Introduction in Strategic Management
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Over two decades ago, Harvard Business School Professor, Michael Porter identified some kinds of driving forces that could be used to analyze the competitive positioning and potential of any industry. This renowned framework is extensively used and referred to as ‘Porter’s Five Forces’. It does not matter whether a business deals with physical goods or is service-oriented, competitive forces are present in any type of competitive business environment, such as the SME sector in the United States of America. This framework has two dimensions: the horizontal dimension that explains the process through which connections are made, and the vertical dimension that connects the raw materials with consumers.
The case study that forms the basis of this paper is a small computer assembling company called Universal Systems. This company was established on 22 January, 2010 by two friends, thus making it a partnership. The company is specialized in designing, assembling and installing of low maintenance personal computers and selling PCs and PC products. The company currently operates in Chicago, IL and has 20 employees. This makes Universal Systems a small enterprise that operates in the PC industry. This paper seeks to shed some light on the PC industry by highlighting its key elements, and thereafter conduct a five force analysis of the industry.
It is apparent that Universal System is delving turbulent waters because the computer industry is saturated with seasoned and well-established firms that control about 70 percent of the global market. Competition within this industry is very stiff and significant price competition seems to be playing a vital role in the industry’s performance (Leili & Abbas 2010, p. 132). Moreover, new innovations as well as constant technological advancements are making the competition of this industry fiercer. Similar to the market of other players in the PC industry, Universal Systems’ market includes government institutions, business enterprises, schools, and individuals. Hence, the market is diverse, and the consumers use their machines for various reasons. For example, PCs can be used by individuals to listen to music, watch movies, or play games and organizations can use them to run their business.
At this stage, the life cycle of the PC industry can be described as mature because the majority of players, including Universal System, are trying to diversify and grow so as to overcome the slow growth rate of PC sales. Moreover, research indicates that the global PC industry is facing tough realities, despite the fact that it has been enjoying rapid growth in the past two decades. This can be attributed to the stiff competition that this industry faces from new categories such as media tablets. This means that buyers of PCs are becoming more and more demanding (Porter 2001b, p.108). The above factors make the PC industry interesting and the two entrepreneurs of Universal Systems need to be guided by the in-depth analysis of the industry, so that they can comprehend the key forces that are shaping its competitiveness.
Threat of Entry
According to Porter, the threat of entry is likely to affect the profit potential of an industry and incumbents must regulate the prices of their products or boost investments to deter new entrants. It is argued that not only does incumbent rival foster competition in an industry, but new entrants may also affect competition. Theoretically, any company should be able to enter and exit any industry, and if entry and exit exists, then profits will always be nominal (Porter 2001, p.87). In reality, though, the PC industry, just like other industries, have some characteristics that sustain high profit levels of companies in the market and mitigate the chances of new entrants to survive in the market. The industry, which Universal System is a part of, requires large capital. This fact combined with established brand identities of seasoned players in the industry make barriers to entry very high. Worse still, the distribution channels and economies of scale that incumbents enjoy, make entry barriers even harder to break (Porter 2001b, p. 144). The major players in the PC industry enjoy demand-side benefits of scale because customers prefer to purchase the PC and related products from large and trusted companies rather than new entrants; thus raising the level of entry barriers.
Nonetheless, the stakes regarding the threat to entry are not very high because there are some factors that lower entry barriers. For example, the consumer switching costs are small due to the fact that PCs are open systems with universal specifications that any manufacturer can meet. This means that new entrants can delve into this industry without being restricted by the government (Leili & Abbas 2010, p. 125). Another factor relies upon previous examples that show that industry incumbents are not very aggressive towards new entrants into the industry.
The Power of Suppliers
Similar to most PC firms, Universal System either purchases different components that make up a PC and assembles them or manufactures them altogether. The good thing is that most of these parts are easily available and can be purchased from several suppliers. Unfortunately, many, if not all, PC manufacturers do not poses the vital technologies that allow them to manufacture the most important part of the PC (Central Processing Unit). As a matter of fact, only two suppliers, which are AMD and Intel, can provide the required central processing unit required in every PC. Since the two are the dominant suppliers of this important piece, with Intel occupying about 80 percent of the market, the two suppliers have a higher bargaining power over PC makers like Universal Systems. Similar to the central processing unit, a PC cannot function if it does not have an operating system. Most PCs operate on Microsoft’s Windows operating system. Barratt (2004, p. 30) believes that this gives suppliers – mostly Microsoft Company, which is the principle supplier of the operating system, a high percentage of the PC industry’s profitability.
