The Success of Dell Computer

The Success of Dell Computer

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

The PC industry has started to develop fast in the 80's when IBM launched its first PC series and later on when numerous small companies entered the market. PC is a new product and companies had to create the demand to it from the scratch.

We shall apply the Porter's 5 Forces model to examine the PC market and see how forces of competition influence the profitability of the market players.

(See Appendix 1 for detailed description of how does certain parameter influence the market.)

Entrance barriers are:

The initial investment is relatively low (1.1)

Brand loyalty is average to low (1.2)

Switching costs of the market player are average. (1.3)

The threat of new competitors lowers the profitability of the market

Customers bargaining power:

It is very hard for the customers to join forces and fight for their interests. (2.1)

According to the modern way of life the need for computer in every work place and home is high which decreases even more the power of the customers. However, the switching costs are low (2.2)

In general the customer bargaining power is low and therefore it raises the potential of market's profitability. Though, most of the companies provide "buy-backs" and price protection that lessens the chance to cash on moderately strong manufacturers position.

Suppliers bargaining power

Suppliers are divided into 2 major groups: (3.1)

See the attached table (3.2) for the detailed description what parameters influence the suppliers’ powers.

The suppliers bargaining power is generally strong because of the big monopolies and the high importance of purchasing components and operating system, therefore it decreases the profitability of the market players.

Threat of substitute goods

Substitute goods are different on for different market segments see (4.1) For most of the customers these substitute products cannot satisfy the needs covered by PC computers.

The lack of suitable substitutes raises the industry profitability.

Complimentary products product market is rapidly growing and therefore it raises the industry profitability.

Rivalry among established firms is fierce. There are several factors that illustrate this: established market players (6.1). The product is highly standardized and the switching costs of the customers are low. Players are aggressive (6.2)

Business environment.

PC industry is affected by two opposite forces: technological advance that pushes the industry forward and the industry sensitivity to economical stagnation (if the economical situation is bad customers won't upgrade their computers).