Dell Computer

 

 

Dell case study - financial analysis of working capital

 

 

- Founded in 1994 by 19 year old Michael Dell

- designed, manufactured, sold and serviced high performance PCs

- initially, they purchased IBM compatible PCs, upgraded them, and sold them to businesses by mail order

- then created own brand

- then began selling by toll-free telephone line

- ship directly to customers * core strategy

- dealing directly with customers, Dell had advantage in that they could sense changes in demand faster.

- advertising in computer trade magazines, and eventually a catalog

- low cost sales / distribution model

- production after receipt of order

- build-to-order model

- customized orders within a few days

- first in industry to offer toll-free telephone & onsite tech support

- differentiate by customer service

- build computer after receiving order

- different from competitors who foresact, and maintain finished goods inventory

- in 1990, Dell decided to go after a growth strategy and changed its business model to include indirect selling through resellers, with the goal of attracting small business and individual consumers. Dell made deals with CompUSA, and Price Club. Also, Dell began to focus on foreign markets. The combination of these moves toward resellers, distributors and foreign buyers increased the inventory needs

- Dell later exited the low margin indirect model, but would return to it in 1997 when they partnered with Wal-Mart

- much-publicized manufacturing process that allows Dell to hold virtually no inventory of parts and make computers more quickly and cheaply than any other company.

- Key aspects of the Dell formula: The machine. Dell spends little on product research and development — $440 million a year, vs. $4 billion a year at Hewlett-Packard. Yet in the entrance of one of its factories here, the walls are lined with framed certificates for patents. Almost all of them are for manufacturing processes — which reveals Dell's priority.

- Dell has no warehouses to store parts and takes delivery of parts only when it has orders that need them. It holds, on average, seven hours of inventory, vs. weeks of inventory for most tech manufacturers. On the factory floor, parts and products whiz overhead on conveyors so the right items get to the right places at the right time.

- But each PC or other product is built by one person, and it can be tracked back to that person if something goes wrong, making individuals accountable and keeping quality high

- Dell interacts with customers directly through the Web or phone — or, in the case of corporate customers, through a direct sales force. By cutting out retailers, Dell saves money and time

- Dell has no central warehouse facility but instead ships to customers directly from its manufacturing plants. Based on customer location, a shipment may originate from a Dell plant in Ireland, China, Brazil, Malaysia, Texas or Tennessee.

 

 

 

 

Financial History

http://www.dell.com/content/topics/global.aspx/corp/investor/en/history?c=us&l=en&s=corp

 

 

 

 

Strategy - general

 

 

Staying below the radar, and focusing on a niche market that more powerful global companies may be ignoring are good strategies to consider when competing against a stronger global leader. The book “Transnational management” focused on companies such as Dell, Cemex and Electrolux that successfully followed this strategy to international success. The key to this strategy is to focus just on one niche market, but to develop multiple layers of competitive advantages in that product or service. A company may start out as an OEM supplier to more powerful international companies, or they may focus on serving industries that established leaders consider insignificant. The goal is to develop strength and infrastructure. Then, when the company is ready, they should move quickly to expand with its own brand and challenge quickly. This was seen in the BSkyB case when Sky chose to enter the satellite TV market which BBC considered to be a peripheral market that it was not interested in. By staying under the radar, they were able to build on their strengths and eventually challenge BBC for mainstream viewers (and ad dollars)

 

 

 

 

Strategy - specific

 

 

As Michael Dell explains it, Dell operates on a belief that all technologies follow a similar pattern. Soon after a technology product comes to market, it is a high-priced, high-margin item made differently by each company.

 

Over time, the technology standardizes, the way PCs standardized around Intel chips and Microsoft operating systems. Then parts makers blossom, manufacturing costs drop and the technology starts becoming a commodity.

