Financial Statement Analysis of Dell, Inc. in 2005 - Term Paper Example

Section I. Summary Currently, Dell, Inc. is widely recognized as one of the market leaders in the global information technology (IT) industry. The company corners the largest market share in the US personal computer (PC) market accounting for 33% in 2003 (Dell, Inc. in 2005 C-130). As an international player, the company is also very aggressive in pursuing strategies to capture rapidly developing economies in Europe and Asia. This success of Dell, Inc. can be directly traced to the efficient strategies it employed. The IT firm is also regarded as a world class manufacturing system which employs the most modern and state-of-the-art value chain. Looking further, the strategy of Dell is multi-faceted which does not only include the internal company’s internal operations but its external stakeholders as well. It should be noted that Dell’s strategy can be summed up as follows: 1. Cost-efficient Build to Order Manufacturing 2. Quality Control 3. Partnership to Supplier 4. Commitment to Just-in-Time (JIT) Inventory Practices 5. Direct Sales Strategy and Marketing Effort 6. Customer Service and Technical Support 7. Pioneering Leadership in the Use of Internet and E-commerce Technology; and 8. Expansion into New Products (C-130-140) This strategy of Dell is perfect for the hypercompetitive industry it is currently operating in. A hypercompetitive industry, according to Kotler, is one where there is an intense rivalry among the competitors coupled with high buyer leverage, forcing the firms to commit to an efficient value chain which eliminates incompetence in the system which will bring eventually bring down the cost of operation and enhance customer value. In the face of this high competition and buyer power, Dell was able to come up with a strategy featuring a value chain which eliminates wastage and adds customer value. In the IT market, it is important that a player establishes an efficient manufacturing system which reduces or even eliminates wastage in its value chain. Dell has become a pivotal driver of the supply chain revolution in the IT industry because of its adoption of the Toyota Manufacturing System also known as Just-in Time (JIT) inventory system. This, together with its commitment in solely marketing its product directly to customers and the utilization of relationship marketing is very much appropriate for the industry Dell is operating in. As a market leader in its field, Dell is regarded in having the leanest and most efficient manufacturing system, excellent customer service, intensive research, lowest prices, and quality products. It should also be noted that Dell was able to develop its competitive advantage due to its unique strategy. Even though Dell’s competitors like Hewlett-Packard, IBM, and Gateway continue to push aggressive strategies to eat up into Dell’s market share or at least, capture a more patronage, the firm was already able to create a competitive image, insulating it from attacks. It can be noted that as the sales revenue of other competitors decline or remain flat, Dell manages to record increments. In fact the current strategy utilized by the firm manufacturer has become a sustainable competitive advantage. In contrast to competitive advantage, the business model of Dell is hard and is even impossible to be replicated by its various competitors. It should be noted that some organizations planned to emulate the business model of Dell but failed. Michael Dell, the firm’s CEO expressed that competitors will be bound with their present strategies because adopting the business model of Dell will be detrimental especially in their distribution channels. Currently, Dell enjoys its strategic position as a market leader in the IT industry. Due to this, the company is quiet insulated with current strategic issues. The only thing that Dell must address nowadays is the significant decision whether it directly employs its core strategies in its geographic expansion. As the company opted to conquer more lucrative markets outside its home country, Dell is faced with the dilemma of standardizing or adopting its business model to suit the different preference and culture of new markets. It should be noted that in other parts of the world, especially in the developing economies, direct marketing might not work as customers are not comfortable with the idea of spending bulk of their earnings to purchase a computer they have not touched or seen at all. In other parts of the world, online shopping is not yet prevalent because customers are afraid of online fraud. As the company has a commitment of providing ultimate customer value and satisfaction, Dell should make an effort to take into account the different cultural preference of its different markets. However, doing so may erode the competitiveness of Dell because of the higher costs entailed by contracting or employing intermediaries. At present, Dell seems to have the most appropriate business model and strategies in the IT industry. Its commitment in pursuing an efficient operation, customer satisfaction and profitability pushes it into a highly competitive position against its rivals. However, as the company pushes its horizons outside its home country, Dell is faced with the challenge of either standardizing or adopting its business model to new customers. Section II. Industry and Firm Analysis Industry’s dominant economic features Market size. In 2004, analysts estimate that the global market for IT products is approximately $800 billion dollars with a 10% double digit growth. However, it is also expected that demand for IT products have grown significantly due to the increasing consumer demand from both developed and developing