Dell Computers

At age 13, Michael Dell was running a mail-order stamp-trading business, complete with a national catalog, and grossing $2,000 per month. At 16, he was selling subscriptions to the Houston Post. He enrolled at the University of Texas in 1983 as a premed student but soon became absorbed in computers and started selling PC parts out of his college dorm room. He bought random-access memory (RAM) chips and disk drives for IBM PCs at cost from IBM dealers, who often had excess supplies on hand because they were required to order large monthly quotas from IBM. Dell resold the components through newspaper ads at 10-15 percent below the regular retail price.

By April 1984 sales were running about $80,000 per month. Dell dropped out of college and formed a company, PCs Ltd., to sell both PC components and PCs under the brand name PCs Limited. He obtained his PCs by buying retailers' surplus stocks at cost, then powering them up with graphics cards, hard disks, and memory before reselling them. His strategy was to sell directly to end users; by eliminating the retail markup, Dell's new company was able to sell IBM clones at about 40 percent below the price of an IBM PC. The price discounting strategy was successful, attracting price-conscious buyers and producing rapid growth. By 1985, the company was assembling its own PC designs with a few people. The company had 40 employees, and Michael Dell worked 18-hour days. By the end of fiscal 1986, sales had reached $33 million.

During the next several years, however, PCs Ltd. was hampered by a lack of money, people, and resources. Michael Dell sought to refine the company's business model, add needed production capacity, and build a bigger, deeper management staff and corporate infrastructure while at the same time keeping costs low. The company was renamed Dell Computer in 1987, and the first international offices were opened that same year. In 1988 Dell added a sales force to serve large customers, began selling to government agencies, and became a public companyЎXraising $34.2 million in its first offering of common stock. Sales to large customers quickly became the main part of Dell's business. By 1990 Dell Computer had sales of $388 million, a market share of 2-3 percent, and an R&D staff of over 150 people. Michael Dell's vision was for Dell Computer to become one of the top three PC companies.

The five forces model focuses on five forces that shape competition within an industry. The risk of new entries, degree of rivalry among established companies, bargaining power of buyers, bargaining power of suppliers, and threat of substitute products all make up the model. Each force will focus on how Dell handles the competition within the industry.

The risk of entry by potential competitors for Dell is high. With so many computer companies entering the market, there is much competition. Economies of scale are high which include cost reductions through mass-producing a product such as computers and different software. DellЎ¦s brand loyalty is very high. They have produced many ads and slogans to boost their name, as well as high customer satisfaction with a high quality product. Switching costs are also high because certain programs can only work for certain computers. This causes a customer to be locked into the product because it can get expensive to buy all new software for a new system.

The rivalry among established companies is pretty high. There are a large number of firms that are in competition with Dell. The industry growth rate is very high. There are always new systems and new software coming out which is better than before. Each company has to keep establishing themselves as a respectable competitor by coming out with new and better ideas. High fixed costs go along with Dell as well. The costs of producing systems and different software are very high. This exit barrier can make it very difficult for Dell to back out of the industry if it is not going well.

Bargaining power of buyers and suppliers is also another aspect to look at. The bargaining power of buyers is pretty low. When customers buy computers and computer software, their purchase is generally minimal, buying only a few items. This takes away their power to force down prices from companies. On the other hand, the bargaining power of suppliers is relatively high. Substitute products in the computer industry are very high with many companies producing different products. This takes away from suppliers power because if Dell is ever unhappy with their supplier, they can find a company that can replace them quickly. Though, Intel has about 85% of the market and thus puts Dell in a very vulnerable position.

As mentioned before, the threat of substitutes is very high. Similar products from different companies like WebTV, email telephone, and other different software packages