PDF Dell Corporation Phil Laube / Dorothy Skowrunski / Tom Vaughn

Dell Corporation Phil Laube / Dorothy Skowrunski / Tom Vaughn

Summary

Dell has leveraged a unique sales model to incredible success. Recently, though, it appeared that Dell has missed changes in the market and new opportunities in the consumer market. Michael Dell has returned as CEO and the company has adopted new models to capitalize on the growth in the consumer market. Dell's core competencies appear to remain strong and place them in a good position to respond to the market.

Background The company was founded in 1984 under the name Dell Computer Corporation and changed its name to Dell, Inc. in 2003. Dell is headquartered in Round Rock, Texas

Dell, Inc. and its subsidiaries engage in the design, development, manufacture, marketing, sale, and support of various computer systems and services worldwide.

Dell is a leading technology company, offering a broad range of product categories. They are the number one supplier of personal computer systems in the US, and the number two supplier worldwide. Dell was founded on the simple concept: by selling computer systems directly to customers, they can best understand their needs and efficiently provide the most effective computing solutions to meet those needs.

Company Identifiers - 2007 Ticker: DELL Hoover ID: 13193 Legal Status: Public Employees: 66,100 1 Yr. Employee Growth: 18.0% 1 Yr. Sales Growth: 2.7% 1 Yr. Income Growth: 27.7% Debt Ratio: 9% Return on Equity: 53.2% Cash: $12,605,000,000 Current Ratio: 1.35 Long-term Debt: $392,000,000 Fortune 500 Ranking: 34 FT Global 500 Ranking: 148

Dell offers various products, including desktop computer systems and workstations; mobility products that consist of notebook computers, mobile workstations, and MP3 players; software and peripherals, such as printers, monitors, plasma and LCD televisions, and projectors, as well as third-party printers, televisions, software, and digital cameras; servers and networking products; and storage devices.

The company also provides infrastructure consulting services; deployment services; asset recovery and recycling services; training services; enterprise support services; client support services; and managed lifecycle services.

Dell has a joint venture with CIT Group, Inc. to provide various financing alternatives, asset management services, and other customer financial services.

The company sells its products and services directly to large corporate, government, healthcare, and education accounts, as well as small-tomedium businesses and individual customers.

Sales Channels Direct Dell was started on what was a new and unique way to sell personal computers, the direct model. The direct model built systems to order based on the customers' specifications. Customers can order over the telephone or the internet. This model has been employed to great success in the business/enterprise sales of Dell.

In addition to the traditional direct model, Dell began placing kiosks in shopping malls to allow customers to see `floor model' type systems. Dell began this in 1994 and in 2005 expanded it to Australia, Canada, Singapore and Hong Kong. The customer would then place their custom

build order through the kiosk. In 2006 Dell has began opening larger direct retail stores. These stores carry inventory to allow a customer to walk out with a system or they can also custom order a system with the assistance of store personnel. The success of this model will need to be determined. Apple has very successfully implemented a direct store retail model that accounts for 17% of its sales. Other companies, such as Gateway, tried a similar model but failed. Location is a key aspect to this model's success. Another is how Dell handle the cost of the stores. "Stores mean ongoing operational costs as well as infrastructure ... Anybody can make money when times are good, but when economies contract, retailers are the first to be tested. Some will remain profitable, others may not."1

Indirect Dell has tried several times to sell its computers and products through 3rd party retailers. One effort began in the early 90's and ended in 1994 due to the lower profit margins of this channel. In 2003, Dell briefly offered its products through Sears. The direct model works well for business and even some high end users who value the ability to select among components (such as size of hard drive and different video controllers). But the trend is for consumers to want more simplicity in the choices and to be able to see and touch the actual system they will be purchasing. This model is credited with HP's success in passing Dell in market share. Beginning in 2007, Dell again began selling through 3rd party retailers. Michael Dell acknowledged this need in his statement that "The direct model has been a revolution, but it is not a religion,"2 This time Dell is working with Wal Mart and Sam's Club, the largest general/mega retailer, Staples, the largest business office supply chain, and Best Buy, one of the largest home electronics retailers. This model is also being expanded to the U.K. Europe and Asia. Foreign markets as well are not comfortable with the direct model for the same reasons as U.S. consumers.

Advantages and Challenges ? The direct model has several advantages including a negative cash conversion cycle ? the customer pays for the unit before the item is assembled and shipped, a "pull" system that allows inventory to be kept very low as supplies are ordered only as needed for customer orders. Dell focused heavily on its supply chain management and had the lowest cost of inventory in the industry. But the competition has also focused on this and Dell's advantage is shrinking. In 1997, Dell's inventory cost per system was around $20 compared to $160 for HP. Dell has shrunk its inventory cost to $10, but HP's inventory cost is now only $70. ? Despite its previous efforts, the indirect model is still a newer area for Dell compared to its competition. HP, Acer, Lenovo and Apple all have had more experience managing the indirect sales channel. ? The indirect model will challenge margins as Dell experienced in the 90's. Dell will need to prepare for the impact of this on its financial results and its working capital ? The product changes in the indirect model. Dell cannot know what the customer wants and then build it. It must stock inventory in the stores. The challenge is in what to build. There will be more standardization on parts and more focus on design (shape, colors) than in its enterprise sales. ? Selling to more consumers places more focus on customer support. Business/enterprise customers have their own IT departments to assist in support. Consumers have no similar resources and go straight to the manufacturer for support. In ACSI's survey of customer satisfaction, Dell ranks below the industry average. Dell's index of 74 is under the average of 75 for the industry, lagging behind Apple (79), HP (76) and Gateway (75). Their satisfaction index decreased by 5.1% compared to a decrease of 2.6% for the industry in 2007.3. Dell will need to focus on improving its support function.

