Dell Current Situation Goals Objectives,

Dell

Current Situation

Goals Objectives, Policies and Strategies

Strengths

Maintained No. 1 position in the computer hardware industry

Introduction and sell of 2 million printers

Increased Revenues

Increased Year over Year Shipments

Weaknesses

Decline in revenue growth

Decrease in Investment Income

Opportunities

Increasing the company's presence in existing markets

Entering new markets,

Pursuing additional product and service opportunities

Threats price wars (competition)

Inability to handle product transitions risks associated with doing business abroad

Instability in the infrastructure

Terrorism

Alternatives

Implementation

Evaluation and Control

Current Situation

Historical Background

Dell Inc. is the leading manufacturer in the computer hardware industry. The company specializes in the development, design, manufacturing, marketing, and selling of an expansive product line built according to customer requirements ("Full Company Description"). These products include both enterprise and client systems. The products sold to enterprises include storage servers, networking products and workstations ("Full Company Description"). Client systems include desktop and notebook computer systems ("Full Company Description"). Dell also offers a wide array of printers, MP3 players, projectors, handhelds and wireless products ("Full Description").

In addition, the company offers various support programs including 24-hour around the clock support ("Full Company Description").

The company is able to maintain such a support system because it has Command Centers throughout the world including China, Japan, Ireland, the United States ("Full Company Description"). Additionally, all computer systems have a limited warranty and the company offers both telephone and online support. It also offers a helpdesk for all software and peripherals ("Full Company Description").. Dell's customer support system has long been the benchmark in the computer hardware industry ("Full Company Description").

In January 2004, Dell announced partnerships with Fuji Xerox, Kodak and Samsung (Hachman). These partnerships were initiated to allow Dell to add new products to its already expansive product line (Hachman). By the end of 2004 these partnerships resulted in the addition of digital media adapters and video players to the company's product line (Hachman). These partnershipt aid Dell in maintainng a competitive advantage (Hachman).

Goals Objectives, Policies and Strategies

Currently, your company is divided in three geographic subdivisions including Europe, the Americas, and Asia Pacific (Japan) ("Dell Annual Report 2004"). Inside the Americas, the company is further divided into Business and U.S. Consumer subdivisions ("Dell Annual Report 2004"). The objective of the company is to increase stockholder value through the implementation of a strategy, whose foundation is based on the direct model ("Dell Annual Report 2004." This model is concentrated in three areas including growth, profitability, and liquidity ("Dell Annual Report 2004"). In addition, your company's business strategy seeks to merge its direct customer model with an efficient manufacturing and supply chain management organization emphasizing standards-based technologies. ("Dell Annual Report 2004")

Another lofty objective of the company came in 2002 when the company declared that it would double sales to $60 billion in five years. Although many scoffed at the idea, today Dell is on its way towards meeting this objective. Indeed the company's strategy involves identifying a small number of priorities, directing resources to them, then measuring and holding ourselves accountable for significant progress toward them. Dell's efforts remain focused on four strategic initiatives: driving global growth, attaining product leadership, continuously improving the customer experience and enhancing Dell's winning culture. We've long understood the powerful global relevance of the unique, direct way we do business, for customers and for Dell. Direct is not an exclusively American or European or Asian concept. It is a customer concept, rooted in understanding and meeting individual needs, at ever-higher levels of value ("Dell Fiscal 2004 in Review")."

Additionally Dell's strategy involves being the low-cost leader in the computer hardware industry. The company accomplishes this by implementing a direct to customer model, which allows the company to maintain the lowest cost structure in the industry and pass these savings on consumers ("Dell Fiscal 2004 in Review). In addition, the company has implemented a strategy that focuses on cost control, which in 2004 garnered the company the lowest operating expense in its history and in the lowest amongst its competitors in the computer hardware industry ("Dell Fiscal 2004 in Review"). In addition, the company offers financing alternatives to businesses and consumers through Dell Financial Services LP, which is a joint venture between CIT Group and Dell Inc. According to "Dell Fiscal 2004 in Review" the ultimate objective of Dell objective is to be a great company in all ways. We maintain very high expectations for operational excellence. For customer value and experience. And for providing superior shareholder return over time. But it's equally essential to be known as an exceptional place to work. As responsible citizens in all of the markets we serve. And as ethical in everything we do ("Dell Fiscal 2004 in Review")."

