Business Model of the Computer Company Dell - Case Study Example

Introduction: The computer industry is one of the leading industries and has numerous players that participate in it. One of the major PC manufacturers across the world is Dell. This paper is based on the case study of Dell Computer Corporation: An Analysis of the PC Industry. The paper will answer three main questions about the company and these have been discussed under the three main topics as below. Dell: Overview and Business Model: Dell Computer Corporation was started as by an eighteen year old Michael Dell, who as a student worked part time from his hostel room to format hard disks for the PCs of the fellow students and also worked on improving the memory space and disk drives and the modems of the IBM clones. This was the actual birth of the company and it was from here that Michael Dell moved on to build one of the world’s largest PC manufacturing companies. Dell at present holds as much as 13.2% of the total markets of the world, however the company has slipped down from its major position in the market over the past few years (Krangel, 2009). Dell uses a business model which is direct and very transparent and simple. The company’s business model is one which is focused on better execution and minimum inventory. Considering the various attempts in the markets where companies try and imitate other companies it has been noted that in the case of Dell this has not been the case (Liker, 2003). There are several underlying reasons for the fact that other companies do not imitate the products of Dell and these have been discussed as below: a) Economies of Scale: Dell has over the years been able to develop the operations to a level where the company faces Economies of scale. The term Economies of scale refers to the advantage that a company gains with the expansion of its business. This is an microeconomic theory and here the businesses are faced with a reduced costs in terms of per unit when the scale of production increases. The concept is a long term concept and is based on the level that businesses reach over years. Dell started with a very small operation however over the years the company has been able to gain a major part of the markets and by doing this the company has been able to also reduce the costs that they incur in terms of each unit of production. The company has built a strong image for itself and a strong level of suppliers across the world within each of the local markets. b) Highly Effective and Efficient Processes: Dell’s overall processes are very effective and efficient. Here the company has been able to follow a business model which although looks very simple and straight forward (Albarran, A. B., Olmsted, S. M., & Wirth, M. O. (2005). However this business model is very effective and efficient and provides the company with a chance to improve the speed of execution and use minimum inventories. The company also uses the c) Quality: “Quality management is an organisation-wide approach to understanding precisely what customers need and consistently delivering accurate solutions within budget, on time and with the minimum loss to society” (CQI, 2009). Quality is one of the most essential elements of Dell. As explained by Willa A. Foster, and as has been followed over the years by various companies across the world, it is clear that “Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction, and skilful execution; it presents the wise choice of many alternatives” (Willa A. Foster). Dell believes in ensuring high levels of quality and effective working. Looking at the working of the company it has been noted that the company follows a very strict policy in terms of the quality of the products. The theory of Deming has been adopted in the company. ‘The Deming System of Profound Knowledge’ was a philosophy of W. Edward Deming. Deming suggested that the quality can be increased if the appropriate principles are adopted and this will also allow for reduction of costs, by reduction of the other factors like wastes, rework, litigations and also staff attrition (Jobber, D., 2004). Porter’s Five Forces – Dell: One of the best and most essential analysis that need to be conducted to check for the strategies of any business and the factors that affect any business is a Porter’s Five forces. Considering Dell’s environment and the markets that it operates within, the following five forces can be derived. a) Threat of New Entrants: Moderate: The company operates in a market where the threat for new entrants is very low or moderate. The levels of investment for the independent stores are very high and hence the number of companies that attempt to be a part of this industry is very low. Also the barrier for entry is quite high due to the brand name and the brand image that has been created. This also leads to low product differentiation. The low economies of scale also have a major impact on the threat of new entrants. As seen in the previous discussion the economies of scale for Dell is high thereby giving it an edge over the new entrants in the markets. It is also essential to understand that there are no legal barriers or any barriers from the governments which make the entry relatively simpler but not as simple due to other economic reasons. Also seeing Dell being faced with reducing profitability and with the company being faced with a constant decline in terms of the markets this creates a form of threat of new entrants. b) Rivalry: High: There is a high level of rivalry that is being faced by the company in the present markets. The main factors that need to be considered in terms of the rivalry include the high concentration of numerous companies in these markets. Hence making the industry highly concentrated and leaving Dell to be faced with a high level of rivalry. Also the price wars that exists in the markets with the high levels of competition leads the company to have very low margins and low levels of profits that it can retain. Also with the changing markets and higher number of rivals, the companies clearly are faced by lack of profitability or a clear decline in the profitability levels. Also with the number of companies that are present in the markets the levels of differentiation is also very low. The technology and the systems are similar in a number of ways hence the level of differentiation can only be more towards the customer care and personalization options. Dell however has still been able to face this competition and still have a major part of the market which simply implies that the strategies and the business model used by the company is strong and effective. c) Threat of Substitutes: Low: Dell faces low levels of threats in terms of the substitutes. It has been noted that there is a strong presence of PCs throughout the society and almost one of three people in the United States possess a computer. It has also been noted that one of the only companies that can form a substitute is Apple computers which however have high prices and they also lack a number of software that they lack which in turn causes issue for the apple users to shift and make a switch. The only substitute that is present in the markets includes Apple computers. d) Bargaining Power of Buyers: High: As discussed earlier, Dell concentrates a lot on the quality of its products and the company works on providing excellent customer service and customer care. These are a few factors that allow Dell to build their brand loyalty and the brand perception as well. Every brand has a certain image that it created for its product and the quality that it