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APPLE COMPUTER

CASE ISSUES

Core Competency (CI#1) : Apple design, develop and market numerous product and service lines. They sell their products to education, consumer creative professional, business and government customers. While apple seems to display numerous products and conduct business on different segments, it is legitimate to wonder what the company is really good at? Too much diversity is exactly what crushed Apple during the John Scully days.

Cannibalization (CI#2): Through January 2005, Apple has opened 102 retail stores. Although these launches are potentially beneficial, Apple stores are hurting the resellers’ business and not all of them will survive. Considering that the company’s resellers still account for more than 50% of its domestic sales, the company is facing the risk of cannibalization and might deeply suffer.

High Cash (CI#3): Why is Apple holding so much cash? Having too much cash in reserve might either mean that the company does not know yet how to allocate it or that they may have some risk concerns about future potential investment.

Succession (CI#4): Apple is clearly one of the handful of companies where the fortunes are seen to be intricately tied to the person in charge. The star quality and the visionary talents associated with Steve Jobs are certainly contributed to the success of the company. So the news of Jobs’ cancer surgery might lead to a succession problem and compromise the company’s future.

I. CURRENT SITUATION

A.CURRENT PERFORMANCE

Apple achieved a solid performance for the first quarter of 2005 compared to the same quarter 2004 with strong net sales in the Americas segment (+77%) in Europe (+63%) and in Japan (+18%). The Americas segment represents approximately 47% of the company’s total net sales. The increase in net sales in the Americas, Europe and Japan was primarily driven by increased demand of the iPod and the consumer-oriented iMAC. Demand for the iBook products were especially high for the Americas, while peripherals and other hardware were more popular in Europe.

The retail segment’s net sales grew to $561 million as compared to $273 million in the same period in 2004, this represents a remarkable 105% increase.

B. SRATEGIC POSTURE

Mission

Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services.

Apple’s Guiding Principles

Ø Meet or exceed all applicable environmental, health and safety requirements.

Ø Where laws and regulations do not provide adequate controls, Apple will adopt their own standards to protect human health and the environment.

Ø Support and promote sound scientific principles and fiscally responsible public policy that enhance environmental quality, health and safety.

Ø Advocate the adoption of prudent environmental, health and safety principles and practices by their contractors, vendors and suppliers.

Ø Communicate environmental, health and safety policies and programs to Apple employees and stakeholders.

Ø Design, manage and operate our facilities to maximize safety, promote energy efficiency and protect the environment.

Ø Strive to create products that are safe in their intended use, conserve energy and materials and prevent pollution throughout the product life cycle including design, manufacture, use and end-of-life management.

Ø Ensure that all employees are aware of their role and responsibility to fulfill and sustain Apple’s environmental, health and safety management systems and policy.

Goals

Ø Innovation above everything else.

Ø Increase sales in the education segment.

Ø Produce user friendly, good appearance products to get customers “think Different” and “think Digital”.

Ø Developing new digital lifestyle consumer, and professional software application

Ø Investing in new products area such as rack-mount servers, RAID storage system and wireless technologies.

Ø Provide a high quality sales and after sales support experience.

Strategy

Trough the design and the development of its own operating system, hardware and many software application and technologies, Apple strives to bring to its customers compelling new products and solution with superior ease-of-use, seamless integration and innovative industrial design.

Apple currently focus on:

Ø Increasing marketing and advertising investment in order to improve product and brand awareness.

Ø Vertical growth strategy: expand the retail segment by opening more retail stores. (CI#2)

Ø Market opportunities related to digital music distribution and consumer electronic devices, including iPod.

Ø Implement a cost leadership strategy to keep up with the competition and be more affordable for the educational segment.

Ø Continue to be the leader in innovation for new technology by implementing a product differentiation strategy.

Policies

“Employee diversity “: This policy is a key component and contribute to the success of the company.

“We respect these differences and threat them as an additional value that we incorporate in the way we treat other and approach our customers.”

Therefore, Apple apply that each employee is fully responsible for understanding and following this policy.

“Substance policy”

Ø Apple comply with applicable substance legislation worldwide.

Ø monitor and assess new scientific findings on the environmental impact of substances used in Apple products.

Ø educate our supply chain partners and drive innovations within our supply chain to find alternative materials that improve environmental performance.

“Product Take-Back and Recycling Policy”

Ø Producers should provide a means to facilitate environmentally friendly recycling of their products at the end of electronic products’ useful life.

Ø Consumers should select a disposal method for end-of-life electronics products that does not adversely impact the environment.

Ø Governments should develop a legal framework and public policies to promote appropriate end-of-life management, including environmentally friendly disposal and recycling.

Ø Materials generated from the recycling of our products should be used as feedstock for new products whenever possible.

II. CORPORATE GOVERNANCE

A. BOARD OF DIRECTORS

The Board consists of 6 members, of which 5 are external directors:

Board Member-Occupation Audit and Finance committee Nominating Committee Compensation Committee

William l V. CampbellChairman Intuit, Inc C Ccc

Millard S. DexlerChairman and CEOJ. Crew C C

Albert Gore, Jr.Former Vice President of the US C C

Steve JobsCEO and Co-founderApple ComputerChairman and CEOPixar

Arthur D. LevinsonChairman and CEOGenentech, Inc C Ccc

Jerome B. YorkCEOHarwinton Capital Corporation Ccc

cc=Chairperson C=Member

*Audit and committees members are used to ensure feedback and monitor implementation and compliance.

Steve Jobs

Co-founder of Apple in 1976, he has played an important role in the development of the personal computer. He also co-founded NeXT Software, inc. and served as CEO until 1997 when NeXT was acquired by Apple. Director since 1997 and currently CEO of Apple and Pixar Animation Studios, Jobs is viewed as a key character for the company. However his strong voice and personality within the company could give him the power to sway the board. (internal) (Advantage/Conflict?) CI#4

William V. Campbell

Director of Apple since 1997, he was also the former CEO and president of Intuit, Inc. Mr. Campbell also serves on the board of directors of Opsware, Inc. His experience and knowledge in business, finance and technology might be valuable for the company, however, he is in direct competition with Apple in the sale of software such as Quickbook. (External) (Conflict)

Millard S. Dexler

Director of Apple since 1999, he has been Chairman and Chief Executive Officer of J. Crew Group, Inc. since March 2003. Previously, Mr. Drexler was Chief Executive Officer of Gap Inc. from 1995 and President from 1987 until September 2002. (External)

Albert Gore, Jr

Director since 2003, he was a former Vice President of the United States of America. He has remained an active leader in technology, launching a public/private effort to wire every classroom and library in America to the Internet. Therefore, Gore plays a key role in the implementation of Apple’s products in the educational segment. (External) (advantage)

Arthur D. Levinson

Director since 2000, he has been President, Chief Executive Officer and a

director of Genentech Inc. since July 1995. Mr. Levinson’s experience could benefit apple but his interest may be somewhere else. (External) (Advantage/Conflict?)

Jerome B. York

Director since 1997, he is also a director of Tyco International Ltd. and Metro-Goldwyn-Mayer, Inc. Previously, Mr. York was Chairman and Chief Executive Officer of MicroWarehouse, Inc., a reseller of computer hardware, software and peripheral products and he also served as a Senior Vice President and Chief Financial Officer of IBM Corporation. Mr. York’s experience in the computer industry might be a big pro for the company.(External) ( Advantage)

The Board of Apple is composed of a very diverse group of professionals who bring valuable expertise in the areas of technology, biotechnology, finance, turnaround strategies, retail business management, etc. The backgrounds and current “independent” positions of these members provide a wealth of knowledge and a variety of business perspectives for Apple. However the external activities of some of the members of the board might also be a source of conflict for the company.

B. Top Management & Management Style

1) Fred D. Anderson-Executive Vice President and CFO

2) Timothy D. Cook-Executive Vice President, Worldwide Sales and Operations

3) Nancy R. Heinen-Senior Vice President, General Counsel and Secretary

4) Ronald B. Johnson, Senior Vice President, Retail

5) Peter Oppenheimer, Senior Vice President of Finance and Corporate Controller

6) Jonathan Rubinstein, Senior Vice President, Hardware Engineering

7) Philip W. Schiller, Senior Vice President , Worldwide Product Marketing

Vertrand Serlet, Ph.D.-Senior Vice President, Software Engineering

9) Sina Tamaddon, Senior Vice President, Applications

10) Avadis Tevanian, Jr., Ph.D.-Senior Vice President, Chief Sofware Technology Officer

C. Management Style

Despite the fact that the company claims to have a partnership management style, I personally believe that Steve Jobs is leading an entrepreneurial style and highly influence the company. (CI#4)

III. EXTERNAL ENVIRONMENT SCAN

A. SOCIETAL ENVIRONMENT

1) Political-Legal Forces

Ø Different countries have different legislations and these in some ways restrict the companies or give opportunities to the company.

Ø NAFTA, European Union and other regional trade open doors to market in Europe, Asia, Latin America that offer enormous potential.

Ø Political uncertainties caused by terrorism activities are directly impacting the overall business of the company.

Ø The company relies on access to patent and intellectual property obtained from third parties. The company might unknowingly encounter infringe issues with existing patents of others.

Ø Beatles lawsuit against the company may negatively affect the company’s reputation.

Ø The company has to comply with the environment regulations such as environment safe disposal or recycling.

2) Socio-Cultural Forces

Ø The computer and internet usage is growing worldwide and is a good source of opportunities for the computer industry.

Ø Customers had become more experienced and computer literate.

Ø Education has become a primordial issue for the new generation, which is a key factor for the company’s business.

3) Economic

Ø In the past year, the industry has been affected by the slow economic and that resulted in low consumer spending. However the current economy shows some sign of improvement, consumer spending and investment might increase as well.

Ø Due to weak economic conditions, the U.S. educational is encountering large budget deficits in many states. This factor has a negative impact over Apple’s sales in the educational segment.

Ø Sales of products that include components obtained from foreign suppliers can be adversely affected by currency exchange rate fluctuations and by international trade regulations (tariffs and antidumping penalties).

4) Technology

Ø Technology is evolving at a rapid pace today ,and people appreciate more & more advances in their systems and are switching over to new information appliances.

Ø Internet availability and usage is growing and leads to good opportunities for the industry.

Ø The traditional desktop might become outdated by the entrance of new revolutionary products.

Ø Increasing demand for new technology in schools and professionals.

B. TASK ENVIRONMENT

Threat of New Entrants:

Ø Medium to High - In the PC market any firm that discovers a new technology that is efficient in terms of price & performance is an immediate threat to the industry. However, Established standards, start-up costs and established brands names (Intel, Windows) are difficult to overcome for a new entrant.

Threat of substitute products:

Ø High - The new forms of Information appliance like Digital TV / HDTV Digital set- top box & Internet screen phones are gaining increasing popularity this might hamper the growth of the PC industry as a whole.

Bargaining power of suppliers:

Ø High - Since the industry is highly dependent on component suppliers, a powerful supplier could exert pressure on the market, by supplying components at a higher price to increase his profits. Since Apple is working only with few selected suppliers, the company is running at a higher risk than the average.

Bargaining power of buyers:

Ø Low - Due to high number of other suppliers in the industry the customer has the options to take the cheapest and the best.

Rivalry among competition:

Ø High - Competition among the giants is fierce, everyone aiming for a larger market share ,intensive price cuts & changes.

IV. INTERNAL ENVIRONMENT SCAN

A. CORPORATE STRUCTURE

Apple is organized along functional lines.

Apple is structured primarily on a geographic basis. The company’s reporting operating segment are comprised of:

1. The Americas

2. Europe, Middle East and Africa

3. Japan

4. Other: Asia-Pacific (Australia, Asia, and the subsidiary FileMaker, Inc.)

B. CORPORATE CULTURE

Ø Commitment to innovation and product quality

Ø Dedication to hard work and education

Ø Commitment to diversity and to empowering employees

Ø Commitment to safety and conservation of the environment/energy

Steve Jobs has a huge impact in the company’s culture. Since Job’s return in 1997, the company has reinvented itself with an array of different colors and styles of computers. The introduction of the Ipod and Itunes largely position the company as an innovative leader.

C. CORPORATE RESOURCES

1.) Marketing Mix

a.) Product

Apple is committed to sell original, good looking products that have an easy-to-use interface. The company offers a range of personal computing products, related devices and peripherals, and various third party hardware-products. In addition, the company offers software products (Mac OS X), server software and related solution; professional application software; and consumer, education and business oriented application software.

