This paper examines Dell Computer's competitive position within the PC industry during the mid-2000s. It analyzes the market structure of the PC industry, characterizing it as approaching perfect competition with high price sensitivity and low barriers to differentiation. The paper explores how Dell's direct-sales model, build-to-order manufacturing, and low-inventory strategy gave it a durable cost advantage over rivals such as HP/Compaq and IBM/Gateway. It also addresses emerging threats from Apple's expansion into music and consumer electronics, government regulatory concerns, and shifts in price elasticity of demand. The paper concludes with strategic recommendations for Dell to maintain its market leadership through continued low pricing, made-to-order production, and selective investment in new product categories.
The current structure of the PC market is one that most closely resembles perfect competition, with a distinctly buyer-friendly rather than seller-friendly focus. Many buyers and sellers, along with a high level of price volatility, characterize the PC industry. However, no real market perfectly matches a textbook definition of any single market structure. Although there are many products in the PC industry, they are not all exactly alike in nature, and with many available substitutes, barriers to entry are higher than in a purely competitive structure — meaning this state of near-perfect competition is somewhat limited (Investopedia, 2005). Overall, Forbes Magazine reported that PC market growth would moderate in 2005 due to a lack of significant new product introductions in an already overcrowded marketplace ("Market Share," 2005).
No new competitor has quite been able to match Dell's efficiency. Dell sells directly to its customers, so its distribution channels are simple and inexpensive, with no need for either the company or the consumer to absorb dealer markup. Dell builds to order, keeping inventories low compared to its competitors. Low inventories mean that when component suppliers such as Intel drop the price of processors, Dell does not have older, more expensive processors sitting in its warehouses at a loss to the company.
As a result, Dell can reduce the prices on its computers faster than its competitors because the components making up those computers are always the latest and least expensive available. So far, no other PC maker has been able to match Dell's cost structure (Bean, 2005).
The problem faced by Dell's competitors HP and Compaq is the same one that earlier defeated Gateway and IBM: Dell Computer's consistently low pricing. Dell has become and remains the most cost-efficient PC manufacturer in the industry. Whenever HP, Compaq, Gateway, or IBM compete on price, Dell maintains the advantage (Bean, 2005).
Dell's production levels can remain lean, and by keeping inventories low, the company can align productivity far more closely with immediate consumer and supplier demand than its competitors are able to do.
For Dell's competitors, differentiating on factors other than price is the only viable strategy for reducing the effectiveness of Dell's price competition (Bean, 2005). Introducing new features or emphasizing non-price attributes can reduce the market's overall price sensitivity. However, the current relative scarcity of new innovations in the PC market — which would otherwise motivate consumers to upgrade — has stripped most of Dell's competition of this advantage ("Market Share," 2005).
Forbes identified Dell's strongest future competitor as Apple, another low-cost, user-friendly computer company. While Apple had long been a minor market player due to the limited popularity of the Macintosh, the iPod's trendy image and widespread adoption had begun to turn the company's fortunes around ("Market Share," 2005).
Dell was considered the PC company best positioned to gain market share in 2005 ("Market Share," 2005). In September 2001, Hewlett-Packard acquired Compaq for approximately $25 billion in HP stock. The New York Times later described the deal as bringing together two struggling computer companies into one giant entity with twice the problems (Bean, 2005). The justification for the merger was the cost savings expected to result, but even before combining, both HP and Compaq were already large enough to capture most available economies of scale in PC manufacturing. The merger involving Gateway produced similar cost problems, and other market competitors such as Sony and Toshiba were far more diffuse in their business interests than Dell ("Market Share," 2005).
HP/Compaq and IBM/Gateway are hampered by their unwieldy organizational structures. By contrast, Merrill Lynch reported high activity at Apple, largely because iPod demand continued to outstrip supply for the new Shuffle models, and the average iPod buyer was also purchasing accessories for the new device. The accessories element is especially important for sustaining the music-computing market because it signals that this segment of the hardware industry had not leveled off or bottomed out — it still depended on innovation and first-mover strategies, in sharp contrast to the broader PC market. Thus, Apple's expansion into the music market posed a potential challenge for Dell, although Dell had also begun making inroads into this space by introducing comparable models of its own.
"Demand grows elastic as innovations slow"
"Lawsuit risk and supply management challenges"
"Pricing, production, and input strategy going forward"
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