The challenge is to meld retail sales with its supply chain prowess. For instance, Dell can use downtime in customer PC orders to manufacture models destined for retailers. "Going retail is not necessarily bad. Dell can smooth out production since demand for made-to-order computers is unpredictable. The company can manufacture PCs for a different sales channel on slower days to keep factories utilized. When Dell sells through Wal-Mart, it means lower profit margins. But as long as Dell is smart about factory idle times, it can work."4

Dell also believes it can leverage its supply chain success in the indirect channel. "We're going to leverage our build-to-order capabilities so our resellers won't have to carry inventory, and we can still have a winning strategy without being a HP or Lenovo," "Our competitors typically don't have the supply chain that we have, and would [stock] thousands of their [computer] systems on the shelf," he explained, noting that this adds to their inventory cost. - Paul-Henri Ferrand, Dell's president of Asia Pacific South5

1 MacNN. Apple Retail Strategy Make Not Work for All. 2 New York Times. Dell's Founder is Rethinking Direct Sales. pagewanted=print 3 The American Customer Satisfaction Index. Q2 2007 and Historical ACSI Scores. 4 Knowledge@Wharton Can Dell's Turnaround Strategy Keep HP at Bay? 5 BusinessWeek. Dell's Rebooted Asian Strategy.

Financial Considerations Select Financial Ratios

Dell's new strategy of entering the indirect sales channel and thus creating the middleman they worked so hard to eliminate will take Dell into a new arena where the competition has much experience. There is an opportunity for Dell to apply its competency in manufacturing

Inventory Turnover

Dell Industry

54.4

47.7

and inventory management to competitive advantage in the indirect sales channel. Yet the Net profi t %

5.0

12.4

first financial results after introducing this new channel show a 61 percent increase in

5 yr a vg net profi t %

5.8

8.8

inventory over the previous year when sales rose only 2.7%. Their net profit, while still considerably good, is below that of the industry as a

whole. This leaves little room for error in a sales channel that competes on margin. Dell needs to be able to maintain their advantage in cost of

inventory and turnover to be successful.

Dell is in a good financial position in general and relative to the industry. Dell's debt position is very strong with a debt to equity ratio of 0.096. Cash and working capital are good, especially at the most recent balance sheet date, with cash of $12.6 billion and working capital of $6.3 billion7. Dell reports $21 billion of treasury stock from past buy backs. This gives Dell added flexibility by presenting another source of capital that the competition does not have. Dell appears in good financial condition to both weather a downturn in the economy and react to opportunities.

Core Competencies and Values

Business Strategy: Their business strategy is evolving as they combine their direct customer model with relevant technologies and solutions, highly efficient manufacturing and logistics, and new distribution channels to reach commercial customers and individual consumers around the world.

Product Development: Dell focuses on developing standards-based technologies that incorporate highly desirable features and capabilities at competitive prices. Dell employs a collaborative approach to product design and development, where their engineers, with direct customer input, design innovative solutions and work with a global network of technology companies to architect new system designs, influence the direction of future development and integrate new technologies into their products. They create a collaborative, customer-focused approach and strive to deliver new and relevant products and services to the market quickly and efficiently.

Manufacturing and Materials: Dell believes that their manufacturing processes and supply-chain management techniques provide them a distinct competitive advantage. (discussed in sales channel section below). Their build-to-order manufacturing process is designed to allow them to significantly reduce cost while simultaneously providing customers with the ability to customize their product purchases.

Green Computing: Dell is committed to environmental responsibility and has set an ambitious long-term goal to be the "Greenest technology company on the planet", and have a number of efforts that take the environment into account at every stage of the product lifecycle. Dell became the first company in the information technology industry to establish a product-recycling goal (in 2004). The National Recycling Coalition awarded Dell its "Recycling Works" award for efforts to promote producer responsibility. In 2007, Dell announced that it had exceeded targets in working to achieve a multi-year goal of recovering 275 million pounds of computer equipment by 2009. The company reported the recovery of 78 million pounds (nearly 40,000 tons) of IT equipment from customers in 2006, a 93-percent increase over 2005; and

6 Key Financial Ratios ? Dell Inc. MSN Money. (including numbers in text box) 7 SEC filings ? 10-Q.

12.4% of the equipment Dell sold seven years earlier. Dell set a goal of becoming the greenest technology company on Earth for the long term.8

