1 How and why did the PC industry come to have such a low average profitability situation?

All the manufactures in the PC industry were operating on very less profit rate due to the following reasons. Reason 1. Due to the increase in customer demand for PCs in the late 90s there is more competition to capture the market between the manufactures. There were many manufactures like Dell, IBM, Campaq, HP , Gateway and other small assemblers. There was a price war between the manufacturers and they reduced the prices by keeping low margin to capture the business. Reason 2. The second reason is the reduction the components price. For example Intels 386 DX microprocessor was priced at $299 in 1985 and can perform 2.5 million instructions per second ie a price of $120 per MIPS .But in 1998 it was costing $1 per MIPS . Similarly the prices of almost all the components used to make PCs had typically declined 25-30% per year. In 1998, prices declined even faster at the rate of 1% per week. Reason 3. Most of the major PC manufacturers shifted their assembly plant to low cost countries like China, India, Taiwan and Malaysia so that the operating cost was brought down drastically in order to sell them at low cost. For example Dell had plants in Malaysia and china apart from US and IBM had subsidiary in Taiwan etc Reason 4 Following the success of Dells Direct Model , almost all the major companies started selling through their websites thus the cost associated with dealer commission, advertisement and salesmans incentive all brought down which led the company to sell at lower price. Reason 5 Another major reason for low profitability of PC industry is the Customers buying behavior.

Since there are more choices for the same specification, the customer started buying from a supplier who offers a lower price. This forced the suppliers to reduce their margin to capture the business and whoever selling for a low price captured the considerable share in the market. This brought down the market share of IBM in PC market who was the leader in the market until the price war . Reason 6 The final reason for the reduced profitability is the ease of setting up a manufacturing plant. With a million dollar capital investment one can easily set up an assembly plant capable of assembling 250000 PCs per year . This led many companies to start manufacturing the PCs mostly a clone of IBM but with lesser cost. Since there are more suppliers offering their product to attract the customers it has become customers market and customers prefer the product with a lower price . This led to the price war.

Question 2 Why Dell have been successful despite the such low average profitability in PC industry? The success of Dell is due to many reasons and they are as follows. 1Dells segment targeted approach and positioning of its product resulted for its huge success. Unlike IBM, Dell focused mainly on PC Industry segment and 97% of its revenue was coming from PC market. 2 One of the important reason for Dells success is the Direct Model approach of sales. When the competitors sold primarily through distributors , resellers and retail sales Dell took orders directly from the corporate customers and shipped directly to the customers. Thus Positioning of the product to customer in a competitive market in a different way resulted for its success. 3 Dell supplied computers as per the corporate customer specifications and assembly commenced only after Dell received an order. 4 Since Dell incurred losses on retail sales in 1993 Dell was not keen on retail sales. Only 5% Dells sales were from resellers. But even for this Dell didnt allow returns and it didnt give the purchase protection which normally all the major suppliers do.

5 Since Dell made customized PCs based on actual orders and so there is no finished goods inventory which is very important for a successful company. 6 Dell had manufacturing plants in Ireland, China, Malaysia and Brazil apart from US where the manufacturing costs are considerably less. All these plants are very much integrated which eliminated buffer stocks. 7 Dell worked closely with suppliers to arrange just in time delivery of parts. Thus Dell reduced its raw material inventory from 32 days in 1995 to 7 days in 1998. 8Dell had close electronic link with some suppliers and directed them to supply directly to the customers. For example monitor supplier Sony was asked to deliver directly to customers instead of Dell thus reducing transport cost and time. 9 Dell encouraged suppliers to locate ware house and production facilities close to its assembly operations , a move helps for Just in time delivery from suppliers. 10 Dells after sales service was very good. Nearly 90 % of the customer complaints were solved over telephone using the diagnostic software .For problems required on site visit ,Dell contracted out the service and most of the problems were solved within 48 hours. 11 Dell managed the receivables and payables in such a way that it received payments for its products in 5 days before it had to pay for the suppliers.

All the above reasons made Dell to sell more by reducing the price and making the customer happy by customized solution and it captured 13% of total US PC sales within a short period. And unlike IBM and HP Dell focused mainly the PC market and 97 % of Dells sales comes only from PC market. 3How big is Dells competitive advantage? Calculate the same over Compaq and reseller? Dells has a advantage than its competitors by receiving orders directly from customers and avoiding distribution channels. This enabled Dell to attain cost leadership and competitive advantage in the PC market. The decision to eliminate wholesale and retail dealers proved to be a significant cost cutting measure. It also provided for a less expensive and efficient way of distribution and production of computers.

