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Dell Computer Corporation – 2002

Nicole Seminario: Francis Marion University


Forest David,: Mississippi State University

A. Case Abstract

Dell Computer is a comprehensive business policy and strategic management case that
includes the company’s year-end 2001 financial statements, competitor information and
more. The case time setting is the year 2002. Sufficient internal and external data are
provided to enable students to evaluate current strategies and recommend a three-year
strategic plan for the company. Headquartered in Round Rock, Texas, Dell’s common
stock is publicly traded on the New York Stock Exchange under the ticker symbol DELL.

With 34,800 employees at mid-2002, Dell designs, develops, manufactures,


markets and services and supports a range of computer systems, including desktop,
notebooks, and enterprise systems (includes servers and workstations). DELL also
markets software, peripherals, service and support programs. For the 13 weeks ended May
30, 2002, Dell’s revenues rose less than 1% to $8.07 billion while net income decreased
1 % to $457 million. Results reflect increased desktop sales, offset by reduced margins.

Headed by CEO Michael Dell, Dell Computer Corporation plans to enter the
printer business by the end of 2002. Dell has been dropping hints for months that it might
start selling its own line of printers. But after the company's annual meeting with
shareholders Thursday, Dell President Kevin Rollins' said, "My guess is sometime soon,
you'll see us in the printer business with a Dell-branded printer. Probably by the end of the
year, you'll see something." Students should prepare a three-year strategic plan for CEO
Michael Dell.

B. Vision Statement (actual)

It's the way we do business. It's the way we interact with the community. It's the way we
interpret the world around us — our customers' needs the future of technology, and the
global business climate. Whatever changes the future may bring our vision —Dell Vision
will be our guiding force.

C. Mission Statement (proposed but adapted from actual)

Dell's mission is to be the most successful computer company (2) in the world (3) by
servicing individuals and businesses (1). Dell employs only the best employees (9) to
meet customer expectations of:

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• Highest quality
• Leading technology (4)
• Competitive pricing
• Individual and company accountability (6)
• Best-in-class service and support (7)
• Flexible customization capability
• Superior corporate citizenship (8)
• Financial stability (5)

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability and growth
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

D. External Audit

Opportunities

1. Customers value convenience and one stop shopping.


2. Customers know what they want and need to purchase.
3. Marketing on the Internet.
4. Need for replacement equipment from World Trade Center Attack.
5. US PC households with Internet access will increase 25% by 2002.
6. Some rivals weak in PCs in all the world’s major markets.
7. Servers market can be tapped better.

Threats

1. Global economic recession.


2. Aggressive pricing wars.
3. Continuously changing consumer demands.
4. Strong brand name of competitors (IBM, Hewlett-Packard).
5. Rapid technological advancement.
6. A long-term slow down in global sales of PC’s and servers.
7. Corporate customers and other large buyers decide to rely more and more heavily on
the systems and service capabilities that IBM and Hewlett-Packard can provide and
that Dell cannot.

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Competitive Profile Matrix

Dell Hewlett-Packard IBM


Critical Success Weight Rating Weighted Rating Weighted Rating Weighted
Factors Score Score Score
Price Compt. .25 4 1.0 3 .75 3 .75
Product Quality .15 4 .60 3 .45 4 .60
Market Share .15 4 .60 3 .45 3 .45
Financial Position .15 3 .45 2 .30 3 .45
Global Expansion .20 3 .60 3 .60 4 .80
Consumer Loyalty .10 4 .40 3 .30 3 .30
Total 1.00 3.65 2.85 3.35

EFE Matrix

Key External Factors Weight Rating Weighted Score


Opportunities
Customers value convenience and one stop shopping .05 3 .15
Customers know what they want and need to purchase .05 2 .10
Marketing on the Internet ..06 3 .18
Need for replacement equipment from World Trade Center Attack .05 4 .20
US PC households with Internet access will increase 25% by 2002 .04 2 .08
Some rivals weak in PCs in world’s major markets .10 3 .30
Server market can be tapped better ..06 2 .12
Threats
Global economic recession .12 3 .36
Aggressive pricing wars .09 4 .36
Continuously changing consumer demands .06 3 .18
Strong brand name of competitors (IBM, HP) .07 3 .21
Rapid technological advancement .08 4 .32
A long-term slow down in global sales of PCs and servers .10 3 .30
Corporate customers relying more and more heavily on the systems .07 2 .14
and service capabilities
Total 1.00 3.0

