Dell Inc Case Study

When Dell started his business with the simple concept of built-to-order personal computers sold directly to customers. Michael Dell believed his approach to the personal computer business had two advantages. Firs, in bypassing distributors and retailers, he eliminated the markups of resellers. There by improving his profits. In addition, by building computers only when ordered, Michael Dell greatly reduced the costs and riss associated with carrying large stocks of parts, components, and especially finished goods.

When Dell shifted to large-scale operations, the company initially retained the direct-to-consumer strategy. However, between 1990 and 1994, Dell Computer did distribute its computer products through such retail outlets as Wal-Mart, Staples, and in several Latin American countries, Xerox. However, by 1994 Michael Dell had realized that the profit margins associated with selling through retail distribution channels were too tight. Therefore, the company discontinued retail sales to refocus on its direct selling efforts.

Dell initially started direct sales via mail and phone orders. However, in 1988 the same year Dell had its initial public stock issuance Del added a sales force to focus on the sales and service relationships with the company’s large corporate and government customers. In 1994, Dell became the firs computer company to list a Web site. Initially, Dell’s Web site merely listed price and product information. However, Dell quickly recognized the advantages of direct sales via the company’s Web site. Due mostly to the difficulties and lower profits of selling to single house-holds and consumers, Dell largely ignored the consumer market. However, direct sales to consumers via the company’s Web site began to increase dramatically in 1996. By 1999 Dell Computer was the largest retailer then on the Internet.

Dell’s direct- to-consumer strategy has given the company a substantial cost and profit margin advantage over its rivals. Companies such as Compaq, IBM, and Hewlett-Packard manufacture personal computers in large volumes and keep their distributors and retailers stocked with ample inventories. In contrast, Dell manufactures computers only when an order is received. In doing so, Dell has virtually eliminated finished product and component parts. These cost and profit advantages have allowed Dell to prosper and grow during the past several years, while many of its competitors have weakened or gone out of business.

In March 2004, Gateway completed its acquisition of eMachines, Inc., a privately-held computer manufacturer and distributor. Ted Wait, CEO of Gateway, hoped the merger would allow Gateway to better compete with Hewlett-Packard and Dell. In December 2004, it was announced that Lenovo Group Limited, the largest information technology company in China, would acquire IBM’s Personal Computing Division. While its rivals have continued to struggle, Dell has grown to be the largest PC suppler in the world with just under 18 percent of the global market.

Management Issues ( Vision Statement )

It’s the way we do business. It’s the way we interact with the community. It’s the way we interpret the world around us our customers’ needs, the future of technology, and the global business climate. Whatever changes that future may bring, our vision Dell Vision will be our guiding force.

Mission Statement

Dell’s mission is to be the most successful Computer Company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of:

Highest quality
Leading technology
Competitive pricing
Individual and company accountability
Best-in-class service and support
Flexible customization capability
Superior corporate citizenship
Financial stability

Organizational Structure

Michael Dell is the chairman of the board of directors of Dell Inc. He has held this position since he founded the company in 1984, In July 2004, Kevin Rollins assumed the titles of president and chief executive officer. Kevin Rollins has been with Dell since accepting the position of senior vice president, corporate strategy, in 1996. Headquartered in Round Rock, Texas, Dell Inc. is managed on a geographic basis. The three geographic segments are the Americas, Europe, and Asia-Pacific.

Dell Inc. maintains more than 7 million square feet of office, research, manufacturing, and distribution space in the United States. In addition, a new half-million square-feet manufacturing facility is under construction in North Carolina and is expected to begin operations in late 2006.

