The Existing Competition: Dell Computers - Case Study Example

Dell Computers: A Case Study 2009 Positioning Map The positioning map of the computer industry is given below. It may be inferred from the map that HP is the most reliance competitor with both the performance and the flexibility attribute at high levels. The Executive, Dell’s product, has higher performance at 1, as it has reasonably good internet connection and can perform other functions at a good speed, but its flexibility attribute is lower, at -1, which means that it cannot run many software. On the other hand, Compaq’s products are perceived to be lower than the Executive in performance, with 0.5 but have equally good level of flexibility. IBM (Lenovo)’s products perform better than the Executive, with attribute of 2, but has even lower flexibility, at -1.5. The Existing Competition At the time Dell Computers began to produce 1984, there were already too many producers offering similar products and players had to engage in marketing tactics to attract customers. The market was mature, with buyers going for second computers or replacing old ones. They also had substantial knowledge of computers so did not need on-site training. Instead, they needed a lot of persuasion. So, Dell devised a new business policy – direct selling and build-to-order that enabled it to offer lower prices than the competition. The main advantage of Dell Computers over others is in its direct model of selling and build-to-order supply chain with which it has been able to gain advantage over other players in the computer industry. Through this strategy, the company did not require retail intermediaries, taking orders over phones and over the Internet. Supply orders to the assembly factories were given only after orders were received. Over the years, Dell has grown sophisticated in streamlining the entire process of order-taking from customers, buying and assembling the components from its vendor network traversing the world and dispatching to the customer on time. In contrast, all the other manufacturers sell through retailers. As a result, Dell has lower inventory levels than the others. In terms of the product, Dell should be most concerned about competition from HP as the latter has rapidly captured the market on the strength of the perception of the product. HP has legacy supply chains with retailers and sellers that have enabled it to increase sales. However, the comparative levels of the retailer margins are not provided in the case hence it cannot be definitely said whether Dell has a higher profitability than the others. Also, HP’s products are superior in terms of the performance and flexibility attributes because it spends much more on R&D than Dell does. Dell has concentrated on lead-time management so that the company did not waste time in converting orders into supplies. At the same time, it did not need to hold on to unsold inventories or delay in supplying to customers. Besides, on the basis of its business strategy, it can meet the customers’ requirement exactly. The selling and marketing costs of Dell are lower than the competitors because it sells directly to the customers. Emerging Competition Dell is a relatively late entrant in the computer industry, with IBM and HP having the major market shares when Dell began production. That was why Dell innovated a different business strategy. However, over the years, all the competitors have developed similar production strategies. Although the case does not mention the production strategies of the competitors, it is known that all of them outsource a major part of the supply chain to low cost manufacturing destinations in Asia. This is the main cause of a similar price structure that all producers can offer. The competition in the computer industry has increased because the product has become commoditized. Similar technology is available to all producers who can differentiate products only slightly. Customers can also switch between suppliers at ease. This has meant that there are many new players who can pick up the technology fast. Dell does not derive any benefit from economies of scale as assembling computers do not require huge capital investments. This is mainly why Lenovo, which has its main production bases in China, has been able to quickly capture market even though it has entered the market later than Dell’s Executive. Product quality and cost saving through outsourcing has enabled other manufacturers to catch up. The industry has reached a stage where customers are not looking at increasing performance of computers any more. Rather, with the trend towards central computing systems, the focus is more on client margins rather than flexibility and performance. Standardization of products has meant that assemblers can put together a computer by sourcing most of the components. Hence, the computer market is fast becoming a commodity market like the television or the refrigerator. As a result, there is the threat of other low cost, low brand suppliers like Lenovo capturing the market, like what Dell did two decades ago. Dell’s business model, which has been its key to success for so long, will then become its disadvantage. First, Dell will lose its edge from sourcing benefits since assembly costs will become higher than what the competition can sell. Second, Dell will lose the low cost advantage that it derives from low inventories and absence of retailers since the cheaper brands will be able to offer even lower prices or at least the same price as Dell. Third, the just-in-time component requirements will become more expensive that bulk procurements by producers of commodity computers. Thirdly, the assembly locations near the end-use markets, as Dell does, may become more expensive than low cost production centers elsewhere. Besides, selling at discounters, shopping malls, grocers as the competitors do, may outbeat the low costs of direct selling. The chance of obsolescence and replacement purchases, which make up the bulk of Dell’s sales, will also diminish with commoditization. The lower prices of products, hence of components, will also reduce the cost of inventory for competitors, wiping out Dell’s edge over the competition. Dell’s resources and capabilitiesthat gave it an edge in competitive power is petering out even though no other player has followed the direct selling model as vigorously as Dell has.. Dell’s first mover advantage in the direct selling model has given it an edge to competitors so long but the price differential has more or less evened out. Besides, Dell’s value chain is also finding loopholes as other competitors are making products that are higher on performance. Dell has increasingly focused on corporate clients while the medium-priced products have higher demand from home buyers. For corporate clients, Dell can migrate to enterprise solutions targeting at medium-sized companies where the direct selling strategy would succeed. For home users, Dell is increasingly engaging retailers and selling through other marketing avenues. The case does not differentiate between corporate and home buyers so it is not possible to say whether the competitors are differentiating prices. Corporate clients usually make online purchases more. The company should realize that with commoditization of the computer market, more players like Lenovo will enter in to market and the company should now begin to focus more on volumes than margins. Reference Di Beneditto, Anthony, Case Study: Dell Computers Read More