Matching Dell
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How and why did the personal computer industry come to have such low average profitability?
The PC industry has started to develop fast in the 80s 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 Porters 5 Forces model to examine the PC market and see how forces of competition influence the profitability of the market players.
(See Appendix 1 for detailed description of how does certain parameter influence the market.)
Entrance barriers are:
The initial investment is relatively low (1.1)
Brand loyalty is average to low (1.2)
Switching costs of the market player are average. (1.3)
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. (2.1)
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 (2.2)
In general the customer bargaining power is low and therefore it raises the potential of markets 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: (3.1)
See the attached table (3.2) for the detailed description what parameters influence the suppliers powers.
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.
Substitute goods are different on for different market segments see (4.1) For most of the customers these substitute products cannot satisfy the needs covered by PC computers.
The lack of suitable substitutes raises the industry profitability.
Complimentary products product market is rapidly growing and therefore it raises the industry profitability.
Rivalry among established firms is fierce. There are several factors that illustrate this: established market players (6.1). The product is highly standardized and the switching costs of the customers are low. Players are aggressive (6.2)
Business environment. PC industry is affected by two opposite forces: technological advance that pushes the industry forward and the industry sensitivity to economical stagnation (if the economical situation is bad customers wont upgrade their computers).
We analyzed the PC market by practical questionnaire that quantifies the Porters model, applies the expert (us) examination method and determines the competition level in the industry. The result of the calculations defines the PC industry as highly competitive. See Appendix 2
To sum up, the profitability of the PC market despite of the high arise of activity volume in the last decade is low. The main factors that reduce this profitability are the fierce competition among established firms, the lack of product differentiation and the monopoles on the suppliers side.
Therefore the most of the five forces claim the profit for themselves, decreasing the part of surplus remaining to the PC manufacturers.
2. Why has Dell been so successful despite the low average profitability in the PC industry?
Del computer corporation success and profitability has been conditioned on the following factors.
See Appendix 3 for detailed explanations of how does a certain
factor affected the profitability.
Direct Model – 3.1
Differentiated Products – 3.2
Customer Service – 3.3.
JIT – 3.4
Economies of scale – 3.5
Efficient Assembly Line – 3.6
3. Prior to the recent efforts by competitors to match Dell (1997-1998), how big was Dells competitive advantage? Specifically, calculate Dells advantage over the team of Compaq and a reseller in serving a corporate customer.
Prior to the recent efforts by competitors to match Dell (1997-1998) Dell had a significant advantage that manifested in their phenomenal growth of profits.
See table 2 – Dells net income gross (1992 – 1998) – 1750.98%. More than 4 times over HP (436,4%) – the second best performing player and twice over Compaq (770%).
Revenues of Dell increased on 1285% against 660% of Compaq (1992-1998). From this data it can be