Marketing

Marketing

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Research Associate Marie Bell prepared this case under the supervision of Professor V. Kasturi Rangan. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

V . K A S T U R I R A N G A N

M A R I E B E L L

Dell—New Horizons

Dell entered the 21st century as the most successful company in the PC industry. Founded in 1984, the company had achieved phenomenal records in sales and profit growth. Dell surpassed the $1 billion in sales mark in 1992, the $10 billion mark in 1997, and for fiscal 2000 (year ending January 2000), it surpassed the $25 billion mark. Dell’s revenues and earnings grew by over 30% year after year, and the company reported a return on invested capital of 243% for 2000. Riding a wave of hyper-growth in the personal computer (PC) industry, Dell’s market capitalization exceeded $200 billion in December 1998, and Fortune magazine listed it as America’s third-most admired company.

The PC industry juggernaut continued to grow through 2000. As growth rates climbed to over 30%, PC companies were left scrambling to keep up with demand. At Dell, new product groups and customer segments were formed to manage exploding opportunities, and new employees were hired in record numbers. In the fourth quarter of 2000, the growth came to a screeching halt. Rather than managing a market growing at 30%, for the first time in the PC industry’s history, growth actually declined by a whopping 10%. Industry analysts were unsure as to whether this was an aberration or a harbinger of things to come. The PC industry’s hyper-growth in 1999 and 2000 was driven by several factors. Primary among these was the enormous business investment in technology infrastructure to prepare for Y2K. The explosion of the Internet was also a boon to tech companies. Not only were there thousands of new companies that needed a technology platform to get up and running, but the competition from dot.coms spurred bricks and mortar companies to invest in internet infrastructure as well. Finally there was the flood of service providers that came into existence in order to service the technology needs of Internet companies. Perhaps the best barometer of all this heightened demand for technology infrastructure was the NASDAQ stock index, which rose from 1,835 in March 1998 to a high of 5,132 in March 2000. And then the bubble burst as the NASDAQ plummeted to a low of 1,619 in April 2001.

Dell, along with its rivals, saw a slump in stock price and market capitalization. (See Figure A.) As the market cooled, Dell, a company that had hired 16,000 people over the prior two years, announced its first ever reduction in work force. More cuts were possible. This was in spite of Dell’s record $32 billion in fiscal 2001 sales (year ending January 2001) and a new high on return on invested capital of 355%. (Exhibits 1 and 2 provide relevant balance sheet and profit and loss statement information. Exhibit 3 summarizes selected financials for significant computer hardware vendors.)

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Figure A Market Capitalization and Stock Prices, Selected Firms (March 1997-September 2001)

Dell responded to early signs of a potential slowdown as it had done many times before— aggressively moving on price. The Wall Street Journal reported:

In the past, computer prices have fallen steadily as they became cheaper to make, yet that simply fueled higher demand. But recent price cuts have been much steeper than anything seen before, and combined with a slowdown in demand, could result in a first-ever decline in PC revenues in the United States…

At the heart of the industry’s troubles is a stunning slowdown in revenue growth. Recession fears have certainly hurt sales. But consumers and some companies also are holding onto their computers longer, in part because the powerful machines already provide more than enough heft for most computer tasks thrown at them. Combine that with an increasingly saturated U.S. market, where 53% of homes already have a PC and most businesses are computerized, and that means fewer buyers….

Dell Co-President Kevin B. Rollins insists that Dell can continue its aggressive pricing and remain profitable. “We believe we are the lowest-cost producer,” he says. “We can do better than our competition in a tough environment.”1

In spite of the slowdown and Dell’s significantly reduced growth targets for 2001-2002, the company’s top management of CEO Michael Dell and President and COO Kevin Rollins remained supremely confident of Dell’s future success.2

1 Gary McWilliams, “E-business: Price wars squeeze PC makers,” Wall Street Journal, March 26, 2001, B1. 2 Morton Topfer also acted as Advisor to the CEO. Michael Dell had brought in the experienced Morton Topfer from Motorola as vice-chairman in 1994 in an effort to broaden Dell’s leadership and to position Dell as a Fortune 500 company. Kevin Rollins, who had worked with Dell as a senior partner at Bain and Company, joined Dell as vice chairman in 1997. The trio of Dell, Topfer, and Rollins were credited with much of Dell’s success in the 1990s. With Morton Topfer’s retirement in 2000, James Vanderslice joined Dell as co-vice chairman after 33 years at IBM, most recently as senior vice-president of IBM’s Technology Group. In August 2001, Dell announced that Vanderslice was moving to a senior advisory role as vice-chairman in advance of his retirement the following year.

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Some in the industry, however, believed that the hyper expansionary phase of the industry’s growth was over, and that the players would have to adjust their strategies to reflect the commodity nature of the environment. In response to such pessimism, Kevin Rollins offered:

Well that’s what they said in the 1990s—that PCs were becoming a commodity and that we would have to adjust our expectations downward. But the beauty of our model is that commodities fall right into our sweet spot. Industry gross margins have dropped from about 50% in the early 1990s to about 25% today and at that level the business is not profitable for many of our competitors, yet we continue to show profit growth. We just need to continue to catch products as they move to the commodity phase and apply our low-cost direct model.

In addition to continually improving its position in PCs, the Dell company’s leadership was aggressively pursuing a multi-pronged growth strategy: product opportunities that encompassed high-growth categories (storage and servers), opportunities in the service side of the business, and a geographic opportunity to expand all products and services in international markets. Dell believed that with these opportunities, coupled with over $7.9 billion in cash on its balance sheet, its future was bright.

The Dell Way3

Starting in 1977, there were several waves of entries by firms into the personal computer market. The first wave was between 1977 and 1978, with the entry of Apple as the clear technology leader. Apple offered a unique operating system, with an intuitive and easy graphic user interface (GUI) that enabled applications to be driven by a simple point-and-click menu system rather than typing commands. This ease-of-use attracted many first-time users in the consumer market and made Apple particularly strong in the educational and hobbyist market. Apple, sensing the user-based advantage, refused to license its technology, betting on its proprietary system.

Industry giant IBM entered the PC market in 1981. IBM’s entry legitimized the PC in the minds of business customers. Maintaining a premium-priced position, IBM used its sales force to sell PCs to large corporate customers and retail channels to reach small-and-medium-sized businesses. IBM’s decision to use an open architecture (that essentially allowed for the development of IBM clones) created an environment that allowed new manufacturers to enter the market and meet unsatisfied demand. Compaq, founded in 1982, was one such manufacturer. Unlike IBM, Compaq was a new player to the industry and lacked a sales infrastructure to get its products to market. Faced with this challenge, Compaq recruited retail dealers and value-added resellers (VARs) by promising them full rein of the market including the large-volume corporate accounts. More efficient and focused than IBM, Compaq soon rose to the top of the PC market. (See Table A below.) With the expansion of the open system architecture promoted by Microsoft’s operating system software, Apple found it increasingly difficult to gain share. First, because many software publishers preferred to write software for the larger PC environment, and second, operating systems upgrades to match the rapidly evolving capability of hardware were quite expensive (nearly a $500 million effort).

3 Some parts of this section have been drawn and adapted from HBS case No. 596-058, “Dell Computer Corporation,” and HBS case No. 598-116, “Dell Online.”