E. Internal Audit

Net Worth Analysis in $millions at year-end 2001

1. Stockholders’ Equity + Goodwill $4,694 + 0 $ 4,694


2. Net income x 5 = $1,246 x 5 $ 6,230
3. Share price = $23 /EPS = $.479 x Net Income $1,246 $ 59,828
4. Number of Shares Outstanding X Share Price = 2,600 x $23 $ 59,800
Method Average $ 32,638

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Financial Ratio Analysis as of July 2002
Industry: Computer Hardware
Sector: Technology
Source: www.investor.stockpoint.com

Dell Computer Industry Sector SandP 500


Valuation Ratios
P/E Ratio (TTM) 49.65 29.93 37.84 25.25
P/E High - Last 5 Yrs 105.71 44.40 66.10 49.79
P/E Low - Last 5 Yrs 21.29 17.78 19.59 17.38
Beta 2.04 1.60 1.76 1.00
Price to Sales (TTM) 1.95 1.40 4.05 2.67
Price to Book (MRQ) 13.08 6.12 3.92 4.19
Price to Tangible Book (MRQ) 13.07 6.36 4.98 6.59
Price to Cash Flow (TTM) 41.59 18.93 25.27 17.38
Price to Free Cash Flow (TTM) 49.65 29.93 37.84 25.25
% Owned Institutions 105.71 44.40 66.10 49.79

Dividends
Dividend Yield 0.00 1.30 1.03 2.28
Dividend Yield - 5 Yr Avg 0.00 0.42 0.24 1.36
Dividend 5 Yr Growth Rate NM 6.77 6.24 7.92
Payout Ratio (TTM) 0.00 18.90 9.42 29.67

Growth Rates %
Sales (MRQ) vs Qtr 1 Yr Ago -8.97 -6.99 -2.04 0.81
Sales (TTM) vs TTM 1 Yr Ago -12.17 -10.05 -4.63 1.66
Sales - 5 Yr Growth Rate 3.32 10.78 20.73 11.89
EPS (MRQ) vs Qtr 1 Yr Ago 577.78 -50.05 -2.90 10.50
EPS (TTM) vs TTM 1 Yr Ago -60.15 -39.87 -23.06 0.51
EPS - 5 Yr Growth Rate -23.41 8.18 9.94 8.46
Capital Spending - 5 Yr Growth Rate -7.05 -0.70 13.35 9.96

Financial Strength
Quick Ratio (MRQ) 0.85 1.03 2.37 1.12
Current Ratio (MRQ) 1.06 1.39 2.91 1.65
LT Debt to Equity (MRQ) 0.12 0.45 0.26 0.68
Total Debt to Equity (MRQ) 0.12 0.64 0.35 1.04
Interest Coverage (TTM) NM 36.19 11.26 9.36

Profitability Ratios %
Gross Margin (TTM) 17.47 30.01 48.52 46.90
Gross Margin - 5 Yr Avg 20.62 31.72 51.88 48.17
EBITD Margin (TTM) 6.46 9.65 15.28 20.02
EBITD - 5 Yr Avg 9.64 13.11 21.95 21.84
Operating Margin (TTM) 5.74 6.05 9.65 17.19
Operating Margin - 5 Yr Avg 8.99 9.13 16.02 18.11
Pre-Tax Margin (TTM) 5.52 7.29 10.89 14.62
Pre-Tax Margin - 5 Yr Avg 9.56 10.18 19.06 17.04
Net Profit Margin (TTM) 3.98 4.28 5.54 9.62
Net Profit Margin - 5 Yr Avg 6.65 7.01 11.76 11.20
Effective Tax Rate (TTM) 27.97 28.17 30.95 33.25
Effective Tax Rate - 5 Yr Avg 30.20 29.81 34.06 35.69

