Five forces, Business model and recommendations

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Dominant Economic Characteristics
• The information technology industry witnessed a growth rate of 7.7% in 2010. The
industry growth rate declined during the period 2001-2007.
• The industry usually offers the following products a) Hardware b) PC c) Servers d)
Storage devices e) Printers f) Peripherals
• The PC industry is currently in the matured stage of the product life cycle. Globalization
has not affected the growth rate of the industry.
• The industry has a large number of consumers and it is diverse. The attributes of the PC
industry is useful to anyone. Thus anyone can derive value from the industry.
• The innovation and technological advancements are booming in the industry with the
advent of sophisticated features in their products.
• The industry has both internal and external economies of scale. The industry has achieved
internal economies like managerial, financial, marketing and financial economies and
external economies with the retailers and distributors.
• Most of the households in US and many developed countries have computers. Students
start learning about computers at a very early age. There is high reliability in the industry.
The only drawback is the support systems in the industry.
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• The industry is very competitive and profitable as well. As of now, the PC industry has
the highest profit levels. E.g. Apple
• The industry is also characterized by mass outsourcing, customization, personalization,
electronic commerce etc.
• There was sluggish economic growth in the industry in the international market during
the year 2001-2003.
• Linux and Windows are the major operating systems in the industry.
• There is growing preference for low priced and standard components in the industry.
• The industry is also characterized by standardization, flexibility, simplicity, economy of
use and value.
• There is cut throat competition in the industry. The major companies in the industry are
Dell, Apple, Gateway, HP, Sony, Lenovo etc.
• The market is highly concentrated. The top companies like Apple, Dell etc have the
major share in the market.
• Products in the industry usually follow market penetration as many companies target to
sell their products at low price and get high market share.
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• The industry has high experience curve effects. Companies can achieve economies of
scale only after a company achieves high learning effect. This is a threat to new
companies.
• Price and efficiency are the major factors determining the market share of a company
• The return on asset ratio is low for companies with high market share in the industry.
• The products in the PC industry have moved from being a luxury to a commodity product
(Except Apple products)
• The massive digitalization of content is also an important feature in the industry.
Key Driving Forces
• Explosion of digital and information content is a key driver as it improved data
availability. The overall rate of global spending increased and the data availability also
doubled.
• The advent of search engine activity, social networking sites, e-mail, mobile phones,
android applications etc. also acted as a key driver. This digital expansion improved the
industry’s economic presence and overall demand in the industry.
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• The demand for information technology in emerging markets like India, Brazil, Russia,
China and India increased. The population is high in these areas and thus the demand for
IT products and services also increased. This was a key driver in the industry.
• Certain drivers had negative implications on the industry. The digital volume content
lacked authentication and there are many security issues in the industry. Also the
consumers’ expectations are not stable. These keep changing. The overall ability of the
consumers to deal with complexity and sophistication is low. The consumers want quick
access to their demands. All these factors are the downside driving factors of the industry.
• Replacement factor is a key driver in the industry. The existing PC’s are getting replaced
with the advancement in features, design and compatibility of the PC.
• The entry of smart phones into the industry is a key driver. The cross category
competition became more intense with the developments in the smart phone industry.
These devices also gave access to the internet. The smart phones are sleek and they offer
compatible usage. The costs of these smart phones are also low compared to the PC and
laptops. Thus consumers may switch to smart phones from PC.
• The mobile phones are offering the features of the internet at a subsidized rate. These
driving forces have negative implications on the industry.
• Processor speed and RAM were the driving forces in the industry that generated profit.
They are no longer the driving force as cloud computing is introduced. They are slowly
replacing processors and RAM.
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• The differentiation is not much in the PC industry as most of the players are keeping up
with technological advancement.
• The concept of convergence has been acting as a key driver in the industry through the
history. Earlier, transistors were used in computer hardware and they got replaced with
micro processors. Now these processors are slowly getting replaced with cloud
computing. Similarly smart phones and mobile computing offer the same services as
offered by the PCs and laptops.
