DELL's Cost Leadership
...third generation communities with greater spending power and school attendance, than their first generation counterparts. Also, through the rise in status of these communities, smaller businesses are assumed to develop in the future and will represent a relatively untapped market segment. In effect, adding the African-American segment to this ethnic list, the overall transaction based customer level is believed to rise, given these stated assumptions. One of the key strengths Dell possesses, in addition to its logistics process, is its customer support service (Exhibit 8). Given this information, it is more likely that most transaction based users - home and small office- would find increased value in this service, compared to educational institutes and corporate clients, who would already have their own IT support staff. This is an advantage over Dell¡¦s competitors and can be used to differentiate them in a saturated market. It is assumed that corporations and educational institutes will only repurchase computers every 10 years, as they are more likely to upgrade their computers, as they have their own support staff. Repurchasing requires larger funds to purchase several computers and will not be as prevalent in this segment as in the TB segment. Criteria: The alternatives generated are based on the following criteria; the most important are listed first and the least significant listed last: 1. Profits ¡V Dell must remain profitable. 2. Differentiation ¡V In order to gain a competitive advantage, Dell must differentiate its product by working with a narrower segment of its existing, or a new, market. 3. Future Sales Growth ¡V Dell should look to increase its current sales in a growing market, in order to increase market share and profits. 4. Cost ¡V As Dell does not want to fall behind in its cost advantage it must maintain its low cost pricing and minimizes any additional costs. 5. Risk ¡V Dell must look at which alternative decreases risks and therefore increases chances for success. Alternatives: Careful analysis of Dell¡¦s external and competitor environment reveals that Dell must look to a cost-differentiation integrated strategy. Given Dell¡¦s customer support strength, it must market itself as not only a cost-effective PC manufacturer, but a long-lasting partner of its customers. In this way Dell can maximize profits. To ensure the success of this strategy Dell must focus on a narrower market segment, to who its brand of PCs and its technical and customer support services will add value. As such the following alternatives have been given regarding areas for Dell to focus on: Alternative 1: Focus only on the global corporate market segment. Pros: Given Dell¡¦s strength with 77% of revenue generated from corporations, it can expand sales to areas where it has manufacturing locations: Ireland, Malaysia etc; this increases its potential future sales growth from its existing 8% of the global market share (Exhibit 2b). Cons: Differentiation will be difficult as Dell must ensure that corporate client needs must be met through its customer support service; customer needs will vary greatly from country to country. Costs will also run high as Dell will have to compete on unknown territory with unknown competitors increasing its risks greatly. Alternative 2: Focus on the North American corporate segment and expand into educational institutes by creating a line of Educational PCs. Pros: There exists growth potential in this area as only 5% of revenue is generated through educational institutes (Case, 6); costs can also remain low as educational institutions will be easier to target than corporate clients. As Dell already has a foot in the door with educational institutes it faces minimal risks. Cons: Educational institutes will not rely heavily on customer support decreasing the value of its differentiation strategy. They will only repurchase in longer terms, (ie. every 5-10 years). Alternative 3: Maintain the corporate client base and add focus to the transaction-based customers by creating a line of Home PCs. Pros: This alternative will allow for future growth with the increase in TBs, as it remains at only 18% of revenue currently (Case, 6). It also allows Dell to maintain its core customers- corporations- while creating a separate line for its TBs. Its customer support will be highly valued by TBs who will greatly utilize this service; while Dell¡¦s separate product lines for corporations and TBs will help distinguish the value to each market segment. Costs will remain low over time as Dell will be building a strong relationship with their transaction customers through their customer support services. Risks are minimized with this strategy as TBs are thought to increase in the future and become repeat customers. Increased development in the small business sector, as per the analysis, also indicates potential growth for Dell. Cons: Other competitors¡¦ major targets may be TBs or will be in the near future, causing Dell to face more competition. Dell already encountered failure in this area by working through the retail marketing sector. Alternative 4: Status Quo: Dell can choose to maintain their current competitive strategy. Pros: Corporate clients will be satisfied with Dell¡¦s attention to their needs. Cons: This strategy far outweighs the pros. In not changing with the market, Dell can lose market share over time, due to imitation of its strategy, and it can miss prime growth opportunities stemming from these market changes. Recommendation: Based on the evaluation of the alternatives against the stated criteria, it is recommended that Dell pursue alternative three (Appendix 1). This strategy requires maintenance of their current corporate segment while further focusing on an area of new growth: the transaction based buyers. Marketing Dell¡¦s technical and support services to this segment is estimated to greatly increase Dell¡¦s revenue in the future, as it will be a key differentiation factor between them and their competitors. As this is a value-added criterion, it is believed that TBs will become repeat buyers in the near future with the increase in their personal wealth and knowledge. As a result, it is estimated that Dell¡¦s revenue will increase to $22.2 million (Appendix 2). Appendix ...