Dell Inc. in 2008: Can It Overtake Hewlett-Packard as the Worldwide Leader in Personal Computers? Arthur A. Thompson The University of Alabama 1,000 of his own money and founded Dell Computer with a simple vision and business concept—that personal computers (PCs) could be built to order and sold directly to customers. Michael Dell believed his approach to the PC busi- ness had two advantages: (1) Bypassing distribu- tors and retail dealers eliminated the markups of resellers, and (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods. Between 1986 and 1993, the company worked to refine its strategy, build an adequate infrastructure, and establish market credibility against better- known rivals, In the mid-to-late 1990s, Dell’s strat- egy started to click into full gear. By 2003, Dell’s sell-direct and build-to-order business model and strategy had provided the company with the most efficient procurement, manufacturing, and distri- bution capabilities in the global PC industry and given Dell a substantial cost and profit margin advantage over rival PC vendors. During 2004-2005, Dell overtook Hewlett- Packard (HP) to become the global market leader in PCs, But Dell’s global leadership proved short- lived; HP, energized by a new CEO who engi- neered a revitalized strategy, dramatically closed the gap on Dell in 2006 and regained the global market share lead by a fairly wide margin in 2007—winning an 18.8 percent global share ver- sus Dell’s 14.9 percent. In the United States, Dell also struggled to fend off a resurgent HP during 2006-2007. Whereas Dell had a commanding 33.6 percent share of PC sales in the United States in 2005, comfortably ahead of HP (19.5 percent) and far outdistancing Apple, Acer, Toshiba, | n 1984, at the age of 19, Michael Dell invested John E. Gamble University of South Alabama Gateway, and Lenovo/IBM, Dell's U.S. share had slipped to 28.0 percent by the end of 2007, while HP’s share was up to 23.9 percent. Exhibit | shows the shifting domestic and global sales and market share rankings in PCs during 1998-2007. Since the late 1990s, Dell had also been driv- ing for industry leadership in servers, In the mid- to-late 1990s, a big fraction of the servers sold were proprietary machines running on custom- ized Unix operating systems and carrying price tags ranging from $30,000 to $1 million or more. But a seismic shift in server technology, coupled with growing cost-consciousness on the part of server users, produced a radical shift away from more costly, proprietary, Unix-based servers dur- ing 1999-2004 to low-cost x86 machines that were based on standardized components and techno- logy, ran on either Windows or Linux operating systems, and carried price tags below $10,000. Servers with these characteristics fit Dell’s strat- egy and capabilities perfectly, and the company seized on the opportunity to use its considerable resources and capabilities in making low-cost, standard-technology PCs to go after the market for low- and mid-range x86 servers in a big way. During 2004-2007, Dell reigned as the number one domestic seller of x86 servers for Windows and Linux (based on unit volume), with just over 30 percent market share (up from about 3-4 per- cent in the mid-1990s). Dell ranked number two in the world in x86 server shipments during this same period, with market shares in the 24-26 percent range, which put it in position to contend with HP for global market leadership. Copyright © 2008 by Arthur A. Thompson and John E. Gamble. All rights reserved,wrosmanrg py angonnare Sar Mt oi roaveerWarMaY 44) 2eHNUY GUUG Mt PSEA! we UUG IY BOL aaiE 196] 0 Sod beduog Jo stuoudys‘siajoyrew pue sieoqpord od JotR0 jo spuerq ox Buea SUN Jo Sajes SpryExo pue Kuo SUOWARIS PopUG ApNOU ElepoxeUS TOXIEUI OpINPHON UL, “onous '® Sd Walle pepueiqes orous 002 Ut'S00z 10 JeUENb pucdes etn ul Cuutoa Sos poLIqUIOD NOUN Dae! 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C-53 In addition, Dell was making market inroads in other product categories, Its sales of data stor- age devices had grown to nearly $2.5 billion annu- ally, aided by a strategic alliance with EMC, a leader in data storage. In 2001-2002, Dell began selling low-cost, data-routing switches—a prod- uct category where Cisco Systems was the domi- nant global leader. Starting in 2003, Dell began marketing Dell-branded printers and printer car- tridges, product categories that provided global leader HP with the lion’s share of its profits; as of 2008, Dell’s sales of printers and printer sup- plies were believed to exceed $3 billion. Also in 2003, Dell began selling flat-screen LCD TVs and retail-store systems, including electronic cash reg- isters, specialized software, services, and periph- erals required to link retail-store checkout lanes to corporate information systems, Dell's MP3 player, the Dell DJ, was number two behind the Apple iPod. Dell added plasma screen TVs to its, TV product line in 2004. Since the late 1990s, Dell had been marketing CD and DVD drives, print- ers, scanners, modems, monitors, digital cameras, memory cards, data storage devices, and speakers made by a variety of manufacturers, So far, Dell's foray into new products and businesses had, in most cases, proved to be profitable—for a time, Dell sold handheld PC devices, an MP3 player (called the Dell DJ) that, competed against the Apple iPod, and big-screen TVs, but these products were abandoned when profits proved elusive. According to Michael Dell, “We believe that all our businesses should make money. If a business doesn’t make money, if you can't figure out how to make money in that busi- ness, you shouldn't be in that business.”