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Question 4: Is Dells strategy working?

What is your assessment of the financial performance that Dells strategy has delivered during fiscal years 2000-2008? Use the financial ratios presented in the Appendix of the text (pages 240-241) as a basis for doing your calculations and drawing conclusions about Dells performance. Selected Financial Statement Data for Dell Inc., Fiscal Years 2000 2008 (in million, except per share data) February February February January 1, 2008 2, 2007 3, 2006 28, 2005 Results of Operations Net Revenue Cost of Revenue Gross Margin Gross Profit Margin Operating Expenses + Selling, general and administrative + Research, development and engineering + Special charges Total operating expenses Total operating expenses as a % of net revenues Operating Income Operating profit margin Investment and other income (loss), net Income before income taxes extraordinary loss, and cumulative effect of change in accounting principle Provision for income taxes Net Income Net profit margin Earnings per common share: Basic Diluted Weighted average shares outstanding: Basic Diluted Cash Flow and Balance Sheet Data Net cash provided by operating activities Cash, cash equivalents, and short-term investments Total assets Long-term debt Total stockholders' equity 61,133 49,462 11,671 19.1% 7,538 693 8,231 13.5% 3,440 5.6% 387 3,827 880 2,947 4.8% 1.33 1.31 2,223 2,247 57,420 47,904 9,516 16.6% 5,948 498 6,446 11.2% 3,070 5.3% 275 3,345 762 2,583 4.5% 1.15 1.14 2,255 2,271 55,788 45,897 9,891 17.7% 5,051 458 5,509 9.9% 4,382 7.9% 226 4,608 1,006 3,602 6.5% 1.50 1.47 2,403 2,449 49,121 40,103 9,018 18.4% 4,352 460 4,812 9.8% 4,206 8.6% 197 4,403 1,385 3,018 6.1% 1.20 1.18 2,509 2,568 January February 30, 2004 1, 2002 41,327 33,764 7,563 18.3% 3,604 434 4,038 9.8% 3,525 8.5% 186 3,711 1,086 2,625 6.4% 1.02 1.01 2,565 2,619 31,168 25,661 5,507 17.7% 2,784 452 482 3,718 10.4% 1,789 5.7% (58) 1,731 485 1,246 4.0% 0.48 0.46 2,602 2,726 January 28, 2000 25,265 20,047 5,218 20.7% 2,387 374 194 2,955 10.9% 2,263 9.0% 188 2,451 785 1,666 6.6% 0.66 0.61 2,536 2,728

3,949 7,972 27,561 362 3,735

3,969 10,298 25,635 569 4,328

4,751 9,070 23,252 625 4,047

5,821 9,807 23,215 505 6,485

3,670 11,922 19,311 505 6,280

3,797 8,287 13,535 520 4,694

3,926 6,853 11,560 508 5,308

Profitability Ratios

Gross Profit Margin Operating Profit Margin Net Profit Margin

January 28, 2000 20.7% 9.0% 6.6%

February 1, 2002 17.7% 5.7% 4.0%

January 30, 2004 18.3% 8.5% 6.4%

January 28, 2005 18.4% 8.6% 6.1%

February February February 3, 2006 2, 2007 1, 2008 17.7% 16.6% 19.1% 7.9% 5.3% 5.6% 6.5% 4.5% 4.8%

25.0%

20.0%

15.0% Gross Profit Margin Operating Profit Margin 5.0% Net Profit Margin

10.0%

0.0%

The chart shows the Profitability Ratios of Dell from 2000 to 2008. In general, from 2000 to 2008, the profit of Dell was quite stable. As we can see, Dells strategy is still working and makes a lot of money for Dell every year. However, there was no remarkable increase. The net profit margin has been about 5% during Fiscal Years 2000 2008.

Return on total assets (ROA) Return on Stockholder's Equity (ROE) Return on invested capital (ROI)

January February January 28, 2000 1, 2002 30, 2004 14.4% 9.2% 13.6% 31.4% 26.5% 41.8% 28.6% 23.9% 38.7%

January February February February 28, 2005 3, 2006 2, 2007 1, 2008 13.0% 15.5% 10.1% 10.7% 46.5% 89.0% 59.7% 78.9% 43.2% 77.1% 52.7% 71.9%

100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Return on invested capital (ROI) Return on Stockholder's Equity (ROE) Return on total assets (ROA)

The chart indicates ROA, ROE and ROI of Dell from 2000 to 2008. From 2000 to 2008, ROA has been stable because Dell built a lot of manufactory. However, ROE and ROI had very impressive increase since 2000. In 2006, ROE reached the peak 89% and ROI reached the peak 77.1%. It proved that Dell has used the monetary capital invested in its operations and the returns to those investments very effectively.

