Dell Contributing to the Personal Computer Industry - Assignment Example

1. How and why did the personal computer industry come to have such low average profitability? The personal computing saw a rapid growth between the years 1975 – 1981, which led to a series of firms offering increasingly integrated, pre assembled personal computers. This upward growth in the personal computer industry continued well into the 1990’s during which the PC performance increased resulting a sharp decline in prices. This brought about the influx of several new entrants into the industry, with the likes of Texas Instruments, Hewlett – Packard, Zenith, NEC, Xerox, IBM, Toshiba, Sanyo, Sony, Olivetti, Wang and DEC. This led to the availability of low cost PCs and increased profitability to the companies. However, this initial surge in sales came to a halt in 1990, when the United States was gripped in recession. The existence of a large number of players led to a price war, where all the major players vied for customer attention by slashing their prices. As vast amount of options were made available to the consumer, it led to increasing switching costs. Also it led to a distribution of revenues across all the existing players thereby leading to lower profitability. Added to it, the entry of large number of players providing ancillary services such as distributors, retailers, resellers and traders led to further reduction in profitability of the existing players. 2. Why has Dell been so successful despite the low average profitability in the PC industry? The basic reason behind Dell’s success of maintaining average profitability in the highly concentrated PC industry was its smart strategy formulation. At a time when most of its competitors were relying heavily on their distributors, resellers and retailers for supplying orders, Dell took orders directly from its customers. Besides, 77% of Dell’s customers consisted of businesses and government institutions while home and office users as well as educational institutions accounted for 18% and 5% of its revenue streams respectively. Also more than 70% of its revenue consisted of very large customers who purchased more than $1 million worth of PCs every year. Dell had assigned a team of sales representatives who spent their time on the field in understanding the customer needs, courting customer needs and helping them configure their information systems, thereby promoting Dell’s products and services. This in turn led to the access of a vast amount of information about customer’s needs and preferences which Dell used for their after – sales service, which ultimately translated into highest gross margins among the Relationship buyers. Dell continued to divide its customers into finer and finer categories in order to provide better customer support. It’s website launch also proved to be quite profitable as consumers showed increased interests in accessing the website for availing the benefit of Dell’s online customer support facilities. The company also indulged in the sale of customised PCs that were made to order according to the customer‘s specifications. All this led to the company to sustain the tough competition during that era. 3. How effective have competitors been in responding to the challenge posed by Dell’s advantage? How big is Dell’s remaining advantage? The rapid growth of Dell caused its rivals to take notice and fuelled them to take stringent measures to counter its competitive policies, as a result the price differential between Dell’s products and that of its competitors almost vanished. Faced with persistent losses on its personal computer division IBM started to shift its focus towards direct distribution. However this move too, couldn’t be translated into higher profits and as a result the company was pushed on the verge of a shutdown. In the meanwhile the other major players like Hewlett – Packard and Compaq were eyeing negations for entering into mergers and takeovers to combat the fierce competition, especially from Dell, but with low success. In spite of innumerable efforts on the part of its rivals, they were highly inefficient in incorporating Dell’s business model, which put Dell on the top of the business ladder. The following exhibits represent the company’s superior performance which bears testimony to the fact that the business model as well as strategic decisions taken by the company to get a strong foothold in the personal computers industry is truly unmatched and the company still continues to remain a dominant player in the highly competitive and highly saturated computing industry, and was able to successfully dodge any counter measures taken by its rivals to outsmart Dell’s innovativeness and diligent decision making powers. Read More