Analysis of Competition in the Technology Market

EXECUTIVE SUMMARY

Dell’s competitive advantage is their direct customer sales and customer support; this has made the company one of the leading suppliers of computer systems. Dell has a better understanding of its customers computer needs through continuous online and telephone interaction. This constant interaction drives individual and enterprise productivity. Future growth rates for the computer industry are expected to be less than previous years however, Dell can still be profitable. One of the main problems that Dell faces is the struggling United States economy which Dell has no control over. This is compounded by a saturated PC market with lower profit margins from industry price wars. Dell must focus on being a “market taker”, instead of trying to be a market maker. Dell needs to capitalize on their ability to enter and dominate new markets, as it did in the low-end server and workstation markets. The company must pursue an international expansion of their middle and high-end server products. Through the acquisition of a company like EMC Corporation Dell can pursue the external data storage market. Dell has already captured a large share of the United States market and must increase its server, storage, and service segment overseas to gain more international market share, particularly in China and Latin America. The only viable strategy in order to achieve Michael Dell’s goal to double Dell Computers’ current revenue to $60 billion by 2007 is to work on methods to improve sales in the stated new areas. A combination of service, storage and server product growth across newly established international markets is vital to achieve Dell’s ambitious goal. The United States economy is in a recession, but there are numerous opportunities for growth outside its borders.

INDUSTRY SNAPSHOT

In the early 2000s, the electronic computer industry was struggling amidst a weak economic climate that presented challenges in business and consumer markets alike. According to the U.S. Census Bureau, after a sharp increase from $56.9 billion in 1998 to $64.7 billion in 1999, electronic computer shipment values fell in 2000 to $62.9 billion. As the economy took a turn for the worse, shipment values plunged to $55.8 billion in 2001. This affected virtually every product segment within the industry, including servers and workstations. Along with values, actual unit shipments also declined, falling from 27.2 million in 2000 to 22.7 million in 2001 (XXX). In the early 2000s there were numerous factors that slowed the purchase of new computers. On September 11, 2001 the terrorist attacks crippled consumer confidence. There was also a rise in the unemployment rates and the possibility of war with Iraq. All these factors made customers content with keeping their existing computers. These same conditions caused a slowdown of technology spending in the corporate world too. The wave of year 2000 related new equipment purchases that took place at the end of the 1990s, as well as the availability of quality used equipment from bankrupt Internet companies in the early 2000s, also had a negative impact on the corporate market for new electronic computers.

Global competition among computer makers has favored, low-cost producers, and many of these are United States firms. The four largest United States computer makers, Dell, Compaq, Hewlett- Packard, and IBM controlled approximately 40 percent of world computer shipments. In late 2000, Dell proved itself as a potent competitor by taking the title of world market leader away from Compaq. In 2002 Hewlett-Packard had acquired Compaq, in an effort to challenge Dell’s position.

In 2005 the industry reported 2,278 companies manufacturing electronic computers, employing 90,762 people who generated some $196,557.41 million in revenue. Average sales totaled $116.4 million per company. Electronic computers represented 59.7 percent of the market, while digital personal computers garnered 23.5 percent of the market (Electronic Computers, 2007).

LEADING COMPANIES

DELL

Dell designs, develops, manufactures, markets, sells and supports information technology systems and services. The company sells its products directly to large corporate, government, healthcare, and education customers as well as small to medium businesses and individual consumers. Dell offers its products in six categories: desktop computer systems, mobility products, software and peripherals, servers and networking products and storage products. The desktop computer systems offer three product lines: Optiplex, Dimension and XPS. The company also offers ‘Precision’ work stations (Galenet, 2008). The Optiplex product line is primarily for business, government, and institutional customers and the Dimension product line

