Dell - How and Why Did the Personal Computer Industry Come to Have Such a Low Profitability?

1) How and why did the personal computer industry come to have such a low profitability?

In the past the personal computer (PC) industry has distributed its products at a fairly unaffordable price, however it has collected only a small profit. A major reason for this low profitability issue is due to the large competitive circle. After studying the competitive environment of the industry, it is clear that this market is easy to break into. These computer are not uniquely, they are assembled with standard parts and require very little expertise. Capital requirements to set up an assembly line to produce PC's are also relatively low, estimated at roughly a million dollars. which means that virtually any firm can enter the market easily. Despite sky rocketing demands for PC's, PC producers are unable to capitalize due to increasing number of competitors. The PC industry is also affected by environmental turbulence due to price fluctuations of its components. Constant innovation in PC technology causes older components to be rendered obsolete and prices of older versions to plummet. PC producers who are stuck with inventory of obsolete products incur high costs of dumping these components. PC manufacturers’ who limit their inventory to reduce the impact of price fluctuations are at a cost disadvantage by failing to reduce costs through economies of scale in purchasing components. Therefore, PC manufacturers face high risk when stocking components, and essentially lose out on profitability due to changes in technology. Due to a vast majority of manufacturers and smaller corporations entering the market it has resulted in a very little change for the product. Most of the larger manufacturers have the ability to utilize similar parts and materials, thus allowing them to have the same buying power. Specifically, for processors that are distributed at an equal price to all major companies. It is evident that due to the competition in the large industry, it is not realistic for a long sustainable business. Furthermore, it is easy for other manufacturers to recreate competitive prices, which in turn would create lower profit margins for the industry as a whole. Overall, the high competition and vast ranging price changes have caused the PC industry to have low profitability.

2) Why has Dell been so successful despite the low average profitability in the PC industry?

The differentiated strategy is what has been unique to making Dell a successful company, when comparing them to other major brands. The Direct Model' that Dell used has been thoroughly successful in reducing its bottom line costs. When studying the margins of 1994, Dell retail had 7% gross margin and Dell direct 19%; regardless of the higher operating expense in the direct channel their overall income was higher through this channel. By reducing the costs of using resellers and distributors, Dell was able to sell at lower prices which were attractive consumers. Through its direct interaction with customers, Dell was also able to understand the needs of its customers better than the competitors. With this key information Dell subdivided its customers into categories where it could target them with specific products and services, which ultimately boosted sales. This market focused initiative with customized products differentiated Dell from its competitors. Dell also tied up contracts with large companies and institution which placed large orders, and through its relationship with Dell placed repeat orders as well. By investing heavily in technology, Dell further reduced its operational costs with the launch of its website where customized purchases could be done online.The after sales support of Dell had built up an excellent reputation in the industry, as proven in the customer surveys done in 1998. Customer problems were solved using diagnostic software with 90% cases resolved over the telephone. This reputation increased the brand value of Dell which encouraged sales and repeat buyers through brand loyalty. Dell's unique capability was not only through its direct selling but also its efficient manufacturing line. Through collaboration with suppliers, Dell coordinated its supply chain and manufacturing line to reduce its days of inventory to 7 days in 1998. Co-location of suppliers' facilities to Dell manufacturing sites and electronic communication links made replenishment of inventory easy and quick. By restricting the inventory and efficient manufacturing processes resulted direct cost advantages over its rivals. Using helpful resources, Dell improved over the years. Dell is able to increase their profit as compared to other companies. In addition, Dell’s large amount of sales, customer service, large supply of vendors and support network has allowed this company to be a success in a predominantly low-profit industry. In the 1990s this strategy gave the company an advantage.

3) Prior to the recent efforts by competitors to match Dell (1997-1998), how big was Dell's competitive advantage? Specifically, calculate (that means use numbers) Dell's advantage over the team of Compaq and a reseller in serving a corporate customer.  If you need a couple hints on how to get started, please click on the links below. HOWEVER, try to make headway first before you look at the hints?

Prior to the recent efforts by other major manufacturers to match Dell during the late 1990s, the company had a large advantage that aided their growth towards profit. Between the year 1992-1998 Dells net income gross was about 1750.98%. Which is more than 4 times over HP which is 436,4%, the second best performing player and twice over was Compaq at 770%. Revenues of Dell increased on 1285% against 660% of Compaq. From this data it can be seen that Dell’s net income gross exceeds the revenue gross, while Compaq didn’t succeed to use the revenues incline to make income. Inventory turnover increases by 634.9% at Dell against 202% at Compaq shows the competitive advantage of Dell in managing and maintaining its stocks. In serving its customers Dell has succeeded more than its rivals.  Based on the consumer reports ranking of PC manufacturers, Dell was awarded with the best and highest rank of all. The advantage of Dell in serving its customers as opposed to other companies were vastly different. Dell completely dominated the customer service component of their business. In regards to the corporate customer service by Dell and Compaq, it should be mentioned that the companies give customers the feeling of being heard and valued at Dell Corporation. For example, the 24/7 support based on forecast production system with 64 days of delivery period.  

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