Technology

Dell's Not on Easy Street Yet


Though Wall Street greeted the news of Michael Dell's return enthusiastically, the company's founder has his work cut out for him

After Dell announced the Jan. 31 ouster of Chief Executive Kevin Rollins, the spin coming out of company headquarters in Round Rock, Tex., was loud, clear—and predictable. Despite the bad news—including the disclosure that Dell would miss expectations for the third time in four quarters—the important thing was that the company's iconic founder, Michael Dell, was returning to run the company as CEO. And Wall Street, desperate for a savior, gobbled it up. The stock rallied in extended trading immediately after the announcement and analysts raised ratings the following day.

There's little doubt that changes are needed at Dell (DELL)—and more Michael Dell is a good thing. After nearly two years of faltering financials and lost market share, having him fully back in control will certainly help morale. And Dell hints he'll cut out bureaucracy and find new ways to apply Dell's marketing machine, which focuses on direct sales.

Tough Road Ahead

But don't expect his return to read like the fairy tale that's occurred since Steve Jobs retook the helm at Apple (AAPL) in 1997. While Apple was a bloated, operational mess when Jobs arrived, it still retained all the technical and creative DNA, especially in the area of software, that was there before he departed. Dell has less to work with. Analysts say improving on what it already does won't take the company very far. "They need a zero-based assessment of the company," says Endpoint Technology Associates analyst Roger Kay. "They need to put everything on the table, and say, 'There are no sacred cows.' This is a company that missed out on [the boom in] consumer and retail and on the style changes" that have helped Apple and Hewlett-Packard (HPQ) lure customers, Kay says.

And some wonder whether even Michael Dell, who's considered by many to be a brilliant tech visionary, salesman, and ambassador for the company, has the operational chops to pull it off alone. Dell watchers note that he's never been without a strong No. 2 to handle much of the day-to-day details. Back when Dell was in his twenties and his company was just exploding on the scene, that role was first played by Austin venture capitalist E. Lee Walker. After the company nearly imploded under its own growth in 1993, Dell brought in former Motorola (MOT) executive Mort Topfer, who some executives referred to as "Michael's Dad," Kay notes. Rollins, a former Bain & Co. consultant, took over in 1996 and implemented Dell's vision of using the Internet to attain PC dominance. Earlier this decade, Dell racked up huge profits for a time while each of its main rivals grappled with losses.

Is Dell the man to make his company a star again? Company spokespeople say doubts about his ability are ludicrous and point out that he was last CEO in 2004—just three years ago. But even when Dell was CEO, Rollins was running much of the company on a day-to-day basis. For instance, all regional sales operations reported to Rollins. Dell, on the other hand, focused on technology and product strategy, spending time with key customers and investors. Indeed, when Rollins was promoted to CEO, the company's press release quoted Dell as saying, "Today's change is primarily one of title, not of roles or responsibilities, so it won't alter the way Kevin and I run the business."

Great Ideas?

And not all of Dell's woes can be blamed on Rollins. While execution problems have dogged the company on his watch, many say the bigger mistake was not making more fundamental changes to a strategy blessed by both executives. People close to the company say executives were frustrated by how aligned Dell and Rollins were in their views. With few exceptions, such as Dell's decision to buy gaming PC maker Alienware, the two agreed on what was needed—and more important, what was not. Insiders say both were in lockstep on Dell's refusal, until recently, to use chips from Advanced Micro Devices (AMD). Says Stephen Baker, an analyst at market researcher the NPD Group: "If he had some great ideas, why wouldn't he have implemented them already?"

Dell promises he'll make many "significant changes" in the months ahead (see BusinessWeek.com, 2/1/07, "Michael Dell in Charge, 'Period'"). Most likely, those will involve some cost-cutting. The company's head count rose by 14,000 in the past year. That helped boost employee and other expenses at more than twice the rate as revenue in the third quarter, notes Technology Business Research (TBR) analyst John Spooner.

The executive change is no doubt going over well internally. Rollins is a show-me-the-numbers type, who "was not particularly popular with the troops," says Kay at Endpoint. Rollins and Dell concede neither is particularly warm and fuzzy, in part based on feedback from annual reviews from employees. But despite his championing of a program called the Dell Way, designed to build a corporate culture based on more than Dell's stock price, Rollins never managed to become a beloved leader.

Dell is a different case. While rarely described as charismatic, he's still idolized within the company—in part, say some, because he's been able to rely on Rollins to deal with most of the difficult confrontations. "Michael is viewed very well," says an executive at a rival company. "He's an action figure, while Kevin is viewed as imperialistic and kind of arrogant, with not much passion—not someone you'd want to move a mountain for." Dell is also a good listener. In fact, he sat down for 45 minutes at the Consumer Electronics Show this year with some bloggers and customers who'd been critical of the company. "Michael will bring a listening ear to the company," says Spooner at TBR.

Growth Costs Money

As important as those distinctions may be, neither Dell's reputation nor the company's legendary ability to cut costs will save it. Some of the head count increase was due to much-needed improvements to Dell's customer service. And Dell took steps to shore up quality problems last September when it announced plans to hire 500 engineers in Austin, Tex., says independent analyst Cindy Shaw, who worked at the company in the 1990s. That move could help Dell improve quality problems with notebooks and help the company finally take a bite out of the booming market for hard-to-engineer blade servers. Shaw puts the price tag for the 500 engineers at around $50 million. "Servers are where the money's at," says Shaw, "and blade servers take engineering moxie."

Indeed, almost everything Dell will need to do to find new growth will cost money. Now is payback time at a company for which everything seemed so easy for so many years. Take the consumer PC business. Dell became a leader almost without lifting a finger, as savvy online shoppers began buying its products.

Today, Dell gets a mere 15% of its sales from consumers, even as the consumer market represents more than 40% of the total PC business. To get anywhere near its fair share, Dell faces daunting questions, including whether to make a big push into retail stores. After years of trying to get by with kiosks where shoppers could configure their Dell PC and schedule home delivery, the company has now opened its first mall store in Dallas. A second one in New York's Westchester County is scheduled to open this quarter, says Baker. Now Dell may need to hire an experienced retail hand—someone like Apple's Ron Johnson, the senior vice-president for retail plucked by Jobs from Target (TGT) in 2000. "In a crowded market for consumer goods, your stores act as advertising for you," says Baker. "They keep you top of mind."

As a result, Dell will be hard-pressed to make major moves without lowering its profit margins. "Wall Street should be prepared for Dell to increase its expenses," says TBR's Spooner.

This may be just the right time to bite the bullet and make those investments. After all, investors have long since tired of the results from Dell's familiar strategy of trying to underprice rivals. "The street wants to see Dell healthy again," says Spooner. "And it's clear from the last few quarters that low prices alone don't sway customers as much as they used to."


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