Price Reduction Of 20 On Dell Laptops example essay topic

Annual Meeting & Presentation Abstract Dell is a major computer manufacturer and supplier in today's computer industry. While much competition exists in the market for computers and accessories Dell has proven that they are a market leader. Dell employs approximately 41,800 employees around the world and produced revenue totaling $38.2 billion for the last four quarters. Dell markets its products to large corporate, government, healthcare and education customers, small-to-medium businesses and individuals. Consumers are able to call or go online and custom build a computer based on their specific needs.

The customer support provided is excellent and customers prefer Dell because of that support. Additionally, Dell offers free upgrades, which include CD burners and printers. Dell's goal is to provide its customers with quality, reasonably priced products and services. In this paper, we will identify the market structure and the competition that exists for Dell products. We will describe the process of distributing the products to the market and the production inputs and their significance to the delivery of the products. We will analyze a strategy of lowering prices in an effort to maximize profit and increase market share.

We will also describe the concept of price elasticity and the short-run and long run consequences of lowering prices. Along with a strategy of lowering prices, there will be a competitive reaction to keep up with Dell's strategy. Macroeconomic forecasted events will have an effect on Dell's products. This paper will assess how Dell currently performs in the economy and will describe two strategies which we feel will make Dell an even more profitable company. Competition The organization that Learning Team B has chosen to research during this course is Dell Computers ("Dell"). Headquartered in Round Rock, Texas, Dell is a premier provider of products and services required for customers worldwide to build their information-technology and Internet infrastructures.

Dell's climb to market leadership is the result of a persistent focus on delivering the best possible customer experience by directly selling standards-based products and services. The specific product we will be focusing on will be the laptop computer Dell produces. Both corporate computer users that may travel extensively and students who need mobility are using laptop computers more actively on a daily basis to make it easier to achieve their ultimate goals. Even though Dell is a market leader in the computer industry and they have developed a reputation for offering superior customer service to its customers, this particular market has some heavy competition from some other leaders in the industry. Companies such as IBM, Hewlett-Packard, Gateway, Sony and Toshiba are all striving to either keep or gain a greater market share of the laptop industry. Many of Dell's competitors rely heavily on sales in retail outlets as a source of revenue.

Competitors such as IBM, Hewlett-Packard, Sony and Toshiba offer very little opportunity for potential customers to customize their laptop computers for their specific needs. Dell and Gateway have been the most aggressive forces in the industry in allowing potential customers to design customized systems to the specifications of the buyer. Dell customers now have the luxury of designing a system they need rather than buying systems that do not have all the components needed or systems that may have more components than needed thereby only adding to the price of the unit. Dell believes the most efficient path to the customer is through a direct relationship. Direct customer relationships provide a constant flow of information about customers' plans and requirements and enable Dell to continually refine its product offerings. Further, the direct model eliminates the need to support an extensive network of wholesale and retail dealers.

As a result, Dell reduces customers' prices by avoiding expenditures associated with the retail channel, such as higher inventory carrying costs, obsolescence associated with technology products, and retail mark-ups. Customers can purchase custom-built products and custom-tailored services. The direct model allows customers to purchase custom-built products and custom-tailored services. Dell believes this is the most effective business model for providing solutions that truly address customer needs. Further, Dell's flexible, build-to-order manufacturing process enables them to achieve faster inventory turnover and reduced inventory levels. This allows Dell to rapidly incorporate new technologies and components into its product offerings and to rapidly pass component cost savings directly to its customers.

Dell has been able to position and market itself in such a way that its products and services appeal to everyone from large corporate customers to individual laptop owners with a variety of needs and wants. This marketing strategy has given Dell the ability to offer new technology on each new Dell computer model and ensure that no loss of market share is seen because Dell products do not offer what is viewed to be important by the potential purchasers of laptop computers. Dell offers two types of laptops: Inspiron and Latitude. These two laptops integrate with other Dell products easier than most brands. Dell's laptops have more features that are graphic, movie feature, games, video cards, and other features. The Inspiron laptop is better suited for home users while the Latitude laptop is a business laptop, which they made it to be smaller and more powerful.

