Dells new strategy paysdividends

Such has been the stellar performance of computer maker Dell in recent years that any failure to improve in its quarterly figures stands out like a dirty red ink stain on a white page.

One such figure showed up in first quarter 2004 results: gross margins fell for the period from 18.2% to 18.0%. A tiny amount, but Dell CEO Kevin Rollins was already on the case: He had already decided that, after years of slogging it out on price at the low end, it was time to focus on growth at the high-margin end of the business – on enterprise servers and storage.

The recognition signalled a subtle but important shift: in recent months Dell has eased off the price war in low-end PCs and has also cut its standard warranty from one year to just three months. And in China, its fourth largest market, it has decided to avoid a price war and backed off selling low-end consumer PCs altogether. Indeed, its Chinese experience has warned Dell that low end PCs will always be susceptible to price wars.

Analysts think that Dell's brand is strong enough in PCs to withstand these small measures to improve margins. But its real challenge lies in selling the higher margin products to enterprise customers. Dell has forecast overall 15% annual revenue growth over the next few years – a stiff target against strong competition. A change in focus has been necessary.

At present, Dell is on a roll. Second quarter sales ending in July boomed again, up 20% to $9.78 billion, with net profits up 29% to $799 million. The trends will continue into the third and fourth quarter.

But enterprise systems, not its better known PCs, are the key to this growth. Server shipments are rising by 30% to 40% in some geographies, against an average of 12% for the industry. And total storage revenue increased by an amazing 60%. Dell cites the shift to standards-based systems as the main factor driving server growth.

Dell's own PowerVault storage products have been selling well, but it is the company's partnership with storage giant EMC that is really powering sales.

Initially, Dell simply re-badged EMC's cheaper products, but over time the partnership has become more collaborative, culminating in the launch of the AX100 (designed by EMC and manufactured by Dell) in May.

Both companies claimed at the AX100's launch that it was the first networked storage product set below the $10,000 mark. Dell's alliance with EMC also takes away a hostile competitor in the storage market.

Dell is planning more initiatives at the high end. Recognising that many business customers want support levels that match their willingness to spend, Dell is introducing Platinum Enterprise Services, an extension to its Gold, Silver and Bronze packages. It has also introduced new servers based on Intel's Xeon 32-bit processors – with a 64-bit migration capability.

Andy Rhodes, head of enterprise products for Dell EMEA, believes that the Platinum product will be attractive to large businesses who might not have bought from Dell in the past, thanks to new services such as dedicated account management, enhanced reporting in the identification of problems and flexible billing.

Will this be enough? Daniel Fleischer, European enterprise server solutions analyst for market watcher IDC, believes the new support services will help, but Dell will have to do more.

Dell, he says, still falls short in critical high-end corporate areas such as architectural design and deployment, and vertical market expertise – expertise which rivals HP, Fujitsu-Siemens and especially IBM possess.

"To some extent Dell can get round this through outsourcing but I still believe that the majority of its enterprise business will remain primarily driven by small-to-medium businesses rather than large corporates for some time to come," argues Fleischer. "It still has some way to go before the majority of corporate IT managers are convinced they won't get fired for purchasing from Dell instead of IBM or HP."

And what of Dell's traditional direct sales model? During an analyst's conference call, CEO Rollins also reiterated the continuing effectiveness of direct sales model. "We have a very good insight into what the market is doing because we have no retail outlet middlemen," he said. In this area at least, no changes are planned.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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