Porter’s Five Forces Analysis of Dell
Key Facts
| Name | Dell Technologies Inc. |
| Industry | Technology |
| Founded | February 1, 1984 |
| Headquarters | Round Rock, Texas, USA |
| CEOs | Michael Dell |
| Revenues | USD 101.2 billion (FY22) |
| Profit | USD 4.94 billion (FY22) |
| Competitors | Hp, Lenovo, Acer, Sony, MSI |
Company Overview
Dell is the 10th largest US tech company revenue-wise. Dell is one the largest producer of laptops, computers and other accessories. The company is famous for its e-commerce as it innovated the supply chain by selling directly to end users and removing the middle man, passing some cost synergies directly to users in terms of attractive pricing while keeping the quality premium.
Dell was awarded 3rd largest PC vendor in 2021 and ranked 31st on Fortune 500 list in 2022 from 76th in 2021. Dell is also the second largest non-energy company in Texas.
From a financial standpoint, the company reported revenues of USD 101.2 billion in FY22, up 17% YoY on the back of strong demand post Covid-19 as the silicon chip shortages subside. The company recorded record PC sales.The company reported a Net Profit of USD 4.94 billion. The EPS reported at USD 6.26/sh growing faster than revenues at 27% YoY as the company also resorted to cost cutting measures.
The company generated shareholder value by spinning off VMware, improving its capital structure, and de-levering the balance sheet (returning USD 16.5 billion in debts). The board of directors also approved a USD 5 billion buyback program.
Source: Company Presentation 4QFY11
The company divides its business into the following segments:
Client Solutions Group –The segment delivered a stellar performance with revenues of USD 61.5 billion, up 27% YoY, on the back of an increase in both commercial and consumer revenues. The main highlight was the launch of the Dell XPS 13 Plus, a modern design and performance oriented computer. Dell introduced the world’s thinnest gaming laptop (Alienware X14) under a subsidiary named Alienware which had a 17-inch gaming OLED screen. The segment also introduced the concept Luna, which is a commercial notebook concept that considers sustainability, recyclability, and reuse.
Infrastructure Solutions Group–This segment maintained constant performance with revenues of USD 61.5 billion, up 4% YoY as servers and network revenues increased. The segment announced expansions into the APEX multi-cloud capabilities, which enables consumers to connect to multiple cloud-based servers without hyperscale lock in. Furthermore, Dell introduced Dell PowerProtect Cyber Recovery for AWS (Amazon Web Services) which provides companies with updated data encryption in order to isolate critical data from a virus attack and quicken data recovery.
Source: Company Financial Statements
Source: Company Presentation 4QFY11
Dell Rivalry among Existing Competitors
- Aggressive Competition
The consumer electronics market operates in a similar manner as the FMCG sector where there is low shelf time and high product turnover, also manufacturers are coming up with the latest technology every single year with the old ones being out of date in a couple of years.
- Hewlett-Packard (HPQ)
HP is one of the oldest consumer electronics brands which makes the most premium gaming and professional laptops and computers. Although the reputation for quality is going through major variations these days, Hp is still considered the premium laptop amongst most. The company recorded revenues of USD 63 billion (EPS USD 3.05/sh) in FY22 from USD 63.5 billion (EPS USD 5.33/sh) during FY21. Hp could undoubtedly be considered the fiercest competitor for DELL.
- Lenovo Group Ltd (LNVGY)
Lenovo is one of the fastest growing brands in the PC/laptop business and is expected to outperform both HP and Dell in a few years. Lenovo, a Chinese company, is rated as the 4th most reliable laptop brand (just after Dell on 3rd) by Syed Hammad Mehmood (2022) because it targets cost-conscious customers and with the global recession kicking in along with elevated commodity prices (energy and silicon chips to be the main focus) consumers are now switching to Lenovo because of its exceptional quality in a budget laptop.
