Matching Dell

Question 1:

During the 90’s, the PC industry came to have low profitability. For example, IBM PC division, which represented 23% of IBM’s total revenue, lost over $1 Billion between 1996 and 1998. This was the situation of other major PC manufacturers such as HP, Compaq and Gateway. Unfortunately for the last two, unlike IBM and HP, they had no other lines of business to cover the loss.

In order to analyze the industry’s profitability, we use Porter’s 5 forces model:

Rivalry among established firms:

When IBM launched the first PC in 1981, it published its specifications in order to make it an “open architecture” so that software developers would push the industry forward. Since the architecture was public knowledge, many companies developing “IBM clones” entered the market. By the end of the 90’s many strong players were in the market, most of which held less than 10% of the market (See Ex.1). This competition led to a severe price war and damaged the industry’s profitability.

Bargaining power of buyers:

Currently there are 4 major markets for the industry (See Ex. 2): Large/midsize businesses & government (42.3% of the total $ sales), small business and offices (23.7%), home consumers (28.7%) and educational institutions (5.4%). Each of the groups had an advantage over the industry. The first group was the most powerful: although we can see in Ex. 2 that the $ share of this segment was higher than the unit share, which means that the prices for this segment were higher than for other segments, the manufacturers had to commit for a long term of warranty, spare parts and so on. In the home consumers segment we can see the reverse situation in which the unit share is larger than the $ share. Those clients were price sensitive. Moreover, they had no shifting costs nor did they have loyalty to a special brand. In 1998, 30% of this segment was first time buyers.

Risk of potential competitors:

The entry barriers were very low. An investment of only 1 million dollars could provide an efficient