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MATCHING DELL

This is a contextual case, not a strategic situational decision case. It describes the evolution
of the personal computer industry, with market and company financial and other
information for the 1990s, up to calendar 1998. Dells highly successful direct distribution
model is being copied by other manufacturers, Compaq, IBM, Hewlett-Packard, and Gateway
2000, as they are all attempting to become more competitive and increase their market
shares.

Student Learning

Students will be led to understand situational:


- Market and marketing analysis
- Financial analysis
- Business analysis, including marketing mix, industry key factors for success, company
competitive advantages, and business model

All cases are self-contained and no extra research is expected. Submitted Case Items
Analyses and Case Reports must be based on the Strategic Situation Analysis and
Planning (SSAP) Method. A so-called SWOT Analysis format is not acceptable.

In all strategic situations the following items will usually need to be considered:
- Long-term sales and revenue growth, and capital structure
- Short-term working capital and cash-flow position, and profits and
financial returns growth.
- The overarching or underlying management/operations/organization/
people challenges or problems that are preventing the business sales
and profits challenges from being recognized and responded to.

Strategic situation analysis is using critical thinking and is asking the right questions to
identify the important factors and issues in the situation at the time. The right questions
must be asked before the correct answers can be obtained. The SSAP method is
intended to assist in developing critical thinking skills, in asking the right questions and
finding the correct answers. Students are expected to think for themselves in applying
the SSAP method for case situational analysis, in making their own findings and
reaching their own conclusions (SSAP Steps 1-8), and in formulating and substantiating
their own strategy and planning recommendations (SSAP Steps 9-11).

SSAP APPROACH

Date of Case Situation: Early 1999

Date of Last Financial Report Information: End of calendar 1998 for most companies, and
January 31st, 1999 for Dell. (Hence, Dell 1999 results are comparable with other companies
1998 results.)

Perspective: External investment analyst evaluating the personal computer industry and its
constituent companies as opportunities for equity investment. This analyst would be
interested in the sales, profitability and profit performance of Dell and its competitors in the
past and present, and the reasons why. Based on this information, the analyst would also be
interested in the future strategies and performance of Dell and its competitors, to decide in
which company or companies to invest.

SSAP STEPS

ANALYSIS OF SITUATION, ACTIVITIES AND PERFORMANCE IN THE PAST AND


PRESENT
SSAP Steps 1-8 are analysis of the existing business(es) only. The SSAP Method does
contain at different Steps, some different ways to look for the same information.
Therefore, in Steps 1-4, there is no need to repeat information if it has already been
obtained and analyzed in a previous Step, and Steps 5-8 need not repeat Steps 1-4
information but can build on it.

Step 1. Financial Analysis


This can be focused on measuring Dells performance relative to its competitors, and will
involve identifying the measures of performance financial and otherwise. A complete
analysis of the case financial statements and other information for Dell and its competitors is
needed. This analysis should describe the changing financial performance and position of
Dell versus other companies as the PC industry has evolved to late 1998. Dells cost and
price advantages versus the Compaq-reseller combination can be explored and quantified.

Step 2. External Business Environment Analysis


How and why the PC industry constituted by Dell and its competitors came to have such low
profitability can be analysed and described, This analysis can be based on the evolution of
the PC industry and its structure. It is important to understand the microprocessor and the
operating system standards as structural determinants. If PC manufacturing is not very
profitable, who does make the profits and why?

For the industry, quantification of the sizes and growth rates of the market and Dells and its
competitors market shares, all in unit and dollar terms, can be sought. Some assessment of
the five competitive forces and their evolution as the market has grown may also be useful.

Step 3. Business and Corporate Strategy Analysis


Step 3 can be focused on identifying Dells strategy and actions in the evolving PC industry to
build competitive advantage and deliver the financial performance detailed in Step 1. The
nature and size of Dells competitive advantage(s) versus other companies in the evolving PC
industry can be described. This will likely require some analysis of customer needs and of
the marketing mix for each competitor. Dells past mistakes may also be informative.

Dells advantage(s) will need to be looked at relative to imitative and other moves of
competitors as the industry has evolved. As a result of this analysis, information should be
available to describe: the moves that other companies in the PC industry have made in
response to Dells competitive advantage(s); the relative success or otherwise of these moves;
and, the nature and the size of any advantage(s) that Dell has at the date of the case, i.e.,
early 1999?

Step 4. Operations and Organization Analysis


Step 4 is an analytical comparison of Dells and competitors functional operations value
chains, and organization and management supporting functions. If most analysis has been
done in previous Steps, this Step 4 need not repeat this analysis and a short, summary
description can be sufficient. This analysis should include:
- Why Dell has been so successful despite the low average profitability in the PC
industry;
- The nature and extent of Dells competitive advantage(s) prior to more recent
(1997-98) efforts by competitors to match Dell; and,
- The extent to which competitors have been able to catch up and reduce Dells
value-chain advantage(s), by late 1998.

