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Matching Dell - Cost Analysis

1) To calculate Dell's competitive advantage in 1996 over Compaq/reseller, compare the gap between what customers were willing to pay for Dell's PCs and Dell's costs versus the same gaps for Compaq/reseller. 2) The case allows a quantitative analysis of Dell and Compaq/reseller's relative costs by examining costs for a typical corporate PC using exhibits 6 and 10b. 3) Key cost differences that provide Dell an advantage include inventory purchased later to take advantage of declining component prices and lower inventory carrying costs from fewer days of inventory.

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Vivek Kumar
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4K views

Matching Dell - Cost Analysis

1) To calculate Dell's competitive advantage in 1996 over Compaq/reseller, compare the gap between what customers were willing to pay for Dell's PCs and Dell's costs versus the same gaps for Compaq/reseller. 2) The case allows a quantitative analysis of Dell and Compaq/reseller's relative costs by examining costs for a typical corporate PC using exhibits 6 and 10b. 3) Key cost differences that provide Dell an advantage include inventory purchased later to take advantage of declining component prices and lower inventory carrying costs from fewer days of inventory.

Uploaded by

Vivek Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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

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