Since its beginnings in Michael Dell's dorm room 20 years ago, Texas computer titan Dell (DELL) has steadily expanded its market share by undercutting less efficient rivals. But in the midst of a shaky recovery in techdom, Dell is forgoing share growth to make more money, notably in the most cutthroat of its markets -- budget-priced PCs (see BusinessWeek, 9/6/04, "Dell Outfoxes Its Rivals").
The trade-off: slower growth but higher profits, which investors don't seem to mind. Since Dell's Aug. 12 fiscal second-quarter earnings report, its shares are up 7%, to $35.34. Meanwhile, shares of Dell's principal rival, No. 2 PC maker Hewlett-Packard (HPQ), have lost about the same amount, closing on Aug. 25 at $18.10. Now one Wall Street analyst has called on HP to boost earnings by easing up on its aggressive PC pricing, too.
On Aug. 18, BusinessWeek Dallas Correspondent Andrew Park spoke with Dell CEO Kevin B. Rollins about the tactical shift and how it's playing out in the critical Chinese market. Here are edited excerpts of their conversation:
Q: What prompted your caution about the low end of the PC market?
A: There was a real concern about [expanding] market share to the detriment of profitability. In the last few quarters, if you look at the component industry, we've seen a modest decline in prices versus the historic trend. In that environment, with prices not going down as fast, you get a little bit of a margin squeeze.
Q: But your competitors have not changed their stance. Don't you risk losing share?
A:If you look at the industry, measured by profitability, you see that it's not healthy. That rears its head again when you look at the lowest-end consumer business, which has perennially been unprofitable.
Our focus was on profitable business on every product, in every region, in every country. We said: "Let's make sure we maintain growth but we do it in profitable areas."
Q: Reuters reported on Aug. 16 that Dell had gone so far as to exit the low end of the consumer PC market in China. Why are you backing off in such a critical market?
A: We're not. The conclusions were drawn erroneously from a broader discussion of improving profitability of our business in total. Our No. 1 focus has always been the corporate customer. It's always our strategy. We don't exit anything.
Q: But your pricing is not as aggressive as some competitors' there, and the same story said Dell's top executive in Asia expects growth in China to be about twice the market rate, versus an earlier projection of three times.
A: My guess is you'll see it as double in some quarters, triple in other quarters. One point does not make a trend.