The Personal Computer Industry: Questions and Answers Essay Example

cents for every dollar of revenue. The management of these practices, along with expenses related to advertising to resellers and financing market development, resulted in an additional 2.5 cents being spent for every dollar of revenue.

Despite the low average profitability in the PC industry, Dell has managed to be incredibly successful.

The driving force behind Dell's great success is its Direct Model of marketing to end customers, established early in the company's history. Although there was a brief departure from this model in favor of standard retail store-based marketing, it resulted in losses on products sold through retailers. As a result, the company quickly abandoned this strategy and returned to its tried and proven direct approach.

Dell recognized that the PC industry suffered from inefficiency in distribution and marketing, resulting in PCs being overpriced due to added costs. Dell aimed to eliminate middlemen and create value by assembling hardware components and selling directly to customers, splitting the middleman's profit.

The main idea of Dell's position can be summarized as follows: for a specific group of customers described below, Dell is able to minimize costs without compromising buyer willingness-to-pay. In terms of end-customers, Dell targets informed customers who value product stability, high-performance, and cost efficiency over the long term. In terms of products, Dell avoids cheaper options (below $1 ,OHO) and instead concentrates on reliable product lines. In terms of geographical focus, Dell prioritizes the US market more than its competitors, except for Gateway.

Before the recent attempts made by rivals to match Dell's (1997-1998) performance, how significant was Dell's competitive edge?

The objective is to determine the extent of Dell's

advantage over Compact and a reseller in meeting the needs of a corporate customer. It can be described as significant. Apart from employing the Direct Model, Dell also sought competitive advantages in other aspects. Some of these are worth mentioning, such as customer segmentation. As the company expanded, it adopted more sophisticated customer segmentations to optimize its marketing and customer service effectiveness.

So, Dell started with a simple segmentation model for its clients - large and small clients. However, this model quickly expanded into a much larger multi-category model. Sales efforts were also divided by region and then into countries within each region. This allowed Dell to benefit from local advantages and improve its managerial efficiency. It is worth noting that while these actions improved service and efficiency, they may only be considered advantageous if they set Dell apart from its competitors (this is not clarified in the case study).

If Dell's actions only brought it to the same level as the rest of the industry (and even lower), its success cannot be credited to these actions significantly. However, in 1996, Dell greatly expanded its online services through its enhanced website. This website provided features such as obtaining product information, configuring a computer system, checking pricing, placing and tracking orders, and accessing Dell's full service catalogue.

Dell had created exclusive secure webpages for its corporate customers, offering customized service and relevant information. By 1998, the sales generated from Dell's website stood at an impressive $10 million per day. Additionally, Dell cautiously reentered the reseller market by selling its older systems to a limited number of resellers at a discounted price of 15-20% off the listed

price. Notably, Dell did not provide price protection or buybacks, which helped avoid the associated expenses while getting rid of its depreciating inventory.

Initially limited, this activity would eventually account for 5% of Dell's overall sales. Dell's PCs were produced, handled, and acquired based on specific orders, eliminating the need for stocked standardized machines. Despite this personalized approach, Dell could deliver a product within approximately 1.5 days, from order placement to shipping. This was made possible by an efficient assembly line production process, enabling Dell to outpace competitors in speed while maintaining a significantly lower inventory level.

Furthermore, Dell has discovered that implementing this system results in a decrease in the number of faulty products. Moreover, Dell makes use of this system to meet the needs of its corporate clients by integrating the installation of customers' unique software onto the PC during the manufacturing process. Another benefit of Dell's exceptional production system is its capability to swiftly handle urgent rush orders and large-scale orders for corporate clients. Finally, Dell's products and customer service are renowned for their exceptional quality, consistently outperforming competitors in various surveys.

In many aspects, Compact faced several disadvantages compared to its competitors, particularly in catering to private and corporate customers. One major drawback was that Compact did not directly advertise its products to end customers and instead relied on retail stores and resellers for distribution. Consequently, Compact had to share a portion of its profit margin with resellers and bear the expenses of buybacks and price protection. Additionally, Compact PC's were less customizable and had a less sophisticated production process. These consumer PC's were manufactured as standard units and primarily supplied

through retailers.

