Dell's Competitive Strategy: Porter's Five Forces Analysis

Industry Attractiveness: Porter's Five Forces

The personal computer industry in 1998 was moderately attractive. Using Porter's Five Forces analysis, the reasons for this attractiveness can be determined. Most computer makers held a moderate amount of bargaining power over suppliers. The handful of major computer makers operated at high volume, and inputs were not sufficiently differentiated — both factors that gave some power to computer makers. There were also low switching costs within the industry. The exceptions lay in the two main components of a computer: only two major chip companies existed — AMD and Intel — and only one dominant operating system (Windows). This gave those companies far higher bargaining power over computer makers than other suppliers enjoyed. As a result, the overall bargaining power of suppliers was only moderate, implying that for the most part supplier power was only slightly weak.

While the bargaining power of suppliers was weak, the bargaining power of buyers was moderately high. Buyers often lacked information and frequently relied on computer makers for critical product details, yet they also had many options from which to choose. There was a low degree of differentiation among computers, and consumers demonstrated relatively high price sensitivity. However, the rise of the internet meant there were few substitutes for computers, as they were becoming much more important in the lives of average consumers. Corporate customers, given the number of competitors in the PC industry, often had enough bargaining power to drive prices down.

The threat of new entrants was high. As personal computers became more of a commodity product, new entrants were entering the market with low-cost models. Firms from countries such as Taiwan, China, and Korea were beginning to push established PC players out of the market with inexpensive products. New entrants were likely to put downward price pressure on existing cost leaders like Dell. Over time, it could also become more difficult to effectively differentiate between computers, which would shrink the higher-margin, high-end segment of the market.

The threat of substitutes, however, was low. As computers played a larger role in people's lives, they became more indispensable. Some substitutes still existed, but these largely reflected older technology being displaced by the computer. As the functionality of computers increased, the trend was twofold: computers would compete against more media and functional devices, but as the more modern equipment, computers would represent the competitive threat rather than the target. At the time, there was no viable alternative to the personal computer, and once a consumer became a PC user, there was little likelihood of reverting to older technologies.

The intensity of rivalry in the industry was moderate. With enough competitors in the market, firms did not compete too intensely; the personal stakes were relatively low. Companies competed on the basis of innovation or cost, but for the most part firms did not react aggressively to competitors' moves, nor did they typically compare their products directly to others in marketing. Exit barriers were relatively low for firms in larger conglomerates — HP, Sony, IBM, and Toshiba among them — for whom exiting the PC business remained a viable option. For PC-specialist firms without other lines of business, however — which in 1998 would have included Dell, Compaq, and Apple — exit barriers were significantly higher. The fact that roughly half of competitors could exit the market lowered the overall intensity of rivalry by reducing the competitive stakes.

Overall, this implies that the industry was moderately positive. There were few existential threats to existing firms, but as personal computers became increasingly commoditized, the industry was going to become less attractive: fewer opportunities to compete at the high end and squeezed margins at the low end. Some consolidation might occur if new entrants took too much market share from established players. Dell, however, had been able to employ a number of tactics that enabled the company to thrive within this operating environment.

Dell's Generic Competitive Strategy

Porter identified four generic strategies built around a broad or niche industry focus combined with either differentiation or low cost. Dell operated primarily as a cost leader in the industry but also incorporated elements of differentiation in its business model. Dell undercut many competitors on price, yet by offering only direct sales, it also distinguished itself from rivals. By pursuing cost leadership while delivering a quality product, Dell was able to grow its market share rapidly.

Porter recommends that firms commit to a single generic strategy. Dell's attempt to compete on more than one dimension was therefore a risky proposition. It was foreseeable that Dell would eventually need to decide whether to position itself as a differentiated player or a pure cost leader. If Asian manufacturers entered the market and proved capable of out-competing Dell on cost, Dell would need to revise its business model — consumers could purchase inexpensive computers from lower-cost rivals and high-end computers from premium brands, leaving Dell caught in the middle.