countries. Scope of competitive rivalry. It is irrefutable that the world is becoming a global village with the integration brought about by economic policies which eliminates the trade barriers and technological breakthroughs which eliminates the significance of physical transaction between buyer-seller. This fact relates that the competition in the IT industry is not limited to local and regional markets but encompasses all consumers around the globe. Market growth rate and position on the industry lifecycle. According to analysts, the IT industry is posting double-digit growth spurred by higher product demand worldwide. This growth rate may indicate that PC products are still in the growth stage. However, it can be seen that the US is a more mature market for IT products. Number of rivals and their relative size. The IT industry is comprised of players which range from medium enterprises to large corporate giants like IBM. The exact number of players in the IT industry including the manufacturers and distributors are not given but it is estimated that over 100 are from the US. Number of buyers and their relative size. The global scope of the IT industry makes it very difficult to ascertain its total number of customers. It is also noted that even if Europe has a higher population than that of the United States, the latter still post higher IT product purchases. Buyers can range from households, professionals, small and medium enterprises, large corporations, private institutions and government. Types of distribution channels used. The IT industry uses traditional distribution channel for the sale of its products like manufacturer’s outlet, stalls in malls, home television channel, kiosks, and contract distributors. However, other firms also opted to pursue direct marketing in order to have a closer relationship with their customers. Pace of change and product innovation. The rate of obsolescence is typically high in the IT industry. It could be noted that innovators like Apple Computers, Inc. usually releases new products often making the pace of change and product innovation extremely high. Level of differentiation. During the introduction stage of IT products, manufacturers highly differentiate their products in order to create a better image than their competitors. Apple Computers, Inc. has been heavily criticized because of its proprietary and closed architecture. Because of this, manufacturers are rapidly standardizing their products for more customer convenience. However, it should be noted that companies still try to project different images. For example, Apple tries to win the market by offering innovative products for the middle and high-end products while Dell projects a “more for less” image. Importance of economies of scale. Due to the high level of investment needed to operate in the IT industry, players can significantly gain through economies of scale. Clustering. Physically, the IT industry players are heavily clustered in the Silicon Valley due to perceived economic advantages. Players are also becoming aware of locating their manufacturing plants in countries with lower labor costs. Thus, firms also locate in countries like Brazil due to cost advantages. Importance of learning curves. Learning curve is definitely important in the operation of IT players. Capital requirements and ease of exit and entry. Being an IT player entails huge investment to cover expenses for research and technology and operation. Capital outlays are also needed to aggressively market products and to compete head on with established players. Profitability. There is an unequal distribution of profit in the IT industry with only the top and larger organizations showing profitability. According to Yahoo Finance, the IT industry recorded a net loss of $951.51 thousand in 2005. Porters Five Forces Barriers to Entry Exit. To prospective entrants, there is a high barrier to entry in the It industry due to the capital investment required. Also, entrants should also shoulder the burden of aggressive marketing to establish a presence and battle head on with competitors. Barriers to exit is also high unless a larger company may wish to acquire an ailing entity. Intensity of Rivalry. The intensity of competitive industry varies from each different geographical location. In the United States, rivalry among It product manufacturers and services are more pronounced than in any other nation as competitors are competing next to each other. The widespread popularity of computer in the operation of businesses and homeowners alike make this market attractive to firms. In the global level, it should be noted that lucrative markets especially in Asia are not yet conquered. Supplier Power. Most of the players in the IT industry employ a horizontal business model allowing some of their processes to be done by other entities like suppliers so that the company can focus on their core competence. However, some companies still opt to cover all their activities and source only specific components to supplier. The increasing participation of suppliers in the activity of the IT firms gives vendors a higher leverage. Buyer Power. As discussed above, IT players are competing in a hypercompetitive landscape where customers demand value for their money. The available information about the products sold and prices charged by IT firms through channels especially the internet enhances the high buyer power. Threats of Substitutes. IT industry does not face threats of substitutes outside their market. However, players’ products are highly substitutable as each of them push for standardization. 