Background
Dell Computers was named after its founder and Chairman Michael Dell (Hoovers 2012). The company began functioning in the early 80s to design and manufacture computers. Michael believed in efficiency. He created a company that had extremely efficient operations and responded to customer needs very fast.
The highlight of his business model was the ability of customers to make their computers to their preferred designs. Customers could log on to the company website and choose their preferred features when placing an order. The company would then ship the new computer to the customers’ address. During the 90s and early 2000, Dell was the leading computer company worldwide.
Its woes began when customers began to slow down on their PC purchases. Dell no longer sold as many computers and its growth was slow and painful. Things became worse when the company’s legal trouble began. Advanced Internet Technologies sued Dell for knowingly selling faulty computers to its customers.
This was around the year 2010. Later, Dell got into trouble with the Securities and Exchange Commission. The company was accused of accounting fraud. The result was a restatement of its financials over a five-year period ending 2007. The company also paid several hefty fines to the SEC. As expected, its stock price declined tremendously.
An incident involving a Dell laptop that caught fire during the year 2006 also damaged the company’s public image. This incident led to a move by the company to recall batteries that were suspected to be faulty. Though Sony was the company responsible for manufacturing the batteries, Dell still took the fall for the faulty batteries.
Profits at Dell reached an all time low in 2009. Since then, the company has been re-organizing and re-aligning its business. There has been an attempt to diversify from the PC industry, given the slow growth of the market. The company hopes to attain much needed growth by focusing on corporate IT solutions rather than lone customers. In line with this, it has acquired several smaller companies. These include Perot Systems, sonicWALL, AppAssure and Force 10 Networks.
This paper seeks to explore expansion into the tablet market as a strategic option for Dell Inc. This paper adopts the Balanced Scorecard as the major tool of analysis.
Competition
Dell’s major competitors are Hewlett Packard (HP) and Apple Inc. Apple Inc has created a niche with its innovative products. It is currently the market leader in tablet PCs and smart phones. Customers wait eagerly to acquire new Apple devices (Business Wire 2011). This rarely happens for other PC companies, least of all Dell. The company has invested heavily in Research and Design and it has paid off handsomely. The market has not received any other tablet with so much enthusiasm. The company stock price has also taken an upward trend (Vaitilingam 2005).
HP on the other had has experienced growth due to its merger with Compaq and outsourced operations. The company transferred its laptop manufacturing to China, where labour is cheaper. This enabled it to grow its profit margins and overtake Dell in PC sales. Appendix A shows the industry statistics for the years 2009 and 2010. HP was ahead by 8%-9% during the years under review. This trend has not changed much (Digital Trends 2011). Evidently, if Dell is to regain its market leadership, it has to come up with some new strategies.
The Technological Environment
There has been a slow-down in the purchase of Personal Computers worldwide. The uptake of smart phones and tablets is the major cause of this trend (Canalys 2012). People are moving to a world of convenience and PCs do not fit well into this world. The immobility of PCs has driven customers to seek flexible options such as tablets and smart phones.
Currently, the market leader in the tablet market is Apple Inc with its iPad. It therefore follows that if Dell wants to beat competition, it has to respond to market needs. There is no gain in continuing to manufacture PCs when demand is declining.
Appendix B shows evidence of the shrinking PC market and growing tablet market. This means that any computer company seeking growth in this age should seriously consider selling tablets instead of the traditional PCs. This paper seeks to explore the feasibility of tablet making and its implications for Dell.
The Balanced Scorecard
Learning and Innovation
Dell has been accused of spending very little on research compared to its competitors. Currently, the company is spending almost one percent of its revenues on Research. Over the past three years under study, Dell’s R&D budget never exceeded 1% (Shapiro & Balbirer 2000). The result is that Dell has brought very few new products to the market in the recent past. In contrast, Apple and HP spent 2.6% and 3% of their revenues on research respectively.
However, on taking a closer look at the financials, we discover that Dell has actually increased its R&D budget by 12% from the year 2010. This is evident in its opening of a research centre in Silicon Valley in May 2011. This is an indication of the attempt to catch up with its competitors. Dell has realized that it can no longer ignore or lag behind in market trends.