! Dell products were sold in more than 170 countries, but sales in 60 countries accounted for about 95 percent of total revenues. COMPANY BACKGROUND Atage 12, Michael Dell was running a mail order stamp-trading business, complete with a national catalog, and grossing $2,000 a month, At 16 he was selling subscriptions to the Houston Post, and at 17 he bought his first BMW with money he had earned. He enrolled at the University of Texas in 1983 as a premed student (his parents wanted him to become a doctor), but he soon became immersed in computers and started selling PC components out of his college dormitory room. He bought random-access memory (RAM) chips and disk drives for IBM PCs at cost from IBM dealers, who at the time often had excess sup- plies on hand because they were required to order large monthly quotas from IBM. Dell resold the components through newspaper ads (and later through ads in national computer magazines) at 10-15 percent below the regular retail price, By April 1984, sales were running about $80,000 per month. Dell decided to drop out of college and form a company, PCs Ltd., to sell both PC components and PCs under the brand name PCs Limited. He obtained his PCs by buy- ing retailers’ surplus stocks at cost, then power- ing them up with graphics cards, hard disks, and memory before reselling them. His strategy was to sell directly to end users; by eliminating the retail markup, Dell’s new company was able to sell IBM clones (machines that copied the func- tioning of IBM PCs using the same or similar components) about 40 percent below the price of IBM’s best-selling PCs. The discounting strategy was successful, attracting price-conscious buyers and generating rapid revenue growth. By 1985, the company was assembling its own PC designs with a few people working on six-foot tables. The company had 40 employees, and Michael Dell worked 18-hour days, often sleeping on a cot in his office. By the end of fiscal 1986, sales had reached $33 million. During the next several years, however, PCs Limited was hampered by growing pains— specifically, a lack of money, people, and resources. Michael Dell sought to refine the company’s busi- ness model; add needed production capacity; and build a bigger, deeper management staff and cor- porate infrastructure while at the same time keep- ing costs low. The company was renamed Dell Computer in 1987, and the first international offices were opened that same year. In 1988, Dell added a sales force to serve large customers, began selling to government agencies, and became a public company—raising $34.2 million in its first offering of common stock. Sales to large customers quickly became the dominant part of Dell’s business. By 1990, Dell Computer had sales of $388 million, a market share of 2-3 per- cent, and an R&D staff of more than 150 people.cs Part2 Cases in Crafting and Executing Strategy Michael Dell’s vision was for Dell Computer to become one of the top three PC companies. Thinking its direct sales business would not grow fast enough, in 1990-93, the company began distributing its computer products through Soft Warehouse Superstores (now CompUSA), Sta- ples (a leading office products chain), Walmart, Sam's Club, and Price Club (which merged with Costco in 1993). Dell also sold PCs through Best Buy stores in 16 states and through Xerox in 19 Latin American countries, But when the com- pany learned how thin its margins were in selling through such distribution channels, it realized it had made a mistake and withdrew from selling to retailers and other intermediaries in 1994 to refocus on direct sales, At the time, sales through retailers accounted for only about 2 percent of Dell’s revenues. In 1993, further problems emerged: Dell reportedly lost $38 million in risky foreign- currency hedging, quality difficulties arose with certain PC lines made by the company’s contract manufacturers, profit margins declined, and buy- ers were turned off by the company’s laptop PC models, To get laptop sales back on track, the company took a charge of $40 million to write off its laptop line and suspended sales of lap- tops until it could get redesigned models into the marketplace. Because of higher costs and unacceptably low profit margins in selling to individuals and house- holds, Dell did not pursue the consumer market aggressively until sales to individuals at the com- pany’s Internet site took off in 1996 and 1997. It became clear that PC-savvy individuals, who were buying their second and third computers, wanted powerful computers with multiple features; did not need much technical support; and liked the convenience of buying direct from Dell, order- ing a PC configured exactly to their liking, and having it delivered to their door within a matter of days, In early 1997, Dell created an internal sales and marketing group dedicated to serving the individual consumer segment and introduced a product line designed especially for home and personal use, By late 1997, Dell had become a low-cost leader among PC vendors by wringing greater and greater efficiency out of its direct