Will This Bold Shakeup Save Dell?

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Part of Dell's problem is its slow reaction time. Nearly a decade ago, the company wanted to beef up areas such as data storage and tech services to better compete with IBM, says an investment banker who has worked with Dell for years, but asked not to be named because he still deals with the company. "Wind the clock forward a decade, and they've done almost none of that," he says. Think the PC business is tough now? Wait till 2009, when banks and other financial companies—some of the biggest buyers of tech gear—clamp down on purchases even more. Dell "is in a heap of trouble," the banker says.

Market conditions—in particular, depressed asset values—argue that the time is ripe for Dell to go the way of IBM and HP and build a bigger portfolio of computers, storage devices, software, and services to help companies expand their data centers. Dell spent $1.4 billion in cash in November 2007 to buy storage maker EqualLogic, which Dell's Reid cites as an example of the way the company plans to bundle technologies for cloud computing and other data center applications. Others say Dell should go even further, perhaps merging with storage vendor EMC (EMC) or another business technology player. Even though EMC's $21.4 billion market value exceeds Dell's, Dell could emerge from a tie-up stronger in sales to large companies, and with higher profit margins, says the investment banker. Plus, EMC owns the bulk of fast-growing software vendor VMware (VMW).

Leaner Is Better

At the same time, investors want Dell to dial back on price cuts that cost it profit margin. Overly aggressive prices hurt Dell's second-quarter results, announced in August. Dell adjusted in the third quarter, with a better outcome. "A leaner Dell is a better Dell at this point," says Edward Jones analyst Kreher. Yet the departure of operations maestro Cannon, who sliced costs by outsourcing more of Dell's manufacturing, could hurt profit margins in the future, Jayson Noland, an analyst at Robert W. Baird who has a "neutral" rating on Dell shares, wrote in a Dec. 31 research note.

Finally, Dell needs to strike the right chord with consumers, who still don't find its products as exciting as those made by Apple, or as easy to find in stores as HP's. Dell's consumer business moved into the black last quarter, but its 4% operating margin still trails Dell's overall margin of 6.7%. The company is emphasizing premium-priced notebooks and desktops featuring artsy graphics and expensive materials right when many consumers are cutting back.

Dell likes to emphasize that it can sell consumers a range of products, catering to everyone from a first-time PC buyer to a hard-core game-player who wants the latest graphics chip. "You can play the game a couple of different ways," Ed Boyd, Dell's vice-president for design, says in a recent interview. "Apple has one approach, which is, 'Have it Steve's way,'" Boyd says of Apple CEO Steve Jobs, renowned for offering a narrow range of high-end products.

Dell has had it Michael's way for about two years, and investors are still hoping for better results. The end-of-the-year shakeup is a sign that the company may need to take even bolder steps in 2009.

Ricadela is a writer for BusinessWeek in Silicon Valley.