Matching Dell

Final Exam
lvaro de la Garza Musi
Questions:
1. How and why did the personal computer industry come to have such low average
profitability?
To understand why the personal computer industry is having such a low average profitability we
need to analyze it through Porters 5 forces, analysis that can be found below:

Bargaining power of customers: The bargaining power of the customer is qualified as

medium to high. The whole industry, except Dell, had retailers and resellers as its direct
customers. It can be seen that, retailers and resellers face net margins of 0.6% and 1.3%;
these margins are not caused by a low negotiating power with the manufacturers; they are
driven by the bargaining power of the end customer which has a wide variety of choices
(both retailers and manufacturers) and is mostly persuaded to buy products due to its low
prices. In regards to their relationship with manufacturers, they do possess some
bargaining power. In the case it is presented that manufacturers offer price protection and
buy back policies to the retailers and consumers which represents 25 cents on every cent
of revenue for them. They also spend large amounts on advertising towards them; both
indicating bargaining power.
It is important to also talk about the bargaining power of the end consumer as they will
also affect the PC manufacturing industry profitability. End consumers are divided as
follows:
o Large and midsize business: These consumers buy in bulk and can ask for
discounted pricing, so bargaining power is medium.
o Small business: Very educated customer. All the following characteristics
influence their decision: Reliability, performance, support, service, service, price,
brand, and channel recommendations. Due to this and the crowded PC market
from manufacturers; small businesses do have some bargaining power.
o Individual consumers: Decision is based heavily on the evaluations of
independent organizations, with small knowledge about PCs and their
performance; the individual consumer only looks for the price and this creates a
high bargaining power on their part.
Bargaining power of suppliers: The two main inputs to manufacturers are: operating
system and microprocessors. Currently, most PCs use the common standard Wintel and
by 1991 between 85% and 90% of the computers use these standard. This fact makes
Windows and Intel control the entire industry of OS and microprocessors respectively.
Therefore, bargaining power of suppliers is high.
Threat of new entrants: The threat of new entrants is extremely high in the PC
manufacturing industry because the barriers to entry are really low and do not pose a
serious challenge to anyone who is willing to enter the market. A new PC manufacturing
would only need an initial investment of roughly $1M to start manufacturing 250,000

PCs. Also, most of the current manufacturers do not possess any brand recognition or
loyalty from its consumers; as a consequence their willingness to change is only driven
by any brand (old or new) that offers better quality or pricing.

Threat of Substitutes: The threat of substitute products is low, because at this time the
only new technology being developed was to improve the performance of computers.
One substitute could be said to be Apple computers because they were so much different
than all the Wintel computers. Nevertheless, still Apple only controlled around 10% of
the market and it was rare for consumers to change to Apple at this time.

Rivalry among existing competitors: Rivalry is very high, there are several facts in the
case that show us that the competition is fierce among the manufacturers:
o Between 1975 and 1981, there were various firms that began to offer increasingly
integrated, pre-assembled personal computers such as Texas Instruments,
Hewlett-Packard (HP), Zenith, Nec, Toshiba, IBM, Xerox, Sanyo, Sony, Olivetti,
Wang, and DEC. All these firms crowded the market, moreover; with low
differentiation, they could only compete in price. This would little by little eat up
on manufacturers profits.
o Personal computer sales crested in 1990, just when the United States was facing a
recession; in response to this Dell Computer ran advertisements showing that its
prices were much, much lower than Compaqs list prices. In response, Compaq
slashed its prices by as much as 32%, introduced 41 new products in 1992, and
added new distribution channels. These factors led to a vigorous price war.
Summing up, because both the bargaining powers of the suppliers and the consumers are high;
the PC manufacturers profit margins are pushed down, which decreases profitability.
Furthermore, threat of new entrants and rivalry among competitors are very high and these leads
to price wars, low-product life cycles, etc. which also decrease the profitability of the sector.
This is why the PC manufacturing industry is not a good one to start a business at.
2. Why has Dell been so successful despite the low average profitability in the PC industry?
There are several factors that created a competitive advantage on the cost side for Dell which
helped it being so successful with respect to its competitors. They are presented below:

Just-in-time delivery: On behalf of Dells suppliers, this fact reduced raw material
inventory in a considerable way. This, in turn, helped out Dell in being a company that
was not capital intensive.
Customization: Dell sold directly to consumers and provided tailor-made solutions for
each one. This helped the company in two ways:
o First, the company only produced based on customer orders; reducing its days of
finish goods inventory to a negligible 7 days. Again, supporting the strategy of
making Dell a company with low capital requirements.
o Second, no single customer represented more than 2% of the companys sales;
lowering the companys risk and adding bargaining power to Dell.

Communication with its consumers: Dell created both an inside and an outside sales
team, this way the company could understand his customer needs better. Furthermore,
being a first-mover on the customization strategy, Dell was able to get close to the endconsumer and create a little-bit of loyalty to the brand.
Close relationships with suppliers: Dell was a strong supporter of Co-location, in other
words, the company would incentivize suppliers to locate its respective production
facilities and warehouses close to the manufacturing plant. This reduced transportation
costs for Dell and also WIP inventory.
High Services-level: Dell offered after purchase services to its customers; these services
included:
o 50,000 pages of customer supported information.
o Installation of off-the-shelf software and even software the customer already
owned.
o 24 hour hotline for technical support (which was successful 90% of the time).
Centralized production: The meaning of a centralized production is not that they had
only one facility; on the contrary, Dell had manufacturing plants in Asia, Latin America,
the US and Europe. Nevertheless, the communication among these plants was very
centralized and in this way Dell was able to eliminate all the inventory buffers all of these
individual plants could have.

3. Prior to the recent efforts by competitors to match Dell (1997-1998), how big was Dells
competitive advantage? Specifically, calculate Dells advantage over the team of Compaq
and a reseller in serving a corporate customer.
To calculate the competitive advantage of Dell over Compaq the computer model 97Q1 will
be used. For the analysis the following information was used from exhibit 6: average COGS=
21%. Assumption of inventory carrying cost is taken to be 25%.

Cost differences

Dell

Compaq

Source

Price to customer

$ 2,231.00

$ 2,546.00

Averages of Exhibit 10b

Price to channel

$ 2,418.70

Page 5, paragraph 3

COGS

$ 1,751.34

$ 1,826.69

Exhibit 6, page 2 and 3

Inventory Carrying costs

72.97

Exhibits 6, 13.

Adv. To Channel

63.65

Operating margin

406.69

198.54

Dell's Comp. Adv.

208.15

329.82

Page 5, paragraph 6

4. How effective have competitors been in responding to the challenge posed by Dells
advantage? How big is Dells remaining advantage? Why has it been so hard for rivals to
match Dell?
I believe competitors responded fast, but not in the necessary extent to compete against Dell yet.
All competitors still rely high on their retailers and resellers and not on the direct channel. From
the analysis from question 3 it can be seen that most of this competitive advantage comes from
eliminating that part of the value chain. I believe Dells competitive advantage is still very big

because most of what competitors did was reduce days of inventory which is not a very big
saving for the company. They also added the direct channel through different ways such as sales
force and a website; nonetheless I do not think they have attained the reach the want to.
I think it has been very hard for competitors to match Dell for two reasons:
-

Big corporations are slow to change and it will definitively take some time to transition
from your current strategy which relies on retailers and resellers to a direct one.
Most competitors are unwilling to adopt the customization or pull strategy, they stick
with the push strategy which is their mayor disadvantage.