Dell New Horizons Case Analysis Essays

Dell New Horizons Case Analysis Essays Dell New Horizons Case Analysis Essay Dell New Horizons Case Analysis Essay Dell-New Horizons HBS case-9-502-022 Introduction As a consecutively successful and fast-growing company, Dell’s management got the pressure of maintaining the rapid growth. On the other hand, the hyper-growth in the PC industry over-drafted some growth potential in the coming years and the bubble of the internet economy burst so the speed of the growth would slow down. Since March 2000, Dell’s performance in market capitalization and stock prices had got a slump. In addition, competitions were becoming ferocious so Dell frequently lowered its prices, lowering profit margins as well. Therefore, how to maintain a 30% growth in revenues and earnings year after year was a challenge to Dell. Dell faced the options such as product growth, service growth and international markets growth. In the product growth section, personal computers, workstations, servers and storage were the portfolio. Whether to enter new product categories such as high-end servers, external storage and enterprise services was on the table for the management. The financial constraint was $7. 9 billion in cash on its balance sheet. (In 2000, net income + average growth on liabilities=$ 5,146 million). In this analysis, we will scrutinize the growth options and Dell’s ability in certain fields to make sure which options are suitable for it. Finally, we will lay out a prospective plan to pursue growth. Analysis Dell’s success relies on the growing market of PC industry, its business model and its superior ability to execute to sustain the business model. Dell Direct model was about low cost, direct customer relationships and virtual integration. It was a high velocity, efficient distribution system characterized by build-to-order manufacturing, and products and services targeted at specific market segments. From mail orders and phone orders to internet orders processing, Dell has a long history and experience in direct selling, making it difficult for competitors to imitate. Personal computers This is the biggest segment with $ 217 billion in 2000. It was almost 75% of Dell’s revenues and the market still grew at 10% even though it slowed down from a speed of 20%. It was very important so Dell still need to work hard on this field. Further prices cutting might get some players out of this game while it would harm Dell as well. Dell’s operating incomes on sales were 9% in 1999, 8% in 2000, and 5% in 2001. Without new effective ways to cut costs down further, prices cutting would harm the industry and Dell itself. Dell can expand in this segment by focus on small and medium businesses. International markets such as Asia/Pacific and Japan are main fields to grow. Dell already did a good job in relationship business, producing 60% Dell’s U. S revenues. While in small and medium businesses, Dell had enough space to expand because only 30% of U. S revenue was from this segment and small and medium businesses are countless. Workstations This is the smallest segment in Dell’s products portfolio. The market was $9. 2 billion in 2000 worldwide. Dell already got 36. 8% in U. S and 29. 6% worldwide. With the increasing of Windows-based workstations, Dell’s share can be expected to grow. This segment can contribute revenues to Dell while Dell should not allocate too many resources on it. Servers This is the second largest segment. It was $69 billion in 2000 and kept 7% growth per year. SIAS enjoyed annual growth in excess of 30% and Dell played in SIAS arena and had 25. 5% share in 2001. Therefore, Dell’s management considered entering high-end servers. It is reasonable because Dell had no market share in high-end servers. Storage This market was $69 billion in 2000 and kept 23% growth per year. The industry trend was that NAS and SAN were getting two-thirds of the market while DAS would fall to one-thirds from 70%. Dell’s products mainly were NAS with cheaper prices than competitors’ such as Compaq, Network Appliance and Sun N8200. Dell also allied with EMC by selling its CLARiiON line of products. This is a good idea because Dell can acquire experience and expertise in SAN products and know more about EMC. Manufacturing is easy while selling is difficult. Dell had powerful direct sales force in medium and small business and government accounts. After Dell gets technology, experience and expertise in SAN, it can get into this field. From 1996 to 2001, Dell’s profit margin on sales was 8% in 1998 and 1999, the highest, while it was 1% in 1997 and 2001, the lowest. On the other hand, EMC’s profit margin on sales was 20% in 2000, the highest, and 12% in 1996 and 1998, the lowest. It was