Apple has been very innovative by finding new usages for its Macintosh computer, such as desktop publishing and strong graphics/animation capabilities. The Macintosh’s functionality for managing multimedia files from cameras, DV recorder and MP3 devices has been very popular and successful.

The new introduction of Apple’s iPod and the iTune has revolutionize the digital music industry.

b.) Place

Apple’s operating segment are comprised of:

Ø U.S.

Ø South America

Ø Europe

Ø Japan

Ø Australia.

Recently Apple chose to implement a vertical growth strategy and began expanding their own retail stores. (CI#2) The company also sells its product via third-parties dealers, or via internet through their own website or through the iTune online music stores.

c.) Promotion

In 2003, Apple formed a strategic alliance with PepsiCo. The Pepsi iTune Music promotion calls for people to use the winning code found under the Pepsi’s bottle caps products to redeem songs from Apple’s iTunes Music Store. This promotion has already been successful for both companies and increased the awareness of the iTune presence in the market.

In 2003, Apple also announced a marketing partnerships With America Online that are aimed at driving iTunes use deeply into the mainstream. Apple and America Online have agreed to put iTunes “buy this song” buttons next to every song that’s listed in AOL’s music service, which its 25 million subscribers can access. Clicking the button will automatically launch the iTunes music jukebox and begin downloading the song; billing will be handled through the customer’s existing arrangement with AOL.

Apple has a joint venture with Hewlett Packard. Apple has produced an iPod for PC users and the success of this product was a good way for the company to capture non-MAC users.

The company’ also drew on endorsements from music stars. U2 singer Bono, rap artist Dr. Dre and Rolling Stones singer Mick Jagger each gave a live endorsement of the iChat videoconferencing software. Singer Sarah McLachlan also appeared live to sing several songs and to talk about how she used the iPod.

In 2005, Apple Computer has initiated a partnership with Wal-Mart that will soon see the iPod shuffle featured at Wal-Mart discount locations around the country.

d.) Price

Apple price is know to be above average in the industry. The company is using a differentiation strategy and focus more on innovation, and quality. This strategy is justifying their premium prices. Lately, however, their new technology and their high cash flow allowed them to lower their price and to offer more discount to certain markets such as the education market. (CI#3) This new pricing strategy may help Apple to better compete with the non-Mac user market but might cause some issue with the brand image/recognition.

2.) Finance

The financial results for the fiscal 2004 fourth quarter ended September 25, 2004.

For the year 2004, the Company reported net income of $276 million on revenue of $8.28 billion compared to net income of $69 million on revenue of $6.21 billion in 2003. Their net income has increased 400%!

Sales to the education market grew 11 percent, bringing its highest quarterly total for that market in seven years.

Apple has a strong balance sheet with a lot of cash (CI#3), their inventories have almost double compared to the year 2003. Apple short-term debt and long-term debt have been completely paid, which is a very good advantage for the company.

Apple’s activity ratios are very good and improved a lot compared to year 2003. However their ROE and ROI ratios are still low compared to the industry.

Income Statement Sep 04 Sep 03 Sep 02

Revenue 8,279.0 6,207.0 5,742.0

Cost of Goods Sold 5,870.0 4,386.0 4,021.0

Gross Profit 2,409.0 1,821.0 1,721.0

Gross Profit Margin 29.1% 29.3% 30.0%

Net Income After Taxes 276.0 69.0 65.0

Balance Sheet Sep 04 Sep 03 Sep 02

Cash 2,969.0 3,396.0 2,252.0

Net Receivables 774.0 766.0 565.0

Inventories 101.0 56.0 45.0

Total Current Assets 7,055.0 5,887.0 5,388.0

Total Assets 8,050.0 6,815.0 6,298.0

Accounts Payable 1,451.0 1,154.0 911.0

Short-Term Debt 0.0 304.0 0.0

Other Current Liabilities 1,229.0 899.0 747.0

Total Current Liabilities 2,680.0 2,357.0 1,658.0

Long-Term Debt 0.0 0.0 316.0

Total Liabilities 2,974.0 2,592.0 2,203.0

Total Equity 5,076.0 4,223.0 4,095.0

Ratios 2004 2003 Industry

Liquidity Ratios

Current Ratio 2.58 2.89 1.33

Quick Ratio 2.3 1.44 1.1

Profitability Ratios

Gross Profit Margin 29.47% 27.52% 20.43%

Net Profit Margin 5.20% 1.11% 4.53%

Return on Equity (ROE) 8.8% 1.63% 20.3%

Return on Investment (ROI) 8.8% 1.01% 19.1%

Activity Ratios

Inventory Turnover 56.2 110.84 81.4

Asset Turnover 1.2 0.9108 1.8

Leverage Ratio 1.62 2.47

3.) Research and Development

Apple consider that R&D are critical for the activity of the company. therefore, they are willing to increase investment in R&D to keep a sustainable competitive advantage in the industry. According to the company’s Annual Report in 2004:

“In order to remain competitive, the Company believes that increased investment in research and development (R&D) is necessary in order to maintain and extend its position in the markets where it competes. The Company’s R&D spending is focused on delivering timely updates and enhancements to its existing line of personal computers, displays, operating systems, software applications and portable music players; developing new digital lifestyle consumer and professional software applications; and investing in new product areas such as rack-mount servers, RAID storage systems, and wireless technologies.”

New products are a necessity in this industry and seems to be a priority for Apple. New products are not always a success, though. This might explain why Apple seems to be so hesitant in investing its high cash flow into new projects, the company might be afraid by the potential failure of the outcome. (CI#3)

4.) Operation and Logistics

Apple heavily rely on third-parties in the manufacturing and logistics sector. Therefore, the company’s overall performance is greatly dependent on the performance of its distributors. In order to have more control over the quality of the buying experience, Apple has done continual effort to become vertically integrated during these two passed years.

Apple work only with suppliers that meet the criteria from their policy (involve commitment to environment, safety and diversity.)

At each period the company performs a detailed review on demand forecasts, inventory, product lifecycle status.

5.) Human Resources Management (HRM)

Apple has over 13,000 employees world wide.

Apple believe that employee’s diversity is a key component for the company success. The company expects that all employee will respect the background or cultural differences of their peers.

Apple offer great benefits to its employee such has competitive pay, and compensation, insurance coverage, bonuses, substantial product discount, stock purchase and saving/investment plan.

The company offers all-level of position such as internship, part-time and entry-level for college student.

6.) Information Systems

Apple has encountered a substantial success by introducing a new digital music device called iPod that can store 1,000 songs and copy a CD in 10 seconds. The continual heavy investment in R&D allowed the company to be on the edge of new technology.

Online store distribution channel has been very powerful for the company.

V. SWOT/TOWS ANALYSIS

A. SWOT ANALYSIS

Strengths Weaknesses

1. Ease of use 2. Established in the personal computer market3. High Corporate reputation 4. Control over the product (manufacture both the computers themselves and also the operating systems which they run)5. Leader in innovation and product differentiation6. Employee diversity 7. Strategic Alliance (HP)8. Joint venture with Pepsi9. Strong Top management10. Loyal customer base11. Creative style 1. The ease of use has led to some image issues, with some business people regarding the Macintosh as a toy.2. High inventory3. Distribution problems4. high prices5. Not IBM compatible, though great strides have been made in connectivity the Macintosh is not transparently compatible.6. Declining share in educational market7. Too many product lines

Opportunities Threats

1. Internet2. Growing industry3. Creating new software markets and selling the hardware into these markets.4. Demand for innovation5. Employee benefit programs6. Growing educational market (In both higher education and schooling, the Macintosh ease of use and low maintenance costs are attractive.)7. Music downloads from Itune 1. Very intense competition among the industry2. Price competition3. loss of market share4. Potential litigations5. Budget deficits in education6. Technological and prices discontinuity7. Potential increase in supply’s costs

B. TOWS ANALYSIS

SO1. Focusing on innovation and product differentiation will contribute to the customers satisfaction (S5, O3, O4)2. The diversity of the employees and the employee benefit programs contribute to the high corporate reputation (S3, S6, O5)3. Joint venture with Pepsi and strategic alliance with HP respond to the demand for music download. (S7, S8, O7) WO1. The growing educational market should increase Apple’s market share in this segment (W6, O6)2. The growing industry should allow the company to decrease prices (W4, O2)

ST1. The high corporate reputation might suffer from the potential litigations. (S3, T4)2. Strong management might overcome the potential litigations. (S9, T4)3. Focus on innovation and product creative style might offset the low prices of competitors. (S11, T1, T2)4. Innovation will depend on the technological -prices conditions and changes. (S5, T6) WT1. The image issues concerning the ease of use of the machine might contribute to the loss of share. (W1, T3)2. The discontinuity in technology and prices might create some forecasting problems, which could result in excess or shortage of inventory. (W2, W3, T6)3. Competition might take advantage of Apple’s high price. (W4, T1, T2)4. Apple’s high price might lower the amount of educational contracts (W4, T5)5. Not being IBM compatible might lead to loss in market share (W5, T3)6. The broad product line might be endangered by the technology and prices discontinuity. (W7, T6)

VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

A. STRATEGIC ALTERNATIVES

1.) Turnaround

The company could stop the expansion of their own retail segment in order to maintain a healthy relationship with its third-party distributor and avoid lawsuit. This strategy would also reduce the risks and costs tied to the stores investment. Apple could use its high cash to implement a product development strategy within the market segment they are currently serving. The company could also keep selling its products at a premium price in order to maintain the company’s reputation as an upscale and innovative brand.

PROS

Ø Improve relationship with resellers. (CI#2)

Ø Reduce risks

Ø The allocation of the high cash into a product development strategy might ultimately increase the revenue of the company(CI#3)

Ø The premium price might be profitable and the upscale image brand of the company is respected.

CONS

Ø No control over the quality of the buying experience procured by the third-party distribution (CI#2)

Ø Potential loss of market share because of the premium selling price

Ø Broad product lines might lead to confusion and extra overhead costs. (CI#1)

2.) Pause and Proceed with Caution

In the Annual Report for 2004, the company saw an increase in revenue and profitability. The introduction of iPod or Itune items have largely contributed to the company’s successful year. The retail segment growth has increased the brand awareness of the company but has led to some conflicts with the resellers. This strategy has to be taken with caution because Their lower price strategy is allowing the company to attract some non-Mac users.

During the mid of this year (2005), the company could consider to primarily focus on: the music segment market and the education segment. Apple could also implement a succession plan for the eventual departure of Steve Jobs. The company’s growth strategy has to be taken with caution and compromises with resellers have to be done.

PROS

Ø Good financial results

Ø More control over the quality of the buying experience (CI#2)

Ø Better brand awareness

Ø Less confusion among core competency. (CI#1)

Ø Sufficient cash flow to support the discounted prices. (CI#3)

CONS

Ø Cannibalization risk is still present (CI#2)

Ø The low prices might discredit Apple’s upscale brand image.

3.) Vertical Growth

The company could decide to do a forward integration, by expanding its own retail store. Apple could use its high cash to finance this investment. The stores are a critical way to leverage Apple’s brand and showcase newfangled digital wares to affluent consumers.

PROS

Ø Total control over the quality of the buying experience (CI#2)

Ø High cash can support the investment for the retail segment (CI#3)

Ø Better brand awareness

CONS

Ø Dissatisfaction of the resellers(CI#2)

Ø Potential loss of revenue due to cannibalization (CI#2)

Ø The high cash investment is risky, and might have been allocated in a more safety way. (CI#3)

B. RECOMMENDED STRATEGY

Pause and Proceed

The last fiscal year has seen improvement for Apple. Profits have increased and the focus has been on innovation, especially in the music segment market.

Using the high cash to implement a price strategy appears to be a good idea to compete with the non-Mac users. (CI#3) The brand image might slightly suffer from this strategy, therefore marketing incentive should be increased in order to sustain Apple’s reputation for high quality and innovative products.

The retail segment growth should be implemented with a lot of caution. Apple needs to ease the pain of the resellers by coming up with programs to encourage these longtime partners to help it accomplish goals it can’t achieve on its own. (CI#2)

Apple should also primarily focus on the music segment market and the educational segment market in which they have good opportunities. This focus would allow Apple to be more competitive and profitable. (CI#1)

Least but not Last, the company should prepare a succession plan in response to the eventual departure of Steve Jobs. (CI#4)

VII. IMPLEMENTATION

A. WHO? The top management should narrow their focus to two market segment.

B. WHAT? Apple’s core competency should focus on the music segment market and the educational segment market in which they have good opportunities. (CI#1)

C. HOW? The company has to invest more into these 2 segments and cut some product lines that are not very profitable to the company.

