Five Forces Anaysis Of Dell Inc - Essay Example

? FIVE FORCES ANAYSIS OF DELL Inc …………………. College/ ………….. …………. Introduction Dell Inc, established as a kind of small lucrative business by Michael Dell in early 1984 has grown to become one of the largest and highly successful multinational companies of all times in the world. Michael Dell has realized the wide marketing opportunities that can be brought with the strategy of marketing directly to the end users and this has helped the company create a market of its own. Within few years of its start-up, Dell has been placed to be 25th in the list of computer manufacturers worldwide, all but Dell have gone out of the market to become a fortune 500 company by 1992 (Holzner 2006, p. 5). This research paper presents five forces analysis of Dell Inc to analyze major factors and competitive elements and to assess how successful and effective is the company. The five force analysis, introduced by Michael Porter, can be used as a tool to measure the competitive rivalry and to assess whether the company has achieved sustainable competitive advantages or not. The five force Model The modern economy and international business environments have recently been largely influenced by various critical factors including globalization, fierce competition and advanced technology etc and therefore, as Michael Porter argued, business strategy equates to how a firm competes with other firms in the industry. According to his findings, strategy is not just a series of models and methods at corporate level, but rather it includes analyzing potential entrants, suppliers, buyers, substitutes and competitors (Stahl and Grigsby, 1997, p. 145). The five forces model has widely been applied as an important functional area of management and business academics. Almost all managers and large companies depend on porter’s five force analysis to find their marketing strengths and competitive advantages. Harvard professor Michael E. Porter has developed Five Force model in 1980s to help companies identify what specific forces determine the profits in an industry. Any particular firm in an industry faces various forces within the industry affecting the profitability significantly. Some of such determining factors are competitive rivalry, potential entrants, threat of substitutes, bargaining power of buyers as well as suppliers. If a business is able to understand and analyze all these factors, then it would also be able to develop a business-level strategy to allow business either to take advantage or protect the business from these forces (Ahlstrom and Bruton, 2009, p. 131). Porter argued that each of the five forces determines how the firm would be able to perform in its marketing landscape. The stronger each of these forces is, the more limited is the ability of well-established companies to increase prices and earn greater amounts of profits. Competition rivalry, substitutes, potential entrants, power of suppliers and buyers thus directly impact the profitability as well as effective and smooth functioning of the business (Hill and Jones, 2007, p. 45). The five factors can greatly influence various aspects of the strategies of a company. for instance, if consumers of the company have considerable bargaining power, it will largely impact the business strategy of that company. Similarly, if more number of suppliers are available and there is increased possibility of getting better supplies for comparatively cheaper amounts, the company will be more likely to achieve relatively better competitive advantage as well (Kurtz, MacKenzie and Snow, 2009, p. 57). Competitive rivalry is one of the five forces and is influenced by the other four forces. A company that operates in a market where there are larger numbers of substitutes, more powerful buyers and suppliers and there are chances for new entrants faces relatively more severe competition. A company would be able to flourish if it is able to fence off new entrants and substitutes. Dell Inc: Company Profile For several years, Dell inc has been focusing on direct-selling model with the help of internet and telephone communication to sell directly to the end-user and corporate customers. This has been an effective business strategy for Dell because it helped the company eliminate major middle-men costs and reduce inventory-handling expenses as well. As Dell has been able to eliminate costs and risks associated with inventory handling, the company gained considerable cost advantages. Mainly with the help of direct-marketing strategy, Dell could become second largest PC manufacturer and marketer in 2008 just behind the HP. The direct-marketing model has helped the company gain more accurate information from its customers and thus to maintain better customer relation as well. The marketing strategies and business orientations of Dell Inc has primarily been driven by virtual integration that incorporates specific marketing ingredients like customer focus, supplier partnership, just in time manufacturing and direct marketing etc (Magretta, 1999, p. 193). One of the critical business strategies that helped it become highly successful is its negative cash conversion idea by which Dell Inc has been able to receive payments from its customers of both end and business users well before the company has to pay for materials it bought from suppliers. Dell has identified and uncovered a hidden market, because it focused on those who customers who need computers and other related hardware machines with specific requirements and those who need to buy them directly from the manufacturer or by customizing the specifications and configurations according to individual requirements. The company has facilitated customization through its websites so that customers were able to select the products that they require for their need. Customer focus, richness of customer information, customization facilitated to customers, direct-marketing and virtual integration strategies have thus played significant roles in bringing the company to the very forefront of the worldwide computer market. Customers are able to choose their computer and other hardware related items through mail, phone or other methods and the company sends the ordered items to customers through its own delivery services or through third party agencies. According to Bozarth (2005, p. 22), the direct-marketing strategy model that Dell has been implementing for years was based on a build-to-order manufacturing system, and therefore Dell was able to save much in its operation. Build-to-order and just-in-time manufacturing system means that Dell has been manufacturing computers only when it has actual customer-orders and demands from them and this was one of the main reasons why Dell succeeded even when many of its counterparts failed. As Thomas (2002, p. 163) emphasized, Michael Dell was an extraordinary business man who pursued ‘going-direct’ to market approach which also was aligned to virtual integration and customer focus. Its supply chain system mainly based on ‘direct-marketing’ strategy has later become a model for many companies to help them identify how a company can create wider marketing opportunities with better ideas and strategies (Paley, 1999, p. 374). Research Method: Framing of the Research This piece of research paper is an attempt to develop Five force analysis of Dell Inc to assess and analyze the critical marketing forces and elements that helped Dell achieve greater success in its marketing. The business-related factors and marketing forces of Dell Inc were examined by applying five force analysis. The five forces, namely competitive rivalry, threats of substitutes and new entrants, bargaining power of buyers and suppliers were analyzed with the help of Porter’s five force analysis. Company profile and market overview were given to describe how Dell Inc became successful in its market with help of