Dell’s radical rebuild

Two years ago, Dell lost its Midas touch. The famed sales model – build-to-order and sell direct – that made the company the world’s number one PC vendor (and a top three force in servers and storage) had proved too limiting for a world where sub-$500 PCs had become items that many wanted to touch and play with before making a purchase.


Moreover, Dell once-revered reputation for quality and customer service was being badly dented by a series of product flaws, and that was being painfully exposed on blogs and other Web 2.0 sites.

Having given up the CEOs chair in mid-2004, Michael Dell could not stand by and let the company he founded in 1984 while a college student lose momentum. Returning to the lead role in early 2007, the 43-year-old Texan has re-energized the company. For one, Dell has engaged with the Web 2.0 audience, appointing teams to not only answer customer queries, comments and complaints on its website, but to patrol and feed info into MySpace, Facebook and all manner of Dell-watching blogs and websites.

Dell has also been listening. Through its IdeaStorm feedback web facility, it has allowed customers and prospects to vote on new features they’d like to see. Over 200 of these have now been incorporated into new Dell products (see article, ‘10 Web 2.0 business success stories’).

And the company has tried to shed its reputation for weak design, hiring some of the world’s top laptop and desktop systems designers to add Apple-like panache to many of its models.

Those moves have been accompanied by a rethink of its manufacturing strategy – it now intends to ramp up its use of contract manufacturers and to sell off or lease some of its factories to these partners. And over the last year, it has modified its strict direct sales model to start selling through retailers and distributors.

The proof that this frantic makeover is working comes in a resurgence in revenue growth. Sales in Dell’s most recent quarter are up 11%, putting the company on target for a $68 billion fiscal year, and, while profits are being squeezed by its investment in product development, customer services and market expansion, it has reclaimed the top slots in most of the markets in which it operates. Michael Dell, talking to Information Age in London, can take a lot of the credit for that.


How much does the economic slowdown in the US and Western Europe worry you, and how much will it put to the test the theory of decoupled regional economies – that fast-growing emerging markets will somehow remain immune to the turmoil?

Certainly the financial markets have shown extreme levels of volatility, and we know that in many parts of our business, the outlook is easily reflected or could be reflected in capital spending. And we’ve provided that input to the financial community. Our job at Dell is not to manage those things, because we can’t manage them. We are very focused on the things we can manage: let’s have great products, let’s have great service, let’s take care of our customers, let’s manage our own business in a very effective way. If things are a little slower, we adjust our business appropriately and manage through it.

We experienced a slowdown in 2001. So we will absolutely deal with this one. The first half of this year, we grew about 50% faster than the industry, and I think a big question is what the industry growth will be in the second half. We don’t know.

Turning to emerging markets, one of the things we see is that if you look at the adoption of the cell phone, the PC is kind of an echo of it, following it by about three years. So if you want to see where are people going to buy computers, just go to where they bought cell phones three years ago for the first time, and then you’ll see PC users.

You said last year you were going to take $3 billion out of the company’s costs by 2011. Where are you in terms of achieving that and does it involve transferring manufacturing capability to contract manufacturing partners?

What we are doing is looking at the entire business and finding opportunities across our own operating expense structure, which has been coming down for the last six quarters, looking at our entire structure and how we transform and build products. And we have identified $3 billion of cost savings that we believe we will realise by 2011.

We are using contract manufacturers, as many in our industry do, and we will continue with our own manufacturing and with contract manufacturers. To our customers, this has been a fairly transparent process. A product from Dell could come from a Dell-owned factory or a partner-owned factory that we are tightly controlling.

We also tightly control the supply chain irrespective of the ingredients that go into any systems.

Are you considering outsourcing some of your factories? Can someone else run a Dell factory cheaper than Dell?

Whether they can or whether they can’t, I wouldn’t care to speculate on such things. We have contract manufacturers and it is absolutely a trend in our

industry to use more contract manufacturers. In fact all of our competitors use contract manufacturers much more than Dell does.

So will the proportion of manufacture products derived from contract partners grow?

That shouldn’t surprise you.


Do you see the introduction of smaller form-factors – such as the Dell Mini web-book – as being an important driver in the market?

If you look at screen sizes for portable computers, about 85% of portable computers that run advanced operating systems have 14- to 15-inch screen sizes. So what percent will be eight, nine, 10 inches? I think it is hard to say. We have introduced some product there and there are additional products coming, but I don’t think it will be a massive factor in terms of growth in the industry.

I think [such a smaller notebook] is a second machine for people in developed countries and a first machine in the newly developing countries.

One could believe that most of the growth of the industry is from these small devices; I don’t believe that is the case. We are in there to get our fair share. And there are many different types of product. A lot of these products are 1kg with an 8- or 9-inch screen.

What are your ambitions in mobile Internet devices, especially given the the launch of the Google Android mobile platform?

You certainly can’t ignore a market of that size. I think you will see smaller and smaller screen devices from Dell. We have already come out with a 9-inch device. With new operating systems and open environments like Google’s Android and Windows Mobile, there is lots of opportunity for disruption in that space.


What is the sense of priority among IT decision makers when it comes to adopting green policies and technologies?

I just met with a group of UK government CIOs. The UK government has embraced this goal of carbon neutrality by 2012. And [CIOs] are looking to Dell, saying, ‘You [as a company] have gone carbon neutral, how have you done that, and how can you help us do that? Tell us about virtualisation, tell us about these energy saving products.’ I was intrigued that they were really interested in hearing about what we were doing with our suppliers. And we are actually doing a lot with them to reduce their carbon admissions as well.

But I think there is an easy part, which is the fact that we have saved our customers $2.8 billion [with lower energy products]. And that gets the attention of CIOs pretty easily. But the underlying interest in this around the world is growing at a tremendous rate.

And when we can introduce a product such as a new blade server that uses 25% less energy than a competitor but is also a superior product with faster backplane and 50% more memory footprint, then what’s not to like?

Are they willing to pay a premium for that green footprint?

The way to think about it is, let’s say I told you I was going to sell you a product that was going to save you $300 over the three years you were going to use it, but it would cost you $30 more. Would you pay $30 more to save $300 over three years?

The thing I have seen change dramatically in the last 12 months is, that when a year ago you went to the CIOs saying, “Hey we’ve got these new products that save energy?” a lot of them would react by replying, “Well, energy is not in my budget; it is not my problem.”

Energy costs have gone up so much and the issue is now getting so much attention that they’re now being held accountable for the energy consumption. And companies are seeing this energy cost [of IT] becoming a big factor in their spending. Also they are being held accountablefrom a social standpoint: What are your carbon emissions? What are you doing to reduce energy consumption inside your company? And we all have employee bases that care about these issues as well

So has Dell been ahead of the demand curve here?

We have been well in front of this issue in terms of products: if you look at the desktop products we took energy consumption from about $100 to close to $20. If you go to you can see the magnitude of the programmes that we are doing and the savings. We actually have a real-time counter there that shows how much you’ve saved in terms of dollars.


If you were going to start a business today, what would it be?


Storage. And if I was to start a business today I’d probably go to China.

David Cliff

David Cliff is managing director of Houghton le Spring-based Gedanken, a company specialising in coaching-based support and personal development. Cliff is an experienced trainer, manager and therapist,...

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