D. WHO? As Steve Jobs initiated, the company should keep focusing on a price strategy

E. WHAT? By lowering the prices, the company will be able to be more competitive and increase market share.

F. HOW? The company can use its high cash to support discounted prices. (CI#3)

G. WHO? The top management should decide to expand the retail store.

H. WHAT? Improve the quality of the buying experience by having control over the salesperson and collaborate with the resellers. (CI#2)

I. HOW? The company can use its high cash to invest in the retail store expansion. The company should also tightly work with the resellers by supporting them through programs and bonuses.(CI#2) (CI#3)

J. When? During mid 2005.

K. HOW MUCH? The Company’s current strong financial condition and low debt-to-equity ratio will provide the means to accomplish these implementation initiatives in the short-term. In the long-term these measures will be well worth the cost in increased revenue and market share.

L. WHO? The board of directors and the top management should prepare a succession plan. (CI#4)

M. WHAT? The company has to deal with Steve Jobs eventual departure.

N. HOW? Steve Jobs has to delegate some of his power to the top management and he should also implement some training programs. Tim Cook might be a good potential successor.(CI#4)

P.WHEN? Right now.

VIII. MAINTENANCE AND CONTROL

A. The company’s strong financial position should allow the implementation of the strategies stated above. However the investment related to the retail segment growth is very costly and might be risky. Therefore, the company should:

Ø Increase gradually the opening of retail stores.

Ø Assess performance by having Finance and Marketing reviewing “the numbers “monthly”.

Ø Spot and immediately address any negative trends

The top management should periodically visit stores and gather feedback from line employees. They should also gather feedback from resellers to address expansion issue.

B. The company’s focus on the music segment market and the education segment market has to be tightly monitored.

Ø Top management should evaluate on a weekly basis overall performance. (Revenue, Profit, ROI)

Ø Feedback forms should also be given to customers to maintain good relations and to spot market trends early.

Works Cited

10-Q for Quarterly Period Ended December 25, 2004

http://www.apple.com/investor/

Apple Governance

http://www.apple.com/investor/

Apple Financial Analysis

http://www.hoovers.com/

Diverse Articles on Apple

http://www.businessweek.com

Executive Summary

Dell Computer Corporation was established in 1984 and today ranks among the world’s largest computer systems companies. Dell pioneered the concepts of selling personal computer systems directly to customers; offering build-to-order computer systems; and providing direct, toll-free technical support and next-day, on-site service. The company designs and customizes products and services to end-user requirements, and offers an extensive selection of peripherals and software.

Dell’s complete range of high-performance computer systems include: Dell Dimension and OptiPlex desktop computers, Latitude notebook computers, and PowerEdge network servers. The company’s products and services are sold in more than 140 countries and territories to customers extending from major corporations, government agencies and medical and educational institutions to small businesses and individuals. The company employs approximately 11,000 people. Headquarters are located in Round Rock, Texas, with manufacturing facilities in Austin, Texas; Limerick, Ireland; and Penang, Malaysia.

History

At age 13 Michael Dell was already a successful businessman. From his parents’ home in Houston, Dell ran a mail-order stamp-trading business that, within a few months, grossed over $2,000. At 16 he sold subscriptions to the “Houston Post,” and at 17 Dell bought his first BMW. When he enrolled at the University of Texas in 1983, he was thoroughly bitten by the business bug.

Dell started college as a pre-med student, but found time to establish a business selling random-access memory (RAM) chips and disk drives for IBM PCs. Dell bought his products at cost from IBM dealers, who, at the time, were required to order from IBM large monthly quotas of PCs, which frequently exceeded demand. Dell resold his stock through newspapers (and later through national computer magazines) at 10-15% below retail.

By April 1984 Dell’s dorm room computer components business was grossing about $80,000 a month — enough to persuade him to drop out of college. At about that time he started making and selling his own IBM clones under the brand name PC’s Limited. Dell sold his machines directly to end-users rather than through retail computer outlets, as most manufacturers did. By eliminating the retail markup, Dell could sell his PCs at about 40% of the price of an IBM.

The company was plagued by management changes during the mid-1980s. Renamed Dell Computer, it added international sales offices in 1987. A year later it started selling to government agencies and added a sales-force to serve larger customers. That year Dell went public in a $34.2 million offering.

Dell tripped in 1990, reporting a 64% drop in profits. Sales were growing, but so were costs, mostly because of Dell’s efforts to design a PC using proprietary components and RISC chips. Also, the company’s warehouses were oversupplied. Within a year Dell turned itself around by cutting inventories and coming out with eight new products.

Dell entered the retail arena by letting Soft Warehouse Superstores (now CompUSA) in 1990 and office supply chain Staples in 1991 sell its PCs at mail-order prices. Also in 1991 Dell opened a plant in Limerick, Ireland.

In 1992 Xerox agreed to sell Dell machines in 19 Latin American countries. That year Dell sold a new line of PCs through Price Club (now Price/Costco). Dell opened subsidiaries in Japan and Austria in 1993 and began selling PCs through Best Buy stores in 16 US states.

The computer maker abandoned retail stores in 1994 to refocus on its mail-order origins. The company took a $40 million charge to retool its troubled notebook computer line and later that year released its Latitude notebook to general acclaim. The company also introduced a line of servers.

In 1995 the firm offered Pentium-based notebooks, and hastened the interest in its desktops by cutting prices and releasing a dual-processor PC. The following year Dell ramped up its efforts in the Asian computer market with new mail-order service in Hong Kong, Japan, and Singapore; a new Asia/Pacific Customer Center in Malaysia; and direct-sales operations in South Korea and Taiwan.

In 1997 Dell and Toronto-based Newcourt Credit Group formed Dell Financial Services, a joint venture that will provide financing for Dell customers. That year Dell also announced plans to enter the market for engineering, analysis, and design computers called workstations. Dell built up its consumer business in 1997 by separating that operation from its small-business unit and beginning a leasing program for individuals.

Current Situation (1997)

Computer Industry and Market Prediction

It is hard to believe that another year has gone by in an industry that used to live by Moore’s law. Moore’s law states that technology doubles every 18 months. While that maxim still works, at least when it comes to semiconductors, it doesn’t accurately depict the greater changes the computer industry is going through at this time. The Internet seems to speed ahead in 1997, while the market is expanding in leaps and bounds. Last year at this time, market researchers predicted that we would see at least a 12% growth in PC sales. However, thanks to high demand in sub-$1000 PC’s this Christmas, It is likely to see unit sales for 1997 at 20% or higher. Of course, with lower priced PC’s gobbling up as much as 40% of retail, revenues may actually be down for this same time period.

At the beginning of the year, many thought that the New Computer (NC) was going to start taking off. At best, it is finding a niche in corporate offices where repetitive tasks are essential to productivity. The beginning of the year also saw many predict that information appliances would gain ground, and while Web TV and smart phones have debuted, they have not made any real impact in a market aimed at mainstream consumers.

Many also started out 1997 thinking that Microsoft just might have met their match from the Larry Ellison, Scott McNealey and the Java crowd, but as we head into 1998, Microsoft looks more in control of the market then ever. Indeed, Windows 98 upgrades should bring them great profits in 1998 and Windows NT 5.0 is on track to become a sturdy OS in all phases of corporate computing. With the introduction of two new mainstream user platforms for Windows CE in 1998, Microsoft could end up owning the standards for the consumer market as well.

The only predictions from the beginning of 1997 that has been accurate were the ones dealing with Apple Computer. While very few predicted that Steve Jobs would end up running the company, most market researchers did say that Apple would continue to lose ground in 1997. In fact, they have actually lost as much as 3% of their market share this year alone as Apple confused their developers and turned their backs on cloning partners.

1997 also saw the Internet become an important draw for consumers. Although the sub-$1000 price point got their attention, the Internet has become the reason they are going out and buying these low-cost PCs in such large numbers. The lure of the Internet as a tool for school age kids and its role as an information source for even mom and dad has finally turned the tide for many families that had resisted buying a PC up to now. 1997 will also be remembered as the year that the Justice Department put the heat on Microsoft and tried to rein them in a bit. They are currently being challenged over their monopolistic practices, and this fight over the inclusion of Internet Explorer 4.0 in current versions of Windows will continue to keep them under the scrutiny of government officials as well as the industry at large. So, with 1997 clearly behind us, what is in store for 1998?

The first prediction is that Intel will get the low-cost religion in a big way. While they have already made moves in this direction, Intel competitors such as National Semiconductor/Cyrix and AMD will force them even lower when it comes to semiconductor pricing for consumers. In fact, many analysts predict that by next Christmas, we will be talking about fully loaded PC’s with a 200 MHz processor and 16 Megs of DRAM and at least a 12X CD ROM drive with a street price of around $500, without monitor. Add the monitor and a 2 gig hard drive and we are still talking about a complete system for about $750-$800. According to the Computer-World, the magazines for IS professional, Customers will be able to get the system above and a 600 dpi color inkjet printer all for around $900-$1000 by next Christmas’98.

The second prediction is that there will be a move to make CD-RW the next floppy. Although the DVD RAM camp will try and make this the re-writable standard, the backward compatibility of CD-RW and then DVD RW that comes out of the HP camp is more likely to get the lion’s share of at least the business mindset by the end of 1998. 1998 will also bring the introduction of something that will be called the Auto PC. At last fall’s Comdex, IBM took the lead and showed a network PC embedded into the dashboard of a sport utility vehicle. However, Microsoft and others will start touting their own version of an Auto PC with Internet connections and by this time next year we will even see some autos with a PC based Internet architecture built right into to some luxury vehicles.

Analysts expect to see the fight for the digital living room between PC and consumer electronics vendors heat up significantly. Microsoft and their Web TV Plus will lead the charge, while NCI and their Internet TV concept will also gain some ground. Indeed, at the end of 1997, Scientific Atlanta chose the NCI software for their digital set-top box and it would not surprise me if their main competitor, General Instruments, decides to go the way of Windows CE.

At the same time, digital media reference designs from AMD/Cirrus Logic and National Semiconductor / Cyrix will catch the attention of mainstream PC vendors who are also lusting after the digital living room. This design includes 3D surround sound stereo, DVD ROM, 32 Megs of DRAM, a 1.6 gig hard drive and MPEG video in a single box that connects to the TV. While it does not deliver enhanced TV like Web TV does, it would give the user quite a powerful system for the living room that could be used for various purposes.

Another interesting trend for 1998 will be the purchase of sub-$1000 PC’s as dedicated Internet access devices in upscale homes. We are starting to see people who normally use the PC in the den for productivity look for a second PC that could be dedicated for Web surfing and email. The reason for this is that they do not want their productivity PC to catch any possible virus or infections from Internet and Web data transfers. Dedicating a PC for this type of Web access guarantees that their important PC has no conflicts and protects their work from outside influences.

Another thing that 1998 will bring will be the introduction of a Web based phone into the home. Cidco, Sanyo, Brother and others will take aim at the kitchen by providing an all-in-one device that can make voice calls, do email and use the Web as a telephone directory.

As for industry growth, most market researchers still see a strong US market, with about an 18% increase in 1998. Europe will also be around 18-20% but Asia should see a slow down due to their current economic problems. Growth there may be only about 10% in 1998.

With 1997 behind us and the market moving at lightning speed, the outlook for the PC industry does look pretty good. While there could be some hiccups, 1998 seems to be on track to be a banner year with some exciting new products paving the way for PC technology to gain more ground in both the office and the home.

Inside Dell Computer, Inc.

It’s amazing to see how this small company does grow bigger in Texas. Austin area-based Dell is the world’s leading direct seller of computers, with international sales accounting for an ever-growing portion of revenue. Dell makes its own line of desktop PCs, notebook computers, and servers. More than 90% of them are sold to businesses and government entities. It also markets a variety of compatible peripherals and software from other manufacturers.

With the industry standard Wintel platform (Microsoft Windows operating system and Intel microprocessor) as its foundation, Dell beats the competition by offering custom-built products directly to computer users. Customers can order by phone or over the World Wide Web, where the company is selling as much as $6 million worth of computers daily and expects to be processing half of its transactions by the year 2000.