Dell offers both of these laptops online and they can be custom designed by the purchaser. There are certain factors that could affect Dell's business and prospects. The first of these is armed hostilities, terrorism or public health issues, whether in the U.S. or abroad, could cause damage or disruption to Dell, its suppliers or customers, or could create political or economic instability, any of which could have a material adverse effect on Dell's business. Although it is impossible to predict the consequences of any such events, the aforementioned events could result in a decrease in demand for Dell's products, make it difficult or impossible for Dell to deliver products or for its suppliers to deliver components and could create delays and inefficiencies in Dell's supply chain. Another area that could affect Dell relates to their sales outside the U.S., which accounted for approximately 34% of their net revenue in fiscal 2003. Dell's future growth rates and success are dependent on continued growth and success in international markets.

The success and profitability of Dell's international operations are subject to numerous risks and uncertainties, including local economic and labor conditions, political instability, unexpected changes in the regulatory environment, trade protection measures, tax laws (including U.S. taxes on foreign operations) and foreign currency exchange rates, any of which could potentially adversely affect Dell's operations. Further, as Dell generates cash flow in non-U.S. jurisdictions, Dell may experience difficulty transferring such funds to the U.S. in a tax efficient manner. A final area that could influence Dell is a failure to effectively manage a product transition. Continuous improvements in technology, result in the frequent introduction of new products, short product life cycles and continual improvement in product price / performance characteristics and these characterize the technology industry. Product transitions present some of the greatest challenges for execution and risks for any technology company. A negative effect will occur on if Dell is unable to effectively manage a product transition or its business and results of operations.

In addition, continuing technological advancement, which is a significant driver of customer demand, is largely beyond Dell's control. Dell Computers is a leader in the computer industry and is capable of offering its products and services at low prices while still maintaining the technological integrity of its systems. Dell also has developed a distinct reputation for high levels of customer service. You can see this high level of quality service before the purchase, as representatives are willing to spend as much time needed with potential customers to design the best system for their specific needs and after the purchase with technical support at a minimal cost around the clock. These factors have enabled Dell to gain a large amount of market share and see continued growth in the industry. Profit Analysis Dell has been approached by a group of stockholders in the company that have suggested that by lowering the price of the Dell Inspiron by 20% the company would be able to experience an increase in overall market share and maximize the product's profitability.

We have established a pricing committee to gather data to support the stockholder's beliefs. The committee will utilize break-even analysis and the price elasticity of the Inspiron to calculate the impact that to expect by lowering the price of the system. The committee will also take into consideration the production costs, possible constraints and marginal costs associated with this change. The following report will detail the findings of the pricing committee.

In order to complete a breakeven analysis of Dell's Inspiron laptop computers we felt that we needed to examine the market from 2002. First, we examined the price of the Inspiron laptops to determine the current market price and to evaluate the price with a 20% discount. The market price for one of these computers averages $1,500 and with a 20% discount, that reduces the price to $1,200. We pulled the financial data from 2002 to determine the amount of the revenue realized from the Inspiron. Approximately 28.33% or $8,829 (in millions) of the total revenue of $31,168 (in millions) Dell reported attributable to Inspiron. To determine the expenses credited to the Inspiron we multiplied 28.33% by the total amount of expenses of $29,379 (in millions) and arrived at $8,323 (in millions).

Finally, we needed to determine the amount of income that the Inspiron provided last year. To make this determination, total revenues for the Inspiron, or $8,829 (in millions), decreased by the amount of expenses attributed to the Inspiron, or $8,323 (in millions), which gave $506 million total. Price $1,500 $1,200 $900 $600 $300 Production 5 million 10 million Next, we wanted to attribute a portion of the expenses to fixed and variable costs in the short run so we decided that approximately 36% of the total expenses we were the fixed costs and the other 64% could be attributed to the variable costs. The reasoning behind this logic is since the majority of the expenses incurred for each unit produced are for the parts and labor to produce the computer. The other 36% of the expenses the fixed costs of the property, plant, equipment and land costs to produce the laptops.

