Dell Case Analysis 1

Topics: Personal computer, Marketing, Computer Pages: 5 (1593 words) Published: January 11, 2015

1. How and why did the personal computer industry come to have such low average profitability? The personal computer industry, which started with the launch of the first PC in 1981 by IBM, has been characterised by rapid innovation, low costs and demand for better performance. The personal computers have been historically sold at a reasonably high prices but the profitability has been pretty low. First, we examine how the industry works. The entry barrier is pretty low in the industry. Personal Computers have less product differentiation and are assembled out of standard products and components. Besides, the capital required to set up an efficient PC assembly line, capable of assembling 250000 PC per year was roughly one million dollars in 1990 which is relatively low for a new entrant. Hence we saw start-ups like Apple, Dell, Microsoft etc. and even established firms like Texas Instruments, Hewlett-Packard, Xerox etc. entering the industry increasing the rivalry. Brand loyalty among the customers are pretty low. Buyers of Wintels, the computers with Intel Processors and Microsoft Windows Operating System, were not attached to a particular brand of computers and were ready to switch to PCs of any brand available at a lesser cost and were not very technically aware of the specifications either. Limited differentiation in products and similar operational strategies of majority of the rivals in the industries did not leave much scope for competitive advantage. The major distribution channels prevalent in this industry included retail stores, distributors (who work with small resellers) and integrated resellers. Over time the mark-up kept by these channel entities kept declining in the wake of impaired relationship with the companies. As increasing inventory was a problem concerning these companies they started to explore new ways of making the product available. IBM for example authorised the resellers to assemble the PCs according to customised specifications. This sudden shift did not go out smoothly. IBM’s profitability took a hit. Its PC division lost $39 million in 1996, $161 million in 1997and $992 million in 1998. In the case of Compaq, the overarching power of the traditional channel entities did not allow it to employ the “Direct Selling” distribution channel. Thus it had to think of something like IBM where resellers did the customisation based on specifications. Thus we see that the companies who relied less on Direct Selling distribution channel as opposed to Dell found it difficult to transform in wake of the need to do so. This transformation was needed as Dell was proving that this approach was the way to go. As far as the suppliers were concerned, the Microprocessors and the Operating Systems Software Suppliers were very concentrated in nature. Intel and Microsoft were quite a monopoly. Both these standard components combined together did constitute significant proportion (~50%) of the overall cost structure of a basic PC. Thus their bargaining power was high. Many of the large players invested heavily in advertising (2 – 3 % of revenue) so as to develop recognizable brands. For IBM, Apple and HP as a percentage of the net income this was a sizeable amount. The main resources of a PC firm, operating system and the microprocessor, were mainly provided by Microsoft and Intel respectively. This meant that almost no firm had the advantage of having an inimitable or appropriable resource as all the competitors had the same resources and had to forego a huge chunk of profit to Microsoft and Intel. The components of PC by itself are not durable as they get obsolete and prices of older version plummets. Firms stuck with inventory of obsolete products incur high costs of dumping these components thereby reducing the profitability. Apple, with competitive superiority, had built an emotional attachment with its customer and was thus able to charge premium from them and was an exception in the industry with high...
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