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Table A U.S. Market Share (%) of Vendors—Personal Computer (Desktop and Portable) Units

1985 1994 1999 2001 YTD

September IBM 37% 8.6% 7.2% 5.9% Compaq 4 13.4 15.6 12.7 Apple 18 11.6 4.5 4.2 Dell — 4.2 16.5 24.6 Gateway — 5.4 9.1 8.3 HP — 2.2 8.8 9.8 Others 41 54.6 38.8 34.4 Total Units 8 million 18.5 million 46.9 million 30.4 million

Source: Company Records based on IDC database

Dell, like Compaq, was a company that had been created as a result of the PC’s open architecture. In 1983, Michael Dell, an 18-year-old freshman at the University of Texas at Austin, spent his evenings and weekends pre-formatting hard disks for IBM-compatible PC upgrades. A year later, he dropped out of college to attend to his burgeoning business, which had grown from nothing to $6 million in 1985 by simply upgrading IBM compatibles for local area businesses. In 1985, Dell shifted his company’s focus to assembling its own brand of PCs—PC’s Limited—that were available on a Build-to-Order basis, and the business grew dramatically, with $70 million in sales at the end of 1985. By 1990, sales had grown even further to over $500 million and with it, Dell’s reputation as a national supplier of desktop and portable computers based on the most recent Intel processors. Nearly all of Dell’s sales were to business customers, splitting up almost evenly between the large corporate accounts and medium and small businesses. Even though Dell was labeled a “mail order company,” revenue from individual consumers was less than 5% of sales. In ferocious price wars with its Texas rival, Compaq, Dell steadily gained a footing in the lucrative corporate market. Many of Dell’s corporate customers not only valued the ability to customize their PC configurations to meet the unique needs of users but also liked being able to deal with the manufacturer directly and to receive Dell’s attractive pricing that was the result of its direct model.

Dell’s success continued through 1992, until in 1993 it faced an operating loss for the first time in its history, despite a 40% increase in sales. The problem, Dell quickly discovered, stemmed in part from its entry into retail channels. In an attempt to broaden its penetration of the consumer market, in 1992 Dell had struck agreements with retailers like CompUSA and Sam’s Club. But the 15% gross margins that retailers needed left Dell with a 5% net loss instead of the 5% net profit it had achieved through the direct channel. Dell’s problems were then exacerbated when quality problems arose with its laptops. In the late 1980s, Dell, along with several desktop manufacturers had seen the portable market as a logical extension of their desktop business. Unfortunately many of them, including Dell, had not realized that the component supply and quality for laptops had not yet reached a level of robustness and technological stability for an assembler like Dell to exploit successfully.

Dell acted decisively. By late 1993, Michael Dell realized that the retail channel didn’t fit the Dell model because it did not leverage one of its major attributes: the ability to custom-configure its products. Dell exited the retail channel and resolved to re-enter the laptop market only when that product’s quality matched or exceeded the quality of the Dell desktop.

From the mid-1990s Dell experienced ever-increasing sales and profits driven both by the demand for PCs and Dell’s superior ability to execute. By the early 1990s, businesses had fully embraced the PC, and were more willing to trade off better pricing for less custom support. Fortune 2000 customers had developed the internal expertise to specify PC requirements and, employing a direct sales force

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to sell its products, Dell’s direct model became the means of delivering a high quality PC in a very cost-efficient manner. By 1999, Dell was the leading seller of PCs in the United States, having surpassed early leaders IBM and Compaq. The company had developed a reputation for effectively entering a product market where core proprietary elements had become standardized and undercutting existing players based on price. Michael Dell had coined the phrase “virtual integration” to express Dell’s strategy of choosing best in class providers like Intel and Microsoft, for each component, and leveraging their scale investment in R&D.

A powerful example of success for the Dell model was workstations. These high-end desktop computers designed to run complex applications were originally dominated by products based on UNIX operating systems. In 1996, they began transitioning to standards-based Windows NT powered workstations. Dell entered the market in 1997 with a Windows product priced below anything else in the market. At the time of Dell’s entry into workstations the market had been skeptical of Dell’s ability to compete successfully in this complex product category. Kevin Rollins explained, “When we went into workstations, everyone expected Dell to fail. We were told that the product was too complex for our direct model. But we proved them wrong.”

The same pattern repeated in 1996 when Dell entered the high-margin server market by offering a more powerful Pentium Pro server at the price point of a less powerful Pentium product. By November of that same year, the company had expanded from a single processor server to a dual processor model, and by February 1997 had a four-way offering as well.4 By 1999, Dell emerged as the second-largest Wintel server (i.e., servers based on Intel processors and Microsoft Windows operating systems) producer in the United States, and in the first quarter of 2001, took the first place position in the United States from Compaq.

By 2000, Dell had exhibited an uncanny ability to reach out into the market and identify the next high-margin technology product that could be driven to scale with lower priced products driven by its direct model. Michael Dell remarked: “High margins are a sort of paradox. You look at a business and say, ‘Gee, you’ve got high margins and that’s good. But in this case it’s not good. Because if you have high margins, that means you have this big, soft underbelly. That’s what we live for. That’s what we consider to be fun’”.5

The Dell Direct Model

The Dell Direct Model was the engine of Dell’s success. Easy to describe, but difficult to duplicate, the Dell Direct model was about low cost, direct customer relationships and virtual integration. It was a high velocity, efficient distribution system characterized by build-to-order manufacturing, and products and services targeted at specific market segments. Dell serviced the North American market from its plants in Austin, Texas, and Nashville, Tennessee. To support its global business, Dell had manufacturing facilities in Limerick, Ireland, and Penang, Malaysia, and two new sites in Porto Alegre, Brazil, and Xiamen, China, that came online in 2000.

From its earliest days, Dell was a build-to-order computer manufacturer. Orders would come to the factory from two major streams: (1) inbound calls from consumers and small business customers who’d seen a Dell catalog or print ad referring them to a specific toll free telephone number, and (2) orders placed by Dell “inside sales reps” on behalf of large accounts. This method for taking orders allowed Dell to sell richer configured systems and achieve a higher ARU, or average revenue per

4 Generally the greater the number of processors, the more powerful and complex the product.

5 Fortune, October 16, 2000, p. 100.

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unit, despite the fact that its gross margins and pricing were the lowest in the industry. The phone sales reps typically sold all Dell products, although over time the various business units added sales specialists for server and workstation products, as well as third-party peripherals such as printers.

Once Dell received an order at its factory, the order was electronically broken down into a list of parts required for the computer. When the specification sheet was generated, an electronic bar code linked the system back to its original order number. This identification number not only allowed the customer to check on order status, but also became the basis for problem solving if required after the customer took delivery.

After the parts spec sheet was generated, the assembly of the computer began. First, the motherboard was configured with the ordered microprocessor and the required amount of RAM. Then the other optional parts (disk drives, CD ROMs, etc.) were assembled into a bin, with workers pulling the needed parts from stock. The bin was forwarded to a five-person production cell equipped with computers that provided instant, detailed access to information regarding part configurations and setup. Dell found that the high-volume cell production lines improved the plant’s capacity and also more easily integrated DellPlus components (the company’s custom configuration program) components allowing for even greater customization for customers. After all the options had been installed in the manufacturing cell per the spec sheet, the system was sent to the software loading zone, where the appropriate software, including operating system software, application software, and diagnostic software, were loaded into the hard disk of the system. After all the software was loaded, the system was sent to a “burn-in” area where it was powered and tested for four to eight hours before being packed into a box and sent to the packaging area. There, the completed system was boxed, along with peripherals such as a keyboard, mouse, mouse pad, and the manuals and floppy disks for all the installed software.

The entire purchase process from order receipt to product shipping required only about 36 hours. Indeed, at Dell’s Optiplex factory in Austin, 84% of orders were built and shipped within eight hours. Incoming parts were pulled through the system and ordered on a just-in-time basis. Dell’s model was one of continuous improvement, making it difficult for its competitors to emulate. For example, in the mid-1990s Dell’s direct model operated on 13 days of inventory, versus the 75 to 100 days in the typical indirect model. At the close of fiscal 2000, Dell had six days of inventory with its build-to- order process, compared with 20 to 70 days for most of its major competitors. Dell’s ability to operate on a just-in-time basis was facilitated by its suppliers, who warehoused the bulk of their components within 15 minutes from the Dell factory. Dell had been able to reach these agreements by reducing the number of primary suppliers, from about 200 in 1992 to about 25 in 2000. Shipping was contracted out, with multiple shippers delivering the systems anywhere in North or South America.

