Economic analysis of Dell Desktop Computers Industry Essay Example

is tailored towards corporate and institutional customers who require highly reliable, stable, manageable, and easily serviced systems. On the other hand, Dimension@ products are designed for small businesses and individuals seeking fast technology turnovers and high-performance computing capabilities.

The industry we refer to is characterized by rapid change; effectively managing this variable can determine a company's position either as an industry leader or a lower-tier player. Throughout the various stages of evolution in the computer hardware industry, computing power has become more affordable while usability has improved and the market has expanded.

The computer hardware industry greatly benefited from the rapid growth of the Internet in 1999 and 2000; however, this positive trend took a downturn in 2001 due to the global economic downturn and soft demand in 2002.The decline in global shipment growth can be attributed to the merger of H-P and Compact computers, which led to overlapping products and high inventory costs for unsold items in 2001. Additionally, the sluggishness in the U.S. economy negatively impacted PC demand. Despite facing a recession early on, there was still a modest growth rate of 2.4% for Gross Domestic Product by the end of 2002. Standard & Poor's predicts that real GDP growth rates will remain around 2.4% for both 2003 and 2004.

Along with economic factors, consumers who already own PCs that fulfill their needs without requiring replacement are becoming increasingly dissatisfied with PCs. Despite technological advancements, average customers have seen limited improvement in performance from their PCs. Therefore, significant recovery in PC demand is unlikely. According to International Data Corporation (IDC), GDP growth is projected to remain around 2.4% for 2003 as well.

Although worldwide PC shipments experienced

a modest increase of 2% during the first quarter of that year, weak consumer spending and lackluster commercial PC demand caused subsequent decrease of -1%. The current low-demand environment has resulted in intense price competition.

Toshiba, known for manufacturing Laptop PCs considered substitutes for Desktop PCs, has emerged as one of the top five global PC makers and holds significant market share in the United States market.
The shift in consumer preference from desktop computers to notebooks is reflected in this data. The consumer market outlook shows a decrease of 19.6% in 2001, followed by an increase of 8.4% in 2002 and a predicted increase of 11.3% in 2003.

In the first quarter of 2003, Dell outperformed its competitors and the overall market growth with a unit growth rate of 24.7%. Fajitas Siemens, Hewlett-Packard, IBM, and Toshiba are Dell's main competitors.

Dell's significant growth can be attributed to its aggressive pricing strategy as a direct seller. By quickly passing on lower component costs to customers, Dell leads the way in price cuts to gain market share while leveraging its position as the low-cost producer in the PC industry.

The computer desktop market is heavily influenced by a price war where lower prices lead to higher demand. However, comparing prices between different years can be challenging due to technological advancements and changes in performance and equipment.

Currently, it is possible to obtain a better PC at a lower price compared to five years ago. However, it's important to note that this research does not account for annual inflation or consider different PC prices sold to various consumer groups. Therefore, price changes may vary for different desktops sold to different consumers.
Furthermore, there is

a significant impact of GAP on quantity demanded, as a 1% increase in GAP leads to a 2.53% increase in quantity demanded. The amount of time spent online has consistently increased over the years and seems to be unrelated to economic factors. It is important to note that the money spent online per person per year follows a similar upward trend as the hours spent online per person per year, indicating a strong correlation.

To generate an accurate forecast for future demand, it is necessary to perform linear trend analysis assuming consistent changes in quantity over each period. A linear relationship between firm sales and time can be expressed using the equation: Sales = 1,882,608 * t. The coefficients of this equation can be determined using the least squares regression method by estimating it from the years 1999-2003 in order to predict firm sales for future periods.

In this model, "t" represents the year calculated by subtracting 1998 from the actual year being forecasted (e.g., t = 6 for 2004 and t = 7 for 2005). Therefore, sales in 2004 were equal to six times (1,882,608 units). Sales in both 2004 and 2005 are expected to reach 16,808,293 units based on a linear trend line indicating consistent growth.

