Dells Online Competitve Strategy - Essay Example

DELL'S ONLINE COMPETITVE STRATEGY INTRODUCTION In 1984, Michael Dell founded Dell computers while he was a student at the University of Texas, Austin. The competitive strategy adopted by Dell computers was to operate on the direct sales, such as building order model, taking orders over the phone and creating PCs according to the customer's specifications (Kraemer & Dedrick, 2001). In 1994, Dell adopted the Internet online shopping and then virtual integration in 1996 to facilitate this strategy. By 1996 the company was selling $1 million per day online. And by 1999 Dell had become the most popular PC seller in the United States (Kraemer & Dedrick, 2001). The importance of Information systems cannot be overemphasized in this case study. Information technology is playing major functions in every walk of life and more importantly on the business sector. The emergence of information technology has offered effective and efficient tools and techniques to the organizations, for the business management and to deal with other organizations processes. The objective of this paper is use Dell computers as a case study to explain how information systems can be used as a competitive strategy to respond to competitive forces, to improve its competition, to achieve and sustain competitive advantage. LITERATURE REVIEW The literature review is divided into 3 parts. The first part explains Porter's competitive forces model. The second explains briefly the competitive strategies. The third part explains Porter's value chain model. PORTERS COMPETITIVE FORCES MODEL Before designing the information system to facilitate a competitive strategy, that competitive strategy must be developed in response to the following competitive forces: Source: (Turban et al., 2005; Porter, 1985) (1) The Threat of New Entrants: The threat of new entrants depends on the degree of the barriers to entry. If the barriers to entry are high, the threat of entry will be low and vice versa. Consequently, in order to deter new entrants from coming into an industry, firms cultivate unique or capital-intensive resources that new firms cannot easily duplicate (Shin, 2001). (2) The Threat of Substitute Products/Services: The threat of substitute goods depends on the availability of alternative goods or services in the market. The more alternative goods or services in the market, the higher the threat of substitute good and the lower the market share and total revenue ascertained by the firms in the industry and vice versa. Therefore, in order to increase revenue and market, products will have to be unique and well differentiated. (3) The Bargaining Power of Suppliers: This force determines the level of control a supplier has over the price of its product. Since, the more alternative suppliers in the market, the lower the bargaining power of the suppliers and vice versa. Thus, in a market with few suppliers, a supplier is able to achieve desired level of profit due to a significant control over the price of its products. (4) The Bargaining Power of Buyers: This force determines the level of control a buyer has over the price of the products. Since, the more alternative sellers in the market, the higher the bargaining power of the buyers and vice versa. Therefore, in a market with countless alternative sellers, the buyer is able to reduce the demand of a product by switching to a less expensive competitor. (5) Rivalry among existing Firms within an Industry: The intensity of rivalry among existing competitors depends on the balance of competitors, industry growth, the size of fixed or storage costs, the amount of differentiation or switching costs, the minimum size of investment, the types of competitors the strategies takes, and the size and type of exit barriers( Ankli, 1992). COMPETITIVE STRATEGIES The choice of information system depends on its capability to facilitate the competitive strategy. The following are some competitive strategies designed to improve competition and achieve competitive advantage. These strategies were proposed by Porter (1985), Neumann (1994), Wiseman (1988) and Frenzel (1996). (1)Cost leadership strategy: The I.S should facilitate the production of products and/or services at the lowest cost in the industry. In addition, a firm achieves cost leadership in its industry by thrifty buying practices, efficient business processes, forcing up the prices paid by competitors, and helping customers or suppliers reduce their costs (Turban E. et al 2005). (2)Differentiation strategy: The I.S should facilitate the efficiency in the creation of different products, services, or product features. Since, by offering different, “better” products companies can charge higher prices; sell more products, or both (Turban E. et al 2005). (3)Niche strategy: The I.S should present avenue that will select a narrow-scope segment (niche market) and be the best in quality, speed, or cost in that market (Turban E. et al 2001). (4) Growth strategy: The I.S should help to increase market share, acquire more customers, or sell more