five forces framework in personal computer industry

INDIVIDUAL ASSIGNMENTFive Forces Framework in Personal Computer

Industry (DELL)

AZIZUL RIZAL ZULKAPLI ZP01654

ZCZB6023: BUSINESS ECONOMICS AND DECISION ANALYSIS

Lecturer: PROF. MADYA DR. NIK MUTASIM

Table of Contents

Introduction: Five Forces Framework in Personal Computer Industry..........................1

Threat of New Entrants......................................................................................................3

Bargaining Power of Suppliers..........................................................................................4

Bargaining Power of Buyers..............................................................................................5

Rivalry among Existing Firms...........................................................................................6

Threat of Substitutes and Complements............................................................................7

Recommendation for DELL...............................................................................................9

Conclusion...........................................................................................................................9

Dell Global Business Center Cyberjaya, Malaysia

UNIVERSITI KEBANGSAAN MALAYSIA – GSB MANAGERIAL ECONOMICS

Introduction: Five Forces Framework in Personal Computer Industry

Porter’s Five Forces Model is a model that analyzes an industry to help develop a

business strategy. The model uses five forces that have been identified to categorize an

industry as intensely competitive or not competitive at all and this will then determine the

attractiveness of the market.

For the purpose of this assignment, I will use the company that I work with

before which is DELL as a case study. Dell Inc. (formerly known as Dell Computer) is

an American multinational computer technology corporation based in Round Rock,

Texas, United States, that develops, sells, repairs and supports computers and related

products and services. Bearing the name of its founder, Michael Dell, the company is one

of the largest technological corporations in the world, employing more than 103,300

people worldwide.

Dell opened its plants in Penang, Malaysia in 1995. They have two plants located

in Bayan Lepas (AP 1) and Seberang Perai (AP 2). AP 1 is their main office while AP 2

is Dell Factory and office.

In 2006, Dell opened its office in Cyberjaya. Most of the team located in here is

for IT Support and Development. Currently they have about 900 people working in Dell

Cyberjaya Office.

AZIZUL RIZAL ZULKAPLI ZP01654 1


According to Grant (2005), there are many features of an industry in which a

company competes that determines the level of competition it will face and the profits it

will get. The most famous classification was done by Michael Porter, known as Porters

Five Forces framework which can help a company determine its potential profits by

looking at five sources of competitive pressure. The five sources of competition are:

1. Competition from entrants

2. Competition from substitutes

3. Competition from established rivals

4. Bargaining power of suppliers

5. Bargaining power of buyers.

Taking Dell as an example, I will perform the Porter’s Five Forces analysis on the

personal computer industry to identify the state of this market.

Porter's Five Forces – Personal Computer Industry


http://upload.wikimedia.org/wikipedia/commons/6/66/Porters_five_forces.PNG


Threat of New Entrants The threat of new entrants in the personal computer industry is very weak.

Currently the market is dominated by five major competitors who have nearly the entire

market share; this will likely discourage any potential new companies from entering the

market. A huge barrier to entry is also that the market requires significant investments to

be made in research and development to continually develop innovative products as well

as large fixed start-up costs for manufacturing and employees and customer service.

Large firms have the capabilities of manufacturing at lower prices because of the

advantage of economies of scale, where the will have fewer per unit costs as a result of

their large scale production. Companies trying to enter the market will initially have

smaller production and will consequently have higher prices. In the personal computer

industry there is currently much emphasis put on price because consumers have become

more price sensitive as personal computers have become more or less a commodity.

New entrants will not only have higher prices but they will likely have a less

innovative product as well because they do not have equal funding for research and

development as other established brands and they will also have to deal with the brand

loyal customers that have trusted the existing players in the industry for years. By

attempting to join the market without any market share it will also be important for a new

entrant to focus its investments more heavily on advertising and marketing then existing

brands. A new entrant to the personal computer market will likely not fare well and is

almost guaranteed to always be a second mover as the larger companies will develop

more innovative products more rapidly because of their many competitive advantages.



