Business Essay Sample | Competitive
Forces in the PC Industry Pre Dell
The competitive forces in the Personal
computer industry before Dell's entry.
In analysing the competitive forces in PC industry I will
use the Porter's 5 forces model along with the concept of
Complements proposed by Brandenburger and Nalebuff. (See exhibit
1 - "6-forces" model)
Threat of entry - HIGH The threat of entry is high due to the following reasons:
" Cost of building a manufacturing line is relatively
low ($1MM for 250 m PCs/year)
" Low brand recognition and customers' loyalty which
in practice allowed several companies to start assembling
IBM clones.
" The inputs, a bundle of software and microprocessors
(Wintel) made the PC's configuration easier
" Wide range of distributors, resellers and retailers
catering to individuals, small and large business
Threat of substitutes - LOW In 1990, one possible option as a substitute for large
corporate customers could be the use of the networks and stations
instead of having PC's to each employee.
For small business customers and individuals, a station working
on top of the internet could be a substitute for the PC. The
threat of those substitutes was very low mainly because of
the limitations of the Internet at that time. In addition,
small business usually didn't have mainframes or networks.
Buyer Power- HIGH The buyer power was high due to the following factors:
" The market fragmented into several companies
" PC's were undifferentiated
" The grey market was expanding
" The large corporate customers' size were significant
compared to sellers
Supplier Power - LOW The supplier power was low due to the following factors:
" The products were commodities and bundled
" Relative to manufacturers, the suppliers were relatively
small
" Threat of backward integration
" Competition between suppliers was high
Industry Competitiveness - HIGH
The rivalry in this industry was high because
" the number of players is high which means that the
likelihood of a firm will initiate a price cutting is high,
increasing the rivalry in the industry
" The low product differentiation, being PCs almost
a commodity which means that competition would likely occur
in price.
" The high industry growth driven by an increasing demand
by individuals for electronic mails and the growing of the
World Wide Web. In this case a forecasted profitability works
as a magnet to other companies
" Relatively low fixed costs, which means that the exit
barriers are relatively low.
Complements The variety of complements to the PCs industry is huge.
It basically varies from any software developed to the advent
of the internet. In addition, any new hardware which can be
used plugged to a PC tends to boost the profit of the industry.
The response of Competitors in terms of strategy and positioning To clearly define Dell's strategic position, and then
assess how the competitors positioned themselves after Dell
entered the market, we need to identify its business model
(Who/What/How), its Resources and Capabilities and its generic
strategies. Then, we will have the tools to analyse how competitors
adapted their business models. Finally, we will evaluate the
impact of those changes in the industry's competitive forces.
Dell's Business Model Who: Primarily corporate customers
What: Desktops/notebooks/servers/workstations
" Direct Model under which Dell dealt directly with end
costumers.
" Differentiated service for corporate customers including
the installation of proprietary software
" Worked closely to suppliers to assure just-in-time
delivery of parts. This was a crucial part of the model responsible
for the high level of inventory turnover.
" Subdivided its customer in finer categories to take
advantage of unique opportunities.
Dell's Resources and Capabilities
Resources " Tangible: the most significant tangible resource
is the industry location. Present in several countries and
always bringing its suppliers close together, Dell can pursue
its strategy of fast delivery which differentiates itself
from those companies like Acer which competes basically on
price and has operations mainly on South East Asia
" Intangible: To protect its build-to-order systems,
Dell relies on almost 100 patents. Besides, the reputation
of the company with suppliers was fundamental in bringing
their warehouses and production facilities close to Dell's
" Human Resources: Skilled employees not only in the
assembly line but also in the top level management relying
in seasoned veterans from companies such as Motorola, Sun
Microsystems, etc.
Capabilities " Corporate Functions: the company is able to coordinate
its internal departments with suppliers to assure the just-in-time
production. This capability is crucial to the high level of
inventory turnover
" Management Information: On-line communication among
several manufacturing facilities
" Manufacturing: Using 5-person manufacturing cells,
the company assured high efficiency with fewer defects.
" Sales and Distribution: efficiency and speed in processing
orders allied with reliable quality
Dell's generic strategies (see exhibit 2 - Dell's generic
strategies)
Product Differentiation Vs Cost Leadership With PCs prices plummeting, the only alternative was to
achieve success through product differentiation. Since the
PCs were already a commodity in early 90's, the differentiation
should take place in the processes. And this was exactly the
Dell's choice: Differentiate the product by enhancing the
relationship between the company and its customers adding
value to them.
Broad Vs Narrow Scope Dell traditionally avoided the inexperienced transaction
buyer, focusing on selling for the educated consumer. In line
with this strategy, Dell divided its relationship buyers in
sub-groups and then divided it again over and over, always
looking for the most profitable group.
The competitors change After Dell entered the market the main players, IBM, Compaq,
Hewlett-Packard, tried to shift their models to a mix of direct
sales with participation of the resellers and distributors.
With those changes, they aimed mainly at achieving the same
level of inventories turnover Dell was doing. But, due to
the fact that roughly 70% of their sales were, at that time,
through distributors and resellers, it was not possible for
them to exactly copy Dell's model.
IBM moved to the APP - Authorized Assembly Program,
introducing the Model 0, barely functional computers, which
relied heavily on resellers in customizing them for customers.
Although the program achieved an increase of inventory turnover,
the production was still based on forecasts and not on actual
customers' orders. In addition, IBM launched the Netfinity
Direct Program which allowed large enterprises to purchase
a particular line of servers directly from IBM.
