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The personal computer industry

value chain

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At first glance some of the data on this chart would appear to be out-of-date as it’s from a classic study made back in 1998.  But, when compared with the very recent profit margin estimates shown in the blue panel from the analysts: Canalys, this data provides great insight into what is currently happening in the notebook computer market.  The original groundbreaking study: “Profit Pools: A Fresh Look at Strategy,“ by Gadiesh & Gilbert was published in the Harvard Business Review in June that year.  In that paper two industries, the car industry and the personal computer industry, were used to compare profit margins.  The base data on the chart shows the original work that was done to demonstrate the share of profit involved in the production of a personal computer in 1998. Several factors that are still valid today stand out as significant.  Firstly, the highest profit margins in the production of personal computers were made, and still are made, by creating the essential microprocessor i.e. Intel.  The second best place to be with regard to profit share is in software i.e. Microsoft.  These two companies did then, and still do, take the largest slice of the profit from the creation of a personal computer. In comparison one has to feel very sorry for the Dell’s of this world, who build and sell computers, because they have to work extremely hard for a much smaller share of the total profit.  The component manufacturers achieve much higher margins than the companies which assemble the computer.  Peripherals and services involved around the personal computer yield even healthier margins than those of component manufacturers. Understand the implications of this chart and you can appreciate Dell’s future strategy.  Dell lost significant market share because they refused to cut margins that are already very slim, but companies like Acer and Asus trimmed their profit margins in order to grow their market share.  As a result, Dell’s computers are not seen by consumers as the best value in the market.  Consequently their net revenue has fallen 54 percent in the last quarter according to figures announced this November.  Looking at this chart one can also follow the conventional business logic in the future strategy that Dell is adopting.  They are trying to move into an area of higher profit margin, namely Services, and this is the explanation behind their recent $3.9 billion bid for Perot Systems Corp.  This is a route that HP had already taken with their earlier $13.9 billion purchase of the service company Electronic Data Systems.  This move into Services has already yielded HP increased profits as witnessed by their latest financial results announced on the 23rd November 2009. This chart also explains why Apple can maintain better profit margins by not only being a computer manufacturer but also by controlling the software element of their products.  By always maintaining premium pricing Apple is able to make the best of wafer thin margins as a manufacturer.  Then add the profit element that Microsoft charge for software would normally take and suddenly Apple’s profit margins are much healthier. The additional up-to-date information in the blue panel shows how, since 1998, the profit margins for notebook manufacturers have been eroded.  Once the premium end of the personal computer market, notebook computers now exceed desktop computer sales.  But these products are currently produced on virtually no margin.  In fact the fastest growing segment of the notebook market is the sale of “netbooks.”  These computers are produced for what Canalys analysts estimate is a profit of 60 cents per “netbook” computer, net of all costs.  No company can exist on margins as tight as these.  Even for a laptop retailing at $745 Canalys estimates the net profit per computer is only $2 which means a 2 percent margin.  Once one understands this data one can begin to make sense of a marketplace where the manufacturers’ marketing strategy will need to emphasise the up to the minute thinner and lighter computers with the longer battery life that the latest microprocessors from Intel allow. This emphasis is likely to be coupled with marketing that pushes promotional messaging about the advantages of larger 12 inch screens rather than the smaller 8 or 10inch “netbooks” that have proved unprofitable. With the appropriate data, and an understanding of the business context, one chart can tell an extraordinary story and provide much insight about an entire industry and its many players. June 2009
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2009

The personal computer

industry value chain

At first glance some of the data on this chart would appear to be out-of-date as it’s from a classic study made back in 1998.  But, when compared with the very recent profit margin estimates shown in the blue panel from the analysts: Canalys, this data provides great insight into what is currently happening in the notebook computer market.  The original groundbreaking study: “Profit Pools: A Fresh Look at Strategy,“ by Gadiesh & Gilbert was published in the Harvard Business Review in June that year.  In that paper two industries, the car industry and the personal computer industry, were used to compare profit margins.  The base data on the chart shows the original work that was done to demonstrate the share of profit involved in the production of a personal computer in 1998. Several factors that are still valid today stand out as significant.  Firstly, the highest profit margins in the production of personal computers were made, and still are made, by creating the essential microprocessor i.e. Intel.  The second best place to be with regard to profit share is in software i.e. Microsoft.  These two companies did then, and still do, take the largest slice of the profit from the creation of a personal computer. In comparison one has to feel very sorry for the Dell’s of this world, who build and sell computers, because they have to work extremely hard for a much smaller share of the total profit.  The component manufacturers achieve much higher margins than the companies which assemble the computer.  Peripherals and services involved around the personal computer yield even healthier margins than those of component manufacturers. Understand the implications of this chart and you can appreciate Dell’s future strategy.  Dell lost significant market share because they refused to cut margins that are already very slim, but companies like Acer and Asus trimmed their profit margins in order to grow their market share.  As a result, Dell’s computers are not seen by consumers as the best value in the market.  Consequently their net revenue has fallen 54 percent in the last quarter according to figures announced this November.  Looking at this chart one can also follow the conventional business logic in the future strategy that Dell is adopting.  They are trying to move into an area of higher profit margin, namely Services, and this is the explanation behind their recent $3.9 billion bid for Perot Systems Corp.  This is a route that HP had already taken with their earlier $13.9 billion purchase of the service company Electronic Data Systems.  This move into Services has already yielded HP increased profits as witnessed by their latest financial results announced on the 23rd November 2009. This chart also explains why Apple can maintain better profit margins by not only being a computer manufacturer but also by controlling the software element of their products.  By always maintaining premium pricing Apple is able to make the best of wafer thin margins as a manufacturer.  Then add the profit element that Microsoft charge for software would normally take and suddenly Apple’s profit margins are much healthier. The additional up-to-date information in the blue panel shows how, since 1998, the profit margins for notebook manufacturers have been eroded.  Once the premium end of the personal computer market, notebook computers now exceed desktop computer sales.  But these products are currently produced on virtually no margin.  In fact the fastest growing segment of the notebook market is the sale of “netbooks.”  These computers are produced for what Canalys analysts estimate is a profit of 60 cents per “netbook” computer, net of all costs.  No company can exist on margins as tight as these.  Even for a laptop retailing at $745 Canalys estimates the net profit per computer is only $2 which means a 2 percent margin.  Once one understands this data one can begin to make sense of a marketplace where the manufacturers’ marketing strategy will need to emphasise the up to the minute thinner and lighter computers with the longer battery life that the latest microprocessors from Intel allow. This emphasis is likely to be coupled with marketing that pushes promotional messaging about the advantages of larger 12 inch screens rather than the smaller 8 or 10inch “netbooks” that have proved unprofitable. With the appropriate data, and an understanding of the business context, one chart can tell an extraordinary story and provide much insight about an entire industry and its many players. June 2009
Click to return to page Click here to download the PowerPoint chart: Click here to download the PowerPoint chart: