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Strategic Analysis
Professor Jing Chen
Anurag Rakshit
March 14, 2017

Case Assignment 5 Matching Dell

1. How and why did the personal computer industry come to have such low average
profitability?

This HBS article covers the timeline of the development of the PC. Computers had been
around since 1949, huge vacuum tubes, moving mechanical parts and covered around an
entire city block. However, around 1975 many firms began offering their versions of
portable personal computers. These were very technical devices, built mostly for hobbyists
by companies like Apple and Commodore but in 1981 IBM changed the game by launching
its first PC into the market. They captured the market by commanding 61% of the mainframe
computer market. But this success of IBM gave rise to many imitators, one of which was
Compaq, were all trying to undercut IBMs sales revenues by selling cheaper clones. At the
same time, there were other major players emerging out of the component industries, such as
Intel with its advanced sought-after microprocessors and Microsoft with Windows as a major
software giant who formed a major alliance during the 1990s, known as Wintel in order to
establish a new industry standard of proprietary technology. With all of the Supplier
Bargaining Power that Wintel had over the hardware manufactures like Dell and Compaq, it
forced them to pay a huge share of their profits to these companies in form of licensing fees.
They were also pitted against each other by Intel because of their rationing methods which
allocated a limited amount of semiconductors towards these hardware vendors. In an attempt
to compete with each other for market dominance, PC manufacturers lowered their prices
increasingly to the point where their strategy was to produce enough volume to make up for
the low profit margins and achieve economies of scale.

2. Why has Dell been so successful despite the low average profitability in the PC industry?

When Micheal Dell launched Dell branded PCs into an already populated market, the
chances to succeed without a unique core competence was almost impossible. The Direct
Model was formulated to deal with exactly this issue. The idea was to sell high performance,
low cost PCs directly to large scale corporate accounts who ordered specialized custom
computers, their demands were quickly as well without having to share any profits with a
distributor or reseller, even though they did occasionally sell via resellers for a measly profit.
They also announced their website where customers could log on, customize their PCs and
get in touch with customer service while getting a higher margin (19% compared to 7% in
retail). This allowed them to cater to a very large clientele individually and the customers
were also happy to engage with the firm itself. Generally speaking, this individualized
customer handling style was Dells USP and gave them considerable competitive advantage.
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3. Prior to the recent efforts by competitors to match Dell (1997-1998), how big was Dells
competitive advantage? Specifically, calculate Dells advantage over the team of Compaq.

One of Dells largest competitive advantage was its inventory turnover. They had reduced
their number of days in inventory down from 32 days to 7 days and additionally, due to their
ingenious accounting techniques, they managed receivables and payables such that, on
average ,they received payment five days before it had to pay its suppliers, leaving them
enough time to examine margins and overhead. On the other hand Compaq had to deal with
mediating agents, like resellers leaving them with an inventory turnover period of 60 days.
They were able to reduce it to 45-50 days but Dells advantage was still significantly higher
by over 38 days.