The Power of the Buyer
The PC has become a standardized and commodity-like product. For this reason, customers can easily find similar alternatives and thereafter play vendors against each other. Finlay (2000, p. 154) argues that switching costs between vendors are very minimal and price-sensitive customers can easily hit back at the industry by assembling their own PC. It is imperative to understand that the above factor plays a vital role in strengthening the customer’s bargaining power.
The Threat of Substitutes
According to Porter, substitute products impact an industry because they limit the profit potential of that industry by placing a ceiling on prices. In this regard, the PC industry is highly impacted by the ever changing technologies and innovations. The emergence and rapid spread of media tables and mobile phones, for instance, encourages PC customers to rely either completely or partially on such products in conducting the same activities they used to conduct using their PC (Finlay 2000, p. 123). On the same note, the advent and rapid spread of wireless internet connections and new digital television serve as substitute of the PC. These close substitute products of PCs constrain the capability of Universal System to raise prices. It is important to understand that the competition that is caused by a threat of substitute product comes from products outside of the PC industry.
Rivalry among Existing Competitors
The rivalry that exists between competitors, which Universal Systems is being included in, is very intense. Service improvement, price discounting, marketing campaigns, and continuous product enhancement are defining the competition within this industry. Many competitors in this industry are almost equal in power, with each trying to outdo the major competitor for industry leadership. As reported by a 2011 International Data Corporation, this industry is mature but growing slowly. Unfortunately, the existing barriers in this industry are too high due to the high investments that players in the industry have put in. Besides, the PC industry suffers from price competition. Due to the high fixed costs that players in this industry face, they are compelled to manufacture and sell in vast quantities in order to help distribute the fixed costs across units (Dogan & Sahin 2003, p. 423). This compels competitors to cut the prices of their products almost near or even below their average cost.
Strategic Position of Universal Systems
The strategic position of this company is founded on its corporate strategy, business, supply chain, and marketing. As aforementioned, the economic activities that Universal Systems perform involve the manufacturing, development, and sale of personal computers and other computer-related products. Therefore, Universal System has been able to secure its strategic position in the PC industry through differentiation, coordination, focus/niche and low cost strategies.
Serving as a basis of its strategic position, Universal Systems has focused on differentiation since its inception by developing a steady stream of new PCs and related products to broadly defined markets and customers in and out of Chicago. Additionally, these products are above average market price due to the extra value that is achieved by the differentiation innovations. This strategy has also allowed the company to pursue broader markets; hence it has been able to spread the cost of this innovation over a wider market base (Dogan & Sahin 2003, p. 421). This has gone a long way in enabling the company to keep down costs per unit of sales. This strategy has borne fruits for this Universal Systems, because the company has fostered extensive personal relationship with the customers in terms of sales.
Since it opened its door for business in 2010, this company has based the provision of its products and services on the Direct Model. Universal System’s direct-to-customer business model is has played a vital role in the enterprise’s dramatic growth and success. This can be attributed to the fact that the unique business model is focused on selling directly to the customers (Boalow 2000). This model helps to eliminate middlemen and provides the customers with a more powerful configured system than the company’s competitors. The direct business model allows Universal Systems to have a clear understanding of customers’ expectations, which has helped to increase the customer loyalty and satisfaction, as well as strengthen the relationship between the company and the customers (Boalow 2000, p. 12). One characteristic that makes Universal Systems stand out from other competitors is that the company is able to meet the customers’ needs by developing products that suit their choice and taste. Universal Systems relies on the reputation of the U.S market of high quality products and award winning services to serve its customers in Chicago. In order to meet the individual needs of each of the company’s customers, Universal Systems conducts mandatory surveys on a quarterly basis to ensure that the image that it creates for itself within the market has not existed before.
Very (2002, p. 124) advices that in order to achieve its objective of being the fastest company to deliver the customized products is sells and supplies, Universal Systems must established a closely-knit network of trusted customers within and outside the state of Chicago. To add on this, the company has made most of its suppliers to setup their plants near its facilities so as to minimize the time taken to make and complete a transaction between the suppliers and the company itself. Moreover, this step provides Universal System with constant flow of vital information about their inventory levels.
Universal Systems employed this strategy successfully by developing distinctive marketing channels that link customers with suppliers. As a result of this strategy, the company has been able to develop a competitive edge over its close competitors. This can be seen from the special relationship that has ensued between this company and its suppliers as well as the customers. The company combines its internet expertise together with its unique capability to organize resources around distinct needs to develop new web-related capabilities. Included in this strategy is a three tiered package known as the “Service Provider Direct,” which is the combination of co-marketing and support programs that are designed specifically to benefit web hosting, ASPs, and ISPs customers. Closely related to this is an impending infrastructure computing that is designed to perform specific Internet infrastructure tasks such as caching, web serving and load balancing. Very (2002, p. 123) contends that this strategy serves the company’s strategic position because it provides customers with storage solutions as well as a full range of server for hosting their internet infrastructure.
