Dell’s Strategy Essay

What is Dell’s strategy for success in the marketplace? Does the company rely primarily on a customer intimacy, operational excellence, or product leadership customer value proposition? What evidence supports your conclusion? Dell’s strategy is to provide products and services to the consumers and eliminate the middleman. “Dell’s business strategy combines its direct customer model with a highly efficient manufacturing and supply chain management organization and an emphasis on standards-based technologies” (SEC, 2005).

The company relies on a combination of customer intimacy, operational excellence, and product leadership customer value proposition, but the main focus is customer intimacy driven. According to SEC, “A direct customer relationship, also referred to as Dell’s “direct business model,” eliminates wholesale and retail dealers that add unnecessary time and cost or diminish Dell’s understanding of customer expectations.

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As a result, Dell is able to offer customers superior value by avoiding expenditures associated with the retail channel such as higher inventory carrying costs, obsolescence associated with technology products, and retail mark-ups” and “Dell believes the direct business model is the most effective model for providing solutions that address customer needs (2005)”. What business risks does Dell face that may threaten its ability to satisfy stockholder expectations? What are some examples of control activities that the company could use to reduce these risks?

One business risk that Dell faces is “A failure on the part of Dell to effectively manage a product transition will directly affect the demand for Dell’s products and the profitability of Dell’s operation (2005)” this means that Dell has to keep up with technological advances and changes. With Dell being a technological provider to consumers, they must have the latest and greatest to keep up with competitors. Dell should research and evaluate new technologies as they come about and find out how they can capitalize and bring that technology to their customers.

If Dell can in no way recreate the technology under the Dell name, they should at least make their systems compatible to new technology introduced by other companies. For example, they may not be able to introduce a digital reader such as Kindle or IPad, but they can make their interfaces digital reader friendly. How as the Sarbanes-Oxley Act of 2002 explicitly affected the disclosures contained in Dell’s 10-K report? Before the Sarbanes-Oxley Act independent accountants needed to certify only the presentation of the financial statements, now they have to certify that the company’s internal control over its financial reporting.

Is Dell a merchandiser or a manufacturer? What information contained in the 10-K supports your answer? Dell is a manufacturer. In note 10 the company’s inventories balance presented production materials, work-in-process and finished goods in its balance sheet, a merchandiser would not list these things. What are some examples of direct and indirect inventoriable costs for Dell? Why has Dell’s gross margin (in dollars) steadily increased from 2003 to 2005, yet the gross margin as a percentage of net revenue only increased slightly?

Direct materials and direct labor for Dell’s computer products are direct inventoriable costs and salaries for manufacturing plant supervisors and depreciation of manufacturing plant equipment are indirect inventoriable costs. Dell’s gross margin has steadily increased from 2003 to 2005, yet the gross margin as a percent of net revenue has only increased slightly could be that the fixed costs component of its cost of goods sold is higher than the variable costs component What is the inventory balance on Dell’s January 28, 2005 balance sheet?

Why is the inventory balance so small compared to the other current asset balances? What competitive advantage does Dell derive from its low inventory levels? Page 27 of Dell’s 10-K reports a figure called the crash conversion cycle. The cash conversion cycle for Dell has consistently been negative. Is this a good sign for Dell or a bad sign? Why? Inventory balance on Dell’s January 28, 2005 balance sheet is $459,000,000. Dell has a just-in-time inventory plan and only produces what is needed in the near future; this leads to small balances in comparison to other asset balances.

When an improvement or change in technology comes about Dell can easily change production and not have sunk costs in inventory when they can no long use it. The cash conversion cycle is the time between the purchase of raw materials and the collections of accounts receivables; this has been negative because of its credit terms for its customers. There is a period of time before Dell collects monies from consumers, but they eventually collect it. The may become a problem if collections slow and Dell cannot buy materials needed.

Describe some of the various types of operating expenses incurred by Dell. Why are these expenses treated as period costs? Selling and administrative expenses are operating expenses incurred by Dell. They are period costs because their benefits for the current period are more obvious than in the future. List four different cost objects for Dell. For each cost object, mention one example of a direct cost and an indirect cost. Four different cost objects for Dell are servers, peripheral digital cameras, storage, and printers.

For the server, a direct cost is metal cabinet and an indirect cost is the electricity used to power the equipment in production. For the camera, a direct cost is the flash and an indirect cost is salary of supervisor. For the storage, a direct cost is the microchip while an indirect cost is glue materials. For the printers, a direct cost is the salary of the assembly line worker and an indirect cost is the depreciation of equipment used in the plant.