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The personal computer industry suffers from several factors that have combined to keep profits low. Firstly, PC manufacturers are continuously locked with one another in a series of price wars. Consumer demand is high and, in order to meet this increased demand, firms have saturated the market. Such saturation coupled with the reduction of prices on a regular basis has created an elastic product demand whereby price cuts on one model will force rival makers to make similar cuts before major profits can be made.
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Dell is an example of an organization that has successfully propelled their business forward by modifying their business to suit the industry within which they operate. An analysis of Porter’s Five Forces model reveals that the PC industry is highly competitive, as characterized by low barriers to entry, high availability of substitutes and high buyer and supplier power.
Dell, however, have managed to retain competitive within this industry and have successfully gained market share from a number of their competitors. An analysis of Dell’s performance within the four forces that contribute to the competitiveness of a market; threat of substitutes, buyer power, supplier power and potential threat of new entrants, can provide an insight into how they have gained such market share within the midst of such competitive forces and proves that Dell’s business strategies have been successfully in meeting the demands of the industry.
Supplier power is determined by how concentrated the supplier industry is and how many customers are available within the market to whom they sell. Supplier power within the IT industry is high; there are few suppliers of some of the key components yet the buyer base is perse. Suppliers thus have the power to influence prices. Dell have successfully dealt with this in a number of ways. Perhaps the most significant area within which Dell have gained competitive advantage has been through their ability to maintain power within their relationship with their suppliers through selecting a strategic partners and developing very close working relationships with them.
Such relationships have allowed them to develop a value chain that aligns their operating strategy, resources and manufacturing capabilities with the customer needs and expectations. Dell’s relationships with their suppliers have allowed them to be on an inside track with technological developments. They are a preferred buyer for many suppliers as they have the ability to get technological developments to the marketplace faster than their competitors because of the supply chain process they have developed.
Although substitute products compete with less intensity than primary competitors they are relevant as they can influence the profitability of a market. The availability of substitutes within the PC market has been dependent upon three main factors; prices, comparable or better products and the cost of switching. One of the ways in which Dell have a significant competitive advantage in this area is through their direct to consumer model. By selling direct they have eradicated the need for retailers, agents and distributors.
Each of these functions traditionally increases the cost of the final product to the customer. By removing the requirement for “middle men” Dell have gained a reduction in channel costs from 15% to 2.5% thus enabling them to offer their products at a lower price than their competitors whilst still retaining a profit themselves. Dealing direct with their customer base has also allowed Dell to customize their product and thus produces products that are tailored to customer needs in a way that is not available elsewhere on the market.
The potential threat of new competitors considers how likely new manufacturers and suppliers are likely to enter a market and thus considers the likely competitive intensity and profitability in the future. Potential entry of new competitors within the PC industry has been of significance with regards to technological developments and available innovations. Advances in PC technology have been introduced with an exponentially growing regularity. A particular PC with “top-of-the-line” components does not remain state of the art for very long and will subsequently decreases in price.
Furthermore, PC manufacturers suffer from the dominance of “partners” who manufacture important components of PCs. Firms such as Microsoft and Intel operate virtual monopolies in the areas of operating systems and microprocessors respectively. Without real competition in these areas, firms were able to keep prices of these components relatively high; due the aforementioned competition, the PC makers aren’t really able to pass on the costs to the consumer and this cut deep into margins. Again Dell’s cost advantage has allowed them to be successful within this area.
Through adopting a built-to-order mechanism they have been able to respond quickly to market changes and to new entrants onto the market. With low inventories of raw materials, Dell is able to adjust prices inline with the market extremely quickly and can therefore sustain levels of profitability. They can also match the value offerings of their competitors at an extremely quick rate.
Buyer power measures the level at which the buyers can force prices down or demand more services. The buyer power within the IT industry is high. Buyers have a number of sources from which to choose their products and they are therefore highly price sensitive. In addition to the cost and price advantages that have already been described within this paper Dell have developed a sophisticated customer segmentation strategy that groups customers according to their needs and then mirrors this structure within their own organization. The segmentation adopted allows them to meet customer requirements more efficiently and target sales activities appropriately, thus boosting revenue and profitability.
Within the customer segmentation Dell places heavy emphasis on large customers and attempts, where possible, to implement long term contracts and agreements this removes the buyer power as a threat in a medium basis. In addition to this Dell operates a highly effective sales force that is responsible for both the acquisition and retention of the customer base. By focusing on customer loyalty as well as making a sale, the personnel in these departments are more likely to ensure they made the right sale; if the customers are happy with the product and it meets their needs they will come back for more!
Not only does this increased in sales positively impact profitability it also lowers acquisition costs and, this too, has a positive impact on the bottom line. Beyond the sales process, Dell operates an effective after sales service that was, at the time of the Harvard case, ranked 1st for overall service support (exhibit 8) with 90% of customer problems being resolved over the telephone. This has a positive impact on profits through the retention of customers and increased repeat purchases.
Through analyzing the force forces that contribute to competitive rivalry within the PC industry we can see that Dell have created a value proposition that provides them with a number of competitive advantages. These advantages have created an organization structure and operation that would be costly to imitate and one that has allowed them to stay on top of the PC market for the last few years.
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