3. Industry Drivers Generally, the changes in the IT industry are primarily driven by the technological developments which ushered internet and e-commerce. This is further enhanced by the policies which promote the integration of global markets into a single village. The social arena also became a pivotal driver for the IT market as the culture and lifestyle across nations change. The development and the growing popularity of internet are regarded as the major driver in the IT industry. Internet technology changed the way business is done by players by developing new business models. In terms of operation, the internet technology allows the integration of the various players in each company’s supply chain. It is irrefutable that information sharing is now prevalent among suppliers, manufacturers, and distribution channels. The efficiency of strategic alliances is enhanced by the presence of a system which connects each player to smoothen transactions. Internet has also paved the way for the introduction of a new marketing method which significantly drives down cost. The internet prompted the proliferation of dotcoms. Major players in the IT industry are now becoming click and mortar companies which complements their physical distribution channels with online presence. Nowadays, companies can directly market their products online through their websites. Customers can now also place an order, track their order, pay, and report their feedbacks and complaints with a mouse click. The internet also eliminated the physical geographical boundaries which stand between buyers and sellers. With the aid of the internet, companies can now service buyers from all over the world. The growing globalization is also a current trend which shapes the industry. Globalization is promoted by the government’s effort of setting up a world with lower trade barriers and restrictions leading to the establishment of trade blocs and free trade zones. These eliminate the barriers to trade and investments and facilitate the flow of products, resources, manpower, and knowledge across national boundaries. IT players took advantage of this by expanding geographically. As companies become aware of outsourcing their business process to countries with skilled manpower at lower wages, they are more motivated to establish manufacturing plants in these economies. Competitors in the IT sector are also heavily influenced by the changing lifestyle of their customers. Currently, customers are living past-faced lives and they require products which will serve their changing needs. Businesses are becoming more comfortable with online transaction like videoconferencing instead of spending a lot of money to bring executives together. They also need software and hardware to pursue efficiency in their business processes. Meanwhile, households computing equipment which aids their entertainment need. The market of IT products now wants offerings which can offer them more value and convenience. This in turn, makes product obsolescence and innovation faster. New products which offer more features are introduced by innovative manufacturers. Players see to it that the right products are launched in the market at the right time. Other significant drivers include the need for efficient system, lower production costs, and establishment of strategic alliances among the players in the different levels of the value chain. 4. Industry Mapping As stated above, there is not enough information to cover all the participants in the global IT industry. Due to this, this section will only show a table which lists the major players in each of the identified product segment utilizing 2004 data. Table 1. Top Competitors in IT Industry’s Product Segment 5. Strategic Moves of Rivals In the current situation of the IT industry, it is expected that companies will further boost their strengths and competencies in order to take advantage of the opportunities present in the market. Competitors are expected to closely evaluate their value chains in order to eliminate inefficiencies and ensure that all processes add value to the customer. Since the players are being pushed to standardize their products, it is expected that competitors will be competing on costs and prices passed to the customer. With this, players will be undertaking improvements to better manage their cost of production and operation. Rivals are expected to pursue product and market expansion. The growing demand for computing equipments abroad is likely to attract IT players for lucrative markets beyond their markets. Rivals are more likely to target large and industrializing economies in Asia like China and India and other parts of Europe. Some IT players are also expected to pursue product innovation in order to cater to the changing needs of the market. 6. Key Success factors The success of any IT player in the industry is highly dependent on its capability of providing a product which brings value and satisfies customers. Looking at the competitors, leaders are those who bring customer value by lower prices or quality product features. Thus, in order to remain competitive, players look at their business processes in order to make eliminate inefficiency, invest on research and development to introduce new products, and establish good relationship with customers. To sum up, the key success factors in the IT industry are innovation, efficiency, and excellent customer service. 