REV: OCTOBER 10, 2002
V. KASTURI RANGAN MARIE BELL
Dell entered the 21st century as the most successful company in the PC industry. Founded in 1984, the company had achieved phenomenal records in sales and profit growth. Dell surpassed the $1 billion in sales mark in 1992, the $10 billion mark in 1997, and for fiscal 2000 (year ending January 2000), it surpassed the $25 billion mark. Dell’s revenues and earnings grew by over 30% year after year, and the company reported a return on invested capital of 243% for 2000. Riding a wave of hyper-growth in the personal computer (PC) industry, Dell’s market capitalization exceeded $200 billion in December 1998, and Fortune magazine listed it as America’s third-most admired company. The PC industry juggernaut continued to grow through 2000. As growth rates climbed to over 30%, PC companies were left scrambling to keep up with demand. At Dell, new product groups and customer segments were formed to manage exploding opportunities, and new employees were hired in record numbers. In the fourth quarter of 2000, the growth came to a screeching halt. Rather than managing a market growing at 30%, for the first time in the PC industry’s history, growth actually declined by a whopping 10%. Industry analysts were unsure as to whether this was an aberration or a harbinger of things to come. The PC industry’s hyper-growth in 1999 and 2000 was driven by several factors. Primary among these was the enormous business investment in technology infrastructure to prepare for Y2K. The explosion of the Internet was also a boon to tech companies. Not only were there thousands of new companies that needed a technology platform to get up and running, but the competition from dot.coms spurred bricks and mortar companies to invest in internet infrastructure as well. Finally there was the flood of service providers that came into existence in order to service the technology needs of Internet companies. Perhaps the best barometer of all this heightened demand for technology infrastructure was the NASDAQ stock index, which rose from 1,835 in March 1998 to a high of 5,132 in March 2000. And then the bubble burst as the NASDAQ plummeted to a low of 1,619 in April 2001. Dell, along with its rivals, saw a slump in stock price and market capitalization. (See Figure A.) As the market cooled, Dell, a company that had hired 16,000 people over the prior two years, announced its first ever reduction in work force. More cuts were possible. This was in spite of Dell’s record $32 billion in fiscal 2001 sales (year ending January 2001) and a new high on return on invested capital of 355%. (Exhibits 1 and 2 provide relevant balance sheet and profit and loss statement information. Exhibit 3 summarizes selected financials for significant computer hardware vendors.)
________________________________________________________________________________________________________________ Research Associate Marie Bell prepared this case under the supervision of Professor V. Kasturi Rangan. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
Market Capitalization and Stock Prices, Selected Firms (March 1997-September 2001) Market Capitalization
$250B $200B Market Capitalization ($B) $150B $100B $50B Gateway $0B M ar -9 Ju 7 n9...