Dell’s sales in America are reported in two different categories, Business and U.S. Consumer. The net revenue for business sales of $25,339 million in the Americas segment is by far the company’s largest segment, accounting for almost 52 percent of total net revenue for 2004. With $2,579 million in operating income, business sales in the Americas segment accounted for almost 61 percent of total operating income for 2005. The net revenue for consumer sales in the Americas segment was $7,601 million, accounting for just over 15 percent of total net revenue for 2004. Consumer sales in the Americas segment generated $399 million and accounted for just over 9 percent fo total operating income for 2004. Dell holds 29.1 percent of the total markets for personal computer sales n the Americas, easily placing Dell ahead of its competitors. With total sales of $32.940 million, the Americas segment accounts for almost 67 percent of Dell’s total net revenue. Combined operating income for the Americans segment of $2,978 million accounted for almost exactly 70 percent of Dell’s total operating income for 2004.In addition to its Americas-based operations, Dell maintains almost 4.5 million square feet of office, research, manufacturing, and distribution space in 43 locations around the glob. The European segment based in Blackwell, England, covers the European countries and also some countries in the Middle East and Africa. In 2004, sales in the European segment generated $10,787 million in net revenue, accounting for almost 22 percent of total net revenue. In 2004, sales in the European segment generated $818 million in operating income, accounting for just over percent of total operating income. Dell’s11.7 percent market share for sales of personal computer sales in Europe means that Dell is the second-largest supplier of personal computers in the segment.

The Asia-Pacific segment, based in Singapore, covers the Pacific Rim, including Japan, Australia, and New Zealand. In 2004, sales in the Asia-Pacific segment generated $5,478 million in net revenue, accounting for just over 11 percent of total net revenue, In 2004, sales in the Asian-Pacific segment generated $458 million in operating income, accounting for almost 11 percent of total operating income. Dell’s 8.3 percent market share for sales of personal computer sales in the Asia-Pacific segment means that Dell is the third-largest supplier of personal computers in this segment.

Manufacturing

Dell manufactures its computer systems in six locations: Austin, Texas; Nashville, Tennessee; EL dorado do Sul, Brazil (Americas):Limerick, Ireland (Europe, Middle East, and Africa); Penang, Malaysia Asia-Pacific and Japan; and Xiamenm China. The manufacturing process at Dell’s worldwide manufacturing facilities comprises assembly, testing, and quality control of its computer systems. Parts, components, and subassemblies purchased form suppliers are tested and held to quality standards. Because of its build-to order manufacturing process, Dell quickly produces customized computer systems while achieving rapid inventory turnover and reduced inventory levels. These attributes lessen Dell’s exposure to the risk of declining inventory values. Another advantage of this flexible manufacturing process is that Dell can quickly incorporate new technologies or components into its product offerings. To ensure a defect-free product, testing is performed at various points during the assembly process and on the final products.

Twenty-First-Century Challenges in Strategic Management

Three particular challenges or decisions that face all strategists today are (1) deciding whether the process should be more an art or a science, (2) deciding whether  strategies should be visible or hidden form stakeholders, and (3) deciding whether the process should be more top-town or bottom-up in their firm.

“Organizations are most vulnerable when they are at the peak of their success.”
(R.T. Lenz)

The Art or Science Issue

This site is consistent with most of the strategy literature in advocating that strategic management e viewed more as a science than an art. This perspective contends that firm need to systematically assess their external and internal environments, conduct research; carefully evaluated the pros and cons of various alternatives, perform analyses, and then decide upon a particular course of action. In contrast, Mintzberg’s notion of “crafting” strategies embodies the artistic mode, which suggests that strategic decision making be based primarily on holistic thinking, intuition, creativity, and imagination. Mintzberg and his followers reject strategies that result from objective analysis, preferring instead subjective imagination. “Strategy scientists” reflect strategies that emerge form emotion, hunch, creativity, and politics.
 Proponents of the artistic view often consider strategic planning exercises to be time poorly spent. The Mintzberg philosophy insists on informality, wheras strategy scientists and in this site insists on more formality. Mintzberg refers to strategic planning as an “emergent” process where as strategy scientists use the term “deliberate” process.

