IIM Calcutta

Strategic Management

Matching Dell December 22nd, 2009

Submitted By: Group A5 Section A Gautam Adukia Ajay Bansal Alpesh Chaddha Aman Deep Amit Gupta Amit Nagdewani Amol Deherkar Ankit Jain Avinash Pandit Ankit Kumar Singh 404/16 048/46 085/46 023/46 026/46 027/46 032/46 036/46 040/46 022/46

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

Suppliers

The major suppliers (Microsoft and Intel) enjoy a monopolistic position and have high bargaining power The suppliers of other components are not too specilaized and do not have strong brands

Customers

The channel partners do have significant bargaining power and if resellers or retailers are chosen as the distribution channel they tend to resist other modes of distribution , more so with a new entrant New entrants will face quite a stiff barrier inreaching the customer if they try to distribute directly

Competition

Very intense with big branded and establised players like Dell,HP and IBM The existing players will enjoy large economies of scale due to their set distribution channels The wintel base and components are outsourced so price a big differentiating factor for end users. Existing players better poised to play the price war due to deep pockets

Substitutes

Increasing with high endmobile phones and PDAs Monopolistic suppliers like Microsoft and Intel can enter this space and take away the complete market share by controlling supply to computer manufactures or seliing at a higher price

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

Dells 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

Dells Competitive Advantages Dells 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 didnt 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 dont 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 customers 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, Dells competitors sold their product via downstream partners such as retail chains, integrated resellers and other third party distributors. In attempting to replicate Dells 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 wont 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 Dells 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 Dells 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.