Dell anticipates an annual increase of 1,882,608 units in sales and manufactures the majority of its products in its own facilities to control costs and production.Dell, a company headquartered in Round Rock TX and with manufacturing facilities in Austin TX and Middle Tennessee, has established factories on four continents (including Brazil, Ireland, Malaysia, and China) to optimize global distribution channels. They believe that their manufacturing processes and supply-chain management techniques

provide a competitive advantage by reducing costs and allowing customers to customize their purchases through a build-to-order process. This approach also minimizes inventory risks, facilitates the integration of new technologies into products quickly, and passes cost savings onto customers.

As of January 31st, 2003, Dell had around 39,100 regular employees worldwide (with approximately 21,200 located in the US). The company employs highly qualified labor across various departments such as Information Technology (IT), Legal Affairs, Procurement & Finance Marketing e-commerce Web Technology Product Development Human Resources Department Facilities & Manufacturing. These departments require both skilled and unskilled workers.

Dell's organizational structure is characterized by flat vertical integration with limited hierarchical levels and a broad span of control. Each employee is assigned both functional tasks and project tasks which grant them significant autonomy. Dell is renowned for its highly skilled professionals who thrive in flexible work environments.Dell utilizes a matrix structure with temporary task forces to adapt to the dynamic business landscape. These task forces consist of representatives from different functions and divisions who collaborate on problem-solving while fulfilling their regular responsibilities. Dell incurs fixed costs for research and development, engineering, long-term assets, skilled employee hiring expenses, rent and leasing fees, as well as licenses. Keeping up with the latest technologies is crucial in the computer industry's ever-evolving nature. These fixed costs can be considered as expenses related to research development and engineering. Property investments, equipment buildings infrastructure are included in selling general administrative costs. While workforce size may have changed over time, a significant portion remains essential regardless of sales volume. Thus, the costs associated with skilled employees and employers are considered fixed costs. Dell owns or leases

approximately 10 facilities with a total of million square feet worldwide for office manufacturing warehouse space. In the U.S., Dell has 7.0 million square feet of space while the rest is located internationally. These spaces also fall under selling general administrative costs.
Dell has engaged in intellectual property licensing and cross-licensing agreements with Microsoft Corporation for operating systems and application software. They have also entered into various software and hardware licensing agreements with other companies. These costs are reported as special charges.

The variable costs, including energy, raw materials, purchased products from suppliers, distribution, inventory, and unskilled labor, are part of the selling, general, and administrative costs. Dell can easily adjust its hiring or firing of unskilled workers to meet market demands due to the shortage of highly qualified employees in the IT sector.

The manufacturing process at Dell involves three main elements: assembly, functional testing,and quality control. All parts undergo testing whether they are sourced from suppliers or produced in-house. The manufacturing process involves assessing the quality of various parts at different stages.

Dell operates by overseeing completed units, ongoing production,and tracking failures to detect issues.They also provide service and support programs for customers to report errors.

In terms of research and development,Dell collaborates with advanced technology companies to design competitively priced products that meet customer demands.Allowing them to offer the latest technology in the market.

In the global PC industry,the United States holds a significant position with 34% of total salesand 38%of commercialand retail revenues.The US market accounts for 32% of home PCs and 26% of non-home PCs worldwide. However, consumer PC sales in the US have significantly declined, leading to an overall decrease in sales of 12.2%

in 2001. This decline can be attributed to a drop in retail prices, causing a revenue decrease of 15.8% for consumer PCs during that year. Banc of America Securities (2001) estimates that there was an average selling price decrease of 3.7% for all types of PC units in the US market. Aggressive discounting from manufacturers and retailers further contributed to steeper price drops in certain categories.

This decline suggests that the US consumer PC market is saturated due to high home PC ownership rates; currently, approximately 61% of households in the United States own at least one PC and over 26% own two or more. A study conducted by Forrester Research on US households planning to purchase PCs in 2001 supports this idea of market saturation.

Additionally, a recent survey has shown that 52% of individuals who do not own a PC currently have no intention of purchasing one in the future because they believe it is unnecessary. Consequently, there has been significant consolidation among PC manufacturers serving the consumer market, resulting in declining demand and lower profit margins.

