External and Internal Environments (Dell Computers)

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External and Internal Environments

Background

Founded by Michael Dell in the mid 1980s, Dell Computers is one of the leading computer technology corporations in the world. At the height of the technology boom of the early 1990s, Dell reached a level where it had grown too large too fast to a point that it had to make radical internal changes to stay profitable (Fleisher & Bensoussan, 2007). The company’s rock bottom was in 1993 when it lost a considerable portion of its market share, saw its cash flow and net income drop to $20 million and negative $ 40 million respectively. This called for rapid strategic changes to keep the organization afloat, and that is exactly what Dell did. The paper analyzes Dell’s general environment, its forces of competition, external threats, strengths and weaknesses, resources, capabilities and core competencies, and its value chain.

General Environment

A macroenvironment is the total sum of external factors that have influence on a business. These factors are usually beyond the control of an organization’s management and range from demographic, political, and technological to economic forces. Economic forces in this environment include demand and supply, the amount of competition in a market segment, economic resources available and the efficiency of production methods adopted by an organization (Hatten, 2012). Each of the mentioned economic forces have an impact on both an organization’s production output and possible profit margin from the goods produced thereof. Two key segments that greatly influence the operation of Dell are the Economic and Demographic segments.

In today’s society, the economic well being of consumers has significantly increased. There is more money in the world today with new ways of earning riches especially in the technological front coming up each day. The economic well being has influenced how the company responds to these changes by manufacturing new age user friendly PCs in addition to adopting new business model. It has nonetheless lagged behind in new technology, for example, the tab market is presently dominated by Apple and Samsung. The company must, therefore, introduce net technology so as to remain relevant and tap into a new group of trendy consumers who do not mind about prices. With such changes, the company will bring on board a new category of users that it had left out during the strategic changes of the 1990s.

The past two decades have witnessed shifts in the consumer’s demographic composition, besides there are modern changes in consumer attitudes. Dell has raised the bar its customer service experience with clients getting a feel of personal touch. There is a world population surge with the total number of the planet’s inhabitants reaching seven billion; this has provided a large market for Dell products. According to (Ireland, Hoskisson & Hitt (2008), through information sharing systems put in place by the company in the 1990s and later upgraded to match changes in the market, Dell has been able to make prompt responses to the market and this has been helpful in keeping the company competitive.

Five Forces of Competition

Developed by Michael Porter of Harvard Business School, the framework reviews organizational economics in an industrial setting to comprehend a company’s competitiveness and overall attractiveness to the market (Hill & Jones, 2013). Of the five forces, three examine competition from external sources while the other two look at internal threats. The following are the five forces; the threat from entry of new competitors in the market, the threat of substitute products and services, the bargaining power of customers/buyers, the bargaining power of suppliers and the level of rivalry among existing competitors. Two of the most significant forces for Dell are the buyers’ bargaining power and threats posed by substitute products.

The PC industry has multiple substitutes for products thereby driving competition a notch a higher and greatly influencing imperative aspects such as pricing. Threats of substitute products are dependent on; buyer’s will to go for alternative goods and services, price and performance relativity of the substitutes as well as costs related to making a switch to substitute. Dell faces a significant threat of substitute products hence to remain relevant, it must customize its products in a way that moving to substitute either becomes costly or appears unattractive. With manufacturers of non computer electronics like Samsung entering the PC market, there is the threat of new competitors to Dell. There is equally the threat of substitute products with the rapid of growth of micro computers that serve as mobile phones as well.

Secondly, buyers are the creators of demand in any industry, their buying power, however, depends on; whether products are standardized or not, if there are few dominant buyers and many industry sellers, whether they take the option of integrating the industry backwards or if suppliers hold the threat of integrating forward into a buyer’s industry. Dell must keep this bargaining power in check to ensure that their products remain attractive. With many new segments of customers coming up in the PC industry, buyers’ bargaining power in increasing diluted, making Dell’s industry attractive on this front.

