|
When Michael Dell, a 19-year old college dropout, planned to build Dell Computer Corporation in 1984, with a start-up capital of $1000, the first seeds of commoditization were sown in the technology business. The IT industry, where a few limited brands like HP and IBM ruled the roost, was never easy to enter for a new player as entry barriers were high. But the gradual transformation of the industry towards following a standard platform, that steadily eliminated product differentiation, fostered commoditization. Though companies like IBM had their own de facto market share, systems technology started becoming vendor-specific. In the eighties, IT companies tried to maintain a strong bondage by uniquely bundling hardware and software products before packaging. This created a market where different parts of the computer were assembled and sold at a price cheaper than the branded companies. For example, Dell did not produce computers; it only assembled the software, the hardware and the monitor and marketed it. Following the footsteps of Dell, various other computer vendors, like Gateway and Compaq dived into the business. This outsourced-based model gradually transformed a product into a commodity. Commoditization, which is a natural outcome of intensive competition and technological progress, appeared to be evident in the IT sector.
As more and more competitors entered the technology business, profit margins started dwindling and the scope of product differentiation diminished. Increased competition gradually led to companies producing similar products at lower costs. This turned in a market very similar to the telecom or automobiles industry.
However, both enterprises and consumers required the assurance that the products of the different vendors did not require massive reinvestment. Bypassing the dominant system of using computer vendors to sell mass-produced computers, Dell started the trend of selling custom-built computers directly to end-users. This model eliminated resellers, retailers and other costly intermediary steps together with the industry's most efficient procurement and distribution process. Though Dell was built on the foundations of commoditization, ironically, it became a strong brand. Losing the fight, the market giants in the PC segment like HP and IBM, surrendered to the low-cost leader. Since then, commoditization has continued to dominate the industry.
Probably, it was because of commoditization that global majors were experiencing negative growth as the US economy went into recession. Dell was the only company that was sitting pretty on profits. This was reflected when the worldwide PC market experienced negative growth for the first time since 1986. Among the global vendors, barring Dell, which recorded a rise in its quarter-on-quarter growth, all the other major vendors saw a sharp decline in their PC shipments. The worst hit was Compaq. With a positive growth, Dell managed to grab the number one position by toppling Compaq. Comments Dr. Ashok Jhunjhunwala, Head, Telecommunications and Computer Networks group (TeNeT) at IIT Madras, "For large corporate/institutional customers and about two percent of homes, brand is important. For middle and small size business and 98 percent of homes, the price and utility is most important. Affordability is the key. Branded products, if not affordable, will not be used."
|