is for small businesses and home users. The XPS product line is for the gaming and entertainment needs of the customers. For the users that run sophisticated applications like three-dimensional computer-aided design, digital content creation, geographic information systems, computer animation, software development and financial analysis the company offers the ‘Precision’ workstation. The mobility products division provides MP3 players, handhelds (Dell Axim) and three lines of notebooks (Dell XPS, Latitude and Inspiron). The XPS product line for notebooks targets customers in the gaming or entertainment segment. The Latitude product line focuses on business, government, and institutional customers, while the Inspiron product line is targeted at small businesses. Dell is a leading player in the United States and worldwide for notebook computer shipments (Company Spotlight, 2008). The software and peripheral products of Dell includes printers and displays, software, notebook accessories, networking and wireless products, digital cameras, power adapters, scanners and other products. The company offers variety of third party software products such as operating systems, business and office applications, anti-virus and related security software and entertainment software. The company’s power edge line of server focuses on enterprise customers and small organizations. Dell is the market leader in the United States in shipments of x86 servers. Computers and servers on small to medium networks can be connected using Dell’s PowerConnect switches. Dell doesn’t just provide products, they also offer infrastructure consulting services, deployment services, asset recovery and recycling services, training services, enterprise support services, client support services and managed lifecycle services. Through Dell Financial Services (DFS) the company can provide United States businesses financing alternatives and asset management services.

HEWLETT-PACKARD

Hewlett-Packard (HP) offers a complete product portfolio spanning across personal computing, imaging and printing related products and services, and technology solutions. The company operates through seven business segments: enterprise storage and servers, HP services, software, the personal systems group, the imaging and printing group, HP Financial services and corporate investments. The enterprise storage and servers, HP services and software segment are aggregated under the technology solutions group. Hewlett-Packard is headquartered in Palo Alto, California and the company operates in over 170 countries around the world. The United States is the largest geographical market, 33.4 percent of the total revenue during 2007 (Smith, 2008).

Enterprise storage and servers provide storage and server products to both small and medium sized businesses. Industry standard servers include entry-level and mid-range ProLiant servers, which operate primarily on the Windows, Linux and Novell operating systems, and Intel Corporation (Intel) and Advanced Micro Devices (AMD) processors. The company’s product lines span across pedestal-tower servers, density optimized rack servers and HP’s BladeSystem family of blade servers. The technology solutions group includes enterprise storage and servers, HP services and HP software. Technology solutions group provide servers, storage, software and information technology services for enterprise and mid-market business customers to manage their current IT environments.

Business critical systems include Itanium-based Integrity servers running on the HPUX, Windows, Linux and OpenVMS operating systems including the high-end Superdome servers and fault-tolerant Integrity NonStop servers. Business critical systems also include the Reduced Instruction Set Computing (RISC)-based servers with the HP 9000 line running on the HP-UX operating system, HP AlphaServers running on both Tru64 UNIX and Open Virtual Memory System, and MIPs-based NonStop servers. The company has planned to phase out its Alpha server product line in recent times (PCs Industry Profile, 2008).

Hewlett-Packard’s services include technology services, consulting and integration, and outsourcing services. It serves industries such as communications, media and entertainment, manufacturing and distribution, financial services and the public sector, and government and education services.

The technology services ranges from standalone product support to high availability services for multi-vendor environments and business continuity and recovery services. The consulting and integration segment provided consulting and integration services to implement technology and industry-specific solutions for customers. Outsourcing services provides IT management and outsourcing to support infrastructure, applications, business processes, end user workplace, print environment, and business continuity and recovery requirements.

HP Software provides management software solutions including support, that allow enterprise customers to manage their IT infrastructure, operations, applications, IT services and business

processes under the brand, HP OpenView. It also delivers comprehensive, carrier-grade software

platforms for developing and deploying next generation voice, data and converged services to network and service providers under the HP OpenCall brand. Hewlett Packard acquired Mercury

Interactive Corporation, Bristol Technologies, SPI Dynamics and Opsware in fiscal 2007, which added transaction monitoring, applications security testing and data center automation capabilities to its portfolio.

Personal systems group (PSG) is one of the leading providers of personal computers (PCs) in the world based both on volume and annual revenue. Its product line includes commercial PCs, consumer PCs, workstations, handheld computing devices, digital entertainment systems, calculators and other related accessories, and software and services. Workstations are individual computing products designed for users demanding enhanced performance such as computer animation, engineering design and other programs requiring high-resolution graphics. HP provides workstations that run on UNIX, Windows and Linux-based operating systems.

