Strategic Management Industry Structures And Dynamics Business Strategy Essay

Introduction: 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

part I 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. i

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. iiBundled 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: The Threat of new Entry.

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: The 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: Reducing the 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.

Market part: Segmentation

Introduction: Michael Dell emphasized the significant status of customers to the company’s

business by stating “Finding ways to get close to your customers is critical to your success.” Since

different people would have different need from the computer, Dell divided its customers into

several segments by discovering special needs from each segment. In the year 1994, the

customer group was only divided by two “primary customer and normal customer”. In that year

the assets of Dell is 3.5billion USD. In July 1996 Dell launched its online website www.dell.com.

On the website primary client are divided into three segments which are large company, medium

company and government& education. Customers can easily choose and buy the products

directly with advices and helps from dell.com. The assets of Dell rocketed up to 7.8 billion USD in

that year. However in 1997, Dell continued differentiating its customer for more segments.

Government & education segment was divided to State & Local Government, Federal

Government and education. Small company and home users were also been created as individual

segments. The net revenue of Dell was 12 billion in that year.

On today’s Dell’s website, people will be able to follow the tips and choose a suitable computer in

few minutes. What’s more, customers can personalize their chosen computer by changing the

configuration of the computer (e.g. color, RAM, processors, and hard-disk capacity). With this

direct sale through different segments, Dell can start to assemble the computer once the

transaction has been made. The inventory can then be limited as low as zero. Not like Dell’s

competitors, Dell does not need many warehouses all over the world which will save a lot of

costs for the company.

Although on today’s Dell.com, customers are divided into a lot segments. However, literally

customers are differentiated into two segments; ‘Relationship customers’ in opposing

‘Transaction customers’. Although Dell intends to build and maintain a good relationship with all

customers, it also becomes clear, that the company would regard some customers more

relationship worthy than others, by analyzing customer value.

The ‘relationship customers’ are mainly large enterprise and government etc. which occupied 40%

of Dell’s entire customer. ‘Transaction customers’ are small business and home users which have

percentage of 30 among customers. The remaining 30 percentage customer is regarded as a

mixed customer.

The advantage for dividing customers in different segment is that the company would be able to

analysis how it can encourage the customers to buy its product. For individual users or small

business price is the priority. Those customers are regarded as more price insensitive. So for

home and small business users the price is slightly lower than its competitor’s e.g. HP, Toshiba

and Sony. For bigger customers such as the government or enterprise, they consider more than

the price but consequent services and supports. Take large enterprise for instance, Dell supports

a lots of specific services and solutions for running the business. Like Infrastructure Consulting

service which is basically a plan for simplifying IT infrastructure, helping reduce operating costs

while freeing up resources for new business initiatives.iii Also, Dell runs a program called ‘Dell

business Credit’iv. This is the same as a loan offered by Dell, but with no interest rate and anytime

to pay off the balance. Business without enough cash flow would like to take that program.

One of the Dell’s competitors is IBM, it has a clearly customer segmentation but different from

Dell. IBM is more focusing on Business and Industry market. In a simply word it is even more

focusing on the ‘Big customers’. Similar as Dell did for big client, but even did more specific for

the segmentation. For Dell there is no segment for industries like Aerospace, Chemicals and

petroleum. More segmentation on large customers also brings more services and solutions for all

kinds of industries. One of IBM’s famous solutions is offering the security management for

Wimbledonv. It provided the security solution for players, staff, media and spectators around the

world.

Conclusion: Dell’s market share was No.2 in 2009, IBM was far behind. But since Dell’s customer

groups is much bigger than IBM’s. In 2006 IBM sold its PC department to Lenovo, Lenovo used

IBM’s brand to product and sell IBM’s ThinkPad series. It is very difficult to compare which

segmentation is better. But for the large business users, IBM is a very strong competitor against

Dell, Its high performance computer and advanced technical solutions and services makes IBM

the biggest company for larger business and industries.

i scribd.com Dell operation

ii McGraw Hill Dell Computer Corporation

mhhe.com/business/management/thompson/11e/case/dell5.html

iii Dell.com Large Enterprise service

iv Dell.com business credit

v IBM.com Wimbledon case study