SWOT Analysis

All information contained in the following SWOT analysis is derivative of Dell's 2004 Annual Report filing with the Securities and Exchange Commission on April 12, 2004. This financial data fiscal year ended January 30, 2004, January 31, 2003 and for the purpose of comparison, the data includes financial information from 2002, 2003 and 2004.

Strengths

According to your annual report, the company has done well in protecting its position in the industry as the premier manufacturer of personal computers. In addition, the company is second in worldwide market share for notebook computers with net unit growth of 35%, in comparison to 20% in fiscal 2003("Dell Annual Report 2004"). This increase occurred as a result of customer trends shifting toward mobile computing. Furthermore, the addition of printers to the Dell product line has resulted in shipment of more that two million printers and makes Dell No. 3 in printer sales in the United States. Your annual report asserts that for the year (2004) the company was successful at utilizing the direct to customer model to decrease costs while simultaneously sustaining profitable market share growth ("Dell Annual Report 2004").

For 2004 your companies Return on Assets (ROA) was 14.74% and Return on Equity (ROE) was 49.15% for fiscal year ending 2004 (Key Statistics). This illustrates the strength and proficiency of Dell's Business strategy and management. Additionally the company does not payout dividends so the dividend yield is 0.0%(Key Statistics).

Profit margin is 6.18 and the operating margin is 8.65% (Key Statistics). Total debt to equity ratio is 0.078. Diluted EPS is 1.19 (Key Statistics).

Other key ratios are as follows (taken from "Dell Annual Report 2004"):

These ratios provide evidence, which suggest that the company has been extremely stable over the past three fiscal years. All ratios are in a healthy range. The number of days for which supplies remain in inventory are particularly short and this is the type of direct to customer model that allows the company to experience increased cost savings and remain as the low cost leader.

As you can see from the table below (taken from ("Dell Annual Report 2004"), total net revenue has increased drastically from 2002 ($31.1 billion) to 2004 ($41.4 billion).

This was an improvement of 17% from fiscal year 2003 ("Dell Annual Report 2004"). In addition, Gross margin and Operating Income and Net income have increased since Fiscal 2002. There is also a marked increase in the Income per common share up from $0.48 in 2002 to $1.03.

Your annual report also asserts that year-over-year net unit shipments improved 26% during fiscal 2004. This improvement was a result of, strong growth in the subdivisions of U.S. Consumer, Asia Pacific-Japan, and Europe ("Dell Annual Report 2004"). Additionally your enterprise was able to increase its worldwide market share by nearly 2 points during the calendar year with a market share position of 16.7% ("Dell Annual Report 2004").

In addition to increased revenues, the company was also able to lower operating expenses to 9.7% of net revenue, the lowest it has ever been in the history of the company ("Dell Annual Report 2004"). There were also record-breaking operating profits of $3.5 billion and net income of $2.6 billion ("Dell Annual Report 2004"). During 2004, the company was also strong in the area of liquidity reporting an operating cash flow of $3.7 billion ("Dell Annual Report 2004").

Furthermore, your company saw record cash and investments of $11.9 billion by end of the year ("Dell Annual Report 2004"). The following is a comparison chart of net revenue and annual market share according to your company's various subdivisions for 2004, 2003 and 2002:

As is evident in the table (taken from "Dell Annual Report 2004"), market share in the subdivision of U.S. consumer has improved greatly from 11.9% in 2002 to 23.4% in 2004. The annual report explains that the year-over-year increase in revenue was initiated by a growth in the sell of enterprise systems of 28% ("Dell Annual Report 2004"). This increase in revenue also occurred as a result of the company's increased focus on enterprise systems, such as servers, which accounted for greater than half of the improvement in revenue in the Americas ("Dell Annual Report 2004"). Within the Americas, an increase in net revenue occurred as a result of an increase in corporate spending as the economy recovered ("Dell Annual Report 2004").

