Dell in China: Strategic Rethinking
英语市场调研报告This is a short case covering The External Environment, Internal Environment, Business-Level Strategy and Competitive Rivalry and Competitive Dynamics, as well as International Strategy.
INTRODUCTION
The case is about Dell Computer’s expansion into China, initially via export in 1995, and subsequently in 1998 through establishment of a local manufacturing and distribution operation.
The case centers on Dell’s decision to change its strategy from one focused on the low-end consumer segment to the high-end corporate segment.
The change in strategy was in part a response to price pressure from Chinese competitors such as Legend and Founder.
The intensity of rivalry resulted in price and profit margin declines in the industry. The strategy change was also in response to Dell’s inability to provide delivery of computers and service and support in a timely manner.
Dell exited the low-end market and decided to focus on the servers, printers, and data storage gear. It raised its prices and focused mostly on the corporate market. Dell was confident that it could stand alone on its brand reputation and command higher prices.
The strategy change has resulted in market share increases. Dell captured 24.1% market share in server shipments in 2004, and its PCs captured 7.3% (third place). Despite these successes, Legend (which later changed its name to Lenovo) and Founder ranked ahead of Dell with market shares of 25.7% and 11.3% respectively.
As part of its China strategy, Dell committed to making its China plant the main supplier for north Asia. The case concludes with speculation that Dell may re-enter the low-end market as other firms drop out. Dell CEO Kevin Rollins challenged reports that Dell had exited the low-end PC market, and instead described Dell’s strategy as a temporary de-emphasis based on the current profitability of that segment.
EXTERNAL ANALYSIS
Question 1: Use the model of the general environment to evaluate the opportunities and threats in the general environment in China?
Focus on the general env. in China and the relevant surrounding Asian market. The analysis of opportunities and threats for Dell must be clear.
Demographic Segment
…includes dimensions such as population size, age structure, geographic distribution, ethnic mix, and income distribution. The dimensions most relevant to Dell in China are population size, geographic distribution, and income distribution. In the broadest sense, Chinese population presents an opportunity because of its sheer size (23% of the world total). The main opportunities, however, will be in the larger cities where incomes are higher (as explained in the next section). The rural areas will not present much opportunity for Dell’s high-end PCs.
Economic Segment
The main opportunity is the high growth rate of the Chinese economy [retail sales up 9.8 % in 2005, and 13 % in 2005]. Therefore opportunities for companies exporting or producing in China.
The case notes that China’s PC market was estimated to grow by about 19% in 2004-2005. U.S. exports to China increased 28%, 22%, and 19% respectively for the years 2003, 2004, and 2005.
The rapid economic growth came after WTO membership in 2002.
Despite rapid growth, there are some cautions or threats in the Chinese economy. BUT per capita income in China is low (US$ 1,583) and income distribution is uneven with urban centers such as Beijing with per capita incomes in the range of US$ 5,000.
The Chinese middle class (estimated at 200 million people) has a per capita income of over US$ 8,000. The economic environment could pose challenges for Dell given its change in strategy to (or emphasis on) the high-end market.
Dell’s PCs were priced at US$ 483 (the highest among competitors) and had been selling poorly. According to Exhibit 5 in the case, Dell’s market share was 7% in 2003, below the three main Chinese competitors but above IBM and HP.
Political/Legal
China’s legal and regulatory system is not transparent and can be inconsistent and arbitrary. Business relationships are sometimes based on relationships (guanxi).
American companies in particular have had intellectual property stolen by Chinese companies. With respect to political risks, China’s political system still operates in part as a planned economy and maintains control over unions, and banks and other financial institutions. Deregulation is not at the level found in most U.S. and European Union countries.
Sociocultural Segment
…includes the attitudes and cultural values of a society. While the case does not contain much discussion of these –you’re your general knowledge. Some cultural differences in purchasing expectations (e.g., needing to try products before buying) that companies will have to accommodate.
Global Segment
Annexure 2 shows that the U.S. is the most important market for Dell (69% of sales), followed by Europe (21%) and then Asia/Pacific (10%). The Chinese market presents sales opportunities for Dell, but also threats from local competitors.
The China venture, however, presents other opportunities for Dell as it expands into the north Asia region (Japan, Korea, and Taiwan) using China as a production base.
Overall Assessment: Most of the opps. come from the tremendous economic growth, while most of the threats come from the political/legal environment.