Hewlett-Packard is the leading imaging and printing systems provider in the world. The segment’s portfolio of offerings includes consumer and commercial printer hardware, printing supplies, printing media and scanning devices.

The HP Financial services provide financial service to small and medium size businesses. It also offers leasing, financing, utility programs and asset recovery services, financial asset management services for large global and enterprise customers. This group provides innovative and customized services to counter technology obsolescence.

ACER

Acer functions in the manufacture and sale of IT products, and provision of computer software and maintenance services. The company operates in Taiwan, Europe, Asia, and North America.

The company operates through a single business segment and sells ‘Acer’ branded desktop personal computers (PCs), notebook PCs, and other related information technology (IT) products and services. Acer’s IT product range includes computer system (desktops, notebooks, handhelds, and tablets), servers and storage products, monitors (cathode ray tube and liquid crystal display), peripherals, projectors, internet appliances and personal multimedia, and digital still cameras (DSC). Acer provides a commercial and consumer series desktop. The commercial series desktops include Veriton and AcerPower brands and the consumer series include the Aspire brand. The company provides four series of notebooks: Aspire series, TravelMate series, Tablet PC series, and Ferrari series. The Tablet series is Acer’s latest high-mobility solution, which easily converts between notebook and slate modes. Acer’s servers and storage products are sold under the brand name Altos and Acer. Acer’s services are based on the ‘MegaMicro’ business model, which is defined by the company as a mega infrastructure that supports micro services. The services offered include e-Enabling Services Business, enabling Information Platform Services, and Enterprise e-Caring Services. The company’s e-Enabling offerings combine Acer’s IT products and services, and are delivered through the company’s infrastructure. (Acer.com, 2008)

APPLE

Apple is one of the major providers of personal computers, portable digital music players, and mobile communication devices. Apple designs, manufactures, and markets personal computers and related software, services, peripherals, and networking solutions. The company also designs, develops, and markets a line of portable digital music players along with related accessories and services including the online distribution of third-party music, audio books, music videos, short films, and television shows. The company sells its products worldwide through online stores, retail stores, direct sales force, and third-party wholesalers and resellers. Acer is managed on a basis of geographic segments. The company operates through four operating segments: the Americas, Europe, Japan, and retail. The Americas segment includes both North and South America. The Europe segment includes European countries as well as the Middle East and Africa. Each reportable geographic operating segment provides the same kind of hardware and software products and services. The retail segment currently operates Apple-owned retail stores in the United States, Canada, Japan, and the United Kingdom. The company has 174 retail stores in the United States and 23 stores in Canada, Italy, Japan, and the United Kingdom. Apple’s Desktops product line includes iMac, eMac, Mac mini, Power Mac, Mac Pro, and Xserve. Portables include MacBook, iBook, MacBook Pro, and PowerBook. iPod products include iTunes Store and iPod services, and the company’s own and third party iPod accessories. Other music related products and services include hardware accessories of the company and third parties, wireless connectivity and networking solutions. Software services comprise Apple branded operating system and application software, third party software, AppleCare, and Internet services.

COMPETITIVE ENVIRONMENT

The threat of new entrants into PC market is moderate, a compromise between high brand recognition in the market and strong market growth. The new web enabled mobile phones and games consoles fill the needs of some buyers as well as PCs making the threat of substitutes moderate. Rivalry within the market is moderate, as large competitors are faced with relatively high exit barriers, but still enjoying strong growth that leaves plenty of expansion room for all players. There is product differentiation within the market in terms of technical specification, styling, and support services offered, leading to decrease buyer power. However, there is little differentiation in the underlying architecture, with even Apple recently moving to the use of Intel’s x86 processors. This pushes the market towards commodification and strengthens buyer power. Buyer power can also be increased if more technology savvy people build their own computer. This requires special knowledge and is only a valid alternative to a small portion of the customer base. Buyer power overall remains moderate.

