Business Essays

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

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