PRODUCT

DEVELOPMENT AT
DELL CORPORATION
 EXECUTIVE SUMMARY

This case is all about dell computer which in spite of taking

a good start got stuck into cash crunch in 1993

The company is also facing problems with their existing

design of portable computer as they had some technical
problem relating to battery life

For solving the problem a meeting was held in hopes the

group could reach a consensus on recommendation for
developing a new line of laptop computers
Industry Timeline
Competitive Forces shaping
the Industry
Microcomputers accounted for 40% of all computers sold

Increase in demand of portable computers

Technological breakthrough and competition drove

manufacturing cost down

Flat liquid crystal display screens developed in Japan

Compact hard disk drives which consumes less energy

Portable computer size and shape

Improved battery technology (LiOn)

THE HISTORY OF DELL
In 1983, Michael Dell a freshman at the University of Texas,
Austin started upgrading IBM compatible personal
computers door to door for local business

He soon started buying and assembling components

himself in order to sell computer in his name directly to
customers

High growth and attractive margins allowed him to fund

growth internally and he began to get number of orders
from large oil companies and government agencies

In order to promote dell product , dell started 24 hour

complaint hotline & offer a supply of back up replacement
equipment

Dells company grew to $6 million by 1985, firm introduced

its own brand of personal computers and ended with $70
million in sales
DELL FINANCIAL DATA
Particular 1991 1992 1993
Net sale($M) $890 $2.024 $2.873
Products
Desktops 90% 88% 94%
Laptops 10% 12% 2%
Servers -- -- 4%

Market
segment
sales

59% 61% 64%

Relationship

41% 39% 36%

Transaction

Markets
US 72.8% 72.5% 70.9%
DELL BUSINESS MODEL
Dell computer used the same principal to sell computers.
The company focused on selling customized products
directly via mail to savvy customer

Dell assured product quality by extensively pretesting all

the configuration options it offered

A 24-hour telephone support system comprising well-

trained technical representative provided the first post-
shipment level of support

Dell serviced its customers with combination of home

based telephone representative and field based
representative

Dell maintained a months worth of component inventory

but it suppliers generally carried supplemental buffer stock
that could be immediately shipped
PROBLEM FACED BY DELL
Dell had to callback 17000 units due to technical problem

Company got stuck into Cash Crunch

Dell stock plunged by $7 a share to $25

Profit slashed to $10 million

Retail Selling proved contrary to dell

Senior management unable to guide the firm to maturity

Improper structure of Product Development Process

DELLS LATITUDE
DEVELOPMENT PROJECT
In 1991, Dell came out with its first line of portable

computers
In 1992, with portables accounting for 17 percent of Dells
sales, rumors circulated about quality problems
Earlyin 1993, Dell canceled a new line of laptops under
development, since these were deemed too slow and
expensive
By May 1993, notebook sales had slipped to just 6 percent
of Dell sales previously account for 20-25 percent of
sales
Bill Gated stated:

Dell is a super-solid company . Theyll get on top of the

situation
In October 1993, Dell recalled 17,000 notebooks.
Announced plans for launching a new line of notebooks,
PORTABLE COMPUTER
INDUSTRY
Osborne marketed the first portable computer in 1981

By the end of the decade, the quality of the portability itself

gave these machines gross margins that were typically 3 to
5 percent above desktops

In 1993 portable were classified as laptops if they weighed

between 4.5 & 8 pounds & sub notebooks if they weighed
under 4 pounds

Portable computer Market Size (millions of units)

United
World
States
1992 4.3 2.2
1993 6.2 2.9
1994 7.4 3.2
1995 8.9 3.7
Dells 18-month development
process
What are they trying to
change or improve?

