The revolution and development in the computing industry is the reason behind the strategic hell of low-profit margins that Dell and other big companies in the industry are experiencing. The computing industry is at its highest evolution in history, with the market becoming more saturated with time. Recently, there has been a rise in low-cost computing. Low-costs computing is the result of technology standardization and increased overcapacity in the computer industry. The uniformity in technology makes it possible for consumers to switch products or computer components easily and at low costs. With overcapacity, the players in the industry are disposing their computers and technology at meager prices to keep their operation going. Nevertheless, there is low-costs software due to the increasing number of volunteers in the software development sector.
The cheap software has had an immense effect on the industry. Before 2006, most software was available for purchase in form of DVD drives. Right now there is much software available online for consumers to download. The small companies in the industry are now getting access to cheap software. Thus, small companies can cheaply produce components that are interchangeable with those from big players such as Dell, HP, and IBM. As a result, there is a reduction in profit margins of the so-called technology giants. Chinese companies such as Lenovo can produce computers at much lower costs compared to Dell due to standardization (Brinkerink, Gallachoir, & Deane 2019). Unlike before, it is now easy for competitors to join the industry courtesy of the emergence of low-cost computers that are running on the open-source operating system.
According to the Five Forces diagram below, the level of competition in an industry plays an essential role for new businesses to enter into the industry (Johnson, Scholes, & Whittington, 2012). The big names such as Dell, HP, and IBM in the computer industry dominated the sector up until the end of 2006. They at that time had a brand name that customers associated with high-quality. Thus, they held the largest market share. These companies had the bargaining power in the industry. However, the standardization of technology affected the role played by these companies. It opened ways for new computer components and software suppliers into the industry. As a result, Michael Dell's had to focus on design and quality service delivery to influence the market once again and fight the challenges posed by the now thriving forces from the substitutes. The below diagram illustrates the Five Force in the computer industry.
Switching costs are an approach that businesses use to maintain their profit margins. It refers to methods and processes that companies use to make it difficult for consumers to change from one product to another product usually those of competitors (Varian, 2016). It can be used to influence consumers either financial, psychological, or by consuming time when changing the products. In the computer industry, companies use switching costs method by having components that are not interchangeable with those of competitors. For example, computer batteries, chargers and charging systems, ports, and plugs which are not interchangeable. One effect of switching costs is the additional costs that consumers incur when changing brands of products. The extra cost will discourage a consumer from shifting the product. Thus, switching costs have a positive impact on the company in that customers will be reluctant to switch suppliers to avoid additional charges. Another effect of changing prices is time wastage. In the computing industry, the components of a product from different suppliers can have different design specifications. These components would need to be reassembled thus consuming a lot of time. Switching costs also have a psychological effect on consumers. The consumer's mind is on a product that he finds it difficult to change to another product or brand. The consumer may also view changing products as expensive process in the long run. Therefore, switching costs serves to discourage customers from changing from one product to another, while at the same time increasing dependence on a company's product.
Dell is a giant company with a big reputation worldwide and commands a large market. Many consumers all over the world believe in Dell as a brand. While lowering its prices would be an excellent move to compete favorably with other low-costs sellers in the industry, it will have a wrong impression. Consumers can view the low costs as a drop in the quality of Dell's computers. Therefore, it will be an excellent idea for Dell to focus on more advanced technology, and improve on quality and design. The company has to concentrate on producing computers that are of high quality in terms of operation. Consumers of Dell computers have complained that machines are bulky and heavy. Thus, Dell has to focus more on quality design. Customers will be buying quality, therefore high prices leading to improved market margins.
Brinkerink, M., Gallachoir, B. O., & Deane, P. (2019). A comprehensive review of the benefits and challenges of global power grids and intercontinental interconnectors. Renewable and Sustainable Energy Reviews, 107, 274-287.
Johnson, G., Scholes, K., & Whittington, R. (2012). Fundamentals of Strategy. Ed. Harlow: Pearson.
Varian, H. R. (2016). The economics of internet search. In Handbook on the Economics of the Internet. Edward Elgar Publishing.
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