Post shipment, a customer had several service options: the customer could go online to dell.com to access technical support, or call Dell over the telephone. The phone service model was a major innovation in the PC industry and allowed Dell to handle over 75% of service calls either online or over the phone, with fewer than 25% of calls requiring the dispatch of a tech support person.

If the problem required onsite repair, one of Dell’s major service partners (such as Unisys, Wang, Techtronics, or IBM Global Services) sent technicians to solve the problem, generally within a 24-to-48 hour window. In many product categories Dell set the standard for customer service. For example, the industry average downtime for a PC was 16 hours, but only 8 hours for a Dell PC. For servers, the industry average downtime was 5 hours compared to 1 hour for a Dell server. Dell’s service procedures resulted in satisfied customers. A March 2001 Fortune and Trilogy survey of senior

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officers of Fortune 1000 companies ranked Dell first in managing customer relations.6 Dell’s service also delivered significant economic benefits given the cost of servicing a customer over the telephone was $14 to $18 compared to an on site visit by a field engineer which cost between $250 and $300. Indeed, Dell’s operating costs were the lowest in the industry at about 11.5% in 2000. Gateway with 16% and Compaq and Hewlett Packard at 22% were significantly higher.

To address the needs of its most independent customers, as well as those who had a close partnership with a regional service provider, Dell created a program called Premier Access. This program provided subscribing customers with special training and certification, and allowed them to bypass the first level of phone support and go directly to the higher-level technical assistance. This offering was attractive to large corporations who had their own onsite IT staffs capable of handling routine problems, as well as those who chose not to use a designated Dell service provider but still wanted manufacturer training and support and access to spare parts.

Integrating the Internet

In late 1995, well before the Internet was considered hot, Michael Dell saw its potential to provide the ultimate extension of the Dell direct model. He established a small team of about nine people and began delivering online technical support and order status information. Next the team designed an online retail store, using in-house programmers to build a “configurator” to translate the build-to- order model to an online environment. The configurator performed the role traditionally played by the telephone sales rep—guiding the customer through the configuration of the PC by offering several different options (size of hard drive, amount of memory, peripherals, etc.). By July 1996, Dell’s online revenues were beginning to ramp.

In addition to the www.dell.com site for transactional customers, Dell offered customer-specific sites called “Premier Pages.” These Premier Pages were accessible only by authorized employees of the specific customer, and provided innovations such as paperless purchase orders, approved product configurations, pricing, real-time order tracking, purchase history and account team information. Starting with its largest customers in 1997, by the end of 1999 Dell had more than 40,000 Premier Pages up and running. As one Dell executive noted, “The Premier Pages have become an extension of the account management team. On the relationship side of the business, customers don’t want our sales people in their offices every day, but the Premier Pages give us that daily presence. Customers can conduct commerce via the Premier Pages, notably with fewer errors involved.” Premier Pages were also helpful from a service perspective in two ways. First, individual employees of corporate customers could access the Premier Pages and gain access to answers for basic service issues. Second, corporate MIS managers responsible for computer support went online via their Premier Pages to access information regarding higher order service questions. In fact, in many instances it proved to be a convenient way to manage and monitor corporate IT budgets.

The online model strengthened Dell’s efficiencies on both the transaction and relationship sides of the business. On the transaction side, the productivity of the average Dell sales rep increased by as much as 50% when the customer first went to the online channel to do the preliminary configuration. On the relationship side, where the typical external sales rep had spent about 40% of his or her time on face-to-face customer contact with customers and 60% on administrative matters before the Internet, they now spent 60% of their time with customers and 40% dealing with administrative matters.

6 “Trilogy-Fortune CRM Survey: High Satisfaction with Customer Relationship—Particularly Key in Tight Times,” Business Wire, April 4, 2001.

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The online model proved exceptionally successful. By 2000, sales generated through the Internet reached approximately 50% of revenues and averaged $40 million per day. With its Internet-enabled strategy, Dell achieved increased penetration among consumers, a challenging market to serve profitably for Dell and its competitors. Dell’s consumer market share in the United States grew from 2.3% in 1997 to 6.6% in 2000.

Dell also used the Internet to develop a collaborative planning methodology with its key suppliers. Modeled along the lines of its premier pages with customers, each of Dell’s suppliers accessed a Dell Internet Portal site that enabled them to see the order flow and pipeline inventory of their components. Suppliers’ input of cost forecasts helped Dell’s sales management price accordingly.

Segmentation at Dell: The U.S. Market

Recognizing that large corporations had very different product and service needs from small businesses or government customers, Dell set out to optimize its approximately 7,500 worldwide sales and support reps for each different customer segment.

For Dell, the primary differentiation was between a relationship and a transactional customer. Transactional customers were consumers or small businesses that tended to make one purchase at a time, and did not require a designated sales representative assigned to them. Relationship customers were large enough to have ongoing technology purchase requirements and expected continuity in their interactions with Dell. By 2000, Dell had created nine market segments in the United States (see Table B), which were organized into three business divisions: Relationship, Small and Medium Business, and Consumer Business. Although sales teams were entirely segmented by business, Dell continued to manage functions like technical support on a shared basis, allowing them to leverage scale where it improved cost and performance. Technical support, in fact, was organized primarily on a product basis, with separate call queues for desktops, notebooks, servers, and storage.

Table B Dell’s Market Segmentation

Market Segment Buying Process

Relationship Business Global Relationship Enterprise (>18,000 employees) Relationship Large corporate accounts (3,500-18,000 employees) Relationship Federal government Mixed Education Mixed State & local government Mixed Small and Medium Business Preferred Account Division (400-3,500 employees) Relationship Business Systems Division (2-400 employees) Mixed Consumer Business Transactional

Relationship Business

Relationship business represented about 60% of Dell’s U.S. revenues and included the Global, Enterprise, and Large Corporate Accounts (LCA) representing the Fortune 5000 companies, as well as “public accounts,” government and education, which accounted for nearly a third of the relationship business. Global, Enterprise, and Large Corporate Account customers all had dedicated account

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teams that included program managers and technical support, as well as sales personnel. “Relationship” customers thought of computer purchasing as a multi-dimensional process, regardless of whether they were purchasing 5 or 500 computers. The information sources they depended upon in making decisions included industry analysts, conferences, trials and testing, and referrals from other large customers. Dell’s major competitors in the Relationship segment were Compaq, IBM, HP, and other leading brands who traditionally sold to the customers through VARs (value added resellers), but were increasingly attempting to “go direct” in order to lower their cost structure.

Joe Marengi, senior vice president, Dell Americas, commented:

In this business you are only as good as your last customer relationship. On the relationship side, especially in the global and enterprise accounts, execution is exceptionally important. Dell is executing very large orders with thousands of pieces of equipment that need to be deployed globally and on a timely basis. For example, we recently worked with a partner to provide 20,000 units to a remote sales force. We needed to have the right equipment there, at the right time, with the right installations. It sounds simple but required incredible logistics to execute. What makes it work is not only our systems, but also our culture of personal accountability. You could say we run paranoid.

In the case of Relationship buyers, payment was usually effected through corporate purchase orders or lease agreements, resulting in a longer payment cycle than Dell achieved in its transactional business, which was mostly credit-card based.