provides. Perceived Quality has been defined as, ‘Consumers opinion of a products (or a brands) ability to fulfill his or her expectations. It may have little or nothing to do with the actual excellence of the product, and is based on the firms (or brands) current public image, consumers experience with the firms other products, and the influence of the opinion leaders, consumers peer group, and others’ (Business Dictionary - Perceived Quality, 2009). Dell is also highly price sensitive and the company has a high level of price sensitivity, i.e. customers have higher levels of control and the choice to buy or not are based on customers. There are several players in the markets hence giving the customers high levels of choice. The only other factors that assist the company include the reliability and the customer service that the company provides to the customers. e) Bargaining power of Suppliers: High: Again the level of supplier bargaining power is also high. This is simply because the suppliers present in the markets are in abundance and there are numerous suppliers that can provide the components like hardware etc. However there are two main inputs that have been monopolized and there are two main types of standards that the products that are available which include, Microsoft based standard for PCs and Intel Based Standards for most of the available PCs. The company faces issues as it will be faced with high levels of switching costs and hence is unable to switch suppliers as easily. Strategy Recommendations – Dell: The current business model adopted by Dell will also prove to be very effective in organizations which are a part of the clothing industry. The main advantages of the business model adopted by the company are that it helps in lowering the costs and avoids the dealer’s mark up thereby allowing the customers to save as well. Also in the current market where the customers’ choice is affected a lot by the level of satisfaction and the level of personalization that is available this business model is the most effective. The benefit of the business model is that it provides is that it has the capability to develop the dynamics of the person-to-machine as well as person-to-person interactions, which enables better performance (Mooney, 2007). Also the level of importance given to levels of quality is very high and the theories of Deming also play a major role in the company. Deming also explains that the effects are seen on the customer loyalty which sees a cleat rise. The most essential element as explained by Deming was the need for continual improvements and the need for a combined effort. Deming’s philosophy however was based on two main factors: i) there is a clear increase in the quality and decrease in costs when efforts and focus is completely on quality. This Deming explained with the following formula: Quality = Results of work efforts / Total Costs, ii) Deming also points, that is the prime focus is cost and cost cutting, then the quality clearly declined over time. The business model also assists the customers lower the inventory levels and the ability adopt the Just in Time strategy more effectively. Just – In – Time (JIT) is a recent strategy of inventory management to reduce the carrying costs and the in progress inventory, and also increase the return on investments. This method has been developed to help companies use its investments carefully and appropriately. This was firstly used by Ford Motor Company in 1923 by Henry Ford (Sandras, W.A., 1989). The JIT process is simple and defines stocking of goods to be a waste. Companies using this method follow the thumb rule of ordering for stocks whenever it is required by the company. This process exposes the hidden costs that the company incurs for storing and transporting of the inventories. The process might seem simple however when it comes to incorporating it into the daily business, the companies face a number of issues as it would mean completely changing the process flow of the company. There are a number of different disciplines that are followed to ensure the correct timing for ordering the goods to fit in correctly into the process flow of the company. This process involves aspects of statistics, behavioural science, production management and industrial engineering. In simple terms JIT is a process ensures that the inventories of a company are available at the right time, at the right place, the right amounts and finally the right materials (Sandras, 1989). The company also can save time and the total process of the manufacturing and the testing and shipping is also reduced to a great extent (Brand Extension Research, 2009). Dell can use the option to diversify into newer business and the company has already created brand awareness among people across the world. Dell would be excellent and would be able to succeed in all markets. Marketers have realised that the best way to expand any business is to develop a brand extension (Kotler, P., Armstrong, G., Wong, V. and Saunders, J., 2002). The benefits of capitalising on the brand equity of an existing brand is very high, as it allows more efficiency in terms of production, better brand association and customer awareness and even high perceived quality for the new product or service. There are several different types of brand extensions that are available for the companies to adopt. Brand Stretching refers to use of the well established and stabilised brand names of products to develop product or service of a completely unrelated market. An example of this is Yamaha, a motorbike company originally from Japan. Yamaha has created a strong market presence for itself across the world and the company moved into production of branded hi – fi music instruments and equipments and also sports equipments (Tutor2U, 2009). Hence it is clear that if a company chooses its brand extension and stretching appropriately, the companies will gain several benefits. Firstly, the distributors would face lesser levels of risk if the new product has a well established name and brand image in the market. Also the customers will be able to easily relate to the name and will have a higher inclination towards the brand due to the core product loyalty (Bristol, 2002). Lastly, the advertising and launch costs will also be much lower and the marketing will be relatively simpler for a well established brand. Conclusions: In conclusion, it has been noted that the company – Dell has a strong impact on the markets already. The company can utilize this place that it has created and build an extension or diversify into other products as well. Dell has a strong market share and the company is very effective in all it does. One of the biggest positive aspects of Dell include the need and focus on quality and customer service together which form a major part of the success of the company. Hence Dell can prove to be successful even if it were to expand and diversify into some other products as well (Salvati, 1999). Bibliography Aaker, D. A., & Joachimsthaler, E. (2000). Brand Leadership: The Next Level of the Brand Revolution. Free Press. Albarran, A. B., Olmsted, S. M., & Wirth, M. O. (2005). Hand Book of Media Management and Economics. Lawrence Erlbaum Associates. Brand Extension Research. (2009). 8 Types of Brand Extensions. Retrieved November 6, 2009, from Brand Extension Research: http://www.brandextension.org/types.html Bristol, T. (2002). Potential points of brand leverage: consumers emergent attributes. 11 (4, p.198 - 212). Business Dictionary - Brand Loyalty. (2009). Brand Loyalty. 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