7. Industry Attractiveness In assessing the attractiveness of the industry based on the analysis above, it is important to remember the popular adage that higher risks can either mean huge losses or huge profits. The adage can be applied to an industry like the one under consideration. For prospective entrants, huge profits can be a lure. However, a lot of aspects can discourage them into entrepreneurial venture such as the high entry and exit barriers, high level of required investments, intense competition, high supplier power, high buyer power, and unequal distribution of profit. To large corporations who were already able to make a name in the IT industry, the IT industry if profitable because of their preemptive factors. Competitive and firm analysis Financial Analysis Financial analysis is an indispensable tool which gives analysts an insight on how well the company is performing. The financial performance of Dell can be best assessed by looking at its financial statements. Using the numbers from the financial reports, ratios which pertains to the profitability, efficiency, leverage, and liquidity of Dell will be computed. Table 2. Financial Ratios of Dell (2005) Table 2 shows the financial ratios of Dell during the 2005 fiscal year. Dell shows positive profitability as it records consistent positive ratios during the past five years. It should be noted that 18.2% of the firm’s revenue is accounted as gross margin while 6.4% is turned into net profits. Return on assets and equity are 86.5% and 15.5%, respectively. The efficiency of Dell is indicated by its activity ratios. Dell has average receivables collection of 35 days and day’s turnover ratio of 4 days. The company has a relatively high fixed and total asset turnover at 10.35% and 2.4%, respectively. Amidst the good indicators discussed above, investors should look at leverage structure and liquidity ratio of Dell. It should be noted that Dell is heavily financed by more risky long-term debt. The debt ratio of 82.1 indicates that 82.2% of the total resource of Dell is financed by debt. Also, it should be noted that though Dell can pay all its current liabilities can be paid by liquid assets, the company does not have enough cash to undertake investments with high level of cash outlay. SWOT Analysis Strength. The major strength of Dell, Inc. is its utilization of a business model which enables it to reap various benefits which are not enjoyed by its competitors. The direct business cut a significant amount of cost in the company’s supply chain by eliminating the less value adding activities in the value chain. According to the case, largely contributed in increasing the efficiency of the company—inventories were kept low and technological breakthroughs are delivered to the customer within a week opposed to previous two months. The direct business model also enabled the company to market directly to the customer, thereby offering more customized products. The company also learned how to deliver the value preferred by the customers. Another strength of Dell’s is its cost leadership strategy. As the company is able to produce computers with the least possible cost, the company is also able to charge lower prices to customers relative to its competitors. Because of the aforementioned strengths, the company has made a name in the computer industry and secured a significant portion of the global market share. The company also enjoys strong brand equity. Acquisition of financing is relatively easier as the company’s stock has a higher market value. Weaknesses. One of the major weaknesses of Dell is its lack of proprietary technology in its production activities. Some experts refer to Dell as a computer maker and not a computer manufacturer. Another weakness is Dell’s high dependence on its suppliers. As Dell purchases semi-assembled inputs in its production, bargaining power is tilted in suppliers. Dell’s dependency on suppliers also exposes it to risk faced by them. Also, the heavy dependence of Dell on long term debt may make its investors reluctant of purchasing its stocks. Right now, Dell is also criticized by customers due to its decision in outsourcing customer service from third world English speaking countries like India. These dissatisfied customers report that Dell’s customer service is now far from excellent because of Indian representatives. Dell seems to have some major problems on its Indian call center. Opportunities. The IT industry is currently booming as demand for IT products are growing in many foreign markets especially in developing nations in Asia like China and India. It should be noted that as economic progress in these countries continue, they began to accumulate wealth through higher disposable income. Industrializing nations also opt to update their technologies by investing in computing equipments. These post opportunities of geographic expansion for Dell and the whole IT industry. There are also a lot of opportunities to further venture into new products. IT industry is primarily driven by new product innovations. With the changing lifestyle of consumers, IT firms can further create products which bring more value to clients. Threats. Dell is threatened by the expected higher rivalry among industry players. The consolidation and merger of its competitors to battle head-on with it is also threatening. As firms struggle to promote more efficiency, Dell is attacked by the likely impact of improvements of its rivals. Recommendations The current status of Dell in the IT industry reveals how well Dell’s strategy is working. Dell is primarily recognized as the leading manufacturer of computers and other computing equipments. Nowadays, the company is also providing services through business consultancy. Dell continues to show excellent performance in the product segments that it chooses to operate in. The saga of Dell’s successes on different products and services documented on business cases shows that the IT firm has managed to efficiently coordinate all its functional areas to achieve its goals and objectives. This report supports that Dell’s strategy is currently doing well for its full benefit. The position of Dell in the IT market is the most credible proof of