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Strategic Management
Matching Dell
Submitted By:
Group A5 – Section A
The nature of PC industry is highly competitive mainly because of aggressive pricing which
is a major differentiating factor. The following factors also contribute towards the
competitive nature of the PC industry:
Low Barriers to entry: The industry employs the assembly line which assembles the PC
from its supplies of hardware. The suppliers are plenty in numbers which will ensure the
supply of hardware products. Thus the entry barriers for a new firm to setup in this sector are
quite low.
Low switching costs among customers: With time, the cost of a PC is decreasing rapidly.
The product can easily be replaced in order to get equipped with the latest hardware and
software technologies. Hence the switching costs are quite low among the customers.
Weak differentiation among rivals: The system mainly consists of an Intel microprocessor
and a Windows Operating System. Thus the interface that everyone uses is almost same for
the PC market. This Wintel system comprises near about 95% of the market. Thus the
product differentiation among the rivals is quite low.
Vigorous Price Competition: With the increasing operational efficiencies the cost of
production reduced drastically. Thus, the companies moved quite aggressively on the pricing
issues to gain advantage over others and to undercut the market shares of others. Moreover
the product of various PC manufacturers does not differ much in terms of hardware and
performance .It makes price an important issue for differentiating the product relative to
others.
Severe hold up by Intel and Microsoft: Intel x86 microprocessors are used nearly on every
PC along with Microsoft Operating systems. These 2 things are the most important for any
PC manufacturer. Intel and Microsoft are the biggest player in the sector. Thus the entry to
barrier for the newcomers is quite low.
Barriers to Entry in the Computer Industry
Recommendations for
Competitors
Dells competitive advantage
lay in their supply chain
model combined with the
numerous services it
provided to its corporate
clients, such as online account management and ordering, high levels of customization, on-
site service through third party partners such as Xerox, and a dedicated sales team on each
account. Traditionally, Dell’s competitors sold their product via downstream partners such as
retail chains, integrated resellers and other third party distributors. In attempting to replicate
Dell’s Direct Model, IBM, HP and Compaq were not able to manage the negative reaction
from the distribution partners – creating an adverse effect on existing sales. Since these
distributors were a major proportion of their sales they could not afford to dissociate with
them.
Dells Competitors can use a two pronged approach by attacking both the low end customer
segment and high end corporate segment.
i) Customer Segment: Though Dell has a major cost advantage, Dell hasn't historically
targeted its products to consumers, a segment that has the potential for most of the growth.
Dell's success has been customised products. This approach has worked well with corporate
people and professional users. Dell has not included non-expert buyers in its strategy. As the
prices of computers decreases computers would become ubiquitous with the proportion of
non-expert buyers increasing. This segment would become more and more profitable in the
coming years. For many of these customers, processing speed and customization won’t be as
much a value add as the design of computers. So other companies can target this segment by
simplifying and improving the design of computers. They should spend on marketing
activities to build a better brand value. They can also increase their value proposition by
simplify their sales by curbing the number of options they offers on PCs and by providing
better customer service. Since customer segment is relatively price sensitive Dell’s
competitors should reduce price in this segment by going for direct sales. Distributors and
resellers should be pacified by providing compensation for referrals and by utilizing them for
handling small and medium corporate houses.
ii) Corporate Segment: Corporate customers are not as price sensitive as the consumer
segment. Further, they value services, like uptime and reliability, and are willing to pay a
higher price for that. Thus what Dell’s competitors can do is to bundle their hardware with its
software and services, making it a more attractive proposition for corporate customers. As
IBM, HP and Compaq have strong integrated resellers and other third party distributors, they
can utilize them to gain company contacts to help increase the sales distribution.