Small and Medium Businesses

Much of Dell’s growth in the 1990s came from the small- and medium-sized businesses, which by 2001, accounted for roughly 30% of Dell’s U.S. revenue. Dell segmented the over 10 million potential customers into Preferred Accounts (PAD), companies with 400 to 3,500 employees, and the Business Systems Division (BSD) for companies with 10 to 400 employees. Like the education and government segments, both PAD and BSD supported their customers with a hybrid relationship/transactional model. Dell had relationships with nearly 25,000 PAD customers and nearly a million BSD customers.

Both the PAD and BSD groups had created an impressive customer relationship management system that included custom premier pages for all relationship customers, and a detailed customer profile with buying criteria, service needs, competitive presence, and sales history. This sales history was updated every time a Dell rep interacted with a customer. The customer profile not only identified key people associated with the account, but classified them as influencers, gatekeepers, or financial decision makers. To further prioritize client sales, Dell used the same “RAD” model (retain, acquire, develop) developed for large accounts. Based on the status of the account and its purchasing potential, the phone sales account rep could schedule an onsite visit with one of the division’s field sales reps. The results of these efforts were impressive. Dell used direct mail and catalog mailings to “make the phone ring,” though about half of the orders to the group came through the online channel. David Lockett, vice president of BSD Sales, remarked:

For most companies reaching the small business segment is a hazard. But based on the application of the Dell Direct model to the front end of this business, we have proven that it can be penetrated and meaningful relationships developed. We really know the customer and we know our products—that’s why we can sell even complex products like servers over the phone.

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Consumer Business

By early 2001, the consumer business accounted for about 5% of Dell’s revenue worldwide, and close to 10% within the United States. Consumers were notoriously fickle, and tended to buy from the company that offered the lowest price, although service was also important. Dell marketed to consumers by highlighting overall product performance, specifications, features, bundles, reviews, and awards. The transactional customer consulted information sources such as reviews, editorials, advertising, as well as word of mouth in the buying process, relying on previous brand experience only as an indicator.

Dell’s main competitors in this segment were Gateway—which also sold direct—and Compaq and Hewlett Packard—who sold through the retail channel. Private label or “white box” companies were also a consistent factor in the consumer market. One Dell executive summarized, “On the transactional side of the business, you need to ‘acquire’ the customer every time they buy a system; the only difference is that they’re much more educated the second time than the first.”

Traditionally, Dell had not targeted first-time PC buyers, because these customers required significant handholding in technical support and were therefore less profitable than the more knowledgeable buyers. A senior Dell executive added, “Consumers at retail don’t know what they are looking for, other than price. We, on the other hand, like to sell to the educated consumer.”

Consumers were given the option of paying for their purchase using a credit card or being charged in full on delivery. The ability to generate cash from its orders was another example of Dell’s process velocity. In its transaction business, Dell converted the average sale to cash in less than 24 hours by tapping credit cards and electronic payment. By comparison, Compaq, which sold primarily through dealers, took 35 days and Gateway, 16.4 days.

Strategic Opportunities

Although competitors had been threatening for years to duplicate the efficiencies of the direct model, they had made no lasting progress against this goal. Michael Dell and Kevin Rollins were committed to maintaining rapid growth. They agreed that success in the future required “doing the same things we have been doing for a long time. Picking our spots to focus our engines, and driving the organization behind them.”7

At the same time, they were evaluating alternative strategies for accelerating Dell’s entry into new product categories such as high-end servers, external storage and enterprise services. Product growth, however, was only one of three avenues for Dell’s growth, the other two being service revenues and international expansion. Kevin Rollins was particularly keen to bring Dell’s international revenues up to the U.S. benchmark.

7 “System Upgrade…” Wall Street Journal, Aug. 31, 2000, A1-

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Product Growth

Personal Computers

In 2000, worldwide PC sales were $217 billion, of which $87 billion was in the United States.8

Accounting for almost 75% of Dell’s revenues, laptops and desktops remained core product categories for Dell. As seen in Table C below, Dell was the market share leader in PCs and notebooks in the United States. Compaq led on a global basis until the end of the first quarter of 2001 when Dell overtook it.9 By 2001, while Dell’s performance in PCs had never been stronger, analysts questioned its sustainability. The economic downturn had some industry observers predicting the rate of growth in desktop revenue would slow to about 5% versus the 15% in 2000, while the growth rate of notebooks and other portables was projected to fall to about 15% from 25%.

Table C PCs and Notebooks—Market Share (% Units)

Top Five 1997 Desktops 1997 Portables YTD Sept. 2001

Desktops YTD Sept. 2001

Portables U.S. Worldwide U.S. Worldwide U.S. Worldwide U.S. Worldwide

Dell 9.8 6.0 6.8 4.7 24.6 13.3 24.8 13.9 Compaq 17.1 13.9 13.8 11.5 13.1 11.6 11.3 10.3 IBM 7.4 8.0 13.3 12.0 4.2 5.4 11.6 10.9 HP 7.6 6.2 1.8 1.3 10.8 7.8 6.4 4.7 Gateway 8.2 3.7 2.8 1.5 9.3 3.6 4.8 2.0 Apple 4.3 3.2 3.3 3.0 3.9 2.6 5.5 3.4 Total Industry (000s of units)

24,823 65,435 6,000 14,186 23,518 68,048 6,914 20,031

Source: Company records

As the technology sector and broader economy began to slow toward the end of 2000, Dell responded with aggressive price cuts in an effort to maintain revenue and grow share. “Amid a slowdown that is crunching its own profits, the world’s No. 1 PC maker is employing ferocious high- tech tactics to grab an ever larger share of the PC market,”10 claimed a Wall St. Journal article. This pricing strategy helped insulate Dell from the full effects of the macro economy, while competitors such as Compaq and HP were severely impacted in financial performance (see Exhibit 3).

Workstations

In 2000, the workstation market was about $9.2 billion, down 9.7% from the 1999 level of $10.2 billion worldwide. Originally pioneered by Sun Microsystems based on a Unix platform in the late 1980s, workstations were high-powered desktop computers designed to handle data-intensive scientific and engineering applications, or graphic analysis (such as CAD). Unix-based proprietary systems dominated the workstation market until the mid-1990s when Windows-based open systems offered a powerful and less expensive alternative. Dell entered the workstation market in mid-1997, behind competitors such as HP, Compaq, and IBM. Yet by 2000, Dell was the U.S. and worldwide market leader in Windows NT workstations (see Table D). In addition, worldwide shipments of Windows-based workstations continued to grow at a faster rate than UNIX workstations.

8Data supplied by IDC Technology Market group.

9 IDC press release, from IDC.com

10 Wall Street Journal, June 8, 2001.

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Table D Workstations—U.S. and Total Market Share Windows NT and Total Workstations (%)

Windows NT Workstation 1997 U.S.

1997 Worldwide

2001 Jan-June U.S.

2001 Jan-June Worldwide

Dell 8.6 7.0 55.4 43.9 HP 45.5 44.3 10.0 12.0 Compaq/Digital 29.0 32.6 11.6 17.6 IBM 10.6 9.2 14.1 13.9 Other 6.3 6.9 8.9 12.5 Avg. Selling Price $5,348 $5,773 $3,340 $3,436 Units 195,227 354,367 245,891 511,585

All Workstations Dell 3.7 2.7 36.8 29.6 Sun 29.9 30.6 24.1 20.8 HP 28.8 28.3 10.3 12.5 IBM 10.2 11.3 12.6 13.0 Compaq/Digital 15.5 16.1 7.7 11.8 SGI 9.0 8.5 1.9 2.2 Other 2.7 2.6 6.6 10.1 Avg. Selling Price $10,780 $11,424 $4,632 $4,976 Units 448,063 926,097 370,441 760,025

Source: Company records from IDC data

Servers

Driven by the lower cost of ownership provided by open platforms, as well as increasing availability of applications, companies were steadily migrating their higher-end computing from mainframe computers to servers.

