Dell In China

Introduction to Dell

Michael Dell founded the company Dell to offer network servers, workstations, storage systems, Ethernet switches, desktops, and notebook PCs after successfully selling his computers to customers directly in Texas. Over the course of three years his sales volume warranted the opening of an international sales office in 1987. In 1988 he began selling to large customers including several government agencies and Dell became a publicly traded company.

Dell made the bold decision in 1994 to eliminate their products from retail stores and focused on mail order customers. In 1996 Dell began selling through their website as well. By eliminating the retail store presence Dell was able to reduce costs, reduce inventory, and maximize profit. Dell utilized a built to order system that allowed customers to specify exactly what they did and did not want on their Dell computer. Dell's just in time inventory system lowered inventory to 6 days and storage costs were saved.

In 1995 Dell entered the Chinese market. With a population of 1.3 billion this was a great new market for Dell to tap into. IBM, Compaq, and Hewlett-Packard had all ready realized this and had opened offices in China in the early 1990s. Dell quickly became competitive with not only those companies but also Legend, Founder, Great Wall, Toshiba, NEC Japan, and Acer. With so many competitors Dell faces intense competition to distinguish itself and to penetrate the market.

Chinese Market is Open for Dell

With at least 9 other major competitors in the Chinese market Dell is all ready dealing with a high level of competition. After spending quite a few years competing with Legend and Founder for the low-end market Dell switched to the high-end market in 2004. By breaking down the total market into smaller categories Dell is seeking to divide and conquer each individually. In the high-end market Dell is able to realize larger profits by focusing on servers, printers, and data storage gear and by raising prices by 13%. The low-end market is experiencing smaller profits and as such the companies in that market will be looking for new markets to penetrate. Dell will need to differentiate themselves from the companies they faced in the low-end market if Dell wishes to continue to capture the high-end market. The threat of competitors such as Founder and Legend entering the high-end market appears to be high.

Dell's built to order model provides product differentiation as customers are able to pick and choose what they do and do not need. This allows Dell to gain owner loyalty. There is no specific mention of contracts in the text, therefore Dell would benefit greatly in the high-end market from using these. While Dell has significant repeat business this is not something that Dell can count but if a contract was in place it would guarantee revenue at timely intervals and also block other competitors. The large corporate accounts comprise two-thirds of Dell's current sales.

Dell responded to the Chinese governments push for software to counter Windows by working with Oracle to offer Linux-based Oracle software on Dell's products. This operating system is cheaper and allows Dell to not only appease the government but also to recognize higher profits. In addition Dell has been able to penetrate the Chinese government with Dell products after Legend spreading themselves too thin. If Dell is able to continue to ally themselves with the Chinese government Dell should be able to gain larger brand recognition as well as owner loyalty and increase Dell's market share.

Dell is in great position in terms of its product. While some cell phones are able to mimic some of the features of a PC they can not do all of the tasks. For example a cell phone is able to send and receive email and users are able to utilize the internet, however there are limited software programs. The threat of substitute products is low.

Being in business for over 20 years provides Dell with the capital requirements necessary and this gives Dell an advantage over smaller companies as well as new companies trying to enter the market. The 20 years of experience also proves Dell's stability. This will attract customers. In addition the hardware support facility in Xiamen as well as the research and development center in Shanghai will provide much needed local support to customers as well as Dell.

Dell enjoys significant brand recognition. When Dell initially entered China it had a market share of 1.2% in 1998. In 1999 the market share increased to 3.8%. In 2003 Dell had a market share of 7%. This is significant growth and penetration within a very short time frame. While Legend continues to be the market leader, the second place leader (Founder) only has a small edge in the market share when compared to Dell. This brand recognition provides owner loyalty that other companies will not be able to duplicate.

Porter's Five Forces Model Indicates an Attractive Industry

Due to the high population in China and the relatively low number of actual PC owners, the market in China is ideal right now for both buyers and sellers. As many companies are realizing this the competition will become fiercer. The buyer has the choice of several different brands because there are so many companies all ready in China. Dell will need to continue to cater to the needs of the enterprise and high-end market if Dell wishes to stay in China. While top executives at Dell are confident in the Dell product and that Dell does not need to focus on the entry-level market it will crucial to Dell to remember that the buyers hold the power and to not become overconfident. When Dell is ready to return to the low-end market Dell will need to continue to monitor sales as well as customer satisfaction if Dell wishes to capture low-end market share.

Problems Facing Dell (as displayed in SWOT analysis)

Dell virtually abandoned the low-end market in 2004. This was immediately following the reports of slow delivery and poor service and support by direct sales customers. In addition Dell was facing increased pressure from the PC manufacturers to either lower the quality or reduce the price of Dell products. The Dell PCs geared for the low-end market were experiencing stagnant sales after Legend began selling a PC model for $362 and Langchao sold a PC model for $241.