products. Such a strategy strengthens a company and increases profitability in the long run (Turban E. et al 2001) (5) Alliance strategy: The I.S should facilitate the work with business partners in partnerships, alliances, joint ventures, or virtual companies. In addition, the I.S should help creates synergy which will allow companies to concentrate on their core business, and provides opportunities for growth (Turban E. et al 2001) (6)Innovation strategy: The I.S should help in introducing new products and services, updating new features in existing products and services, or developing new ways to produce them. Innovation is similar to differentiation except that the impact is much more dramatic (Turban E. et al 2001) (7)Operational effectiveness strategy: The I.S should improve the manner in which internal business processes are executed so that a firm performs similar activities better than rivals (Porter, 1996). (8)Customer orientation strategy: The I.S must facilitate customer relationship and making customers happy. Strong competition and the realization that the customer is king (queen) is the basis of this strategy (Turban E. et al 2001). (9) Time strategy: The I.S must be able to improve the speed of transaction. Treat time as a resource, then manage it and use it to the firm’s advantage (Turban E. et al 2001). One of the driving forces behind time as a competitive strategy is the need for firms to be immediately responsive to customers, markets, and changing market conditions (Turban E. et al 2001). (10)Entry barrier strategy: The I.S should create a barrier to entry. By introducing innovative products or using IT to provide exceptional service, companies can create barriers to entry from new entrants (Turban E. et al 2001). (11)Lock in customers or suppliers strategy: The I.S should be able to encourage customers or suppliers to stay with you rather than going to competitors (Turban E. et al 2001). (12) Increase switching cost strategy: The I.S should be able to discourage customers or suppliers from going to competitors for economic reasons (Turban E. et al 2001). PORTER'S VALUE CHAIN MODEL According to Porter and Miller (1985), the most important concept that highlights the role of information technology in competition is ‘‘value chain’’. The value chain of a product is measured by the amount a customer is willing to pay for it (Porter and Miller, 1985). A corporation creates value by using the I.S in carrying out a chain of activities that will reduce the cost of production. Source: Kroenke D. (2009) According to Porter's the value chain model, the activities carried out in any manufacturing company can be divided into two categories, the primary activities and the support activities (shown on the above table). In addition, the more efficient an I.S can integrate and facilitate the delivery of the primary and support activities the more the value is created. To attain competitive edge, a manager will need to systematically evaluate a company’s key processes and core competencies (Kroenke, 2009). To do so, we first determine strengths and weaknesses of performing the activities and the values added by each activity (Kroenke, 2009). The activities that add more value are those that might provide strategic advantage (Kroenke, 2009). Then we investigate whether by adding IT the company can get even greater added value and where in the chain its use is most appropriate ( Kroenke, 2009). CASE STUDY ANALYSIS: COMPETITIVE STRATEGY The competitive strategy adopted by dell is known as the build to order or the direct model strategy. Dell operated on the direct sales model, taking orders over the phone and building PCs according to the customer's specifications (Kraemer & Dedrick, 2001). This strategy was adopted in order to ascertain a value chain. The following diagram shows the direct model: Source: (Kraemer & Dedrick, 2001) Dell sells directly to the consumer by removing the middle men which are the distributors and resellers. However, in the early 1990s, Dell entered the retail PC channel but a downturn in business in 1993 led it to return to its roots as a direct vendor (Kraemer.K et al, 2001). There was a realization that innovation with the use of information technology would initiate growth. Innovation Strategy Dell utilised the web-based I.S as a method of innovation to halt the downturn in business and create value chain. During this time the cash flow dropped to $20 million, the net income reduced to $40 million and its market value had contracted significantly. However, by focussing on precise features of the company and advancement in the business structure of Dell, the web based business strategy idea of virtual integration or value web emerged. After the development and implementation of Dell’s web based business to support this strategy, the customers who before had placed traditional orders by means of the telephone now were able to place orders on Dell's Website. The following shows the value-web Source: (Kraemer & Dedrick, 2001) Information technology, the internet, and other electronic communications (e.g., e-mail, EDI) enabled Dell to coordinate this web of close and distant relationships (Kraemer & Dedrick, 2001). Information flows back and forth between Dell and the customer via the Internet, triggering orders, service calls and other communications to other parts of the value web (Kraemer & Dedrick, 2001). For example, when customer requests a product from Dell, the value web makes it easy for Dell to transfer the information to suppliers and business partners to provide that particular service. This innovation resulted into value chain. Dell is using the virtual company approach to expand the scope of its business without a commensurate expansion of its own work force and without making a major acquisition (Kraemer & Dedrick, 2001). Consequently, Dell achieved competitive advantage, became successful and profitable because the value created by the business process was more than the production cost. In addition, due to the information system innovation, Dell gained benefits from competitive strategies proposed by Porter (1985), Neumann (1994), Wiseman (1988) and Frenzel (1996) Operational effectiveness strategy: By the integration of consumer, suppliers and business partners on the web, there was ease in transaction and business processes thereby improving the manner in which business are done internally. The operational effectiveness reduces the bargaining power of the supplier and consumer because the agents are discouraged to other competitors due to the ease of operation. The following table shows Dell outstanding performance as at 1999: Source: (Kraemer & Dedrick, 2001) Dell consistently carried out its business in other PC makers and the PC industry as a whole on most financial measures as at 1999 (Kraemer & Dedrick, 2001). Dell’s operating performance was impressive, with high rates of inventory and asset turnover reflecting the inherent advantages of the direct model and the efficiencies Dell has achieved with that model (Kraemer & Dedrick, 2001). Growth strategy: The value web facilitated growth through high speed of transactions and as a result, there was a tremendous increase in sales. From 1995 to 1998 Dell achieved annual growth rate of 50% in revenues and 75% in profits (Kraemer & Dedrick, 2001). Consequently, Dell was able to raise barrier to entry and increase market share. During this time, it became the number two PC seller in the U.S. and numbers three worldwide, and saw its stock price rise by a compound rate of 287% annually. In 2000, there was an increase in the bargaining power consumers due to price competition. Consequently, the growth rate slowed down. But Dell still achieved growth rates of 38% in sales and net income rose 27%, as gross margins were squeezed and revenues per employee fell (Kraemer & Dedrick, 2001). Time Strategy, Alliance strategy and Lock-in Supplier and Customer Strategy Dell’s online competitive strategy offered and enabled considerable costs reductions; faster deliver time, as well as a more dependable completed product. As a result of the I.S, Dell’s build-to-order manufacturing process turn an order around in under a week from the time an order is received until the PC is delivered to the customer (Kraemer & Dedrick, 2001). The actual time of assembly is as little as seven hours, including software installation and extensive system testing (Kraemer & Dedrick, 2001). This is a result of new symbiotic association among its suppliers. These collaborative integrations reduced the number of days a Personal Computer assembled in corporate inventory from 32 days to 7 days. Due to the integration of Dell, consumers, suppliers and business partner on the value web, the bargaining power of consumer and suppliers reduced because they discouraged do business with other competitors as switching cost become high. Niche strategies, Differentiation strategy and Customer orientation strategy: Dell has developed the web based business competitive strategy that has targeted only the customers or clients that prepare customised computer and did not require going to a retail store to obtain their computer products. Dell has done so in by automating functions such as product configuration, order entry, and technical support, enabling the company to grow revenues without a corresponding increase in customer service costs (Kraemer & Dedrick, 2001). Dell used the internet to facilitate customer satisfaction by linking itself more tightly to its large customers by developing extranets now called Premier Dell.com. Dell had developed over 50,000 Premier Pages for thousands of business customers by mid-2000 (Kraemer & Dedrick, 2001). This strategies help to raise the barrier to entry because It became difficult for other competitors to match the strategy of offering better customized products at a low cost to a highly loyal customers. Cost leadership: The value web gave Dell a means for extending the reach and scope of its direct sales business model at a relatively low marginal cost (Kraemer & Dedrick, 2001). After the one year of launch of its web based I.S the business of Dell obtained sale of approximately $1 million a day via the internet. The web based platform has also facilitated the Dell in case of cost savings in operational, handling and management areas; like that corporation’s phone bills began to minimize (Ciurez, 2008). By the fall of 1997, the figure was $3 million per day. By 1999, Dell had become the number one PC seller in the United States, and was number two worldwide with $25 billion in sales.