In addition to the America's, your company also did well in the European market.

The company was able to fortify its No. 2 annual share position. In calendar 2003, your company held a 10.5% market share compared to 9.6% market share in 2002 ("Dell Annual Report 2004"). In deed the company's globel presence is increasing at a remarkable rate.

In 2004 your company's Gross margin as a percentage of net revenue increase to 18.2%, compared to 17.9% in 2003 and 17.7% in 2002("Dell Annual Report 2004"). In addition, your company's cost savings initiative drove the year-over-year improvement for fiscal 2004 and 2003 ("Dell Annual Report 2004").

The company also made a concerted effort to improve margins by implementing four main cost reduction initiatives ("Dell Annual Report 2004"). These cost reduction initiatives affect warranty costs, manufacturing costs, design costs, and operating expenses ("Dell Annual Report 2004"). In addition, the cost savings initiatives also incorporate providing some customer technical support and back-office tasks from cost effective locations and driving more capable tools and processes throughout the world ("Dell Annual Report 2004"). According to the annual report

Dell's general practice is to aggressively pass on declines in costs to its customers in order to add customer value while increasing market share. Dell currently expects the component cost and competitive pricing environment will continue to be challenging. However, management believes that the strength of Dell's direct-to-customer business model, as well as its strong liquidity position, makes Dell better positioned than its competitors to continue profitable market share growth in any business climate ("Dell Annual Report 2004")."

Cash flow from operations allowed your company to further strengthen its liquidity ("Dell Annual Report 2004"). This is evident with a cash flow from operations of $3.7 billion, which is an increase from the $3.5 billion reported in fiscal 2003 ("Dell Annual Report 2004"). Furthermore, your company ended fiscal 2004 with $11.9 billion in cash and investments, which showed an improvement of $2.0 billion over fiscal year 2003. The chart below (taken from "Dell Annual Report 2004") is illustrative of your company's ending cash, cash equivalents, and investments as well as the results of Dell's consolidated statements of cash flows for 2004, 2003 and 2002:

All of the aforementioned strengths have allowed the company to remain a dominant force in the computer hardware industry.

Weaknesses

The company's position as the most profitable company in the computer hardware industry is evidence that the company does not have many weaknesses ("Dell Annual Report 2004"). However, a few weaknesses were found in the annual report. The first of which is the decline in revenue growth during fiscal 2004, in comparison to fiscal 2003 ("Dell Annual Report 2004"). This decline was a result of the increased force of the competitive pricing environment coupled with your company's concentration on profitable growth ("Dell Annual Report 2004"). In addition, although the company produced strong year-over-year net unit growth of 67% in the area of consumer notebook computers during fiscal 2004, the growth was somewhat offset by a 13% year-over-year decrease in average revenue per-unit sold due to a change in product mix in favor of lower-priced systems ("Dell Annual Report 2004").

Another area of weakness was found in the decrease in investment income for fiscal 2004, in comparison fiscal 2003 ("Dell Annual Report 2004"). The main reason for this decrease was the decrease in interest rates on investments, offset by an increase in investments and cash equivalents throughout the year ("Dell Annual Report 2004"). The annual report explains that the fiscal 2002 loss in inclusive of a $260 million impairment charge in the second quarter for other-than-temporary decreases in fair value of Dell's venture investments ("Dell Annual Report 2004").

These decreases were caused by investees' inability to implement their business plans and the conditions of the market ("Dell Annual Report 2004").

Opportunities

As in previous years, your company has an opportunity to expand its profitability by adding additional products to the already existing product line. According to the annual report, "opportunity exists for Dell's continued profitable growth by increasing its presence in existing markets, entering new markets, and pursuing additional product and service opportunities ("Dell Annual Report 2004")."