While Dell was opening up a research centre in 2011, HP had opened its third research centre in Singapore in 2010. HP already owned two other centres in England and California respectively. This indicates how far behind Dell is lagging behind compared to its competitors. In terms of patents, Apple is leading the pack with over 2000 patents in its name. This has been the driver for its new product development over time.
Dell attempted to enter the tablet market in 2011, but quickly withdrew (Watson & Head 2001). The tablets it had fronted, Streak 7 and Streak 5 did not meet consumer expectations or needs. They were the wrong size and had no originality. They resembled copycats of Apple’s pads. There was also massive competition from android-based tablets, which the Streak could not match.
Financial Modelling (Learning &Growth)
Increase in the Research and Development budget would benefit Dell financially. If the company can come up with a tablet that is unique and meets consumer needs, then it could regain its market leadership. The company is said to be preparing a new tablet for this year. This tablet will make use of Windows 8. Microsoft is yet to release this new operating system. The system is being custom made for tablets. However, Dell needs to consider the fact that other manufacturers are also waiting in line for this new software.
Appendix C is an example of a scenario created using financial modelling. We obtained the figures from the financial statements and adjusted them according to our assumptions.
If Dell increases the R&D budget by 2% as shown in Appendix C, and creates a tablet suitable for a niche market, the company could increase sales by 20%. Using the created financial model, if Dell also experiences an 18% increase in expenses, then the net result would be a 124% increase in net profit. The assumption is that all other things except tax are held constant (Chorafas 1995). The tax provision is increased by 1%.
Appendix D presents the worst-case scenario. If Dell increases the R&D budget by 2% and fails to achieve a 20% growth, then the resultant net profit growth would decrease to 61%. Dell would achieve a 61% growth when sales grow by 10% and expenses by 9%. Though there is a risk of reduced growth, it is worth taking (Holmes & Gee 2008). If Dell’s investment in R&D pays off, it will pay off greatly.
Internal Business Perspective
Efficiency in internal business processes stem from learning and innovation and create customer satisfaction. Dell needs to work on two major objectives in this perspective. The first is to increase the quality of its accounting and financial reporting. This is especially important given its recent problems with the Securities Exchange Commission.
The company can do this by hiring qualified accounting staff and giving them autonomy to do their work. In order to measure the achievement of this goal, Dell can employ an external auditor to carry out a review of their reports, aside from the annual audit. Dell should also create and enforce a new ethics guideline.
Another strategy to achieve this objective would be to set up an ethics committee. This committee would be responsible for promoting ethical behaviour in the business. It would receive and address all complaints concerning ethics. It would also reward good ethical behaviour and punish violators of the ethical code. These measures will promote ethical behaviour in Dell.
Secondly, Dell can improve on its supply chain management to reduce incidences of delay and decrease cost of sales (Williams 1993). Previously, the company engaged in of selling faulty computers to customers knowingly. The company was also involved in an incident where it recalled several batteries because one of its laptops caught fire.
These accusations led to lawsuits, which tarnished Dell’s corporate image. Many customers lost confidence in their products. A weakness in Dell’s quality control system cost the company customer loyalty. The outsourcing of customer call centres also made the problems worse.
Dell is making some progress towards the improvement of its internal business perspective. This is evident in the opening of the Dell Supply Chain Management Institute in China. This institution has the mandate to research and develop innovative supply chain solutions for Dell and other manufacturing clients. This is a step closer to maximum supply chain efficiency. It is also a revenue-generating centre for Dell.
Customer Perspective
In the past, Dell excelled at satisfying its customers. The company eliminated all intermediaries and dealt with its customers directly. This enabled it to meet the customers at their point of need. Dell was also able to lower significantly the cost of sales, hence delivering cheaper quality computers to customers (New York Times 2011).
Trouble began when the scale of operations expanded and Dell could not maintain the quality. In an attempt to reduce costs further, the company outsourced its call centres to China. This alienated its customers. They could no longer get responses to their issues fast enough. The outsourcing also removed the personal touch associated with Dell.