- Apple (AAPL)
Apple is one of the most premium brands for consumer electronics in the world with a high focus on industry-grade hardware, cutting-edge technology, and product innovation. According to Statcounter Apple IOS still holds roughly 15% of the total operating system market and with the Apple Macintosh only running the OS, Apple is the largest player in the PC/laptop space. However, Windows is the most used with 75%, and is further expected to grow because of the lack of software innovations on Mac’s end and because windows are considered a universal standard across the globe.
- Samsung (SMSN)
Samsung is also one of the pioneers in the consumer electronic space with the most focus on mobile devices. Samsung, a Korean manufacturer, prides itself on the premise of its innovativeness like trying out curved screens, AMOLED displays (used in iPhones), etc. With Samsung’s core focus on delivering the best and most unique experience, most early adopters tend to shift towards Samsung as the company is also famous for keeping the product updated after many years with in-house software updates.
- Key differentiating factors
One of the prime things that Dell did differently is launching a direct-to-customer supply chain mechanism that enabled the company to get rid of the middle distributors/wholesalers/retailers which helped reduce costs and pass on some benefits to consumers as well. This great feat was achieved by developing long-termrelationships with customers, obtaining constructive feedback, and working efficiently to improve using those feedback. For example, Dell customers can now order customized computers from their website and it is delivered directly to their doorstep. Dell is considered a cost leader (although Lenovo is fast-pacing in the same space) by many.
Dell Threat of New Entrants
- Extraordinary Working Capital Requirements
There is immense capital required for setting up facilities that can actually manufacture laptops, computers, and other accessories. Moreover, extremely highly skilled workers are required to run these facilities. In many countries, either such kind of skill is not present or it is expensive which reduces the threat of new entry.
- Research and Development Costs
The dynamics of the laptop business could be understood with the example of garments. There are fashion and different things are trends. Similarly, there is an era for tablets and then there is an era for laptops. Desktop pcs sales are on a declining trend overall and laptops are replacing it as they provide the user access to mobility. Similarly many are now venturing in the gaming industry as there is potential to charge high margins on luxury devices. Coping with all types of technology requires ongoing research and development costs which are mostly high for tech companies.
- Excessively Regulated
The laptop business is highly regulated with many certifications required from different agencies. A typical product that a company manufacturers have to cope with not just international standards but also local standards. For example, there is a law passed in Europe which forces cellphone companies to use Type-C ports as a universal standard (while the largest phone company – Apple still uses its own patented lightning port). These constant changes in regulations have to be incorporated and hence demotivates startups from venturing into this business.
Dell Bargaining Power of Suppliers
- Less number of component manufacturers
There is less number of component manufacturers who control the power to control prices. On the other hand, there is an abundance of laptop middle-man (Dell still uses middlemen for international sales due to logistical reasons) and with the volatility in currency, it’s really difficult for suppliers to get hands-on tech products at the best rates.
- In-house Parts production
There are two types of parts. First are the parts which are specific to a particular brand and model. For these, the manufacturer mostly set up in-house production lines to manufacture the parts, control supply, and keep the costs in control as margins are charged on the final products. The second type is the outside parts (like NVIDIA graphic cards, Intel or AMD chipsets, or Seagate SSDs). For the second part, since the products are also sold in the retail market separately, the suppliers have to provide additional discounts and compete at attractive rates (for example NVIDIA vs Intel in chipsets and AMD vs NVIDIA in graphic cards) which brings downward pressure on overall supplier dependence.
- Risk of Supply Chain disruptions
The supply chain disruptions were caused by the aftermath of the Russia-Ukraine war when commodity prices (especially energy) soared which affected all industries across the globe. Countries faced immense inflationary pressures and resorted to monetary tightening (including major powers like US and UK). The impact of this high cost of leverage is accurately reflected in the high cost of parts manufactured for airline and defense business which majorly affected supplier margins.
