Nidhi A Kumar 0233/51(Group Leader)

Konda Manindra 0181/51

Kumar Ritesh 0191/51
Md Shahbazul Haque 0202/51
Medha Singhal 0203/51
Meesala Abhinav 0204/51
Mohit Singh 0208/51
Shashank Lath 0240/51

1. How and why did the personal computer industry come to have such low average
profitability?
The personal computer industry, which started with the launch of the first PC in 1981 by
IBM, has been characterised by rapid innovation, low costs and demand for better
performance. The personal computers have been historically sold at a reasonably high prices
but the profitability has been pretty low.
First, we examine how the industry works. The entry barrier is pretty low in the industry.
Personal Computers have less product differentiation and are assembled out of standard
products and components. Besides, the capital required to set up an efficient PC assembly
line, capable of assembling 250000 PC per year was roughly one million dollars in 1990
which is relatively low for a new entrant. Hence we saw start-ups like Apple, Dell, Microsoft
etc. and even established firms like Texas Instruments, Hewlett-Packard, Xerox etc. entering
the industry increasing the rivalry.
Brand loyalty among the customers are pretty low. Buyers of Wintels, the computers with
Intel Processors and Microsoft Windows Operating System, were not attached to a particular
brand of computers and were ready to switch to PCs of any brand available at a lesser cost
and were not very technically aware of the specifications either.
Limited differentiation in products and similar operational strategies of majority of the rivals
in the industries did not leave much scope for competitive advantage.
The major distribution channels prevalent in this industry included retail stores, distributors
(who work with small resellers) and integrated resellers. Over time the mark-up kept by
these channel entities kept declining in the wake of impaired relationship with the companies.
As increasing inventory was a problem concerning these companies they started to explore
new ways of making the product available. IBM for example authorised the resellers to
assemble the PCs according to customised specifications. This sudden shift did not go out
smoothly. IBMs profitability took a hit. Its PC division lost $39 million in 1996, $161
million in 1997and $992 million in 1998.
In the case of Compaq, the overarching power of the traditional channel entities did not allow
it to employ the Direct Selling distribution channel. Thus it had to think of something like
IBM where resellers did the customisation based on specifications.
Thus we see that the companies who relied less on Direct Selling distribution channel as
opposed to Dell found it difficult to transform in wake of the need to do so. This
transformation was needed as Dell was proving that this approach was the way to go.
As far as the suppliers were concerned, the Microprocessors and the Operating Systems
Software Suppliers were very concentrated in nature. Intel and Microsoft were quite a
monopoly. Both these standard components combined together did constitute significant
proportion (~50%) of the overall cost structure of a basic PC. Thus their bargaining power
was high.
Many of the large players invested heavily in advertising (2 3 % of revenue) so as to
develop recognizable brands. For IBM, Apple and HP as a percentage of the net income this
was a sizeable amount.
The main resources of a PC firm, operating system and the microprocessor, were mainly
provided by Microsoft and Intel respectively. This meant that almost no firm had the
advantage of having an inimitable or appropriable resource as all the competitors had the

