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

The profitability of the personal computer (PC) market despite of the high arise of activity volume in the last decade is low. The main factors that reduce this profitability are o The fierce competition The personal computer industry has been one of the most competitive industries in the world which led to competitive pricing among producers.The industry is typically characteristiced by rapid innovations products, low initial investment to set up an assembly line to produce PC which means that virtually any firm can enter the market easily, and the demand for better performance systems has kept the market very attractive resulting on invited new vast competitors to joined in this market in order to gain more and more of the market share priced the computers at a very competitive price (operating at very low profit margins). o Lack of product differentiation The existence of many large manufacturers in addition to the continuous entry by smaller manufacturers results in limited differentiation and decreased competitive advantage among PC manufacturers since everyone can access the new technology at the same time. All manufacturers also have access to similar suppliers and therefore have the same buying power especially for processors which are sold at the same price to all manufacturers. It is clear that the competitive advantage in the PC industry is not sustainable as easy replication by competitors promotes price wars which lower profit margins for the industry as a whole. o High monopoles on the suppliers side and the buying power of the customers The supplier power was very high because of the big monopolies (Intel & Microsoft) and the high importance of purchasing components and operating system which is constituting up to 6775% of the PC cost), therefore the PC manufacturers could not control the prices and caused decreases the profitability of the market players. Moreover, the buying power of the customers was also high because of the number of choice available in the market with low switching cost since there was no brand loyalty on part of the customer. The PC companies in order to gain more and more of the market share priced the computers at a very competitive price (operating at very low profit margins). Hence the whole industry has since been in a highly competitive low profitability state"

2. Why has Dell been so successful despite the low average profitability in the PC industry? Del computer corporation success and profitability has been conditioned on the following factors. o Direct Model strategy

Direct Model that Dell adopted has been highly successful in reducing its bottom line costs. Refer to Exhibit 7 when comparing the margins in 1994, Dell retail had 7% gross margin and Dell direct 19%; despite higher operating expense in the direct channel 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. o Build to order (BTO) and supply chain management Strategy Because of each customer order may be unique in terms of manufacturing, procurement, packing and logistics. Dell use BTO strategy and well supply chain management in order to response the needs and satisfaction of customers. 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. This strategy keeps inventories low and with the latest version. Low inventories mean that, when Compaq/IBM/HP drops the price of its processors, Dell does not have many of the old expensive processors sitting around. Latest inventory version mean that it is small risk to setting provision amount for accounting expense as an obsolete inventory items. Limiting inventory and efficient manufacturing processes resulted direct cost advantages over its rivals and Dell also can reduce the prices on its computers faster than its competitors can, because the components that make up those computers are the latest and cheapest. This efficient use of resources which Dell perfected over time meant that it was able to be much more profitable compared to the competition. Dell's extensive sales, service and support network as well as its superior supply chain and manufacturing process flow are critical factors in its success in a low profitability industry. This competitive advantage was unrivaled in the 1990s which was the basis for Dell's profitability. o Specific market segments Strategy Dell clearly distinguished its customers segments and as part of its strategy, it targeted the corporate customers (relationship buyers) who were volume buyers. As a result, the transactions costs/per PC sale were substantially lower than its competitors were (Exhibit 11). 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. o Premium after sales service Strategy

The after sales support of Dell had built up an excellent reputation in the industry, as proven in the customer surveys done in 1998 (Exhibit 8). 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.

3. How effective have competitors been in responding to the challenge posed by Dell's advantage?

Based on 1998 data of comparison of major PC manufacturers (Exhibit 11), it is clear that Dell is way ahead of its rivals with an impressive 62.9% of return on equity. However, due to the transparency of competitive advantage that Dell possessed, the likelihood of imitation by its strongest competitors was extremely high. For example, Gateway which operates on a similar strategy as Dell did surpass Dell briefly in 1994.

As performance increases, differentiation between brand names is going to decrease. Dell's rivals are finding ways to increase their market share by replicating some of Dell's advantages. For example, IBM recognized the advantages of direct distribution and launched initiatives to expand its own direct sales (Joint Manufacturing authorization program (1990), Authorized Assembly Program (AAP, 1995) Compaq saw the advantage of reducing inventory, and therefore took initiatives to do so (Optimized Distribution Model (ODM), DirectPlus program). It "moved from a production system in which it built business PCs according to its own forecast to one in which it built according to forecasts made by channel members". This change in production allowed Compaq to double its inventory turnover. Since its rivals are starting to "copy" its strategies, Dell's strengths would no longer be advantages if this continues.

However, major PC manufacturers could not effectively challenge the dominance of Dell despite the fact that the direct business model was regarded as easy to imitate. This was due to the fact that the challenge was deriving value out of the business model itself. The complexity of building an efficient supply chain and production system could not be met immediately by Dell's competitors. Costly changes in infrastructure and relocation of facilities is an economic deterrence to competitors. Imitating Dell's model requires investment in technology and hiring of experienced work force. Dell also created a very strong brand value and loyalty, which other firms can only acquire very slowly at high expense. However this will not deter the competition in the extremely volatile PC industry.

4. What should each of Dell's major rivals do?

Even though Dell is enjoying the profitability of the market more that rest of the market players, we can't say that its rivals are lame ducks. In our opinion, Dell's rivals should now try to determine focus on their core competences, continuing improving their sourcing, production and distribution system with mixed results. Simple imitation of Dell's model will lead the market to further standardization and won't be profitable to anyone. So what the Dell s major rivals need to do are : o Understand the basic needs and dynamics of customer o indulge in systematic innovation o understanding and knowledge of the value chain

In retrospect, do you agree with IBM s move in selling its PC business?

The end of 2004, IBM sells its renowned PC division to the Chinese company Lenovo Group. Under use the respected IBM brand on its PCs for five years. Considering IBM's PC business generates about $10 billion each year in revenues, onlookers might think this sale does not make much sense. However, IBM was not only making a profit but they could make the computers their way to control prices and build their business substantially. IBM wants to explanation vast new market for information technology products because the China Population more than 1,295,000,000 (in 2000).

IBM knows that doing business in China always requires having a partner and hard to just set up an IBM China and start selling stuff. They must find a local partner company and move into the market together. IBM s partner will be Lenovo, because Lenovo is the biggest PC maker in China. So we agree with IBM s move in selling its PC business to Lenovo because the PC business is a me-too sort of business and not strategic to long-term core strategy for IBM.

Do you agree with the merger of HP and Compaq?

Since HP s strengths are in imaging and printing systems, the software and service business have growth potential and HP is strong in UNIX servers which in area that was dominated by Sun Micro System. Perhaps most important, Hp has an excellent reputation for innovation and quality. For Compaq s strengths are in the hardware business and strong distribution channels. Moreover, the company is known for its information technology (IT) services providing one-stop solutions. Thus a merger between HP and Compaq could be beneficial by combining products and services toward competitive situation that seems to demand such a merger could gain result in cost saving and also sharing of technology and selling their products to customers of both companies would benefit the merged new HP that would rival in size IBM.

As a reason describe above, we strongly agree with the merger of HP and Compaq.

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