Therefore, approximately $2,996 (in millions) is recognized as fixed costs and $5,327 (in millions) qualified as the variable costs of producing the notebooks. After determining the variable costs associated with the Inspiron, we can now determine the variable cost per unit produced. We took the total revenue of the Inspiron for 2002 and divided it by the average cost of the laptop, $1,500, and determined that 5,886,000 units sold in 2002. We can then take the variable costs of the Inspiron and divide by the total number of units to arrive at $905 in variable costs for each unit.

Therefore, for Dell to breakeven in their laptop division after lowering the price of the Inspiron to $1,200, the company would have to sell 10,155,932 units to recover all of the fixed costs of production. This can be determined by using the following equation. We subtracted the variable costs from the revenue associated with the Inspiron arriving at $295 left to absorb the fixed costs of production. We then divide the total fixed costs of $2,996 (in millions) by $295 to arrive at the break-even point of 10,155,932 units. The total demand at the price of $1,500 was 5,886,000 units and the total amount demanded at the price of $1,200 must be 10,155,932 in order to break-even. These figures indicate that we will have to increase production and demand by 72.5% in order to reach the break-even point in production.

This leads us into our next topic, price elasticity of demand. To measure the price elasticity of demand it is necessary to take the absolute value of the percentage change in quantity demanded divided by the percentage change in price (Hall & Lieberman, p. 92). If Dell reduces the price of their laptops by 20%, the price elasticity of demand will determine how sensitive the quantity demanded will be as the price changes. For example, the Dell Inspiron on average costs consumers $1500.

If Dell has reduced their price by 20% or $300, we will assume that consumers' interests will increase and the demand for the product will increase by 40%. Therefore, the 20% change in price resulted in a 40% increase in the quantity demanded, which means that the price elasticity of demand for Dell Inspiron laptops is two. The demand elasticity number also helps determine the percentage change in quantity demanded per 1 percent increase in price. Subsequently, as Dell continues to lower their prices 1 percent, this should directly affect the quantity demanded to rise by 2 percent.

However, the demand elasticity number determines the response of quantity demanded to a fluctuation in price when all other influences on demand remain unchanged. Therefore, if consumers experience a change in income, preference or if the price of competing laptops changes, it may cause the price elasticity of demand for Dell's Inspiron to also change. We consider the market that Dell operates in as an oligopoly. In this market, there are many sellers but only a few large manufacturers.

The profits of competition depend on the differences in price between their products. If we lower Dell's prices by 20% in an effort to maximize profits, there will be long run and short run consequences. Tactics that result in a price war in this type of market will not result in optimal profits for Dell or its competitors. In the short run, if Dell lowered its prices by 20% its competition may follow the lead and lower their prices. The competition is aware that lowering prices results in more sales so they will mirror Dell's strategy.

In the long run, if Dell lowered its prices by 20% and the competition lowered its prices by 20% revenue for all companies would decrease. The more time consumers have to make adjustments the more the riskier this price reduction may become. The long run will give the consumers time to find other products or companies that they would prefer to deal with. Consumers may find even lower prices on substitutes for Dell products by buying used products, remanufactured products, or simply switching brands. The long run will also give Dell the information it needs regarding its consumers' loyalty. Many customers are loyal to Dell's brand name and reputation and they are willing to pay a higher price than their competitors charge.

Dell is one of the most successful businesses in its industry and has been able to maintain a strong financial mix. Their equity to debt ratio is 11 percent, whereas the industry average is around 50 percent. (Krause 2003) One of the most important things to keep in mind is that Dell has had an advantage, as it relates to cost, because they sell directly to the customer or end user of all of their products. Dell's approach to the PC business has two advantages: (1) reducing cost by leaving out the middlemen (distributors and retail dealers), and (2) building the product to order, which eliminates carrying large volumes of both and finished goods. These cost advantages have allowed Dell to gain market share during times when the economy was down. "According to Lehman Brothers research, a 1 point gain in world market share equals about $2 billion in additional revenues".