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Management Effectiveness %
Return on Assets (TTM) 9.30 5.60 2.52 6.07
Return on Assets - 5 Yr Avg 19.46 10.63 9.68 7.97
Return on Investment (TTM) 19.99 10.33 4.84 9.79
Return on Investment - 5 Yr Avg 42.98 20.66 14.66 12.77
Return on Equity (TTM) 25.38 18.83 7.22 17.57
Return on Equity - 5 Yr Avg 55.90 34.67 19.75 21.71

Efficiency
Revenue/Employee (TTM) 896,724 483,696 354,721 482,969
Net Income/Employee (TTM) 35,661 21,153 53,290 78,154
Receivable Turnover (TTM) 12.73 6.43 6.69 9.65
Inventory Turnover (TTM) 87.43 29.63 12.73 10.01
Asset Turnover (TTM) 2.34 1.39 0.74 0.99

www.investor.stockpoint.com
July 2002

Strengths

1. Growing market share.


2. Direct sales approach.
3. Build to order approach.
4. Long term partnerships with reputable suppliers of name-brand parts and components
5. Reputation/image.
6. Managing product End of Life Program/Dell Exchange Just-in-Time inventory,
know-how and capabilities.
7. Contracts with local service providers to handle customer requests for repairs.
8. Environmental policy.

Weaknesses

1. Lacks the product line and service breadth of Hewlett-Packard and IBM.
2. The direct sales approach is not the preferred distribution channel in Europe.
3. No in-house repair service capabilities.

IFE Matrix

Key Internal Factors Weight Rating Weighted


Score
Strengths
Growing market share .15 4 .60
Direct sales approach .14 4 .56
Build to order approach .12 4 .48
Long term partnerships with reputable suppliers of name- .07 3 .21
brand parts and components
Reputation/image .08 4 .32
Dell Exchange .04 3 .12
Just-in-Time inventory, know-how and capabilities .05 3 .15

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Contracts with local service providers to handle customer .06 3 .18
requests for repairs
Environmental policy .07 4 .28
Weaknesses
Lacks the product line and service breadth of Hewlett- .11 1 .11
Packard and IBM
The direct sales approach is not the preferred distribution .08 2 .16
channel in Europe
No in-house repair service capabilities .03 1 .03
TOTAL 1.00 3.20

F. TOWS Matrix
Strengths Weaknesses
1. Growing market share 1. Lacks the product line and
2. Direct sales approach service breadth of Hewlett
3. Build to Order approach Packard and IBM
4. Long term partnerships with 2. The direct sales approach is not
reputable suppliers of name- the preferred distribution
brand parts and components channel in Europe
5. Reputation/image 3. No in-house repair service
6. Dell Exchange capabilities
7. JIT, know-how and capabilities
8. Contracts with local service
providers to handle customer
requests for repairs
9. Environmental policy

Opportunities S-O Strategies W-O Strategies


1. Customers value convenience 1. Conduct aggressive domestic 1. Joint Venture with EMC to offer
and one stop shopping advertising campaign. (S1, S2, storage services.
2. Customers know what they S3, S5, O1, O2, O3, O5, O6, (W1, O1, O4, O6, O7)
want and need to purchase O7)
3. Marketing on the Internet 2. Open two Dell outlet stores in
4. Need for replacement Europe (W2, W3, O6)
equipment from World Trade
Center Attack
5. US PC households with Internet
access will increase 25% by
2002
6. Some rivals weak in PCs in all
the world’s major markets
7. Servers market can be tapped
Threats S-T Strategies W-T Strategies
1. Global economic recession 1. Produce low price standardized 1. Conduct aggressive European ad
2. Aggressive pricing wars PC. campaign to promote Dell Direct
3. Continuously changing (T2, S1, S2, S4, S5, S7) Selling (W2, T3, T2)
consumer demands.
4. Strong brand name of 2. Reduce workforce by 1700
competitors (IBM, HP) employees to cut costs
5. Rapid technological (T1, T2, S2, S3, S4, S7, T6)
advancement
6. A long-term slow down in