The answer to the art versus science question is one that strategists must decide for themselves, and certainly the tow approaches are not mutually exclusive. In deciding which approach is more effective, however, consider that the business world today has become increasingly complex and more intensely competitive. There is less room for error in strategic planning. We also discussed in over view category posts that the importance of intuition and experience and subjectivity in strategic planning, and even the weights  and ratings discussed in preceding posts that  certainly, in smaller firms there can be more informality in the process comrade to larger firms, but even for smaller firms, a wealth of competitive information is available on the Internet and else where and should be collected, assimilated, and evaluated before deciding on a course of action upon which survival of the firm may hinge. The livelihood of countless employees and shareholders may hinge on the effectiveness of strategies selected. Too much is at stake to be less than thorough in formulating strategies. It is not wise for strategies to rely too heavily on gut feeling and opinion instead of research data, competitive intelligence, and analysis in formulating strategies.

The Visible or Hidden Issue

There are certainly good reasons to keep the strategy process and strategies themselves visible and open rather that hidden and secret. There are also good reasons to keep strategies hidden from all but top-level executives. Strategists must decide for themselves what is best for their firms. This site comes down largely on the side of being visible and open but certainly this may not be best for all strategists and all firms. As pointed out in our first category Sun Tzu argued that all war is based on deception and that the best maneuvers are those not easily predicted by rivals. Business is analog ours to war.

Some reason to be completely open with the strategy process and resultant decision are these;

  1. Managers, employees, and other stakeholders can actively contribute to the process. Hey often have excellent ideas. Secrecy would forgo many excellent ideas.
  2. Investors, creditors, and other stakeholders have greater basis for supporting a firm when they know what the firm is dong and where the firms is going.
  3. Visibility promotes democracy, whereas secrecy promotes autocracy. Domestic firms and most foreign firms prefer democracy over autocracy as a management style.
  4. Participation and openness enhance understanding, commitment, and communication within the firm.
 Reasons why some firms prefer to conduct strategic planning in secret and keep strategies hidden form all but the highest-level executives are as follows.

  1. Free dissemination of a firm’s strategies may easily translate into competitive intelligence for rival firms who could exploit the firm given that information.
  2. Secrecy limits criticism, second guessing, and hindsight.
  3. Participants in a visible strategy process become more attractive to rival firms who may lure them away.
  4. Secrecy limits rival firms form imitating or duplicating the firms’ strategies and undermining the firms.
 The obvious benefits of ht evisible versus hidden extremes suggest that a working balance must be sought between the apparent contradictions. Parnell says that in a perfect world all key individuals both inside and outside the firm should be involved in strategic planning, but in practice particularly sensitive and confidential information should always remain strictly confidential to top managers. His balancing act is difficult but essential for survival of the firm.

The Top-Down or Bottom-Up Approach

Proponents of the top-down approach contend that top executives are the only persons in the form with the collective experience, acumen, and fiduciary responsibility to make key strategy decisions. In contrast, bottom-up advocates argue that lower- and middle-level managers and employees who will be implementing the strategies need to be actively involved in the process of formulating the strategies to ensure their support and commitment. Recent strategy research and this site emphasize the bottom-up approach, but earlier work by Schendel and Hofer stressed the need for their firms at a particular time, while cognizant of the fact that current research supports the bottom-up approach, at least among U.S. firms. Increased education and diversity of the workforce at all levels are reasons why middle-and lower-level managers and even non mangers should be invited to participate into he firm’s strategic planning process, at least to the extent that they are wiling and able to contribute.

Auditing in Strategy Evaluation Process

A frequently used tool in strategy evaluation is the audit. Auditing is defined by the American Accounting Association (AAA) as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria, and communicating the results to interested users”. Since the Enron, WorldCom, and Johnson & Johnson scandals, auditing has taken on greater emphasis and care in companies. Independent auditors basically are certified public accountants (CPAs) who provide their services to organizations for a fee; they examine the financial statements of an organization to determine whether they have been prepared according to generally accepted accounting principles (GAAP) and whether they fairly represent the activities of the firm. Independent auditors use a set of  standards called generally accepted auditing standards (GAAS). Public accounting firms often have a consulting arm that provides strategy-evaluation services.

