Research and Analysis
Dell’s Competitive Advantage
Funding 52% Growth in 1996
Funding 50% Growth in 19973
Exhibit 1: Dell’s Annual Worldwide Sales Dollar Growth Versus Industry Exhibit 2: DSI Comparison of Dell, IBM, and Compaq
Exhibit 3: Working Capital Financial Ratios for Dell
Exhibit 4: Percent of Dell Computer Systems Sales by Microprocessor Exhibit 5: Profit & Loss Statements for Dell Computer Corporation Exhibit 6: Balance Sheets for Dell Computer Corporation
Exhibit 7: Projected Balance Sheet of Dell Computer Corporation for 1996 Exhibit 8: Projected Balance Sheet of Dell Computer Corporation for 1997 Exhibit 9: Projected Profit and Loss Statement of Dell for 1997 Exhibit 10: Balance Sheet for Dell Computer Corporation, 1997 Exhibit 11: Profit & Loss Statement for Dell Computer Corporation, 199712
This case study analysis of Dell’s Working Capital and its financial statements has been done to come up with a plan for the company to finance its future growth. Dell Computer Corporation has proven to be one of those companies that revolutionize an entire industry. They were the ones to introduce the Build-To-Order business model in the computer manufacturing sector, which gave them a tactical as well as competitive advantage over other companies. This new business model along with its working capital management and allocation of resources provided Dell with the opportunity for substantial growth in the 1990’s. We forecasted, using the percent of sales method, for the financial statements of 1996 and 1997. The sales were increased by 52% for 1996 and 50% for 1997. The financial ratios of our pro forma balance sheets were calculated, and the information was used to figure out the external funds needed by Dell to finance its growth. As per the analysis there was no requirement of any external funds because the EFN (External Funds Needed) came out to be negative. According to our analysis Dell’s operational and financial structure seems to be organized in such a way that it does not need any external funding for substantial growth opportunities. Due to factors like its Build-To-Order model, working capital management, and its inventory system, Dell has enough resources to finance its growth internally and without any need for external financing. Also, the company has the potential to payout its long-term debt and increase its dividend policy by using its internal funds. All this can be done without harming the prospect of future growth and expansion potential.
Dell Computer Corporation was founded by Michael Saul Dell in 1984. Dell designs, manufactures, sells and services personal computers. The company’s growth rate increased considerably once it started marketing and selling its own brand personal computers by taking orders over the phone (and later online), and shipping directly to customers. This was Dell’s core strategy. This, along with the Build-To-Order model (similar to Toyota’s Just-In-Time, a.k.a. JIT, system) gave Dell the upper hand over its competitors. Dell has much smaller investments in working capital than its competitors because of this Build-To-Order model. It also helps Dell to take advantage of the benefits of reductions in component prices and to introduce new products in the market more frequently. Over the years, since its inception, Dell has grown quickly and has been able to finance its growth internally by its efficient use of working capital and its profitability. During the mid 1990’s, the PC industry was growing at a rapid page along with Dell leading the revolution. As mentioned earlier, Dell introduced its Build-To-Order model to the industry, which allowed customers to have customized computers systems with the latest technology. Dell was able to keep its Work-In-Process (WIP) and finished goods inventory at very low...