Will This Bold Shakeup Save Dell?

The computer maker is struggling, but CEO Michael Dell's latest cost cuts, layoffs, and reorganizations may be steps in the right direction

By Aaron Ricadela

Dell CEO Michael Dell Justin Sullivan/Getty Images

Nearly two years since retaking the helm of his company, Michael Dell has just taken his toughest steps yet aimed at righting the ship. On Dec. 31, Dell (DELL) announced the departure of two top lieutenants and reorganization of the struggling company's commercial sales division. As 2009 gets under way, investors will be eager to know where he navigates next.

After stepping back into the chief executive job in January 2007, Dell began a program of steep cost cuts and layoffs. And as part of an effort to regain lost market share, he pushed the low-cost, direct-sales PC maker to turn out fresh, compelling products consumers will be more likely to want to buy. He acquired software, storage, and technology services companies to try to compete with more diversified and bigger rivals Hewlett-Packard (HPQ) and IBM (IBM). The company faltered nonetheless. Dell's stock lost 58% in 2008 after closing on Dec. 31 up a penny, or 0.1%, at 10.24. In the most recent quarter, revenue and profit declined from a year earlier.

The reorganization announced on the final day of 2008 signaled Dell's efforts were falling short. Operations chief Mike Cannon, recruited from contract manufacturer Solectron last year, is leaving the company. Chief Marketing Officer Mark Jarvis, an Oracle (ORCL) veteran who came to Dell in 2007, is also departing. Longtime Dell manager Jeff Clarke got a promotion to vice-chairman in charge of operations, and Dell reorganized its commercial business into three units. That move is designed to unify development and sales decisions around the world. "We've made a good deal of progress the past two years," says Dell spokesman T.R. Reid. But profit and market share performance "don't represent full realization" of the company's potential, he acknowledges.

More Aggressive Moves to Come

Dell had to do something. "Michael is deciding to get more aggressive now rather than sit around and hope for the best," says Bill Kreher, a technology analyst at Edward Jones who has a "buy" rating on Dell shares. "There was a lot of excitement around Michael's return," Kreher says. "Some of that is beginning to wane."

But the management moves are only the beginning. To try to regain some of its former glory, Dell needs to do at least three things, say analysts, bankers, and tech industry executives. The company needs to forgo market-share gains and aggressive sales growth targets for the sake of higher profits; it must balance an aim to move upmarket to compete with Apple (AAPL) and Sony (SNE) with consumers' belt-tightening in the teeth of a recession; and Dell should also consider putting more of its $19.9 billion market value and $8.6 billion in cash to make acquisitions that push it further into the burgeoning market for corporate data centers that run Internet applications. "He's still the king of direct [sales]," Bob Muglia, a senior vice-president at Microsoft (MSFT), says of Dell in a recent interview. But direct-to-consumer PC sales have less value to customers than they once did, he says.