Case Study Analysis

Dell’s Dilemma in Brazil

Introduction

In mid-March 1999, Dell Corporation was faced with an unforeseen situation affecting
its decision to locate its first manufacturing plant in Latin America. The situation,
which had arisen from a change in the political climate within the preferred state of
Rio Grande do Sul, had left the company with three options. They must leave Brazil
entirely, move the plant to another state, or try to renegotiate with the newly elected
governor. This case study analysis assesses the appropriateness of the company’s
decision to enter Brazil (through country and industry analysis), the process followed
in selecting a state, the current situation and contributing factors, and provides a
recommended way forward for the company.

Dell – the company

University of Texas student, Michael Dell, began selling IBM-compatible computers

from his dorm room in 1984. Using parts he purchased at wholesale prices, Dell built
the machines to closely resemble IBM models and then sold them to PC users looking
to avoid the prices typically charged by computer retailers (Dell Corp History).
Following its re-naming from “PCs Limited” to “Dell Computer Corporation” the
company grew internationally with is first operations opening in Ireland in 1987,
which was followed by eleven other countries during the next four years. The
company that was started with $1000 capital was selling stocks for $8.50 per share
four years later (About.com).

From its conception, the company was based on a simple idea that it could best
understand consumer needs and efficiently provide the most effective computing
solutions to meet those needs by selling computer systems directly to customers. This
direct business model eliminated retailers, who added unnecessary time and cost, and
also allowed the company to build every system to order, offering customers
powerful, richly configured systems at competitive prices. Dell introduced the latest
relevant technology much more quickly than companies with slow-moving, indirect
distribution channels, turning over inventory, on average, every four days. In less
than two decades, Dell became the number one retailer of personal computers
outselling IBM, Hewlett-Packard, and Compaq (Achtmeyer, 2002).

Sustaining a direct model of operation required intensive organisation. The company

outsourced all components but assembled systems itself. It eliminated retailers and
shipped directly from its factories to end customers. It took customised orders for
hardware and software over the phone or via the Internet. And it designed an
integrated supply chain linking Dell’s suppliers very closely to its assembly factories
and order-intake system (Achtmeyer, 2002).

Strategy for global expansion

Dell’s core business is the assembly and sale of computers to meet specific customer
requirements. The characteristics of Dell’s global operation resemble a “global”
strategy for expansion with a centralised hub. This is due to the fact that the key
decision-making, along with financial decisions, are made centrally from headquarters
in Texas, while manufacturing or assembly of the company’s products are strategically
positioned across the globe to better realise its direct to customer and speed of
service business goals. Further, this global setup enables them to provide localised
support services, bridging any inadequacies that may arise from the lack of store
front exposure.
Prospective market, Brazil

Country view

Functions of doing business in a country are a function of the size of the market, its
present wealth and its future growth prospects (Hill, 2009). In 1998, with a
population of close to 170 million, Brazil was the tenth largest economy in the world.
It was a highly diversified economy with wide variations in the levels of development.
Most large industries concentrated in the south and southeast. Brazil embarked on a
successful economic stabilisation programme known as the “Real plan” in July 1994.
Inflation, which had reached an annual level of nearly 5000% at the end of 1993, fell
sharply reaching a low 2.5% in 1998. From a macroeconomic point of view, Brazil
had a GDP of $1.057 trillion in 1999 at a real growth rate of 0.8%. This accounts to
$6,150 per capita (Economic expert.com).

Brazil operates under a federal system with 26 separate states and one district which
contains the capital city, Brasilia. States are generally based on historical,
conventional borders and have developed throughout the centuries. Each state has
an autonomous local government, comprising a mayor and legislative body elected
directly by the people. The state governments are responsible for maintaining
highways, housing programmes, public infrastructure and police. They also collect
state taxes which are generally concentrated in sales taxes (Dagapioso & Barcenas,
2009).

The level of authority given to the states meant that each could attract foreign direct
investment by providing a set of lucrative incentives specific to those states, and thus
compete with other states. This type of drive for economic growth and the opened-up
economy meant that Brazil’s foreign direct investment rose from $19 billion in 1997 to
$28.9 billion in 1998 (Encyclopaedia of Nations).