Customers drive sales and market share. Dell needs to please its customers if it is to make any money. In the tablet market, Dell has yet to please customers. The Streak tablets failed miserably and received terrible customer reviews. Following its strategy of shifting to corporate clients, Dell can create a tablet that is friendly to business executives and managers.
The new tablet would be integrated with their PCs such that no matter where they are, the executives can access their work. With this strategy, Dell can create a niche for itself and avoid competing with Apple. It will also conform to its strategy of integrating corporate Internet Technology. Dell can market these tablets because executives who are conversant with Windows OS will find it easier to work with a tablet running on Windows rather than any other Operating System.
There is a growing market for Tablet computers among individual and corporate clients. Market research companies project a continuing increase in demand until the year 2015.
Appendix E also indicates that the tablet sales as a percentage of PCs are projected to rise to 61% by 2015 (Et Forecasts 2012). This means that six in every ten PC users will own a tablet three years from now. Though Apple is currently the market leader, there is still a large untapped market for Dell to enter.
Financial Perspective
The Financial Perspective relates to shareholder satisfaction. Lenders and creditors are also concerned with the financial perspective. Dell’s share price has not been performing well in the market since its troubles with the SEC began.
This means that shareholders cannot rely on the current stock price for motivation. Other stakeholders such as creditors also look to the financial statements for an indication as to the status of Dell (Barker 2001). To assess the financial health of Dell, we compute several financial ratios. Appendix F shows the ratios over time, from 2009 to 2011.
The return on capital is an indicator of how efficiently management is using stakeholders’ funds in the organization. Capital refers to both owners’ equity and non-current borrowing. Dell’s return on Capital has shown a 4% increase between 2010 and 2011. This growth is small compared to the year 2009. However, it is positive to see that the ratio did not decline.
The gross operating margin is obtained by deducting cost of sales from sales revenue (Buckley 1998). It is an indicator of how well the company controls its cost of sales. Dell has managed to maintain its gross margin between 17% and 18%. This is not a good sign given the difference in company performance over the three years (Gitman & Madura 2001). There should be a significant difference between the performance in 2009 and 2011. Management should review their cost of sales and create innovative ways to reduce it hence increasing the gross margin.
The Earnings per Share (EPS) refers to the profit attributable to the owners’ equity (Brealey & Allen 2003). It indicates how efficiently management is using shareholders’ funds. For some investors, this criterion determines whether they invest in a company. Dell posted the lowest EPS in 2010 of $0.73. The company posted the best EPS in 2011. This shows slight improvement. However, there is room for improvement to catch up with industry leaders.
The current and quick ratios are measures of liquidity. They are indicators of how able the company is able to meet its short-term obligations. They can be used as proxies for the cash flow position of the company. Dell has managed to maintain healthy current and quick ratios throughout the three years. This means that the company is not likely to run into short-term cash-flow problems. This is a good indicator especially to short-term creditors such as suppliers and banks.
Potential for Growth
Sales revenue is the driver for financial growth. Without sales, a company cannot make profits and therefore cannot survive. Appendix G shows Dell’s performance in comparison with competitors between 2010 and 2011.
Dell is behind HP by 2% in 2010 and by 4% in 2011. Unfortunately, Dell has suffered a 12% decline in units shipped due to the decline in PC sales. HP lost only 3%. Overall, the PC shipment reduced by 6.1% during the period under study.
Dell needs to come up with a strategy to beat declining sales before its cash flow starts suffering (Grundy 1998). The proposed introduction of a tablet computer could close the gap between HP and Dell.
Limitations of the Balanced Scorecard
The balanced scorecard is a very useful model in performance management. However, users should consider several shortcomings. First, implementing the Balanced Scorecard is a time-consuming process. The implementers must study the business in question thoroughly. They then proceed to establish the strategic direction of the business and its broad goals and objectives. After doing this, they must come up with objectives for each of the perspectives, bearing in mind that each objective builds on another.
Eventually, the team must create measures of performance. These KPIs will show whether the company is on track to achieve its goals or not. They will determine the control action to be taken. This process involves numerous meetings with managers at different levels. It also involves great planning and monitoring to ensure success. Some businesses may not have enough workers to dedicate such time to performance measurement.