Furthermore the direct model also gave Dell a better understanding of their customers, as their sales team remained in close contact with them, versus their resellers and distributors. Dell was able to accomplish this by aligning and integrating their supply chain directly with customer expectations. Dells competitive advantage is derived from 3 sources, namely: 1. Just In Time (JIT) purchasing of components (avoiding falling prices) 2. Lower inventory costs (avoiding carrying and inventory costs based on cost of capital) 3. Distribution channel related costs and markups (which increases prices to the customer). Competitive Advantages over Compaq , HP & Gateway in the year 1998

Category Net income / Revenue Inventory Days Value of PCsale/ Revenue Return on equity

Dell 7.7% 7 97%

Compaq -8.8% 34 89%

HP 6.3% 70 25%

Gateway 4.5% 10 93%

63%

-24%

17%

26%

Question 4 How effective have been the competitors move in responding to Dells strategy? Dells strategy: Direct deal with the customers by supplying tailor made products as per customer specifications. Production starts only after getting the order. Supply the product with relatively low price by reducing the inventory by following JIT method, avoiding distribution channels

Good after sales service enabled it to gain good name in the market. Competitors Move in response to Dells strategy:

IBM To counter Dells Direct sales model IBM followed Authorized Assembly Programme(AAP). In this IBM shipped lightly configured PC known as Model 0 to downstream partners and the channel partners completed the assembly by as per customer specifications by purchasing components from IBM. This move did not yield enough results to IBM because though the customer was getting the tailor made product the price was high because still it was selling through the distribution channels and they need to keep some margin at their end. This move helped to reduce the inventory days of the distributors but not IBM because still IBM was producing against the forecast from distributors . So IBM started explored options to start its own direct sales program and launched a new product under the name of AMBRA , a low cost product but it failed and so IBM closed it in 1994. In 1998 IBM opened a website that allowed individual customers to buy through the site directly and later under the Netfinity direct program allowed large enterprises to purchase a particular line of IBM servers without going through resellers. Due to this move the PC operations unit which was under loss until 1998 started making profit by the end of 1998. Compaqs Move to counter Dells strategy: Like IBM , Compaq also was selling through distribution channels and retailers initially. Further to Dells success , Compaq launched an online catalog in 1993 but abandoned the initiative in the face of channel resistance. Again in 1996 Compaq introduced a toll free number that allowed consumers to order directly from Compaq but to satisfy the resellers Compaq kept the prices higher and so it didnt give enough results. Like Dell, Compaq started Optimum distribution model(ODM) in which PCs were built after an order was received .This is a move which reduced the inventory from 50 days to 25 days , but still it preferred to sell through channels like IBMs two stage process for customized solution and so this move didnt give enough results

So in 1998 Compaq unveiled the directplus program where it started selling directly to customers through internet and telephone. This move allowed Compaq to breakeven in the first qtr of 1998 to post profit by the end of 1998. Hewlett Packard Like other major players HP also was selling through distributors and resellers till the middle of 1997. After seeing the tremendous success rate of Dells customized product solution HP also offered a program called Extended solutions partnership program( ESPP) like Dell and compaq. As per ESPP , HP builds PCs in their plant as per customer specification and deliver it through the resellers. HP tried to take advantage with the channel partners who were unhappy with Compaq when Compaq launched its Directplus programme. But latter HP also started Direct sales through its website for individual customers but still HP requested the Business customers to complete purchases through resellers. Gateway Gateway also followed the same principle of Dells direct model and it has become the second largest direct PC maker after Dell. Gateways focus was on the home and small officer yielded good results since Dell was focusing on large business customers. But still Gateways profit was not as much as of Dell because Gateway didnt follow the lean principle like Dell and it resulted in excess inventory.

Conclusion Thus all the competitors of Dell followed Dells strategy of Direct Model in some or other way to stay in the market and got benefited by following Dells strategy.

What should the major rivals ( IBM, HP ,Compaq , Gateway) In the market place do now? In the year 2002 HP and Compaq which had a market share of 7 % and 11% respectively merged together. But still Dell was leading the market with a market share of 16% until 2006 which was closely followed by HP-Compaq . In 2007 HP-Compaq

took the leadership and in 2010 HP-Compaq was the market leader with a market share of 18% and Dell was closely following it with a market share of 13%. IBM and Gateways markets share fell down further to sixth and tenth position respectively in 2010.