“Planners should not plan, but serve as facilitators, catalysts, inquirers, educators, and synthesizers to guide the planning process effectively.” (A.Hax and N. Majluf)

 Two government agencies the General Accounting Office (GAO) and the Internal Revenue Service (IRS) employ government auditors responsible for making sure that organization comply with federal laws, statutes, and policies. GAO and IRS auditors can audit any public or private organizations. The third group of auditors consists of employees within an organization who are responsible for safeguarding company assets, for assessing the efficiency of company operations, and for ensuring that generally accepted business procedures are practiced.

The Environmental Audit

For an increasing number of firms, overseeing environmental affairs is no longer a technical function performed by specialists; rather, it has become an important strategic management concern. Product design, manufacturing, transportation, customer use, packaging, product disposal, and corporate rewards and sanctions should reflect environmental considerations. Firms that effectively manage environmental affairs are benefiting from constructive relations with employees, consumers, suppliers, and distributors. As indicated in the Natural Environment Perspective, J.P. Morgan bank has made environmental policy disuse in its lending policy.

Shimell emphasized the need for organizations to conduct environmental audits of their operations and to develop and should include training workshops in which staff can help design and implement the policy .The CEP should be budgeted, and requisite funds should be allocated to ensure that it is not a public relations facade. A statement of Environmental Policy should be published periodically to inform shared holders and the public of environmental actions taken b the firms.

Instituting an environmental audit can include moving environmental affairs from the staff side of the organization to the line side. Some firms are also introducing environmental criteria and objectives in their performance appraisal instruments and systems. Conoco, for example, ties compensation of all its top managers to environmental action plans. Occidental Chemical includes environmental responsibilities in all its job descriptions for positions.

What is Contingency Planning in Strategy Evaluation?

A basic premise of good strategic management is that firms plan ways to deal with unfavorable and favorable events before they occur. Too many organizations prepare contingency plans just for unfavorable events; this is a mistake, because both minimizing threats and capitalizing on opportunities can improve a fir’s competitive position.

Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events, such as strikes, boycotts, natural disasters, arrival of foreign impact of potential threats, organization should develop contingency plans as part of their strategy-evaluation process. Contingency plans can be defined as alternative plans that can e put into effect if certain key events do not occur as expected. Only high-priority areas require the insurance of contingency plans. Strategists cannot and should not try to cover all bases by planning for all possible contingencies. But in any case, contingency plans should be as simple as possible.

“Strategy evaluation must make it as easy as possible for managers to revise their plans and reach quick agreement on the changes.” (Dale McConkey)

Some contingency plans commonly established by firms include the following.

  1. If a major competitor withdraws from particular markets as intelligence reports indicate, what actions should our firm take?
  2. If our sales objectives are not reached, what actions should our firms take to avoid profit losses?
  3. If demand for our new product exceeds plans, what actions should our firm take to meet the higher demand?
  4. If certain disasters occur-such as loss of computer capabilities; a hostile takeover attempt’ loss of patent protection; or destruction of manufacturing facilities because of earth quaked, tornados, or hurricanes-what actions should our firm take?
  5. If a new technological advancement makes our new product obsolete sooner that expected, what actions should our firm take?
 Too many organizations discard alternative strategies not selected for implementation although the work devoted to analyzing these options would render valuable information. Alternative strategies not selected for implementation can server as contingencey plans in case the strategy or strategies selected do not work. U.S. companies and governments are increasingly considering nuclear-generated electricity as the most efficient means of power generation. Many contingent plans certainly call for nuclear power rather than for coal- and gas- derived electricity. As indicated in the “Global Perspective”, the United States is well below many countries in the world in the percentage of poor derived from nuclear power plants.