- Supplier Audits
In order to regulate after-sales service feedback on suppliers (as supplier provides these services in non-US regions), Dell has formulated a policy to send inspection teams at regular intervals to assess the quality of service, warehouses, stocking, and other necessary measures.
Dell Bargaining Power of Buyers
- Continuous Brand Development
The computer market is an extremely competitive market where only the best quality is needed. There are millions of videos on the internet, and posts on different platforms where consumers have reviewed technology products and provided their ratings. So this is the business where image matters! Most brands have already worked on their image (like Hp, Dell, and Apple) for more than decades now with a focus on stellar after-sales service, attractive replacements and warranties, and regular discounts.
- Ability to pass on Cost-push inflation
The last year has been extremely painful for tech buyers and sellers alike as the supply chain disruption caused by the shortage of silicon chips and other parts (like Type-C ports) has caused havoc. Manufacturers around the world have increased their product prices by around 10% YoY according to Agam with Intel chipsets increasing around 16% YoY. There is an emerging class of new laptops called Chromebooks, which sacrifices some features to keep the costs in control.
- Diversified client base
Dell has a diversified client base globally as the company has partnered with more than 130,000 sellers across the globe to sell products in more than 180 different countries. The computer market operates in extremely standard product (like button layout on a keyboard) dimensions, however, some degree of innovation (in the supply chain, performance, and after-sale service) is always warranted.
Dell Threat of Substitute Products or Services
- Low Switching Cost
It is evident from the financial statements of technology brands that many like Dell, Apple and Hp have struggled in the last few years to even maintain their market share. With the Chinese and Korean brands now in the picture, delivering stellar product quality at less cost, there is an extremely low switching cost for end users.
- Vast resale market
There is always an option to sell your old tech to get a new one with the rapid pace of advancement in technology. Many brands selling premium products now have to factor in that a single product will be used by various users and re-used in markets for many years. The low cost of re-used laptops poses a direct threat of substitutes to these companies who spend millions of dollars in research developing cutting-edge new technology.
- Cannibalization from Cellphones, tablets, and gaming consoles
Back in the good days, a pc or laptop was used for gaming, video conferencing, browsing the internet, watching movies, and listening to music. However, in today’s world, a single cellphone has enough computing power to do all these things alone and packs more power than most CPUs built ten years earlier. There are powerful gaming consoles that completely replace the need for gaming pcs (the Playstation 5 costs USD 500 as compared to USD 2000 for an average gaming pc built). Hence, since everybody owns different pieces of tech reduces the overall demand for laptops and pc to some extent.
References
- Companies Market Cap, (2023), Top publicly traded tech companies by revenue [Online], https://companiesmarketcap.com/tech/largest-tech-companies-by-revenue/
- Syed Hammad Mahmood, (2022), 7 Most Reliable Laptop Brands for 2022 [Online], https://www.makeuseof.com/laptop-brands-most-reliable-2022/
- Statcounter, (2022), Desktop Operating System Market Share Worldwide– December 2022 [Online], https://gs.statcounter.com/os-market-share/desktop/worldwide
- MBA Knowledge Base, Case Study: Critical Success Factors of Dell [Online], https://www.mbaknol.com/management-case-studies/case-study-critical-success-factors-of-dell/#:~:text=One%20of%20the%20characteristics%20that,success%20factor%20behind%20DELL%20Computers.
- Agam Shah, (2021), Inflation hits PC market as laptop and desktop prices jump, and most businesses are last in the line for kit [Online], https://www.theregister.com/2021/10/29/inflation_hits_pcs/
- Forbes, (2022), Dell [online], Available at: https://www.forbes.com/companies/dell-technologies/?sh=1135f44b94f2
- The Wall Street Journal, Topic: Dell [online], Available at: https://www.wsj.com/market-data/quotes/DELL
- Annual Financial Statements, Press Release and Company Presentations (2022-21), Company website [online], Available at:https://investors.delltechnologies.com/