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global sales of PC’s and servers
7. Corporate customers relying
more and more heavily on the
systems and service capabilities
that IBM and HP provide

G. SPACE Matrix
y-axis
Financial strength +3.66 +1 worst to + 6 best Y axis: 3.66 + (-3.75) = -0.09
Environmental stability -3.75 -6 worst to –1 best

x-axis
Competitive advantage -1.4 -6 worst to –1 best X axis: 2.75 + (-1.4) = 1.35
Industry strength +2.75 +1 worst to +6 best

FS
Conservative Aggressive

CA IS

Defensive ES Competitive

Backward Integration
Forward Integration
Horizontal Integration
Market Penetration
Market Development
Product Development
Joint Venture

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H. Grand Strategy Matrix
RAPID MARKET
GROWTH
Quadrant II Quadrant I

WEAK STRONG
COMPETITIVE COMPETITIVE
POSITION POSITION

Dell

Quadrant III Quadrant IV


SLOW MARKET
GROWTH

1. Concentric Diversification
2. Horizontal Diversification
3. Conglomerate Diversification
4. Joint Ventures

I. The IE Matrix

The IFE Total Weighted Score

Strong Average Weak


3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99

Medium IV V VI
The EFE Total 2.0 to 2.99
Weighted Score

Low VII VIII IX


1.0 to 1.99

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Hold And Maintain

Segments Revenue Profit EFE IFE


Americas 71% 81% 3.46 3.52
Europe 21% 13% 2.1 2.1
Asia-Pacific and Japan 8% 6% 2.1 2.1

J. BCG Matrix

Relative Market Share

High 1.0 Medium .50 Low 0.0

High +20 Stars Question Marks

Industry Sales
Growth Rate
Medium 0 Cash Cows Dogs

Low -20

K. Matrix Analysis and TOWS Summary


Alternative Strategies IE SPACE GRAND COUNT
Forward Integration X X 2
Backward Integration X X 2
Horizontal Integration X X 2
Market Penetration X X 2
Market Development X X 2
Product Development X X 2
Concentric Diversification X 1
Conglomerate Diversification X 1
Horizontal Diversification X 1
Joint Venture X X 2

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Retrenchment
Divestiture
Liquidation

L. QSPM
Strategic Alternatives
Joint venture with Produce low price
Key Internal Factors EMC to offer standardized PC
Weight storage services
Strengths AS TAS AS TAS
Growing market share .15 3 .45 4 .60
Direct sales approach .14 2 .28 4 .56
Build to order approach .12
Long term partnerships with reputable suppliers of .07 3 .21 4 .28
name-brand parts and components
Reputation/image .08 4 .32 3 .24
Dell Exchange .04 1 .04 4 .16
JIT inventory, know-how and capabilities .05 1 .05 4 .20
Contracts with local service providers to handle .06 1 .06 4 .24
customer requests for repairs
Environmental policy .07
Weaknesses
Lacks the product line and service breadth of HP and .11 4 .44 1 .11
IBM
The direct sales approach is not the preferred .08
distribution channel in Europe
No in-house repair service capabilities .03

SUBTOTAL 1.00 1.85 2.39

Joint venture with Produce low price


Key External Factors EMC to offer standardized PC
Weight storage services
Opportunities AS TAS AS TAS
Customers value convenience and one stop shopping .05 4 .20 3 .15

Customers know what they want and need to purchase .05 3 .15 4 .20

Marketing on the Internet .06 1 .06 4 .24


Need for replacement equipment from World Trade .05 4 .20 2 .10
Center Attack
US PC households with Internet access will increase .04 1 .04 4 .16
25% by 2002
Some rivals weak in PCs in all the world’s major .10 3 .30 4 .40
markets
Servers market not tapped well .06 4 .24 1 .06
Threats
Global economic recession .12
Aggressive pricing wars .09 3 .27 4 .36