Dell’s built-to-order boxes mean lower inventories, so the company can offer the latest technologies. Lower inventories also translate to lower costs and, therefore, higher margins for the company. Looking to apply its winning strategy in a new theater, Dell introduced its first line of workstations, based on the Windows NT operating system. Founder and Chairman Michael Dell, who despite his youth is the longest-tenured CEO at any major US computer firm, own 16% of the company. (#190 in FORTUNE 500 & #226 in Hoover’s 500)

Officer and Employees (Source: Hoover Online)

Chairman and CEO: Michael S. Dell, age 32, $1,993,371 pay

VC: Morton L. Topfer, age 60, $1,575,898 pay

VC: Kevin B. Rollins, age 44, $828,150 pay (prior to promotion)

SVP and CFO: Thomas J. Meredith, age 46, $928,779 pay

SVP; General Manager, Europe: Martyn R. Ratcliffe, age 35, $990,908 pay

SVP Desktop and Workstation Business: G. Carl Everett Jr., age 47

SVP Law and Administration: Thomas B. Green, age 42

SVP, Server Group: Michael D. Lambert, age 50

SVP Relationship Group: Joe Marengi

SVP, Desktop Business Unit: D. Scott Mercer, age 46

President, Europe, Middle East, and Africa: Jan Gesmar-Larsen, age 37

VP; General Manager, Japan: Hiroshi Fukino, age 55

VP and Chief Information Officer: Jerome N. Gregoire, age 45

VP; General Manager, Asia/Pacific: Phillip E. Kelly, age 39

VP; General Manager, Preferred Accounts Division: John Kinnaird

VP World Procurement: John K. Medica, age 38

VP Human Resources: Julie A. Sackett, age 53

VP Finance and Corporate Controller: James M. Schneider, age 44

VP and Treasurer: Alex C. Smith, age 37

VP Value-Added Services: Bill Waas, age 49

Auditors: Price Waterhouse LLP

1997 Employees: 10,350

1-Yr. Employee Growth: 23.2%

Location and Market (Source: Hoover Online)

Headquarters: One Dell Way, Round Rock, TX 78682-2244Phone: 512-338-4400Fax: 512-728-3653

Web Site: http://www.dell.com

Dell sells its products in more than 140 countries. The company has manufacturing facilities in Ireland, Malaysia, and the US.

1997 Sales

$ Mil. % of total

Americas 5,279 68

Europe 2,004 26

Asia/Pacific 476 6

Total 7,759 100

Product and Operation (Source: Hoover Online)

1997 Sales % of total Desktop systems 78

Notebooks 18

Servers 4

Total 100

Selected Products:

Computer peripherals

Desktop computers (Dimension, OptiPlex)

Notebook computers (Inspiron, Latitude)

Servers & workstations (PowerEdge, WorkStation)

Service and support

Software

Competitors (Source: Hoover Online)

Acer

Apple Computer

Canon

Compaq*

Digital Equipment

Fujitsu

Gateway 2000*

Hewlett-Packard IBM*

Machines Bull

Matsushita

Micro Warehouse

Micron Technology

NCR

Oki Electric

Packard Bell

Philips Electronics Tandy

Toshiba

Unisys

Siemens

Sony

Sun Microsystems

Sharp

Hyundai

Hitachi

* Note: The big-bold-italic-red printings are the main competitors for Dell.

Financials (Source: Hoover Online)

Ticker symbol: DELL 1998 Revenue ($ mil.): 1998 Net Income ($ mil.):

Exchange: NASDAQ 12,327.0 944.0

Fiscal year-end: January

1-Yr. Revenue Growth: 1-Yr. Net Income Growth

58.9% 82.2%

Dell Computer Corporation

NASDAQ: DELL Fiscal Year-End: January

Data Definitions

Market Data | Comparison Data | Detailed Annual Financials | Detailed Quarterly Financials | Historical Financials & Employees | Real-time SEC Filings | Investor Resources

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1997 7,759 518 6.7% 18.09 3.34 16.53 27 5 0.68 0 1.16 10,350

1996 5,296 272 5.1% 6.17 2.47 3.42 18 7 0.34 0 1.30 8,400

1995 3,475 149 4.3% 2.98 1.20 2.66 15 6 0.20 0 1.03 6,400

1994 2,873 (36) — 3.07 0.87 1.38 — — (0.07) 0 0.78 5,980

1993 2,014 102 5.0% 3.12 0.94 2.89 18 6 0.17 0 0.63 4,650

1992 890 51 5.7% 1.51 0.84 1.33 17 9 0.09 0 0.48 2,970

1991 546 27 5.0% 0.97 0.19 0.94 16 3 0.06 0 0.24 2,050

1990 389 5 1.3% 0.40 0.19 0.19 20 10 0.02 0 0.18 1,500

1989 258 14 5.6% 0.53 0.32 0.40 13 8 0.04 0 0.17 1,175

1988 159 9 5.9% — — — — — 0.06 0 0.07 –

1997 Year-End Financials

Debt ratio: 2.2%

Return on equity: 64.3%

Cash ($ mil.): 115

Current ratio: 1.66

Long-term debt ($ mil.): 18

Shares Outstanding: 692

Dividend yield: –

Dividend payout: –

Market value ($ mil.): 11,442

Main Competitor’s financial comparison

Company Ranking for: (Source: CorpTech, Technology Company Information)

Company Employment Growth in 1997 Growth projected for 1998 Annual Sales Revenue Sales per Employee

Dell 18 of 3,011 123 of 2,777 N/A 12 of 2,966 178 of 2,952

Compaq 14 of 3,011 N/A N/A 4 of 2,966 108 of 2,952

IBM 1 of 3,011 738 of 2,777 N/A 1 of 2,966 422 of 2,952

Gateway 2000 25 of 3,011 802 of 2,777 N/A 17 of 2,966 158 of 2,952

Description and Financial Review for: (Source: Hoover Online)

1. Compaq Computer Corp

Compaq Computer, Corp. leads the PC market and still isn’t satisfied. The Houston-based company is logging experience in handheld systems and other new fields in efforts to become the top global computer company. Compaq is the world’s leading PC maker with about 10% of the global market, and it’s churning out more new products than ever before (PCs account for about half of sales). Other Compaq products include servers that run distributed networks of computers, consumer systems, and communication tools.

Compaq’s planned purchase of Digital Equipment Corp. and its purchase of struggling Tandem increase its depth in the high-end hardware market. (The deal for Digital, the biggest acquisition in the history of bits and bytes, would create the world’s second-largest computer firm, behind IBM.) Compaq also acquired modem maker MicroCom to boost its remote-access business.

The firm’s latest products emphasize diversity, such as clustered, high-end PC servers that link several systems’ resources, and machines that compete with low-end UNIX systems. The expansion has its price — an entry into the home information appliance market, its PC theater developed with Thomson S.A., was killed after less than a year due to bad reception in the marketplace. What the company lacks in analysts’ eyes is competitive delivery and network service. The majority of Compaq’s revenues come from sales to corporate customers, but it also markets products to home users, governments, schools, and students. (#60 in FORTUNE 500 & #41 in Hoover’s 500). Source: Hoover Online

Compaq Computer Corporation

NYSE: CPQ Fiscal Year-End: December

Data Definitions

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1997 24,584 1,855 7.5% 39.78 14.20 28.25 33 12 1.19 0 6.21 32,656

1996 18,109 1,313 7.3% 17.43 7.18 14.88 20 8 0.87 0 4.49 18,900

1995 14,755 789 5.3% 11.35 6.23 9.60 19 10 0.60 0 3.45 17,055

1994 10,866 867 8.0% 8.43 4.83 7.90 12 7 0.68 0 2.90 14,372

1993 7,191 462 6.4% 5.05 2.78 4.92 505 278 0.01 0 2.10 10,541

1992 4,100 213 5.2% 3.32 1.48 3.25 20 9 0.17 0 1.67 11,300

1991 3,271 131 4.0% 4.95 1.47 1.76 50 15 0.10 0 1.53 11,600

1990 3,599 455 12.6% 4.52 2.36 3.75 13 7 0.34 0 1.44 11,400

1989 2,876 333 11.6% 3.75 1.97 2.65 14 8 0.26 0 0.99 9,500

1988 2,066 255 12.4% 2.19 1.40 1.99 10 7 0.21 0 0.70 6,900

1997 Year-End Financials

Debt ratio: 0

Return on equity: 19.7%

Cash ($ mil.): 6,418

Current ratio: 2.31

Long-term debt ($ mil.): 0

Shares Outstanding: 1,519

Dividend yield: –

Dividend payout: –

Market value ($ mil.): 42,912

2. IBM (International Business Machine Corp.)

IBM’s safety net turned out to be a web — the World Wide Web. Armonk, New York-based International Business Machines is the world’s top provider of computer hardware, software, and services. Not long ago the bottom had dropped out on sales of IBM’s mainstay mainframe and midrange computers. But with airlines, insurance companies, and banks relying on mainframes for their vast databases, and with the booming Internet business demanding big servers, business has been on an upswing.

Software and service revenues are also strong. Notes software from IBM’s Lotus Development subsidiary has more than nine million users worldwide. And services, once a freebie for big customers, now account for one-fifth of IBM’s sales.

Big Blue’s shedding of its longtime image as the quintessential button-down establishment was engineered by CEO Louis Gerstner, who became head of the ailing firm in 1993. Gerstner cut the workforce, shook up entrenched management, resuscitated the mainframe, and refocused the company on selling systems and support services.

Gerstner is betting IBM’s future on the networked world. The company is making every piece of hardware network-ready and has released the industry’s first network appliance, the IBM Network Station. Software units, Lotus and Tivoli (systems management software), focus on products for corporate intranets and new Web technologies. Acquisitions are also expanding IBM’s Web presence; for example, it recently purchased a majority stake in NetObjects, which makes Web site development software. (#6 in FORTUNE 500 & #6 in Hoover’s 500). Source: Hoover Online.

International Business Machines Corporation

NYSE: IBM Fiscal Year-End: December

Data Definitions

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1996 75,947 5,429 7.1% 83.00 41.56 75.75 17 8 5.01 0.65 21.04 240,615

1995 71,940 4,178 5.8% 57.31 35.13 45.69 16 10 3.53 0.50 20.24 225,347

1994 64,052 3,021 4.7% 38.19 25.69 36.75 15 10 2.51 0.50 19.00 219,839

1993 62,716 (8,101) — 29.94 20.31 28.25 — — (7.11) 0.79 16.04 256,207

1992 64,523 (4,965) — 50.19 24.38 25.19 — — (4.35) 2.42 24.17 301,542

1991 64,792 (2,827) — 69.88 41.75 44.50 — — (2.48) 2.42 32.40 344,396

1990 69,018 6,020 8.7% 61.56 47.25 56.50 12 9 5.26 2.42 37.48 373,816

1989 62,710 3,758 6.0% 65.44 46.69 47.06 20 14 3.24 2.37 33.50 383,220

1988 59,681 5,491 9.2% 64.75 52.13 60.94 14 11 4.64 2.20 33.36 387,112

1987 54,217 5,258 9.7% 87.94 50.00 57.75 20 11 4.36 2.20 32.04 389,348

1996 Year-End Financials

Debt ratio: 31.3%

Return on equity: 25.4%

Cash ($ mil.): 7,687

Current ratio: 1.20

Long-term debt ($ mil.): 9,872

Shares Outstanding: 1,016

Dividend yield: 0.9%

Dividend payout: 13.0%

Market value ($ mil.): 76,959

3. Gateway 2000, Inc

Gateway 2000 is one of the leading direct marketers of personal computers in the world. The company develops markets and manufactures and supports a broad line of big screen PC/TVs, desktops and portable PCs used by businesses, individuals, families, government agencies and educational institutions.

Gateway 2000 thrives in the fast paced environment of the PC industry, one of the most competitive businesses in history. Gateway 2000 wants corporate America to see spots. The North Sioux City, South Dakota-based maker of IBM-compatible PCs is the US’s #2 direct marketer of computers (behind global leader Dell). Known for packaging its PCs in boxes spotted like Holstein cows and then shipping them straight to consumers, Gateway is now targeting big businesses as the recipients of more of its systems.

European operations are based in Dublin, Ireland. Active European markets now include the United Kingdom, Ireland, France, Germany, Belgium, Luxembourg, Switzerland, Austria, Sweden and the Netherlands. Along the Pacific Rim, the company has sales and support operations in Japan and Australia, and manufacturing in Malaysia.

