Dell's Competitive Advantage example essay topic

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 80's 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 Porter's 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 market's 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 won't 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 cera tin 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 Dell's competitive advantage? Specifically, calculate Dell's 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 - Dell's 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 seen that at Dell net income gross exceeds the revenue gross, while Compaq didn't succeed to use the revenues incline to make income. Inventory (table 2) Inventory turnover - increase of 634.9% at Dell against 202% at Compaq shows the competitive advantage if Dell in managing and maintaining its stocks Customer service (table 3) In serving its customers Dell has succeeded more than its rivals. It can be seen from the table 3 that ranks PC manufactures based on Consumer Report where Dell won the 1st rank place. Competitive advantage of Dell in serving customers in comparison with other manufacturers can be also seen on table 3. Concerning corporate customer service by Dell and Compaq should be mentioned deep understanding of customer needs at Dell Corporation and 24/7 support against based on forecast production system with 64 days of delivery period. (see Appendix 4, 4.1 for detailed explanation) 4.

How effective have competitors been in responding to the challenge posed by Dell's advantage? How big is Dell's advantage? The steps of competitors threaten the competitive advantage of Dell. The calculation of Dell's competitive advantage might be seen in table 4 and 5 that provide ranking of the financial performance. According to the information from the case, Dell will loose its competitive advantage if it doesn't keep up with demand for innovation. According to Shumpeter's life cycle of innovation, the inventor will loose its benefit on the stage of innovation diffusion if not offer a new innovation.

As performance increases, differentiation between brand names is going to decrease. Dell's rivals are finding ways to increase their market share by replicating some of Dell's advantages. For example, IBM recognized the advantages of direct distribution and launched initiatives to expand its own direct sales (Joint Manufacturing authorization program (1990), Authorized Assembly Program (AAP, 1995) Compaq saw the advantage of reducing inventory, and therefore took initiatives to do so (Optimized Distribution Model (ODM), Direct Plus program). It "moved from a production system in which it built business PCs according to its own forecast to one in which it built according to forecasts made by channel members". This change in production allowed Compaq to double its inventory turnover.

Since its rivals are starting to "copy" its strategies, Dell's strengths would no longer be advantages if this continues... Competitive advantage in financial performance 1998 Dell -IBM 1 Dell -Gateway 9 Dell -Compaq 10 Dell- HP 10 5. What should each of Dell's major rivals (IBM, Compaq, HP, and Gateway) do now? Even though Dell is enjoying the profitability of the market more that rest of the market players, we can't say that its rivals are lame ducks. In our opinion, companies should now try to determine their core competences, focus on them and get rid of all the activities that they are now doing best. Simple imitation of Dell's model will lead the market to further standardization and won't be profitable to anyone.