ANALYTICAL PROJECTIONS OF FUTURE EXPECTED SITUATION, ACTIVITIES AND


PERFORMANCE

Step 8 is the summary analysis of the past, present and future strategic situation of the
company, i.e., Steps 1-8, upon which planning for the future, i.e., Steps 9-11, is based.
Step 8 must be based on the evidence and conclusions from the previous analytical
Steps 1-7. Situational opportunities, issues or threats, and organizational strengths,
challenges and weaknesses, may be identified at Step 8, but this should be done
advisedly based on preceding analysis. New business possibilities, including internal
development, joint ventures, acquisitions or
mergers, may be identified at Steps 5-8 but their analysis is to be left to Step 9.

Steps 6-8 can be incorporated in the Market Penetration box of Step 9 and this will save
some writing. Step 9 starts with the four boxes in the product/market matrix: Market
Penetration, Product Development, Market Development, and Innovation/Diversification.
The Market Penetration box therefore is made up of two parts: Market Penetration
Continuing (as Steps 6 -8) and Market Penetration Desired (for any Step 9 strategy
intent over and above the continuing level).

Step 5. External Business Environment Future Analytical Projections


Step 5 need not repeat information that has already been given in Steps 1-4. Step 5 is
important because this is where analytical projections of industry size and growth, and
structural development, can be considered, based on Step 2. Based on your analytical
projections, what is the expected future of the PC business, including customers, market and
its constituent competitors?

Step 6. Business and Corporate Strategy Future Analytical Projections


Step 7. Operations and Organization Future Analytical Projections
Step 8. Financial Future Analytical Projections
There is no need to do Steps 6-8, as we know that industry dynamics are continuing and
that Dell and its competitors strategies are changing, so that there is no do nothing
baseline.

PLANNING FOR FUTURE SITUATIONAL ACTION AND PERFORMANCE


As well as strategy and planning for the existing business(es) of the company, analysis
of new business possibilities, including internal development, joint ventures and
acquisitions or mergers, recognized at Steps 5-8, is carried out at Steps 9-11. These
new possibilities each can be analyzed using SSAP Steps 1-8 and then their possible
strategic combination with the companys existing business(es), operations and
organization considered.

Step 9 starts with the four boxes in the product/market matrix: Market Penetration,
Product Development, Market Development, and Innovation/Diversification. Steps 6-8
can be incorporated in the Market Penetration box of Step 9 and this will save some
writing. The Market Penetration box therefore is made up of two parts: Market
Penetration Continuing (as Steps 6 -8) and Market Penetration Desired (for any Step
9 strategy intent over and above the continuing level).

Step 9. Business and Corporate Strategy and Planning for the Future
Step 10. Financial Strategy and Planning for the Future
Step 11. Operations and Organization Strategy and Planning for the Future
For each of the competitors that constitute the PC business, the product/market
development matrix (SSAP Method Exhibit 14) can be used as a categorial framework to
visualize possible situational strategic directions for the future. Situational strategy
alternatives that exist for each competitor can be described and evaluated, depending on its
competitive position in the industry.

- As an industry analyst, what business and corporate strategic moves and/or actions do you
perceive that Dell and its major rivals (IBM, Compaq, Hewlett-Packard and Gateway) will
likely be undertaking in 1999 and into the future?

FINAL QUESTION

Based on your SSAP analysis:


- As an investment analyst, which company or companies in the PC industry would you
recommend as investment opportunities to your clients, and why?

ADDENDUM: FURTHER INFORMATION ON STEPS 1-4

Note that the year-end for Dell is January 31. Therefore, for example, Dell financial
information for fiscal 1999, i.e., for y/e January 31, 1999, is comparable to other companies
financial information for fiscal 1998, i.e., for y/e December 31, 1998.

At all Steps 1-4, where possible, comparative analysis of Dell versus its competitors is
required. The primary comparisons are with Compaq and Gateway, and their business is
over 90% PC dependent.

Be sure to consider what base year you are going to use for trend calculations. It is useful to
have financial and marketing trends calculated on the same base year, if you want to
compare them directly.
When doing analysis the case exhibits are important. Adopt the approach of a detective
interpreting the puzzle of the crime scene. For example, in Case Exhibit 1, rest of world
numbers can be obtained by subtracting United States numbers from Worldwide numbers.
Can you calculate average unit prices for each year? Regarding Case Exhibit 2, market share
figures are indicated as percentages but the numbers in Case Exhibit 1 are actual yearly
totals. You need to work out actual units for each company in order to do trends versus
competitors and versus total segment and market. Apply similar thinking to Exhibit 3. What
can you deduce from the other case exhibits? What are the drivers of the market and of
competition?

Presumably, a company whose shares of important and growing segments, and of the market
as a whole, are growing faster than the segments or the market is most competitive but how
and why?

Analysis of the financial information can be done using the Addendum to the SSAP Method,
but you must know what you are looking for. This case is comparative analysis of industry
competitors from the perspective of a potential investor. What performance measures are
therefore most important in this particular situation? (I do not mind if you calculate
everything, but this takes a lot of time and the critical thinker is one who looks for and at the
important things in the situation at the time.)

At Step 3, identify the marketing mix for each company and then identify competitive
advantages, key factors for success, and competitive advantages. What is Dells business
model and how is this linked to Dells competitive advantage?

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