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Why looking southeast may be a wise move for Dell

Dell global strategy

What do you do when your best friend meets the new kid on the block who happens to be cooler than you and has better toys? You can pick up new toys, find a more loyal friend, or move to a new block. To be safe, you should try all three.

For most kids, where our parents settle down is rarely a function of our popularity, but in this particular case, we’re not talking about Johnny losing Sally to Tommy. We’re talking about Dell. The block is the U.S. market. The best friend is the domestic consumer. And the new kid? Well, kids is more appropriate, but the coolest one on the street is the guitar playing, cigarette smoking, surf board riding Apple, which has resumed its role as a harbinger of counter-culture radicalization of the PC marketplace.

So what do you do when the playground rules begin to change and cliques replace conformity? How do you stay in step with the Justin Bieber that moved in next door? We advise that you forget the singing lessons and trips to Urban Outfitters and embrace a monastic existence predicated on a conservative pursuance of academic excellence. In other words, find out what the teachers want and deliver. You will never be as cool as Justin Bieber.

Think of the teachers as businesses, and in the binary and dreary logic of traditional corporate strategy, you should determine what other lame businesses need and tailor your own lame products appropriately. This is what Dell does best, and, despite forays into gaming and music-oriented laptops, Dell has been and should always be the teacher’s pet.

But now Dell, a firm that has historically placed cost reduction as its primary objective, is feeling the pressure to become something more. The U.S. consumer market is becoming much more sophisticated as consumers increasingly perceive electronic devices as chargeable organs rather than modules designed to increase our productivity. We are very much a bionic society and much more prone to spend lavishly on our interface with our online identities.

The consumer market is also constricted by the weak economic conditions that have persevered since the credit crisis. Dell’s primary market, businesses, has also been restrained by a lack of liquidity caused by timid lending despite interest rates flirting with the zero-bound. Competing on cost has created hyper-competition that drives down margins and places economic rents in the hands of the consumers. Finally, the prospect of a “double-dip” leaves little hope for domestic sales to recover to their pre-crisis levels. The playground looks menacing.

So, where does Dell go from here? The firm’s most recent financials would seem to indicate that the domestic market is recovering, but these numbers are slippery because post-crisis numbers always appear promising and do not reflect the possibility of a second recessionary trend. As long as one in six Americans is underemployed or unemployed, the outlook is grim. Dell has to look overseas.

The BRIC + Ten countries have become a significant source of revenue for Dell as it seeks to entrench its products in entrepreneurial ventures in emerging markets. These ventures are less concerned with style than they are with functionality and the bottom line always serves as the decision rule. Dell has just moved in with the right toys, a receptive friend, and more comfortable block and, in bizarre-world fashion, the geeks are beginning to inherit the earth, but it still has some distance to go and hurdles to overcome before prom court.

Dell in India

By 2015, the number of PCs in India will grow 10 times and in the last year our personal computer sales in India grew by 99% compared to the previous year” – Michael Dell.

The approach Dell takes in trying to capture more market share in India will be crucial to its bottom-line. To some extent, it will have to distance itself from a sales model that is at the very core of Dell’s past successes. The Indian consumers preference for retail shopping as opposed to internet purchases poses a necessary change in Dell’s strategic model as its direct-sales approach and customized products are something that cannot be replicated in India. Moreover, a lack of internet penetration in India makes it difficult for Dell to follow its US online shopping model there. Indian consumer’s obsession with cash transactions, satisfaction of tactile, and visual senses have made it important for Dell to change its traditional approach of selling PC’s. Hence, Dell has teamed up with Tata Croma, one of the biggest electronic retail stores in India, as well as Staples stores in order to reach the Indian consumer. In October 2008, Dell announced the opening of the first Dell exclusive stores in India in New Delhi and in Coimbatore. Dell is aggressively teaming up with 600 system integrators all over the country;these system integrators could take orders on its behalf, to increase its reach over Indian consumers.

Additionally, Dell is targeting the growing Indian Middle class. Dell has spent more on branding and advertising than all the other top vendors combined. Dell has captured more than 10 % of Indian consumer market, making it the fastest tech MNC Company to cross $1billion sales mark in India. Increasing purchasing power of Indian middle class and a high earning young Indian population makes it an attractive segment for Dell. Dell has tried to price its product below US PC makers such as Apple and HP and above Asian players such as Acer and HCL and thus create a strategic position in upper middle class consumers. This should help Dell ride the lucrative wave of domestic consumption in India.

Dell faces a strong challenge from HP which is changing its distribution network to expand its reach in Tier II and Tier III cities.  Hence, Dell has to keep its costs low if it wants to grab market share in small cities and towns. With this in mind, Dell has opened up a manufacturing plant in Chennai. Also, by decreasing profit margin and increasing sales volumes, Dell can get discounts from its suppliers, thus helping Dell to maintain low costs.