Gateway has expanded its revenues more than 35% annually by offering products directly to computer users ordering by phone or Web site instead of through resellers, a tactic that cuts costs by avoiding profit markups. It also lets the company get the latest technology to market faster:

Gateway was among the first PC makers to add color monitors, Pentium microprocessors, and CD-ROM drives as standard features. To correct its traditionally weak corporate standing (the majority of its business clients are small and medium-sized companies), Gateway has doubled the sales and service staff and worked to become more global itself (expanding Pacific Rim sales, among other things). The initial products in the new business line include the first NetPCs, stripped-down computers that cost under $1,000 (without a monitor).

Pony tailed chairman and founder Ted Waitt and his brother Norm own 46% and 9% of Gateway, respectively. (#284 in FORTUNE 500 & #288 in Hoover’s 500). Source: Hoover Online.

Gateway 2000, Inc.

NYSE: GTW Fiscal Year-End: December

Data Definitions

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1996 5,035 251 5.0% 33.13 9.00 26.78 21 6 1.61 0 5.31 9,700

1995 3,676 173 4.7% 18.75 8.00 12.25 17 7 1.10 0 3.73 9,300

1994 2,701 96 3.6% 12.38 4.63 10.81 20 8 0.61 0 2.60 5,442

1993 1,732 151 8.7% 10.75 8.38 9.81 15 12 0.71 0 1.94 2,832

1992 1,107 106 9.6% — — — — — — — — 1,369

1991 627 39 6.2% — — — — — — — — 657

1990 276 17 6.2% — — — — — — — — 303

1989 71 4 5.6% — — — — — — — — 150

1988 12 0 2.7% — — — — — — — — 40

1987 2 — — — — — — — — — — 11

1996 Year-End Financials

Debt ratio: 0.9%

Return on equity: 30.7%

Cash ($ mil.): 516

Current ratio: 1.65

Long-term debt ($ mil.): 7

Shares Outstanding: 154

Dividend yield: –

Dividend payout: –

Market value ($ mil.): 4,111

Key Issues

SWOT Analysis

Strengths

* High performance and Low price

* Direct marketing

* High sensitivity of the customer needs (because it sells direct and has direct contact with its customers)

* Custom Configured product

* Catalog/mail out database of customer

* Its commitment to sold relative high quality, relative low price products that are custom configured

* Have the best customer satisfaction in the industry: warranty packages, installation, maintenance, repair services, and user support

* Service Innovation & Recognition

* Value added service

* The second largest PC manufacture in the U.S. market and the third largest PC in the world, rank at 190 position in the Fortune 500

* Efficient distribution channel keep the production cost low

* A substantial cost advantage coming from the reseller’s markup, the costs and risks associated with carrying large inventories of finished goods.

* High growth (look at the competitor comparison)

* Service and Support as the ultimate competitive weapons in this maturing industry / customer satisfaction strategy. (Source: “Making the right choices for the new customers”)

* Outsource the unnecessary component and the component that doesn’t give big added value

* Keep its product open to the change or upgrade and adjustable or doesn’t need change on the software application/ system. (open architecture)

Weaknesses

* Not have much indirect distribution / Under-distribution

* Stock Keeping Unit / Inventory

* Not have so many product lines (2 for desktop, 2 for laptop/notebook and 2 for workstation)

* Lacked of / neglected laptop computers / Notebook, which is the hottest bit of the PC market

* Lack of diversifying distribution channel (too much focus on the direct channel)

* Its stock control and product forecasting systems could not keep up with its growth

* Dependent too much on the Wintel architecture. Dell Computer is the only manufacture that uses no other brand processor except Intel and the only manufacture who offers an operating system from Microsoft for all of its broad range of product.

* Not have so many resources in the computer networking, system and network integrators, which are combination of software, hardware, and peripherals. This market is more likely safer compare to the PCs and promising much higher profit margin. (This market has boomed by 20% every year).

* Unclear segmentation target customer

* Negative effect of direct marketing strategy. Because of this strategy, Dell lost the opportunity to gain the first buyer customer.

* Not have so much Financial Resources for developing its own project development. Ex: build its own monitor or build its own modem.

Opportunities

* Fastest Growing market in the Notebook segment

* International Growth opportunity; Japan (Dell is the ninth largest local vendor in Japan), Korea, Europe, Asia, Africa

* To be the most leading computer industry in terms of efficiency, profit margin, return on equity (ROE) and innovation

* PC’s is a huge market (Every person buys approximately 3 PCs every 10 years, The U.S. statistics)

* Huge opportunities to enter the derivation of the PC market, such as software, printer, scanner, and peripherals.

* Develops and markets its own operating systems that built based on the order of its customer

Threats

* Wintel Architecture

* Currency Exchange (36% revenues from international sales)

* Government Regulation, such as Recycling, EPA

* Because of its main customer is large company, it means they have a buying power and this could squeeze its profit margin

* Gateway 2000 is the closest competitor which has the same strategy (direct marketing, cut mark up cost, custom build computer and target the same segment customer; such as middle size and big corporation customers). In addition, Dell has to face head to head competition with Gateway 2000 in the same country; because both of them have the plants in the same country: Ireland & Malaysia.

* Short product life cycle of the semiconductor from 5 years to 3 months (Rapid technology cycles).

* Operating in one of the most competitive business in the history.

* Product Transitions.

* Production Forecasts / high degree of uncertainty demand.

* Technology standards and Key licenses.

* System Implementation (the risk of implement the new system).

* Credit Risk

* Year 2000 Compliance

Objectives

1. The most efficient and effective company in the computer industry

Dell is best known for establishing a direct distribution system. The traditional distribution system, indirect distribution system was very inefficient, because the reseller stores charge a 25-30 per cent mark-up for a computer. Beside that most salespeople do not know much about computers they sell.

2. Provide the best customer satisfaction in the computer industry

Satisfying customer involves meeting their specific needs, which makes segmentation and customization necessities.

3. The most profitable company in the computer industry that produce high ROE, ROI and profit margin

So far Dell has lead the great financial performance in the computer industry. This competitive strength is gained from the combination of its strategies above; the most efficient and effective company and provide the best customer satisfaction in the computer industry.

Marketing Strategy

1. Focus on high margin customers: Large Customer, such as large companies, Government and Education and Midsize companies and Small Business.

2. Stay on direct marketing and not rely on traditional retailing

3. Outsourcing the PC’s component to the independent manufactures and outsourcing the after sales service, then integrate and treat them as if they are inside the company (this will be explain in the next section).

Action Plans

Target Markets

From the data “Customer Group” (Dell Computer Corporation: Formulation Strategy), most of Dell Computer sales comes from Major corporate, Government, and Education Accounts. This data could support the strategy choice to focus chiefly on corporate customers while de-emphasizing consumers. In turn, Dell should allocate a substantial portion of its marketing resources to reaching customers through conventional retail distribution.

In order to make the segmentation success, Dell Computer should make it as clear as possible. Here is the example that we got from the article “The Power of Virtual Integration: an Interview with Dell Computer’s Michael Dell”.

Segmentation lets Dell Computer tailor its program to meet the customer’ needs. Moreover, Segmentation allows Dell Computer closer to its customer and it allows Dell to understand their needs in a really deep and real time way. This closeness gives the company access to information that is absolutely critical to its strategy. In addition, it also helps the company to forecast what the customers are going to need and when. And good forecasts are the key to keeping the cost down.

Target Segments

Dell’s direct marketing strategy made Dell PCs more interesting for novice /advance computer buyers (not first time buyer). Dell use World Wide Web to market its products, instead of 800 number and catalog / mail. Dell’s research profiled its typical customers as knowledgeable about computers, up to date on new systems, and specific about the product they want. These kinds of customers do not need or want the hand holding assistance provided at retail outlets.

Internal Operations

To accommodate its customer profile, Dell developed flexible manufacturing techniques. These techniques enable the company to build a customer’s computer virtually to order (custom build PCs through World Wide Web, instead of mail and catalog or telephone). Using different components for each order in Dell customs configured computers to meet customers’ specifications.

Instead of developing FMS, Dell also built a virtual integration between several strategies including customer focus, supplier partnerships, and mass-customization, just in time manufacturing. The virtual strategy itself means a technique how to combine that piece of strategies in the highly innovative way: technology is enabling coordination across company’s boundaries to achieve new levels of efficiency and productivity, as well as extraordinary returns to investors. In a simple way, it means Dell basically stitch together a business with partners that are treated as if they are inside the company.

Virtual integration harnesses the economic benefits of 2 very different business models. It offers the advantages of a tightly coordinated supply chain that have traditionally come through vertical integration. At the same time, it benefits from the focus and specialization that drive virtual corporations. Virtual integration as Michael Dell envisions it, has the potential to achieve both coordination and focus. (Source: “The power of Virtual Integration:”, Harvard Business Review, March-April 1998).

Beside that Dell marketing department are finding that data base strategies help them to better serve its customers. In dealing with large number of customers, it is difficult for marketers to serve them adequately. But, with a data-base strategy, they can gather insights and better understanding their customers’ expectations. In fact, Dell Computer Corp. has identified at least US $ 100 million in revenue opportunities within existing accounts by using a relationship data base strategy when it started in 1994.

To gather data for the project, Dell used a telemarketing procedure that could keep customers on the line long enough to give a lot of information. The ultimate goal was a 27-minute conversation (Direct contact and gather information). And the resulting data base includes planned purchased, Dell’s projected share of those purchases, and the timing of purchases so Dell could determine how often to call customers.

Cost Control

In order to gain high profit margin, the cost should be kept in line. Dell has already implemented this by carrying fewer inventories (35 days’ worth versus 110 days for Compaq Computer Corporation). Such flexibility allows Dell to uses its mail order expertise to introduce new and more expensive models faster that it could through the longer manufacturer to distributor to retail channel. Moreover, by reducing operating costs (Dell’s is 5.4 % of revenues versus 13 percent for Compaq) and by eliminating the middleman markup, there are more opportunities for marketing and sales to undercut the major brands after tapping other strategy options. Look at the chart below:

1. The dominant model in the personal computer industry - a value chain with arms-length transactions from one layer to the nest

2. Dell’s direct model eliminates the time and cost of third part distribution

3. Virtual Integration works even faster by blurring the traditional boundaries and roles in the value chain

Channel Innovation

Dell marketers recognize that getting comfortable with their current direct channel approach could limit expansion, especially in global markets that lack the sophisticated communications and delivery systems of North America. So by experimenting with the new distribution channels, managers at Dell continue to investigate new distribution concepts such as interactive mall and marketing via Internet.

According to the InfoWorld (Tebbe, Mark), Dell Computer Corporation shows that Web-based business is not just a dream. In fact, the company now sells more than US $ 1 million worth of computing equipment per day via the Internet. This revenue is growing by 20 percent each month. Dell has quickly created a sales channel that should deliver more than $400 million this calendar year.

Controls

Performance Metrics. These metrics are financial measurement, such as balance sheet and the Profit & Loss of the company. These tools are used to manage operations.

From the balance sheet we may track:

- How many days of inventory turnover; Higher means better.

- Account Receivables and Payables.

The real time performance measures in the P&L. We may split P&L by segments, by product and by country.

Feedbacks are being collected from four sources. Feedbacks come from the customers, from suppliers, and one from employees and the others from information system. The key to manage this work is how to release the information flows in the way that enhances the speed, either directly or indirectly.

Platinum Council and Team account. These teams are formed to serve large account customers only such as Boeing, MCI, etc.

BIBLIOGRAPHY

“Channeling their energies”; by Paley, Norton; Sales and Marketing Management magazines.

“THE POWER OF VIRTUAL INTEGRATION: AN INTERVIEW WITH DELL COMPUTER’S MICHAEL DELL”; by Magretta, Joan; Harvard Business Review edition March-April 1998.

“Dell shows that Web-based business isn’t just a dream”; by Tebbe, Mark; Infoworld.

“Dell hopes to up channel business by going after regional resellers”; by Zarley, Craig; Computer Reseller.

“Dell Computer Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“Compaq Computer Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“IBM Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“Gateway 2000 Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“Making the right choices for the new consumer”; by Dell, Michael S; Managing Service Quality.