When strategy-evaluation activities reveal the need to a major change quickly, an appropriate contingency plan can be executed in a timely way. Contingency plans can promote a strategist’s ability to respond quickly to key changes in the internal and external bases of an organization’s current strategy. For example, if underlying assumptions about the economy turn out to be wrong and contingency plans are ready, then mangers can make appropriate changes promptly.

 In some cases, external or internal conditions present unexpected opportunities. When such opportunities occur, contingency plans could allow an organization to quickly capitalize on them. Linneman and Chandran reported that contingency planning gab users, such as DuPont, Dow Chemical, Consolidated Fods, and Emerson Electric, there major benefits; (1) It permitted quick response to change, (2) it prevented panic in crisis situations, and (3) it made managers more adaptable by encouraging them to appreciate just how variable the future can be. They suggested that effective contingency planning involves a seven-step process.

  1. Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies.
  2. Specify trigger points. Calculate about when contingent events are likely ot occur.
  3. Assess the impact of each contingent event. Estimate the potential benefit or harm of each contingent event.
  4. Develop contingency plans. Be sure that contingency plans are compatible with current strategy and are economically feasible.
  5. Assess the counter impact of each contingency plan. That is, estimate how much each contingency plan will capitalize on or cancel our its associated contingent event. Doing this will quantify the potential value of each contingency plan.
  6.  Determine early warning signals for key contingent events. Monitor the early warning signals.
  7. For contingent events with reliable early warning signals, develop advance action plans to take advantage of the available lead time.

Characteristics of an Effective Evaluation System

Strategy evaluation must meet several basic requirements to be effective. First, strategy-evaluation activities must be economical; too much information can be just as bad as too little information and too many controls can do more harm than good. Strategy evaluation activities also should be meaningful they should specifically relate to a firm’s objectives. They should provide managers with useful information about tasks over which they have control and influence. Strategy-evaluation activities should provide timely information on occasion and in some areas, managers may daily need information. For example, when affirm has diversified by acquiring another firm, evaluative information may be needed frequently. However, in an R&D department, daily or even weekly evaluative information could be dysfunctional. Approximate information that is timely is generally more desirable as a basis for strategy evaluation than accurate information that doses not edict the present. Frequent measurement and rapid reporting may frustrate control rather than give better control. The time dimension of control must coincide with the time span of the event being measured.

Strategy evaluation should be designed to provide a true picture of what is happening. For example, in an ever economic downturn, productivity and profitability ratios may drop alarmingly, although employees and managers are actually working harder. Strategy evaluations should fairly portray this type of situation. Information derived from the strategy-evaluation process should facilitate action and should be directed to those individuals in the organizations who need to take action based on it. Managers commonly ignore evaluative reports that are provided only or informational purposes; not all managers need to receive all reports. Controls need to action-oriented rather than information-oriented.

The strategy-evaluation process should not dominate decisions; it should foster mutual understanding, trust, and common sense. No department should fail to cooperate with another in evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Complex strategy-evaluation system is its usefulness, not its complexity.

Large organizations require a more elaborate and detailed strategy-evaluation system because it is more difficult to coordinate efforts among different divisions and functional areas. Managers in small companies’ often communicate daily with each other and their employees and do not need expensive evaluative reporting systems. Familiarity with local environments usually makes gathering and evaluating information much easier for small organizations than for large businesses. But the key to an effective strategy-evaluation system may be the ability to convince participants that failure to accomplish certain objectives within a prescribed time is not necessarily a reflection of their performance.

There is no one ideal strategy-evaluation system. The unique characteristics of an organization, including fits size, management style, purpose, problems, and strengths, can determine a strategy-evaluation and control system’s final design

The Balanced Scorecard tool in Strategy Evaluation Process

Introduced earlier in my previous posts discussion of objectives, the Balanced Scorecard is an important strategy-evaluation tool. It is a process that allows firms to evaluate strategies from four perspectives: financial performance, customer knowledge, internal business processes, and learning and growth. The Balanced Scorecard analysis requires that firms seek answers to the following questions and utilize that information, in conjunction with financial measures, to adequately and more effectively evaluate strategies being implemented.