The Balanced Scorecard is a subjective measure. Companies develop their own KPIs. There is no standard measure of progress. Therefore, there is a chance that implementers could choose the wrong KPIs for a business. If the wrong indicators are chosen, then the measures will be meaningless. The business could be moving in the wrong direction while thinking they are moving in the right direction. Managers should think carefully about the KPIs they choose to use. If they face difficulty in creating their own, they could benchmark with other companies in the industry.
The third disadvantage of the balanced scorecard is the resistance faced from employees during implementation. Employees like to maintain the status quo. Therefore, implementing a balanced scorecard may be viewed as an unnecessary change. If they do not understand the benefits, employees can sabotage the implementation process. This is especially because they are at the operational level of the business. Engaging employees in continuous dialogue to get their views can counter this limitation.
The Balanced Scorecard is not a comprehensive model of performance measurement because it ignores competitors. The model considers the internal affairs of the business while placing little emphasis on competitors and suppliers. Due to this limitation, it is advisable to use the Balanced Scorecard with other models, which consider environmental influences.
The implementation of a Balanced Scorecard requires a lot of commitment from the top executives. The leadership of the business must be on board and inspire the other employees. If the leadership is not on board, then the process will fail. Managers and business executives should be informed beforehand. They should also be made to understand exactly how the process would work.
Strategic Options- Ansoff Matrix
The Ansoff matrix presents four options for a company’s strategy. They are Market Penetration, Product Development, Market Development and Diversification (Scholes 2008). I would recommend that Dell pursue two strategies simultaneously. The company should practise Market penetration and Product Development.
The creation of a tablet computer for its current market is a type of product development. Dell will use its current competencies in PC manufacture to meet new customer needs. The company will require further research to ensure the product meets consumer needs. However, the manufacture of a tablet PC is not very new territory for Dell sine it is competent in PC manufacture. If the company can find an efficient way to manage the supply chain like it did with PCs, then it will succeed in this segment.
Dell may need to benchmark its new tablet computers with Apple, the current market leader. This will enable it to obtain an idea of what features customers are willing to pay for. It will also prevent Dell from making the same mistakes it made with its first tablet, The Streak. However, it should not copy the competitor’s product. The R&D team should come up with an innovative design that meets customer expectations at a low price.
The demand for tablet computers has been accelerated by the new flexible working hours and need for mobility. Information has also become an important source of competitive advantage. With the internet, people can keep informed wherever they are. Tablet computers facilitate the satisfaction of this need for information. Success in the computer industry is shifting from a focus on PCs to a focus on tablets. Dell has to keep up with the industry or fall out of the race.
Market penetration involves defending the organization’s current market share. Dell has experienced decline in computer sales to the point that HP has overtaken it to be the market leader in computer sales. This is a disturbing situation. Dell needs to take strategic actions to maintain its current market share. Such actions could include increased advertising, re-branding, following up on current clients to enhance loyalty and improving customer care.
Dell’s customer care department has been criticized previously for failing to be responsive to customer needs. Dell has seen its customers complain on several websites. This together with the media’s emphasis of the problem has left Dell with no choice. The company needs to make drastic changes to this department if it is to maintain the current market share.
Adopting a market penetration strategy will enable Dell to maintain its current position while a product development strategy will enable Dell to attain sales and revenue growth. If these two strategies are implemented correctly, Dell will experience an increase in profitability. The customers and other stakeholders will all be pleased with the company.
Strategic Implementation
Dell needs to consider several things before adopting any strategy. The company needs to ensure that there is a market for its product, that that product meets customer needs, that the critical internal business processes are functioning properly and that the organization possesses the necessary capabilities (Miller 1998).
In order for a consumer group to meet the definition of a market, they must demonstrate that they need or want the product. Secondly, this group must also demonstrate the ability to purchase the product if it was available.