( Kraemer.K et al, 2001) THE REFLECTION: The value chain achieved through innovation was the crucial ingredient for the success of Dell PC. Dell was able to organise all business activities with the value web and as a result all other strategies were achieved. The value web or the virtual integration facilitated cost leadership and product differentiation. The cost leadership and differentiation allowed dell to raise barriers to entry due to its economies of scale. The differentiation created a barrier by forcing entrants to spend heavily to overcome customer loyalty (Porter, 1979). Due to the cost leadership Dell was able to produce on a large scale at low cost to force the new entrant to either to come in on a large scale or to accept a cost disadvantage (Porter, 1979). However, the strength of these strategies is questionable. If these strategies were fully implemented, then why is Dell not a monopoly? As a result of their success, the barrier should have been strong enough to leave Dell as the only firm in the industry. Due to the emergence of Apple PC and other competitors, is clear that the strategies used were not strong enough to block the threat of new entrants and substitutes. In retrospect, this might be due to the use of internet. According to Turban E. et al (2005), the internet usually increases the threat of new competitor. This is due to the fact that the internet is easy to set up and more importantly the internet encourages foreign competitors into the market. Consequently, the barrier of entry reduces as the market is flooded with numerous competitors. Furthermore, the internet creates an avenue for suppliers and consumers to find alternative suppliers, get information about product, and compare prices. This reduces the bargaining of suppliers and increases the bargaining power of consumers as switching costs decline. In addition, the internet reduces the level of differentiation between products. The visibility of Internet applications on the Web makes proprietary systems more difficult to keep secret, reducing differences among competitors (Turban E. et al, 2005) and [Ray, 2004]. Therefore, the internet had a considerable negative effect on the effectiveness of their competition. Recently, in order to remove the threat of new entrants Dell has been using price discrimination strategies. The business strategy is to reduce its pricing by reducing the numbers of rebates and promotions offered on single-product-foundations by 80 percent in next 18 months. The policy is designed to combat recent price competition in order to benefit from the recent increase in consumer bargaining power. This new business policy will start from Inspiron notebooks as well as flat screen TVs and expand to Dell Dimension desktops PCs (Jackson, 2006). However, this strategy might fail because price discrimination is complex and leads to client confusion. In its place, Dell should present straight costs that always undercut the PC market competition. Nonetheless, as a result of the virtual integration, Dell's rivalry among existing firms in the industry is still quite strong in the face of rising competition. At the present, the major PC makers are Dell, Hewlett-Packard, Acer, Lenovo, Toshiba, Fujitsu, Apple and Sony. In 2009 the Dell PC’s 2nd quarter United States marketplace share fall 19 % from a year ago to 26.3 %, however that was good enough to get the position of No. 1 Company of PC retailers in the United States over HP, according to IDC. However, Toshiba’s and Acer’s marketplace share has enhanced in the next quarter because Apple falls to 7.6 %, down 12.4 % from a year ago. However, the main region of competition between Apple and Dell corporations is the areas of education. Recently, Dell and Apple businesses insistently target schools and students in an effort to be selected for back to school(Ankli, 1992) (Jackson, 2006) & (Consumer, 2008) & (Cloisters, 2010). CONCLUSION In this study, Dell case study is utilized to explain how information system can be used to respond to competitive forces, achieve competitive advantage through competitive strategies proposed by Porter (1985), Neumann(1994), Wiseman(1988) and Frenzel (1996). The main reason for Dell's success is the virtual integration resulting into the value chain. Dell was able to arrange it business process with the use of I.S value web to achieve competitive advantage over its competitors. However, due to the availability of the internet and web services Dell was not able to close the market to other competitors. Dell PC's are now practicing price discrimination due to price competition. 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