Transcript Slide 1

Dell and HP’s Value Chain
MBA290G 2007
Erik Hebert
Cristian Marcu
Marshal Miller
Anna Tsai
Kai Xia
Joseph Zakzeski
26 September 2007
Table of Contents
Executive Summary
Brief History of the PC Industry
Value Chain Introduction
Porter’s 5 Forces Analysis
Value Chain In Detail
Comparable Companies Analysis
Executive Summary
• PC industry value chain very different from Mobile Handset
industry…why?
• Wintel standard: basic PC largely commoditized with little opportunities
for differentiation
• Mature: growth has slowed as new markets have been penetrated and
existing markets saturated
• Oligopoly: need for economies of scale and scope drove massive consolidation
leaving only the strongest handful of competitors remaining
• Margin compression: maintain/gain market share largely through price competition
• Results on the PC industry value chain?
• Completely fragmented: links separated to take advantage of absolute cost
advantages and core competencies, both country and firm-specific
• Economies of scale the rule: with thin industry profit margins, scale is a
requirement just to compete
• Wintel stranglehold: Microsoft and Intel able to leverage control over core IP and
standards development enabling them to extract enormous economic rents
Personal Computer Industry History
Computers
Military
Research
during
WWII
Hobbyists and
Educational
Institutions
Increased popularity
1945
1975
Large mainframe
computers
IBM
DEC
1981
Integrated,
preassembled
PC’s
IBM launches first PC
Apple
Computers
MITS
Where a calculator on the ENIAC is equipped with 18,000 vacuum tubes and weighs 30
tons, computers in the future may have only 1,000 vacuum tubes and weigh only 1 1/2
tons. ---Popular Mechanics, March 1949
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
Historical Growth of the Value Chain
1981
IBM mainframe and standard
Components commissioned
Sears and Computerland
Value-added Resellers
Intel microprocessor
Sales Force
Microsoft software
Large corporations
-Bulk Discounts
Individuals &
small business
IBM opening up its standard is an industry turning point  enabled the
PC to proliferate very rapidly to a 95% market share in 10 years
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
The IBM Clone Wars
IBM declines to adopt 386
Low-priced
clones enter
market
-Compaq
-Dell
-Hewlett-Packard
1982
Use Retailers
and Resellers
IBM holds
42% of
market
1983
Compaq adopts
386 and leads
clone makers to
affirm existing
industry standards
Recession
1986
1990
IBM market share falls
from 37% to 16.9%
Dell/Compaq
Price war
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
1998-Present
• Hardware components
– Highly competitive global markets
• Microprocessors
– Supplied by very few companies
• Intel dominated the market (80-90%)
• Operating System
– Microsoft also dominated this market
• Hardware and software in PC’s sold as integrated bundle by a few
major players
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
Value Chain Overview
Inputs
Manufacturing &
Assembly
Design, Branding,
SC Coordination
Manufacturing &
Assembly
Design, Branding,
SC Coordination
Go To Market
Raw Materials
Hard
Drives
PC Hardware
Capital Equip.
Microprocessors
AMAT, Novellus, Lam
Displays
Optical
Drives
Software
Capital
MotherBoards
DRAM/
Flash
Memory
Chasis
Other
Components
From Gov’t, Investors
Skilled Labor
Technical, Low Cost
–
–
–
–
–
–
–
Branding
Go To Market
Procurement
Manufacturing
Outsourcing
R&D
Inventory
Management
Enterprise
Sales Force
Direct Sales
• Online (e.g.
Dell Direct)
• Branded
Retail (e.g.
Apple Store)
Retail
CPUs
IP
Enterprise
Customers
Best Buy, CompUSA, CDW
Suitable for Fabs
• Handful of highly
sophisticated, mature
competitors
• Combination of
competitive variables
determines success
Distribution
Land
Direct Sales
Ingram Micro, Tech Data
Sand, Quartz, Metals
SMB
Consumer/
SOHO
Value Chain Feedback and Feedforward
Applying Porter’s Five Forces
Threat of New Entrants
• Moderately high
• Asian competitors, especially China, using
learning curve and local market expertise
to move up the value chain
Bargaining Power of
Suppliers
• Extremely high with respect
to Wintel!
• Wintel dominance enables
them to extract enormous
rents from PC value chain
• Customers demand
compatibility, enabling Wintel
standard to remain
entrenched
• Other suppliers of
commoditized components
and services have little
power
• Few opportunities for product
differentiation or absolute cost advantage
Intensity of Rivalry
• Extremely high!
• Wintel standard removes opportunities for
product differentiation
• Excess capacity leads to severe price
competition
• Economies of scale are key
• Operational efficiency, supply chain
coordination, Q/A and service key
determinants of competitive advantage
Threat of Substitutes
• Currently low but growing
• PDAs/smartphones increasing
functionality
• Proprietary/alternative platforms (e.g.