• Apart from these the factors affecting the experience curve and scale effects, profitability
ratios like ROA etc. are also driving forces for the industry. The learning curve affects
the new entrants and determines the attractiveness of the industry and economies of scale
determine the cost of production. If these are easier to achieve, the industry becomes
more attractive. In the PC industry, the learning effect is high and thus it is not easy for
the new entrants to achieve economies of scale.
Key Success Factors
• Dominant brand name: many companies in the industry have strong brand name. Their
dominant presence in the market is because of the image they created for their products
through their strategic moves. This enabled them to earn more market share in the
industry. E.G. Apple, Dell, Sony. These companies have strong brand identity in the
market.
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• Keeping up with the demand: The industry is up-to-date with the technological
innovations taking place around the market. Also, it sells products that are preferred by
the consumers. Constant replacement of products is taking place in the industry. New
versions of laptops, PC etc have increased the compatibility, storage, look and usage of
the product.
• Economies of scale: even though the industry experience high learning curve effects,
once the learning is achieved, the companies are benefited from economies of scale.
Although this is a disadvantage to the new entrants, in the long run this makes
justification to their investment.
• Pricing policy: the pricing policy in the industry is very clear and appropriate. the
pricing in the industry is related to the economies of scale. As the production cost has
come down because of the economies of scale, the industry is capable to maintain their
current pricing levels. The pricing is also acceptable by the consumers.
• The supplier relations, distribution systems and strategic approaches like backward or
forward integration have also acted as success factors in the industry. In particular, Dell
had its own in house manufacturing of its components which helped them to build
expertise in their technology they use.
• The R&D capabilities in the industry improved and enabled them to keep their products
on the cutting edge because of the efficiency achieved in vertical integration.
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• Outsourcing the manufacturing of certain components and having a concentrated
assembly line also proved to be effective in the industry.
• The reduction in the supply chain by integrating and collaborating with outside vendors
and suppliers have acted as a success factor in reducing product and production cost.
Porter’s Industry Analysis
Rivalry
Follow the leader strategy is the current trend in the industry as the products can be easily
imitated. Although there is lot of differentiation in the industry, as the products can be easily
replicated, it is following follow the leader strategy. The competition in the industry is cut throat.
There are few major players like Dell, Laptop, HP, Apple, Sony etc with similar market share.
Other small competitors include Toshiba, Lenovo, and Acer etc. The competition is intense due
to slow growth rate and market saturation. The switching costs are low in the industry which
again increases rivalry.
Threat of new entrants
The economies of scale is high in the industry. It enhances with increase in learning. This is a
threat to new entrants as many companies would have already achieved economies of scale. Also
brand loyalty is poor in the industry. This means that anyone can enter the market and if they
show some differentiation it will sell. This is a threat from the new entrants to the industry. Also
the capital requirements are high in the industry. It requires high capital investment to enter the
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market. Also the return on asset ratio is shrinking slowly at the rate of 0.7% percent which is
again a threat to new entrants. The existing players like Dell have already established strong
relationships with their suppliers and they have achieved supremacy in their in-house production
of key components. The existing players can easily block the entry of new entrants because of
this which makes the industry unattractive.
Substitutes
There are substitutes in the industry like mobile applications and android phones which can
provide similar functionality of a PC or a laptop. These devices also use servers to access
internet.
Supplier Bargaining Power
Dell squeezed the number of suppliers from 204-47. The bargaining power thus has improved
but still not good enough as the 47 existing suppliers are core suppliers and Dell already has a
strong supply chain. But the bargaining power of suppliers in the chip segment alone is high as
there are only two major suppliers and they are AMD and Intel.
Buyer bargaining power
There are low or no switching costs in the industry and thus the buyers can easily switch their
brands. In this industry, price will be the major factor for switching the brand.
Dell Resources, Capabilities, Core competence and Distinctive competence
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• Dell’s unique business model is both a resource and a capability. Dell’s products like
laptops, PC’s, printers and printer cartridges, LCD plasma TV, cash registers, CD, DVD
drives, hand held devices, MP3 etc are important tangible resources.