In existing markets such as the United Kingdom, Japan and China, the company has the opportunity to gain a greater percentage of the market share and the number one positions. It also has the opportunity to expand its product line in certain existing markets. The company is also yet to expand into some new markets; there are countries where Dell computers are not yet sold. In addition, the company has the opportunity to create new products and offer new services. It also has the opportunity to apply the company's strategy of cost savings to the LCD televisions that it offers. If the company could find a way to reduce the price of this product the way to reduce the price of PC's, it could easily dominate that industry as well.

Dell also has an opportunity to gain a greater percentage of the market share with its printers. The company has already been able to grab the third position in this market. By expanding the product line and further reducing the price of the product and the ink, the company could gain more of the market share.

Threats

One might think that because Dell is the number one company in the computer hardware industry, the threats to the company's infrastructure and overall financial condition are minimal. However, the reason company's success is greatly associated with the risk the company has taken. The same risks that made the company successful also threaten the continued success of the firm. One of the largest threats to the company is an even more significant price war between the leading firms in the industry. Because there is very little differentiation of products from one firm to another, consumers will choose the product with the lowest price and the best service. Therefore, Dell cannot insure investors that it can maintain the share of the market that it currently possesses (Full SEC Annual Report).

Another factor that serves as a threat to your company is the general economic condition and business conditions. These conditions are a threat because they could result in a decrease in net revenue (Full SEC Annual Report). Your Annual report asserts that the company's net revenue could decline based on economic conditions in America and other countries (Full SEC Annual Report). Since technology purchases tend to be more of a luxury item, when there are adverse economic conditions technology sales tend to suffer (Full SEC Annual Report).

Another threat could potentially be the company's inability to handle periodic product transition (Full SEC Annual Report). One of the formidable characteristics of the technology industry is the rapid changes in technological advancements (Full SEC Annual Report). This includes the introduction of new products, the reduction in the cost of products and the short life cycle of products (Full SEC Annual Report). If Dell cannot provide consumers with the technological products that they desire sales and profitability will suffer (Full SEC Annual Report).

There is also a threat associated with the potential inability of your company to manage its inventory levels to minimize excess inventory. In addition, there are certain risks and uncertainties associated with international sales. In 2004, 36% of Dell's net revenue came from outside the United States. In order to remain a successful company Dell must pursue growth in the international market (Full SEC Annual Report). However, such growth comes with risks and uncertainties including local economic and labor conditions, unexpected changes in the regulatory environment, political instability, fluctuations in foreign currency exchange rates, tax laws, and trade protection measures (Full SEC Annual Report).

Another threat to Dell is failure in the complex infrastructure the company has created. The company's infrastructure is the lifeblood of the organization and allows the company to maintain its dominance as the low cost leader (Full SEC Annual Report). If there is a disruption in this infrastructure caused by a computer virus, hackers, security failure (customer information), telephone system failure, or a manufacturing failure the company will not be able to meet its obligations, which will increase cost, void sales and affect the reputation of the company (Full SEC Annual Report). Such failures could have a lasting impact on the company depending on the gravity of the failure.

Problems in the supply chain could also threaten the profitability of the company (Full SEC Annual Report). For instance, if the company cannot get the components needed to produce its products, there could be an adverse affect on sales and thus profitability (Full SEC Annual Report).

This is a particular problem for Dell because it has relationships with many single source suppliers (Full SEC Annual Report). Therefore, in some cases if a component is not available from that supplier, no alternative is readily available (Full SEC Annual Report).

Like many in the computer industry, Dell provides customers with financing options. The annual report explains

Although Dell has no financial exposure to the existing assets and liabilities of DFS, should the joint venture experience and interruption in operations, Dell would likely have to find alternative sources for future financing arrangements with customers. Dell is dependent upon DFS to provide financing for a significant number of customers who elect to finance Dell's products, and DFS is dependent upon CIT to access the capital markets to provide funding for these transactions. If CIT is unable to access capital markets, DFS may not be able to fund customer financing arrangements (Full SEC Annual Report)."

