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In Depth October 15, 2009, 5:00PM EST

Dell's Extreme Makeover

How Michael Dell is trying to change almost everything about the computer company he founded

By Cliff Edwards

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When a wave of mergers swept the tech industry in 2004, Michael S. Dell promised investors they wouldn't see his computer company anywhere near a negotiating table. "When was the last time you saw a successful acquisition or merger in the computer industry?" he asked at the time. Five years later, it's a different story. Round Rock (Tex.)-based Dell is weeks away from closing its largest acquisition ever, a $3.9 billion deal for tech-services provider Perot Systems (PER). The chief executive says more deals are likely, and this won't be the end of his changes in strategy. "Everything's on the table," he says.

And with good reason. The company Michael Dell started in his college dorm and built into the preeminent personal computer maker has fallen on hard times. As the center of the tech industry has shifted from the PC to the Internet, Dell has struggled mightily to find its place. While Hewlett-Packard (HPQ), IBM (IBM), and other rivals transformed themselves in recent years by acquiring new companies and capabilities, Dell long stuck with its old playbook of cranking out PCs as efficiently as possible. It's hard to remember that in 2005 Dell was valued at $100 billion, or more than HP and Apple (AAPL) combined. Today, it's worth $30 billion, less than a third of its rivals' market values.

While such signs of struggle are clear to the public, what isn't apparent is the steady overhaul Michael Dell has been working on since he returned to the chief executive role in 2007. The 44-year-old has been making sweeping changes in everything from personnel and partnerships to acquisitions and distribution. He hasn't talked publicly about his comeback strategy before. But in interviews with BusinessWeek, the CEO made it clear he is determined to change almost everything about the company he started 25 years ago. "There's been a pretty ginormous shift in our business over the last several years," says Dell, dressed in a black suit and tieless white shirt in the sprawling conference room next to his office. "We can do, and must do, more."

He has installed an almost completely new management team to help with the turnaround. Seven of his ten direct reports are new to their posts, including veterans from General Electric (GE), IBM, and Motorola (MOT). The company has been restructured to sharpen the focus on customers. And it is branching out into services, software, and new hardware categories, including smartphones and tablet-like devices. Sources say Dell is even preparing to add social networking features and music and video services to Dell.com. The old Dell is history, the CEO vows, and a new one is just beginning. "We're not trying to become like our competitors," he says. "We're digging our own path."

It's not at all clear Dell can pull this off. The old Dell succeeded because of its mastery of logistics and the supply chain, allowing it to sell computers directly to customers at prices no rival could match. The new Dell requires completely different skills—flexibility, customer focus, and innovation. Leadership experts say changing a management approach is one of the toughest undertakings in business, particularly for a founder who has had early success. "He's got tremendous challenges ahead of him, because he's in an industry that itself is undergoing rapid, sweeping change," says Warren Bennis, chairman of the Leadership Institute at the University of Southern California Marshall School of Business.

A SLOW RESTART

Investors have given Dell virtually no credit for his work so far.

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