Apple, thin computing)
Bargaining Power of
Buyers
• Extremely high in
enterprise market,
moderately high though
increasing in SMB and
Consumer/SOHO markets
• Low switching costs
• Role of distribution and
inventory management
(e.g. Ingram, Tech Data)
and retail shelf space (e.g.
Best Buy, CompUSA) very
important in certain
segments
Key Themes and their Roles in the PC Industry
Theme
Role in the PC Industry
Outsourcing
• Labor-intensive links in the value chain (e.g. assembly, packaging)
• Outsource activities to locations with absolute cost advantages
• Risky to outsource links that transfer IP
Economies of Scale
• Critical for high-volume enterprise segment
• Enables buyer/supplier power within the value chain in consolidated
procurement and volume purchasing
• Complicated by customization and need for flexibility, particularly in
consumer segment
Economies of Scope
• Enables product bundling and family branding
• Leverages strengths in distribution and retail presence to sell more
products
• Halo effect (i.e. iPods driving sales of Macs, Apple software, accessories)
Ecosystem Development
• Growing and controlling the ecosystem can help competitors extract rents
(e.g. software and applications developed on the Wintel standard)
• Extremely complex and diverse value chain; no single firm can dominate
every link
PC Value Chain
Semiconductors
- microprocessor
- graphics processor
- memory
- HDD controller
- power management
- WLAN radio
- USB controller
- display driver
Hardware
Components
PC Platform
Design
PC Platform
Assembly
- HDD
- optical drive
- motherboard
- housing
- modem
- peripherals
Software
- operating system
- office productivity
- enterprise workflow
Go To Market Strategy
Enterprise
Consulting and
Integration
Services
Support and
Maintenance
Large
Enterprise
Customer
Direct Sales
Medium
Enterprise
Customer
Support
Distribution
Retail
Consumer and
Small Business
Customers
Companies in the PC Value Chain
Hardware
Components
Semiconductors
- Western Digital
- Creative Labs
- ASUS
- Intel (mobo)
- Linksys
- Logitech
- HP
- Apple
- Viewsonic
- LG.Philips LCD
- Manufacturers in
Taiwan and China
- Intel
- AMD
- IBM
- Texas Instruments
- Broadcom
- Infineon
- Cypress
- Samsung
- Micron
- Nvidia
PC Platform
Design
PC Platform
Assembly
- HP
- Dell
- IBM
- Sun
- Lenovo
- Apple
- Dell
- Manufacturers in
Taiwan and China
Software
- Microsoft
- Apple
- Oracle
- IBM
- Red Hat
- Novell
Go To Market Strategy
Enterprise
Consulting and
Integration
Services
- IBM
- HP
Support and
Maintenance
Large
Enterprise
Customer
Direct Sales
- IBM
- HP/Lenovo/Acer/
Dell/...
Support
- Geek Squad (BB)
- Firedog (CC)
- HP/Lenovo/Acer/
Dell/...
Medium
Enterprise
Customer
Distribution
- Ingram Micro
- CDW
- Tech Data
Retail
- Best Buy
- Circuit City
- Costco
- CompUSA
Consumer and
Small Business
Customers
Lenovo/Acer
Semiconductors
Hardware
Components
PC Platform
Design
PC Platform
Assembly
Software
Go To Market Strategy
Enterprise
Consulting and
Integration
Services
Support and
Maintenance
Large
Enterprise
Customer
Direct Sales
Medium
Enterprise
Customer
Support
Distribution
Retail
Consumer and
Small Business
Customers
HP
Semiconductors
Hardware
Components
PC Platform
Design
PC Platform
Assembly
Software
Go To Market Strategy
Enterprise
Consulting and
Integration
Services
Support and
Maintenance
Large
Enterprise
Customer
Direct Sales
Medium
Enterprise
Customer
Support
Distribution
Retail
Consumer and
Small Business
Customers
Dell
Semiconductors
Hardware
Components
PC Platform
Design
PC Platform
Assembly
Software
Go To Market Strategy
Enterprise
Consulting and
Integration
Services
Enterprise
Direct Sales
Large
Enterprise
Customer
Support
SME Direct
Sales
Small and
Medium
Enterprise
Customer
Support
Consumer
Direct Sales
Consumer
Support and
Maintenance
Apple
Semiconductors
Hardware
Components
PC Platform
Design
PC Platform
Assembly
Software
Go To Market Strategy
Medium
Enterprise
Customer
Direct Sales
Support
Distribution
Retail
Consumer and
Small Business
Customers
Value Chain Economics
• Illustrative Division of $2,000 Notebook Economics
• Microsoft is a monopolist so no
opportunity to get share of pie from
them
Retail & Distribution
15%
PC Makers
10%
Microsoft
40%
• Intel/AMD lately have had to
compete more on price though Intel
still very powerful
• Retailers and distributors very large
and powerful in their own right
Other Components
25%
Intel
10%
Source: Based on Merrill Lynch estimates as of May 2007
• Leaves very little in the value
chain for PC makers to work
with!!!
Geographic Breakdown
Lenovo Revenue By Region 2007
Dell Revenue by Region
Dell
Lenovo
13%
12%
38%
Americas Business
21%
Americas Consumers
China
Americas
21%
EMEA
53%
EMEA
Asia-Pac
Asia-Pac-Japan
14%
28%
Apple Revenue By Region 2006
HP Revenue By Region 2006
Apple
HP
7%
17%
Americas
40%
44%
Europe
49%
6%
Japan
Americas
Asia-Pacific
EMEA
Retail
Other
21%
16%
YOY Growth per Geographic Region
Americas
Asia-Pacific
EMEA
Europe
China
Retail
Other
45.00
• HP is a mature company with
large revenues and slow
growth across all segments
• Lenovo is “new” and is
showing good growth
everywhere but in the
Americas
40.00
Revenues (Billions)
35.00
30.00
25.00
20.00
15.00
10.00
5.00
Americas
Asia-Pacific
EMEA
Europe
China
Retail
Other
0.00
Dell
Lenovo
Apple
45.00
HP
40.00
• Growth in Asia-Pacific region
and China among the highest
for all companies
– Apple’s “Other” column may
be hiding growth in China
Percentage Growth
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Dell
Lenovo
Apple
HP
Comparable Companies Analysis – Trading Metrics
($ in millions, except per share data) (1)
Market
Enterprise
Company
Value
Value
EV/Revenue
Microsoft
272,640
251,580
4.6x
4.2x
11.5x
9.9x
18.5x
15.7x
1.5x
1.2x
10%
42%
Intel
151,720
143,130
3.8x
3.5x
11.0x
8.9x
22.8x
18.4x
1.3x
1.1x
8%
39%
Apple
128,950
115,180
4.6x
3.7x
23.5x
19.0x
38.0x
31.9x
1.6x
1.4x
23%
20%
2007
EV/EBITDA
2008
2007
P/E
2008
2007
PEG
2008
2007
Rev
Growth(2)
2008
EBITDA
Margin(3)
US PC Manufacturers
HP
129,520
125,640
1.2x
1.1x
10.3x
9.5x
17.1x
15.1x
1.3x
1.1x
5%
12%
Dell
62,320
62,320
1.0x
1.0x
14.5x
12.5x
20.5x
17.1x
1.7x
1.4x
5%
8%
699
743
0.2x
0.2x
11.5x
7.8x
NM
NM
NM
NM
2%
2%
Mean
0.8x
0.8x
12.1x
9.9x
18.8x
16.1x
1.5x
1.3x
4%
7%
Median
1.0x
1.0x
11.5x
9.5x
18.8x
16.1x
1.5x
1.3x
5%
8%
Gateway
• Comparable companies analysis reveals the enormous rents Microsoft and Intel are able to extract
from the value chain as shown by huge profit margins (i.e. EBITDA Margin)
• Apple, through tremendous growth prospects and innovation (outside the Wintel standard) enabling it
to maintain relatively high margins, is rewarded with a higher valuation
• The PC clone makers struggle with relatively thin profit margins and their valuations are much more
modest (compare EV/Revenue multiples)
Notes:
(1) Market information as of 09/24/07. Estimates as of 09/24/07.
(2) Projected 2007 through 2008 Revenue CAGR.
(3) 2008 projected EBITDA margin.
Sources: Capital IQ for stock prices, company filings for financials, Reuters for estimates.
Comps Analysis for PC Industry
• Effects of value chain on financial ratios
• Financial ratios indicate: Margins, Debt, Capital Intensity, Power
Dell
Profitability
Revenue Growth
Gross Margin
EBITDA Margin
Net Income Margin
Liquidity Ratios
Quick Ratio
Debt/Value Ratio
Management
Return on Assets (ROA)
Power
Accounts Payable Days
Accounts Receivable Days
Inventory
Inventory Turnover Days
Equity
Enterprise Value/Revenue
Enterprise Value/EBITDA
Price/Earnings
Price/Earnings to Growth
E arnings per S hare
HP
Lenovo
Apple
2.08%
16.78%
12.30%
4.63%
5.41%
24.53%
9.72%
6.76%
9.10%
13.96%
1.33%
1.10%
27.87%
28.98%
13.86%
10.30%
1.11
0.01
1.35
0.02
0.87
0.07
2.24
0.00
0.11
0.08
0.03
0.12
75.59
26.14
63.85
53.01
57.49
16.05
90.21
23.66
4.42
40.89
10.40
7.18
1.02
8.31
24.55
11.81
1.14
1.26
12.98
20.91
3.86
2.40
0.39
29.01
39.05
4.29
0.36
6.35
45.76
64.83
2.33
2.29
Highlights
•
•
•
•
Apple  higher margins
International  lower margins
In general very capital intensive industry
Dell  high ROA and low inventory
turnover days
• Apple  high A/P days, low A/R days