Bargaining Power of SuppliersSuppliers in the personal computer industry can be categorized into three groups,

including hardware suppliers, software suppliers and service suppliers. The core of

their products are generally standardized and they compete by focusing on creating

better, more advanced products at a better price and not through their attempts to

differentiate them. As a result, firms within the industry are able to switch between their

suppliers relatively easily. It is really in the hands of the firm and which strategy they are

committed to that will determine whether or not they will utilize a high or low end

supplier.

With the quality of a computer being largely determined by their microprocessors

and application system installed within them, suppliers of hardware and software within

the industry play a critical role in the pricing of products. If a firm is following a high

quality strategy then it can be expected that their prices will generally be higher to reflect

the higher prices they are paying their suppliers

In terms of service suppliers, the service that can be offered within the personal

PC industry include internet, tech support and repair services. These suppliers focus

highly on operational performance and relational performance in order to increase

customer satisfaction. They also offer a variety of customer loyalty programs in attempts

to lock in and expand their customer base while trying to gain the competitive edge over

competitors within the service industry of personal computers.

While the PC industry changes regularly, it can be observed that only the central

processing unit (CPU) is a key input. All other items are commodity in nature and so

don’t command a bargaining power. Intel has a significant market power as it is a single

major supplier of microprocessor and has an 80% of market share.

Thus, Dell as computer manufacturer holds a power over the suppliers as opposed

to the suppliers holding a power over the manufacturers. It is the suppliers that are in

direct competition with each other. The suppliers are often forced to slash prices or merge

with larger companies in order to survive. Hence, the bargaining power of suppliers is

moderate.


DELL’s Direct Model

Components Order

Components

Product

DELLComputers

FinalCustomers

ComponentManufacturer

Distributors


Bargaining Power of BuyersThe personal computer industry is somewhat vulnerable against the bargaining

power of buyers. In recent years customers have more and more alternative options to

the personal computer. Smartphones, tablet computers, and other handheld devices like

Ipods have most of the same capabilities as a personal computer.

Because of the availability, sleekness, and trendiness of these alternatives, they

have become increasingly popular making personal computers more and more obsolete.

In order for the personal computer to compete with these newer alternative options, it

must differentiate itself in order to regain market share.

Large businesses, governments and schools which buy computers in large

volumes have the power to bargain on price, quality and service. Personal computer

buyers are price-sensitive. PC manufacturers can reduce a threat of buyer power by

differentiating their product.

DELL is the only PC manufacturer that applied direct model concept where

buyers can directly buy computers with DELL without a so called middle man. By using

this concept, computers cost per unit can be reduced. Furthermore, buyers are able to

customize the PC based on their needs.

The basis of the direct model concept is to improve efficiency by effectively

eliminating the intermediaries thereby allowing the company to speak directly to the

customer. Dealing directly with customers allows Dell to customize their orders

according to the customers' needs.

But, despite several ways in which manufacturers have differentiated their

products and found ways to increase switching costs, customers still see units as very

similar and thus choose primarily on price.

Hence the bargaining power of buyers can be concluded to be strong.



Rivalry among Existing FirmsThere is fierce competition between the top manufacturers in the personal

computer industry. All of which are fighting to produce a low cost, powerful machine

with the most efficient operating system. Firms specialize in different areas in order to

compete amongst their rivals. Some focus on innovation and attempt to bring the newest

technology to their customers first. Nevertheless, others may focus on their distribution

channel and services throughout their firm. However, one of the fiercest areas is the price

competition throughout the industry.

As the PC has increasingly become a commodity in a household, the fight to keep

costs low while bringing the best product to the market has become a never ending battle.

One major factor in determining the quality of a personal computer is the microprocessor

and application systems installed. As a result, there is a direct correlation between the

firm’s profitability and the profitability of the firm’s suppliers.

Main manufacturers namely DELL, IBM, HP, Acer and Apple are in competition

to produce the least expensive and most efficient machine. Japanese companies such as

Fujitsu, Toshiba, Sony and NEC also have large market shares.