(Krause 2003) Many large corporations and small business choose to use Dell laptops. The only constraint that I can see is the merger between Hewlett Packard and Compaq. "If Hewlett Packard and Compaq are able to take full advantage of any synergies that exist, they may be able to challenge Dell as a low-cost provider". (Krause 2003) This is the major reason that Dell has the power it has in this market. Krause Fund Equity Research has a sensitivity analysis that detail best and worse case scenarios. There is a projected 4 percent growth for notebooks in 2003 and 2004 with a continuing value growth rate of 3 percent.

"Due to the inability to apply pressure on suppliers, the cost of revenues increased 1 percent, when compared to the most likely scenario". (Krause 2003) We have based all of this information on the worst-case scenario for Dell. In the best-case scenario, results would yield rate in the teens for the laptops through 2008, with a continuing growth rate of 4.75 percent. "The cost revenues will decrease by 1 percent when compared to the most likely situation, due to Dell's bargaining abilities with suppliers". (Krause 2003) The pricing committee has used the data obtained during the research phase to determine that a 20% reduction in retail price of the Inspiron would not cause maximize Dells profits at this time. The 20% reduction would increase the demand level needed above the projected levels of demand.

There is also a great risk that a price war could develop between Dell and its competitors that would also decrease demand and lower profitability greatly. The pricing committee will continue to develop strategies that may increase the profitability of the company to present to stockholders in future meetings. Competitive Reaction The pricing committee has been performing research to determine if a 20% price reduction in our Inspiron laptops would increase the company's market share and profitability. The committee has established estimates based only on the changes within Dell without regard to competitive reaction. The marketing department has assisted the pricing committee to establish possible reactions by the competitors in the market. We will identify Dell's marketing structure and assess the reactions that Dell can expect from the competition.

Dell operates in an oligopoly market and faces the threat of strong competitors that have the ability to react quickly to any changes made in Dell's overall structure. Dell has been able to gain considerable market share by offering custom systems and high levels of customer service. Dell has been extremely competitive in the area of pricing and has been able to experience significant growth without lowering prices significantly in the market. The marketing department has gathered research that estimates that a price reduction of 20% on Dell laptops will cause competitors to react by also lowering prices to remain competitive.

The research estimates that the reductions offered by the competitors will be less than the 20% offered by Dell but will still reduce the impact the price change will have on Dell's overall market share. This change in expected revenue will cause the cost per unit to rise and expected profitability to lower. The marketing department also has expressed concern that consumers may have a negative reaction to the new pricing because Dell has recently expanded its line of products. Dell has started to offer computer accessories such as printers and digital cameras that were once not part of the Dell product line. Consumers may perceive that as Dell begins offering additional accessories and the customers give less attention to the computer systems produced. This may possibly lead consumers to believe that Dell is sacrificing quality in their computer systems to offer additional products.

In addition, the price reduction may only strengthen this perception to Dells customers. It is highly likely that the competition may utilize this perception in targeted marketing to draw the attention of consumers to this issue. Considering the possible reactions by the competitors in the market it may be better for Dell to consider other options than a reduction in a single line of products, such as the Inspiron. In either scenario above, Dell would possibly lose either profitability or market share.

If competitors react by reducing their prices to remain competitive then Dell will not observe the projected growth in market share needed to compensate for the reduction in profits. If competitors react by targeting Dell as a company that is sacrificing quality for the expansion of its product line then consumers may actually be willing to pay the higher price of the competitor. This will lead to an insignificant increase in market share and a strong possibility of decreased profitability. The proposals from the marketing department suggest that it may be more beneficial for Dell to develop computer packages instead of offering a price reduction on specific products in the Dell line. Since Dell is beginning to broaden its line of computer accessories, it has the ability to absorb the price change as a bundled package rather than lowering the price of a specific item within the package. This will allow Dell to increase its market share in the accessories market while still maintaining the quality image of the Dell computer line.

