Porter’s Five Forces Analysis of Dell Computers

In 1984, Michael Dell had a vision for personal computing, a vision that customers could buy customized computers direct from their home. That vision would soon be emulated, but never at the same level as Dell. The industry is more than just personal computers; it includes servers, data storage devices, networking switches, printers and printer cartridges, and services as well. Dell has been able to remain innovative in their approach to building computers. They proved throughout their years of existence that providing differentiated, customizable computers with exceptional customer service at reasonable prices is possible. During the early years, Dell was able to undercut the competition by substantial margins. When they developed their strategic plans to sell computers internationally, they were quickly able to capture some of the market share once held by super-giant IBM. As a result, in 2007 International sales accounted for over 41% of Dell’s sales. To expand upon their business model, they diversified their product offerings to include Dell branded speakers, printers, and ink cartridges. Though not all diversification efforts were successful, Dell proved they could be innovative in their approaches to reaching customers. Michael Dell knew exactly what he wanted to do with his business when he first started his venture, and sticking to that vision has created one of the most successful computer ventures ever.

Porter's Five Forces Analysis of Dell Computers

Most important thing about Dell is its direct business model where it has eliminated the middlemen and let the customers have what they wanted and desired. It is an innovative company that is innovating continuously to grow its customer base and to keep customers happy. Here is Porter’s Five Forces Analysis of Dell Computers explaining how various factors affect the competitive position of Dell in the market.

Rivalry Among Competing Sellers

Dell’s rivals include more than PC manufacturers. They compete and tally revenues in the following product categories: desktop PCs, mobility products (laptop PCs and workstations), software and peripherals (printers, monitors, TVs, projectors, ink and toner cartridges), servers and networking hardware, consulting and enhanced services, and storage products. Principal competitors amongst these categories include HP, Lenovo/IBM, Apple, Acer, Toshiba, Sony, Fujitsu-Siemens, Sun Microsystems, EMC, Hitachi, Cisco, Broadcom, Enterasys, Nortel, 3Com, Airespace, Proxim, Lexmark, Canon, Epson, Accenture, and EDS.

Rivalry among competitors is fierce. If one company falters even the slightest bit anywhere along the value chain, other competing companies will enter and capitalize on the transfer of market share. For example, in the first quarter of 2008, Dell had 15.7% of the total global market share, which is up from 14.8% in the fourth quarter of 2007. The rest of the competition outside of the top five competitors (HP, Dell, Acer, Lenovo, and Toshiba) lost 5% of the total market share. These numbers vary from quarter to quarter, but when the top five competitors see increases in market share, it is clear who dominates.

Dell happens to offer a highly differentiated product. They pride themselves on providing high quality computers at better prices points than the competition as a result of directly selling to customers. Prior to Dell, no company successfully offered such a business concept. Sales and promotions are targeted toward special bundle packages (like monitor, printer, and computer in one purchase) and slightly dated computer designs. With Dell’s premier account, for example, businesses and schools are encouraged to buy specially configured computers (which can be further customized). Savings tend to be larger when consumers purchase computers bundled with an anti-virus package, and Dell warranty, and interest free payments for six months if customers own a Dell premier credit card. Though competitors like Sony offer similar incentive programs, none of them can match Dell.

Though Dell was strictly direct-to-consumer oriented for the longest time, they were losing significant market share to Apple as a result of not offering their computers in stores. As a result, they agreed to a contract with Best Buy and Wal-Mart. Though customers would technically pay for the markup at Best Buy or Wal-Mart for the same computer they could purchase through Dell, this tactic helped to keep Dell from losing market share to HP and Apple. In addition, Dell began offering white-box PC solutions in 2003 which helped them achieve an additional $380 million in revenues. Though critics were skeptical of the decision to move into this segment, most saw it as an effort to take on white box dealers in China.

Potential New Entrants

The threat of potential new entrants is minimal if even possible. There is a considerable presence of sizable economies of scale in production and other areas of the operation include the following: a substantial amount of marketing and advertising that goes into Dell’s products and the ability to outsource areas of the business they cannot make profitable by locating in the US. In addition, Dell is the industry leader in minimizing inventory on hand.

In addition to the economies of scale, the learning and experience effects curves have to be taken into consideration. Dell has followed the simple model of “learn by doing”. As a result, they have been improving efficiencies in their business model for the past eighteen and a half years (as of 2008). The competition cannot match Dell.

As with any industry that has been defined for decades, there is a strong brand preference and somewhat high degrees of customer loyalty. Because Dell is focused on being the lost-cost leader in the industry, they need not worry about customers switching purely on price. Customers want an established brand name that has the proven ability to withstand the test of time. As a result, HP, Dell, Acer, Lenovo, and Toshiba will remain the top competitive global competitors for the years to come. Though Apple is a leader in the US, they will not be able to compete in price conscious countries. Because the market share is dominated by the big five, any completion will fight for the remaining half that is crowded with hundreds and thousands of un-established brands.

As with most industries that have long been established, there would be extensive capital requirements for a new company. Entry would likely cost millions, is not billions of dollars. As a result, the same brand names have existed for decades. On top of that, striking deals with distributors and retail stores would prove to be difficult. What basis would new consumers have for trusting a brand new computer company? That is why Insignia failed. Assuming the company has these issues sorted out, they would still have to deal with restrictive regulatory policies and tariffs and international trade restrictions. A new threat will only exist if the company can figure out how to succeed at every one of these difficult situations.

Substitute Products

Substitute products are becoming an issue within the industry. As technology progresses the products of yesterday become obsolete. The smart phone is becoming the biggest threat to the personal computer. Though they are much smaller and fit in the palm of the customer’s hand, they are capable of doing many of the tasks that a computer can do. For users that compute on larger scales such as film makers, musicians, and reporters, the computer can never be replaced. As a result of the smart phone’s popularity, computer companies are now competing in this segment.

Supplier Bargaining Power

The supplier bargaining power through Dell is mainly weak, though there is some slight flexibility. For example, Dell cycles through the top two CPU suppliers (Intel and AMD). Because they are in fierce competition, they continue to make quality products and are normally differentiated only by price. When Dell switched to AMD in 2006, they switched because AMD was able to provide Dell with a better performing chip for a better price. Similar situations occur with peripherals like printers (switch from HP to Lexmark then Dell branded), several speaker offerings from Altec Lansing and Dell branded, and different suppliers for the motherboard. Dell will switch to the best supplier for the best price as long as component quality does not suffer.

Buyer Bargaining Power

Buyer bargaining power, on the other hand, is high. There are a variety of products to choose from at lower price points than the competition. Purchasing items in bundles leads to greater saving, especially if customers have a Dell premier account. In addition, refurbished or customer-returned computers are offered at even greater discounts. Because technology continually evolves, buyer preferences change, ultimately leading to product adaptations. Customers demand the best product at a better price than the competition. If Dell fails at their own mission statement, they will lose the market share they currently possess.