1. From Tab #1, what is the meaning of the Unneeded Investment? Why is having fewer “days” of inventory an advantage over Compaq?
Answer: The Unneeded Investment is done by Compaq in contrast to Dell. Dell could minimize its inventory days in 1995 to 44% of the inventory days of Compaq in the same year! It means for Dell that its liquidity does not have to be invested (to be held) in the inventory, but can be used to achieve faster growth or to do the prices of its products even more attractive.
2. From Tab #2, why does having lower inventory translate into a potential margin advantage for Dell?
Answer: Both Companies are acting on a high-tech market. The development and progress in this market is really fast. If Dell holds the components in his inventory not so long, there is a competitive advantage for Dell, exceptionally in case of technology change. The old technology loses its value and has to be sold cheaper to customers. On the other hand Dell can faster bring new technologies to the market than its competitors. We can take the fast development by Intel CPUs to Pentium in 1994-95. Dell was able in the shortest time deliver the new chips to its customers. Such technology change is for Compaq clearly more expensive and it means a potential margin advantage for Dell.
3. From Tab #3, you can estimate the “Net Financing Requirement” for Dell in FY1996. Why do companies, even profitable ones, need financing as they grow?
Answer: Growing companies try to access new markets, increase the sale channel and other expanding activities. These activities require a higher investment than the company could finance only from the profit. To enter new markets successfully some initial support has to be done before the desired profit will come. On the other hand the Net Financing Requirement is nothing negative or bad. If company would have got too much available liquidity then it would be also not profitable. The liquidity would be held and... [continues]
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