The Value Chain of Dell Computers 2006

 The Value Chain of Dell Computers 2006
 
Introduction The value chain of a company, the concept introduced by Porter (1985) is its entire product flow from the suppliers to the customers and managing the information flow seamlessly such that the customer derives maximum satisfaction while the company maximizes its profits. Dell Computer’s value chain is unique in the sense that the company sources all its components from vendors across the world, undertakes the final assembly and sells it directly to the consumer. Dell’s direct model of selling and build-toorder supply chain have been the main driving forces that have enabled it to gain advantage over other players in the computer industry that can be described as highly competitive according to Porter’s (1980) Five Forces model. The Industry Structure The computer industry is a highly competitive one. According to Porter’s (1980) theory, the level of competition in an industry is defined by the five forces: · The threat of entry of new competitors (new entrants) · The threat of substitutes · The bargaining power of buyers · The bargaining power of suppliers · The degree of rivalry between existing competitors The model can be elaborated in the following diagram. Dell Computers 3 The threat of new entrants raises the level of competition in the industry. The computer industry is highly competitive because of the high degree of commoditization – that is, uniformity and availability of technology and little scope of differentiation of the products resulting in little customer switching costs – that enable any of the vendors of computer parts or a new player to develop assembling capabilities. There are no large benefits to Dell from economies of scale neither does assembling require huge capital investments. Similarly, the threat of substitutes is also high since products from Dell are essentially similar to those from HP, Compaq and Gateway. However, Dell has been able to sell at lower margins since it saves on the margins charged by wholesalers and traders. The relative price and the performance determine customer preferences and Dell has taken advantage of the market preferences. Dell’s suppliers do not have a high level of bargaining power since Dell dictates the terms and schedules of delivery. Besides, in an industry that is characterized by innumerable suppliers, who are not in a cartel, and a few dominant buyers of components Dell Computers 4 that are individually low-value and undifferentiated, suppliers cannot have a high degree of bargaining power. Similarly, the buyers of computers, too, do not have a high bargaining power that could reduce the attractiveness of the industry. There are a large number and a wide variety of customers – from corporate to individual customers for desktop to laptop PCs, as well as for storage, servers and printers – that the players can target. The intensity of rivalry between players depends on the number and size of players, cost structure of the industry, level of product differentiation, customerswitching costs, level of aggression by players and exit barriers. In these terms, when Dell entered the market, it found an intensely competitive market, which is highly fragmented and produce a commodity that is nearly undifferentiable and customer switching costs in the market are low. Hence, the players are highly aggressive and evolve different selling strategies. This resulted Dell in forming its unique direct model since it realized that with competition, returns and margins inevitably comes down. Hence, there was an imminent pressure to maintain margins, which it could do with the direct model. Thus, although the buyers of computers and the suppliers of parts do not have much bargaining power in the industry because of their large numbers, the other three forces – namely the threat of rivalry or new competitors, the threat of substitutes and the intensity of industry competitors – are acute enough for Dell to formulate a new operation and selling strategy in terms of its value chain. Dell Computers 5 Dell’s Value Chain (application of Porter’s 1985 model) Primary Activities Current Functional Level Strategy Dell outsources all its component manufacturing, including sub-assemblies like motherboards and nearly the entire production chain for notebook PCs. However, it does not outsource the final configuration and keeps control over the production and supply chains. In the initial years, the company shipped parts and components mostly from Asia. More recently, regional components manufacturers – which again may be units of Asian, European and American companies- are increasingly supplying to Dell. Typically, components like disk drives, CD-ROM drives, power systems, cables and connectors are shipped from Asia while motherboards are largely procured locally. Since Dell follows build-to-order and just-in-time policies, the inventory remains in the suppliers’s books till Dell puts the order. Intel is the only exception