Do the opportunities outweigh the threats? And of course in the longer term, things will get easier as the WTO rules are implemented
The Industry Environment
Use Porter’s Five Forces Model to analyze the PC industry in China. Given this analysis, is the industry attractive or unattractive?
apply the Five Forces Model and include a discussion of what makes a force strong or weak [and say why].
Threat of Entry: Moderately High (given the recent entry by U.S. competitors). IBM, Compaq, and HP entered the industry in the early 1990s, and Dell entered in 1995. All were established firms and did not face
• the barriers of product differentiation,
• capital requirements, or
• switching costs,
But access to distribution channels and government policy (permit requirements) may have been barriers.
Scale economies will be a barrier to new entrants given the scale advantages that Dell now has through its large production plant in China. There is also a threat of entry from local competitors, although these will face product differentiation.
Since China joined the WTO in 2002, there will be reduced government policy barriers.
Bargaining Power of Suppliers: Low. Dell is vertically integrated, and thus does face powerful suppliers. If we assume that most competitors are vertically integrated, then supplier power is not threat.
Bargaining Power of Buyers: Moderate. The case indicates that state-owned companies, MNCs, and educational institutions accounted for most of the PC sales in China. In Dell’s case, its main buyers were government, education, telecoms, and power and finance. These accounted for 50% of its business.
Since it is possible that these groups have at least two characteristics of powerful buyers (purchasing a large portion of the industry’s total output, sales account for a significant portion of the seller’s annual revenues), these buyers could be powerful.
The power might be exercised in negotiating quantity discounts. In contrast, since individual buyers have no such negotiating power, they are not powerful. One aspect of the PC industry that mitigates the power of buyers is the reputation and uniqueness of a particular PC brand (such as Dell, HP, and IBM). Dell has recently been making sales to China’s government agencies and ministries which had formerly bought computers from Legend.
Threat of Substitute Products: Weak. There are no substitutes.
Rivalry: Intense - see price pressure that is brought to bear by the local competitors. Other characteristics of the industry that contribute to intense rivalry are
• the high fixed costs of the production capacity, and
• the high strategic stakes.
The case notes specific actions by competitors that contribute to rivalry. Legend started to follow Dell’s direct sales model in China. It also entered into an agreement to supply computer technology to the 2006 Turin Winter Olympics in an effort to boost its brand recognition.
Legend also planned a joint venture with IBM in China to further increase its market share. The intense rivalry is mitigated by the high industry growth rate potential that reduces the need for competitors to take market share away from each other. The case data shows that only 2.5% of urban Chinese owned a computer compared to 55% in the US. Exhibit 5 shows the top six PC rivals in China in 2003, with Dell ranked 4th with 7% market share.
Despite the intense rivalry, and the moderate threat of entry, the industry remains attractive (i.e., it has a high profit potential) primarily because of the potential for growth.
The case points out that China was the 5th largest PC market in 1999 behind the USA, Japan, Germany, and the UK. In addition, the main buyers are institutions which have more resources to make purchases rather than individual purchasers who are constrained by low disposable incomes.
Q3: Who are the main competitors of Dell and how does Dell measure up against these competitors?
Dell should seek to understand its competitors’ future objectives, current strategy, assumptions, and strengths and weaknesses.
The future objectives of the competitors seem to be to build market share rapidly given that only 2.5% of urban Chinese own a computer.
Since IBM, Compaq, and HP have recently lost market share to local competitors (Legend, Founder, and Tongfang), these American competitors will likely try to regain the lost share.
Legend can be expected to not only maintain, but to increase its lead. As shown in Exhibit 5, the three Chinese competitors control 45% of the market share in 2003. Dell leads the U.S. competitors with 7% market share compared to 5% for IBM, and 3% for HP.
The current strategy of the three Chinese competitors is cost leadership, while the strategy of HP and IBM seems to be differentiation, with a emphasis on the consumer market. Legend, however, seems to be positioning itself to challenge Dell in the high-end segment.
Finally, the key strengths of the local Chinese competitors are knowledge of the market and low-cost advantage, but are weak in brand recognition. Dell’s American competitors have strengths in their technology and brand recognition.
Dell measures up quite well against these competitors in its chosen markets of competition. Its Chinese production plant gives it an advantage of cost and quality control. BUT Dell is clearly outperforming HP and IBM in market share, but is well behind Legend.
Question 4: Which competitor is Dell’s main rival? How shielded are Dell’s competitive advantages?
