Five Forces Framework in Personal Computer Industry Porter’s Five Forces Model is a model that analyzes an industry to help develop a business strategy. The model uses five forces that have been identified to categorize an industry as intensely competitive or not competitive at all and this will then determine the attractiveness of the market. For the purpose of this assignment, I will use the company that I work with before which is DELL as a case study. Dell Inc. (formerly known as Dell Computer) is an American multinational computer technology corporation based in Round Rock, Texas, United States, that develops, sells, repairs and supports computers and related products and services.
Bearing the name of its founder, Michael Dell, the company is one of the largest technological corporations in the world, employing more than 103,300 people worldwide. Dell opened its plants in Penang, Malaysia in 1995. They have two plants located in Bayan Lepas (AP 1) and Seberang Perai (AP 2). AP 1 is their main office while AP 2 is Dell Factory and office. In 2006, Dell opened its office in Cyberjaya. Most of the team located in here is for IT Support and Development. Currently they have about 900 people working in Dell Cyberjaya Office.
According to Grant (2005), there are many features of an industry in which a company competes that determines the level of competition it will face and the profits it will get. The most famous classification was done by Michael Porter, known as Porters Five Forces framework which can help a company determine its potential profits by looking at five sources of competitive pressure. The five sources of competition are:
1. Competition from entrants
2. Competition from substitutes
3. Competition from established rivals
4. Bargaining power of suppliers
5. Bargaining power of buyers.
Taking Dell as an example, I will perform the Porter’s Five Forces analysis on the personal computer industry to identify the state of this market.
Porter’s Five Forces – Personal Computer Industry
Threat of New Entrants
The threat of new entrants in the personal computer industry is very weak. Currently the market is dominated by five major competitors who have nearly the entire market share; this will likely discourage any potential new companies from entering the market. A huge barrier to entry is also that the market requires significant investments to be made in research and development to continually develop innovative products as well as large fixed start-up costs for manufacturing and employees and customer service. Large firms have the capabilities of manufacturing at lower prices because of the advantage of economies of scale, where the will have fewer per unit costs as a result of their large scale production. Companies trying to enter the market will initially have smaller production and will consequently have higher prices.
In the personal computer industry there is currently much emphasis put on price because consumers have become more price sensitive as personal computers have become more or less a commodity. New entrants will not only have higher prices but they will likely have a less innovative product as well because they do not have equal funding for research and development as other established brands and they will also have to deal with the brand loyal customers that have trusted the existing players in the industry for years. By attempting to join the market without any market share it will also be important for a new entrant to focus its investments more heavily on advertising and marketing then existing brands.
A new entrant to the personal computer market will likely not fare well and is almost guaranteed to always be a second mover as the larger companies will develop more innovative products more rapidly because of their many competitive advantages.
Bargaining Power of Suppliers
Suppliers in the personal computer industry can be categorized into three groups, including hardware suppliers, software suppliers and service suppliers. The core of their products are generally standardized and they compete by focusing on creating better, more advanced products at a better price and not through their attempts to differentiate them. As a result, firms within the industry are able to switch between their suppliers relatively easily. It is really in the hands of the firm and which strategy they are committed to that will determine whether or not they will utilize a high or low end supplier. With the quality of a computer being largely determined by their microprocessors and application system installed within them, suppliers of hardware and software within the industry play a critical role in the pricing of products.
If a firm is following a high quality strategy then it can be expected that their prices will generally be higher to reflect the higher prices they are paying their suppliers In terms of service suppliers, the service that can be offered within the personal PC industry include internet, tech support and repair services. These suppliers focus highly on operational performance and relational performance in order to increase customer satisfaction. They also offer a variety of customer loyalty programs in attempts to lock in and expand their customer base while trying to gain the competitive edge over competitors within the service industry of personal computers.
While the PC industry changes regularly, it can be observed that only the central processing unit (CPU) is a key input. All other items are commodity in nature and so don’t command a bargaining power. Intel has a significant market power as it is a single major supplier of microprocessor and has an 80% of market share.
Thus, Dell as computer manufacturer holds a power over the suppliers as opposed to the suppliers holding a power over the manufacturers. It is the suppliers that are in direct competition with each other. The suppliers are often forced to slash prices or merge with larger companies in order to survive. Hence, the bargaining power of suppliers is moderate.
Bargaining Power of Buyers
The personal computer industry is somewhat vulnerable against the bargaining power of buyers. In recent years customers have more and more alternative options to the personal computer. Smartphones, tablet computers, and other handheld devices like Ipods have most of the same capabilities as a personal computer. Because of the availability, sleekness, and trendiness of these alternatives, they have become increasingly popular making personal computers more and more obsolete. In order for the personal computer to compete with these newer alternative options, it must differentiate itself in order to regain market share. Large businesses, governments and schools which buy computers in large volumes have the power to bargain on price, quality and service.
