how and why did the personal computer industry come to have such low average profitability

Read the Matching Dell case. It is required to submit a two-page note on analysis and recommendations. Everyone should focus on the following questions:

  • How and why did the personal computer industry come to have such low average profitability?
  • Why has Dell been so successful despite the low average profitability in the PC industry?
  • Prior to the recent efforts by competitors to match Dell (1997-1998), how big was Dell’s competitive advantage? Specifically, calculate Dell’s advantage over the team of Compaq and a reseller in serving a corporate customer. If you need more guidance, read the following:

To size up Dell’s competitive advantage, you must compare (a) the wedge that Dell drives between the willingness of customers to pay for its products and the costs that it incurs to provide those products to (b) the wedge generated by a Compaq / reseller team. To the extent that Dell’s wedge is larger, it has a competitive advantage. The case allows you to analyze relative costs in quantitative detail. If you need more guidance, read the following:

To examine relative costs, consider a typical PC equipped for the business market. From Exhibit l0b, you can calculate the price that Dell charged for such a machine in 1996. Next, you can use Exhibit 6 to calculate Dell’s COGS for such a machine. Using information in the case, identify the major categories of cost differences between Dell and the Compaq / reseller team; as they provide a typical corporate PC, how do the costs they incur differ? Finally, try to quantify the savings or extra costs associated with each difference.

The case allows you to compare willingness to pay across companies only qualitatively.

  • How effective have competitors been in responding to the challenge posed by Dell’s advantage? How big is Dell’s remaining advantage?
  • What should each of Dell’s major rivals (IBM, Compaq, HP, and Gateway) do now?

 

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