sales and build-to-order business model. Since then, the company had continued driving hard to reduce its costs by closely partnering with key suppli- ers to drive costs out of its supply chain and by incorporating e-commerce technology and use of the Internet into its everyday business practices Throughout 2002-2007, Dell was widely regarded as the lowest-cost producer among all the leading vendors of PCs and servers worldwide, Moreover, its products were highly regarded; in 2007, Dell products received more than 400 awards relat- ing to design, quality, and innovation—this was the largest number of product awards for a single year in the company’s history. In its 2008 fiscal year, Dell posted revenues of $61.1 billion and profits of nearly $3.0 billion. It ranked number 34 on Fortune’s list of the 500 largest U.S. corporations for 2007. In 2008, Dell had approximately 88,200 employees worldwide, up from 16,000 at year-end 1997; more than 66 percent of Dell’s employees were located in countries outside the United States, and this per- centage was growing. The company’s headquar- ters and main office complex was in Round Rock, Texas (an Austin suburb). Its name had been changed from Dell Computer to Dell Ine. in 2003, to reflect the company’s growing business base outside of PCs, Exhibits 2 and 3 provide informa tion about Dell’s financial performance and geo- graphic operations. Michael Dell In the company’s early days Michael Dell hung around mostly with the company’s engineers, He was so shy that some employees thought he was stuck up because he never talked to them, But people who worked with him closely described him asa likable young man who was low to warm up to strangers.” He was a terrible public speaker and wasn’t good at running meetings. But Lee Walker, a Sl-year-old venture capitalist brought in by Michael Dell to provide much-needed managerial and financial experience during the company’s organization-building years, became Michael Dell's mentor, built up his confidence, and was instrumental in turning him into a pol- ished executive.> Walker served as the company’s president and chief operating officer from 1986 to 1990; he had a fatherly image, knew everyone by name, and played a key role in implementing Michael Dell’s marketing ideas, Under Walker’s tutelage, Michael Dell became intimately familiar"8002-002 ‘2002 ‘soda y-01 “ou ‘sabieyo "8002 Feasy BuuNp 8a Aq pounboe seyvedisod 01 payetes UOIW EBs Jo SeBLeYD IuOUIdOFeAEP Pu YoseAsaL Ssadoic-Ul BuI}-aUO SPNIDUI, *E21 ON spiepueIs Bununoooy (eovEULS Jo juawEIS of USING ‘gOOE PU L002 S129K feos Jo} S2sUedKa oHEsUadwo9 peseq-OIS SOpNUL 08's veo'y o8z'9 ser'o zy0' sce’ sex’ ‘Aunbe sieprowpoors e101, 80 ozs sos sos 29 69s zoe yqep wH9}-6u07, ogg‘ ges'et ue'6. sizez ese'ez seo'sz bosue, S198Se [BIOL ese'9 282'8 zee‘ 208'6 oz0'6 g6z'oL 2262 ‘sjueunsenut wie}-W0Us pue ‘sjustennbe yseo ‘sea sees sees LES ess Ices GOBES — GEES nunoe Bunesedo Aq papinaid yseo ie eieq ye0Us soUEIeS PUE Moly YseD ele geez ez ease ervz wee Lyez painiia gest zoe ses'z 60s’ cove sse'z ezz'z seg -Bulpueysino sezeys aBeene poiyBian 190s, 9y08 tors ais. avis vis ters: paniig gg'0$ eros Zorg, ozs oss, suis seis, 918g :erBys UoWWOO Jed s6UILIES “99 %0'r %6Y'9 %1'9 %S9 68'S “ey Brew youd yey goers gels se'zgs WES ZEs sE'Zs LEZs au se ‘ser 980" see" 900° z9L. ge ish'z tery ue e0r'y 809'r sve'e ese ununosoe uy sBueyo Jo yoyo ennye|numno pue ‘s80] Areuipioenxe ‘sexe eui00u! 01049 eluCoU} eel oat 261 9% siz 288 (850)) ewioour Jauno pue juoUNSeAU| 08 “8 98 82 eS 49s Brew word Buneiedo, e92'2, ses'e g02'r zae'y ou0'e one's ‘woul Buneredo %6'0 86 86 %6'6 we “SL ‘Sentuenal 10u Jo % 8 Se Sasuadxe Buneiodo FeO) S562 880'r zis'y 60s's ‘ovr'9 lez’ sesuedxe Buneiado fe}0L veh = = = = = ‘seBzeup jeoedg ve vey oor Bsr 86r 269 Suye2ubue pue wwewdojanep “yoseesou 2882 voo'e zse'y 1s0's ere's gest ‘With Compaq, we become No. | in Windows, No. 1 in Linux and No. | in Unix . . . With Compaq, we become the No. | player in storage, and the leader in the fastest growing segment of the storage market—storage area networks, With Compaq, we double our service and support capacity in the area of mission-critical infrastructure design, outsourcing and support. . . . Let’s talk about PCs... . Compaq has been able to improve their turns in that business from 23 turns of inventory per year to 62—100 percent improvement year overcm year—and they are coming close to doing as well as Dell does. They've reduced operating expenses by $130 million, improved gross margins by three points, reduced channel inventory by more than $800 million. They ship about 70 percent of their commercial volume through their direct channel, comparable to Dell. We will combine our success- ful retail PC business model with their commercial business model and achieve much more together than we could alone. With Compag, we will dou- ble the size of our sales force to 15,000 strong. We will build our R&D budget to more than $4 billion a year, and add important capabilities to HP Labs We will become the No. 1 player in a whole host of countries around the world—HP operates in more than 160 countries, with well over 60 percent of our revenues coming from outside the U.S. The new HP will be the No. 1 player in the consumer and small- and medium-business segments. . . . ‘We have estimated cost synergies of $2.5 billion by 2004, . .. It