Brazil’s alliance within the South American customs union that included Argentina,
Uruguay, Paraguay, Chile and Bolivia was another lucrative proposition for market
leaders as this agreement enabled a country that produces 60% of a particular
product to trade with member nations free from tariffs. Together, these factors
created an attractive prospect for Dell entering Brazil.

Market for computers – industry level view

In the late 1990s, the sales for personal computers were growing faster in Latin
America than anywhere else in the world. According to the Secretariat of Computer
and Automation Policies in Brazil, the computer industry grew nearly 14% in 1999,
with the sale of computer goods and services generating revenue of R 25.6 billion.
The computer sector employed 100,000 workers directly, with 36.23% being college
graduates. It was forecasted in 1998 that there would be more than 30% growth in
computer operation in Brazil by 2001 (Information Society in Brazil, 1998). These
factors cumulatively endorsed Dell’s decision for market entry.

Dell’s selection process

Requirements

The key factors that Dell would consider as requirements in settling on a potential site
for manufacturing could be drawn out from the main reason for its success as a
business. That is, its business model. A prospective manufacturing site must ensure
that the company’s just-in-time and knowledge intensive processes perfected through
time can be maintained. It must also enable speed of delivery of products to its
customers. In order to stay above its competition, Dell must be able to achieve this
in Brazil at the lowest possible cost. Commitment to high-technology investment and
availability of skilled labour and security were also important requirements driving
Dell’s decision-making process.

States considered

Keith Maxwell, Senior Vice President for Dell’s worldwide operations, and his team of
selectors considered five states in Brazil. The following is a summary of how Dell
perceived each candidate as a potential site for its business.

Sao Paulo was one of the highest ranking states during Dell’s analysis. The main
attraction was the size of its market. This state, with its large population, was Dell’s
principal market for selling computers and provided the company with access to a
large pool of appropriately skill labour. The state’s foreign investments were brokered
through the state-owned foreign investment promotion agency and were already
exposed to a large amount of foreign investment. Due to that success, the state had
adopted a policy of not offering special financial incentives ─ this was undesirable to
Dell. Dell’s decision to exclude Sao Paulo as a candidate was also influenced by the
efforts of the promotion agency that were perceived to be negative in promoting the
state to Dell.

The coastal city of Rio de Janeiro was overlooked purely based on the reputation of
the head of its foreign investment promotion agency, as he was well known for long
and drawn-out negotiations.

The state of Pranha also suffered at the hands of (from Dell’s perspective) a poorly-
performing foreign investment promotion agency. This agency had made no efforts to
address Dell’s specific requirements and gave an impression of a “one-fits-all”
presentation. The state also offered no financial benefits to attract Dell and was
excluded from consideration.

Minas Gerias was a close contender as the preferred state. From Dell’s perspective,
the foreign investment company that was 70% state-owned and 30% private-owned
had presented a successful case for promoting the state and had offered a lucrative
financial deal that included considerable tax benefits as well as financial loans with
significant grace periods. Dell’s ultimate decision was affected by the perception that
Minas Gerias is more suited for large industries that are more capital intensive (e.g.
mining, automobile) and thus not suited for Dell’s face-paced, just-in-time oriented
company.

Rio Grande do Sul was Dell’s eventual primary selection. The state had a lot to offer
in well-developed modern infrastructure, privatised and efficient telecommunications,
a skilled labour pool with most having university qualifications, and lucrative financial
incentives that included cost compensation for extended shipping required due to its
geographic location. The foreign investment promotion agency, Polo, is the only
privately-owned such agency in Brazil and was able to leverage its business know how
and established networks to effectively persuade Dell.

Analysis and synthesis

Within Dell’s determinations in relation to each of the states above, there were two
consistently prominent elements. They are:

1) the involvement and the level of importance of the investment promotion

agencies; and

2) the focus on financial incentives offered by each of the states.

The prominence of these elements warrants closer consideration of the implications of
such perspectives in selecting Dell’s desired location.

Investment promotion agencies

Each state had a unique approach to promoting its attractiveness to Dell’s

requirements. This was done solely through the designated foreign investment
promotion agency of the respective state. From Dell’s (the entering business’s)
perspective, there are a number of advantages with such a setup.

