Matching Dell Analysis of competitive advantage: Hints

Question: In 1996, how big was Dell's competitive advantage? Specifically, calculate Dell's advantage over the team of Compaq and a reseller in serving a corporate customer. 1. To calculate Dell's competitive advantage, you must compare a) the gap that Dell creates between the willingness of customers to pay for its products and the costs that it incurs to provide those products to b) the gap created by a Compaq/ reseller team. To the extent that Dell's gap is larger, it has a competitive advantage. 2. The case allows you to compare customers' willingness to pay across companies only qualitatively. 3. The case allows you to analyze relative costs in quantitative detail (see the table on page 2). To examine relative costs, consider a typical PC equipped for the business market. From Exhibit 10b, you can calculate the price that Dell charged for such a machine in 1996. Next, you can use Exhibit 6 to calculate Dell's COGS for such a machine. Using information in the case, identify the major categories of cost differences between Dell and the Compaq/ reseller team; as they provide a typical corporate PC, how do the cost they incur differ? Finally, try to quantify the savings or extra costs associated with each difference. 4. Using income and balance sheet data alone can lead to misleading conclusions since these firms are either diversified or have a product portfolio of dissimilar products. 5. Make note of Exhibit 6 footnote. Relative cost analysis in 1996 Assumptions Machine Customer Competitor Dell Price Dell gross margin in 1996 Rate of decline of component prices per week Annual cost of capital Dell days of inventory Competitor days of inventory Channel markup Calculations Dells COGS on 1 PC Dell advantage due to Inventory purchased later Total Dell advantage Dell advantage as a percent of revenue

PC equipped for a corporate customer Corporation Compaq/ reseller combination 2313 (average of quarterly figures for 1996 in Exhibit 10b) Exhibit 6

20%

assumption

$1,816

=$2,313 * (1-gross margin) Due to decline in component prices