Supplier power is low because PC manufactures do not incur a significant cost when switching suppliers. However, Intel has strong supplier power due to its brand recognition of its products and use in the vast majority of PCs on the markets. Microsoft also has strong supplier power as a result of their dominance in the operating systems market. The overall supplier power is strong.

The threat of substitutes within the PC market is moderate, with much of the functionality of modern PCs being unavailable through alternative means. However, one of the largest threats to the consumer PC market lies within the sphere of gaming, especially with respect to the next generation games consoles, whose increased specifications are attracting gamers away from the PC format. Mobile phones and similar hand-held devices with email and web browser capability can also replace much of the communication role of PCs. The major PC manufacturers are relatively large companies. Some are strongly focused on the PC market (e.g. Lenovo), others have broadly diversified businesses (e.g. Sony), and so that on average the importance of the PC market to its players is moderate.

COMPANY SWOT

DELL

Strengths

Despite losing market share to Hewlett-Packard Company in the recent past, Dell continues to remain a strong player in the computer hardware segment. In the computer and peripheral equipment manufacturing industry in the United States, Dell was in the second place behind the Hewlett-Packard Company. In the computer and computer peripheral equipment and software wholesalers industry in the United States, Dell was in the first place with a market share of 6.5 percent. Dell is also one of the leading players in the global servers segment. The company has a strong market position in the storage segment owing to its partnership with EMC. The company’s Asia Pacific-Japan segment has reported strong performance in recent three years. The revenue of this segment increased from $5,465 million in fiscal 2005 to $7,358 million in fiscal 2007, an increase of 34.6 percent over 2005. All product categories in this region experienced revenue growth during fiscal 2007 and fiscal 2006. The company has a wide product portfolio, comprising desktops, notebooks, servers, storage products, networking, printers, ink and toner, televisions, software and accessories. Dell has formed partnerships to strengthen its presence in areas where it is weak. A wide portfolio of products has helped the company provide bundled offerings to customers.

Weaknesses

Dell has weak internal controls. The US Securities and Exchange Commission (SEC) started an investigation into the accounting and financial reporting matters at Dell, in August 2005. In 2006

The company announced that its Audit Committee’s investigation had identified a number of accounting errors, evidence of misconduct, and deficiencies in the financial control environment. The company has had to recall several products in the recent past owing to quality issues. In August 2006, the company announced the recall of 4.1 million notebook batteries owing to fire risk. These Dell branded batteries were based on cells of Sony. The company also recalled several other products in previous years owing to quality problems, including AC Adapters and printers.

Opportunities

Dell has acquired new companies in 2007 and also plans to go in for acquisitions in the future. In

July 2007, Dell entered into an agreement to acquire privately-held SilverBack Technologies, a service delivery platform provider for remote monitoring and management of information technology infrastructure such as servers, storage, networks, desktops and notebooks. In the following month, Dell entered into an agreement to acquire ZING Systems, a private consumer technology and services company that focuses on always-connected audio and entertainment devices. This acquisition enables Dell to use ZING’s capabilities to continue improving the entertainment experiences it provides its customers. In November 2007, the company has entered into a definitive agreement to acquire EqualLogic, (Dell.com, 2008) a provider of high-performance iSCSI storage area network (SAN) solutions optimized for virtualization. The global Personal Computer (PC) market generated total revenues of $163.8 billion in 2006, representing a compound annual growth rate (CAGR) of 7.3 percent for the period spanning from 2002 to 2006. Desktop sales proved the most lucrative for the global PC market in 2006, generating total revenues of $123.1 billion, equivalent to 66.9 percent of the market’s overall value. In comparison, sales of Laptops generated revenues of $60.9 billion in 2006, accounting for 33.1 percent of the market’s aggregate revenues. The company is entering into new retail agreements to enable consumers to have greater access to Dell products. In September 2007, the company partnered with Gome, China’s largest consumer electronics retailer to reach millions of in-store computer buyers and to sell the company’s latest products through it. In October 2007, Staples and Dell signed an agreement which allows customers to have the option to buy at 1,400 Staples stores for a wide collection of Dell notebook and desktop computers, monitors, printers, ink and toner (Dell.com, 2007).

