Eshita Malik
September 28, 2015
Eshita Malik
September 28, 2015
DELL BATTERY CASE
In October 1993, Mark Holliday and the portable computer development team at Dell were faced with three design options regarding a proposal for launching a new series of portable computers by late fall of 1994. The three design options at the end of the profile phase of product were regarding battery design; to stick with the nickel hydride batteries, to adopt the new lithium ion batteries or to defer the battery decision for another nine months until the qualification phase of product development and choose either a dual-path or over-design approach currently. If I were a member of the team, based on the information given in the case study my recommendation would be to defer obligation to either battery design and go with a dual-path approach for now. At the time of this decision regarding batteries, looking at the financial data of Dell presented in the case, there are many factors to be considered. The net sales of the company were $890 and $2014 million in 1991 and 1992 respectively. The increase was much more than the forecast. But the Dell’s sales market share of laptops showed a decrease from 12% in 1992 to 2% in 1993. Due to the austere character of Dell’s business model, the R&D expenses were also a small part of the sales. The R&D expenses represented 4.7% of sales in 1991 and dropped to 2.4% in 1992. There is an understated importance of laptop sales market share in 1993. The portable computer sales are forecast to double in 1994 so it is necessary for Dell to make a decision and launch a product to capture maximum part of the market. It also needs to recuperate from its bad market and customer reputation because of recall of 17,000 notebooks, which were found to have faults in the electrical circuitry. The portable computer market was a highly commoditized market at that time. Many features were considered valuable to the customers; microprocessor choice, battery life, screen resolution, weight, size etc. Dell decided to differentiate their new product line on battery life. They had recently learned about lithium ion batteries being developed by Sony but these batteries had only been tested in smaller electronics and needed further validation for use in equipment like the portable computer. Since the notebook market was highly competitive at that time, a significantly differentiated product would give Dell the first movers’ advantage in the market. If the team decided to go with the dual-path strategy and develop two different products independently, there would be some risks involved but the rewards could be much higher. In following this approach the company would have to develop two portable computers, one using the LiOn battery technology and the other with the existing NiHi battery. The main risk involved in this strategy is that it would incur a fixed cost of about $2.5 million in duplicate engineering process for developing the two products. The other downside of this approach was the potentially upsetting engineers whose product contribution would be finally slashed along with the un-estimated opportunity costs of having developers work on a dual-product development project. But in my opinion the sense of a safety net and future rewards this approach promises overshadow the risks involved. Deferring a decision now and waiting for the test results from Sony, gives Dell the time to know whether the LiOn batteries will actually work on laptops or not. They do not have to experiment with an unproven technology at this stage when they have the option of waiting. In the future scenario that the LiOn batteries are actually proven to work and improve the battery life of laptops by almost double, Dell can expect to gain major ground in the notebook industry. If the LiOn technology actually works, then Dell can expect to see gross margins of about $594 million, according to the McCarty’s data on different development options. This is based on the assumption that Sony will provide Dell enough information at the end of qualification phase that the LiOn batteries actually work or not. In case the LiOn batteries are not proven to work, Dell will have an opportunity to revert to NiHi batteries. This would also save them any rework because they would be working on developing two products simultaneously. This strategy gives Dell a chance to launch a differentiated product in a competitive market and capture significant market share in case the new technology works. A company like Dell, in its current situation needs to take a well-calculated chance. The company needs to recover from the faulty laptop setback. The financial risks involved in the dual-path are very small when compared to expected margins. Holliday personally felt that after the portable computer fiasco in October 1993, the team did not have much to lose on the revenue side or even the worker morale side. My suggestion for the implementation phase of product development in a dual-path approach would be to launch the NiHi product first as they already have experience with all stages of development of that technology and leave LiOn for second. From the engineering perspective, a strategy could be to develop the body of both the portables in a way that the batteries are interchangeable. On the electrical side, since the company already has some experience with NiHi batteries, they would need low level work here and can work on obtaining more experience and expertise in LiOn battery incorporation. On the software front, there should not be much problem as the development will be similar for both the products. From a marketing standpoint, the company would need to work on a dual marketing strategy with an emphasis on LiOn technology. The dual-path option is the best option at the moment described in the case from a risk-reward point of view.