SMB Market

‘‘We’re very strong in the large enterprise segment, but over the next three years, we’ll also focus on consumers and small and medium (Indian PC market growing faster than China: Michael Dell news, 2010) businesses. That’s where we see a big part of the next billion dollars in India coming from.”- Sameer Garde, India country manager in 2010

India is one of the largest SMB markets with a capacity between 7 to 13 million SMB consumers; Dell currently just has 12000 SMB customers in India. In 2011, Dell is planning to target SMBs in India, as this market sector is growing rapidly and is not exposed to global shocks which makes it a much more stable market. To expand in this market Dell is following a four dimensional approach. First, as a major portion of SMB consumers is located in the small cities of India, Dell is increasing its retail stores in tier II and tier III cities with 600 current retail stores in these cities. Second, it has built up a team of 200 employees dedicated to SMB expansion. Third, as cost is a major concern of these SMB consumers, Dell is focusing on simplification of the business processes to improve its cost efficiencies. In addition, it has teamed up with Tally, the most used accounting software by these SMB consumers, to offer free tally subscription for an initial period. It’s followed a similar approach with Dell Vostro systems. Finally, Dell is planning to provide hardware and software services customized to SMB consumer requirements.

In addition, Dell has launched new advertising campaign for SMBs named “Take Your Own Path” which target SMBs with a new range of laptops. It has also introduced a portal named “Dell 360”, along with discussion forums, where SMBs can educate themselves about importance of IT in their businesses.

One of the major sources of revenue for Dell in India is the government sector. Up until now Dell received 10% of the IT orders from the Indian government for IT hardware related products.Both the central and state governments are increasing their IT spending in the health care and education sectors. Recently, Dell has acquired companies such as Perot Systems, KaceNetworks, ScalentSystems, and Ocarina Networks. Subsequently, it can now provide not only its traditional hardware products, but also enterprise solutions such as software development services, data security, configuration management, asset management, power optimization, recovery, and remote support services.  As a result, Dell has positioned itself to receive more orders from the Indian government.  Historically, Dell been successful at wining government orders by providing the most competitive bids; its strategy was to sell its IT hardware at very low margins to the Indian government in order to increase its sales volume.  As its product and service offerings have grown and become more complementary, Dell can make up for the low margins by providing software and IT infrastructure management services. Subsequently, by following a model that offers both hardware and software services, Dell has created a value based model that brings high switching cost to its large-scale customers.

Asia Pacific Growth

Dell seems to be an upswing these days. It’s regained some of the footing it lost in 2009 by seeing a 21% increase in revenue for the first 9 months of 2010 compared to the same period in 2009.[1] It’s surpassed HP to take the number one spot in India in regards to PC sales.[2] However, Dell is not free of obstacles standing in its way to continue this positive trend. The number of substitutes entering the market are becoming more technologically sophisticated and posing a valid threat to the PC market. Web-enabled products such as smartphone’s and tablets are becoming more appealing to consumers and sequentially battling for consumer’s attention. Additionally, rivalry among existing competitors has not gotten any less intense as competitors such as Apple are continually pushing the innovation envelope. This obstacle in particular does not bode well for Dell as its reputation for innovation and research and development is not one of its strongest in the industry. Therefore, Dell must compensate for these by looking elsewhere for growth.  Fittingly, emerging markets such as India seem to be ideal ground upon which Dell could firmly establish its new value based model, resulting in a positive impact to their bottom-line.

Bibliography

Computer hardware in India(Datamonitor, June 2010)

Dell Inc.- company profile(Datamonitor, September 17, 2010)

Global Computers & Peripherals – Industry profile(Datamonitor, March 2010)

PCs in Asian-Pacific – Industry profile(Datamonitor, June 2010)

Indian Consumer Electronics Report(Business Monitor, Q4 2010)

The Battle for China’s Good-Enough Market by Orit Gadiesh, Philip Leung and Till Vestring

(Havard Business Review, 2007)

A New Channel Strategy for Dell(Kellog Insight- Focus on Research)

http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/a_new_channel_strategy_for_dell

Dell: Selling Directly, Globally by Hong Iris Wang, Ali Farhoomand, Pauline Ng

(Harvard Business Review, August 2007)

Dell India becomes No. 1, topples HP(India times, August 21, 2010)

http://timesofindia.indiatimes.com/business/india-business/Dell-India-becomes-No-1-topples-HP/articleshow/6384154.cms

Dell India Launches 3G Smartphones; a Sign of Things to Come?(PC world India, November 1, 2010)

http://www.pcworld.in/news/dell-india-launches-3g-smartphones-sign-things-come-40602010

Dell Says India May Become New Manufacturing Hub(Business Week, March 26, 2010)

http://www.businessweek.com/news/2010-03-26/dell-says-india-may-become-new-manufacturing-hub-update1-.html


[1]“United States Securities and Exchange Commission: Dell Inc., Form 10-Q”Dell, Inc. Quarterly Report (Q3 2010). Edgar System, SEC Web. 13 December 2010.

http://sec.gov/Archives/edgar/data/826083/000095012310110442/d77106e10vq...

[2] "DATAMONITOR: Dell Inc." Dell, Inc. SWOT Analysis (2010): 1-10. Business Source Complete. EBSCO. Web. 13 Dec. 2010.

http://web.ebscohost.com/ehost/detail?vid=3&hid=119&sid=05ecc2e9-3557-45...

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.