• Dell has a strong supply chain and strong vertical integration. Dell squeezed the number
of suppliers in the industry from 204-47. This is the main capability and core competence
for Dell.
• Capabilities also include Dell’s just in time inventory, technical capabilities, customer
knowledge, relationships, ability to manufacture low cost customer related and preferred
products etc.
• Dell also has a strong capability as it has a website and intranet server that is strongly
tailored to the customer’s situation.
• The efficiency achieved in the supply chain is a powerful capability for Dell. The direct
to customer channel in the supply chain has been very effective and successful.
• The configuration and other features offered by Dell’s products have instant
customization and personalization to its customers which is again a key capability.
• The feedback system adopted by Dell gives quick and up-to-date information about
customers’ needs and preferences which is again a strong capability.
• Dell’s supply chain management is the firm’s distinctive competence. It’s direct to sales
strategy is also one of its distinctive competence.
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Business Model
Customer Value Proposition:
• Dell sells its products at low prices because of its just-in-time ordering system which
minimizes stock and the need to calculate demand in advance
• They provide an opportunity for the customers to choose what specification they want
through Dell’s customization program and the prices are quoted accordingly.
• The sales and marketing efforts of Dell are focused around customer groups whereas
many of the technology companies focus around product lines.
• The ability to quickly respond to the design flaws and component defects reported by the
customers gives a significant advantage for Dell over the other PC makers.
• The direct sales approach by Dell gives an edge over the other manufacturers which acts
as a totally customer driven system. This customer driven system provides flexibility to
transition quickly to new generations of components and PC models.
• Dell website provides almost all the details what the prospective customer wants like
configuration, price customization, track order etc. As the sales through website is higher
than the sales inquiries received via phone. This helps to identify the level of customers
“E-Loyalty” regarding the purchase mode.
• Dell has an efficient way of delivering free On-Site service for most of its PC’s by having
a tie up with local contract service providers to support the customers’ requests for
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repairs. Customer notify dell regarding the repair which in turn dell provide support
through the contract service providers.
• Dell provides a password protected and customized website called Premier page for all
premiere customers like Corporate, Government and Institutions which gives access to
information to all Dell products and configurations and place order online which routes
electronically to high level managers for approval and the assembly then delivery.
• The management of inventory records of the purchases for its large customers makes it
easier for the Dell support and sales personnel to provide recommendations and
suggestions about the PC purchases, configurations of customer’s PC network and to
provide value-added services.
• The customers of dell products are encouraged to provide reviews which is inspected by
dell later and posted in the website which in turn help the prospective customers to
choose among the best.
• The concept of feedback from the customers is encouraged in dell. This is achieved by a
website called “Idea Storm” where the customers of dell products post suggestions and
opinions to improve the quality of the products.
• Dell’s R&D focus on new developments which would prove most useful and cost
effective for customers. The philosophy of dell is to think on behalf of its customers to
seek out for new technologies arriving at the marketplace and to adapt to the design,
feature’s, options and solutions that are most relevant to the customers.
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Profit Formula
Revenue generation:
• Sale of Desktops PC’s, Laptops, software and peripherals like printers, monitors,
Projectors, Ink and toner cartridges, Server and Networking Hardware, Consulting and
enhanced services and storage products.
• Sale of Warranty on most of the Dell products.
Cost Structure:
• The costs involved in making these products are the raw materials which are
manufactured by dell itself. Also includes production and manufacturing costs,
establishing the website, Investment cost involved in expansion of business in lucrative
markets.
• Promotional & Advertising costs and Support & maintenance cost are also one of the
major cost involved.
Profit Margin:
• The profitability of Dell dependent on attracting large number of customers to cover its
costs. They sell its product at low profit margin by keeping in mind of the high sales
volume through their effective selling strategy.
Key Resources and Processes
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• Dell operates globally by conducting business through 3 geographic segments like the
America, Europe and Asia Pacific-Japan. Each one severs the neighboring countries.
Dell’s capabilities like Demand management, internal collaboration, Leverage partners
and Business fundamentals. It’s Process like Manufacture to order, Information
technology and Integrate partner planning and execution respectively.