Long term debt to capital ratio Long term debt to equity ratio

January 28, 2000 0.09 0.10

February 1, 2002 0.10 0.11

January 30, 2004 0.07 0.08

January 28, 2005 0.07 0.08

February February February 3, 2006 2, 2007 1, 2008 0.13 0.12 0.09 0.15 0.13 0.10

0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 Long term debt to capital ratio Long term debt to equity ratio

The chart shows 2 leverage ratios of Dell: Long-term debt to capital ratio and long term debt to equity ratio. These ratios are quite important because they measure creditworthiness and balance sheet strength. As we can see, all the ratios were very low, under 0.2 which had very good effect to the creditworthiness and balance sheet strength. Besides that, they could also help Dell to borrow additional funds if needed. In conclusion: Through the analysis, we can say that Dells strategy is still effective. It helps Dell to earn a lot of money every year. However, although Dell has gained profit during Fiscal Years 2000 2008, there was no remarkable increase in profit and it seemed to be stable. Dells strategy has been very successful when it helped the company to control the cost very well and run the company very smoothly.

Question 5: What does a SWOT analysis reveal about the attractiveness of Dells situation in 2008? Dell SWOT analysis Strengths:

Worlds largest PC maker. One of the best known brands in the world. First PC maker to offer next-day, on-site product service. Direct to customer business model. Uses latest technology. Dell has remarkably low operating cost relative to revenue because it cuts out the retailer and supplies directly to Dells Direct Model approach enables the company to offer direct relationships with customers such as corporate Dells direct customer allows it to provide top-notch customer service before and after the sale. Each Dell system is built to order to meet each customers specifications. Reliability, Service and Support. Dell boasts a very efficient procurement, manufacturing and distribution process allowing it to offer customers Dell is able to introduce the latest relevant technology compared to companies using the indirect distribution Dell is not a manufacturer; Components are made by the suppliers and Dell assembles the computers using

the customers.

and institutional customers.


powerful systems at competitive prices.

channels.

relatively cheap labor. The finished goods are then dropped off with the customer by courier. Dell has total command of the supply chain.

Dell turns over inventory for an average of every six days, keeping inventory costs low. Dell is enhancing and broadening the fundamental competitive advantages of the direct model by increasingly

applying the efficiencies of the Internet to its entire business. Weakness:


A huge range of products and components from many suppliers from various countries. Computer maker and not the computer manufacturer, making DELL unable to switch supply. Dell lacked solid dealer / retailer relationships. No propriety technology Not attracting the college student segment of the market. Dells sales revenue from educational institutions such as Dells focus on the corporate and government institutional customers somehow affected its ability to form

colleges only accounts for a merely 5% of the total.

relationships with educational institutions.

For home users, Dells direct method and customization approach posed problems. For one, customers cannot go to Customers just cant buy Dell as simply as other brands because each product is custom -built according to their

retailers because Dell does not use distribution channels.

specifications and this might take days to finish. Opportunities:


Diversification strategy by introducing many new products to its range. Personal computers are becoming a necessity now more than ever. Customers are getting more and more educated

about computers. Second-time buyers would most likely avail of Dells custom-built computers because as their knowledge grows, so do their need to experiment or use some additional computer features.

The internet also provides Dell with greater opportunities since all they have to do now is to visit Dells website to Since Dell does not have retail stores, the online stores would surely make up for its absence. It is also more

place their order or to get information.

convenient for customers to shop online than to actually drive and do purchase at a physical store. Threats:

Competitive rivalry that exists in the PC market globally. New entrants to the market pose potential threats. The threat to become outmoded is a pulsating reality in a computer business. Price difference among brands is getting smaller. Dells Direct Model attracts customers because it saves cost. Since other companies are able to offer computers at With almost identical prices, price difference is no longer an issue for a customer. They might choose other brands The growth rate of the computer industry is also slowing down. Today, Dell has the biggest share of the market. If

low costs, this could threaten Dells price-conscious growing customer base.

instead of waiting for Dells customized computers.

the demand slows down, the competition will become stiffer in the process. Dell has to work doubly hard to differentiate itself from its substitutes to be able to continue holding a significant market share.

=> Technological advancement is a double-edge sword. It is an opportunity but at the same time a threat. Low-cost leadership strategy is no longer an issue to computer companies therefore it is important for Dell to stand out from the rest.

Question 6 : Which company is competitively strongerDell or Hewlett-Packard? Use the weighted competitive strength assessment methodology shown in Table 4.2 of Chapter 4 to support your answer.

Competitive Strength Assessment (Rating scale: 1 = very weak; 10 = very strong) Dell Strength Weighted Rating Score 9.5 1.425 10 1.5 10 0.5 9 1.35 7 0.35 10 1 10 1 10 1.5 10 1 9.625 HP Strength Rating 9 9 10 10 10 9 10 9 8 Weighted Score 1.35 1.35 0.5 1.5 0.5 0.9 1 1.35 0.8 9.25

Key Success Factor/ Strength Measure Quality/Product Performance Reputation/Image Manufacturing Capability Technological Skills Dealer Network/Distribution Capability New Product Innovation Capability Financial Resources Relative Cost Position Customer Services Capabilities Sum of Importance Weights Overall weighted competitive strength rating

Importance Weight 0.15 0.15 0.05 0.15 0.05 0.1 0.1 0.15 0.1 1.00

Dell is stronger competitively because of their strengths in key areas like Quality/Performance and Reputation/Image. These two things are extremely important in the PC industry and go hand in hand. Although both of these companies are extremely close in terms of their competitive strength, Dell is slightly stronger beating out HP in those critical areas.