Direct distribution attempts through a toll-free telephone number were unsuccessful due to Compact's decision to maintain high prices and avoid upsetting its supply chain. Similarly, efforts to create an operational website for direct distribution were halted because of objections from the distribution chain. When it came to corporate customers, Compact relied on demand forecasts from its supply chain when producing its corporate PC's. This approach enabled Compact to keep its inventory for just 30 days, although this was still longer than Dell's inventory holding period. Consequently, the product still took about 65 days to reach the customer due to reseller inventory holding periods.

Competitors' response to Dell's advantage: How effective?

Dell's remaining advantage and the success of Compact's initial measures to challenge it can be measured. In 1997, Compact implemented an Optimized Distribution Model (EDM), which involved collaborating with distributors and resellers. According to this model, private customer units were manufactured after receiving orders. For more customized units and corporate orders, a two-step assembly process was required. This involved shipping a partially assembled PC to the distribution channel, which would then complete the remaining 20% of assembly.

Despite implementing various measures including reducing price protection to two weeks, the delivery time for Dell remained within the 45-50 days range, with expectations of eventual reduction to 25 days. Although this improved timeframe posed no significant challenge to Dell's superiority, in late 1998, Compact introduced the Directress program. This program sold customized units to small and midsized companies via telephone and internet at lower prices than those offered by retailers. On average, it took several days for delivery.

The recent development has significantly reduced Dell's

advantage in terms of shipping time, as it is now equal to or less than the competition. However, it is worth mentioning that Dell still maintains a strong lead in certain areas. Firstly, the Directress program only offers a limited range of products. Secondly, this program is geared towards small and midsized businesses, meaning it does not improve Compass's services for large businesses and individual customers. Additionally, Compass lacks a dedicated website for private customer purchases and specialized customer service for corporate clients. IBM was one of the first companies to acknowledge and respond to Dell's advantage.

The company implemented an Authorized Assembly Program (PAP) which involved shipping basic "model O" PC's to their distribution channel. The distribution channel would then finish assembling the PCs according to customers' orders, allowing for more customization options and a decrease in depreciable inventory. This also resulted in a faster turnover rate for inventory. However, IBM continued to produce model Co's based on their own demand forecasts, leading to a significant amount of inventory. In 1994, IBM launched a website that allowed customers to purchase PCs directly from the company.

Despite being a move to counter Dell's advantage, Vim's website was designed exclusively for private customers and did not cater to corporate customers. Moreover, it lacked the extensive range of services and customization options offered by Dell's website. IBM's position was subsequently strengthened when they introduced a service tailored for corporate customers, enabling them to purchase directly from the company. However, the success was tarnished by the limited product line available and the ongoing absence of a dedicated customer service website for corporate customers.

In 1997, shortly after Compact

launched its EDM program, HP introduced its own program called Extended Solutions Partnership Program (ESP.). HP would deliver orders to resellers as usual, or directly to the end customer upon request. The program was similar to 'Mob's model O, where the distribution channel members handled the final assembly stages. However, HP had a different approach towards direct distribution. They believed that bypassing resellers would lead to resentment and decreased sales. As a result, HP initially refrained from selling directly to end customers.

In 1998, a website was created by the company with the aim of delivering products through resellers instead of direct sales. The website was expected to have various advantages, including reducing price protection to 2 weeks, minimizing defects, and cutting 5-15% off the price. Eventually, HP also implemented direct sales on its website but only for individual customers; corporate customers still had to rely on purchasing through resellers. However, it is worth mentioning that these improvements are not yet comparable to the services and products offered on Dell's website.

Dell still maintains its production and inventory advantages compared to HP. In order to address their declining operations in 1997, Gateway launched 144 Gateway stores throughout the United States. These stores were designed as showrooms where customers could order PC's, but they did not stock any inventory. At the same time, Gateway shifted its focus from obtaining large corporate customers to targeting small businesses. Additionally, a subdivision called "Gateway Partner" was created specifically for reseller business. It is clear to see that Gateway made some improvements following Dell's lead.

However, Gateways is likely to have a decreasing presence in the PC market and

focuses on small businesses and private customers. Dell has evident advantages over Gateways in terms of production efficiency, customizable inventory management, direct distribution, and online service, especially for corporate customers. While Dell may have lost some advantages it once had (such as Compass's shorter delivery time), it remains in a superior position compared to its competitors.

