Tuesday, June 4, 2019

Major Factors For The Low Profitability Commerce Essay

Major Factors For The Low Profitability Commerce EssayTo regard the indispensable elements that contributed as major factors for the low profitability in the information processing system industry, the group had to apply Porters five forces orientation. The main reasons for a low average profitability in the computer market even though there exists juicy level of output and innovation especially during the last ten years lavatory be attributed to these factorsPrimary, as a weak strategic choice, Stiff Competition (which ultimately led to price competition) was war of attrition between these companies, and of course as a result of this some money was left on the table and average profitability was low. Secondly, product differentiation among the industries was very weak and complementary products that would submit made a difference were non as such available. Thirdly, as it can be seen from the business chain, the suppliers had monopoly power over the manufacturers. Fourth, thr eat of the substitutes was very high since there was no brand loyalty on the part of customers. So, as a result these forces were able to put an undeniable pressure on the computer industry and led to a low average profitability.2) Why has Dell been so successful despite the low average profitability in the PC industry?In 1998 the computer industry shared or had the same kind of business strategy. This is more(prenominal) obvious when one sees the similarity in dissemination carry. What made Dell distinctive from the competitors was their application of the Blue Ocean strategy. Dell focused on direct orders from customers, offering customer tailored products and meanwhile real new marketing and distribution strategy. This resulted in low product variable be and 8% increase in operating(a) profit in comparability with usage of standard distribution channels.Dell segmented their customers in two main groups relationship and transaction buyers. This increased the capability of be tter understanding and responding more efficiently to customer needs. This raised customer satisfaction level and created loyal customers, which affected positively the lodges profitability.The decision to take orders instantly from the internet web page, knowing especially through a new CRM model, made it possible for Dell to provide innovative service and products to all customer segments. A crucial headstone to Dells success was the decision to proceed with production only after an order was received.In the same time focusing on limited number of suppliers and maintaining occlude relationship with them, allowed Dell to separate delivery of different components of production, thus reducing shipping time and decreasing operating cost by keeping short letter at minimum level.Dells successes resulted from implementing an impressive and profitable corporate strategy by focusing heavily on direct customers and suppliers.3) Prior to the recent (19971998) actions by the competitor s to hold in Dell, how big was Dells competitive advantage?The personal computer industry has been one of the most competitive industries in the world. It is typically characterized by rapid innovations, low costs, and in most cases, the demand for updated processing systems has kept this industry very attractive.The only way companies can be profitable under this set framework was to be operationally efficient. In the 1990s, the growth of the World Wide Web led to an increased demand for PC and thus consequently led to a parentage in prices because of its highly competitive nature.Dells efficiency in 1997-1998 came from two key success factors First, they sell directly to their customers so their distribution channels are saucer-eyed and cheap (eliminating all middlemen costs, no dealership markup). Second, they adapted the necessitate Model, where they only do build-to-order, which kept inventories low. Low inventories mean that, when the competing companies drop the price of its processors, Dell did not tolerate accumulated old expensive processors. It was able to strangle the prices on its computers faster than its competitors can, because the components that made up those computers are the latest and cheapest.Dell clearly terrific its customers segments and as part of its strategy, it targeted the corporate customers (relationship buyers) who were volume buyers. As a result, the transactions costs/per PC sale were substantially lower compared to its competitors.In summary, Dells strategy was characterized byBuild-to-order and direct-to-customer relationshipsFocus on specific market segmentsLow cost distributionManufacturing and strong supplier relationshipsMinimum inventoryService and repair through call in and third parties.Exhibit 1 shows that Dell as compared with the competitors had a low gross margin. (See annex)Exhibit 2 shows that Dells net profit margin is the same as the market average. We can conclude that the fixed costs for Dell was mu ch lower than for the competitors, which gave Dell an opportunity to cut prices unlike its competitors. (See annex)Exhibit 3 shows that the attach to has a relatively low inventory turnover which gives the company a competitive advantage in the fiercely growing market by minimizing losses. (See annex)4) How effective have competitors been in responding to the challenge posed by dells advantage?IBMIBM was the first PC maker to recognize Dells competitive advantage in direct gross revenue distribution. In early 1990s it launched a series of initiatives to improve the coordination with resellers and distributors called Joint Manufacturing Program that was followed by Integration and assemblage program and Enhanced Integration and Assembly Programs. IBM started to ship heavily configured PCs to resellers and distributors who completed the configuration of the machine for the end users.In 1995 IBM launched Authorized Assembly Program shipping lightly configured computers (Model 0s) to downriver partners who would complete the assembly with the missing components and ship to customers. The AAP program helped IBM to rapidly deliver customized PCs without holding large amounts of inventory.In 1998 IBM launched its web site where business customers would refer to certain resellers and individual customers could purchase standardized PCs directly from IBM.CompaqIn 1994 Compaq was the worlds largest manufacturer of PCs. Compaqs initial strategy was to distribute the PCs to customers primarily through retail stores. The company launched several attempted initiatives to sell directly to customers (online catalogue in 1993 and toll free telephone in 1996) which soon had to be shut down because of channel conflicts.From 1995, Compaq launched new initiatives to reduce the inventory by optimizing its production system and introducing Optimized Distribution Model. This eventually reduced the inventory to 25 days.Starting from 1998 Compaq launched Direct Plus Program sellin g PCs directly to customers via internet and telephone. Direct Plus came with additional services such as support service, software modules and leasing programs.HPHP sold PCs mainly through distributors and resellers and retail channels. HP was reluctant to sell PCs directly to customers and although in 1997 it started to accept orders on its web site, the PCs were delivered to the customers through resellers.In 1998 HP extended the scope of HP obtain Village web service that allowed the consumers to purchase PCs directly from the web site, however like IBM business customers were referred to resellers.GatewayGateways business model was very similar to Dells, the company took orders from the customers, build the PCs and shipped them directly to the customers. Initially the strategy was very successful but over time Gateways competitive advantage declined despite a series of initiatives. In 1998 the company lost its corporate customer segment and refocused on small businesses.Despit e the efforts the competitors made to match Dells success, none of them were particularly successful.5) What should each of Dells major rivals (IBM, Compaq, HP, Gateway) do now?As a short term solution, competitors (IBM, Compaq, HP and Gateway) before focusing on their core competence and increase their market margin they have to imitate Dells competitive advantages for some time. But in the long run competitors shouldPursue sustainable increase in efficiency of the production processes to decrease the operating costs analyze and revise current supply chain, outsourcing certain tasks to the other geographical location in order to benefit from the lower labor cost and also try to find new market place as a comparative and competitive advantage.A special attention should be apt(p) to premium customers (large companies) through direct sales and sales-force, because these clients make big and repetitive orders, and for the rest of the segments sales can be conducted through Internet or phone. Direct sales help avoid leaving margins in pocket of resellers and distributors.And most importantly, they should focus on their specialization.CompanyKey Market segmentsKey Distribution channelsBusinessDellLarge BusinessDirect distribution 86.6%Assembly (only)GatewayHome and small businessDirect distribution 90.43%ProductionHPSmall and middle business 32.6% Individuals 28%Distributors 75%, Resellers, 23%ProductionCompaqSmall and middle business IndividualsDistributors 66.6%, Resellers, 24.6%ProductionIBMLarge Business Small and sensitive BusinessDistributors 69.6%, Resellers, 18.4%ProductionAnnexExhibit 1Exhibit 2Exhibit 3

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