In 2000, the worldwide server market totaled $69 billion—a 7% increase from 1999. Like the workstation market, the server market was divided into proprietary (CISC/RISC) servers and open architecture servers (SIAS or Standard Intel Architecture Servers), with the proprietary systems accounting for $42 billion in revenues (615K units at an average retail selling price of $67K) and SIAS systems accounting for $27 billion (4.1 million units at an average retail selling price of $6.6K). Dell entered the server market in 1996, and by 1999 servers accounted for almost 12% of sales. Unlike its competitors who offered both proprietary and SIAS servers, Dell competed only in the open standards arena. In the late 1990s, SIAS servers enjoyed annual growth in excess of 30%, as companies began to invest heavily in internet infrastructure. This growth rate was expected to slow with the economic downturn and demise of dot.coms.

Exhibit 4 provides a brief overview of Dell’s server range. The overall server market was segmented into high-end servers, midrange servers, and entry-level servers. Dell participated primarily in the entry-level server market, with two-thirds of its server sales in that segment. Table E provides a summary of U.S. market share in the midrange and entry-server segments.

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Table E Computer Serversa—U.S. Market Share (units %)

Mid-Range Servers

1997 1999 Jan-June 2001 Entry Level Servers

1997 1999 Jan-June 2001

Compaq 0.7% 8.8% 13.8% Compaq 28.4% 27.5% 24.0

IBM 27.8 16.6 18.1 IBM 15.0 10.0 9.9

HP 23.1 23.9 25.1 HP 12.5 9.5 7.2

Sun 21.8 34.5 38.0 Dell 9.7 17.1 25.5

Sun 5.3 5.5 6.4

Average retail price $189,205 $151,500 $181,867 $11,636 $7,726 $6,089

Total units 31,824 39,622 11,062 Total units 820,668 1,463,134 1,183,948

Source: Dell Sourced IDC data

aMid-range servers are servers sold between $100,000 to $999,999. Entry-level servers are servers sold under $100,000.

Storage

Until the 1990s, data storage was typically sold inside the server in the form of multiple internal disk drives. This storage configuration was referred to as Direct Attach Storage or DAS. In the late 1990s, companies like EMC began to sell storage that was external to the server. External storage offered customers greater manageability and reliability (mostly provided by special software) as well as potential for storage consolidation.

EMC Corporation was a small, financially strapped Massachusetts disk drive company that decided in the early 1990s to scrap all of its product lines to focus on external storage systems for IBM mainframes at a time when “IBM sold huge, old-fashioned disk drive systems.” Led by hard charging CEO Mike Ruettgers, EMC entered the market from the bottom by using technically inferior RAID (redundant array of inexpensive disks) technology to couple together a dozen or more smaller, cheaper, standardized disk drives in a single box. These early Symmetrix systems quickly ate into IBM’s storage market share, with IBM’s share falling from 58% to 33% in four years. In 1995, EMC introduced a heterogeneous storage unit that could work with different types of servers (from mainframes to Unix workstations). Equally important to EMC’s success was the concurrent realization that the proprietary software to manage these storage-filing systems had higher profit margins than the hardware itself.

As internet infrastructure drove massive demand for increased storage capacity, EMC achieved sales of almost $9 billion in 2000. As a focused storage company, EMC invested heavily in storage- related research and development and customer service. EMC had earned a 99% customer retention rate and 80% of sales were to existing customers. EMC prided itself on its service and technology. Despite its high-growth profile, EMC like Dell was not exempt from the slowdown that faced technology companies in early 2001. By October 2001, its stock had fallen under $12 per share, down from a 52-week high of $104.93. (See Exhibit 5 for EMC’s balance sheet and selected financial information.)

By 2000, external storage was a $32 billion market, growing at 23% per year. Although Dell was the sixth-largest overall storage provider worldwide with revenue of more than $1 billion in sales, its market share in external storage was still very small. There were two alternative architectures for external storage, SAN (EMC’s primary platform) and NAS (pioneered by start-up Network

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Appliance). NAS was easier to install than SAN and attached directly to the network. SAN required connections to the switches and servers and had a heavier software component as well. Exhibit 6 provides more detail on these storage architectures with pricing for a Dell NAS product. In 2000, DAS (Direct Access Storage) still represented nearly 70% of the volume in the industry, but by 2005 NAS and SAN were projected to take two-thirds of the market. DAS was the simplest of the three technologies. As the name implies, it was linked to the server directly.

While EMC dominated the external storage market, other competitors were coming on strong, and Dell believed this was an ideal opportunity for its model. A senior Dell executive remarked:

As the market for storage system expands over the next several years, there will be significant opportunity to grow Dell’s business through the same core strategies that have driven success in other areas of our company. Dell is coming in at a moderate price point at the bottom of the market. We aren’t attacking EMC at the top end—we don’t have that capability. There is sufficient growth in the market for several profitable players including Dell.

The Table in Exhibit 6 provides an illustrative price comparison for Dell versus competitors for a low-end product.

Kevin Rollins noted:

A small business is not going to buy a big, huge EMC [storage system]. It’s too expensive, and they don’t need it. They’ll go buy a little storage solution. What about a medium-sized business? They’ll need something else. So we’ll sell and target the storage solutions we have for each of these customers. We’ll take apart the [storage] market and target rifle shot at every one until we get big enough that the competition can’t deal with us anymore. 11

Despite this internal optimism, industry analysts expressed concerns about Dell’s ability to win big in the high-end server and external storage markets. Dell’s R&D budget was well below that of its primary competitors, and some enterprise customers still questioned Dell’s ability to support mission-critical environments. One observer noted:

The bad news is, Dell is getting shut out of the big enterprise accounts. They don’t have the robust products they need to get into the data centers. Frankly, they’re not getting a lot of help from Microsoft and Intel in terms of getting the quality of stuff customers are looking for. The flip side is the small-business market is pretty big and pretty untapped.12

While another commented:

I don’t think Dell understands what it’s up against. PC companies think the business is done when they put stamps on the box. But selling a server is just the beginning of a long relationship. It’s about reliability, serviceability, availability, and manageability.

In response to these kinds of concerns, Dell launched its own in-house services capabilities to install complex solutions. Called the Controlled Deployment Team or CDT, this group of Dell field engineers offered an alternative to the network of Dell Service Providers (DSPs). As one Dell executive remarked, “Having Dell’s own people on site is all part of deploying a solution rather than installing a piece of hardware.” Where possible the system engineers were brought into the sales

11 “Can Michael Dell Escape the Box,” Fortune, October 16, 2000.

12“ Dell’s New Storage Devices Aimed at Small Business,” Austin American Statesman, August 30, 2000

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process early to better understand the customer’s objectives for its server and storage solutions because, as one Dell executive noted, “Customer satisfaction is about getting the system to work in the customer’s environment and having it do what the customer wants it to do.”

Dell also announced in November 2001 a marketing alliance with EMC under which Dell would become a major sales channel for EMC’s CLARiiON line of products, which it had previously acquired as part of Data General. This partnership combined a leading mid-range SAN product line with Dell’s powerful direct sales force in medium and small business and government accounts, where EMC’s share was low, as well as large corporate accounts. Response from both customers and investors was positive.

Service Portfolio Growth

With 2000 revenues of approximately $2.0 billion, services were an increasingly important part of Dell’s portfolio. Within the United States, associated services revenues accounted for 12.4% of server revenues, 9.8% of notebook revenues, 8.4% of desktop revenues, and 6.9% of workstation revenues. Dell believed that a key opportunity for the company lay in further expanding Dell’s services offerings to include technical consulting and software migration as well as installation and break/fix services. Based on the growth of its services business, Dell forecast revenues of $3 billion to $5 billion by 2002.