is a rare opportunity when a tech- nology company can advance its market position substantially and reduce its cost structure substan- tially at the same time. And this is possible because Compaq and HP are in the same businesses, pur- suing the same strategies, in the same markets, with complementary capabilities, However, going into 2005 the jury was still out on whether HP's acquisition of Compaq was the success that Carly Fiorina had claimed it would be. The company’s only real bright spot was its $24 billion crown jewel printer business, which still reigned as the unchallenged world leader. But the rest of HP’s businesses (PCs, servers, stor- age devices, digital cameras, calculators, and IT services) were underachievers, Its PC and server businesses were struggling, losing money in most quarters and barely breaking even in others—and HP was definitely losing ground to Dell in PCs and low-priced servers. In servers, HP was being squeezed on the low end by Dell’s low prices and on the high end by strong competition from IBM. According to most observers, IBM overshadowed HP in corporate computing—high-end servers and IT services. HP had been able to grow rev- enues in data storage and technical support ser- vices, but profit margins and total operating profits were declining. While HP had success- fully cut annual operating costs by $3.5 billion— beating the $2.5 billion target set at the time of the Compaq acquisition, the company had missed its earnings forecasts in 7 of the past 20 quarters. Part2 Cases in Crafting and Executing Strategy With HP's stock price stuck in the $18-$23 price range, impatient investors in 2004 began clamoring for the company to break itself up and create two separate companies, one for its printer business and one for all the rest of the businesses. While HP's board of directors had looked at breaking the company into smaller pieces, Carly Fiorina was steadfastly opposed, arguing that HP's broad product/business lineup paid off in the form of added sales and lower costs. But in February 2005, shortly after HP released dis- appointing financials for 2004 (the company’s earnings per share total of $1.16 in 2004 was sub- stantially below the earnings per share total of $1.80 reported in 2000), Carly Fiorina resigned her post as HP's CEO amid mounting differences between herself and members of HP’s board of directors about what actions were needed to revive HP’s earnings. Mark Hurd, president and CEO of NCR (formerly National Cash Resister Systems), was brought in to replace Fiorina, effective April 1, 2005; Hurd had been at NCR for 25 years in a variety of management positions and was regarded as a no-nonsense executive who under- promised and overdelivered on results.”° Hurd immediately sought to bolster HP's competitive- ness and financial performance by bringing in new managers and attacking bloated costs. In his first seven months as CEO, the results were encouraging. HP posted revenues of $86.7 billion and net profits of $2.4 billion for the fiscal year ending October 31, 2005. HP had the number one ranking worldwide for server shipments (a posi- tion it had held for 14 consecutive quarters) and disk storage systems, plus it was the world leader in server revenues for Unix, Windows, and Linux systems. During the first seven months that Hurd was HP’s CEO, the company’s stock price rose about 25 percent, With Hurd at the helm, Hewlett-Packard continued to gain traction in the marketplace in the next two fiscal years. For example, HP's sales of laptop computers increased 47 percent in fiscal 2007 and its PC business in China nearly doubled, making China HP's third biggest market for PCs. The company posted revenues of $91.7 billion in fiscal 2006 and $104.3 billion in fiscal 2007. Earn- ings climbed from $2.4 billion in 2005 to $6.2 bil- lion in 2006 (equal to a diluted earnings per share of $2.18) and to $7.3 billion in 2007 (equal to aCase4 Dell Inc. in 2008: Can It Overtake Hewlett-Packard as the Worldwide Leader in Personal Computers? diluted earning per share of $2.68). By late fall 2007, HP’s stock price was more than double what it had been during Carly Fiorina’s last days as CEO, The company’s 2007 share of the esti- mated $1.2 trillion global IT market was almost 9 percent. It was the global leader in both PCs and x86 servers running on Windows and Linux operating systems. About 67 percent of HP’s sales were outside the United States. In May 2008, HP announced that it was expecting fiscal 2008 rev- enues of about $114 billion and a diluted earnings per share in the range of $3.30 to $3.34. Exhibit 9 shows the performance of Hewlett-Packard’s four major business groups for fiscal years 2001-2007. HP's strategy in PCs and servers differed from Dell’s in two important respects: 1. Although HP had a direct sales force that sold direct to large enterprises and select Cs other customers, a very sizable share of HP's sales of PCs were made through distributors, retailers, and other channels. These included: + Retailers that sold HP products to the pub- lic through their own physical or Internet stores. * Resellers that sold HP products and ser- vices, frequently with their own value-added products or services, to targeted customer ‘groups. * Distribution partners that supplied HP products to smaller resellers with which HP had no direct relationships. + Independent