“1997 Warp-Up and 1998 Predictions”; by Creative Consumer Marketing

“Service sells”; by Dell, Michael S; Executive Excellence magazines.

http://www.dell.com

http://www.compaq.com

http://www.ibm.com

http://www.gateway.com

http://www.hp.com

INTRODUCTIONIn 2001, Dell Computer became the world’s largest personal computer vendor, continuing togain market share and post profits in an industry struggling with slumping sales and billions ofdollars in losses. Dell sells 90% of its PCs directly to the final customer, largely bypassing thereseller channel that accounts for most of the world’s PC sales. This direct customer relationshipis the key to Dell’s business model, and provides distinct advantages over the indirect salesmodel. Dell’s direct relationship with the customer allows it to tailor its offerings to customerneeds, offer add-on products and services, and use the Internet to offer a variety of customerservices. In addition, Dell’s PCs are built to customers’ specifications upon receipt of an order,giving Dell additional advantages over indirect PC vendors who must try to forecast demand andship products based on those forecasts. Dell’s direct sales and build-to-order model has achievedsuperior performance in the PC industry in terms of inventory turnover, reduced overhead, cashconversion, and return on investment (Kraemer, et al., 2000).

Dell’s business model is simple in concept, but very complex in execution. Building PCs toorder means that Dell must have parts and components on hand to build a wide array of possibleconfigurations with little advance notice. In order to fill orders quickly, Dell must have excellentmanufacturing and logistics capabilities supported by information systems that enable it tosubstitute information for inventory.

The demands of Dell’s model have led it to adopt a new organizational structure referred to as avirtual company or value web (Figure 1). It is marked by a focus on a few key strategicactivities, and extensive outsourcing of non-strategic activities. Dell works closely with externalpartners to produce its PC products and to offer its customers an array of additional products andservices that add value and allow Dell to capture a larger share of the customer’s IT spending.

To manufacture its products, Dell coordinates a global production network that spans theAmericas, Europe and Asia, combining in-house final assembly with heavy reliance on outsidesuppliers and contract manufacturers. Manufacturing of printed circuit board assemblies(PCBAs), subassemblies (box builds), and some final products (mainly notebook PCs) is handledby contract manufacturers or original design manufacturers such as SCI, Solectron, Celestica,Hon Hai, Quanta and Arima. Like other PC makers, Dell relies on outside suppliers forcomponents and peripherals such as disk drives, CD-ROM drives, semiconductors, add-on cards,monitors, keyboards, mice and speakers. Its PCs can be bundled with standard software such asMicrosoft Office or with specialized software requested by corporate customers.

Dell relies on outside partners for services such as system integration, installation, on-site repairsand consulting. Partners include Wang, Unisys, IBM and BancTec. It also works with resellerswho support Dell hardware and receive referral fees for recommending Dell to customers.

3FIGURE 1. Dell’s Value Web ModelDell Custome rSystemintegratorsLogisticscompaniesCMs/OEMsComponentsuppliersThird partyHW and SWsuppliers DistributorsRepair andsupportcompaniesPhysical flows, including products and servicesInformation flowsAs Dell has moved beyond its home market in the U.S., it has had to adapt its business activitiesand organizational structure to the different markets in which it operates. In effect, Dell has hadto create similar but distinct value webs in each of the major regions, and to further customize itsmarketing and service functions for individual countries. The process of globalization hasshaped Dell’s own structure, but Dell’s success has conversely helped to reshape the globalstructure of the PC industry.

This paper looks at how Dell organizes its activities globally, regionally and within regions, andwhat factors determine its location decisions. The focus is on the PC manufacturing value chainincluding procurement, manufacturing, distribution and the logistics involved throughout thevalue chain. This includes Dell’s own assembly operations and the location of its suppliers inresponse to Dell’s decisions. We will also briefly discuss the organization and location ofmarketing, sales and service functions as they relate to Dell’s overall global organization.

GLOBAL ORGANIZATIONDell is a global company operating in 34 countries in three world regions, with about 35,000employees and $30 billion in sales. Dell is organized along geographic lines into the Americas,Asia-Pacific and Japan, and Europe/Middle East/Africa (EMEA). Corporate headquarters is inRound Rock, Texas, which is also the regional headquarters for Dell Americas. Each of theregions has its own regional headquarters and its own assembly plants and supply network.

Regional headquarters include Bracknell, U.K. for EMEA, Hong Kong for Asia-Pacific andKawasaki for Japan (Table 1).

4Dell’s business activities are organized in each region around different customer segments.

These vary somewhat, but generally include: (1) relationship (large corporate) customers; (2)home and small business (sometimes called transaction customers); and (3) public sector(government and educational) customers.

Product development is largely centralized in the U.S., and the same base products are soldworldwide. These products are customized for different regional and country markets withappropriate power supplies, keyboards, software and documentation. Other functions such as ITand e-commerce applications usually originate in the U.S., and then are adopted with necessarymodifications in the other regions. Manufacturing processes are always being upgraded, and thenewest plant is usually the most advanced wherever it is located. Improvements developed fornew plants are implemented in existing plants as much as possible.

Table 1Dell’s Worldwide Locations, With Employment and Sales, End of 2000Country City Employees Sales(FY2000)HQ ManufacturingWORLDWIDE 40,000 $25.3BTHE AMERICAS 27,200 $17.9BUnited StatesRound Rock and Austin TX 20,800 World and Americas YesNashville, TN area 2712 YesBrazil Eldorado do Sul 200 YesCanada n.a.

Chile n.a.

MexicoASIA-PACIFIC 3,200 $1.8BHong Kong (PRC) 25 A/PAustralia n.a.

China 330Xiamen 200 YesIndia Bangalore n.a.

MalaysiaPenang 1600 YesNew Zealand n.a.

Singapore 130Taiwan n.a.

Japan Kawasaki 700 JapanSouth Korean.a.

EUROPE, MIDDLEEAST AND AFRICA9,000 $5.6BUnited KingdomBracknell 500 EMEAIreland Limerick 3,400 YesBray 600• Dell has subsidiaries in 16 other EMEA countries, not listed here.

• Source: Dell web site and various news reports5LOCATION OF MANUFACTURINGWhile Dell does not manufacture its own components or subassemblies, it does handle finalassembly for nearly all of its desktop PCs and servers. Notebook PCs are manufactured byTaiwanese manufacturers Quanta and Compal. In some cases the notebook PCs are shippedcomplete to the final customer. However, Dell is increasingly ordering base units from itssuppliers and doing final configuration of notebooks in order to offer more configuration optionsto customers.

Dell organizes manufacturing by region, operating one or more assembly plants to serve itsmajor markets. Plants in the Austin, Texas and Nashville, Tennessee areas serve North America;Eldorado do Sul, Brazil serves Brazil and South America; Penang, Malaysia serves the Asia-Pacific region; Xiamen, China serves China and Japan; and Limerick, Ireland serves Europe, theMiddle East and Africa (Table 1).

Dell began manufacturing its own brand of PCs in Round Rock, Texas in 1985. It subsequentlyexpanded to new production sites outside the United States as follows (from Dell’s web site):1990: Opens manufacturing plant in Ireland1996: Opens manufacturing plant in Malaysia1998: Opens manufacturing plant in China1999: Opens manufacturing plants in Tennessee and BrazilIn addition, Dell has greatly expanded its production capacity in the Austin/Round Rock areaover the years, and now operates four facilities there. These plants produce the full line of Dellhardware products. Until the Tennessee plant opened, they supplied the entire North Americanmarket. Similarly, Dell has expanded its production capacity in Limerick, Ireland and nowoperates two plants there.

Employment worldwide is closely correlated with sales (Table 2). The Americas account for72% of Dell’s revenues and 68% of employment; EMEA has 20% of sales and 22% ofemployment; Asia-Pacific equals 8% of sales and 10% of employment. The only slight surpriseis the lack of bias toward the home country, even with the presence of corporate functions inTexas. An explanation could be that the large size and homogeneity of the U.S. market allowDell to achieve economies of scale in its production sites, call centers and other operations, andthus have a higher revenue per employee than other markets.11 We heard this explanation several times in interviews with Dell people in the EMEA region. They pointed out thatDell EMEA deals with 13 different languages, 18 different currencies, and 18 different tax rates whereas Dell NorthAmerica deals has only 3 different languages, currencies, and tax rates.

6TABLE 2Sales and Employment by Region (End of 2001)Americas EMEA Asia-PacificSales (last 4 quarters) $22.2B $6.6B $3B% of total sales 70 21 9Employment 21,600 8,250 4550% of total employment 63 24 13Revenue/employee $1,027,000 $800,000 $659,000Source: Dell web siteDELL’S LOCATION DECISIONSDell’s decisions about where to locate are driven by the need to minimize costs while extendingthe build-to-order, direct sales model around the world. Given the need to have production andsupport capabilities in the major markets, Dell selects specific locations based on a combinationof factors including labor costs, transportation and information infrastructure, market access,proximity to markets and government incentives. The role of these factors can be seen bylooking at particular locations of Dell facilities.

The AmericasTexasDell’s original headquarters was in Austin, Texas, where Michael Dell founded the company in1984. In 1994, Dell was offered a package of incentives from the neighboring city of RoundRock that Austin did not even try to meet. After collecting the usual 2% tax on Dell sales, thecity rebates 31% of those tax collections to Dell for 60 years; property tax abatement of 100%for 5 years; 75% for 5 years; 50% for 50 years (Schnurman, 2000). Dell moved its headquartersto Round Rock, built other facilities there, and eventually had over 12,000 workers in the formerbedroom community.

Dell maintains manufacturing facilities in Austin, including its high-volume Metric 12 plant thatassembles an estimated 4 million PCs per year. Overall, Dell has about half of its 36,000employees in central Texas, owing to incentives, a relatively low-cost workforce (compared toother U.S. locations), and a tendency to expand existing capacity rather than look elsewhere asthe company grew.

TennesseeDell opened its first North American manufacturing facility outside of Texas in 1999, inNashville, Tennessee. Nashville was chosen for very generous state and local tax incentives,good transport infrastructure, good labor supply and location central to East Coast markets.

Tax and other incentives from the state of Tennessee included:Infrastructure assistance (road improvements and utilities to service the facility totaling about$12 million7Job training assistance for Dell employees, which could range from $12 million to $20million over five years based on the employment projects of the companyJobs tax credits of $2,000 per employeeThe local Nashville government offered even more lucrative incentives, including:The gift of 100 acres of airport-area property valued at $6.5 million, and the leasing ofanother 600 acres for 40 years at fair marketAbatement of all property taxes on the facilities for 40 years$8 million in infrastructure improvements (beyond the state’s $12 million), and $1.5 milliontoward demolition of old buildings on the site (Locker, 1999)Dell now has two manufacturing facilities in Tennessee: one in Lebanon making consumerdesktop PCs and one in Nashville making consumer notebook PCs. It also has a sales andsupport call center in Nashville.

BrazilIn 1999, Dell began manufacturing at a facility in Eldorado do Sul, Brazil. The decision wasmotivated by the need for production to supply the South American market. Locating in Brazilenabled Dell to avoid tariffs that can nearly double the price of an imported $1,000 PC,according to Dell. Our own research (Dedrick et al., 2001) shows that tariffs on PCs can reachabout 30% of the price, so perhaps Dell is also including transportation or other costs into thisestimate. In any case, Brazil is by far the largest market in South America, and it would beimpossible to compete there with such a price disadvantage. Also, PCs produced in Brazil canbe exported without tariff to other Mercosur countries, which include Argentina, Uruguay andParaguay.

The specific choice of Rio Grande do Sul state was somewhat surprising, as most of Brazil’scomputer industry and supplier base is located near Sao Paulo. However, there were reportedlyfinancial concessions offered by the state government, and the southern state is centrally locatedto supply the other Mercosur countries. Michael Dell said in a statement that the region is a”phenomenal opportunity” for Dell. “Rio Grande do Sul is an excellent base of operationsbecause of its sophisticated labor force, its economic incentives to attract technologymanufacturingcompanies to the region and its strategic location as an export hub to other SouthAmerican countries,” (Mahoney, 1999).

Europe/Middle East/Africa (EMEA)Dell’s EMEA headquarters are in Bracknell, United Kingdom. It also operates a sales andsupport call center there for consumer and small business (transaction) customers in Europe.

Dell opened an assembly plant in Limerick, Ireland in 1990 to serve the European market, andsubsequently opened a second plant and administrative center there as well. It also operates asales and customer support center in Bray, Ireland to support larger corporate and otherinstitutional (relationship) customers. Dell located in Limerick initially because of the low costand high quality of labor. Today labor costs are much higher, but the work force is still highly8skilled and non-union. Dell has received good cooperation from technical schools anduniversities in the area to develop the skills Dell needs. Now 50% of the people working forDell in Limerick have at least a bachelor’s degree.