What steps should Dell's major competitors (MM, Compact, HP, and Gateway) take at this point?

In order to better meet customer demands, there are several initiatives that should be considered. Firstly, actively seeking customer feedback and providing a platform for them to suggest and rate product improvements is important. Additionally, collaborating with customers to co-create new products holds significance. Secondly, it is crucial to create a website that matches or surpasses Dell's website. This includes catering to both private and corporate customers on the platform and implementing personalized online customer service for our high-end clientele, similar to Dell's offering. Lastly, expanding into emerging economies such as China, India, and Brazil is crucial due to the increasing competition in the PC industry in developed economies.

Customers have become more demanding and easier to satisfy. Emerging economies offer a vast untapped market where Dell's advantages may not be as significant. Additionally, entering new technological markets like laptops and smart-phones does not give Dell a particular advantage in production and supply schemes. To overcome these challenges, Dell can differentiate their products in terms of quality and/or design, such as incorporating designs by contemporary artists. The main question remains why it has been difficult for competitors to match Dell.

The Dell story demonstrates various obstacles to replication, such as

tradeoffs, complexity/fit, preemption, and organizational resistance to change. Considering these challenges, recommendations and a suitable plan of action should have been provided to competitors. The response should have addressed whether the company should completely adopt a direct sales model, if it would benefit from division into specialized segments, or at least mostly independent units. Grade: 15 out of 17 points.

Utilize the VIRGIN model to evaluate Dell and its competitors.

The resource-based view of business and strategic management suggests that the success of a company is determined by its unique resources and competencies. Strategic decisions involve creating and maintaining competitive advantages through the company's core competencies. According to the VIRGIN model, a resource must have four key attributes to be considered a sustainable competitive advantage: it must be valuable, create value for the firm by taking advantage of opportunities, eliminating threats or allowing the firm to differentiate products/services; it must be rare, with few or no competitors possessing the resource.

The resource of Dell is difficult to copy or reproduce, giving it an imperfectly imitable advantage. Additionally, there are no readily available equivalent resources that can create similar value, making it non-substitutable. The main strength of Dell is its production and supply schemes, which serve as its chief advantage. In this paper, we will implement the VIRGIN model characteristics on these schemes and compare them to Dell's competitors to determine if they provide a sustainable competitive advantage.
Although valuable, Dell's supply chain is not as valuable as before due to decreasing computer technology prices over time. As a result, even with superior production and supply schemes, the company's profit margin now comes from a lower priced product.

This reduction in nominal profits may force Dell to make compromises in areas such as service and product quality in order to maintain profitability.

Putting cost before quality is a move that may prove detrimental to Dell's long term interests. As computing power has gotten greater, the standard PC is sufficient for supplying the needs of most average users. As such, the value of Dell PC's superior customization has decreased significantly. Rare: In the past, Dell's unique production scheme and streamlined direct distribution model allowed for a highly customizable product, unrivaled by its competition. Recent developments, however, have put a dent in this unique advantage.

Vim's "Model O" approach, Compact's equivalent, HP's equivalent, and Compass's Directress have all provided customers with additional customization options. However, Dell stands out as the only company that offers the same level of sustainability and extent of options on its website. Dell's production and supply schemes are difficult to replicate, although not impossible. Companies that have traditionally relied on distributors find it challenging to achieve disintermediation due to conflicts in the supply chain.

Manufacturers currently rely heavily on their distributors, who are resistant to disintermediation. However, Dell's success has influenced competitors to gradually follow suit. If Dell does not innovate and counter its rivals, it risks losing its competitive advantage and becoming limited in capabilities. Nonetheless, it is worth noting that Dell has sustained this advantage for a significant period.

To address concerns about competitors copying Dell's model, its production and supply schemes in the desktop PC market have proven to be highly efficient. This has helped Dell maintain dominance in the industry. However, the desktop PC market has seen

a rapid decline in recent years as other forms of computing products become more popular.

Dell does not offer any significant advantages over its competitors in terms of production and supply strategies for laptops, game consoles, and smartphones, which are gaining more prominence in the computer market.