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APRIL 6, 2005
By Olga Kharif Dell: Time for a New Model? Its direct-sales strategy has been a winner so far. However, in today's global market, that approach may need some adjusting
Back in 1984, Michael Dell started a computer company with $1,000 and a cool new idea: To sell PCs directly to consumers, bypassing retail stores and system integrators and offering limited customer support but dramatically lower prices. For years, that direct, low-cost sales model worked perfectly. It allowed Dell (DELL ) to make high margins while selling computer gear for less than its rivals. As a result, it now holds a leading 17.9% share of the world PC market and has grown much faster than competitors Hewlett-Packard (HPQ ) and IBM (IBM ). But lately, this same sales approach might be hampering Dell's growth. Increasingly, industry analysts believe it's time for Dell to tweak its sales model. After all, times have changed. And to keep growing Dell may need to change, too, and not just in appearance -- last summer Kevin Rollins took the CEO reins from Michael Dell. MIGHTY HIGH TARGET. As things stand, Dell's growth prospects are less than stellar. Even after recent downward revisions, the Street's expectations might still be too high. While most analysts predict 20% earnings growth in the next few years, 16% to 18% might be more realistic, says Zack Schroeder, an analyst with BB&T Asset Management in Raleigh, N.C. And while the consensus projects sales to rise 16% in that period. Schroeder believes 12% to 15% will be more like it. Such growth concerns have sent Dell's stock down 7.5%, to $39, since January. Dell claims that growth will come. After the market close on April 6, Dell reaffirmed its guidance for the fiscal first quarter, when it expects to earn $0.37 a share, up 32% from the prior year, on $13.$4 billion in sales, a 16% increase on the year-ago quarter. The company also announced it will spend $2 billion on its stock repurchase program in the current quarter, more than double its prior guidance. During its analyst conference slated for Apr. 7, Rollins is expected to outline his plans for turning Dell, with $49.2 billion in revenue last year, into an $80 billion company within three to four years. That target may take longer to reach if Dell's growth slows down. SOFTWARE AND SUPPORT. Today, Dell's stripped-down service is working against it in many new markets. In servers, rivals like Fujitsu and IBM can now not only meet Dell on cost (IBM's Express boxes sell for less than $500, similar to low-end Dell servers), but also offer many more services, says Susan Eustace, co-founder of tech consultancy WinterGreen Research in Lexington, Mass. For instance, IBM can help its small-business and corporate customers integrate disparate software systems, like payroll and inventory. "The [server] product is a commodity, and the differentiation is to be able to offer software and support," says Eustace. And as Dell is weaker than IBM in both, she believes its 4.2% world market share in low-end servers will actually decline in the next year. While Dell's overall server sales might still grow (demand for such boxes should skyrocket in the next five years, thanks to wider adoption of videoconferencing and over-the-Internet calling), Dell will need to strike more partnerships or beef up its services through acquisitions to keep up with the market, Eustace says. TOO FAR AWAY. Dell's lack of retail presence could hurt as well. In desktop and notebook PCs -- which contribute 79% of sales -- much future growth will come from outside of Dell's U.S. stronghold, where PC sales have slowed. About 80% of total PC unit sales from now to 2010 will come from developing markets like China and India, according to tech consultancy Forrester Research. But Dell is struggling there. Here's why: Because of cultural and technological reasons, customers in those markets buy computers from stores and system integrators, says Forrester analyst Simon Yates. That's not surprising, considering that in India, where PC ownership should jump from 7.9 million units to 78 million by 2010, most people don't have Web access. Many rural areas lack phone lines, and most people know little about computers. So they go to local stores or computer specialists to ask for advice and to make their purchases. And because Dell doesn't have a strong presence there, consumers buy their computers from local heavyweight HCL Technologies, HP, and IBM, whose PC division is now owned by China's Lenovo. As a result, Dell gets a measly 4% share China's PC shipments, according to tech consultancy IDC.
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