Dell had begun to apply its commoditization model to the services business, taking the time needed to install a Dell “commerce server” to less than one hour, compared with the seven hours needed to install a similar competitor’s server. Dell achieved this service time reduction by offering key applications that were already validated, and preloaded software and hardware bundles to speed deployment of the application. With two different service levels (gold and silver), Dell offered various levels of support and pricing according to the type of product and customer (high-end workgroup, low-end enterprise, and high-end enterprise). A high-end enterprise service package would cost about $8,000 for Dell’s gold level customers and $3,500 for Dell’s silver level customers, compared to about $12,000 and $6,000, respectively, for comparable Compaq service packages. Dell’s packages offered customers improved efficiency with customers experiencing a 19% reduction in logistics costs and a 21% decrease in technical support costs. Dell resolved 72% of problems remotely (twice the industry average), thereby leveraging Dell’s installed technical services capabilities.

International Market Growth

By 2000, Dell generated $7.4 billion, about 25% of its total revenue outside the U.S. market. Because Dell’s market share outside the United States was about half what it was inside the United States, Michael Dell consistently highlighted the potential for international expansion (Exhibit 7 provides market share in key global regions.)

In all major markets, Dell used its direct model. In smaller markets, where the market potential had yet to be proven or infrastructure issues presented logistical challenges, Dell used a network of distributors to sell and service its products. (Exhibit 8 provides an overview of where Dell used its direct model and where it operated through distributors)

Dell had created three regions outside the United States: Americas International (that comprised Canada, Mexico, South and Central America), EMEA (Europe, Middle East and Africa), and APCC/Japan (covering Asia Pacific, China, Australia, India, and Japan).

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EMEA Like many U.S. companies, Dell began its global expansion in Europe, opening a U.K. sales office in 1987. In 1988, it created a wholly owned subsidiary in Germany and added one country each year after that. By 1992, Dell had operations in all of the major Western European countries and had ventured into Poland and Czechoslovakia as well. To support its European business, Dell built a manufacturing site in Limerick Ireland in 1990, and customer support centers in the Netherlands and Bray, Ireland. In a number of countries in the Middle East and Africa, where market potential was modest, foreign ownership limited by government, or tariff barriers prohibitive, Dell worked through a distributor network. Within EMEA, Dell participated in the Consumer/SOHO (small office home office), medium business, corporate, global, and government segments.

As Dell’s international business grew, the application of the model improved. For example, in Europe Dell originally developed a call center for each country but later migrated to four regional call centers. It had become apparent that with multi-lingual capabilities, a northern European call center could handle the Scandinavian region, another regional center could handle calls from France, Italy, and Spain, etc. Worldwide service partners such as Unisys provided a cohesive service offering especially attractive to Dell’s Global Accounts. As one Dell executive explained, “It wasn’t so much that the global accounts didn’t want a patchwork of local providers, but they really needed the service data collection that a global firm could provide.”

APCC/Japan In 1993, Dell launched direct businesses in both Japan and Australia, and established distributor relationships in China and Thailand. By 1995, Dell’s APCC and Japan revenue justified building a manufacturing facility in Penang, Malaysia. Over the next several years, Dell launched direct models in Hong Kong, China, New Zealand, Taiwan, South Korea, and India.

By 2000, Dell had added a second Asia manufacturing site in Xiamen, China, and four technical support offices in Penang, Sydney, Seoul, and Tokyo. Louise O’Brien, vice president of Corporate Strategy at Dell, who had launched Dell’s Global Enterprise Account Program in 1997, commented on Dell’s international market expansion:

We have successfully leveraged our global customer relationships to gain scale in new international markets. For example, we were pulled into India by customers like P&G and Exxon. They demanded local support, and so we were able to start out with a base of global business that could then be expanded into local companies. In globalization as in many parts of the Dell model, we evolved in response to what our customers told us they needed us to do.

South/Central America In November 1999, Dell opened its Latin America manufacturing facility in Porto de Alegre, Brazil, signaling a significant commitment to the Latin American market. As early as 1992 Dell had developed a direct model in Mexico but it wasn’t until the late 1990s that Dell began to put emphasis on Latin America. In 1997 Dell introduced the direct model in Chile and opened its first South American sales office in Santiago. Within Latin America, Dell competed in the Consumer/SOHO, global, and corporate market segments. Again, where necessary Dell adapted to meet market conditions. For example, a Dell executive noted, “In Latin America with a smaller customer base, we started with just two basic market segments (transaction and relationship) rather than the nine-plus sales segments we have in the United States.”

As Kevin Rollins considered the international markets, he remarked:

What we’ve seen especially in the international markets is that if you can get to the number one or number two in the market, you grow at a much faster rate than the rest of the pack. It is a question of relevance. If you are relevant in the market you can get the growth you need. As we look at the international markets we need to consider the markets that are key to unlocking

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the region: Germany in Europe, China in Asia, Brazil in South America. We need to look at these markets, understand how they work, and set our direct model to work.

New Horizons

Kevin Rollins summed up Dell’s traditional approach to strategy:

We have a well-crafted Dell-Direct Model that provides value to customers, keeps our costs low and provides lofty returns for shareholders. We have to aggressively pursue growth and share gains. There is no secret to our strategy. It is all in the execution, and we believe that we have the confidence and capabilities to keep it going.

Many at Dell had argued that with its superb Direct model, the corporation should be able to take a larger bite out of the server and storage market. They pointed out that there was much room for growth on the international front as well. It was the view of this group that while the 25% to 30% growth rates of the past may not be attainable in the future, a company like Dell could handsomely grow margins even at a somewhat lower sales growth.

Other senior managers, however, questioned whether continued superior execution would be able to generate sufficient growth. For the first time, Dell’s leaders began to ponder the pros and cons for Dell of strategic acquisitions.13 It was likely that such a strategy could provide incremental growth, but at what cost to Dell’s strong internal culture and focus on execution? How would it fit Dell principles of low cost, superior customer value, and virtual integration?

13 On September 4, 2001, Hewlett Packard (HP) and Compaq announced a merger agreement to create an $87 billion technology leader. Under the terms of the proposed deal valued at $25 billion, HP shareholders would own 64% of the merged company, with Compaq shareholders owning 36%. The merged company was expected to hold the leading position in servers, PCs, and handhelds, and imaging and printing as well as strong positions in IT services, storage, and management software. In 1998, Compaq had purchased Digital Equipment Corporation for $9.6 billion to gain entry into the high-end computing markets dominated by IBM and HP. After some uncertainty regarding shareholder approval of the merger, in part driven by a lack of public support from HP’s founding families, the merger was narrowly approved in March 2002.