Personal computer buyers are price-sensitive. PC manufacturers can reduce a threat of buyer power by differentiating their product. DELL is the only PC manufacturer that applied direct model concept where buyers can directly buy computers with DELL without a so called middle man. By using this concept, computers cost per unit can be reduced. Furthermore, buyers are able to customize the PC based on their needs. The basis of the direct model concept is to improve efficiency by effectively eliminating the intermediaries thereby allowing the company to speak directly to the customer. Dealing directly with customers allows Dell to customize their orders according to the customers’ needs. But, despite several ways in which manufacturers have differentiated their products and found ways to increase switching costs, customers still see units as very similar and thus choose primarily on price. Hence the bargaining power of buyers can be concluded to be strong.
Rivalry among Existing Firms
There is fierce competition between the top manufacturers in the personal computer industry. All of which are fighting to produce a low cost, powerful machine with the most efficient operating system. Firms specialize in different areas in order to compete amongst their rivals. Some focus on innovation and attempt to bring the newest technology to their customers first. Nevertheless, others may focus on their distribution channel and services throughout their firm. However, one of the fiercest areas is the price competition throughout the industry. As the PC has increasingly become a commodity in a household, the fight to keep costs low while bringing the best product to the market has become a never ending battle. One major factor in determining the quality of a personal computer is the microprocessor and application systems installed. As a result, there is a direct correlation between the firm’s profitability and the profitability of the firm’s suppliers.
Main manufacturers namely DELL, IBM, HP, Acer and Apple are in competition to produce the least expensive and most efficient machine. Japanese companies such as Fujitsu, Toshiba, Sony and NEC also have large market shares. DELL is focusing on distribution channel and high quality service while others such IBM and Apple focus more on innovation. All these create differentiation to some extent. Low-cost production at DELL contributes its positive growth rate, while other major manufacturers are experiencing negative growth rates. Another important of competitive advantage is globalization. Many PC makers in the US now earn around 40% of their revenues in international markets. Although PC markets in the US, Europe and Japan have matured and the demand has slowed down, on the other hand demand in Asia Pacific is expected to grow.
The effects of intense competition are beginning to be felt as companies exit via selling to other companies or simply exiting the industry altogether. For example, Compact Computers was acquired by Hewlett-Packet in 2002 while Xerox exited the computer business and concentrate on printers. Regardless of the number of companies present, the computer industry will continue to expand and remain competitive for a number of years to come. Hence the threat to industry rivalry can be concluded to be strong.
Threat of Substitutes and Complements
Although it is very unlikely for a new entrant to join the personal computer industry there are currently other growing industries such as the smartphone and tablet industries which are predicted to affect the sales of personal computers. The smartphone and tablet industry have different major players, but their product offers similar benefits to consumers that a personal computer also has. As smartphones and tablets continue to increase in popularity and in performance the sales of personal computers will likely decline, as some consumers see these products as alternatives for one another. The internet can now be accessed through phones and tablets and they are more portable than a laptop. Currently laptops and personal computers offer many unique applications and are compatible with much more software than smartphones and tablets.
If smartphones and tablets can attain greater memory space, processing speeds, and compatibility with similar software, smartphones and tablets may be an all-in-one alternative to personal computers. As technology continues to increase these separate industries may merge into one, or at least drastically affect each other. According to the guardian.com, Dell revenues slump by 11% year-on-year to $13.7 b as tablets and smartphones enter into market. In digitaltrends.com, PC shipments in 2013 show a decline over the previous year while tablet sales forecast to grow by a hefty 67.9 percent with 202 million sales. Moreover, in ctvnews.ca, it stated that PC sales continue to fall nearly 8 % as smartphones and tablets cut the demand.
But, according to Michael Dell himself, the impact of smartphones and tablets will be limited to DELL, as it focused on the entire IT ecosystem. They have leading capabilities to manage customer information seamlessly and securely in multiple-device and BYOD environments, including virtualized desktop that you can access from any device. It is forecasted that 87% of connected devices sales by 2017 will be tablets and smartphones. Hence threat from substitutes is strong in the PC industry.
Recommendation for DELL
The following are the recommendations on how DELL can turn its existing product advantage to a competitive advantage: Dell’s origin is in U.S. It is important for DELL to launch its products in US first before branch out to Europe and Asia. What is happening now is the reverse tactics that will jeopardize the threats of Power of Buyers. Consumers are moving from PC to smartphones and tablets nowadays. Even though Dell launched its smartphone named Dell Streak in 2010, seems like this substitute for PC was failed to gain the market share.
Dell streak is no longer available in the market not even after one year of its launch. Even though Dell streak was the first of its kind with 5-inch Android phones, the failure to continue the R&D makes Dell left far behind in smartphone and tablet industry compares to Samsung and Apple. DELL is focusing on distribution channel and high quality service for many years. Other rivalry such as Apple and IBM focus more on innovation. With the fast growing technology movement, it is time for Dell to focus more on innovation and R&D. Otherwise, it will left behind and face hard time to sustain in the PC makers market share..
It can be conclude that the PC industry is fairly attractive for well-established, global and leading companies but not for new firms. Although cost of assembling a PC is low, the barrier to entry is fairly high because of the economics of scale and brand-loyalty.
Providentially, the high barrier to entry provides strong competitive advantages to existing large companies like DELL. Nevertheless, PC manufacturer like Dell should especially focus on buyers, industry competitors and also substitutes for PC like smartphones and tablets to gain the market growth and sustainability of their profits.