What is the degree of market commonality and resource similarity between Dell and its competitors?. To the extent that the markets are common and that resources are similar, then the two firms will be direct competitors.
Most likely, the class will identify Legend as having the closest market commonality and resource similarity (for the Chinese market) and thus is Dell’s main competitor.
The PC market is closest to a Fast Cycle market so that Dell’s advantages are not shielded from competition. From the case, it appears that Legend through its copying of Dell’s direct sales model, its joint venture with IBM, and its Turin Winter Olympics initiative, is positioning itself to challenge Dell’s competitive advantage.
Question 5: Evaluate Dell’s tangible and intangible resources? Which are more important as a source of competitive advantage? Why?
Tangible Resources
• Financial Resources. Strong. For example, Exhibit 1 shows that Dell is ranked 1st in worldwide PC market share (20.7%) – with sales have climbed steadily from 1997 to 2004. Dell’s revenue in the Chinese computer market reached $8 billion in 2002, almost double the 2002 revenue.
• Organizational Resources: Strong. Dell’s direct sales system is a strength. As few Chinese used the Internet, only 5% of its orders were made in this way. Dell also maintained toll-free numbers to provide sales and support, and its sales personnel visited cities to enlist new customers. Another organizational strength was the alliance between Dell and Oracle in China to offer Linux based Oracle software on its computers.
• Physical Resources: Strong. The physical resource that is most relevant to the case was Dell’s local production plant in China. This plant allowed Dell to continue its build-to-order system which had made it so successful in the US. The build-to-order system allowed Dell to keep its inventory levels at six days of supply compared to 40 days for Chinese competitor Legend. Build-to-order system has kept costs low, profits up, and contributing to Dell’s market share in increase in 1998.
• Technological Resources: Strong. Dell has traditionally had strong technological resources and it seems to have leveraged these in China through its production plant and sales and service organization. The alliance with Oracle also contributes to its technological strengths. Dell received the 2003 “Best Overseas PC Corporation” award from China Center of Information Industry Development for its product performance.
Intangible Resources
• Human Resources not mentioned in the case
• Innovation Resources: only the alliance with Oracle is mentioned that could possibly lead to innovations. Dell has generally had a reputation as an innovative company in its technology, business practices (e.g., build-to-own) and customer service.
• Reputational Resources: Excellent. The company is able to leverage this worldwide reputation by positioning itself in the higher priced end of the market.
Overall Assessment: Dell had strong resources both tangible and intangible. A key concern that comes out of the above analysis is whether Dell will have the appropriate quality of China resources to be able to carry out its strategy.
Discussion Question 6: What are the main capabilities of Dell? Does Dell have a core competence?
Capabilities are “the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired state” or “the glue binding an organization together…” Also capabilities are defined as residing in the “unique skills and knowledge of employees, and often their functional expertise.”
Possible capabilities at Dell are in its manufacturing (build-to-order), and resultant low inventory. Dell also has competences in its customer service.
Does Dell have a core competence? Core competencies are defined as “resources and capabilities that serve as a source of a firm’s competitive advantage over rivals.” Thus, core competencies are groupings of resources and capabilities. Not all of a firm’s resources and capabilities are core competencies. Dell’s core competencies reside in its manufacturing, technology, and customer service areas.
Apply the value chain concept and examine which activities contribute most to the core competencies at Dell. Suggested activities are Inbound Logistics (inventory control), Operations (build-to-own), Marketing and Sales, Service (on line and phone order capability, installation, and repair), and Technology Development (product design, servicing procedures).
Discussion Question 7: Does Dell have a sustainable competitive advantage in the Chinese computer industry?
Valuable Capabilities (help the firm neutralize threats or exploit opportunities) Yes.
Rare (not possessed by others) Mixed. The build-to-own and customer service capabilities of Dell are not possessed other computer companies in China. Other capabilities in technology and manufacturing are not rare.
Costly to Imitate Yes. It would be costly to imitate the unique attributes of Dell.
Nonsubstitutable (no strategic equivalents) Yes. Dell’s direct sales model is an example of a nonsubstitutable capability on the grounds that to date, no competitor has been able imitate it.
Thus, to the extent that Dell is able to replicate this direct sales model in China, this capability is nonsubstitutable. The case does note, however, that Legend is attempting to copy that direct sales model.
Possible conclusion: at best “sustainable competitive advantage,” and at worst, “temporary competitive advantage.”
