Case Study 2: Dell Tuesday, March 12, 2013 11:39 PM 1. How and why did the personal computers industry come to have such low average profitability? * Using Porters Five Forces to explain the profitability of the computer Industry. * Defining the industry: * The PC industry consists of manufacturers and suppliers of personal computers and computer parts respectively. Some PC manufacturers include: Dell, HP, Compaq, Gateway etc. * The current industry consist of proprietary standards in operating systems and microprocessors supplied by Microsoft and Intel Respectively. Bargaining Power of Suppliers * Bargaining power in any market is a crucial factor that influences the level of competition within an industry. * The most important components of a PC are supplied by companies with a near monopoly, these suppliers Microsoft for their Windows OS and Intel for their Microprocessors. * It is crucial for hardware to work with software and Intel and Windows is the best choice for the average consumer. * Bargaining Power of Buyers * The power of Buyers is equally as important as that of the suppliers.
Consumers expect an upgrade each time they purchase a different computer but also expect the prices to remain low. In the PC industry buyers have low brand loyalty and tend to make purchases based on best offer for the price. * Threat of Substitutes * The threat of substitutes in the PC industry is more on the low than high side. Every household in contemporary times consist of at least one PC but with modern inventions such as smartphones and Tablets consumers tend to stray a little from PC’s but ultimately cannot give it up completely. * Rivalry Rivalry in the PC industry is very high due to presence of proprietary standards. * Similarities in the hardware and software installed on different PC manufacturers’ computers is similar which therefore makes for price wars and intense competitions between PC manufacturers where the consumer benefits in the end. * Barriers to Entry * Barriers to entry into the PC industry is neither high nor low. * No government barriers to the market. * Not an attractive industry due to low profitability 1. Why has DELL been so successful? * Firm Infrastructure * Dell’s founder was a Visionary. Dell’s operations span the entire globe.
They are currently in the process of cutting operating expenses: downsizing employees and facilities. * Human Resource Management * Dell employs over 90,000 individuals with majority being overseas. Dell is actively involved in recruiting, development and compensation of employees. * Dell assigns teams of outside and inside sales reps to each of its Relationship accounts * Technology Development * Dell is focused on the shortening of its development cycle and tailoring regional solutions for international growth. It has also strengthened its IT and server offerings for its corporate business partners. * Procurement Marketing & Sales: Dell has employed a differentiation strategy in the PC industry. Dell’s business model involves the removal of the middle man between the PC manufacturer (Dell) and the consumer/potential buyers, this strategy is referred to as the Direct Model. * Logistics: Dell’s utilization of the Direct Model system removes the middle man, enabling Dell to custom build its own computers on its own assembly line and shipping the product directly to the customer when its finish. * Products & Services: Dell is in a position to offer specialized products for its category of relationship and transactional customers.
Dell is very famous for providing expert customer service both before and after the sales of their products. This extended support allows small and large enterprises to configure their IT systems through the Dell website. 1. Prior to the recent efforts by competitors to match DELL (1997-1998) how big was DELL’s competitive advantage? Specifically, calculate DELL’s advantage over COMPAQ in serving a corporate customer. * Dell’s competitive advantage was very Impressive, based on financial data in 1998 from the comparison of the Major PC manufacturers, Dell had a 62. 9% return on its capital/equity. . How effective have competitors been in responding to the challenge posed by DELL’s advantage? How big is DELL’s remaining advantage? * Using data from 1998 of the comparison of the Major PC manufacturers it is clear that Dell has a leading edge on its competitors with an impressive 62. 9% return on its equity. However, since DELL was the pioneer in the “Direct Model” approach that drove down the prices of the computers because of the riddance of the Middle Man. The competition (HP, COMPAQ) realized that this model was a feasible model and started to adopt/imitate the direct model approach. Even though the model was easy to imitate Major PC manufacturers could not effectively challenge the dominance of Dell because the challenge was deriving actual value from the business model itself. The complexity of building an efficient supply chain and production system could not be met immediately therefore DELL’s remaining competitive advantage is still substantially large. * 2003 data however shows that there is a small risk that DELL’s remaining advantage would be reduced due to proper imitation of the direct model business strategy.