a. How and why the PC industry has such a low average profitability? The PC industry has started to develop fast in the 80's when IBM launched its first PC series and later on when numerous small companies entered the market. PC is a new product and companies had to create the demand to it from the scratch. We shall apply the Porter's 5 Forces model to examine the PC market and see how forces of competition influence the profitability of the market players. Entrance barriers are: The initial investment is relatively low. Brand loyalty is average to low.
Switching costs of the market player are average. As the result, the threat of new competitors lowers the profitability of the market. Customers bargaining power: It is very hard for the customers to join forces and fight for their interests. According to the modern way of life the need for computer in every work place and home is high which decreases even more the power of the customers. However, the switching costs are low. In general the customer bargaining power is low and therefore it raises the potential of market's profitability.
Though, most of the companies provide "buy-backs" and price protection that lessens the chance to cash on moderately strong manufacturers position. Suppliers bargaining power: Suppliers are divided into 2 major groups. One is the suppliers of core components like Intel and Microsoft to provide CPU and operating system. The other group is the suppliers of accessories like keyboard, hard drive, etc. The suppliers bargaining power is generally strong because of the big monopolies and the high importance of purchasing components and operating system, therefore it decreases the profitability of the market players.
Threat of substitute products: Substitute goods are different on for different market segments. For most of the customers except individual consumers, these substitute products cannot satisfy the needs of office work covered by PC computers. Before the widespread availability of the Internet, the substitute products for individual consumers like play station, VCD player could fulfill their needs of entertainment. However, the rapid upgrading of PCs decreases the profitability of the market players. Intensity of competitive rivalry: both US domestic and worldwide markets, the competition is really intensive after 1990s.
The market share for main competitors changed rapidly during this period. They were trying to reduce inventory and to drive down profit margins to win the market share. Therefore, the profitability of PC industry decreased in this situation. b. The key to Dell's success Dell recognizes itself as a service provider rather than a product manufacturer. In many ways, Dell has more in common with Federal Express than with IBM. Much of Dell's business model hinges upon routing information, components and product quickly and efficiently between suppliers and customers.
In an environment where computer components decline in value by 30% per year, Dell's zero-inventory model is the factor that helps it to survive. The build-to-order model exemplifies the service perspective. In a market where both the finished product and components used in its manufacture are commoditized, Dell differentiates itself from the competition by its interaction with the customer through the Dell Direct, and the efficient convergent delivery of all parts, and services needed to land the PC at the customer’s door. . Dell's actual competitive advantage, and evaluate recent attempts to respond to Dell by industry rivals and the resulting impact on Dell's competitive advantage. In late 90's, Compaq was busy emulating IBM as a full-service computer company, and Gateway 2000 was engaged in mergers while losing track of its growing inventory. Dell succeeds because the company has self-awareness its rivals’ lack. Because of this, Dell can concentrate on PC manufacturing.
IBM benefits from its AAP to deliver customized PCs rapidly without holding large amounts of inventory and improve its inventory turnover rate. Besides, the IBM website and the Netfinity Direct for large company help IBM to build direct channels to compete with Dell. However, its Model 0 PCs were still based on forecasts, not on actual customer orders make IBM less competitive than Dell. Compaq has a huge group of specialists for customer services and consulting to help it to build loyalty and satisfaction, and it maintain it as core competitiveness.
Although Compaq tries to build up direct sale channel through the phone, the results have been tepid because of the constraint of its high price. However, Compaq still benefits from its ODM to reduce inventory holding days and expand its market share in the late 1990's. HP attempts to emulate Dell's direct marketing program, but can’t commit to duplicating Dell’s entire business model. HP depends on the reseller relationship to support their wider product line and cannot afford to alienate resellers. Its wider market scope is actually a disadvantage versus Dell.