*NEWS*IT’S DELL vs. THE DELL WAY

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*NEWS*IT’S DELL vs. THE DELL WAY

 user 2006-02-23 at 10:05:00 am Views: 83
  • #14611

    It’s Dell vs. the Dell Way
    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 
    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 , 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 and Intel , the two companies most responsible for Dell’s
    dominance in the PC business. Dell is in talks to install key search
    software from Google  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 , 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.