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Exhibit 1 Dell Computer Corporate—Balance Sheet (yr. ending Jan. 31 of that year)

Balance Sheet ($ millions) 1997 1998 1999 2000 2001

Assets Cash and equivalents 115 320 1,726 3,809 4,910

Other short term investments 1,237 1,524 923 323 528 Accounts receivable 903 1,486 2,094 2,608 2,895 Inventory 251 233 273 391 400

Other current assets 241 349 791 550 758 Total current assets 2,747 3,912 5,807 7,681 9,491 Long term investments — — 532 2,721 2,418

Property, Plant & Equipment 374 509 775 1,140 Accum. Depreciation and amortization (139) (167) (252) (375) Property, Plant & Equipment other — — — —

Property, Plant & Equipment (net) 235 342 523 765 996 Goodwill/Intangibles — — 15 304 Other Long term Assets 11 14 — — 530

TOTAL ASSETS 2,993 4,268 6,877 11,471 13,435

Liabilities

Accounts Payable 1,040 1,643 2,397 3,538 4,286 Short term Debt — — — — — Current long term debt and CLOs — — — — —

Other Current Liabilities 618 1,054 1,298 1,654 2,257 Total Current Liabilities 1,658 2,697 3,695 5,192 6,543 Long term Debt 18 17 512 508 509

Other Long term Liabilities 511 261 349 463 761 Total Liabilities 2,187 2,975 4,556 6,163 7,813 Shareholders’ Equity 806 1,293 2,321 5,308 5,622

Total Liabilities and Shareholders’ Equity 2,993 4,268 6,877 11,471 13,435

Source: Company Records

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Exhibit 2 Financial Performance of Dell Computer Corporation ($ in millions) (Yr. End. Jan. 31 of that year)

Income Statement 1987 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Net sales ($ in millions) 69.5 889.9 2,013.9 2,873.2 3,475.3 5,296 7,759 12,327 18,243 25,265 31,888

United States 648.1 1,459.6 2,037.2 2,400.0 3,474 5,279 8,531 12,420 17,879 22,871

Europe 241.9 553.0 781.9 952.9 1,478 2,004 2,956 4,675 5,590 6,399

Other international 1.3 54.0 122.4 344 476 840 1,149 1,796 2,618

Cost of sales 53.6 607.8 1,564.5 2,440.4 2,737.3 4,229 6,093 9,605 14,137 20,047 25,445

Gross profit 15.9 282.2 449.5 432.8 738.0 1,067 1,666 2,722 4,106 5,198 6,443

Operating expenses:

SGA 10.3 182.2 268.0 422.9 423.4 595 826 1,202 1,788 2,387 3,193

R&D 1.5 33.1 42.4 48.9 65.4 95 126 204 272 568 482

Special Charges 105

Total operating expenses 11.7 215.3 310.3 471.8 488.8 690 952 1,406 2,069 2,955 3,780

Operating income 4.1 66.9 139.1 -39.0 249.3 377 714 1,316 2,046 2,263 2,663

Net income 2.2 50.9 101.6 -35.8 149.2 272 531 944 1,460 1,666 2,177

% of Net sales

Net sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

United States 72.8 72.5 70.9 69.1 66.0 68.0 69.2 68.0 70.7 71.6

International—Europe 27.2 27.5 27.2 27.4 28.0 26.0 23.9 25.6 22.1 20.1

International—others 0.0 0.1 1.9 3.5 6.0 6.0 7.1 6.4 7.2 8.3

Cost of sales 76.9 68.3 77.7 84.9 78.8 79.9 78.5 77.9 77.5 79.3 79.8

Gross profit 23.1 31.7 22.3 15.1 21.2 20.1 21.5 22.1 22.5 20.7 20.2

Operating Expenses

Marketing and sales 14.8 20.5 13.3 14.7 12.2 11.3 10.7 9.8 9.8 9.4 10.0

R&D 2.3 3.7 2.1 1.7 1.9 1.8 1.6 1.6 1.5 2.3 1.5

Special Charges .3

Total operating expenses 17.1 24.2 15.4 16.4 14.1 13.1 12.3 11.4 11.3 11.7 11.8

Operating income 6.0 7.5 6.9 -1.3 7.1 7.2 9.2 10.7 11.2 9.0 8.4

Net income 3.1 5.7 5.0 -1.3 4.0 5.1 6.8 7.7 8.0 6.6 6.8

Other Significant Dell Operating Statistics

1997 1998 1999 2000 2001 Employees 10,350 16,200 24,400 36,500 40,000 Days supply of inventory 13 7 6 6 5 Return on invested capital 85% 186% 195% 243% 355% Avg. total revenue per unit $2,700 $2,600 2,350 $2,250 $2,050

Source: Company records

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Exhibit 3 Selected 2000 Financial Statistics ($ in millions)

International Business Machines 1999 2000 2001 YTD Total Revenues $87,548 88,396 63,040 Personal Systems Revenue $16,118 $16,250 $9,072 Personal Systems Pre-Tax Income -$360 -$148 -$136 Enterprise Systems Revenue $11,503 $11,340 $9,669 Enterprise Systems Pre-Tax Income $1,832 $2,092 $1,111

Source: Company Financial Statements

Notes: IBM changed the definition of its segments between 2000 & 2001. For 1999 & 2000, Personal Systems included PCs and PC servers. Enterprise Systems included Unix & mainframe servers and all storage. For 2001, Personal Systems included PCs and printing systems, and Enterprise Systems included PC servers in addition to Unix and mainframe servers, and all storage. 2001 YTD includes first three fiscal quarters (January – September 2001). In addition to revenue from Personal Systems and Enterprise Systems, IBM, in 2000, earned significant revenues from the following segments: Technology Hardware that included peripheral equipment for use in general-purpose computer systems and components such as semiconductors and hard disk drives ($10 billion), Global Services ($33 billion), and Software ($12 billion), Global Financing ($3 billion) and Enterprise Investments ($1 billion).

Compaq Computer Corp. 1999 2000 2001 YTD Total Revenues $38,525 $42,383 $25,126 Access Group (PCs) Revenue $18,179 $20,722 $11,453 Access Group (PCs) Operating Income -$186 $459 -$485 Enterprise Computing Revenue $12,974 $14,316 $7,995 Enterprise Computing Operating Income $1,201 $2,140 $102

Source: Company Financial Statements

Notes: Compaq’s Access Group consists of PCs and handheld devices sold to consumers and businesses. Compaq’s Enterprise Computing Group consists of Intel servers, high-end servers, and storage. 2001 YTD includes first three fiscal quarters (January – September 2001). Compaq garnered approximately $7 billion in additional service revenues.

Hewlett-Packard FY 1999 FY 2000 FY 2001 YTD Total Revenues $42,370 $48,782 $33,702 Computing Systems Group Revenue $17,814 $21,095 $13,539 Computing Systems Group Operating Income $850 $960 -$327

Source: Company Financial Statements

Notes: Hewlett-Packard’s Computing Systems Group consists of PCs, Intel-based workstations and servers, Unix-based workstations and servers, and storage. Hewlett-Packard’s fiscal year ends in October. 2001 YTD includes first three fiscal quarters (November 2000 – July 2001). Other segments that contributed significant revenues for HP were Imaging and Printing ($20 billion) and IT Services ($7 billion).

Gateway FY 1999 FY 2000 FY 2001 YTD Total Revenue $8,965 $9,601 $4,944 Operating Income $596 $511 -$128

Source: Company Financial Statements

Notes: Includes all company revenues and operating income on a pro-forma basis, excluding one-time charges. 2001 YTD includes first three fiscal quarters (January – September 2001)

Dell FY 1999 FY 2000 FY 2001 YTD Total Revenues $25,265 $31,888 $23,107 Operating Income $2,263 $2,663 $1,195

Source: Company Financial Statements

Notes: Includes all company revenues and operating income on a pro-forma basis, excluding one-time charges. 2001 YTD includes first three fiscal quarters (February – November 2001)

For the exclusive use of Y. Wang, 2018.

This document is authorized for use only by Yangyin Wang in Global Marketing Management MRKT 620-850 SUMMER 2018 taught by RAJIV MEHTA, New Jersey Institute of Technology from May 2018 to Nov 2018.

