Dell Hbr Case Study

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INTRODUCTION
Dell Computers was started by Michael Dell in 1984. Dell’s primary differentiator was its business model. It sold primarily on the B2C market and custom built personal computers on demand. Therefore, it had very low inventory by comparison to its competitors. As a result of this, Dell was able to operate quite efficiently and profitably in its niche market. By the late 1980’s – early 1990’s, Dell noticed that its market share was only 1% of total and that industry amalgamations could potentially force Dell out of the market. It was time to make a decision; it could remain status quo or pursue an aggressive growth strategy. The latter option proved to be favourable and Dell expanded into the B2B marketplace through a growth plan that focused on selling to retailers to improve its market share. The plan worked and Dell saw subsequent revenue increases of 268% within two years, compared to industry growth of 5%.1 The good times came to an end in 1993 when Dell posted its first loss after eleven subsequent quarters of profit.2 Dell decided to more efficiently manage its liquidity, profitability and growth and was exited the indirect retail channel where margins were exceptionally low . The retail channel had served its purpose, however, in assisting Dell as a brand to become well known throughout the market place. Following these measures, and the fact that Dell had exceptionally low relative inventory, they were able to become the first company to launch the new Pentium chip computers and maintain first mover status with subsequent upgrades. Michael Dell was now in a position to forecast future growth for his company.

STATEMENT OF PROBLEM
Michael Dell predicted that the company’s growth rate for the next year would again outpace the industry. Dell needed to focus on how its working capital policy could assist in financing future growth. Further, what other internal and external financing options might assist Dell in reaching their goals?

RECOMMENDATION
Assuming Dell’s sales will grow at 50% in 1997, h ow would you recommend that the company fund this growth? How much capital would need to be reduced and/or profit margin increased if the company were to fund its growth by relying only on internal sources of capital? What steps would you recommend the company take?

Dells attempt to increase its sales by 50% in 1997 will require 2 major types of investments: Investment in working capital
We estimate this figure to be $345M (please refer to Exhibit 1 for the detailed calculation). Investment in fixed assets
Expansion of production will most likely require the purchase of the additional equipment. There is no data available in the case on depreciation expenses or capital expenditures made by Dell in 1996 to support the 52% growth of sales. However, if we refer to Dell’s full financial statements for 1996, we see that Dell spent $100M on capital expenditures and we assume it will spend approximately the same amount in 1997.

1
2

Richard Ruback, “Dell’s Working Capital,” Harvard Business Review 9-201-029 (2003): 3. Ibid

1|P a ge

EDHEC MBA – Dell Business Case
From the projected figures in the Exhibit 1 we conclude that Dell will be able to finance the above investments using the following funding sources:
Profit margins and management of the working capital cycle
Assuming that there is a certain percentage of fixed costs in Dell’s cost structure, the company will be able to increase its net profit margin from 5.1% in 1996 to 5.6% in 1997, generating a net profit of $448M. Net margin should be sufficient to cover additional working capital of $345 M if Dell is able to maintain its Cash Conversion Cycle (CCC) at 1996 levels of 47 days. Maintaining the CCC at the same level is crucial for this type of financing to be sufficient. An increase in DSO by 5 days will increase working capital delta up to $453M (refer to Exhibit 2) and will force Dell to increase margins, which may reduce revenues, or...
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