Case 7-5: Dell Computer Corporation

Chapter Seven Measuring and Controlling Assets

Employed

Arranged by:
Adin Ihtisyamuddin / 16312337

ACCOUNTING DEPARTEMENT
FACULTY ECONOMIC
UNIVERSITAS ISLAM INDONESIA
2018
1. Background Company
As of January 2005 TI Computer Corporation (Dell) was the world's largest direct-selling
computer company, with 57,600 employees in more than 80 countries and customers in
more than 170 countries. Headquartered in Austin, Texas, Dell had gained a reputation as
one of the world's most preferred computer systems companies and a premier provider of
products and services that customers worldwide needed to build their information-
technology and Internet infrastructures. Dell's climb to market leadership was the result
of a persistent focus on delivering the best possible customer experience. Direct selling,
from manufacturer to consumer, was a key component of its strategy.
In 2005, Dell was ranked as America's most admired company by Fortune. Every sixth
computer being sold in the world was a Dell machine, Dell's revenue growth at 19% was
7% higher than the industry average and its operating efficiency resulted in net margins
of 6% while the rest of the industry lagged behind at 1%. Dell was no longer the underdog
of the PC business. Instead of resting on its laurels, Dell realized that the PC business was
slowing down and chose to build a diversified IT portfolio. Dell moved into servers and
storage, mobility products, services, software peripherals and also challenged the
dominant printer leader, HP. CEO Kevin Rollins reckoned that aside from the PC
category, Dell is neither the leader nor the biggest and that would keep the notion of being
the underdog alive and well in the company, the same notion that inspired Dell21 years
ago to challenge the PC orthodoxy with stunning results.
Management Systems
Turning Michael Dell's concept into reality meant rallying a large and dynamic
organization around a common purpose and measuring its performance by relevant and
concrete measurements (or metrics). In August 1993, Dell engaged Bain & Company,
Inc., a global business consultancy, to help it develop a set of metrics to judge business-
unit performance. Reflecting on that experience, Michael Dell said, "It was all about
assigning, responsibility and accountability to the managers . . .. Indeed, there were some
managers within Dell who resisted the use of facts and data in daily decision making, and,
painful as it was for all of us, they eventually left. But for the most part, people were
energized by the change. We carefully communicated what this meant for the company's
 future to our employees, customers, and shareholders. It was met with an overwhelmingly
positive response because of the clarity of vision it afforded. 'Facts are your friend' soon
became a common phrase at Dell. We were still the same company, marked by the same
Dell drive and spirit, but we were better armed to make important decisions.
In 2005, even after 21 years of operations, Dell could perhaps match a startup company
in its informality and execution speed and energy. A benchmark for flat organizations,
Dell used its structure as a competitive advantage and localized decision making. If an
issue did not require a higher up's attention, then the decision would be made without
involving him. The efficient channels of communication and the accessibility to the
management ensured that even junior employees' ideas, which would benefit the
company, got implemented, without the dampening effects of bureaucracy. Similarly, the
senior management also harvested the speed of the flat structure to quickly roll out
strategies and to respond to the competitive markets. For instance, in April 2001, as a
competitor announced that they were missing their quarterly numbers, Michael Dell and
Kevin Rollins saw a tremendous business opportunity and immediately set about cutting
prices. By 2 a.m. the next day the company had made a formal announcement of the price
cuts and was in full readiness to execute on it. This would not have been possible in
companies bogged down by layers of bureaucracy.

2. Discussion Questions
2.1 What is Dell's strategy? What is the basis on which Dell builds its competitive
advantage?
Dell’s strategy was based on:
 Market leadership as a result of a persistent focus on delivering the best possible
customer experience. Direct selling, from manufacturing to consumer, was a key
component of its strategy.
 Its reputation as one of the world’s most preferred computer systems companies and a
premier provider of products and services that customers worldwide needed to build
their information-technology and internet infrastructure.
What is basis on which Dell builds its competitive advantage?
 Dell redesigning PC industry value chain as a tool in developing competitive advantage
based on:

 Cost advantage: This was done in three areas. Component purchase costs, inventory
costs and selling and administrative costs.
 Customer knowledge advantage: Dell understood consumer needs and efficiently met
those needs by selling computer systems directly to customers. The direct business
model eliminated retailers, who added unnecessary time and cost, and shipped
directly from its factories to end customers. It took orders for hardware and software
over the phone or via the internet. Dell designed an integrated supply chain linking
Dell’s suppliers very closely to its assembly factories and order-intake system. Dell
outsourced all components but performed assembly.
 Technology advantage: dell custom-built its machines after receiving an order instead
of making machines for inventory in anticipation of orders. Dell introduced the latest
relevant technology much more quickly than companies with slow moving
inventories; turning Dell to become the number-one retailer of PC, outselling IBM
and Hewlett-Packard.
 IBM and Hewlett-Packard
 Dell moved into IT portfolio; it moved into servers, and storage, mobility products,
and also challenged Printer leader HP.

2.2 How do Dell’s control systems help execute the firm’s strategy?
 Performance Measures: Dell’s scorecard included both financial measures (such as
ROIC, component purchasing costs, selling and administration costs) and non-
financial measures (component inventory stock outs, finished goods inventory, A/R
day and A/P days).
 Localised decision making system: Dell used its structure as a flat organization as a
competitive advantage and localized its decision-making. If an issue did not require
a higher up’s attention, then decision would be made without involving him. This
would not have been possible in companies bogged down by layers of bureaucracy.
  Business unit Performance: in 1993, Dell developed a set of metrics to judge
business-unit performance.
 Expedited the assembly process: Dell recognized early the need for speed, or velocity,
quickening the pace at pace at every step of business.

3. Conclusion
Dell’s strategy was based on Market leadership as a result of a persistent focus on
delivering the best possible customer experience and Its reputation as one of the world’s
most preferred computer systems companies and a premier provider of products and
services that customers worldwide needed to build their information-technology and
internet infrastructure. Dell redesigning PC industry value chain as a tool in developing
competitive advantage based on Cost advantage, Customer knowledge advantage,
Technology advantage. Dell’s control systems help execute the firm’s strategy such as
Performance Measures, Localized decision making system, Business unit Performance,
and Expedited the assembly process.