distributors that sold HP products into geographic areas or customer segments in which HP had little or no presence. Exhibit 9 Performance of Hewlett-Packard’s Four Major Business Groups, Fiscal Years 2001-2007(in millions) hour ur bac) Cece ee) 2007 Net revenue $28,465 Operating income 4,315 2006 Net revenue $26,786 ‘Operating income 3,978 2005 Net revenue $25,155 Operating income 3,413 2004 Net revenue $24,199 Operating income 3,847 2003 Net revenue $22,569 ‘Operating income (loss) 3,596 2002" Net revenue $20,058 Operating income (loss) 93,985 2001" Net revenue $19,602 ‘Operating income (loss) 2,103 Perera sn) Eien Systems fie eici asc’ $36,409 $21,094 $16,646 1,939 2,927 1,829 $29,169 $18,609 $15,617 1,152 1,531 1,507 $26,741 $17,878 $15,536 657 751 1,151 $24,622 $16,074 $13,778 210 28 1,263 $21,210 $15,367 $12,357 22 (48) 1,962 $21,895 $11,105 $12,926 (372) (656) 1,969 $26,710 $20,205 $12,802 (728) (679) 1,617 “Results for 2001 and 2002 represent the combined results of both HP and Compaq Computer. ‘Source: Company 10-K reports 2003, 2004, and 2007,C76 + Independent software vendors that often assisted HP in selling HP computers, serv- ers, and other products/services to their software clients. * Systems integrators that helped large enter- prises design and implement custom IT solutions and often recommended that these enterprises purchase HP products when such products were needed to put a customized IT solution in place. Much of HP's global market clout in PCs and servers came from having the world’s big- gest and most diverse network of distribution partners. The percentage of PCs and servers sold by its direct sales force and by its various channel partners varied substantially by geo- graphic region and country, partly because customer buying patterns and different regional market conditions made it useful for HP to tailor its sales, marketing, and distribu- tion accordingly. While in-house personnel designed the com- pany’s PCs and x86 servers, the vast major- ity were assembled by contract manufacturers located in various parts of the world. Big- volume orders from large enterprise cus- tomers were assembled to each customer's particular specifications. The remaining units were assembled and shipped to HP’s retail and distribution partners; these were configured in a variety of ways (different microprocessor speeds, hard drive sizes, display sizes, mem- ory size, and so on) that HP and its resellers thought would be attractive to customers and then assembled in large production runs to maximize manufacturing efficiencies. During 2005-2007, after replacing a number of HP's senior executives, Mark Hurd engineered several strategic moves to strengthen HP’s com- petitiveness and ability to deliver better financial performance to shareholders: Top executives charged each HP business with identifying and implementing opportuni- ties to boost efficiency and lower costs per unit. Every aspect of the company’s supply chain and internal cost structure was scruti- nized for ways to become more efficient and reduce costs. The costs of each value chain component—from real estate to procurement Part2 Cases in Crafting and Executing Strategy to IT to marketing—were examined so that managers could know costs by business group, region, country, site, product, and employee; these levels of cost analysis were then used to scrutinize how each expense sup- ported HP's strategy and whether there were opportunities for cost savings. Corporate overheads were trimmed, negotiations with suppliers were conducted to be sure that HP ‘was getting the best terms and best prices on its purchases, steps were taken to trim HP's workforce by about 15,000 people worldwide, the organizational structure was streamlined resulting in three layers of management being removed, and the company’s very compli- cated IT operations were simplified and the expenses reduced—the objective was to engi- neer HP’s IT architecture and operations to be the world’s best showcase for the com- pany’s technology. In 2008, HP began trim- ming the number of sites worldwide at which it conducted activities by 25 percent. The resulting improvements in operating expenses paved the way for HP to price its products more competitively against those of Dell and other rivals, Company personnel began working more closely with large enterprise customers to find ways to simplify their experience with infor- mation technology. A number of new products and services were introduced. HP spent close to $7 billion to acquire more than a dozen software, technology, and ser- vice companies that management believed would add significant capabilities and tech- nology to HP’s portfolio and help fuel rev- enue growth. The company prepared to capitalize on three big growth opportunities that top manage- ment saw emerging over the next four or five years: (1) next-generation data center architec- ture; (2) growing consumer interest in always- ready, always-on mobile computing; and (3) digital printing. Mark Hurd believed that HP had important strengths in all three of these high-growth market arenas but needed to be more adept in getting new products into the marketplace, He directed company personnel to develop a better “go-to-market”Case4 Dell Inc. in 2008: Can It Overtake Hewlett-Packard as the Worldwide Leader in Personal Computers? model and to arm the