Another advantage of Ireland is its low corporate tax rates. In addition, Ireland is part of theEuropean Community, so products made in Ireland can be shipped to Europe without paying thevalue-added tax. Also, because Ireland is now adopting the Euro, Ireland will have currencystability with the rest of Europe, eliminating the exchange rate risk within Europe. This is amajor factor in Dell’s decisions to expand production in Limerick (Loughran, 2000).

Another factor was the tax incentives and other support offered by the Irish DevelopmentAgency. The agency helped Dell find land, set up its facilities, and assisted with job training.

More recently support has been provided in the form of per capita grants for each Dell employee(Kennedy, 2000a). Finally, Ireland is attractive due to the presence of suppliers such as Intel andMicrosoft, the presence of contract manufacturers such as SCI, and the quality of its freight andtransportation infrastructure (Kiely, 2000).

In addition to Ireland and the U.K., Dell operates subsidiaries in 16 other countries aroundEMEA, mostly for sales and local technical support. It also operates five logistics hubs wherePC units are brought together with monitors, peripherals and other add-ons for distribution to endcustomers. Furthermore, these hubs also provide repair services.

Asia-PacificDell opened its first manufacturing center in the Asia-Pacific region in 1996 in Penang Malaysia.

Malaysia was chosen for its central location in the region, proximity to suppliers, reasonablewage rates and attractive incentives. When Dell built its factory in Penang, it received a five-yeartax holiday. High-tech companies investing in Malaysia are entitled to five years without havingto pay the country’s 30% corporate income tax. Projects that the government thinks will have asignificant impact on the economy can qualify for strategic-project status, which provides for a10-year tax exemption, so Dell began working to get a better deal according to Phil Kelly, Dell’spresident for Asia-Pacific operations at the time (Arnold, 1997). Evidently, Dell got what it waslooking for. In 2000, the company announced it would more than double its capacity in Penangby opening a new facility that will produce notebook PCs for the Asia-Pacific and U.S. markets.

In 1998, Dell opened a new manufacturing facility in Xiamen, China. The plant is directlyacross the straits from Taiwan, and is home to a number of Taiwanese computer and componentsmakers. This provided Dell with a base of suppliers and other support services. Having a plantin China was necessary to sell in the main land China market. With China’s tariffs and taxes,importing is not a viable strategy, and if Dell hopes to sell to government agencies and stateenterprises, it needs to have production in China. In 2001, Dell announced it would beginproducing desktop PCs for the Japanese market in Xiamen, shifting production from Penang.

General Location FactorsLooking across the regions and sites, the following are the major factors affecting Dell locationdecisions. As was suggested by each of the vignettes above, no one of these factors is sufficient9by itself to determine a location decision. Rather they seem to operate in a nested hierarchy withmarket considerations first, followed by labor and infrastructure, and then by governmentincentives.

Market access: Texas is central to all of the U.S; Tennessee to the East Coast. Malaysia iscentral to the huge Asia-Pacific region. Ireland is offshore but close to the big markets of theUK, Germany, and France. Also, as part of the European Union (EU), Ireland providestariff-free access to EU markets. Brazil and China plants are set up for market access and toget around tariffs and taxes that would make PC prices uncompetitive if imported.

Labor costs and quality: Texas and Tennessee are cheaper than Silicon Valley. Malaysia ischeaper than Singapore (although more expensive than Thailand or Indonesia). Ireland isstill cheaper than most other EU countries (although more expensive than Portugal orGreece). Eastern Europe is cheaper than Ireland and more centrally located within Europeand, as a result, many of Dell’s contract manufacturers and suppliers are locating there andcreating speculation that Dell will follow (Kennedy, 2000b). The quality of labor is high ineach of these locations as well. Besides having well-educated workers, engineers andtechnicians, each location has little or no labor union activity.

Transportation and telecommunications infrastructure: Logistics is a bigger cost thanmanufacturing labor according to Michael Dell, so transport infrastructure is very important.

The Tennessee locations, for instance, are in close proximity to major highways and to amajor Federal Express distribution center. Telecommunications bandwidth, cost, and qualityare also factors, especially for call centers and data centers.

Government incentives: Major incentives were offered by Round Rock to get headquartersand call center operations. Dell also received valuable incentives in Tennessee. Apparentlyfinancial incentives were offered in Brazil by the state government, and also in Malaysia inthe form of tax holidays. It is unclear what was offered in Xiamen, China, but it is commonfor local governments to offer incentives in China. Ireland’s low corporate tax rate was amajor incentive, but Dell also received support in finding land, building facilities and trainingemployees; today it received per capita grants for each employee.

Industry clusters: Dell generally avoids existing industry clusters, preferring to locateproduction where labor markets are not as tight. For instance, it avoided industry clusters inSao Paulo (Brazil) and Shenzhen (China). Its locations in Penang and Ireland were decidedbefore those locations had developed into IT industry clusters. Most of Dell’s operations donot rely on access to research universities and high concentrations of specialized engineeringtalent, so it can avoid the higher costs associated with such locations. It also does not need tobe very close to suppliers’ manufacturing facilities; rather it requires that suppliers simplyship to supply hubs close to Dell’s assembly plants.

SOURCINGUnlike other PC makers, Dell has avoided outsourcing final assembly of its products. Itoutsources subassemblies, such as motherboards and bare-bones PCs, and outsources nearlycomplete assembly of notebook PCs, doing only limited final configuration in its own assemblyplants. Also, in 2001, Dell outsourced production of a standard, non-configurable PC called theSmartStep to Taiwan’s Mitac, which is manufacturing the product in its plants in China(Commercial Times, 2001). But in general, Dell prefers to keep control over the key final10assembly and configuration processes for the bulk of its products. One reason is a concern thatby outsourcing its manufacturing completely, Dell might be creating its own competitors, as U.S.

television makers did when they outsourced to Japanese suppliers. Also, unlike some of itsmajor competitors (IBM, HP, Compaq), Dell’s main business is PCs, and it feels it cannot affordto give up its capabilities in PC production (Louise O’Brien, 2001).

A network of suppliers and contract manufacturers supports each production facility. Sourcingdecisions are made by worldwide procurement and product development in Austin with inputfrom the regions. Most sourcing is global, which means that Dell sources major components forall locations from their headquarters. This allows Dell to consolidate its buying power and getbetter terms from suppliers.

While sourcing of materials for PCs (major components and systems) is done centrally, sourcingof consumables is local (box and shipping material, printing of keyboards, printing of manuals,etc.). The majority of sourcing is from low cost suppliers in Asia, but some sourcing is fromlocal producers. For example, monitors for the EMEA region are purchased from Sony,Samsung and Acer, and shipped by sea from Asia, but monitors are also purchased locally fromPhillips and Nokia. This might be due to product specifications, need for backup supply or price.

For major components, Dell looks for suppliers with global capabilities such as Intel, SCI, IBM,Samsung, Toshiba, Sony and Seagate. For each major component, it usually works with only afew suppliers, e.g., with Seagate, Maxtor, Western Digital and IBM for disk drives. Localsuppliers in each region provide other parts.

Suppliers are required to maintain inventory near or in Dell plants to support Dell’s build-toorderproduction. They can produce elsewhere and ship to supply hubs, or they can set upproduction nearby. For EMEA and the Americas, Asian suppliers increasingly do both. In someplants, components are actually kept in trucks backed up to shipping docks, and are pulled off asneeded. Suppliers are required to maintain ownership of that inventory until it is actually pulledoff the truck and onto the assembly line (Intel is the exception; its market power allows it to setits own terms, which require PC makers to take ownership as soon as the product leaves Intel’sfacilities).

Impacts of Dell’s Location on Supplier/Partner LocationWith so many different suppliers and partners involved, the location decisions of thesecompanies naturally vary by company and location. Many parts and components aremanufactured in Asia and shipped to distribution centers near Dell facilities. This is usually thecase for hard disk drives, floppy drives, power supplies, CD-ROM drives, cables and connectors,and many add-on cards such as modems, sound cards and video cards. On the other hand, alarger share of motherboard production is located regionally. For instance, Solectron and SCIsupply Dell’s U.S. plants from their plants in Guadalajara, Mexico, and from plants in the U.S.

In Europe, Dell’s Ireland plants are supplied from Asia and from local plants. Many of Dell’ssuppliers came to Ireland at Dell’s insistence. After opening the first Limerick plant, Dell gave11Irish suppliers eight months to show they could meet Dell’s demands. When local supplierscould not do so, Dell brought in outside suppliers (Kennedy, 2000a). The outsiders bought someIrish companies, consolidated others, and took over much of the supply industry. The companiesthat came in were global companies that were already serving the PC industry. They included,for example: Fullerton — a Scottish company from Glenrothes that does work for Dell and forIBM in Raleigh, NC; Lightening Beech — a U.S. company that supplies sheet metal; Trend Tec–a company that does metal and plastics in the U.S. and serves Dell and Compaq; and APW,which bought two Irish companies and does chassis, plastics, and metal. In addition, contractmanufacturers already in the UK or Ireland supply Dell: Jabil supplies Dell with PCBAs fromScotland, SMS from Wales, and SCI from Fermoy, Ireland (Kennedy, 2000a). One Irishsupplier, Keytech, did make the grade. Keytech is located in Shannon near Dell’s Limerickplants, and made cases, chassis and subassemblies (Kennedy, 2000a,b).2For the Ireland plant, the breakdown of supplies by region is as follows:Asia 65%Europe 25%US 10%For some specific components and peripherals, the locations are as follows:Monitors Europe and Asia (Phillips, Nokia, Samsung, Sony, Acer)PCBs Asia, Scotland, and Eastern Europe (SCI, Celestica)Drives Asia, mainly Singapore (Seagate, Maxtor, Western Digital)Printers Europe (Barcelona)Box builds Asia and Eastern Europe (Hon Hai/Foxteq)Chassis Asia and Ireland (Hon Hai/Foxteq)SCI (now owned by Sanmina) makes 90% of the motherboards used by Dell in Cork. However,a new deal with Hon Hai to supply motherboards globally may change that. Three differentsuppliers provide the chassis. The suppliers’ truck, located on the inbound side of the plant, isthe local warehouse, and the suppliers’ people deliver chassis to the production cells as needed.

Overall, not much actual manufacturing is located very close to Dell’s plants, except inMalaysia, and much of that was already there. But more components are produced regionally assuppliers and CMs organize their own production regionally. For instance, PCB assembly andbox builds are done in Mexico and Europe as well as in Asia to supply much of Dell’s demand inthe U.S. and EMEA. It is hard to attribute any of this to Dell alone, as Compaq, Apple andGateway are all in either Ireland or Scotland and in either Malaysia or Singapore, so CMs cansupply multiple PC customers from one location. Dell’s BTO model clearly does not requirehigher value components to move closer, nor do very low value components such as powersupplies and keyboards need to move closer. It’s the mid-level components such as box builds,motherboards and other PCB assemblies that seem to be moving closer to Dell’s assemblyplants. This is particularly the case for large, bulky items such as box builds (nearly completesystems) that would be expensive to ship by air to meet volatility in demand, and at the same2 While Key Tech was successful in surviving the initial shakeout, it is no longer a supplier to Dell. Key Techindicated that it stopped bidding on Dell procurements because Dell kept driving down prices. Key Tech hasfocused on building higher value-added storage products that better fit its cost structure.

12time are too expensive to risk holding in inventory. Although light in weight, motherboards tendto be assembled locally because the build-to-order model does not allow sufficient time for themto be assembled in Asia and then shipped. However, baseboards for PCB assemblies aremanufactured in Asia and shipped in by air.

DELL’S OTHER OPERATIONSDell’s other operations tend to follow the location of its production facilities, but they do notfollow in a simple pattern, as each operation seems to have its own organizational logic andlocation considerations. This is illustrated by looking at a few of Dell’s other operations:logistics, call centers, marketing and sales and data centers.

LogisticsDell’s organization of logistics in EMEA provides a good illustration of the general logic forlogistics. All of Dell’s inbound logistics for material needed in assembly of PCs are handled bysuppliers who must have supply hubs or production facilities located within 30-minutes’ traveltime of the Limerick plants. Third parties operate some hubs for a number of suppliers.