Future prospect

Dell has to address a number of strategic challenges most of which are quite complex and multidimensional. Key among them will be to enhance customer service since the company, despite having a highly integrated value system has not yet fully tapped their potential with regard to customer service, (Griffin, 2008). This will ensure that the company beats of competition from its key rivals who have come up with new alternative products. Additionally, to tap into the increased buying power of consumers, the company will have to focus on lucrative customer segments since although sales to businesses account for up to 85 percent of Dell’s total sales, the most lucrative sector within the computer industry still remains client sales with an estimated 75 percent of the market, (Dedrick, and Kraemer, 2008).

External Threats and Opportunities

Dell’s competitiveness steadily faced threats in 2000s because its rival companies had outsourced PC manufacturing to reduce costs and also adopted strategies to manage their own supply chains. Besides, unlike Dell, Apple and HP have always made innovation a critical component of their value chain management strategy. The two companies have consistently spent billions of dollars in an attempt to come up with new innovative products and components, (Hill, and Gareth, 2009). Although in the past innovation cost was a disadvantage to HP and Dell in the beginning, it today allows them to produce more versatile, stylish and powerful computers in addition to portable digital devices. This has given Apple and HP a competitive advantage over Dell hence an explanation towards the dramatic changes in the values of the two companies during the 2000s, (Griffin, 2008).

In the year 2005, Dell’s market value stood at $100 billion more than Apple and HP combined, but by 2011, this value had dropped to $30 billion while HP’s and Apple’s stood at $75 billion and $300 billion respectively, (Hill, and Gareth, 2009 and Smith, 2008). This can be attributed to a number of shortcomings in Dell’s competitive strategy especially the company’s its loss of focus on the customer and its inability to innovate the kind of computers and other mobile computing devices desired by the customers. The company’s competitive strategy especially that which focused on material and supply chain management which allowed it to get computer components, assemble them and sell to customers more efficiently. During the peak of its operation, Dell had a 20% cost advantage over both Apple and HP since it assembled computers at low cost locations within different locations, (Hill, and Gareth, 2009). Dell has an opportunity to adopt a strategy that increases its ability to customize its Computers for customer’s needs. Most of its computers have been either of black or beige color as a result of standardization which increased quality and reliability thereby lowering production cost, (SchwieBelmann, 2010). Customizing computers will ensure increased customer base and loyalty hence increasing the company’s profitability.

Strengths and Weaknesses

Strengths are usually internal and range from brand recognition, efficient production processes to market share a company has within an industry (Fine, 2009). Weaknesses are equally internal and can be defined as those shortcomings that could work to the detriment of a company; they should not be known by competitors and should instead be within the knowledge of top management who are tasked with turning such weaknesses into strengths. Dell’s greatest strength was in the adoption of the strategy of tailoring its manufacturing to keep control of the customer element in the microenvironment (Koehn, 2001: P439). In their virtual integration, the company incorporated production schedules with the flow of sales, on site assembly of sites, and installation of software as requested by the customer. With these manufacturing interactions, completion of final products was done in a short duration of 36 hours adding value to customer with regards to delivery time.

Since this integration strategy ensured that inventory levels never piled up, suppliers were attracted to doing business with Dell. When Dell adopted the strategy of targeting specific customers by defining them as knowledgeable users of PCs, they in effect took a path that no other computer manufacturing company had taken keeping them way ahead of the competition. Virtual integration strategy ensured that Dell accommodated the interest of all stakeholders with customers taking lead. Dell’s most significant weakness over the years has been the lack of innovation. The company has stuck with old models and has not significantly carried out new research to come up with new computing solutions that customers want. New strategies are needed to address this weakness; the company can devise new designs and products that are easily customizable, (SchwieBelmann, 2010).