For example, having such an agency to deal with means that Dell has access to one
source for gathering the required information and intelligence on a state. It also
means that the company has one point of contact into that state, which can lead to
increased efficiencies during the selection process. Dell is also able to develop and
establish useful relationships with these agencies and in turn gain access to local
knowledge, customs, business practices, networks and political leverage, which are
key elements driving the success of a company entering an international market. For
example, through Polo, Dell was able to gain access to and gather useful market
information from leading local businesses such as Gerdau Steel conglomerate and
international companies such as Coca-Cola. Another benefit of having one point of
contact is that Dell primarily has one point of negotiation which can reduce the time
taken to enter the market.

With such a setup, a number of disadvantages that could cause both financial and
non-financial costs to Dell were also prevalent. For example, the agency may be open
to corruption and unethical behaviour. Having one source of information means that
the information can easily be manipulated to be presented from an altered and
untruthful perspective. It is easy for the agency to only disclose information that
presents a favourable case for the state. For example, when Polo arranged for Dell
executives to meet with major business executives, the agency could have easily
hand-picked local executives who would provide the desired information or worse,
could have incentivised them to present desirable information. Dell executives could
have missed vital information that would have been material in making a decision.

Another limiting factor is that discovering a state’s true potential is dependent on how
the agency performs. For example, as outlined above, Dell disregarded a number of
states purely based on the performance of the agencies. This could have led them to
miss a better opportunity with another state, especially considering the fact that Dell’s
two most preferred states were represented by agencies that were either fully or
partially privatised, enabling them to have access to better-qualified staff (through
higher financial offerings) within the agencies. The calibre of agency staff may not
necessarily represent the calibre of the state in meeting Dell’s requirements.

Financial incentives focus

Leverage in terms of financial incentives is a common goal for a company looking to

expand globally. The decision for global expansion is usually driven by its vision to
increase profitability or increase potential for profit growth. A key element in realising
this vision is to closely manage costs involved with setting up and maintaining a
business. Fixed costs such as taxes, if reduced, can add great value towards realising
profit-based visions for business. Therefore, Dell was justified in seeking the best
financial incentives on offer from competing states, especially given that this is a
major benefit for direct investment in Brazil. More aligned with Dell’s business model,
lower costs will enable the company to offer an even more lucrative price proposition
to its customers by maximising its already low cost product offerings. There is also
the potential of raising required capital locally through low cost loans with long grace
periods on offer by state governments. This enables Dell to refocus its capital in other
areas of growth.
The main disadvantage of persisting with a strong focus on financial incentives is that
it could overlook or not give due consideration to one or more non-financial (e.g.
political, social-cultural or environmental) risks that, in net effect, could create greater
costs than the benefits gained through financial incentives.

Current situation and contributing factors

Unfortunately, Dell’s dilemma in Brazil eventuated as a result of one or more

disadvantages affecting the key aspects discussed above becoming a reality. While
Polo was successful in promoting and convincing Dell to select Rio Grande do Sul, the
company was not able to properly investigate a key non-financial factor ─ political
risks. In a country that has seen several political reforms and delegated so much
authority to state governments, a thorough analysis of the political stability and risks
should have been at the top of Dell’s considerations. Upon a closer look at the factors
leading to Dell’s ultimate choice of Rio Grande do Sul, it is clear that its decision was
swayed by Polo’s clever promotional strategy. The foreign investment promotion
agency gained Dell’s trust by comparing itself to the existing successful relationship
between Dell and the Irish Development Authority. The head of Polo, Jose Cesar
Martins, is a successful ex-business man who knew what concerns business
executives. Therefore, he was able to anticipate and tailor the state presentations to
meet Dell’s needs. For example, he was able to persuade the governor to cancel a
meeting and meet with Dell executives, arrange prominent local business executives
to provide a ground level perspective and arrange dinner in a location that resembled
the familiar surroundings of their home in Texas. At no stage did the political
situation of Rio Grande do Sul come into question.