Threats

The electronics manufacturing industry is struggling to compete with the black market, parallel import, and smuggled goods. Some countries like China represented an overwhelming 81 percent of the total value of seized goods in 2006. With an increase in the number of counterfeit products being manufactured in China, the company faces serious threats in most of its market segments. These products, although of poorer quality in most cases, are considerably cheaper and may affect the revenue of the company in the long run. Dell’s failure to comply with new environmental legislation could result in significant penalties and liabilities. Restriction of Hazardous Substances (ROHS) Directive, effective as of July 2006, imposes restrictions on the

use of six hazardous materials. Although the company uses a number of third party manufacturers, it will continue to bear responsibility for compliance with the ROHS directive. The European Union has also enacted the Waste Electrical and Electronic Equipment (WEEE)

Directive which makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment, and disposal of past and future covered products. The United States and Eurozone are two important markets for Dell. The recent turmoil in financial markets, the very weak housing market indicators and consumer sentiments, the growth projection for the United States and the United Kingdome has slowed. Economic slowdown in the United States and Eurozone could lead to less IT spending, which in turn would adversely affect demand for the company’s products.

 

HEWLETT-PACKARD

Strengths

Hewlett-Packard has a strong market position in most of its product segments. The company has a leading market position in the global PC market in terms of shipments. Hewlett-Packard seized market leadership from Dell in the global PC market in 2006 and managed to sustain it in 2007 with 19 percent market share. The company is the second largest entity in the servers market behind International Business Machines (IBM), with its server range extending from low-end systems to high-end systems. In particular, the company is the market leader in x86 Blade and UNIX based servers. Hewlett-Packard has a leading market position in printers. Hewlett-Packard has reported strong financials in recent years. The company has reduced its long-term debt over the last few years from $6,494 million in 2003 to $4,997 million in 2007. Hewlett-Packard’s long-term debt ratio stood at 0.1 for the fiscal year ended October 2007. The strong financial position provides the company the flexibility of expanding its geographical coverage and product portfolio through organic and inorganic initiatives. Hewlett-Packard also has high brand equity. The company is one of the leading brands in the technology sector along with Microsoft, IBM and Intel. Hewlett-Packard markets several products such as personal computers, inkjet printers and digital cameras to consumers. A strong brand image plays a critical role in consumer markets.

Weaknesses

Hewlett-Packard has weak internal controls. The company is being investigated by a number of agencies for employing questionable methods to identify the board member, who was leaking confidential information to the media (Los Angeles Times, 2006). The company is accused of using private agencies, which used illegal methods such as imitation to obtain the phone records of its board members and select journalists. Hewlett-Packard lacks in-house management consulting division. Instead the company has formed partnerships with the likes of Accenture and Capgemini to provide management consulting services to its customers. Increasing number of IT services companies are establishing management consulting divisions in order to provide a more comprehensive and integrated range of services. The research and development expenditure of Hewlett-Packard has remained flat in recent years. The company invested $3,643 million in research and development in each year of 2006 and 2007 compared with $3,492 million in 2005. Research and development as a percentage of revenues declined over the last three years from 4 percent in 2005 and 3.9 percent in 2006 to 3.5 percent in 2007 (HP.com, 2007).

Opportunities

Hewlett-Packard has undertaken an ambitious revamp of its IT operations, which it hopes will not only improve its effectiveness but also serve as a showcase for its technological capabilities. Hewlett-Packard has taken up five classes of IT initiatives: portfolio management, IT workforce effectiveness, world-class IT, enterprise data warehouse and global data centers. The portfolio management initiatives of the company include reducing active projects from 1,200 to 500 and

reducing the number of applications. For improving IT workforce, the company is reducing its IT core sites from 100 to 29 among other initiatives. The company is focused on extending its leadership in imaging and printing. HP acquired Snapfish, online photo service, to dominate the sharing and printing of digital images over the internet. Hewlett-Packard is expanding Snapfish in Europe and Asia.

