Meathead - Dell is the most efficient manufacturer of pc's in the world. What happens in other industries when one firm enjoys a cost-of production advantage over its rivals? Ans. - It expands production, causing prices and margins to fall, and rival firms are forced to imitate the methods of the low-cost leader. Either that, or they lose money and go out of business. That's the way capitalism usually works, and that's the way it's working in pc's today.
Which firms, besides Dell and CPQ, are currently making money? According to what I've read, IBM, HP, PB, and the Japanese boxmakers ( in their U.S. operations) with the possible exception of Toshiba, are all losing money. Moverover, their situation seems likely to only become worse, so there's a real question whether most of them will still be boxmakers 5 years from now. As some other posters -- you yourself especially, have argued, the Dell build-to-order model is very complex and extremely hard to imitate.
In a few years there may be no one else for Circuit City or CompUSA to buy from other than firms like Dell or its direct- channel imitators. You wrote,
What prevents Circuit City and CompUSA from becoming middlemen
for Dell is the fact that they ARE the retail channel. Why
would anyone buy a Dell PC from CompUSA that they could get
cheaper directly from Dell?
Good point. However, why does anyone today buy from CompUSA when they can purchase an equivalent or better computer directly from Dell
for less money?
If the two markets (direct and indirect) co-exist for the same name brand, it wouldn't be that surprising to me. Consider that:
1. Some mutual fund investors buy load funds even though they could have saved money by buying an equivalent, no-load fund. According to numerous research studies, load funds, on average, provide no performance advantage over no-load funds.
2. An investor who purchases 100 shares of Dell through a full service brokerage firm could have saved money by using a discount broker instead. Why didn't he? A possible answer is that he is a novice and needs hand-holding. For the same reasons I believe the CompUSA's will probably exist, even in an all- Dell- lookalike world.
I have a question for you. What do you think the industry will look like in 5 years? Which firms will have the greatest market shares? Do you think HP and IBM will still be major players as they are today? Do you think Pac Bell will sucessfully transition to the BTO model? I hope Jim Kelley will also take a stab at this.
Regards,
Geoff
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