If for any reason, Dell Financial Services is unable to provide financial services to customers Dell would have to find alternative financing; such as negotiating financing with another entity (Full SEC Annual Report).

If the company cannot obtain it could adversely affect the company's cash flows by causing losses in originations of financing arrangements (Full SEC Annual Report). This could threaten the liquidity of the company.

The impact of terrorism, war and public health issues around the world also threaten Dell's operations. Hostilities that occur in America or abroad could have an adverse impact upon the company's suppliers or customer and cause economic and political instability. This is a threat that Dell has very little control over.

All of these threats could potentially have an impact upon the company's bottom line and prevent the company from meeting its objectives.

Alternatives

The company has to address the decline in revenue growth that took place between fiscal 2004 and 2003. We found that decline occurred because of the competitive pricing environment and Dell's focus on profitable growth ("Dell Annual Report 2004"). Because there is little differentiation amongst the technology products that are sold by the leading firms, Dell may need to examine inexpensive ways to distinguish its product line, so that customers are more attracted to Dell's products. Although this change in revenue growth was not alarming, if not addressed it could be an impediment to reaching strategic goals and objectives.

We also found that while the company had strong year-over-year net unit growth of 67% in consumer notebooks during fiscal 2004, the growth was offset by a 13% year-over-year decrease in average revenue per-unit sold. The research suggests that the decrease occurred because customers favored less expensive systems. This problem will inevitably occur as it becomes increasingly less expensive to create notebook computers ("Dell Annual Report 2004").

To combat this the company must focus on the development of new technologies.

The decrease in investment income for fiscal 2004 is more complicated because the decrease occurred as a result of a decrease in interest rates on investments. The company was able to offset this loss with an increase in investments and cash equivalents throughout the year ("Dell Annual Report 2004").

If interest rates on investments continue to decrease, the company may have to increase investments and cash equivalents throughout the year. Additionally, the fiscal 2002 loss of a $260 million impairment charge in the second quarter for other-than-temporary decreases in fair value of Dell's venture investments may be offset by more succinct implementation of business plans but the company has little control over the conditions of the market ("Dell Annual Report 2004").

At this point, the company must successfully manage the investments already in its portfolio.

The company must also be more aggressive in hedging the risks associated with conducting business abroad. Currently the company uses foreign currency option contracts and forward contracts. This type of hedging seems effective for the company as fluctuations in foreign currency have not effected the company in the last three fiscal years. However, as the company continues to expand in both existing and new markets there may be a need to evaluate other forms of hedging to alleviate some of the risk associated with conducting business abroad.

If the company is to continue as a leader in the industry, it must continue its focus on cost savings. This is the business strategy that enables the company to remain as the low cost leader. When the company is able to save cost it can offer its products at a lower price than competitors. In the past cost savings strategies have prompted the company to move manufacturing and customer service positions overseas, where the cost of labor is lower. In the future the company may have to reimplement this strategy.

In addition, the company could concentrate more on growth as it relates to overseas markets. The company is number one in the United States and Canada. Although your company is first in Canada your report entitled "Dell Fiscal 2004 in Review" explains that 80% of the Dell's revenue in Canada came from Canadian corporations; why not make it a priority to make that number 90%? Additionally, in the United Kingdom your company is second and in Japan and China it is third. This means that there is room for improvement and that Dell has the opportunity to takeover these markets as well. This is most evident in China where Dell is currently number three. According to "Dell Fiscal 2004 in Review,"

China is a critical market for information technology, and its significance is expanding rapidly. Dell's unique ability to directly understand and meet the needs of customers positions it well to benefit from that growth. Company shipments this past year increased nearly 60%, four times that of the rest of the industry, and revenue rose nearly 40% ("Dell Fiscal 2004 in Review")."