Threats

Hewlett-Packard faces intense competition in all its business segments in terms of price, quality, brand, technology, reputation, distribution, range of products etc. The company faces stiff competition in the PC market. The company has become the market leader in the PC segment in the third and fourth quarter of 2006, sending Dell to the number two position. Acer’s acquisition of Gateways has made it the third largest PCs supplier in the world. In some regions, the company faces competition from local companies and from generically-branded or white box manufacturers. In the printer supplies segment, Hewlett-Packard competes with re-manufacturers including private label brand stores such as Office Max, supply stores such as Cartridge world, internet vendors and original equipment manufacturers such as Lexmark. The European markets and the United States economy are forecast to decline in coming years. The unemployment rate in the United Kingdom is also forecast to grow in 2008. Rising interest rates and increasing unemployment would negatively affect the consumer spending in the United Kingdom.

 

ACER

Strengths

Acer has robust market position in the global PC and notebook markets. In 2008, the company was ranked as the third largest player in the global PC market with a market share of 12.8 percent. Acer was ranked the second largest in the global notebook market with a share of 19.6 percent. The company was ranked the third largest player in the United States PC market and notebook market. In September 2008, the company completed acquisition E-Ten Information Systems (Acer-group.com, 2008). The acquisition helped the company to strengthen its position in handheld devices, including smartphones and GPS devices. Acer also purchased Packard Bell in 2008. In 2007 the company purchased one of the largest PC companies in the United States, Gateway. The successful mergers of Gateway and Packard Bell helped the company to strengthen its presence in the United States and enabled deeper penetration into the European and Asian markets. These acquisitions helped the company in generating increasing revenues from non-Taiwan markets.

Weaknesses

Acer is significantly dependent on Europe for its revenues. In FY2008 and FY2007, the company generated around 51 percent of its total revenues from Europe. Europe is experiencing a slowdown in the recent periods. The United Kingdom economy is forecast to be weak in the coming years. The company’s high dependence on Europe makes its operations vulnerable to fluctuations in Europe economy.

Opportunities

The smartphone market is expected to grow in the coming years. It is anticipated that the smartphone market will grow by 15 percent every year for the next three to five years. The value of the global smartphone market is also expected to be more than $95 billion, representing 47 percent of the total handset market value in 2013. Acer is well-positioned in this segment. The growing smartphone market will provides the company an opportunity to increase its revenues in the coming years. Despite the slowdown in the overall PC market, the netbooks/mini-notebooks sales are forecast to grow in near term. The netbook market experienced a robust growth in 2008 and is forecast to grow about 68.5 percent in shipments. Acer offers netbooks under its four brands: Acer, Gateway, Packard Bell and eMachines. Acer has upgraded its products in the recent times. In September 2008, Acer along with its partners introduced Acer-Hitachi SMS 100, a storage product designed for the needs of small and medium sized businesses. The product offers enterprise class features and does not require specific storage experience to be installed and can be connected to any server through an ethernet network. Acer also launched the Aspire M7200 desktop PC targeting multimedia home-users looking for a powerful multi-tasking system, with plenty of expansion and customization capabilities

Threats

Acer competes with several large branded as well as smaller branded and generic companies. The company faces severe competition from branded competitors such as Apple, Dell, and Hewlett-Packard. The note book segment has also attracted competition from nontraditional players. Intense competition in the PC segment may erode the company’s margins and reduce its market share. Acer has been part of several patent law suits in the recent periods. In 2007, HP filed a suit against Acer alleging that Acer and its United States subsidiary have knowingly infringed on five HP patents related to PCs. This has raised HP’s recent patent claims against Acer to 10. However in 2008, Acer settled all ongoing patent litigations with HP. Acer operates in various countries worldwide, and is exposed to risk from changes in foreign currency rates. The company derived about 95.3 percent of sales from customers outside Taiwan in FY2008. The consolidated companies record transactions in their respective functional currencies, which generally are the local currency of the primary economic environment in which these entities operate.

 

APPLE

Strengths

Apple enjoys a high level of brand awareness and brand recognition for its products throughout the markets in which it operates. Apple leverages its brand image to differentiate its product offering and drive sales. The company’s strong brand enables it t

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