Compaq created a model similar to IBM's Model 0 called ODM
- Optimized Distribution Model which also relied on resellers
and distributors for the final assembly and configuration.
It was expected to reduce total inventory to 25 days, still
much higher than Dell's 7 days. To attend small and mid-sized
companies directly, Compaq launched its DirectPlus Program.
But, as happened with IBM and for the same reasons, Compaq
had to include the resellers and distributors in the process
which off-set some profitability.
Hewlett-Packard launched its Extended Solutions partnership
Program (ESPP). The main difference from those launched by
IBM and Compaq was the declared focus on maintaining the relationship
with resellers. Every sales would be delivered to resellers
or directly by customers at the reseller's request.
Changes in Competitive forces Dell was subject to With Dell, the structure of the industry and the relative
position of each player have changed. Since the competitors
were trying to shift their model to match Dell's, it is reasonable
to make an evaluation of the competitive forces now taking
into account the new industry model. With Dell, some of PCs
industry's competitive forces changed. The impact was as follow:
" Threat of entry: The logistic implemented by Dell
created a barrier for new entrants. To compete with Dell,
any company would have to consolidate a relationship with
suppliers similar to Dell's which means achieve to bring them
together close to its assembly-lines. For companies already
in the market, it would be even more difficult, as it was
being to IBM, Compaq and HP, to cope with the resellers and
direct sales at the same time.
" Supplier power: Although the model highly depended
on a synchronized worked between Dell and suppliers, their
bargain power was still relatively low due to their small
size in general, the low differentiation of the parts they
provided, the competition among suppliers, and the unlikely
forward integration.
" Buyers Power: Since no single customer was responsible
for more than 2% of Dell's Sales, their relative strength
was low
" Rivalry: to some extent, the logistic implemented by
Dell with an integrated system between internal departments
and suppliers eventually created a differentiation to the
product. In addition, that structured logistic with suppliers
probably involved some long term contracts mainly with those
working close to Dell's assembly line. This increased the
exit barriers.
Sustainability of Dell's Competitive Advantage The Dell's competitive advantage is clearly based on a
highly integrated logistic with suppliers which guarantees
high inventory turnover, a subdivided structure of customers
in finer categories to exploit any available opportunities,
and an independence from resellers and retailers which allows
it to deal directly with end customers.
The sustainability of this model depends on the following
factors: " Creating a casual ambiguity: At a first sight,
one can find simple to replicate Dell's suppliers' structure.
But the point is to identify exactly which differences are
critical to the success of the relationship. For Dell, it
is important to keep it as obscured as possible.
" Preemption: Taking advantage of its subdivided structure
of customers, Dell should focus on exploiting any available
opportunity in this market.
" Obscure superior performance: By consolidating accounts
with different subsidiaries can be a go in hiding abnormal
performance.
Given the feasibility of those conditions, the Dell's competitive
advantage is sustainable in the future. As stated by Michael
Dell, the Dell's competitors are not prepared to play baseball
because they are basketball players. Due to the fact that
their other operations such as servers, mainframes, printers,
etc, heavily depend on the resellers and distributors as sales
force, they cannot change their models, which means by-pass
the resellers and distributors, to compete with Dell in the
PC market. As soon as Dell established a new concept in terms
of logistics to that market, it automatically created a barrier
to them to "re-entry" in this market.
Significant Threats to Dell's Future Success In such a competitive and fast changing industry, constantly
evaluating and re-positioning the business model is vital.
Moreover, in this kind of environment, the difference between
a threat and a new opportunity depends on the responsiveness
and timing of company's response. Some of the problems Dell
might face in continuously changing its business model are:
" Not realizing the need for change: One common mistakes
senior managements commit is to take the competitors or possible
new entrants for granted. Michael Dell point of view stating
that Dell and IBM, HP, Compaq are not disputing the same market
can be true in one time but not in the future. Such Mental
Models can be very dangerous and its persistent use and some
short-term success based on them can create an escalation
of commitment to them and, as a result, to the business model.
The combination of Mental Models and escalation of commitment
tends usually to block the awareness of need of strategic
changes. Specific to the PC industry, the need for change
can be raised, for instance, by a new technology. Not recognizing
that need or adopting a dud technology can be a threat as
well. Again, Mental Models and escalation of commitment can
make the managers blind to those changes. It's worth mentioning
that Dell has the lowest R&D/sales among the 4. Although
this difference can be justified by the fact that the other
competitors also invest in mainframes, servers and printers,
an innovative technology might come from any sector.
" Lacking the incentives to change: Equal to what happens
in other industries, the incumbents in PC's industry tends
to get stuck in the same paradox. While the fixed costs of
old technologies are sunk costs, the incumbents have little,
if any, incentive to change. In general, they are less likely
to replace older technologies than new entrants.
" Rigidities & Inertia: Besides the importance of
the previous threats, the biggest threat Dell might face in
the future is related to the interconnectivity of its activities.
The strong links among manufacture system, suppliers and sales,
which currently represent the core competence of the company,
can be its competence trap in the future. Due to the fact
that those activities are strongly interlocked, it might be
very difficult, if possible, to change them as a response
to a market change. Moreover, the common organizational inertia
tends to contribute to the rigidity of the company Exhibit 1 - "6-forces" Model
Exhibit 2 - Dell's Generic Strategies
Please note: The above business essays and dissertations were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.
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