Matching Dell

The PC industry is one of the most competitive industries in the world. The industry had started to develop fast in the 80's when IBM launched its first PC series following which a number of "Clones" made their entry into the market. Along with these clones a number of smaller manufacturers also started entering the market. The reason for this emergence was mainly that IBM had conceded the rights to the 2 most important components of a PC i.e. the microprocessor and the Operating System to Intel and Microsoft respectively. This was due to their "Open Architecture" model. This caused the technology to be available to everyone.

We can analyze the PC market using Porter's 5 forces theory

Ð'* Industry Competitors: The PC industry consists of a number of companies; hence the threat from industry competitors is high. Due to the product being highly standardized and shifting costs between brands is low, there is fierce competition which leads to lower margins and profitability in the market. The PC industry can be described as being highly competitive

Ð'* Threat of new entrants: The threat of new entrants is a constant one in this industry which again leads to companies adopting aggressive strategies and lowering margins

Ð'* Threat of substitute products: The lines between PC's and other devices is blurring, other devices like PDA's, handheld electronics etc. are now coming out with features similar to PC's. This again is driving faster and faster innovation among the PC makers

Ð'* Buyers growing powers: Unlike in the introduction phase when there were certain people who were loyal to the Apple Mac, loyalty is rarely seen among the customers in the present scenario. Since the financial risk associated with switching between products is lower, customer turnover is increasing. Hence there is competition to retain customers as well

Ð'* Suppliers bargaining power: With the prices of the inputs required for PC's reducing the suppliers are the people finding themselves in a problem, the bargaining power in this case lies with the PC manufacturers

From the above data we can deduce that the reasons for the low margins and low profitability of the PC manufacturing operations is mainly to the following reasons

Ð'* Innovation

Ð'* Decreased prices

Ð'* Increased competition / New entrants

Ð'* The lines between electronic devices being blurred

Ð'* Decreased differentiation

The profit is mainly used for countering the effects of the 5 forces. Hence in this market only the operationally efficient manufacturers could survive.

Dell entered the market with a new model of operations called the "Direct Model". The "Direct Model" incorporated a few characteristics like

Ð'* Differentiated products for different customers on a made-to-order basis.

Ð'* Increased Customer service, they divided the customers into 2 groups : Relationship buyers and Transaction buyers and had sales reps for each of these groups

Ð'* Focus on specific Market Segments like the large companies which normally bought PC's for their entire workforce

Ð'* Just In Time manufacturing Ð'- This model helped Dell keep its prices lower when compared to their competitors as they were able to take advantages of any small change in cost due to the made-to-order nature of their process

Ð'* Good relationships with suppliers Ð'- Dell worked in close conjunction with their suppliers in order to arrange for in time delivery. In fact, they had a web-site customized to give both Sony and themselves simultaneous access to the customer

Ð'* Low Cost of Distribution Ð'- The distribution channels used by Dell were the most efficient and helped them achieve the tough task of distribution within a minimum cost. This led to a massive cost advantage

Ð'* Minimum Inventory Ð'- The inventory levels kept by Dell were close to zero, this saved them the high cost of storage and ensured faster delivery. Dell's electronic links with its suppliers helped it to communicate the inventory levels on an hourly basis for timely replenishment, which in turn kept the inventory levels low and hence carrying costs.

Ð'* Efficient after-sales service through various means Ð'- The after-sales service was provided by Dell through different mediums like the Internet, a 24 hour hotline and third party services like Xerox and Unisys

These factors have contributed to Dell establishing itself as a major player in the PC industry.

As the competition realized that Dell's model is operating with efficiency, the other manufacturers also introduced their own direct selling models.

Ð'* IBM introduced the Netfinity Direct program

Ð'* Compaq acquired DEC and introduced