In order not to repeat Dells previous mistakes, senior

management rolled out a new 18-month process for
product development beginning in 1993, replacing the
older, more informal process
To emphasize on organized new product development
around cross-functional teams that were responsible for the
project from the beginning to the end
Faster decision making
Which battery option
should Hollidays
team select?
Continue with a proven
battery technology (NiHi):

Estimations:
Dells market share will be 2.5% if Dell stays with the status
quo battery configuration of NiHi
Expected profit margin will be $485M (825000 unit selling,
$600 average gross margin per unit, $10M expected cost of
production)
Pros:
NiHi batteries are known, proven products that will not fail in
concept
Mitigated uncertainty
Takes less space than LiOn batteries
Allows for packing in other features
Cons:
Limits Dells ability to differentiate
Dell will be unable to advertise their battery as adding value
Expected Profit Margin is not the highest out of all options
Go with the new battery
technology
Estimations:
(LiOn)
Dells market share to jump to 3.0% (~990,000 units
over 3 years) if it succeeds, Expected Profit Margin will
be $584M
Dells market share will fall to about 1.25% (~413,000
units over 3 years) if it fails
Pros:
Dell would obtain a distinct differentiating factor in an
increasingly competitive market
It would give Dell the ability to deliver a superb product
versus a good product
Sony has a limited supply of the LiOn technology, hence
a successful Dell LiOn product would erect a strong
barrier to entry
Cons:
Wholly committing to LiOn technology could be a grave
error
Development process would cause a delay to market
LiOn batteries occupy more space than NiHi, thereby
allowing less room for packing in other features
Failure would taint Dells current brand image of quality
and spillover into all its products: laptops, desktops,
Dual Development Defer
commitment until
qualification phase review
Pros:
This option combines the pros of new technologyLiOn,
while avoiding the cons
Dell can earn a real option and additional time to make
the final decision until they receive more LiOn
information
Cons:
Dell needs to pay an additional fixed cost to get this
delay option.
Demoralization and financial impact of discarding half
the craftsmanship in the final product
Opportunity cost of pulling people from other projects
also needs to be considered
Over-design Defer commitment
until qualification phase review

Pros:
High Expected Profit Margins as per estimation
Combines the pros of new technology, while avoiding the
cons
Cons:
Over-design would occupy more space, thereby pushing
more hardware out of the overall design
Bulkier design would be less attractive to potential
customers
Over-design style is not transferable to the next product
generation
OPTION 1

Option 1: continue with a proven battery

technology (NiHi)
Confidence = 100% (likelihood that it works
as expected)
Net margin = 825,000 units * $600/units-
$10m =$485m
OPTION 2
Option 2: Go with the new battery technology
(LiOn)
Confidence = 60% (likelihood that it works as
expected): Risky
Net margin (if LiOn works) = 990,000
units*$600/unit-$10m =$584m
Net margin (if LiOn fails) = (825,000 units*0.5) *
$600/units- ($10+0.3*$10)
=$234.5m
If LiOn fails at launch, a switch to NiHi would
require substantial rework (70% of original
schedule and 30% of cost). Because competitors
would have an established product on the market
before them. Dell would lose about 50% of
projected units sold
If LiOn causes a failure, there could be spillover
effects into the desktop business. Dell regulation
for quality could be tarnished
OPTION 3
Option 3: Defer commitment until qualification
phase review (dual development or design
The analysis assumes that Sony will give us
enough information at the end of the
qualification phase to determine with full
certainly if LiOn will work or fail. If it fails Dell can
drop it and revert to option 1
Evaluating product development
process
Dells product development lifecycle is extended as of now

Market analysts and product designers try and gather information as

to what exactly the market conditions will look like at product launch

Commitments are made so early on in the product development

lifecycle, and become costly to change later in the process

Recommendation:

In order to speed the time to beginning design work, managers must

approve a process by which manufacturing parts can be approved
on a piece by piece basis as opposed to waiting for a single go-no-
go management checkpoint

Also in this model risk can be mitigated by delaying important

decisions, like which battery to install, until later in the development
process when designers can accurately know the current market
conditions
Thank You!!!