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Continuously changing consumer demands .06 2 .12 4 .24
Strong brand name of competitors (IBM, HP) .07 4 .28 2 .14
Rapid technological advancement .08 4 .32 3 .24
A long-term slow down in global sales of PCs and servers .10 4 .40 2 .20

Corporate customers relying more and more heavily on the .07 4 .28 1 .07
systems and service capabilities
SUBTOTAL 2.86 2.5
6
SUM TOTAL ATTRACTIVENESS SCORE 1.00 4.71 4.9
5

M. Recommendations
1. Produce a standardized low price PC $599 - (T2, S1, S2, S4, S5, S7)

Objective: to use our low cost producer competitive advantage to gain more market share
from rivals. Exposing new customers to Dell quality and service further develops our
brand loyalty where customer’s next purchase will most likely be a higher profit medium
or top level PC.

Revenue and Cost Estimates

Last ¼ worldwide PC shipments = 30 million


Monthly average = 10 million

Dell’s Market Share = 13.8%

Approx. 1,400,000 PCs per month

Assume sales of 1% of current gross sales volume = 14,000 units per month

Projected Revenue = $600 * 168,000 = $100,800,000


Gross Margin = 18.71% = $ 18,900,000

Est. cost of revenues = $ 81,900,000

(Monday October 29, 2001 Dell began selling a standardized $599 PC – this is a slight
move away from their traditional custom built, direct selling business model)

2. Joint Venture with EMC to offer customers storage services – (W1,O1, O4, O6, O7)

Objective: to increase Dell’s ability to compete with Compaq, HP, and IBM in more than
the PC market. This JV will help Dell offer more one-stop solutions to business
customers as well as increase hardware sales through EMC customer recommendations
and referrals.

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Revenue and Cost Estimates

Estimated 5 year revenue = $4 billion


If shared on an equal basis Dells anticipated gross revenue = $2 billon

Annual estimated gross revenue = $400 million


Est. gross margin = 18.71% = $ 75 million

Est. cost of revenues = 81.29% $ 325 million

N. EPS-EBIT Analysis
$Amount Needed: $1,000
Stock Price $23
EBIT Range $2000 to $3000
Tax Rate 485/1731 = 28%
Interest Rate 5%
#Shares Outstanding 2,600

Common Stock Financing Debt Financing


High Low High Low
EBIT ($1,789 in 2001) $3000 $2000 $3000 $2000
Interest (5%) 0 0 50 50
EBT 3000 2000 2950 1950
Taxes 28% 840 560 826 546
EAT 2160 1440 2124 1404
# of Shares Outstanding 2643 2643 2600 2600
EPS .817 .545 .816 .540

Conclusion: Dell Computer should use debt to raise the $500 million.

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O. Epilogue

On June 17, 2002, Dell and Microsoft announced an agreement to provide education-
specific network servers and notebook computers to K-12 education customers in the
United States. The new products, which feature Microsoft Class Server software, will
allow teachers and school administrators to easily organize and manage institutional
resources, provide individualized and engaging ways for students to learn, and promote
parents' involvement in their children's education.

On June 12, 2002, IBM proclaimed that it is going after Dell in the mainstream
server market, and the company introduced two new servers this week that it claims are
cheaper and better than Dell products. IBM said it is targeting the "sweet spot of Dell's
server lineup": the two-way Intel server segment. "Two-way" refers to the number of
processors the server sports. "We've gone after Sun [Microsystems] before, but this is the
first time we've gone after Dell," an IBM spokesperson said. Dell officials shrugged off
the challenge. "Being the number one server provider, just about everybody -- from white-
box manufacturers on up to those that are in the number two and three positions -- are
looking to gain market share from us," Dell server spokesperson Bruce Anderson said.
"IBM is no different," Anderson said. "They're in the same category as everyone else:
They're looking to expand their business, so they're going to go after the number one
provider."

Dell lost its #1 position in the PC market following the Hewlett-Packard purchase
of Compaq. Dell is now is considering expanding into the printer business, which is one
of the most profitable sector of the IT industry. HP, whose printing and imaging business
is widely seen as the firm's most valuable asset, is concerned. The printer business is HP's
primary source of profitability.

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