Action Plan
• Increase standard
As the competitors have better standards in the same product line which makes it a weakness in
the competitive market. By inspecting the quality of the parts before entering into production
will reduce the defects and compete or come in par with the competitor’s standard.
• Idea Storm:
The senior management takes the decision of the design and the features depending on the
feasibility of the production. The feedback site called Idea Storm by Dell has various suggestion
and opinion which should be considered majorly and using the innovation expected by the
people should be identified for the feasibility for production. By fulfilling maximum expectation
of the customers with the integration of the company’s low cost goal, market share can be
increased drastically.
• Trade Off
There are not many Dell products available in the retailers as they sell its products through direct
selling (website) and customized which are the company’s core values. This customization needs
time and bought through dell site, thus makes the home users disappointed who are interested in
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buying directly at shop by examining the product and buy some other brand instead. So keeping
in mind of the home buyer and electronic buyers, dell products should be sold at retail stores and
in the website.
• Student focus
Only 5% of the Dell’s total sales come from education institutions like schools and colleges as
the company did not focus in that market unlike other competitors. This is one of shortcomings
of dell. Through effective marketing by providing discounts to students, sales can be increased.
• To focus on innovation:
Providing more emphasis on Research & Development will help the company to stay ahead of
the industry through the development of new products. Increase of spending in R & D from 10%
when compared to its competitors. R&D should be done without changing its focus from mass
customization.
• To expand their support and services:
This strategy encourages Dell into the business consulting. Dell’s expertise in the field of
Support and services would definitely provide differentiation in the market.
• Customer service is one of the key success factors for the company which should be
enhanced.
• To strengthen the customization of Dell’s product, the firm must increase its suppliers
those who can integrate well with the Dell’s supply chain.
• To modify its retail sales in markets by launching retail showrooms where customers
doesn’t have access to internet or credit cards.
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Competitive Business Strategy
Strategic alliance:
Dell forms strategic alliance with ika Systems where the both has Healthcare business process
outsourcing and Technology service respectively. Due to this alliance, Dell reduces
administrative costs and streamlines the process. Dell and Perot systems formed alliance to
provide fully integrated virtualized health care technology solutions to reduce cost and improve
patient care.
Virtual Integration:
Dell basically stitches together a business with partners or suppliers like AMD, Seagate
technology etc that are treated as if they are inside the company. When launching a new product,
the supplier engineers are right in the dell’s plant and the problem is fixed in real time.
Offensive Strategy:
When rival computer companies provide relatively higher cost, dell decreases its price by timely
discounts which acquires the market share overall.
DELL’s CORPORATE LEVEL STRATEGY
In order to gain, competitive advantage a corporate level strategy that involves selecting and
managing a group of different businesses competing in different product markets was necessary
for Dell.
Dell diversified from a being a pure desktop PC provider to an industry leader in various other
categories as well. It realized the growth opportunities for other supporting products like storage
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devices, internet switches, servers, printers and other consumer electronics like MP3 players and
LCD TVs. And this has led to more than 30% of share for Dell in the industry.
Because of this ratio and the existing links between its diversified businesses, a related
constrained diversification strategy is being employed. This strategy has enable Dell to expand
value of its resources and capabilities by sharing activities and exploiting economies of scope
between its businesses.
To diversified by having strategic alliances with EMC, a leader in data storage to manufacture
storage devices. It contracted out its printer manufacturing to Lexmark. Its other businesses were
made possible by the core competencies that Dell already developed for in one of its existing
businesses. Hence transferring it to a new business eliminates the need for additional cost.
Moreover, the intangible resources are difficult for competitors to reproduce and Dell has made
use of that. For example, Dell started to make servers from the confidence it created among
people. Their PC desktops and laptops have acquired the brand value for Dell. So this intangible
resource that they have acquired over years has helped to launch servers under the brand name.
Thus, the resources and capabilities are utilized to achieve diversification of Dell’s offerings.
Moreover, the complementing products like printers and servers are going to benefit Dell’s
overall sales in the long run.
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