Dell Computer Takes Green Strides - Many computer manufacturers are driving toward the use of green technology and higher efficiency for an increasingly power-strained world. Dell has taken the latest steps, vowing that before 2008 is over, it will be carbon neutral (no net output of carbon). Dell's new service, "Green print," allows the company to work with corporations to reduce energy consumption,9

Future Risks: There are many risk factors that affect Dell's business and results of operations, some of which are beyond their control. The following are some of the important risk factors that may cause Dell's actual results in future periods to differ substantially from those they currently expect or desire:

? Declining general economic, business, or industry conditions may cause reduced net revenue ? Dell's ability to generate substantial ?non-U.S. net revenue faces many additional risks and uncertainties ? Dell's profitability may be affected by their product, customer, and geographic sales mix and seasonal trends (see discussion in sales

channel section above) ? Retention could be impacted by an inability to improve satisfaction in its support functions relative to the competition ? Failure to maintain a cost advantage may result in reduced market share, revenue, and profitability ? Dell's failure to effectively manage a product transition could reduce the demand for products and the profitability of their

operations ? Dell's reliance on suppliers creates risk and uncertainties ? Disruptions in component availability could unfavorably affect their performance ? Dell could experience manufacturing interruptions, delays, or inefficiencies if they are unable to timely and reliably procure

components from single-source or limited-source suppliers ? The acquisition of other companies may present new risks ? Failure to properly manage the distribution of their products and services many result in reduced revenue and profitability ? Litigation and governmental investigations or proceedings arising out of or related to their recent accounting and financial reporting

investigation could result in substantial costs

Industry Overview The computer manufacturing industry in the US includes about 1,500 companies with combined annual revenue of $75 billion. Major companies include IBM, Hewlett-Packard, Sun Microsystems, and Dell. The industry is highly concentrated: the top 50 companies hold more than 85 percent of the market..

Competitive Landscape Demand is tied to consumer and business income. The profitability of individual computer companies depends on purchasing and production efficiencies, and on technological expertise. Large companies have economies of scale in purchasing and production. Small companies can compete successfully by specializing in certain products or by developing superior technology. The industry is capital-intensive and highly automated; annual revenue per employee is about $500,000.

Competition: Dell faces intense price and product feature competition from branded and generic competitors. Historically, Dell competed primarily based on the customer value that a direct relationship could bring. They were able to pass cost declines to their customers to enhance customer value. During fiscal 2007, Dell deemphasized lower priced, entry-level products and lost 1.1 points of share in 2006 slipping to the number 2 PC supplier worldwide and number 1 in the U.S. Dell believes that their evolving business strategy and indirect distribution channels, as well as their strong liquidity position, makes them well positioned to continue profitable growth over the long term in any business climate.

Competitors:

Acer Hewlett-Packard Apple Lenovo CDW Hitachi Data Systems IBM Sun Microsystems 3Com Brother Industries Canon Cisco Systems EMC Enterasys Extreme Networks Fujitsu Siemens Computers Gateway, Inc. Hitachi Matsushita Electric MPC Computers NEC Epson SGI Sony Unisys

8 Dell. Wikipedia. 9 Dell. Competitors. Hoover's

Products, Operations & Technology Major products include personal computers (PCs); printers; monitors; mainframes; servers; and disk drives. PCs, including desktop, laptops, and workstations, account for almost 50 percent of industry revenue. Input-output devices such as printers, monitors, keyboards, and mice account for 20 percent of revenue, mainframes and servers for 15 percent, and disk drives for 12 percent.

The manufacturing process for PCs consists of integrating circuit boards, disk drives, and input/output devices into a final product. Companies typically assemble PCs from components bought from other manufacturers. Key components like "motherboards" are specially made for a particular product, while disk drives and other components may be off-the-shelf parts. Despite automation gains, some assembly work is still labor-intensive. Manufacturers of specialized devices like printers, monitors, and disk drives may also buy some components from outside vendors. The manufacture of some products requires highly sophisticated machinery.

Although components and other materials can usually be bought from a variety of vendors, some components are available from just a few suppliers. For example, Intel is the major supplier of processor chips for PCs. Many components are bought from foreign vendors and many US manufacturers have foreign manufacturing operations, mainly in Asia.

Computer manufacturers rely heavily on technology to produce better products and lower costs. R&D spending at large manufacturers generally varies between 5 and 15 percent of product revenue, and can be higher for smaller companies or lower for pure assemblers, like Dell. Patent licensing is common and patent disputes frequent. Technological advances can rapidly make products obsolete. The life cycle for a product is often less than 18 months, which is based on a common industry concept called Moore's Law, which states the capacity of a computer chip must double every 18 months to keep up with evolving technology. Moore's Law has held true for several decades.

Conclusion

Dell has been a very successful company that rose to be the largest PC manufacturer against very established and large competition. Dell focused on their original model for that success and on the business/enterprise market that fueled its growth. This focus appeared to ignore the growth area of consumer purchases, which has allowed the competition to catch Dell, with HP gaining the top spot in market share. However, Dell's core competencies in its business model, product development, manufacturing and it's `green' focus remain in place and put them in a favorable position relative to their competition. With the return of Michael Dell, the company appears energized and open to the changing market.

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