If Dell absorbs the price change into its bundled packages, the marketing department believes that there will be little competitor reaction to this. The reaction will be much greater if Dell chooses to lower the price of a single line of computer system. Dell is able to make a choice that will not only increase the demand for a computer line that is already strong but will also increase the demand of the new line of accessories Dell has made available to the market. Considering the additional data that the marketing department offered, the pricing committee will strongly consider the option of absorbing the pricing change into additional savings to the consumer on bundled packages. This strategy appears to be one that will offer considerable growth in market share for Dell computer line. Macroeconomic Assessment We expect Dell to outperform the industry as soon as the first quarter of the year 2003.

"Dell continued to successfully deliver on its strategy to sequentially improve operating profitability despite challenging industry conditions. Net operating margins for the period were 7.4 percent of revenue versus 6.8 percent in the year-ago fourth quarter. Operating expenses were 10.2 percent of revenue, the lowest level in company history. Dell's leading asset, management, helped generate more than $1 billion in cash from operations during the fourth quarter. Total cash and investments at the close of the period were $8.3 billion. Four days of supply in inventory matched the low achieved in the previous two quarters".

(Dell Computer, 2002) The shareholders have requested a 12-month assessment of how the planning and business strategies for Dells laptops affected by macroeconomic forecasted events. General economic and industry conditions may result in a decrease in net revenue. Due to the fact that Dell is a global company with customers in virtually every business and industry, their net revenue could decrease as a result of macroeconomic trends in both the U.S. and abroad. If the current economy does not improve, or continues to decline, customers or potential customers could reduce or delay their technology investments. This state in the economy could negatively affect Dell's net revenue and earnings. Specifically, if interest rates rise, this could affect manufacturing and the purchase of new capital and equipment.

Based on several economic forecasts, the interest rates are projected to increase over the next 12-months. This will affect Dell's spending habits. If they decide to hold off on purchasing new manufacturing equipment, this will affect their profitability because of cycle time relative to production. If they fall behind their competitors, and the cost increases, this may hurt Dell in 2004.

Dell's success is based on its ability offer its products and services at a lower price than its competitors. However, Dell continuously encounters aggressive competition from organizations in the U.S. and abroad. Therefore, Dell cannot provide any assurance that it can maintain a pricing advantage over its competitors if they alter their cost structure or business model or take other actions that affect Dell's current competitive advantage. Subsequently, if Dell cannot maintain its competitive advantage over its competitors, this may result in a loss of market share and profitability. One macroeconomic forecasted event Dell needs to consider is retail sales.

The National Retail Federation sees an increase in consumer confidence for the end of 2003 and the year 2004. This will translate into increased sales for retail companies. Economists have estimated that the year 2003 holiday sales at $217 billion, which is a 5.7% increase from the year 2002. Online sales have an even greater outlook with estimates as high as a 27% increase for the fourth quarter of 2003. Online sales only account for about 2% of the retail industries total but still this is a positive outlook for Dell to consider when estimating its sales for the year. Based on economic data from the Livingston Survey the real gross domestic product forecasted an increase in the next twelve months by about 3.56%.

The gross domestic product measures the billions of dollars spent in the United States economy overall on finished goods and services in a year. Due to the fact that economists are not seeing too much of an increase in the money spent in the United States in 2004 we must prepare to find other ways to increase our revenues in the next year. Therefore, we feel that we must capture some of the dollars spent on technology and computers in other ways than the current methods we are using. One way that we feel is an expanding area is the ability to use the computer to work in addition to being able to watch television on the same monitor.

Therefore, we decided to introduce the Dell W 1700 17" LCD TV that just became available in the United States on 10/28/03. The W 1700 17" LCD TV features both VGA and DVI inputs for use with a computer system, as well as an integrated tuner and S-video, component video, and composite video inputs for use as a television, whether or not it is connected to a PC. The remote control enables users to easily choose whether to use the display as a monitor or television and access its many features. (Dell 10/22/03) The display is HDTV compatible for all of those people who are worried about the conversion process that we will probably encounter in the next ten years. Dell today introduced the Dell Digital Jukebox (Dell DJ) music player and announced details of a partnership with Musicmatch (R) to provide customers an easy, legal way to download their favorite songs and albums. Dell will be offering a unit that will hold about 15-20 GB of hard drive space that is available to download songs of the service of Musicmatch (R).