 

Dell monitors those patterns. At a certain point between standardization and commoditization, a technology is ripe for Dell. The incumbents are making 40% or 50% profit margins and are vulnerable to Dell storming in and making a profit on far slimmer margins. Yet there's still plenty of room for Dell to drive out costs by perfecting manufacturing and using its buying power to get cheaper parts

 

For most of Dell's existence, it has applied that capability to PCs, moving up the chain into higher-priced laptops, workstations and, lately, servers

 

Dell sees few boundaries on its growth. As long as new technologies get invented — by someone other than Dell — a stream of tech products will flow down that curve to where Dell can jump in. "We've got more opportunity than we know what to do with," Michael Dell says. "We can't take on too many of these at one time."

 

Launched as a static page in 1994, Dell.com took the plunge into e-commerce shortly thereafter, and by 1997 was the first company to record a million dollars in online sales, according to Dell spokesperson Deborah McNair.

 

After six strong years of online sales -- widely regarded by analysts as stumble free -- Dell has racked up some impressive statistics. In the last quarter of 2002, Dell.com logged a billion page views, a company first. According to Dell spokesperson Bob Kaufman, about half of the company's revenue comes from the site, which means approximately $16 billion flowed through Dell.com in the last year.

 

A key part of Dell's success, says Aberdeen's Allen, is that the site offers consumers "choice and control." Buyers can click through Dell and assemble a computer system piece by piece, choosing components like hard drive size and processor speed based on their budgets and needs.

 

"Their ability to allow people to custom design has traditionally been something that they're ahead of the game with, and a lot of people are slowly starting to catch up now," Allen says. "But they continue to be viewed as the leader."

 

This direct contact with consumers gives Dell a competitive advantage, explains Dell's McNair. "Because we know exactly what our customers are ordering, it's a 1-to-1 proposition. We get feedback on how our site is working so we're constantly making tweaks to it to make the experience for our customers easier."

 

Certainly Dell's competitors see the advantage of the company's direct model, and to a varying degree use similar tactics. But, says Gartner analyst Mark Margevicius, "The other vendors have legacy ties to supply chains -- supply chains with distributors and resellers. Those elements provide value and revenue to the IBMs and HPs of the world. So they can't automatically switch on a dime. But those non-direct channels are also less efficient. So Dell had the ability to cut margin without cutting profit."

 

Profit Source: B2B

While Dell's consumer sales are highly visible, thanks in part to a high profile TV campaign, its business sales are a much bigger revenue source. "About 15 percent of our total revenue is consumer business and the rest is B2B," Dell's Kaufman says. "Our major focus in the IT marketplace is selling servers, storage products, network switches and services to corporate customers. A lot of the e-commerce engine revolves around that."

 

Or, as Aberdeen's Allen notes, "B2C keeps them in newspapers a lot, B2B keeps them in the black."

 

To facilitate B2B sales, the Dell site offers each corporate customer an individualized interface. Using what Dell calls a Premier page, purchasing managers log on and order using an interface customized for their company's needs. "They place the order, it gets routed up to whoever in their company needs to approve it, then the order is sent directly to us," McNair says.

 

The efficiency of the B2B system works in synergy with the consumer sales, Kaufman says. "Remember, corporate customers are also consumers, so if they have a good experience, they'll come over and buy a system for their home, or vice versa."

 

 

Acquisitions

 

 

Dell buys EqualLogic for $1.4B, biggest cash purchase of private tech company

Dell just announced the planned acquisition of EqualLogic, a supplier of data storage for large companies, for about $1.4 billion in cash.

The deal is the largest ever cash purchase of a private venture backed technology company, according to data from VentureSource. See table below.  This could be painful for EMC. Dell it the largest distribution partner of Clariion, EMC’s product that competes with EqualLogic’s. “I’m sure [EMC Chief Executive] Joe Tucci woke up with headache,” said Greg Gretsch, managing partner at Sigma, an early investor at EqualLogic.

 

EqualLogic, based in Nashua, New Hampshire, is hot because it bet early on a new standard for storage systems called ISCSI, which allowed the building of so-called Storage Area Networks (SANs) on Ethernet. The technology, which makes storage Internet based and locally available, makes storage for large companies more efficient and less costly than alternative technologies.

