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IIM Calcutta

Strategic Management

Matching Dell

December 22nd, 2009

Submitted By:

Group A5 – Section A

Gautam Adukia 022/46


Ajay Bansal 023/46
Alpesh Chaddha 026/46
Aman Deep 027/46
Amit Gupta 032/46
Amit Nagdewani 036/46
Amol Deherkar 040/46
Ankit Jain 048/46
Avinash Pandit 085/46
Ankit Kumar Singh 404/16
The World Computer Industry
The computer industry was highly standardized with most of the desktop machines using
Intel architecture and Microsoft operating system. The PC manufacturers assembled
hardware and loaded software before selling and thus differentiation based on component
quality was not possible. The only differentiation factors present were: brand value (based on
the range of products available and quality of the assembled product), and cost
differentiation. We can analyze the industry structure by considering the factors of Players,
Distribution Channels, Customers and Product Range available:
Players: The top four players in the PC market in 2002 were Dell, HP, Gateway and IBM.
The 4 market players comprised around 58.8% of the total share.
Distribution Channels: The sales were mainly done by the following distribution channel:
Direct Sales Force, Internet, Reseller/Distributor, Retail and third party telesales.
Customers: They served mainly Large and midsize businesses, government offices. Along
with that they also targeted home consumers and educational institutions.
Product Range: The industry was taking advantage of economies of scope and looking into
the multitude of opportunities. They were also getting into the business of manufacturing
Notebooks, Servers, Workstation, Imaging and Printing Devices, PDAs etc.

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

Ways to Surpass the Barriers


– Enter the segment which is not much profitable for the current player and then move
into the profitable segments
– Focus on branding and differentiating by better post sales service and support
– Dual Distribution Strategy : Use Channel partners in the regions which are tough to
penetrate with direct distribution and Direct distribution for other regions without
creating conflict of interest

Dell’s financial advantages


• Higher percentage of sales in the US market which had higher average prices
• Low asset base due to low inventory (7 days v/s 50 days)
• Higher margins due to direct distribution
• Lower advertising and R&D costs
• Higher percentage of sales to businesses which provided greater margins

Dell’s Competitive Advantages


Dell’s competitive advantage came
from bringing changes in the
primary activities of the value
chain. By bringing changes in
primary activities, Dell was able to
reduce its cost of production and
differentiate its products from its
competitors.
Cost Leadership: Dell used just in time manufacturing technique, as a result, the finished
goods inventory was reduced which reduced its storing cost. The suppliers were also
connected with the online mechanism which helped them identify real time demand for Dell.
This helped suppliers reduce their inventory holding time for Dell. The reduced cost benefits
were again transferred to Dell.
Dell used cell system in its factories. Each cell had five workers involved in assembly of
personal computers. This system improved the product quality by reducing defective products
which helped them to cut their wastage cost.
Dell distribution
channel didn’t
include resellers and
retail stores. They
sold their product
directly to the
customers by using
third party shippers
which helped them to
save dealers margin.
Product
Differentiation: Dell
differentiated its
product from its
competitors by giving
its customer the facility of customization. Buyers could customize both hardware and
software according to their choice and don’t had to buy customized products as offered by
other firms in the industry. This feature gave buyers the freedom to choose the kind of
configuration which matched their requirement giving more value.
Dell also used to provide their customers with 24 hours a day customer support for solving
any kind of problem related to their product. Dell also provided on-site service in some cases;
this was a unique value proposition at that time.
By decreasing their cost and increasing customer’s willingness to pay for their product
because of features like customization and customer support, Dell was able to increase its
area in which it can price its product. This gave them the room to adjust their prices
according to its competitors in this highly competitive 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.