Political situation

The state had two candidates for the position of governor: Olivio Dutra, a socialist,
and Antonio Britto, a pro-business moderate. Although holding widely-divergent
political views, both candidates endorsed the idea of promoting economic
development within the state through foreign direct investment. During Dell
negotiations, Antonio Britto was the governor elect and had been elected on promises
to promote foreign investment creating jobs and economic development in Rio Grande
do Sul ─ promises that are well in line with Dell’s offering to the state. However, what
Dell failed to consider in its negotiation was the political opposition and the
implications of the opposition coming into power. The governor elect from the 1998
elections, Olivio Dutra, was against the government granting benefits to foreign
transnational corporations. Part of Dutra’s campaign against Britto was that
excessive concessions granted to foreign transnational corporations must stop. As a
result, the financial incentives offered to Dell, including the loan arrangements, would
need to be renegotiated.

Recommendations

There are three possibilities available to Dell for overcoming its current situation in
Brazil:

a) leave Brazil entirely;

b) move the plant to another state; or

c) try and negotiate with the newly-elected governor, Dutra.

Key entity perspectives

In determining the appropriate direction for Dell to recover from this situation, it is
important to consider the situation from the perspectives of the key entities involved.

Dell’s selection process did not favour many of the states considered. Even Dell’s
principal market for computers in Sao Paulo was seen to be inappropriate for meeting
Dell’s business model. The closest competing state, Minas Gerias, was overlooked by
the executives under the belief that the state could not provide for Dell’s specific
requirements. In fact, based on the analysis process followed by Dell, Rio Grande do
Sul was the only potential state for establishing its business in Brazil. Moreover, the
findings of country and industry analysis suggest that Brazil, with its developing
economy, growth in the computing market and potential access to Mercosul countries
is a market that should not be discounted lightly.

From the perspective of Rio Grande do Sul, the state had just lost the investment of a
major international business in Ford. This loss of investment raised dissatisfaction
within the state and its people and had even triggered protests. Dutra’s Partido dos
Trabalhadores (Workers Party) is a socialist party that believed in honest and effective
government. They were about promoting development for people of the state by
creating jobs and development opportunities. Following the loss of the Ford
investment, politically, Dutra did not stand in good stead with his voters in remaining
true to his campaign promises. This leaves the governor in a vulnerable position from
which Dell could negotiate to arrive at a similar or better position for establishing its
business in Rio Grande do Sul.

Renegotiating with Dutra

Based on the factors discussed above, there is merit in Dell renegotiating its deal with
Dutra. However, the key factors should be presented from a socio-cultural
perspective (such as the pledges made by Dell for returning value to the state) rather
than a purely economic perspective ─ a socialist party would better relate to socio-
cultural perspectives; a capitalist party would focus more on economic factors. For
example, in its current agreement, Dell has promised to develop joint research and
development projects with the local universities. In addition, the company’s $128
million investment in the plant would create work opportunities for the state through
construction and maintenance contracts for the facility. Further, the company had
pledged to hire 260 employees locally rising to 700 in five years of operation. These
benefits from foreign direct investment for the state, coupled with the unfavourable
position developed for Dutra through Ford’s decision to abandon the state, should
provide a compelling case for financially incentivising Dell in order to encourage Dell
to establish its business in Rio Grande do Sul.
Appendix

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Quotes. Retrieved from
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Achtmeyer, W., F. (2002). Dell Computer corporation. Retrieved from

mba.tuck.dartmouth.edu/pdf/2002-2-0014.pdf

Dagapioso, R., M., & Barchenas, T. (2009). Explanatory Notes. Retrieved from
http://www.scribd.com/doc/21205265/A-Look-into-Brazil-s-Political-System

Dell Corp Early History. Retrieved from http://ecommerce.hostip.info/pages/303/Dell-

Computer-Corp-EARLY-HISTORY.html

Economic expert.com. Retrieved from

http://www.economicexpert.com/a/Economy:of:Brazil.html

Encyclopedia of the Nations. Brazil foreign investment. Retrieved from

http://www.nationsencyclopedia.com/Americas/Brazil-FOREIGN-INVESTMENT.html

Hill, C., W., L. (2009). International Business – Competing in the global marketplace.
McGraw Hill International Edition, 12(420).

Information Society in Brazil. (1998). Computer Technology and Telecommunication

in Brazil. Retrieved from http://www.ehealthstrategies.com/files/it_brazil.pdf