sales force with the tools needed to “get quotes and proposals in front of customers as fast as anybody on the planet.” HP added 1,000 people to its sales force in 2007 to expand its coverage of key accounts and geographic markets; an addi- tional 1,000 salespeople were added through acquisitions. Soon after becoming CEO in 2005, Mark Hurd concluded that HP needed to beef up its, IT services business in order to go head-to-head against IBM, the unquestioned worldwide leader in IT services; IBM had 2007 revenues of about $54 billion and an estimated 7.2 percent global share of a $748 billion market. Hurd took a major step in that direction in May 2008, mak- ing his first really big strategic move as HP’s CEO by cutting a deal to acquire Electronic Data Sys- tems (EDS) for a cash price of $13.25 billion. According to Gartner (one of the world’s lead- ing technology research firms), EDS had IT ser- vice revenues of $22.1 billion in 2007, equal to a global share of 3.0 percent—ahead of HP with revenues of $17.3 billion and a 2.3 percent share (see Exhibit 10 for the sales and market shares of the world’s top six IT service providers), While a combined HP/EDS would have IT service rev- enues of more than $49 billion and market share of 5.3 percent—sufficient for a strong second place in the global market—industry observers were not enamored with the ability of HP/EDS to compete with IBM for high-end, high-profit buyers of IT services. IBM’s profit margin in IT services was almost double EDS’s 6 percent profit margin, partly because IBM catered to the needs of high-end customers and partly because IBM had about 74,000 employees in India, where wages for IT professionals were considerably lower—only 27,000 of EDS’s 140,000 employees were in India, EDS, founded in 1962, was best known for its capabilities in running clients’ mainframe sys- tems, operating help desks to support personal computer users, developing and running busi- ness software for its clients, and handling such automated IT processes as billing and payments for clients.”” In contrast, HP’s IT service business revolved around managing infrastructure—such as back-office server systems—for its large enter- prises, There was relatively little overlap between on Exhibit 10 Estimated Sales and Market Shares of the World's Six Leading Providers of Information Technology Services, 2007 UTE ey Sine 1BM 12% Electronic Data Systems (EDS) 224 30 ‘Accenture 20.6 28 Fujitsu 18.6 25 Hewlett-Packard 173" 23 Computer Sciences Corp. (C80) 16:3 All others 599. Totals $748, *Gartner's $173 billion estimate of for HP's 2007 revenues in IT ‘services exceeds the $16.6 billion reported by HP in its 2007 10-K report and shown in Exhibit 8 ‘Source: Gartner, a reported in Justin Scheck and Ben Werthen, “Hewlett-Packard Takes Aim at IBM," The Wall Street Journal, May 14, 2008, p. Bt the customer bases of the two companies. HP executives believed there was plenty of opportu- nity to cut costs at EDS and that there were clear revenue-boosting opportunities, such as expand- ing sales of managed printing services. Even so, HP's shareholders were unenthusiastic about the EDS acquisition—HP’s stock price fell more than $10 per share in the two days following news of the acquisition but recovered $2.50 of the drop within a week. DELL'S FUTURE PROSPECTS Ina February 2003 article in Business 2.0, Michael Dell said, “The best way to describe us now is as a broad computer systems and services company. We have a pretty simple system. The most impor- tant thing is to satisfy our customers, The second most important thing is to be profitable. If we don’t do the first one well, the second one won't happen.””8 For the most part, Michael Dell was not particularly concerned about the efforts ofcr Part2_ Cases in Crafting and Executing Strategy competitors to copy many aspects of Dell’s build- to-order, sell-direct strategy. He explained why on at least two occasions: ‘The competition started copying us seven years ago. That's when we were a $1 billion business... And they haven't made much progress to be hon- est with you. The learning curve for them is di cult. It's like going from baseball to soccer.” think a lot of people have analyzed our busi- ness model; a lot of people have written about it and tried to understand it. This is an 18-year process. .. . It comes from many, many cycles of learning, . . . It’s very, very different than design- ing products to be built to stock. . . . Our whole company is oriented around a very different way of operating. . . . I don't, for any second, believe that they are not trying to catch up. But it is also safe to assume that Dell is not staying in the same place.” On other occasions, Michael Dell spoke about the size of the company’s future opportunities: When technologies begin to standardize or com- moditize, the game starts to change. Markets open up to be volume markets and this is very much where Dell has made its mark—first in the PC market in desktops and notebooks and then in the server market and the storage market and services and data networking. We continue to expand the array of products that we sell, the array of services and, of course, expand on a geographic basis. The way we think about it is that there are all of these various technologies out there. ... What we have been able to do is build a business system that takes those technological ingredients, translates them into products and services, and gets them to the customer more efficiently than any company around.’