DELL is focusing on distribution channel and high quality service while others

such IBM and Apple focus more on innovation. All these create differentiation to some

extent. Low-cost production at DELL contributes its positive growth rate, while other

major manufacturers are experiencing negative growth rates.

Another important of competitive advantage is globalization. Many PC makers in

the US now earn around 40% of their revenues in international markets. Although PC

markets in the US, Europe and Japan have matured and the demand has slowed down, on

the other hand demand in Asia Pacific is expected to grow.

The effects of intense competition are beginning to be felt as companies exit via

selling to other companies or simply exiting the industry altogether. For example,

Compact Computers was acquired by Hewlett-Packet in 2002 while Xerox exited the

computer business and concentrate on printers.

Regardless of the number of companies present, the computer industry will

continue to expand and remain competitive for a number of years to come. Hence the

threat to industry rivalry can be concluded to be strong.



Threat of Substitutes and ComplementsAlthough it is very unlikely for a new entrant to join the personal computer

industry there are currently other growing industries such as the smartphone and tablet

industries which are predicted to affect the sales of personal computers.

The smartphone and tablet industry have different major players, but their product

offers similar benefits to consumers that a personal computer also has. As smartphones

and tablets continue to increase in popularity and in performance the sales of personal

computers will likely decline, as some consumers see these products as alternatives for

one another.

The internet can now be accessed through phones and tablets and they are more

portable than a laptop. Currently laptops and personal computers offer many unique

applications and are compatible with much more software than smartphones and tablets.

If smartphones and tablets can attain greater memory space, processing speeds, and

compatibility with similar software, smartphones and tablets may be an all-in-one

alternative to personal computers. As technology continues to increase these separate

industries may merge into one, or at least drastically affect each other.

According to the guardian.com, Dell revenues slump by 11% year-on-year to

$13.7 b as tablets and smartphones enter into market. In digitaltrends.com, PC shipments

in 2013 show a decline over the previous year while tablet sales forecast to grow by a

hefty 67.9 percent with 202 million sales. Moreover, in ctvnews.ca, it stated that PC sales

continue to fall nearly 8 % as smartphones and tablets cut the demand.

But, according to Michael Dell himself, the impact of smartphones and tablets

will be limited to DELL, as it focused on the entire IT ecosystem. They have leading

capabilities to manage customer information seamlessly and securely in multiple-device

and BYOD environments, including virtualized desktop that you can access from any

device.

It is forecasted that 87% of connected devices sales by 2017 will be tablets and

smartphones. Hence threat from substitutes is strong in the PC industry.



Recommendation for DELLThe following are the recommendations on how DELL can turn its existing

product advantage to a competitive advantage:

Dell’s origin is in U.S. It is important for DELL to launch its products in US first

before branch out to Europe and Asia. What is happening now is the reverse

tactics that will jeopardize the threats of Power of Buyers.

Consumers are moving from PC to smartphones and tablets nowadays. Even

though Dell launched its smartphone named Dell Streak in 2010, seems like this

substitute for PC was failed to gain the market share. Dell streak is no longer

available in the market not even after one year of its launch. Even though Dell

streak was the first of its kind with 5-inch Android phones, the failure to continue

the R&D makes Dell left far behind in smartphone and tablet industry compares

to Samsung and Apple.

DELL is focusing on distribution channel and high quality service for many

years. Other rivalry such as Apple and IBM focus more on innovation. With the

fast growing technology movement, it is time for Dell to focus more on

innovation and R&D. Otherwise, it will left behind and face hard time to sustain

in the PC makers market share..

ConclusionIt can be conclude that the PC industry is fairly attractive for well-established,

global and leading companies but not for new firms. Although cost of assembling a PC is

low, the barrier to entry is fairly high because of the economics of scale and brand-

loyalty.

Providentially, the high barrier to entry provides strong competitive advantages to

existing large companies like DELL. Nevertheless, PC manufacturer like Dell should

especially focus on buyers, industry competitors and also substitutes for PC like

smartphones and tablets to gain the market growth and sustainability of their profits.


five forces framework in personal computer industry

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