Dell the Personal Computer Industry in 1998 Essay

Dell

The personal computer industry in 1998 was attractive. Using Porter's five forces analysis, the reasons for this attractiveness can be determined (QuickMBA, 2010). Most computer makers have a moderate amount of bargaining power over suppliers. The handful of major computer makers have high volume and the inputs are not sufficiently differentiated, both factors that give some power to the computer maker. There are also low switching costs within the industry. The exceptions are in the two main components of a computer. There are only two major chip companies -- AMD and Intel, and only one major operating system (Windows). This gives these companies much higher bargaining power over computer makers than other suppliers enjoy. As a result, the bargaining power over suppliers is only moderate, implying that for the most part the bargaining power of suppliers is slightly weak.

While the bargaining power of suppliers is weak, the bargaining power of buyers is moderately high. While buyers lack information -- and often rely on computer makers for critical information about their products -- buyers also have many options from which to choose. There is a low degree of differentiation in computers and consumers have relatively high price sensitivity. However, the rise of the internet means that there are few substitutes for computers, as computers are becoming much more important in the lives of average consumers. Corporate customers often have enough bargaining power, given how many competitors there are in the PC industry, to drive prices down.

The threat of new entrants is high. As personal computers become more of a commodity product, new entrants are coming into the business with low-cost models. Firms from countries like Taiwan, China and Korea are beginning to push old-established PC players out of the market with low cost products. New entrants are likely to bring down prices in the industry, which will put downward price pressure on existing cost leaders like Dell. Over time, it may even become more difficult to effectively differentiate between computers, so that the high end of the market may become smaller than it already is.

The threat of substitutes, however, is low.As computers play a larger role in people's lives, they become more indispensable. There are still substitutes, but for the most part those reflect older technology that is being replaced by the computer. As the functionality of computers increases, the trend will be twofold -- computers will compete against more other media and functional devices, but with computers being the more modern equipment they will be the competitive threat. At present, there is no viable threat to personal computers and once a person becomes a personal computer user there is little threat of substitution by way of reverting to older technologies.

The intensity of rivalry in the industry is moderate. There are enough competitors in the market that firms that are in the market do not compete too intensely. There are few personal stakes. Companies compete based on innovation or low cost but for the most part firms do not react to the moves that other firms make. Firms do not typical compare their products to others in marketing. There are relatively low exit barriers, though for PC specialist firms without viable other businesses, which in 1998 would have included Dell, Compaq and Apple, the exit barriers are significantly higher. For other firms in conglomerates -- HP, Sony, IBM, Toshiba among them -- exiting the PC business remains an option, and that half the competitors can exit lowers the intensity of rivalry by way of lowering the stakes of competition in the industry.

Overall, this implies that the industry is moderately positive. There are few existential threats to the existing firms in the industry, but as personal computers become….....