! There are enormous opportunities for us to grow across multiple dimensions in terms of products, with servers, storage, printing and services representing huge realm of expansion for us. There’s geographic expansion and market share expansion back in the core business. The primary focus for us is picking those opportuni- ties, seizing on them, and making sure we have the talent and the leadership growing inside the com- pany to support all that growth. And there’s also a network effect here. As we grow our product lines and enter new markets, we see a faster ability to gain share in new markets versus ones we've previ- ously entered.*? ‘A great portion of our growth will come from key markets outside the U.S. We have about 10 percent market share outside the United States, so there's definitely room to grow. We'll grow in the enterprise with servers, storage, and services. Our growth will come from new areas like print- ing. And, quite frankly, those are really enough. ‘There are other things that I could mention, other things we do, but those opportunities I mentioned can drive us to $80 billion and beyond.®® That Dell had ample growth opportunities was indisputable—in 2007, it only had a minus- cule 2 percent share of the $1.2 trillion global market for IT products and services, Exhibit 11 shows Dell’s principal competitors in each of the industry's major product categories and its esti- mated 2007 market shares in each category. In 2008, despite near-term prospects of slug- gish economic growth in the United States and perhaps elsewhere, Michael Dell remained enthu- siastic about the unrivaled opportunity for the company’s business given that the number of peo- ple online globally (via PCs, cell phones, and other devices with Internet connectivity) was expected to increase from just over 1 billion in 2008 to over 2 billion by 2011: The world is witnessing the most exciting and promising period for technology ever seen. We call it the “Connected Era.” The second billion people coming online, many from the world’s fast grow- ing and emerging economies, expect a different technology experience to the first. The Internet has unleashed billions of new conversations and made it possible for people to connect in new ways. The emergence of this connected era is arguably the most influential single trend remodeling the world today.** In May 2008, the latest sales and market share data indicated that Dell might be closing the gap on Hewlett-Packard and on the verge of mounting another run at being the global leader in PC sales, Exhibit 12 shows the sales and mar- ket shares of the world’s top five PC vendors in the first quarter of 2008 as compared to the fourth quarter of 2007. Moreover, Dell’s senior executives believed that their aggressive moves to reduce costs would help restore profit margins, given that there seemed to be some modest relief from having to contend with eroding average rev- enues per unit sold (see Exhibit 7). However, by late Fall 2008, Dell’s prospects for overtaking HP were looking more bleak. Global recessionary forces had caused a significantCase 4 Dell Inc. in 2008: Can It Overtake Hewlett-Packard as the Worldwide Leader in Personal Computers? Exhibit 11 Product Category, 2007 pect tere Dell's Principal Competitors cn Dell's Principal Competitors and Dell’s Estimated Market Shares by eae Sic enced Pearce) Pree eed PCs Hewlett-Packard (maker of both Compaq and HP brands), Lenovo, Apple, Acer, Toshiba, ‘Sony, Fujitsu-Siemens (in Europe and Japan) $375 billion 18% Servers Hewlett-Packard, IBM, Sun Microsystems, Fujtsu $ 60 billion 11% Data storage devices Hewlett-Packard, IBM, EMC, Hitachi $ 48 billion ~5% Networking switches Cisco Systems, Broadcom, and related equipment Enterasys, Nortel, 3Com, Alrespace, Proxim ~$ 65 billion 2% Printers and printer Hewlett-Packard, Lexmark, Canon, cartridges Epson ~$ 50 billion 5% Services Accenture, IBM, Hewlett-Packard, Fujitsu, EDS, many others. ‘$748 billion <1% ‘Source: Compiled by the case authors from a variety of sources, including International Data Corporation, www.dell.com, and The Wall ‘Street Journal, May 14, 2008, p. 81. Exhibit 12 Worldwide Unit Sales and Market Shares of Top Five PC Manufacturers, Gieuraietesui0 esi 1 Hewlett-Packard 13,251,000 19.1% 2 Dell 10,913,000 187 3 ‘Avert 6,914,000 99 4 Lenovo 4,814,000 69 5 Toshiba 3,069,000 44 All Others 30,597,000 _43.9 Total 69,498,000 100.0% ‘st Quarter 2008 versus Fourth Quarter 2007 Cerra Sa aeeLcuSa! 