On the outbound side, Dell has five distribution hubs in EMEA to take advantage of locationclose to major markets, transportation networks and logistics expertise. These distribution hubsare as follows in EMEA:Limerick for Ireland, Eastern Europe, Middle East and Africa (except South Africa);Liverpool for UK;Tillberg, Netherlands for middle Europe;Gottenberg, Sweden for Nordic countries; andJohannesburg for South AfricaA different logistics partner operates each hub. Similar outbound staging areas and arrangementswith logistics partners exist in the Americas and Asia-Pacific.

Call CentersDell makes extensive use of call centers, both for sales and for technical support. Dell generallyorganizes its call centers around its major customer segments with different call centers forrelationship and transaction customers. It tends to locate call centers regionally to optimizetelecommunications and language considerations, but customers may at different times be routedto call centers in different locations. Regional call centers are located as shown below. TheEMEA call centers illustrate the complexity within any one region.

U.S.: Round Rock and Nashville. A new call center is planned in Fort Worth, Texas.

EMEA: Limerick, Ireland; Bracknell and Bray, U.K. Relationship customers are handledthrough Bracknell, whereas HSB customers are handled through regional centers inMontpelier, France for France, Spain, Italy and the southern countries; Amsterdam for themiddle and central countries; Copenhagen for the Nordic countries; and Bray, Ireland for theUK, Ireland and other English speaking countries. The Limerick call center specializes in13higher-level technical issues, and also operates as a backup call center whentelecommunication problems occur or call volume is exceptionally high.

Asia-Pacific: Bangalore, India.

Marketing, Sales and SupportDell’s marketing function is directed from global and regional headquarters with specialmessages targeted for the different country markets. However, the sales, service and supportfunctions are located in the individual countries because these activities must be close to endcustomers. To compete for large contracts from corporate and public sector customers, Dell’sdirect sales force must be on the ground in each country in order to be aware of salesopportunities, interact with procurement personnel and negotiate through the competitive biddingprocess. Moreover, since many Dell contracts are large and Dell hopes to expand its businesswith every customer, the account executives assigned to each large customer must be within easyreach. Similarly, although telephone technical support is centralized in regional call centers,field service and support require location close to the customer. As a result, Dell has sales andservice offices in 34 countries around the world, usually in a large urban area and with multipleoffices in some countries.

IT and Data CentersA network of data centers supports Dell’s sales, manufacturing, logistics and other operations.

The data centers are regionalized and have their own development as well as operations staffs.

Global applications such as online sales tools, order management, and supply chain managementgenerally are developed or first implemented in Austin. The regional data centers are thenresponsible for transferring these applications and adapting them to the local markets. Datacenters are as follows:Americas IT and data center is in Austin/Round RockThe EMEA data center, located in Bracknell, England, is the Internet hub for Europe,including intranets, extranets and Internet. It was located there despite the fact that Limerickis Dell’s production hub because Ireland did not have adequate telecommunications facilitiesfor these functions whereas England did. There are also major data centers in Limerickserving the two production facilities and an administrative center, which includes finance,administration, tech support, customer service, and Dell online.

Asia-Pacific data center and IT operations are in Singapore, which has the besttelecommunications infrastructure in the region.

Dell’s Service PartnersRather than do everything itself, Dell has made extensive use of business partners to help serveits customers, especially as it has moved into producing servers and targeting the small andmedium business market. Three functions - systems integration, service and repair, andconsulting - all have to be located very close to the customer, as they involve direct contact withthe customer. Dell partners with companies that can deliver these services globally - or at leastregionally.

14System integration: Dell partners for procurements with integrators like Electronic DataSystems (EDS) who will install Dell servers and link them up with end user devices.

Service and repair: Dell also partners with firms like IBM, Unisys, Wang and Banctec forfield service and repair. While 90% of service incidents are handled by telephone in Dell’scall centers, about 10% involve field calls, which Dell has outsourced to these partners.

Their field service units are tied to Dell electronically, and get the orders for field servicewithin an hour or two of a call coming in to Dell.

Consulting: Dell partners with Arthur Andersen and Gen 3 in the U.S. to provide consultingservices to companies that seek to emulate Dell’s success with the direct model and InternetbasedIT.

Reaction to Market Slowdown in 2001Like all PC makers, Dell’s sales were affected by the decline in PC demand that started in late2000 and continued throughout 2001. Dell was the only PC maker to show any growth in salesin 2001, as it made major gains in market share, but it still saw much slower growth than the 30-50% annual gains it was used to. It also saw its margins reduced by the price war that itlaunched to gain market share.

In order to cut costs, Dell laid off about 5,000 workers, mostly in the Austin, Texas area. Theseincluded cuts in headquarters staff and some other functions. Smaller cuts of a few hundredemployees were made in Tennessee. About 600 workers were laid off in Europe. Theconcentration of layoffs in the U.S. appears to be due to the focus on cutting corporate staff morethan a shift of production or other activities away from the U.S.

CONCLUSIONSAlthough Dell only entered the PC business in 1985, it has become a global company with globalproduction networks spanning the three major world regions: Americas, EMEA and Asia-Pacific. These networks, which are complex and multi-level, are able to take advantage ofcapabilities that serve the entire PC industry. In many cases, the capabilities were first createdby with the introduction of the IBM PC when IBM sourced parts and components globally inorder to break into the PC market fast (Dedrick and Kraemer, 1998). The networks weresubsequently expanded and enriched by both traditional computer makers such as IBM, Hewlett-Packard and DEC, and by newer PC companies such as Compaq, Gateway and Acer.

Broadly speaking, market potential is the driving force behind Dell’s general location decisions,while costs and capabilities are the driving forces behind the specific location of Dell’s activities.

In other words, Dell targets markets that appear receptive to its business model. To serve thosemarkets, Dell sources from locations that have the production capabilities and cost structure itneeds to be competitive in the targeted markets.

The markets in which Dell operates vary by global region and by countries within these regions,and so Dell has organized its operations by region and by country. Headquarters offices,assembly production and call centers are centralized within each region (although not all in thesame country), whereas sales, service and support are decentralized to individual countries.

15Supply/logistics hubs are organized by sub-regions covering several countries. The choice ofspecific sites for production within a region is discussed below.

Dell’s location decisions are not based upon any single factor, but rather upon an array of factors.

The best way to understand how these factors come into play is to view them as multi-tiered.

The first tier involves market considerations. These include the character and potential growthof prospective markets and country requirements for market access. For example, when Dellwent into Europe, it went into the English speaking markets of Ireland, UK, and Sweden, whichwere similar to the U.S. in language and business culture, before venturing into the large Germanand French speaking markets. Likewise in Asia-Pacific, Dell concentrated on English-speakingmarkets such as Australia, Singapore and Malaysia first, followed by Japan, the second largestPC market in the world. Having built a regional infrastructure, it later entered China to gainaccess to its rapidly growing and potentially very large market.

Once a decision has been made to enter a market, then second tier considerations of labor andinfrastructure come into play when deciding where to locate production activities. These areused to narrow location choices to several countries. The primary consideration with regard tolabor is cost or wages, but skill levels, quality and availability also enter into decisions.

Theoretically, the ultimate factor should be cost relative to productivity, and it appears that this isthe case, as Dell has located facilities in places with a combination of low (but not the absolutelowest) cost and high quality workers. Infrastructure considerations include transportation,logistics expertise and telecommunications quality and cost.

At the third tier, factors such as government incentives come into play and affect the choice ofone country, state, or even city, over another. Such incentives usually include land, facilities,export processing flexibility, and/or employee per capita grants.

Dell has a major impact on its supplier location decisions in three ways. First, Dell requires thatsuppliers locate material within a specified delivery time from its assembly plants. Asiansuppliers (and U.S. suppliers producing in Asia, such as disk drive makers) maintain supply hubsnear Dell assembly plants worldwide, where material is pulled as it is needed for production.

Second, Dell requires that its suppliers continually reduce the price they are charging Dell; inexchange it agrees to reward these suppliers with larger orders and longer-term contracts. Thisrequirement causes suppliers to continually seek lower wage production sites in order to meetprice pressure from Dell (and other PC makers as well). Third, Dell requires that suppliers haveadequate inventory to supply the needs of its direct, build-to-order production model. Demand ishighly volatile, and consequently suppliers cannot meet Dell’s fluctuating demand totally fromAsia. Material must be produced regionally, so suppliers and contract manufacturers must alsoorganize regionally. Thus, within the EMEA region, some Asian suppliers have built localmanufacturing capability, initially close to production hubs in Ireland, Scotland and Wales butincreasingly in lower cost sites in Eastern Europe.

Both the American CMs and Asian suppliers are moving to lower cost production sites: EasternEurope for EMEA, Mexico for the Americas, and China for the Asia-Pacific region. It is saidthat they are often moving at the insistence of the computer makers. It is unclear whether Dellwill follow its suppliers to low cost production sites or outsource final assembly to its contract16manufacturers. Dell has already gone to China, mainly for market access, but is now producinga line of non-configurable PCs in China for sale in other markets (including the U.S.).

Dell makes extensive use of outsourcing, but claims it will never outsource the final assembly ofconfigure-to-order products. Dell insiders argue that execution of the build-to-order model isstrategic to the company; therefore, final assembly/configuration for different markets andcustomers will not be outsourced. “Dell doesn’t want to pass on the secrets of the direct modelto subcontractors. Dell is bringing in more of the box with more stuff in it from suppliers, butkeeps control of the complex and proprietary parts of the process. Dell’s model is very good andvery unique in the industry. The focus is on execution. There will always be boxes needed inthe market. Dell doesn’t have to move away from making boxes. It simply needs to keepfocused on quality, price, and delivery” (Corkery, 2000). They further argue that Dell plants aremajor showcases that help sell large corporate customers on Dell as their supplier (Freake, 2000).

They leave open the question of whether they will eventually move to lower cost sites for finalassembly.

In summary, the organization of Dell’s production network is changing. Whereas the networkwas previously located mainly in Asia, today it is increasingly being regionalized in order tobetter target markets with the direct model and to respond to rapid changes in markets. Theseregional production networks involve a combination of Asian suppliers and U.S. contractmanufacturers. Regional suppliers are also playing a role. Sales and employment across worldregions are generally in line with one another, with the Americas showing somewhat greaterproductivity. More than two-thirds of Dell’s employees are in the Americas, and mainly theUnited States, where Dell continues to expand its operations through new plants and call centers.

Dell maintains control over its value network by a new model of organization–the virtualorganization–wherein Dell’s ownership of the customer relationship gives it the power andleverage to coordinate the entire network.

REFERENCESArnold, Wayne. 1997. Two major PC firms stand to save big in Malaysia. The Asian Wall StreetJournal, 21 January: 6Corkery, Sean. 2000. Interview with Sean Corkery, General Manager, EMF3, Limerick Ireland,November.

Commercial Times. Taiwan’s Mitac Wins Desktop PC Orders from Dell. October 31.

Dedrick, Jason and Kraemer, Kenneth L. 1998. Asia’s Computer Challenge: Threat orOpportunity for the United States and the World? New York: Oxford University Press.

Dedrick, Jason, Kraemer, Kenneth L, Palacios, Juan J, Tigre, Paulo Bastos. 2001. Economicliberalization and the computer industry: Comparing outcomes in Brazil and Mexico.

World Development, 29(7):1199-1214.

Freake, Reginald. 2000. Interviews with Reginald Freake, Industry Relations, Dell Computer.

Limerick, November.

Kennedy, Tom. 2000a. Interview with Tom Kennedy, Enterprise Ireland, October.

Kennedy, Tom. 2000b. Interview with Tom Kennedy, Enterprise Ireland, November.

Kiely, Stephen. 2000. Interview with Stephen Kiely, Dell Computer Ireland. December.

17Kraemer, Kenneth L., Dedrick, Jason and Yamashiro, Sandra. 2000. Dell Computer: Refiningand extending the business model with IT. The Information Society, 16(1):5-21.

Locker, Richard. 1999. Nashville wins Dell Computer with hefty incentives, thousands of jobspromised. The Commercial Appeal, 7 May: A1.

Loughran, Declan. 2000. Interview with Declan Loughran, Manager, Logistics IT Development,Dell Computer, Limerick, Ireland, October.

Mahoney, Jerry. 1999. Dell Computer to open factory in Brazil today, KRTBN Knight-RidderTribune Business News: Austin American-Statesman – Texas, 3 November.

O’Brien, Louise. 2001. Interview with Louise O’Brien, Dell Computer, April.