Dell’s potholed road to recovery

The first step of any recovery has got to be admitting there is a problem. After decades of knowing little else but runaway success, it has taken computer manufacturing giant Dell several quarters to get to that stage, and, by many accounts, the company is still firmly in denial.

The creation of Dell 2.0, as the company labels its recovery programme, certainly has some trauma to deal with: the company started its stumble in mid-2005, when a series of product design and pricing mishaps gave rivals an unexpected edge. Several of those rivals were also seeing the fruits of longstanding efforts to create a potent blend of the direct-sales model that drove Dell’s pre- eminence and a third-party distribution channel.

Dell also bore the brunt of 2006’s exploding laptop-battery fiasco. Although Sony, which manufactured the unreliable batteries, stepped into the share cost of recalling 4.1 million units, and despite other manufacturers being afflicted, it was Dell that came to be synonymous with the problem.

Those woes have allowed the company’s principal competitor, Hewlett-Packard, to unseat it as the world’s leading PC manufacturer and have generated a run of sluggish financial numbers. From the second quarter of 2005 to the same period in 2006, Dell’s net income dropped by almost 50%, from $1.02 billion to $502 million. PC revenues over that time shrank by 4%, while server revenues remained flat.

But there has been a shortage of reliable comparisons since. From mid-2006 the company has been unable to produce full financial statements, after the US’s Securities and Exchange Commission launched an investigation into its accounting practices. As a measure of the seriousness of what may emerge from the scandal, the company announced the resignation of CFO, James Schneider, in December.

Dell 2.0, hatched by chairman Michael Dell and CEO Kevin Rollins in September 2006, is designed as the new dawn. They say it will refocus on customer service and usability, will target emerging markets and, most significantly, will push further into the IT services market.

Leading that push as the new global head of services will be the one-time COO of IT services giant EDS, Steve Schuckenbrock. To date Dell’s services model has been based around using the spare capacity of service partners. But it may now look to build up its own base of execution capabilities in this area. For example, in November it acquired UK-based IT services group ACS, a 200-employee company focused on customising Windows installations for business-wide roll-outs.

Building a services capability that can compete with the likes of IBM and HP will take a lot more than point acquisitions like that one, but the company’s executives are adamant that services are going to be key to the recovery. “Our services business is one of Dell’s fastest growing businesses and it is one of our strategic pillars for Dell 2.0,” says Rollins.

On another front, Dell has also divided its product development function into business and consumer divisions. That should help it better meet customer requirements, and so improve sales.

But some analysts fear that current plans are not radical enough to reinvigorate the company.

“It’s more Dell 1.1 than Dell 2.0,” says Gartner analyst Mark Margevicius. “They are re-tuning the machine, re-adjusting the motors.”

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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