Competitive Analysis of DELL using Porter’s Five Forces Model

Dell Company was founded in 1984 by Michael Dell. It is the world’s largest direct-sale computer vendor; Dell Inc. is now also the leading seller of computer systems in the world, capturing a global market share of more than 15 percent. Dell markets desktop personal computers, notebook computers, network servers, workstations, handheld computers, monitors, printers, high-end storage products, and a variety of computer peripherals and software. In this article we will use Porter’s Five Forces to analysis Dell’s great success in the industry.

Force 1: The Degree of Rivalry

The PC industry consists of a number of companies; hence the threat from industry competitors is high. Due to the product being highly standardized and shifting costs between brands is low, there is fierce competition which leads to lower margins and profitability in the market. The PC industry can be described as a high competitive industry. For Dell the main competitors are IBM, Apple, HP, TOSHIBA, Gateway etc. Dell uses several strategies to reduce the competitive rivalry between existing players.

Firstly Dell differentiated its sales from other competitors. Dell used the direct sales strategy since 1984. To sell PCs directly to consumers, by passing retail stores and system integrators and offering limited customer support but dramatically lower prices. For years, that direct, low-cost sales model worked perfectly. It allowed Dell to make high margins while selling computer gear for less than its rivals. As a result, it now holds a leading 17.9% share of the world PC market and has grown much faster than competitors Hewlett-Packard and IBM. With thousands of phone and fax orders daily, $5 million in daily Internet sales, and daily contacts between the field sales force and customers of all types, the company kept its finger on the market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any problems with its products. If the company got more than a few similar complaints, the information was relayed immediately to design engineers. When design flaws or components defects were found, the factory was notified and the problem corrected within a matter of days. Management believed Dell’s ability to respond quickly gave it a significant advantage over rivals, particularly over PC makers in Asia, which made large production runs and sold standardized products through retail channels. Dell saw its direct sales approach as a totally customer-driven system that allowed quick transitions to new generations of components and PC models.

Secondly Dell provided good customer service to compete with its rivals. In 1986 the company began providing a guarantee of free on-site service for a year with most of its PCs after users complained about having to ship their PCs back to Austin for repairs. Dell contracted with local service providers to handle customer requests for repairs; on-site service was provided on a next-day basis. Dell also provided its customers with technical support via a toll-free number, fax, and e-mail. Dell received close to 40,000 e-mail messages monthly requesting service and support and had 25 technicians to process the requests. Bundled service policies were a major selling point for winning corporate accounts. If a customer preferred to work with his or her own service provider, Dell gave that provider the training and spare parts needed to service the customer’s equipment.

Force 2: Threat of new Entrants

Firstly, Dell created a brand image to reduce the threat of new entries by advertising. Dell was the first computer company to use comparative ads. Its advertisements have appeared in several types of media including television, the Internet, magazines, catalogs and newspapers. Secondly, Dell cuts its price or offering free bonus products in the effect to maintain its market share. In 2006, Dell cut its price in an effort to maintain its 19.2% market share. However, this also cut profit-margins by more than half, from 8.7 to 4.3 percent. To maintain the strategy Dell continuing to accept the online and telephone purchase. The brand loyalty and the low price built up a barrier of entry for the new companies.

Force 3: Threat of Substitutes

Other devices like PDA, handheld electronics etc. are now coming out with features similar to PC’s. The mobilebility is the key factor of the competition. Dell generate a smaller size laptop called “mini” which only has a 10.1 inch screen and only sells at the price under £200 which is even lower than some of the handheld electronics. With the efficiency of mobile and the same function, for example Wi-Fi and Bluetooth, Dell protects its market share against those substitutes.

Force 4: Bargaining Power of Customers

Dell built up its brand loyalty to reduce the bargaining power of customers. First, Dell had its own system and strategy to manage the relationship with customers. Since Dell use the direct sale strategy, customers can buy Dell’s products from the website or ordered by phone or fax. The customers then can personalize their computer by choosing the configuration of the computer (e.g. RAM, processors, and hard-disk capacity). On the Dell’s website from which people can directly choose, buy and give feedback, it divided the customers into four major groups home users, small& medium business, public sector and large enterprise. Dell then treats different groups differently by offering the special service they need from different groups. For instance, Dell provides special solutions and services for higher education. Such as data consolidation and management, HPC (high performance computing environments), wireless solution, connected classroom etc. Because of its direct sale strategy, Dell can easily track the service for any individual buyers. All the buyer information will be stored in its system; dell can differentiate customers and send relevant product information and services to different customers. These special strategies in selling upgrade its brand image among customers.

Second, Dell uses the advertisements to help building up its brand image. On the website, TV, newspaper, high street, people can easily find dell’s advertising. Those can not only increase dell’s market activity but also increase its brand pride.

Force 5: Bargaining Power of Suppliers

Dell has a special understanding on the SCM (supply chain management). Dell’s strategy is to limit the amount of supplier but pick up some outstanding supplier all over the world. Each supplier has a very close relationship with Dell in long-term. Dell uses its huge globe market to share its business with its entire suppliers. For instance, Dell built a assemble factory in Malaysia, its supplier from Ireland soon built a factory in there as well in order to gain a geographic efficiency. Dell had it’s assemble factories all over the world which relatively close to its suppliers. This will save a lot of transport costs. The double-win strategy makes the supply chain works well. With the double-win strategy and constant relationship, Dell will be able to ask lower price from the suppliers and reduce the bargaining power from them.