some of its strong market strategies like going direct to the customers, virtual integration, customer focus and customer relationship management etc. There are basically three types of research methods namely exploratory, descriptive and explanatory. Both exploratory and descriptive are appropriate methods when the main research issue is not already explored or known and thence further research on the same is required. Explanatory research is more suitable when the issue is already known and the researcher attempts to explain the facts and figures in quite more detail based on reviewing relevant literatures. The research methodology that the researcher used in this paper is explanatory research to further explain the factors and marketing forces that Dell Inc has been facing in its business landscape and how these factors determine its competitive advantages and business effectiveness. Data Collection The research is based on secondary data collected from various reliable sources including books, internet and relevant journals. Contemporary marketing books were used to describe marketing concepts and to explain elements of five force analysis. Details regarding Dell’s marketing perspectives and business strategies were extracted from internet and relevant journals and the information thus collected were applied to the five marketing forces in order to analyze the competition rivalry of the firm. Dell’s Industry Analysis Five force analysis is primarily a tool to analyze the competition strengths among firms in an industry. the major players in the computer industry are HP, Acer, Dell, Toshiba, Lenovo, Samsung, Sony etc. Dell has been placed to be on second or third spot in the computer industry just behind HP and some times behind Acer. The five force analysis depicted below can help illustrate the major five forces that Dell faced in its market and between its counterparts and other stakeholders. Each of the five forces are illustrated and detailed below: Competition Rivalry Though Dell Inc faces rigorous competition from major market players like HP and Acer, it still stands stronger due to some of the factors like stronger market share, strong brand loyalty and brand reputation and the opportunities it seized from ‘direct-marketing’ model etc. Dell inc, started as a small lucrative business in early 1980s, has eventually grown to become second or third largest computer manufacturer and marketer. It has been sharing around 13 or more percentage of the total market (Holzner, 2006, p. 5). As compared to many other computer manufacturers, Dell’s market share is very strong and this alone can help the company stay long in the market. As Holzner (2006, p. 5) stressed, Dell is a very strong brand name and has gained wide reputation worldwide. The reputation it gained and the brand loyalty Dell holds turn to be greater assets helping the company gain competitive advantages on other counterparts. The direct marketing strategy has helped the company eliminate middlemen costs and inventory handling expenses. So, Dell could reduce the prices of its computer products. Product differentiation and price reduction are very powerful strategies that can help a company achieve competitive advantages. A very important factor that helped Dell face competition and became successful was its unique manufacturing system by which it was able to reduce wastes, avoid or eliminate risks associated with inventory handling etc. Dell inc first obtains orders from the customers and then according to the order it gives orders to the suppliers and manufacturers products and services as are required and demanded by the customers. it therefore never faced problems of lass demand from customers or demand fluctuation difficulties. Bargaining power of Suppliers Suppliers are not treated differently, but rather, Dell has treated its suppliers and customers as if they are parts of the company. When suppliers are treated as if they are parts of the company, they automatically hold a partnership relation and this cause them not to bargain with the company. the virtual integration model that Dell has implemented positively impacted on bargaining power of suppliers as well as customers (Holzner, 2006, p. 7). Bargaining power of customers Customers are always more likely to get satisfied with Dell machines, because customers get customization option through Dell’s website and they module the items they require. Dell is also very rich with customer information and as it contacts directly with customers who places orders for purchasing computer items. The direct-marketing model helped the company contact with end-users more directly and thus to obtain more accurate information as well. As long as the company is rich with customer information, it could develop market according to customer requirements and the likelihood of bargaining of customers is relatively less. Similarly, as customers become highly satisfied with the products they customized, ordered and purchased, they are very less likely to bargain with the company. Substitute products Computer, both desktop and laptop have no perfect substitutes. But when it comes to various single purpose or use of computer, it has plenty substitutes in the market. For example, calculator is a substitute when computer is viewed as a machine for calculating. Computer can also be used for watching movie and videos, and therefore TV or other small video players can be substitutes to computers. As far as various small electronic products, that are available in the market and can be used as substitutes to some of computer purposes, are considered, Dell faces threat of substitutes and this can have greater impacts on its sales. Threats of new entrants The computer market is perfectly competitive and any new company start manufacturing and marketing of computer and other related hardware products. There are no restrictions for companies to start business and also some electronic wiz companies may start manufacturing of computer items due to that it is more profitable and highly demanded side of the market. Findings of the Five force analysis of Del inc Dell Inc is an illuminating example for a highly successful company that has implemented various international and most effective business strategies. Almost all the business models it implemented have in turn helped the company achieve sustainable competitive advantage and greater marketing success. One of the main strategies it implemented was direct marketing that in turn helped the company gain more accurate information about customers, create closer relationship with them and maintain long term profitability through the relation it thus created. As illustrated by the five force analysis, Dell inc is competitive and very strong in the market due to that it’s buyers and suppliers have relatively less bargaining power and it has created stringer marker share, strong brand image and brand reputation worldwide. This piece of research paper has described how and why Dell is successful and how much competitive in its market. Conclusion This piece of research paper has outlined an industry analysis of Dell Inc based on Porter’s five force analysis. Michael Dell started his business as a small lucrative business in 1980s and within few years he could make his business a world-class computer company, being placed to be one among fortune 500 and as the second largest to share around 15 percent of the computer hardware market. When it comes to the five marketing forces, Dell faces relatively less risks and threats from competition rivalry, bargaining power of buyers and suppliers, where as relatively higher risks from potential entrants and substitutes. This paper has concluded that Dell Inc is strong in the market as it has achieved greater success with sustainable competitive advantages and better marketing performances too. 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