Dell and Wal-Mart Companies Profitability Factors

Introduction

The world of business has continuously become competitive. Companies are now spending a lot of resources on strategic management. This paper analyses some of the factors that affect profitability and define success in some industries. The paper discusses Dell Company and the industry in which it operates. Porter’s five forces technique is used to analyse some of the external forces that affect industries. The paper also discusses Wal-Mart Company and the 6th force on industries.

Dell Company

Background Information

Dell Company was started in the US in 1984 by Michael Dell (Aujla, 2009). Today, twenty-nine years later, Dell is one of the largest technology firms in the globe. The company is known for developing, selling, repairing, and supporting computers and other related products and services. The company currently employs more than 108,000 people across the globe with a market capital of $24.34 billion and net income of $1.34 billion. Dell is a player in the personal computer industry (Ting & Vishal, 2009).

Number, size and distribution of players in PC industry

Personal computer industry is mature, competitive and hosts well-established players (Aujla, 2009). Goods offered in this industry are highly standardized. Similarly, most markets have been well penetrated. According to Aujla (2009), PC industry is led by another US firm called Hewlett Packard (HP). HP has a market capital of $43.82 billion and currently employees 331,800 people worldwide. Apple is another major player based in the US. Lenovo – based in Hong Kong – is the leading player outside the US. It has a market capital of $11.32 billion and employs 35,000 people. Other serious firms not based in America include Acer and Asus. These two have Taiwan roots.

PC industry is characterised by fierce competition among its 26 known players. Most of these players are based in the US. In this industry, pricing is the most used competition tool (Aujla, 2009). A computer sold at $600 ten years ago would only fetch $300 today. This has reduced profitability in the PC industry. A lot of funds are also spent on innovation. This further lowers profitability by increasing operating costs (Aujla, 2009).

Nature and height of barriers to entry

There are many barriers to entry in the PC industry (Porter, 2008). To start with, established firms enjoy economies of scale. PC industry is highly dominated by leading firms that operate on large scale. Operating on large scale reduces per-unit cost. Consequently, old players can lower prices to levels that cannot be afforded by entrants. Established brands can be hard to dislodge after they develop trust with customers and suppliers. It should also be noted that investing in computer manufacturing requires substantial amount of money for research, innovation and other logistical issues. Too high entry cost in this industry is a barrier to start-up firms. In addition, there is already too high competition in the PC industry. Potential entrant cannot be interested in an industry that is already too crowded (Porter, 2008). There are also high customer switching costs. Changing from one PC model to another may require installation of new software. This costs money and time.

Extent of product differentiation

There is low product differentiation in the PC industry (Aujla, 2009). Products from different players are almost similar in functioning. However, some firms have been regularly making changes in their modes of production, distribution channels and pricing in order to stand out from the rest. As Aujla, (2009) notes, channels of distribution are designed to lower costs and serve customers better. Dell has employed this strategy. Apple’s iPod was a well differentiated product but it was countered by other firms through non-product differentiation means such as pricing (Aujla, 2009). In this case, instead of differentiation, players have concentrated on price wars (Aujla, 2009).

Environmental Conditions that Create Barriers

One of the factors that increase barriers in an industry is high competition involving established brands (Vishal, Karsten & Robert, 2006). When competition is high, players are likely to engage in activities that make it hard for new players to enter (Vishal et al., 2006). Government involvement may also create some barriers by raising entry requirements.

Implications of barriers to established firms

Barriers to new entrants protect the interests of existing players (Porter, 2008). As Porter (2008) points out, entry of new player in an industry reduces profitability. New players take up market shares and increase competition. This means that there will be need to invest more on product promotion and, consequently, reduce profitability. The future of old players may also be threatened if new entrants come with superior strategies. For this reason, veteran firms will always ensure that barriers exist in order to retain and continue enjoying their market shares (Porter, 2008).

Implications of barriers to potential entrant

Barriers make it hard for firms to venture into other industries (Porter, 2008). Firms that don’t have enough capital are locked out. Those with enough capital will have to endure high entry and operating costs as they compete with established players. However, a well-crafted strategy can take established firms by surprise (Porter, 2008).

Porter’s Five Forces on Walmart

Power of suppliers

Porter’s fourth force has been one of Walmart’s secret to success (Ting & Vishal, 2009). Retail firms rely on suppliers for finished goods. They also need supply of labour and other necessary material. In this case, powerful suppliers reduce profitability in an industry by increasing prices or reducing quality. On the other hand, weak suppliers increase profitability in an industry because they can be dictated by industry players. In this regard, Wal-Mart is so important to suppliers because it controls about 8% of retail activities in the US. Consequently, the company can afford to dictate terms suppliers (Ting & Vishal, 2009). Wal-Mart has also become so popular to an extent that most of its suppliers cannot survive without it. This puts the company in a better position to make certain demand including discounts (Ting & Vishal, 2009). Consequently, Walmart can afford to charge low prices than its competitors.

Rivalry in the Wal-Mart’s industry

There is high competition in the discount superstore industry (Ting & Vishal, 2009). Some of the firms that offer serious competition to Walmart include Sears, K Mart, and Target. While Sears and K-mart have been relatively weak, Target offers significant challenge to Wal-Mart. Walmart uses low pricing to beat competitors. The company is large enough to control suppliers and gets large discounts (Ting & Vishal, 2009). It also enjoys economies of scale because it operates on large scale.

Sixth Force

In addition to Porter’s five forces, the power and competence of complementing companies (sixth force) also affect industries (Ting & Vishal, 2009). In this case, complementing companies are firms that produce goods that add value on the items produced in a certain industry. Demand for items increases when the demand for complement items increases. This leads to increase in profitability in the affected industry. For instance, firms that manufacture software complement PC industry because the two products are used together.

References

Aujla, N. (2009). Comparative Analysis of PC Market Leader. Los Angeles: American Jewish University.

Ting, Z. & Vishal S. (2009). Spatial competition with endogenous location choices – an application to discount retailing. Quantitative Marketing and Economics, 7(1):1–35.

Porter, M.E. (2008) The five competitive forces that shape strategy. Harvard business review. Boston: Harvard University.

Vishal, P. S., Karsten T. H., & Robert C. B. (2006). Market entry and consumer behaviour: An investigation of a Wal-Mart Supercenter. Marketing Science, 25(5):457–476.