The unit will cost approximately $249-$329. The user will have the ability to use the unit for up to 16 hours. Afterwards the customer can recharge the device with a laptop or the AC adaptor included with the Dell DJ. Musicmatch (R) is a no subscription service that will allow users to download songs that they choose for 99 cents each or $9.99 per album (Dell, 10/27/03).

This will allow users to legally download the selections that they chose without having to purchase the entire album. We also feel that it is necessary to constantly improve our brand name products such as the Dell Desktop Dimensions, Dell Inspiron Laptops, Dell Axim PDA, Dell Printers, Dell High Speed Internet Access and Dell Financing items offered to our consumers personal needs and home office needs. Dell also offers a line designed to fit the needs of small and large businesses through Dell desktops, workstations, laptops, servers, storage and networking, software and peripherals and services and training. Finally, Dell also offers a line of computers intended for the government, education and healthcare sectors of the market. If Dell is able to obtain a competitive advantage by being superior to all of their competitors in the products that they produce and supply to their customers. In addition, Dell is taking steps to help prepare for the drop in demand of computers that will eventually result when the market stabilizes.

Recommended Strategies for Becoming More Profitable One strategy that Dell should continue to incorporate within their organization relates to research and development. Research and development is critical for many top tiered organizations in the US to ensure that they stay ahead of their competitors and increase their market share. By continuously allocating money to the research and development budget, Dell will continue to improve and succeed in the new economy. "Ultimately, Dell hopes to take its brand of innovation to the bank. It aims to double revenue to $60 billion over the next few years, largely by selling new products such as consumer electronics and information technology services". (Spooner, 2003) Therefore, if they want to hit these targets it will beneficial for them to hire more engineers to assist in the design, development, and testing phases.

By hiring more employees and introducing more products to the market, this is one way that Dell can do its share to help the economy prosper. Additionally, for each dollar they spend on research and development, this could potentially result in a significant tax credit. The research and development tax credit includes all wages for qualified activities, all supplies consumed in the research efforts, and research conducted by outside vendors, up to 65%. In 2001, a survey taken by Dell employees, after the first layoff in the companies history, told Michael Dell (CEO) and Kevin Rollins (President) that over half of the employees were discontent, felt little loyalty and would leave Dell if they had the opportunity to do so. In addition, internal interviews revealed that many subordinates thought Dell, 38, was impersonal and emotionally detached, while many saw Rollins, 50, as autocratic and antagonistic (Park).

(My section so far!! !) Dell's commitment to the environment continues to expand throughout their manufacturing and assembly facilities. Specifically, Dells Environmental Management System (EMS) adheres to the necessary requirements set forth by ISO 14001 as the internationally recognized standard for EMS. Additionally, Dell has continued to be in compliance with all laws and regulations required by the local regions when it involves environmental objectives and performance targets, managing each of its facilities to minimize waste and pollution and to conserve energy resources. Because of Dells business model, which yields strong production inventory and capital investment efficiencies, they are able to produce tangible benefits for the environment.

Dells products are made-to-order, which means that their inventory turnover rate is the fastest in the industry, averaging only four days parts and equipment. Because of this build to order inventory system, Dell is able to keep the environmental impact of warehousing to a minimum. Dell does not order or have any components shipped to their manufacturing facilities until they are ready for final assembly. Ultimately, this results in energy and building cost savings that are associated with storing inventory.

So as you can see, the new economy is welcomed by Dell, as they intend to expand upon their build-to-order inventory system and their research and development efforts. Because millions of people rely on their technology, Dell will continue to be one of the leaders in the industry and will also continue to be profitable for many years to come..