Q 1) How and why did the computer industry come to have such low average

profitability despite being a dynamic, fast growing business with compelling

customer demand
1. The PC industry is driven by rapid technological improvements in
components, particularly microprocessors, other semi conductors, and
stroage devices.
2. Two factors played important role in determining the ability of PC
companies to manage inventory and introduce new products.
3. The traditional distribution system of the PC industry is an indirect model
often referred to as the channel
The Porters Five forces explains the reasons for low average profitability.
Threat
from new
enterants
Moderat
e

Bargainin
g power
of
Suppliers
- Very
High

Rivalary
amongst
competito
rs - Very
High

Bargainin
g power
of
customer
s - Low

Threat
from
Substitute
s Moderat
e- High

Bargaining Power of Suppliers (very high)

1. Proprietary standards and customer desire. Microsoft & Intel positioned to
extract profits from industry
2. Other inputs are commodities
Bargaining Power of Customers (Low)
1. Resellers and retailers have some grip on end-user relationships, giving
them ability to extract price protection
2. End users are sophisticated (and less in need of assistance) over time
Competition from Rivals (Very High)
1. Wintel Standards:- little distinguish among machines of leading
companies except price because of vigorous price competition

2. Growth of processing power outstrips growth in need for processing

3. Intense excess capacity and saturation
4. Fight for market share
Threat from new entrants (Moderate)
1. Low manufacturing cost (capital/ setup cost)
2. Stream of low cost entrants and contract manufacturers
3. Absolute cost advantage difficult to maintain since inputs are available at
fixed prices
Threat of substitutes (Moderate High)
1. Alternative sale methods
2. Technology Advancements
3. New devices such as PDAs