As a result, six dominant manufacturers now hold a combined market share of 95% in leading PC retail stores throughout the United StatesThese manufacturers, including HP/Compact, Sony, Machines, and Apple, are the main computer brands. Dell and Gateway dominate retail sales through the direct-sales channel, accounting for over half of all sales. These manufacturers have expanded their product lines to cater to different types of PC buyers; HP/Compact targets the mass market while Gateway focuses on semi-professional users. Dell caters to knowledgeable consumers while Machines serves customers seeking affordable machines. On the other hand, Sony and Apple concentrate on

capturing the high-end market segment.

It is important to note that most potential PC buyers in the US already own PCs as they gain more experience with them over time. This trend allows specialized retailers to attract a larger customer base. Manufacturers like Dell have taken advantage of this by implementing aggressive pricing strategies that resulted in significant growth in consumer sales share back in 2001. To further support this approach, Dell has established kiosks at shopping malls where prospective buyers can test their systems before making online purchases.

The computer hardware industry presents various barriers to entry, giving established players an advantage over newcomers. These barriers include competitive pricing influenced by economic factors. In recent years, there has been slow growth in the computer hardware market with only a 3% increase. PC sales have declined in both 2002 and 2001 (15%), mainly due to economic challenges.The downturn in the computer hardware market can be attributed to Microsoft's dominance in operating software, as over 90% of PC users worldwide rely on Windows. Furthermore, Intel holds a monopoly in processors with an adoption rate of 80% among PCs. This standardization of components has led to intense competition among industry players, and companies must use aggressive pricing as their primary strategy to secure market share and sustain success. For example, Compact significantly reduced PC prices in 1992 and gained substantial market share as a result.

Currently, Dell is the leader in pricing due to their direct selling strategy. In just the first quarter of 2003, Dell experienced a remarkable increase of 24% in market share. Computer manufacturers heavily depend on Intel and Microsoft for their products and often need to

produce large quantities to take advantage of special offers and discounts from these key partners. This approach allows them to create affordable yet high-quality PCs.

New entrants into the computer hardware market face challenges such as competitors' aggressive pricing strategies and cost advantages that make it difficult to offer and sell large quantities of desktop PCs. Additionally, dealing with inventory and forecast risks is a significant factor in this market.Companies face challenges in satisfying ever-changing demands, as predicting future demand, determining optimal product mix, and estimating raw material requirements can be costly. In 1994, Compact made errors in forecasting customers' transition to Intel's new Pentium processor, which led them to lower prices for PCs with the outdated 486 processor and incur losses. The following year, competitors had excess inventory anticipating increased demand after the release of the Windows 95 operating system. Many manufacturers stocked up on memory due to a shortage of DRAM chips. However, demand was lower than expected after the release of Windows 95, causing a sharp decline in DRAM chip prices. Consequently, numerous companies suffered losses from high inventory levels and decreased profits.

The product life cycle has recently shortened to 3-4 years. Maintaining strong cash flow is vital for companies because introducing a new product yields at least fifty percent profit during the first six months; any quality issues during this period can be detrimental. Therefore, continuous innovation and maintaining high cash flow are necessary.

To differentiate themselves from competitors, companies prioritize advertising efforts that highlight product performance, reliability, quality, and after-sales service. Providing overnight customer support is an expensive yet indispensable service.Moreover, newspaper, magazine, and TV advertising are crucial in establishing a distinct

product image and shaping potential customers' perceptions. However, concerns have arisen regarding warranties and consumer rights in the computer desktop market due to legal barriers. In the past, manufacturers would shift responsibility for operating system issues or desktop reliability problems to dealers, resulting in poor after-sales service and expensive shipping charges for customers. To address these challenges, entities like the US Consumer's Union and certain state legislatures (e.g., Pennsylvania and Illinois) have introduced laws such as the PC lemon laws. These laws hold companies accountable for after-sales problems while strengthening consumer rights. For instance, they require companies to replace defective items after two unsuccessful repair attempts. As a result of these bills, companies now face additional expenses as they are obligated to provide free repairs and cover shipping costs for faulty products. Generally speaking, newcomers encounter difficulties when entering the computer desktop market due to costly initial investments and the need for substantial financial resources. These legal obstacles pose a challenge for those aspiring to enter this market.