Dell case comments

...

The analysis of the business at that time showed that the retail channel was simply not profitable. The profit was always higher under the direct-distribution model.

In addition, Dell knew that there were great variations in profitability among different segments of its customer base. When it served customers one-on-one, it was able to monitor those variations directly. But by going through indirect channels, it lost a vital conduit to its customer base. As a result, it was unable to distinguish between customers of varying profitability.

Dell pulled out of the retail channel in 1994 and dramatically changed its approach to customers, to serve only the most profitable segments, such as big companies. Today Dell regularly re-segments its customer base, tracking shifts in the profit pool, and as a result is able to respond more quickly than competitors when attractive new sources of profit emerge.

- SWOT ANALYSIS:

STRENGTH

WEAKNESS

- Direct model approach, it provides Dell a way to interact to customers directly. Dell has a total command of the supply chain

- Customization of products

- Reliability, service and support

- Latest technology

- Market share growth is slow due to competition, fake products imitations affect sales

- Overdependence on suppliers. There is also occasional products recall that can cause Dell some damage to the brand image

- Lack of dell stores can be an issue for some customers

OPPORTUNITY

THREAT

- With increase in e-commerce the online retail stores of dell provide them better framework to tap new business

- Diversification strategy by introducing many new products to its product line

- The direct approach model will help to sell the other IT products

- Tablet and smart phone Market

- With the increase in innovation in the market the computer systems are becoming outdated, so dell should constantly come out with new products

- People need the quality products at low price which was Dell strength due to its customize solution but now its competitors are coming up with products in same price range

- Financial Past performance:

- Income statement:

In 2012, Dell marked an exceptional financial performance with revenues of $ 62.1 billion, up 1% from 2011. Dell's total revenue is composed of its product sales and services. Dell's product sales revenue decreased by 0.191%, while its services revenue increased by 5.86%.

The operating income rise 26% to $ 4.4 billion due to a decrease in cost of revenues. Overall, Dell's operating expenses as a percentage of revenues decreased from 94% in 2011 to 92% in 2012. In general, in a mature market, such as the PC industry, operating expenses should increase, since expenses on advertisements and marketing will help preserve, or increase, market share.

Dell's net income increased 32.5%, from $ 2.6 billion in 2011 to $ 3.5 billion in 2012. A high portion of this growth resulted from increased efficiencies in expenses. Dell also experienced international tax rate efficiencies. Its overall effective tax rate fell from 21.34% in 2011 to 17.64% in 2012. The increase in Dell's net income is really interesting, especially since its net revenues only increased 0.938%. The entirety of this net income growth is due to expense efficiencies, primarily through increased product margins. As a percent of sales, Dell's profit margin increased from 4.29% in 2011 to 5.63% in 2012.

- Cash Flows statement:

Dell's operating cash flows increased 39.2%, from $3.97 billion in 2011 to $5.53 billion in 2012. Much of this increase is due to Dell's increase in net income and increased efficiency in turning over its accounts and financing receivables accounts. Overall, Dell has been trending towards increasing operating cash flows from 2011 to 2012, which is a strong signal in such a weak, illiquid, economic environment.

On a year-over-year trend, Dell's investing cash outflows increased tremendously, from $1.16 billion in 2011 to $6.2 billion in 2012 (increased purchases of investments, such as securities).

Finally, and most necessary for interpretation, is Dell's large increase in capital expenditures (CAPEX), which increased from $444 million in 2011 to $675 million in 2012 (+52%). This increase in CAPEX results from increased expenditures on improving current facilities, increasing the life of equipment, building new facilities, and other improvements which help generate future income for Dell. Overall, the increase in investing cash outflows signifies strength for Dell's long-term outlook, and confidence from management within the industry.

- Analysis of the project (Manufacturing a new type of tablet computer)

- Presentation of the project:

In this part we will determine the free cash flows and NPV of a proposed new type of tablet computer project similar in size to an iPad but with the operating power of a high-end desktop system.

The development of the new system will initially require an initial capital expenditure equal to 10% of Dell’s Property, Plant, and Equipment (PPE) at the end of fiscal year 2012. The project will then require an additional investment equal to 10% of the initial investment after the first year of the project, a 5% increase after the second year, and a 1% increase after the third, fourth, and fifth years.

The product is expected to have a life of five years. First-year revenues for the new product are expected to be 3% of Dell’s total revenue for the fiscal year 2012. The new product’s revenues are expected to grow at 15% for the second year then 10% for the third and 5% annually for the final two years of the expected life of the project.

We assume that the operating costs and net working capital requirements are similar to the rest of the company and that depreciation