Research in the technology world has shown that there is a ready market for tablet computers. Projections indicate that tablet sales will beat PC sales by 60% in the next three years. This means that the recommended strategy is feasible. The only thing Dell needs to do is to carry out a detailed market survey to ensure that the new tablet meets customers’ needs and expectations.
The critical business processes involved in this project are supply chain management and quality management. Dell has already learnt a lesson about the importance of quality through experience. The company is likely to employ the highest standards to ensure there is no quality malfunction associated with this product. The company has also recently set up a centre for supply chain management. This is an indicator of the healthy state of its supply chain function.
There is no doubt that Dell possesses the necessary organizational capabilities to compete successfully in this segment. The company has been successful in a similar segment, selling PCs. The tablet computer is in fact a PC with several adjustments to size and applications. This is another an indicator of the potential success Dell can have in this market.
Conclusion
Dell computers need a new strategy to help the company regain its market leadership. In the past seven years, the company has faced many problems ranging from decrease in sales to lawsuits and trouble with the SEC. All these factors led to the decline of its stock price and reduced investor confidence. This paper has employed the Balanced Scorecard to assess Dell’s current strategic position.
In the past, Dell spent very little on research. This was contrary to its competitors such as Apple invested a lot in development of new technology. In the recent past, HP and apple have reaped the benefits of advanced Research and Development. The two have developed niches and managed to oust Dell from the market leadership position. The customer perspective also suffered when Dell was sued for knowingly selling faulty computers. Loyalty was destroyed and market shares declined.
These problems together with the financial crisis directly affected the financial perspective. Dell’s annual revenues reduced. The Earnings per Share also reduced. This situation made investors to lose confidence in Dell (Fraser & Ormiston 2001). The proposed strategies seek to improve the learning and growth perspective, then the internal business perspective, customer perspective and the financial perspective.
The proposed strategy involves the entry of Dell into the Tablet PC market. This paper has shown that this market is ready for new entrants. It also possesses potential for growth in the coming years. Dell’s capabilities and core competencies can enable it to succeed in this market.
Market Penetration and Product Development strategies are suitable for Dell since they are in conformity to its current business model. Research has also shown that there is a ready market and willing consumers waiting to be satisfied. Dell should cautiously implement the above-mentioned strategies, bearing in mind the limitations of the Balanced Scorecard.
Reference List
Barker, R. 2001, Determining Value: Valuation Models And Financial Statements, FT Pitman, London.
Brealey, M. & Allen, J. 2003, Principles of Corporate Finance, McGraw Hill, London.
Buckley, A. 1998, Corporate Finance Europe, McGraw Hill, New Jersey.
Business Wire, 2011, Strategy Analytics for Apple. Web.
Canalys, 2012, Smart Phones Overatake. Web.
Chorafas, D. 1995, Financial Models & Simulation, StMartins /Macmillan, Rome.
Digital Trends, 2011, Smartphone sales exceed those of PCs for first time, Apple smashes record. Web.
Et Forecasts, 2012, Forecasts. Web.
Fraser, L. & Ormiston, A. 2001, Understanding Financial Statements, Prentice Hall, New York.
Gitman, L. & Madura, J. 2001, Introduction to Finance, Addison Wesley Longman, London.
Grundy, T. 1998, Exploring Strategic Financial Management, Prentice Hall, New York.
Holmes, S. & Gee, T. 2008, Interpreting Company Reports & Accounts, FT Prentice Hall, London.
Hoovers, 2012, Dell Incorporated. Web.
Miller, A. 1998, Strategic Management, McGraw Hill, New York.
New York Times, 2011, Dell Inc., Web.
Scholes, J. 2008, Exploring Corporate Strategy, FT Pitman & Whittington, London.
Shapiro, A. & Balbirer, S. 2000, Modern Corporate Finance, Prentice Hall, London.
Smith, T. 1996, Accounting for Growth, New Century, London.
Vaitilingam, R. 2005, Financial Times Guide to Using the Financial Pages, FT Prentice Hall, New York.
Watson, D. & Head, A. 2001, Corporate Finance Principles & Practice, FT Prentice Hall, New York.
Williams, E. 1993, Corporate Strategy and Financial Analysis, Pitman, Melbourne.