Resources, Capabilities and Core competencies

Dell’s core competencies revolve around its competitive strategy which has three key ingredients: Virtual integration, having tailored manufacturing processes to meet unique customer needs and True value in customer service features. To achieve “virtual integration”, the company developed a symbiotic relationship between its suppliers, had customers directly connected to the manufacturer while the end users had links to proper customer service that availed the much needed assistance. This integration ensured that costs were reduced, delivery done quickly , and good quality finished products delivered to consumers (Dell & Fredman, 2006).

The lacking inventory is a key supply chain strategy used by the Dell Corporation with the longest time it takes for a part to sit in inventory being 4 hours. Most of the small parts suppliers are located near the factories which send e-mail’s after every two hours to the suppliers informing them of the parts needed for the next 90 minutes, (Rakowski, Cheuk and Kammala 2010). The missing parts are, therefore, supposed to be delivered within the time frame besides, multiple suppliers are used to order to minimize any delivery delays. Assembling a Dell laptop for example, takes estimated 400 suppliers from Europe, North America and Asia, (Rakowski, Cheuk and Kammala 2010). Dell’s system transfers the risk of holding inventory from Dell to the component manufacturer, therefore, limiting any cases of breakdowns or sentimentality, (Rakowski, Cheuk and Kammala (2010).

Dell has also adopted a lean manufacturing philosophy which has ensured a corporate environment committed to process improvement and the regular use of objective data to further improve its production process, (Worthington, and Britton, 2006). The approach initially resulted in a crisis in terms of inventory management although it eventually became ingrained in the company’s operational practices, (Ireland, Loskisson and Hitt, 2008). The company has further ensured that its production plants have prototyping areas in which new ideas for improving production are regularly monitored and implemented. As a result several practical production improvement have been developed, for example; in 2002 the company’s came up with a process of building a laptop by flipping it over two times rather than six times, which had been the norm. Additionally, in 2004, the Dell factory management developed a strategy to cut down the number of times a worker could touch a PC during assembly into half.

Dell’s Value Chain

Dell’s Value chain management strategy includes Just in time, Mass Customization, Total Quality Management and Six Sigma, (Rakowski, Cheuk and Kammala, 2010). The supply chain involves an efficient performance, reduced inventory, use of the internet to carry out day to day business transaction and a large quantity of parts flow. Customers are allowed to select their favorite computers and make an order online or via phone after which computers are assembled in one of its six factories in Ireland, China, Brazil, the US or Malaysia. The assembling process takes 90 minutes after the receipt of the order, and it takes between, 5 to 10 days for the laptop to be delivered in the customer’s home.

The company’s profitability has also been driven by the explosion of the digital and information content which has driven and improved data availability. Besides, the advent of search engine, e-mail, mobile phones have also acted as a key driver of the digital expansion in which Dell is a part of. The company’s value is also created by its dominant brand name, economies of scales, its pricing policy which is cheap and very clear and appropriate, (Ireland, Loskisson and Hitt, 2008).. The company also has favorable supplier relations with well established distribution systems. The company also has effective R&D capabilities besides, its ability to outsource manufacturing of certain aspects have proved effective in adding value to the company’s entire production process.

Summary

In summary, Dell strategy of direct selling to consumers to avoid payment to retailers, just in time inventory to keep expenses at minimum and flexible manufacturing for customization at low costs account for Dell’s phenomenal success. Nonetheless, the future looks grim as customers are opting for retail stores for electronic gear which Dell is still a new player. The company’s customer satisfaction rating has also fallen, and complaints are on the increase. Besides, there is cutthroat competition within the desktop PCs accounting for more than half of Dell’s sales. A bigger concern, however, remains Dell’s lack of innovation, always assuming that price is paramount leading to their focus on inexpensive, commodity like products. Buyers of today want portable music and video players, table PCs, digital photography and more. Despite being four times larger than Apple, Dell spends less on R&D hence the company needs to up its budget and focus on more creativity, flexibility and customer service.

References

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