Strategic Analysis - Dell

A Brief History of Dell and its Problems

Dell was originally named PCs Limited, first established in 1984, by 18-year-old Michael Dell. The main idea of his business was firstly to sell IBM compatible computers built from stock components. In 1986, he dropped out of University of Texas, and decided to run the business full time, where he renamed the company Dell Computer Corporation. Dell Computer Corporation was just in time to catch the rapidly increasing trend of computers and Internet usage. According to a survey conducted by U.S. Consumer Electronics Association in 2005, more than 90 Percent of households in the United States had at least one PC, 36 percent had two or more PCs, and 52 percent were reluctant to purchase a new PC. Dell Inc was listed as the first place in the Top PC Makers globally having a market share of 19%. However, during its growth, Dell ran into many problems and in fact made some huge mistakes that caused Dell to lose much of its potential profit.

Dell made this “one time pricing and miscalculation problem”, termed by Kevin Rollins, Dell’s CEO. They tried to reduce prices to increase its market share. Although the price cut helped the company to increase its shipments by 6 percent, its operating income declined by 48 percent. At the same time, Dell failed to replace Intel chips with cheaper and better quality chips from AMD. Chief technology officer of Sun Microsystems commented, “Dell is stuck with only Intel, and Intel is just not competitive right now.” AMD had developed processors that were faster and more energy efficient than Intel’s. AMD’s prices were also lower than Intel’s. Despite these reasons, until May 2006, Dell was the only manufacturer who refused to use AMD’s product. This not only increased cost and reduced price flexibility, but also affected product quality.

Apart from product cost, Dell also spent less on research and development compared to HP and IBM. For instance, in 2005, Dell spent $475 million or less 1...