What Dell Should Do


The growth engine that Dell once was is sputtering. The degree of its troubles was made plain—yet again—on July 21, when the company said this quarter's earnings would fall far short of analysts' forecasts. Sales won't meet expectations either.

It was the fourth time Dell (DELL) said it wouldn't meet quarterly earnings or sales forecasts since the beginning of last year, and investors were incensed. Some registered dismay at the company's annual shareholder meeting in Austin the same day (see BusinessWeek.com, 7/21/06, "Dell's Dull Meeting"). Dell shares dropped nearly 10% to $19.91, the lowest level in almost five years, and dragged shares of other computer makers, including Hewlett-Packard. The rout left the Nasdaq at a 14-month low.

Dell's profit sagged after the company cut prices to keep pace with rivals such as Hewlett-Packard (HPQ) and Lenovo. Dell also pointed to a "slowing commercial market." Per-share earnings will be 21 cents to 23 cents, missing the 32 cents expected by Wall Street. Sales of $14 billion won't meet the $14.2 billion analysts were predicting.

WHAT WENT WRONG. The gloomy warning revived debate over the extent to which Dell's woes are of its own making. Analysts say the industry is in the midst of a deeper-than-expected demand slump, particularly among businesses that have already upgraded computer systems and won't be making new purchases any time soon. But Dell's statement also reflects company-specific doldrums, analysts say. Dell, the world's largest computer maker, simply isn't measuring up to its next closest rival, HP.

Goldman Sachs (GS) analyst Laura Conigliaro summed it up well in a research note issued after Dell's warning. "Dell's miss is largely about Dell, although it does add yet another reaffirmation about the state of the commercial PC market, mostly in desktops," she wrote. "The absence for Dell of good positioning in notebooks, international, consumer, and retail—all areas where HP is strong—was a major part of the reason last quarter why Dell's performance was as negative as it turned out. We think the reasons are similar this quarter."

But more important than what went wrong is what Dell needs to do to make it right. Several efforts are under way. These include improving customer service and simplifying a complicated pricing structure. "We're very focused on building the customer experience, and we expect to end the year with the widest product portfolio in our history," says Dell spokesman Bob Pearson. "We believe that overall we're taking the right actions for the consumer today, we just aren't seeing the results of those actions yet."

What else should Dell do? BusinessWeek.com put that question to investors, consultants, analysts, and tech executives. Here's a sampling of what they had to say:

Paul Saffo, a Silicon Valley technology consultant and forecaster:

Bring Mike back. Dell Founder and Chairman Michael Dell stepped away from day-to-day management of the company in 2004. "Dell needs to get back to its roots, and to do that it needs Mike," Saffo says. Dell's imprimatur on the company and its marketing would send a signal the company is serious about getting back on track, Saffo says. "Mike is a powerful spokesman. He would resonate both with consumers and with the folks on Wall Street."

Greg Blonder, general partner at Morgenthaler Venture, a venture capital fund:

Make upgrades easier. "Dell realized early on that PCs are a perishable good, and selling them as such worked for a decade," Blonder says. "Now that everyone who wants a PC has one, we're in a mature replacement stage, and Dell hasn't shifted strategies to meet that change fast enough."

Consumers tend to care less about their PC hardware and more about the data they store on it. Moving that data from an old machine to a new one has become a huge chore. "By making that migration path simple—either by letting the user pop out all the hard drives or doing it for them as a service, you'd lock people to Dell computers forever," Blonder says.

Regis McKenna, a longtime Silicon Valley marketing consultant:

Innovate from within. Dell spends a miniscule portion of its revenue—less than 1% in fiscal 2005—on research and development. Instead it builds systems around the latest Intel-designed motherboards, and it runs plain vanilla installations of Microsoft's (MSFT) Windows. "When you rely on others for component and system design, it's really hard to innovate," McKenna says. Microsoft and Intel have done Dell's R&D for them, and makes them a distributor…Somewhere along the line you lose the quality. Dell needs to do something that shocks people out of their day-to-day world."

Charles Wolf, an analyst at Needham & Co.:

Rethink retail. Dell, which sells its computers directly by phone and over the Web, could boost business by opening stores, Wolf says. "Consumers who are buying online are buying online, and the others want to buy in stores," Wolf says. "They want to kick the tires." A move into big-box retailers like Best Buy (BBY) and Circuit City (CC) would mean markups that would erode Dell's price advantage, but Wolf argues that Dell could take a page from Apple's (AAPL) book and build more of its own stores, where it can set its own prices.

Dell is already experimenting with retail sales at two stores, one in Dallas and the other in West Nyack, N.Y. The stores are essentially showrooms that let consumers test-drive computers if not walk out of the store with one in hand. And just because it works for Apple doesn't mean it will work for Dell. Just ask Gateway, which closed 188 stores in 2004.

Clay Sumner, an analyst at Friedman, Billings, Ramsey:

Clinch service contracts. The aggressive pricing environment has created more problems for Dell than margin pressure, Sumner says. "It follows intuitively that, if a consumer is paying less for a PC, he is going to be less inclined to pay up for an expensive service contract," Sumner says. "My principal concern is that (Dell's) consumer PC support contract business is slipping. Those are very high margin programs for Dell."


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