Dell—New Horizons 502-022

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Exhibit 4 Storage and Server Products in Dell’s End-to-End Enterprise Offering

PowerEdge 1550

PowerEdge 1550

Dell 32-way system

Dell 32-way

Dell 32-way system

PowerEdge 350

PowerEdge 350

PowerApp.web 120

PowerApp.web 120

PowerApp.web 110

PowerApp.web 110

PowerApp. BIG-IP

Dell Dell OpenManageOpenManage Systems Management Solution Systems Management Solution

Dell Infrastructure ServicesDell Infrastructure Services

Consistent with its distribution strategy, Dell sold its servers through its direct sales force to larger relationship clients and through telephone and online channels to smaller business clients. Dell had designed a three-tier architecture to help guide customers through their total enterprise computing needs with Dell’s server and storage product lines at the heart of the system. At Tier 1 the most basic level, companies needed servers to perform basic functions such as load balancing and caching. For these functions Dell sold its PowerApp appliance servers. At the next level of complexity (Tier 2) companies that required servers to perform higher order functions such as web hosting might be sold either a PowerApp appliance server or an entry-level general purpose PowerEdge server. Tier 3, the most sophisticated and mission critical applications (such as maintaining databases or server farms) required Dell’s most powerful general purpose server configurations. In addition to servers functioning in the Internet space, Dell sold servers for a variety of other purposes, such as the basic print servers within workgroups or departments of large companies.

Source: Company records

Exhibit 5 EMC Selected Consolidated Financial Data ($ in millions, except share data)

1996 1997 1998 1999 2000

Revenues $3,616 $4,487 $5,436 $6,715 $8,872

Operating income 539 716 834 1,241 2,256 Net income 420 587 654 1,010 1,782

Net income per weighted avg. share (basic) $0.22 $0.29 $0.32 $0.46 $0.79 Year-end stock price (unadjusted for splits) $33.125 $27.438 $85.00 $109.25 $66.50 Weighted avg. shares (basic) 1,878 2,002 2,030 2,061 2,164

Working capital $1,597 $2,582 $2,825 $2,922 $3,986 Total assets $3,178 $4,627 $5,627 $7,173 $10,628

Stockholders equity $1,978 $2,900 $3,728 $4,951 $8,177

Source: Company financials

For the exclusive use of Y. Wang, 2018.

This document is authorized for use only by Yangyin Wang in Global Marketing Management MRKT 620-850 SUMMER 2018 taught by RAJIV MEHTA, New Jersey Institute of Technology from May 2018 to Nov 2018.

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Exhibit 6 Storage Architectures

The Integration of NAS and SAN The Integration of NAS and SAN

′ Storage connects to switches and servers.

′ High speed FC tape backups

′ More complex installation ′ Storage consolidation ′ Separate network from

LAN/WAN

Storage Area Network (SAN) Storage Area Network (SAN)

Network Attached Storage (NAS) Network Attached Storage (NAS)

PowerVault 35F Bridge

PowerVault 650F FC Storage

LAN

NetWare Server NT Server PowerVault 705N NAS Appliance

UNIX Server

Unix Clients

Windows Clients PowerEdge

Servers

PowerVault 56F Switch

PowerVault 130T Library

′ Storage connects directly to the network

′ Simple to install & manage ′ Storage consolidation for

clients ′ True data sharing ′ Concurrent multi-OS

support ′ Allows user to access data

without server intervention ′ Fast response time over the

network

Representative Product Comparison – Power Vault 735N

Dell PowerVault 735N

Compaq TaskSmart N2400

Network Appliance F740

Sun N8200

Capacity 1.4 TB 2.0 TB 1.0 TB 0.8 TB Availability/ Disaster Tolerance

– Redundant hot swap power, cooling & drives.

– -Snapshot – Phone-home alert

– Redundant hot swap power, cooling & drives.

– -Snapshot – Phone-home alert – Cluster support

– Redundant hot swap power, cooling & drives.

– -Snapshot – Phone-home alert – Cluster support – Mirroring

– Redundant hot swap power, cooling & drives.

– -Snapshot – Phone-home alert – Cluster support

Rackability 130 GB/U 133 GB/U 52 GB/U 40 GB/U OS Platforms – Windows, Unix,

Linux, Netware, MacOS

– Windows, Unix, Linux

– Windows, Unix, Linux

– Windows, Unix, Linux

Entry Pricing – $9,999: 1 proc, 144GB – $0.07/MB

– $11,999: 2 proc, 144GB – $0.08/MB

– $34, 710: 2 proc, 72GB – $0.21/MB

– $79,900: proc, 126GB (CIFS, NFS) – $0.61/MB

– $53,800: 1 proc, 200GB – $0.27/MB

Source: Company Records

For the exclusive use of Y. Wang, 2018.

This document is authorized for use only by Yangyin Wang in Global Marketing Management MRKT 620-850 SUMMER 2018 taught by RAJIV MEHTA, New Jersey Institute of Technology from May 2018 to Nov 2018.

Dell—New Horizons 502-022

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Exhibit 7 Leading Vendor Market Share (%, units in 000s) Region: Western Europe 1996 1998 2000 Compaq 14.9 18.3 16.9 Fujitsu Siemens 8.4 11.3 11.2 Dell 4.4 8.4 9.8 Hewlett Packard 5.3 6.9 8.3 IBM 9.3 9.1 7.9 NEC 4.5 5.2 5.6 Toshiba 3.3 3.8 4.6 Acer 2.7 2.8 4.2 Apple 4.2 2.8 3.1 Gateway 1.6 1.0 1.3 Units 16,698 23,638 29,741 Region: Asia/Pacific 1996 1998 2000 Legend 1.6 5.3 10.4 IBM 7.3 8.0 7.6 Samsung 6.4 4.3 7.4 Compaq 9.2 8.4 6.4 Hewlett Packard 3.4 5.3 4.9 Acer 6.1 4.6 4.3 Dell 1.3 2.6 3.7 Trigem 4.1 2.2 3.6 Founder 0.0 1.4 3.3 Units 9,083 10,630 19,976 Region: Japan 1996 1998 2000 NEC 33.2 27.2 21.7 Fujitsu Siemens 21.9 23.1 20.4 IBM 11.4 10.4 9.8 Sony 0.0 3.8 8.8 Toshiba 6.3 7.0 6.2 Compaq 3.7 4.3 4.9 Sotec 0.0 0.2 4.8 Dell 1.6 3.1 4.2 Hitachi 3.9 5.3 4.0 Apple 10.4 5.1 3.9 Gateway 0.6 2.2 2.1 Hewlett Packard 0.4 1.0 1.6 Units 8,099 7,925 14,129 Region: Latin America 1996 1998 2000 Compaq 14.0 13.8 19.2 IBM 11.4 8.0 6.0 Hewlett Packard 5.0 5.2 5.5 Acer 10.1 5.1 4.9 Dell 1.1 2.0 3.3 Toshiba 0.4 1.4 1.8 Apple 3.1 1.3 1.4 Units 3,462 5,118 7,761 Region: Rest of the World 1996 1998 2000 Compaq 7.6 8.7 9.3 IBM 7.0 8.0 5.4 Hewlett Packard 3.1 3.8 4.1 Acer 3.6 2.0 3.6 Dell 1.7 2.4 3.6 Units 4,174 5,454 7,594 Source: Company records (IDC) W Europe does not align with Dell’s EMEA segment. IDC does not include Eastern Europe in this segment.

For the exclusive use of Y. Wang, 2018.

This document is authorized for use only by Yangyin Wang in Global Marketing Management MRKT 620-850 SUMMER 2018 taught by RAJIV MEHTA, New Jersey Institute of Technology from May 2018 to Nov 2018.

502-022 Dell—New Horizons

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Exhibit 8 Dell Worldwide Manufacturing and Sales Sites

Austin

Limerick

Direct Sales/Support Countries

Distributor Only Countries Porto Alegre

Xiamen

Penang

Manufacturing Facilities

Prohibited/Restricted Countries

Countries Not Presently Served

Nashville

Source: Company records.

For the exclusive use of Y. Wang, 2018.

This document is authorized for use only by Yangyin Wang in Global Marketing Management MRKT 620-850 SUMMER 2018 taught by RAJIV MEHTA, New Jersey Institute of Technology from May 2018 to Nov 2018.


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