“Unless strategy evaluation is performed seriously and systematically, and unless strategists are willing to act on the results, energy will be used up defending yesterday. No one will have the time, resources, or will to work on exploiting today, let alone to work on making tomorrow.” (Peter Drucker)

  1. How well is the firm continually improving and creating value along a measures, such as innovation, technological leadership, product quality, operational process efficiencies, and soon?
  2. How well is the firm sustaining and ever improving upon its core competencies and competitive advantages?
  3. How satisfied are the firm’s customers?
 A sample Balanced Scored card is provided below. Notice that the firm examines six key issues in evaluating its strategies: (1) Customers, (2) Mangers/Employees, (3) Operations/Processes, (4) Community/Social Responsibility, (5) Business Ethics/Natural Environment, and (6) Financial. The basic form of a Balanced Scorecard may differ for different organizations. The Balanced Scorecard approach to strategy evaluation aims to balance long-term with short-term concerns, to balance financial with non financial concerns, and to balance internal with external concerns. It can be an excellent management tool, and it is used successfully today by Chemical Bank, Exxon/Mobile Corporation, CIGNA Property and Casualty Insurance, and numerous other firms. For example, Unilever has a financial objective to grow revenues by 5 percent to 6 percent annually. The company also has a strategic objective to reduce its 1,200 food, household, and personal care products to 400 core brands within three years. The Balanced Scorecard would be constructed differently, that is , adapted, to particular firms in various industries with the underlying theme or thrust being the same, which is to evaluate the firm’s strategies based upon both key quantitative and qualitative measures.

Published Sources of Strategy-Evaluation Information.

A number of publications are helpful in evaluating a firm’s strategies. For example, Fortune annually identifies and evaluates the Fortune 1,000 the largest manufacturers and the Fortune 50 the largest retailers, transportation companies, utilities, banks, insurance companies, and diversified financial corporations in the United States. Fortune ranks the best and worst performers on various factors, such as return on investment, sales volume, and profitability. In its March issue each year, Fortune publishes its strategy-evaluation research in a article entitled “America’s Most Admired Companies.” Nine key attributes serve as evaluative criteria: quality of management; innovativeness; quality of products or services; long-term investment value; financial soundness; community and environmental responsibility; ability to attract, develop, and keep talented people; use of corporate assets; and international acumen. IN October of each year, Fortune publishes additional strategy-evaluation research in a article entitled “The World’s Most Admired Companies.”

An Example Balanced Scorecard

Area of Objectives
Measure or Target
Time Expectation
Primary Responsibility
Customers



1



2



3



4



Managers/Employees



1



2



3



4



Operations/Processes



1



2



3



4



Community/Social Responsibility



1



2



3



4



Business Ethics/Natural Environment



1



2



3



4



Financial



1



2



3



4




Another excellent evaluation so a corporation in America, “The Annual Report on American Industry,” is published annually in the January issue of Forbes. It provides a detailed and comprehensive evaluation of hundreds of U.S. companies in many different industries. Business week, Industry Week, and Dun’s Business Month also periodically publish detailed evaluations of U.S. businesses and industries. Although published sources of strategy-evaluations information focus primarily on large, publicly held businesses, the comparative ratios and related information are widely used to evaluate small businesses and privately-owned firms as well.

Most Admired Companies (2010)

Rank
Company
Total Return (2009)
1
Dell
2.4%
2
General Electric
20.7%
3
Starbucks
88.1%
4
Wal-Mart Stores
0.4%
5
Southwest Airlines
1.0%
6
FedEx
46.4%
7
Berkshire Hathaway
4.3%
8
Microsoft
9.1%
9
Johnson & Johnson
25.1%
10
Procter & Gamble
11.9%
Top 10 Average SIPSCO

23.1%,10.88%