same resources and had to forego a huge chunk of profit to Microsoft and Intel. The
components of PC by itself are not durable as they get obsolete and prices of older version
plummets. Firms stuck with inventory of obsolete products incur high costs of dumping these
components thereby reducing the profitability.
Apple, with competitive superiority, had built an emotional attachment with its customer
and was thus able to charge premium from them and was an exception in the industry with
high profit. An Apple consumer was less likely to shift to a Wintel Personal Computer as it
was not only considered superior but also the hardware components in Apple were different
from the other 96% of Personal Computers, thus making the Apple Personal Computers
unique in a way and passing the test of substitution.
It is clear that the competitive advantage in the PC industry is not sustainable as easy
replication by competitors promotes price wars which lower profit margins for the industry as
a whole. Ultimately, high competition and price fluctuations have led the PC industry to low
profitability.
2. Why has Dell been so successful despite the low average profitability in the PC
industry? Can you do a value chain analysis of Dell to outline its superior
profitability? Assume data after providing suitable justifications.
Dell has been successful in the PC Industry despite the low average profitability, mainly,
because of the following two reasons:
1 Direct Model
2 Manufacturing machines based on actual orders
3 Efficient collaboration with suppliers
Dell has been able to adapt the method of taking orders and delivering the finished product to
the customers directly, especially corporate customers. This has enabled and empowered Dell
to cut down retail costs and hence increase their gross income (19% in Direct as compared to
7% in Retail). With the growth of World Wide Web in 1990s, the Direct model of Dell
picked up further advantage. In short, Dell was able to reduce its bottom line costs by
adapting this method.
Dell also built the requested PC based on actual order rather than the prediction method
(based on many parameters such as previous sale trends) used by the competitors. This helped
Dell in keeping low or no inventory of the products and thus reducing the significant
inventory costs to give further cost advantages to the firm. Low inventories mean that Dell
was able to use the latest microprocessors and other component parts earlier than its
competitors and as the prices of these components were declining very rapidly meant that
Dell was gaining qualitative as well as quantitative advantage over its competitors. This is
evident in the fact that a Compaq PC was 65 days old by the time it reached the customer and
hence, the competitors, not only, had the difficulty to keep up with the advancement in
technology and hence serve their customers with the same, but also had to incur extra cost to
replenish the inventories held by the resellers and distributors. The story was similar for other
competitors because their major sales happened through retail channels. Thus, Dell method of
business was effective enough to overcome these weaknesses of the competitors and emerge
as a champion and pioneer.
To get additional cost and business advantage, Dell worked closely and efficiently with its
suppliers. This allowed Dell to arrange just in time delivery of PC components. Further, Dell
used electronic links & communication to direct supplies straight to the customer, for

example, Sony monitors never passed through Dell facilities and thus, reduced significant
redundant transportation cost.
Overall, the Dell model allowed Dell to understand the needs & requirements of the
customer and divide its customer base accordingly. This empowered Dell to specifically
target customer with specific products and services which helped them boost their sales
exponentially in this emerging PC market. Furthermore, Dell was a champion not only in
sales but also in post-sales services, as is evident in the fact that 90% customer problems
were resolved over telephone and other problems were resolved within 24 to 48 hours.
Value Chain Analysis of Dell
Primary Activities:
1) Inbound Logistics:
Dell worked closely with suppliers to arrange just-in time delivery of parts.
Inbound Parts Picking and Delivery:
Dell encouraged its suppliers to have warehouses and production facilities close to its
assembly operations.
Moreover it narrowed down its number of suppliers over the years.
The suppliers of hardware components such as Monitors were directly handled
between the suppliers and outbound logistics without Dell acting as an intermediary.
This significantly reduced the Inbound Logistics Overhead.
Colocation and mitigation of intermediation acted as a major competitive
advantage parameter for Dell over other big players like IBM, Compaq etc.
2) Operations:
Dell had an efficient assembly line for assembling the procured components after
which the required software loading and rigorous testing followed. This integrated
approach eliminated buffers which led to no pile up.
The inventory cost structure comparison of Dell with Rivals:

Inventory Costs
8000
6000
4000
2000
0
1992

1993

1994
Dell

1995

1996

Compaq

1997

1998

HP

Figure 1 The values are in millions of Dollars

Minimal inventorisation was a major source of competitive advantage for Dell.
3) Outbound Logistics:
The third party shippers were responsible for physical distribution of final assembled
products. Some hardware components that were to be bundled together were directly
received from Dells Suppliers.

4) Marketing and Sales:

Dell had categorised its customer base into Relationship buyers (Large companies and
institutions likely to place repeated orders) and Transaction buyers (SMBs and home
computer buyers).
Relationship buyers required greater pre-sales force involvement and after sales
service and technical support staff. Dell had a separate team of outside sales reps and
inside sales reps.
Dell employed reaching transactional buyers through advertising in trade journals etc.
& direct marketing.
They did foray into retail channel model but this could not turn out in Dells favour
leading to their constant focus on Direct Distribution.
Later on further customer segmentation into finer categories led to efficient customer
handling.
Thus the overall marketing and sales which included unorthodox Direct Marketing,
Greater Customer Classification were sources of competitive advantage.
Support Activities:
Firm Infrastructure: Dell was initially managed as a typical entrepreneurial start-up with lack
of formal corporate structure. Bad financial performance led Dell to hire seasoned managers
form established firms as the likes of Apple, Motorola, Intel etc. Several performance metrics
such as Return on Invested Capital, metrics associated with receivables and payables etc.
were the focus areas of the top management team.