These conclusions depend on whether the “mixed” conclusion about rare capabilities is taken as “yes” or “no.”
SWOT ANALYSIS AND GENERAL PROBLEM STATEMENT
Strengths
• Reputation
• Competitive advantage (valuable, costly to imitate, nonsubstitutable)
• Manufacturing plant (build-to-order capability, JIT)
• Direct sales model (on line and phone order capability)
• Strong sales revenue in 2003 ($8 billion)
• Strategic alliance with Oracle
• Product performance (Best Overseas PC Corporation Award)
Weaknesses
• Dell does not have a low-cost advantage that will allow it to compete in the consumer segment.
• Possible cost advantages not realized from the China plant.
Opportunities
• Large population in China and economic growth potential
• Sales potential in larger cities
• Growth potential in China
• Only 2.5% of urban Chinese own computers
• Reduction in tariffs on information technology products
• Attractive (high profit potential) industry
• Chinese government ministries and agencies (as buyers of Dell
• 英语市场调研报告Expansion into Japan, Korea, and Taiwan
Threats
• Low GDP per capita in China
• Weak government protection of intellectual property
• Moderately high threat of entry of new competitors
• Intense rivalry among competitors (especially local Chinese competitors)
• Legend’s copying of Dell’s direct sales model in China
• Legend’s attempt to boost brand recognition via supply agreement at 2006 Turin Winter Olympics
• Legend – IBM joint venture
GENERAL PROBLEM STATEMENT
The main challenges facing Dell are concerned with the rivalry that it faces from Chinese PC rivals, in particular, Legend.
Dell is concentrated in the corporate market where the profits are highest. It needs to consider how it will expand to other markets, in particular, the consumer market that is more price sensitive.
Specifically, Dell main problems/challenges are:
• How to overcome Legend’s attempts to copy its direct sales approach and build it brand recognition. This threat from Legend could challenge Dell’s dominance of the high end market.
• How to build a cost advantage so that it can reenter the low-cost segment (as CEO Rollins appears to be suggesting that the company will do). The case notes that Dell cannot survive in this segment of the market and must either lower its quality and service levels, or maintain its quality and service levels and accept a decline in profits.
In summary, Dell faces challenges on two fronts.
1. it must lower its costs if it is to be viable in the low-end market,
2. it must also innovate to outpace Legend who is trying to encroach on Dell’s dominance in the high-end market.
What would you do?
Dell does have one advantage over Legend in that its world market share is much higher and it can offset losses in one market with profits in another. Dell could challenge Legend in other Asia markets that are important to it while increasing its product quality and services in China.
Question 8: What is Dell’s business-level strategy? Is the strategy appropriate to offset the forces in the industry? Do you recommend any changes?
Dell’s business-level strategy is best described as differentiation based on its product quality, build-to-own capability, and direct sales method.
Dell does have an element of focus in its scope, that is, it sells mostly to the Large Corporate Accounts which accounted for 50% of Dell’s business.
The second part of the question asks about the ability of the strategy to offsetting forces in the industry. For this part, look at the previous Five Forces analysis and consider which forces were most powerful and whether Dell’s strategy could protect the firm.
The differentiation strategy has been successful at offsetting the main force in the industry, rivalry from local competitors. A good argument can be made that Dell’ s increasing market share and net income, coupled with the Best Overseas PC Corporation Award, and the Chinese government purchases shows that the strategy is succeeding.
Question 9: What was Dell’s entry strategy in China and what international-level strategy is currently being followed? What were the main incentives for the entry into China, and how would you evaluate the international strategy so far?
The case illustrates quite well the reasons for international expansions, and the advantages of a wholly-owned subsidiary.
Dell’s initial entry strategy was exporting, which is appropriate where a firm is entering a market for the first time, and has little experience in that market.
The disadvantage of this strategy is that it did not allow Dell to implement its build-to-order strategy, like in US.
Another disadv. - distribution was not under Dell’s control.
Dell later moved to a wholly-owned subsidiary that was responsible for both manufacturing and distribution - allowing Dell to take advantage of low cost Chinese labor and to control its own distribution.
And to use China as a low cost source for sales to other parts of Asia. The international-level corporate strategy was a global strategy.
This strategy assumed a “standard core” of product features and sales and service that would be expected by any customer buying a Dell product. At the same time, would allow adjustments for local conditions, for example, allowing potential customers to try the product before purchasing it.