11,291,000 18.6% 8,971,000 148 4,164,000 69 3,980,000 66 2,544,000 42 29,674,000 48.9 60,624,000 100.0% “Figures for Acer include shipments of Gateway, which was acquired by Acer in 2007. ‘Source: International Data Corporation, as per posting at www. slowdown in global IT spending during 2008 and even larger cutbacks were being forecast for at least the first half of 2009 in light of the global financial crisis that emerged in Fall 2008. Still, HP. reported a 5 percent increase in revenues for its 2008 fourth quarter ending October 31 (excluding the effect of its recent acquisition of EDS) versus the year earlier 2007 fourth quarter and a 2008 .com (accessed May 12, 2008), fourth quarter earnings increase of 4 percent; moreover HP was forecasting that fiscal 2009 revenues would be in the $127.5 to $130 billion range, up from $118.4 billion in 2008. Dell’s sales revenues in the third quarter of 2008 were 3 per- cent below those in the 2007 third quarter on unit- shipment growth of 3 percent; Dell’s third quarter 2008 net profits were down 5 percent.80 The Wall Street Journal reported in Septem- ber 2008 that Dell was trying to sell its worldwide network of computer factories in an effort to reduce production costs; the apparent plan was to enter into agreements with contract manufactur- ers to produce its PCs, While Dell had for many years been the industry leader in lean manufactur- ing approaches and cost-efficient build-to-order production methods and was still the low-cost leader in producing desktop PCs, it had fallen behind contract manufacturers in producing notebook PCs cost efficiently—and there was a pronounced shift among individual consumers to purchase laptop PCs instead of desktops. Laptop PCs were more complex and labor-intensive to assemble than were desktops, To help contain the assembly costs of laptops, Dell had already begun having Asian contract manufacturers partially assemble its laptops; these partly assembled lap- top units were then shipped to Dell’s own plants where assembly was completed. Because each lap- top was produced at two factories, Dell referred to its assembly of laptops as a “two-two” system. But the two-touch system was more costly than simply having a contract manufacturer in Asia Part2 Cases in Crafting and Executing Strategy perform the entire assembly: hence, Dell’s inter- est in abandoning in-house production altogether and shifting to 100 percent outsourcing. As of late November 2008, Dell had found no buyers for its plants. But the company had nonetheless begun outsourcing the full assembly of some laptop models to contract manufactur- ers (such as Taiwan's Foxconn Group) to elim nate the extra costs of the two-touch system, and it had made significant progress in cutting oper- ating expenses elsewhere—operating expenses were 12.1 percent of revenues in the 2008 third quarter versus 12.8 percent in the 2007 third quarter. There were some other positives. In the 2008 third quarter, Dell’s Global Consumer busi- ness posted a 10 percent revenue gain on a 32 per- cent increase in unit shipments—Dell’s revenue growth was double the industry average and the profitability of this business was the highest in 13 quarters, Dell consumer products won 41 awards in the 2008 third quarter—the Inspiron Mini 9 notebook was selected as one of Time Magazine's “Best Inventions of 2008” and as one of CNET's “10 Most Cutting Edge Products of 2008.” As quoted in Dell Puts Heppy Customers Fist Nikkel Weeki, December 16, 2002, # sichae! Del: On Managing Growth” M/S ‘Wook, September 5, 1988, p. 1 ® -The Education of Michael Deli; Business Wook, March 22, 1989, p. 88. Dale 2005 10+ report, pp. 1-2. * Remarks by Kevin Flins in a speech at Peking University, Novernber 2, 2008, and posted at www dll.com. As quoted In Joan Magrota, “The Power of Virtua nt An Interview with Dell (Computer's Michael Deli Harvard Business Review, March-April 1998, p. 74 ibid, . 75. * Speech by Michael Dell at University of Toronto, September 21, 2004, www.dell.com {eocessed Dacombor 16, 200). Ibi, p. 78 *® lemarks by Michael Del, Gartner Sympo- sium, Orlando, FL, October 20, 2005, vv. del.com. Quoted in Neel Chowdhury, “Dell Cracks China’ Fortune, June 21, 1989, p 121, ° Romarks by Michael Del, Geriner Fall Sym posium, Orlando, FL, October 8, 2002, wer del.com. * lemarks by Michael Del tthe University of ‘Toronto, September 21, 2004, srww.dell.com. * quoted inthe Fharcial Times Global News Wire, October 1, 2002 | Remarks by Michael Dell, Gartner Sympo- sium, Orlando, FL, October 20, 2008, ‘wor dll com. "Kevin Bolins, “Using Information to Speed Exocution’ Harvard Business Review, March-April 1998, pt "As quoied in Don Tennant. ‘Dell Exec ‘Addresses Service Woes in Run-up t @-Service Launch’ Computervorid, March 17 2008, wiww.computerworkd.com (accessed May 12, 2008) bi, ‘#Magrota, “The Power of Virtual Integration? By Michael! Dek Rocks Fortune, May 11, 1998, p61 2 Quoted In Kathryn Jonas, "Tho Dell Way Business 20, February 2003. = Compary press release, Apri 6, 2008. "Much of his paragraph was developed by ‘the case authors trom information in Hewiet- Packara's 2007 annual report Can Compaq Catch Up” BusinassWeok, May 3, 1999, p 163, ® Company press release and speach posted at wwwhp.com, accessed December 1, 2006: 4 Louise Lee and Poter Burrows, What's Dogging Del's Stock’ BusinessWeek, Seotember 5, 2008, p. 20. + Justin Schock and Ben Worthen, “Howiet- Packard Takes Aim at |8M/ The Wal Strest Journal, May 14, 2008, p. Bt Business 2.0, Fobruary 2009, www. bbusiness2.com + Comments made to students atthe Un- ‘versity of North Carolina and reported in the Raleigh News & Obsarvar, November 16, 1209. Remarks by Michaol Del, Gartner Fall Sym- posium, Orlando, FL, October 9, 2002, ‘row del. com, Remarks by Michael Dell, MIT Sloan School ‘of Management, Septembor 26, 2002, ‘wv. dal.com, + Remarks by Michael Dell, University of ‘Toronto, September 21,2004, www.dell.com. Remarks by Michael Dell, Gartner Syrnpo- sium, Orlando FL, October 20, 2005, ‘www del.com, + Remarks by Michael Dello reporters in Dubai, company press release, Apri, 2008,