It's Dell vs. the Dell Way
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By Louise Lee
BusinessWeek
FEBRUARY 23, 2006
businessweek.com
How the PC maker's once-revolutionary sales strategy may actually be holding it back
During a conference call on Feb. 16 to announce quarterly results, Dell (DELL ) executives unleashed a torrent of impressive numbers. Earnings grew 52%, to $1 billion. Sales rose 13%, to $15.2 billion. And the company said it increased market share, already tops on a global basis, in every region around the world. "Our promise to you is that we intend to grow and take share, as we have historically," said Chief Executive Kevin B. Rollins.
Yet Dell's investors keyed in on another number: Sales growth for the coming quarter would be just 6% to 9%, the company said, a far cry from the 16% Dell posted a year earlier. The following day, Dell shares slid 5%, to $30, bringing the decline over the past year to 25%.
On Feb. 22, Dell said it would postpone an annual analyst meeting scheduled for April until September, a move that gives the company more time to improve its performance before the public affair.
"THE NEXT PARADIGM." For the past 22 years, Dell has laid waste to mighty rivals with one of the most groundbreaking business innovations of the past half-century: selling technology products directly to customers via the telephone, and later the Internet, instead of going through retail stores or resellers. But now the remaining competitors, such as Hewlett-Packard (HPQ ), have narrowed the gap in productivity and price.
That leaves Dell in a tight spot. Rollins and Michael S. Dell, founder and now chairman, must either come up with another breakthrough innovation or face a future of slugging it out on near-equal footing with rivals. "Michael broke the paradigm about how to run a computer business, but they haven't been so great at finding the next paradigm," says David Yoffie, a professor at Harvard Business School. "That's the big challenge for Dell the company and for Michael."
This looks like the year Dell will be pushed harder than ever to reinvent itself. Rollins wasn't available to comment for this story. But he and his top managers are weighing several steps that would represent sharp breaks with the past, including loosening its relationships with Microsoft (MSFT ) and Intel (INTC ), the two companies most responsible for Dell's dominance in the PC business. Dell is in talks to install key search software from Google (GOOG ) on its computers in exchange for payments of as much as $1 billion over three years. Such a deal is sure to antagonize Microsoft, which has been trying to gain ground against Google in search.
CONSUMER PRESSURE. Dell has also reopened negotiations with Intel rival Advanced Micro Devices (AMD ), according to one well-placed source. Dell is considering offering PCs and servers built on AMD processors, a move that would mark the first time Dell has bought processors for its machines from a supplier other than Intel. The source cautions that talks have been serious in the past and failed, and they could falter again.
Yet analysts say what's different this time is the rising pressure on Dell to offer AMD chips, since AMD is swiping market share from Intel. "Customers want AMD," says Charles Wolf, an analyst with Needham & Co. "If Dell doesn't offer their chips, it has less ammunition in the war."
Dell has long been known for its strict financial and operational discipline. But some in the industry say what's needed now is a willingness to experiment, perhaps with larger acquisitions, perhaps with selling through retailers or resellers. "Dell is still singing the same old song," says analyst Mark D. Stahlman of Caris & Co. "It's time for them to change."
The world is clearly changing around Dell. The once-torrid growth in sales of personal computers has slowed, to about 5% a year. More surprising, consumers seem less enamored of buying their tech wares over the Web or phone. According to researcher NPD Group, the percentage of PC sales done via the phone and Web fell last year, and the share of sales through U.S. retail stores rose, as people flocked to shops to fiddle with new gear such as digital-music players, digital cameras, and slick laptops.
PLAIN PCS. Consumers' buying habits are a reflection of a broader shift in the technology world. People are mesmerized by new digital gear with unique features and style. Commodity technologies, such as plain-vanilla PCs, are passé.
That's a difficult development for Dell. It spends less on research and development ($463 million) than Apple Computer (AAPL) ($534 million), despite being four times Apple's size. "Not investing in R&D works great in the commoditized PC world," says Vinnie Muscolino, general partner with Babson Capital Management. "It doesn't work as well in other areas."
That's not to say Dell is broken. It's the global leader in PC market share, with 17.2%, and most analysts expect it to continue to gain share even without any significant changes to its approach. One reason is that Dell has room to expand in fast-growing markets such as China. And Dell is making progress in offering basic computer installation and maintenance services to businesses as well as in reselling back-office storage gear from partner EMC Corp.
NEED FOR INNOVATION. But Dell is losing its reputation as a must-own growth stock in the tech field. With its inconsistent financial results over much of last year, several big shareholders have headed for the exits. Citigroup, insurer AXA, and Nicholas-Applegate Capital Management have each slashed their holdings in Dell by 80% in recent months, according to filings with the Securities & Exchange Commission. Dell's market cap has dropped below that of Hewlett-Packard, with HP worth $92 billion and Dell at $70 billion.
Dell's greatest difficulties are related to one of its biggest opportunities: consumers. Operating margins for Dell's consumer business were an estimated 3.8% in the fourth quarter, despite an attempt to reduce reliance on low prices. While Dell remains a leader in selling home PCs, it hasn't made inroads in selling more lucrative gear like portable music players. "Innovation is now front and center," says analyst Stahlman.
Can Dell get back on track with consumers? Job One is to fix its poor reputation for customer service: The Better Business Bureau saw complaints more than double last year, to 1,533. Dell has already boosted its support staff in North America by 20% and is planning another call center in India.
CHANGING TIMES. Dell may have to do even more. Some analysts say it's time for the company to invest more in R&D to spice up products. That's not happening so far. Dell recently axed one research group assigned to examine and prepare for future trends.
Putting more money into R&D. Selling through retail stores. Breaking with Intel. None of these steps sound anything like Dell. The fact that analysts are raising these ideas underscores how dramatically the times are changing. If Rollins and Dell want to keep up the company's image as one of the great stock market performers of all time, they may have to think different.
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Lee is a correspondent in BusinessWeek's Silicon Valley bureau |