We all know that China is a critical market for any international business because of the large population and the rapid and substantial growth of the economy. For this reason, Dell must pursue China aggressively and not allow competitors to dominate this market. The company must take action to ensure that it can sustain this growth.

Recommendations

In the area of addressing the decline in revenue growth that took place between fiscal 2004 and 2003, the company must differentiate its product line. One way of doing this would be to conduct a comprehensive consumer analysis to understand what customers are truly looking for in a computer or technology product. If the most important thing to the customer is the quality of the computer and the customer service they will receive, Dell must further differentiate itself form competitors in these areas. In the area of quality, the company could use more extensive testing of various product models to ensure that the casing is sturdy. The company must also ensure there are no problems with the motherboard or the software that is installed on the computer when it is received by the customer. In responding to the problem in this fashion, the company will increase sales therefore offsetting the reduction in revenue growth caused by competitive pricing in the industry.

To address the problem associated with the 13% year over year decrease in average revenue per-unit sold for notebooks, it is recommended that the company develop new technologies that can be added to the interface of the already existing or new notebooks. Dell will still be able to sell these new and improved systems at a low cost but changes in the system will allow for some differentiation. As we mentioned previously, the company experienced a 67% net unit growth in the area of consumer notebooks. This means that there is a demand for the product and anything that can be done to improve the product and offer it at a slightly higher price will be beneficial to Dell.

The recommendation for rectifying the decrease in investment income for fiscal 2004 is to focus on maintaining the investments that the company already has in its portfolio. Dell does not have control over the fluctuations that can occur in interest rates. Therefore, when there are clear economic indications that interest rates will continue to fluctuate the company should protect the investments that are currently in its portfolio. In addition, venture investments are extremely risky, and have cost the company in the past, Dell should avoid new venture investments. If less risky investments come along the company may examine adding those investments to its portfolio.

As Dell expands abroad, it also has to recognize that doing so increases certain risks. Although the company already hedges through the use foreign currency option contracts and forward contracts, the use of these hedging strategies should continue. However, it is recommended that the company investigate further the use of other strategies to further decrease risks associated with foreign currency fluctuations.

It is recommended that if the company wants to remain as the low cost leader that it aggressively pursue cost savings. This is the only way that Dell will maintain the competitive advantage. To aggressively pursue low cost savings the company must examine every area of the business extensively this includes the supply chain (purchase of components), production, Labor costs, and research and development. By examining each of these areas, the company will find new ways to apply cost savings and pass these savings on to consumers.

The company also has an opportunity to pursue further growth by tapping into new markets and expanding product lines in existing markets. It is recommended that the company conduct extensive research in countries abroad that do not yet have access to Dell computers. Such research will allow the company to evaluate the market and determine whether introducing a product line to that market would be conducive to revenue growth and the overall business strategy of the company.

In markets such as Canada, Japan, and China, it is recommended that the company attempt to gain a greater chare of the market through additions to its product line and new services. For instance, in Canada the company could attempt to increase the percentage of corporations using Dell products by offering business services that are not currently available or offering certain incentives.

In China and Japan, your company can focus on further improving its reputation, to attract customers. It is recommended that this tactic involve a marketing plan that focuses on the consumers' love for technology with the company's ability to deliver that technology at a low cost with efficient customer service. All of these recommendations will prove effective in the global growth of the company, which will improve revenue and profitability.

Implementation

The implementation of such a strategy would entail management's review of the aforementioned recommendations. If management decides that the recommendations are necessary to secure the future growth and stability of the company, it can then develop a five-year strategy for bringing these recommendations into fruition. The plan should contain detailed information as it pertains to the financial costs of such a strategy, a marketing plan, research and development of new products, and logistics as it relates to transactions abroad including the attainment of certain licenses.

In addition, the plan must discuss each of the aforementioned recommendations. Firstly, the plan must explain how the company plans to address the decline in revenue growth by differentiating its product line. Furthermore differentiating the product line means there must be some analysis of the consumers so that an efficient product can be created. The plan must explain why differentiation will slow the decline in revenue growth.