How structurally attractive was the PC Industry in the late

1990’s

Ans:- The threat of new entrants is very high for the industry because there is uniformity
and availability of technology and hence there is a lot of imitation and no product
differentiation. This results in little switching costs. Hence the attractiveness to enter is
high.

Similarly, the threat of substitutes is also high since products from Dell are essentially
similar to those from HP, Compaq and Gateway.

The suppliers do not have a high level of bargaining power since the industry dictates the
terms and schedules of delivery. Besides, in an industry that is characterized by
innumerable suppliers, and a few dominant buyers of components that are individually
low-value and undifferentiated, suppliers cannot have a high degree of bargaining power.
Similarly, the buyers of computers, too , do not have a high bargaining power that could
reduce the attractiveness of the industry. There are a large number and a wide variety of
customers – from corporate to individual customers for desktop to laptop PCs as well as
for storage, servers and printers – that the players can target.

The intensity of rivalry between players depends on the numbers and size of players,
cost structure of the industry, level of product differentiation, customer-switching costs,
level of aggression by players and exit barriers. In these terms, when Dell entered the
market, it found an intensely competitive market, which is highly fragmented and
produce a commodity that is nearly undifferentiable and customer switching costs in the
market are low. Hence, the players are highly aggressive and evolve different selling
strategies. This resulted Dell in forming its unique direct model since it realized that with
competition , returns and margins inevitably comes down. Hence, there was an imminent
pressure to maintain margins, which it could do with direct model.

Thus, although the buyers of computers and the suppliers of parts do not have much
bargaining power in the industry because of their large numbers, the other three forces –
namely the threat of rivalry or new competitors, the threat of substitutes and the intensity
of industry competitors – are acute enough for Dell to formulate a new operation and
selling strategy in terms of its value chain.

Describe how Dell constructed a unique Value chain to succeed in this industry?

How did Dell cope with the industry structure?

Ans :- Dell outsources all its component manufacturing, including motherboards and
nearly the entire production chain. However, it does not outsource the final configuration
and keeps control over the production and supply chains. Since Dell follows build-to-
order and just-in-time policies, the inventory remains in the supplier’s books till Dell puts
the order. Dell’s direct-selling model depends critically on lead time-management so that
inefficient lead conversion time would not leave the company overage or underage Dell
computers of components. Once an order matures – either over the phone or through the
internet- the sales executive is entirely responsible to run the product chain to ensure it is
delivered on time. The pricing is also tailored to the company’s demand forecasts that are
strictly monitored on a weekly basis . Dell has eliminated from its value chain the
intermediaries, who would have charged margin, from the value chain, taking orders over
phones – and since the late 1990s over the Internet – and aligning the supply chain
closely to the assembly factories

Why did such rivals as IBM, Compaq, HP fail to effectively

challenge Dell

IBM and Compaq, used intermediate resellers to sell computers. This led to higher
inventory, higher costs, and slower responsiveness to customer wants. However, Dell has
been able to sell at lower margins since it saves on the margins charged by wholesalers
and traders. The relative price and the performance determine customer preferences and
Dell has taken advantage of the market preferences.

Dell’s business strategy was to take advantage of an opportunity in the market. It thus
crated a fit in the industry because it integrated all its processes and hence delivered a
customized PC. From getting the information about the requirements of the customer to
assembling of the products and delivering it to him, it had an interlinking process al
dependent on the inventory it had with it.

However Compaq and IBM couldn’t effectively challenge because they couldn’t trade off
their distribution channels of retailers and distributors and get into customization of PC’s
alone and get ahead of the market. If it had done so it would have lost a huge market
share. In order to careate a fit it had to copy the entire Dell system of customization
which was a huge risk and hence they couldn’t effectively challenge Dell.

Using your insights from the Dell value chain, comment on its
Retail Fiasco
Ans:-
Actually the case provides very contradictory statements by Dell. On
one hand Dell mentions that they want to sell only to the educated
customer who knows all about PC configurations rather than a
customer who buys a PC from the retail only for the purpose of price.
However it can be seen that not only were products imitated but
channels of distribution were also imitated. Dell had seen IBM succeed
and also Compaq overtake IBM because of its sales through
distributors and retailers. It thought that by manufacturing standard
PC’s it would penetrate the market as how IBM and Compaq had done
but it did not observe another side of the coin wherein these two
companies not only built standardized PC’s but also shipped stripped
down PC’s, containing only a motherboard, a floppy drive, and a video card and the
other components used to get assembled in the channels before being sold. This used to
make a huge amount of profits for Compaq and IBM which was being done by Dell but
in the Direct Selling form. Also when sold to retailers Dell price used to fall because it
had to sell at a lesser price to a retailers so that the retailer could mark it up a little bit and
get a profit as well. Hence the profit margins reduced a whole lot and hence even though
in the short run profits were made, in the long run losses crept up.