more profitable than Dell’s PC products. Dell had reasons to pursue bigger market share in this market. Critics thought that Dell did not have robust products and was not getting help from Microsoft and Intel in terms of getting the quality of stuff and that Dell had no strength in reliability, serviceability, availability and manageability. However, that does not mean that Dell cannot acquire supports from Microsoft and Inter and that Dell cannot cultivate the abilities. Dell launched Controlled Deplyment Team to improve its abilities. Service Portfolio It contributed $2 billion to Dell’s 2000 revenues and was an increasingly important part of its portfolio. Dell had strength in speed, costs and prices. It can leverage the strength to expand the service portfolio. Of course, it is limited by other products Dell can sell. It cannot be separate from Dell’s products. If it was separated, the workers would spend time and money to study other competitors’ products and this would improve competitors’ service availability. International market growth The PC market worldwide was 3 times bigger than the U. S market and the workstations market worldwide was twice of the U. S market while Dell had only 25% revenues outside the U. S. It is not difficulty to understand that Kevin Rollins was particularly keen to bring Dell’s international revenues up to the U. S. benchmark. In the U. S. , Dell was the number one in PC and workstations while it was the third in Western Europe, the 7th in Asia/Pacific and the 8th in Japan. Kevin Rollins’ assumption is reasonable. Dell can be the number one in the U. S. Why can’t in other countries? It confronted almost the same competitors in foreign countries as in the U. S. Recommendation To maintain a 32% growth, we recommend a 25% growth in the U. S. and a 50% growth in the international market. Even in 2001, Dell’s growth was 26%, the lowest since 1996. Therefore, a 25% growth in the U. S. is reasonable. From 1998 to 2000, Western Europe market grew by 26%, 88% in Asia/Pacific, 78% in Japan, 52% in Latin America and 39% in the rest of the world. So an expected 50% growth in the international market is practical. Dell should expand high-end servers and external storage market by leveraging its cost advantages, high velocity and good executions. In addition, it should aggressively expand in international markets, focusing on Germany, China and Brazil. To get bigger shares in high-end servers and external storage, Dell can ally with Microsoft and Intel. They already had cooperation and allies in PC and workstations. The homework is just to expand these allies to high-end servers and external storage by negotiations. Even it can consider a merge or purchasing with EMC so EMC can contribute the technology and expertise and Dell can contribute the sales channels, low costs, and excellent executions. Dell also needs to allocate more budgets to RD to develop â€Å"robust products†. We recommend increasing the budget for RD to 3% from 1. %. The market segment is small and mid-size companies. EMC’s products are too expensive. Dell can target this market by offering much cheaper and a little storage solutions. Low costs and prices are Dell’s strength. On the other hand, the sufficient growth in the market can bring profits to Dell. To expand in the international markets, people are the key. Why didnt Dell play the best in foreign countries as it did in the U. S? The answer should be that the management teams in foreign countries were not competent in those markets. Probably they were very good in the U. S. ut not in foreign countries due to languages and cultures. Dell should launch a program to recruit and train more competent managers who are natives in foreign countries and know their markets very well and let them work in the U. S. to learn Dell’s culture, values, and management skills, and then relocate them to their homelands to take management positions. In addition, aggressive marketing in these markets is important, more sales people, more advertising, more promotion and more distributors, if applicable. Projected Income Statement ($ in millions) 2001 Forecast Basis 2002 2003 2004 2005 Net Sales 31888 132%*2001 sales 42092. 16 55561. 65 73341. 38 96810. 62 Cost of Sales 25445 80%*2002 sales 33673. 73 44449. 32 58673. 1 77448. 5 Gross Profit 6443 8418. 432 11112. 33 14668. 28 19362. 12 SGA 3193 10%*2002 sales 4209. 216 5556. 165 7334. 138 9681. 062 R 482 3%*2002 sales 1262. 765 1666. 85 2200. 241 2904. 319 Special Charge 105 Operating Income 2663 2946. 451 3889. 316 5133. 897 6776. 743 1996 1997 1998 1999 2000 2001 Average Total liabilites growth 36% 53% 35% 27% 38% Profit margin on sales 5% 1% 8% 8% 7% 1% Operating income on sales 9% 8% 5% Sales growth 52% 47% 59% 48%