EqualLogic is focused entirely on this market, while larger competitors EMC and Network Appliance have continued to serve older technologies, even if they’ve focused more aggressively on ISCSI of late.

 

This ends a long ride for EqualLogic, which almost accepted a $35 million offer in 2002, when the market turned downward and the outlook was bleak. Sigma’s Gretsch tells me that Sigma and CRV encouraged the company to slog on.  The company’s momentum developed in recent years, however, and in July it filed for an IPO. It was ready to proceed with the offering as of last week, but the company decided to postpone the IPO until tomorrow to see if Dell would make its offer — and it did.

 

EqualLogic opted for the purchase because of the risks inherent in being a public company. The investors were willing to take it public, but the management team decided the $1.4 billion in cash wasn’t such a bad thing. The company was profitable for the last year, and had $37 million in revenue for the most recent quarter. It signed up 500 customers last quarter, said Gretsch.

Sigma Partners and Charles River Ventures invested in EqualLogic in 2001, when the company was just a business plan and three people. So those firms did very well. Total invested was $50 million, which included money from Fairhaven Capital and Focus Ventures.

 

 

 

Future

 

company began to experiment with kiosks in shopping malls. Since launching the initiative, it has opened 57 kiosks in nine states. Recently, Dell announced it is ramping up its kiosk presence by placing them in Sears stores.

 

The kiosks are mini-stores, about 10-12 feet wide, with basic inventory and Dell salespeople. Dell's Kaufman explains that the kiosks enable mall shoppers to "go in and touch and feel some of our product and then either order right there or go back home and order."

 

So part of the e-commerce giant's expansion effort is geared, ironically, toward traditional retail. Or rather, since the kiosks are tied electronically to Dell.com, they're an odd hybrid: a brick-and-mortar mini-store with an e-commerce option. Analysts note that one of the advantages of the Sears kiosk placement is that, in comparison to the Dell site, the department store's foot traffic contains a higher percentage of women and shoppers who are over 55

 

My analysis:

 

Dell used its working capital policy as a competitive advantage by reducing the amount of WIP and finished goods inventory in its system. As a result of maintaining a minimum amount of inventory, Dell reduced its need for inventory financing, warehousing and inventory control. Dell kept its accounts payable (A/P) account to a minimum volume by waiting until the customers order was received before placing the “release” order with their suppliers. Dell’s suppliers were all located very close to Dells manufacturing plants, and made daily deliveries to Dell based on just-in-time delivery. By not receiving the parts until the last minute, Dell kept both its inventory and its accounts payable to a minimum. On the sales side, Dell took orders directly from consumers who normally pay with a credit card online, or over the phone. Because Dell waited until they received the order from the customer to start building the computer, Dell kept the CCC (cash conversion cycle to a minimum).

 

If Dell were to operate at Compaq’s DSI level, we estimate that Dell would have to increase its 1995 inventory from $293m to $668m, which is an increase of $375 million. This would mean that Dell would have needed to invest in $668 million in inventory. I believe that the main reason that Dell was able to maintain such a low level of inventory compared to their competition has a direct result of their competitive strategy to maintain a minimum level of inventory.

 

 

From Dells perspective, there is a competitive advantage to maintaining a low level of inventory in case of a technology change. Because they have less WIP and FG inventory, Dell is better positioned to take advantage of quickly changing technology (processors, for example). If technology were to reduce 30% of the inventory value, Dell would be better off with a lower quantity of inventory which has to be written down. If the inventory were based on Compaq’s DSI number ($668m in inventory), then the write off would need to be $112 more. (30% of $668-$293). On the other hand, there are some disadvantages to having a low level of inventory on hand, as was shown by Dell in 1996 when they indicated that sales could have been higher if they would have had additional inventory in stock. Sometimes you might have to forfeit sales if you keep your inventory level too low, and can not deliver quick enough to your customers.\