Dell: Porter’s 5 Forces Essay

Question 1 Bargaining Power of Suppliers

Although there were many suppliers for computer components, “microprocessors were supplied by only a handful of companies.” Pg.3. Microsoft and Intel monopolized the suppliers market as, “between 85% and 90% of computers sold conformed to Microsoft/ Intel Standards.”pg.3. With such a high percentage of computers being sold using Microsoft and Intel it would make it very difficult for any new suppliers to take the lead in this market, making the supplier power high.

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Threat of Substitutes

Computers were a hot item in the U.

S, being that “45.5% of household’s owner a computer in 1998, and the figure was expected to rise to 49.5% by 2000.”pg3. A computer was something new into the market, and no other product nearly compared to its capabilities and complexity. Given that the computer was one of its own kind in this time the threat of other substitutes was very low.

Bargaining Power of Buyers

Dell created a strong and reliable relationship with its customers.

“Over a thousand outside sales reps spent their time in the field, understanding customer needs, courting customer personnel, helping customers configure their information systems, and promoting Dell’s products and services.” Pg6. Although Dell had put a great effort into their customer service, the prices of the product were a key factor in the success of Dell. “Customers at retail don’t know what they’re looking for, other than price.” Pg.7. As price appears to be the major deciding factor in product choice, the buyer will be most likely to purchase their product based on price rather than quality of the actual product.

Threat of New Entrants

Within the market of computers, there is not a great amount of product differentiation, with the exception of Dell directly serving its customers. Without much differentiation new entrants could very easily present a new and different business strategy which could surpass leading market shareholders. The threat of new entrants would be high due to the lacking differentiation, but is also considered medium because of the great amount of existing entrants in the market. With IBM, Compaq, Hewlett-Packard, Gateway, Dell, and Apple all entering the computer market within a short period of time, we can conclude that it was relatively easy to enter the market. Although it was easy to enter, it was nearly impossible to differentiate, and produce a business plan to succeed in gaining a competitive advantage to already existing competitors.

Competitive Rivalry

Competition was very high within the computer market, as all the competitors were finding ways to stay competitive by reducing costs and improving sales efforts. “HP hoped that the program would allow it to reduce price protection to two weeks, cut down defects, and shave 5%-15% off of its prices.”pg.12 In conclusion, the personal computer industry was a very attractive industry to do business in, as the threat of substitutes was very low, and new entrants is medium/high. This means that it would be easy to enter the market, and there were not any other products that compared to the computer. This makes for a very attractive market to do business in.

Question 2

Dell was the first and only competitor in the computer market to deal directly with its customers, giving them strong differentiation therefore making them unique. “You can’t ignore what Dell has done… I could give you a list of names of really large customers who have said to HP, ‘Either do business with us directly or you are not going to do business with us.’”pg.12 Dell used specific tactics through its use of the Dell’s Direct Model in order to ensure the PC industry was an attractive one that it could compete in. Dell realized in order to be successful in this market they needed to set themselves apart from related companies by possessing a variety of differences from like companies appealing to consumers.

Dell took advantage of the gap evident in the computer industry by eliminating the use of middlemen such as retailers and distributors. By eliminating the middleman Dell developed an inventory free system, resulting in saving costs and allowing them to be more competitive in the market. “[The current production system] requires that the whole organization be integrated. You’ve eliminated buffers. When you have no buffers and you have no inventory, the whole organization has to work together. There is no way to let things pile up, because you have no piles.”

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