Universal System Core Competence
The core competencies that define Universal Systems include cost minimization, innovation and coordination. Cost minimization emanates from the company’s cost strategy. To minimize cost, the company produces a bundle of products that are much more affordable than equivalent offerings of competitors (Pickett 1998, p. 79). Moreover, the company does not involve itself in original research, but rather prefers buying successful innovations from excellent innovators. In order to become and continue being an integrated cost leader, this company produces PCs of high quality and end up selling them directly to the customers through its direct business model. As a matter of fact, this company had been able to register above average returns and remain competitive in this turbulent industry, thanks to the company’s direct-model concept. As a result, customers have come to appreciate and develop a brand-name loyalty to Universal Systems because of their low cost differentiation strategy. Despite the signs of early success, the company is still threatened by fierce competition from seasoned players in the industry. In order to maintain its strategic position as one of the best PC companies in Chicago, Universal System decided to enter into a partnership. The good thing with this move is that the company will not be subjected to extra costs of more time while trying to develop a face-to-face communication with customers because the business is already known.
As highlighted earlier, Universal System has been able to grow because the company has embraced innovation. Pickett (1998, p. 80) argues that this core competence has enabled the company to produce a steady stream of innovative products compared to its competitors. The company’s innovative nature results from its internal capacity and access to the latest development and research capability in the industry. In regards to coordination, Universal Systems has put much emphasis on facilitating and building exceptional value-adding chains that link together its customers and suppliers. Through coordination, the company has been able to achieve marketing power in marketing and procurement.
Key Success Factors
There are several success factors that have enabled Universal Systems to survive this turbulent industry for so long. Borrowing from Stoehr (2002, p. 122) team work seems to be one of the major success factors that have sustained this company. Running a successful enterprise calls for teamwork due to the fact that this important practice creates value and success (Porter 2009, p. 134). Since this company is considerably new in this industry, the management discovered that the probability of its success would be increased if people worked as a team, thus a team of three entrepreneurs was formed. As Fichter & Beucker (2012, p. 234) argues, a team that is comprised of individuals with complementary skills add value to the organization.
Another key success factor for Universal Systems culminates from the company’s product quality as well as the speed, at which these products reach the markets. As aforementioned, this company has been able to survive in this industry, which is controlled by a few major players because of the quality of its products. Not only are these products of high quality but they are also the most affordable in the market. From the onset, the company’s executives knew that every customer will be interested in getting the value of their money. This is the main reason as to why the company ensures that every product it produces and sells is of high quality. As Porter (2009a, p. 123) argues, the value of presenting a product in the market earlier is worth more than the entire development and engineering cost of the product. Universal System has been able to practice this since it opened its doors for business, because all its new products reach the markets before those of the competitors. It has been established that by introducing their products into the markets earlier than the competitors, the lifetime profitability of the company’s products is increased by one third (Fichter & Beucker 2012, p. 154).
The other success factor that has propelled Universal System to greater heights is the excellent customer service that it provides to the customers. To achieve this, the company has made it a norm of training its support staff frequently. By providing good customer services, the company has been able to develop a very close relationship with its customers by cutting down the middle men. This practice has earned the company praise from happy buyers as well as rebuke from unhappy customers due to their hands-on customer service (Fichter & Beucker 2012, p. 124). The company has the reputation of having a quick response to all customers’ issues. Universal Systems constantly evaluates its tech support operations.
Based on the analysis in the paper, it is apparent that the PC industry is very competitive and Universal System, which is our case study, has done everything possible to remain competitive. The good economic environment in Chicago has a positive effect on the development of this company. Porter’s five forces analysis indicates that the bargaining power of both the customers and suppliers in the PC market is very strong. On the same note, the threat of new entrants is not very heavy but the threat of substitutes is. Moreover, the paper has highlighted the fact that the rivalry among competitors in the industry is very strong, particularly for Universal System, considering that this company has a short history in the market for PC. It has also been established that the competitive forces in the industry is very strong, and this will have a positive impact on the long-term development of Universal System. After understanding the discussed view points as well as the global scenario, it is apparent that the domestic PC industry will be likely to maintain the current momentum. Therefore, Universal Systems must maintain its strategic position in the industry at all costs.