Columbia EBS 7: Matching Dell

ESB

            

Case: Matching Dell, 1999

            

    
- How does Dell’s approach in the personal computer industry
differ from its main competitors?

            

    
- What accounts for the difference in performance between Dell and
its major competitors?

            

    
- How far is Dell’s position likely to be sustainable in the
future?

            

Background: Revenue of Dell rose from $3.5 bn in 1994 to $18.2
bn in 1998 while profits $149 mn to $1.5 bn. Stock price up by
5600%.

            

Dell Advantage: Economies of Scale – huge fixed cost of
distribution (500Mn /$20bn = 2.5%): direct sales force (100 Mn)
which focused on medium-large institution clients and web-base
services (50K pages). Dominated this sector. In 1994, margin of
Dell Direct was 5% while -3% of Dell retail.

            

Gateway had better mfg cost. If it follows Dell and gets 20% MKT
of Dell: 20% * 20bn = 4bn, distribution cost/sales = 500mn/4bn =
12.5%!

            

Inventory of save: Compaq 8% - Dell 2% = 6% * Interest Rate of
Cash (3%) = 0.18%

            

Operation Efficiency: direct sales, outsource on-site services,
rapid customized response, lean mfg process (36 hours), efficient
assembly, and close supplier relationship.

            

Dell’s map: Strategic Situation (Efficiency/cost-advantage in
Dist. vs Inefficiency in Mfg) + Op Efficiency à Strategic Decision
à Performance.

            

Compaq: Huge improvement on Op. Eff (200K à 600K) à Success à
Loss of Focus, Acquisition à HP takeover.

            

Reseller: Integration; Specialize; Fully support services; want
machine quality, price, generic machine. à So IBM/HP/Compaq work
better for resellers.

            

Performance Manipulation:

            

$20Bn Sales, OI $1.6bn, 8%

            

Reduce working Cap $6bn à $2bn by $4bn

            

Cost: 6% * 4bn = $240 Mn

            

Assuming off-set by higher supplier price elsewhere (Delay
Payment – reduce working Cap)

            

OI: $1.6 bn - $240Mn = $1.36 bn

            

Pre-Change ROIC = 1.6 bn/6bn = 26.7%

            

Post-Change ROIC = 1.36 bn/2bn = 63% without fundamental value
created!