Dell (DELL)

Intense competition in Dell’s PC markets can put pressure on both profits and prices. If Dell’s prices are too high relative to the competition, the company stands to lose market share to its competitors. This forces Dell to maintain a balance between per-unit profit margins and market share.

Sluggish demand growth in the domestic PC market can negatively impact Dell’s revenues, as 65% of all sales come from the Americas.

Once the most successful computer company in the world, Dell has since slipped behind HP in global computer market share.

But this is old news, Michael Dell is back to change things around, right?

Well, he is back. But will he be able to change things around?

Dell’s original business model was a stroke of genius. It was one of the only computer companies to only sell direct. Not only that, they made it very easy for small business to partner with them, making it a dominant player in the small business industry. Additionally, their corporate partnerships division allowed major corporations to benefit from volume purchases while Dell was laughing all the way to the bank.

Dell computers were also once viewed as state-of-the-art, top line computers. Their brand allowed them to put big price tags on a cheap product, cut all the middle men out and have huge profit margins. What happened?

Several things. Most importantly, Michael Dell left the position of CEO and their whole business model changed. Instead of selling direct, they dumped resources into a retail division of the company. This is a space that other computer companies such as Toshiba, HP & Acer have been in for decades. Needless to say, they dumped their money into this division and saw that sales and profit margins were just not hitting their targets.

So what did they do? Lowered prices! That ought to boost sales, right?

Well, sure retail sales got a slight boost, but the damage to the brand is irrevocable, and profit margins suffered significantly. Now instead of a prestigious computer brand that you could only purchase through a partner or online, you have a cheap computer that is competing with the likes of small-timers like Lenovo Group (LNVGY).

Now Dell is in a tough position. Last year they lost 2.5% of their market share, and in a 25 Billion dollar a year industry, that is a significant loss. Their business model is not as profitable, and competition is getting stiff, especially with an Apple (AAPL) revolution already in progress, things are looking grim for poor old Dell.

As Dell outsources more components to third parties, thereby increasing its dependence on technology partners, Dell loses some of its control over prices and the overall supply chain.