Matching Dell
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The PC industry is one of the most competitive industries in the world. The industry had started to develop fast in the 80s when IBM launched its first PC series following which a number of “Clones” made their entry into the market. Along with these clones a number of smaller manufacturers also started entering the market. The reason for this emergence was mainly that IBM had conceded the rights to the 2 most important components of a PC i.e. the microprocessor and the Operating System to Intel and Microsoft respectively. This was due to their “Open Architecture” model. This caused the technology to be available to everyone.
We can analyze the PC market using Porters 5 forces theory
Industry Competitors: The PC industry consists of a number of companies; hence the threat from industry competitors is high. Due to the product being highly standardized and shifting costs between brands is low, there is fierce competition which leads to lower margins and profitability in the market. The PC industry can be described as being highly competitive
Threat of new entrants: The threat of new entrants is a constant one in this industry which again leads to companies adopting aggressive strategies and lowering margins
Threat of substitute products: The lines between PCs and other devices is blurring, other devices like PDAs, handheld electronics etc. are now coming out with features similar to PCs. This again is driving faster and faster innovation among the PC makers
Buyers growing powers: Unlike in the introduction phase when there were certain people who were loyal to the Apple Mac, loyalty is rarely seen among the customers in the present scenario. Since the financial risk associated with switching between products is lower, customer turnover is increasing. Hence there is competition to retain customers as well
Suppliers bargaining power: With the prices of the inputs required for PCs reducing the suppliers are the people finding themselves in a problem, the bargaining power in this case lies with the PC manufacturers
From the above data we can deduce that the reasons for the low margins and low profitability of the PC manufacturing operations is mainly to the following reasons
Innovation
Decreased prices
Increased competition / New entrants
The lines between electronic devices being blurred
Decreased differentiation
The profit is mainly used for countering the effects of the 5 forces. Hence in this market only the operationally efficient manufacturers could survive.
Dell entered the market with a new model of operations called the “Direct Model”. The “Direct Model” incorporated a few characteristics like
Differentiated products for different customers on a made-to-order basis.
Increased Customer service, they divided the customers into 2 groups : Relationship buyers and Transaction buyers and had sales reps for each of these groups
Focus on specific Market Segments like the large companies which normally bought PCs for their entire workforce
Just In Time manufacturing Ð- This model helped Dell keep its prices lower when compared to their competitors as they were able to take advantages of any small change in cost due to the made-to-order nature of their process
Good relationships with suppliers Ð- Dell worked in close conjunction with their suppliers in order to arrange for in time delivery. In fact, they had a web-site customized to give both Sony and themselves simultaneous access to the customer
Low Cost of Distribution Ð- The distribution channels used by Dell were the most efficient and helped them achieve the tough task of distribution within a minimum cost. This led to a massive cost advantage
Minimum Inventory Ð- The inventory levels kept by Dell were close to zero, this saved them the high cost of storage and ensured faster delivery. Dells electronic links with its suppliers helped it to communicate the inventory levels on an hourly basis for timely replenishment, which in turn kept the inventory levels low and hence carrying costs.
Efficient after-sales service through various means Ð- The after-sales service was provided by Dell through different mediums like the Internet, a 24 hour hotline and third party services like Xerox and Unisys
These factors have contributed to Dell establishing itself as a major player in the PC industry.
As the competition realized that Dells model is operating with efficiency, the other manufacturers also introduced their own direct selling models.
IBM introduced the Netfinity Direct program
Compaq acquired DEC and introduced