Dell Hbr Case Study

2230 Words Mar 10th, 2013 9 Pages
Dell Computers was started by Michael Dell in 1984. Dell’s primary differentiator was its business model.
It sold primarily on the B2C market and custom built personal computers on demand. Therefore, it had very low inventory by comparison to its competitors. As a result of this, Dell was able to operate quite efficiently and profitably in its niche market. By the late 1980’s – early 1990’s, Dell noticed that its market share was only 1% of total and that industry amalgamations could potentially force Dell out of the market. It was time to make a decision; it could remain status quo or pursue an aggressive growth strategy. The latter option proved to be favourable and Dell expanded into the B2B marketplace through a growth
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Two scenarios could take place:
1. A one-off investment is required to be made in the beginning of the year. Since the company will have no possibility to generate profits or free up its working capital, it could either liquidate some of its short term investments of $591M or get a loan. The decision will depend on whether the rate of return on investment is higher or lower than the interest rate on the loan, taking after tax effects into consideration. If the rate of return is higher, Dell should finance the purchase of fixed assets through the loan, if it is lower , it should use its investment account to finance the capital expenditure.
2. Gradual investment in capital expenditure is possible. This could be done only by using margins generated within the year and decrease in CCC by managing receivables-days cycle.
If the company can manage to decrease its DSO days from 50 to 40 days, it can reduce its working capital delta to $126M (Exhibit 2), thus making the remaining net profit available for capital expenditures.
How, if at all, would your answers to Question 3 chang e if Dell also repurchased $500 million of common stock in 1997 and repaid its long-term debt?
If Dell decides to repay its debt of $113M and repurchase stock of $500M, the following steps could be undertaken. Stock repurchase
A decrease in DSO by 10 days and increase in DPO by 10 days will release working capital of $44M

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