its excellent strategy. For the time being, the strategy of Dell is very much fitting to its current market. However, it is recommended that Dell looks at the long-term and come up with a strategy which takes into account the current and expected future trends. This paper strongly recommends that the IT company pursue product and geographic expansion supported by its current strategy. But first, however, the company should improve its current financial position by improving its leverage and financial structure. Financial Improvement Dell, as revealed in the financial analysis is fairly leveraged as more than 80% of its resources is financed by long-term debt. This may cause investors to become wary of purchasing the company’s shares. It should be noted that in case of bankruptcy the creditors will be allocated their shares of the company first before the owners. The company’s financial structure can be further enhanced by boosting the company’s return on equity. This can be done by efficient more cost management which leads in higher earnings per share. The company may also opt to issue more shares in order to dilute the share of creditors. It is irrefutable that a company will only be able to invest on new products and geographic locations, Dell have enough cash at hand in order to support these new projects. Dell’s cash position compared to its current liabilities will deem insufficient in order to pursue new projects. The company should be able to raise enough cash for investments. Dell can do this by improving its collection system. Product Innovation As mentioned in the above analysis, innovation is one of the driving forces shaping the IT industry. It was also mentioned that product obsolescence is extremely short while new product turnover is high. Dell should continue to heavily spend on research and development in order to create new products. Nowadays, Dell spends almost 80% of its revenue on its R&D though Dell is not actually pivotal in product evolutions. As we can see, Dell often improves the available offerings in the market leading to more convenient, user-friendly, and less costly computing equipments. However, this report recommends that Dell should also pursue in launching new products. With Dell’s business model, it is fairly easy for it to pursue product innovation using its resources. It should be noted that Dell has a culture which warmly welcomes innovation. This culture can support the Dell’s quest for new products with more features. Dell should pursue this innovation by looking at the needs of the market. First, the company should consult its customers, look at its database of complaints, and feedbacks and turn these into innovative offerings. Then, the company can do a prototype and market it online and its kiosks. This should also be coupled by aggressively marketing this new product. The product should be given a place in magazines, websites, and other marketing media. Geographic Expansion The analysis above shows that the scope of the IT market encompasses the entire globe due to the rapid integration of geographic locations due to less trade barriers and e-commerce. It is irrefutable that technological advancements are prevalent in many developing nations like India and China. Aside from this, Europe is another lucrative market yet to be captured by Dell and its competitors. This report recommends that Dell uses it lean, efficient, and low cost manufacturing system to target countries with customers who are price sensitive. Since the company can manufacture with minimum wastage, it is expected that it will be able to market products lower than other competitors. Dell should set up and strengthen its presence in economies which have large shares in business process outsourcing. Looking at the current global trends, we can see that emerging economies serve for the needs of large multinationals through business process outsourcing. These contact centers and back process offices are commonly set up in developing countries. Nations like India, China, and Philippines are most visible enjoying the wave of outsourcing. Also, experts speculate that Africa will be a future hub for business process outsourcing (Africa gearing 1). The rationale for setting up and strengthening presence in BPO countries is simple—the multinational will need computing equipments in running their operations and the presence of multinationals will post an improvement in the labor market because of new jobs and higher wages. These new opportunities will lead to higher disposable income which can encourage spending in customers. Higher disposable income will significantly lead to higher propensity to spend in capital like computers. It is irrefutable that Dell has already a presence in the aforementioned except Africa. The company should enter the African market as an exporter and distributor of its own product. The problem with the above countries is the likely failure of a direct marketing strategy as investment in computing devices often entails huge savings for developing nations. They are more likely to want to look at the products first before buying. These nations may also feel reluctant to shop online or through phone. It is recommended that Dell starts by having kiosk at major areas like malls where it can display its products. Transactions can be done through these sites. However, this is only for Dell to establish a good name. Once the confidence of the buyers is won, Dell can start selling online and through telephone minimizing the associated marketing costs. References “Africa Gearing to be Next BPO Hub.” Offshore Outsourcing World. 15 July 2005. 29 July 2006. “Dell, Inc.” Yahoo Finance. 29 July 2006 Dell, Inc. The Official Website of Dell, Inc. 2006. 29 July 2006 Read More