A Bad Spell for Dell; Lots of little changes are in store to halt the swoon of this famous model of efficiency.
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Lots of little changes are in store to halt the swoon of this famous model of efficiency.
Kevin Rollins had a lot of explaining to do on Friday, May 19. The chief executive of Dell had just announced the company's most disappointing quarterly revenue growth in four years, and its stock had hit yet another 52-week low. Rollins went from a boardroom where he briefed senior managers on plans to regain momentum to leading an hour-long "town hall" meeting called earlier to field employees' questions. Over the course of the day he answered 250 e-mails, including this one from a once disgruntled customer: "Kevin, Thank you for your concern and assistance with my request. I was contacted by the Care Resolution Center, [who] apologized for his team dropping the ball on a response to my inquiries and recommended a satisfactory solution to my problem. My confidence in Dell and product loyalty are strong again."
Rollins has pulled Dell out of jams in the past, but personally solving customers' problems one by one is an impractical way to run a company with sales of $56 billion. Dell has lost $40 billion in market value since last July. Until early May its executives had refused to say publicly what investors knew all along: Dude, you've got a problem.
The law of large numbers has caught up with Dell. Once worshipped for consistent performance, Dell has had seven quarters of declining revenue growth and missed its own revenue predictions in three of the last four quarters. It finally gave up giving quarterly guidance (arguing that its competitors don't do so, either). Its competition is on its back: HP, now nimbler, is gaining share in the U.S. and is improving its profitability. Lenovo continues to gain share in fast growing China.
In Round Rock, Tex. Rollins impatiently waves off criticism. "We're still gaining share, we're still growing faster than our competitors, we're still more profitable by a long shot," he says in an interview. "Still, we're human. We tripped. And we're not happy about that." Dell has grown faster than HP in businesses where it is smaller, such as services--but lost share in its biggest segment, desktop PCs. Although Dell executives are loath to be pinned to a timetable, neither the company nor its founder, Michael Dell, who still holds 9% of its stock, is not known for patience. "I believe the things we're doing now will be successful, and a year from now we'll be able to talk about how they've been successful," Rollins says.
The changes being made are medium-size but manifold. In a first, Dell will abandon its Intel-only policy and begin offering corporate customers high-end servers running microprocessors from Advanced Micro Devices, an option Hewlett-Packard has been offering for years. But more deals with AMD could be down the road.
Dell began cutting prices on PCs and servers in earnest in early spring, but Rollins pledges he won't jeopardize the entire business by setting off a price war. In the last few years, Dell simply got greedy and tried to grow profits and ultimately sacrificed revenue. Now that's changing. In its most recent quarter, Dell's operating (Ebitda) margin sank to 7.7%, while HP's climbed to 10.7%.
"This isn't an excuse for why the margins are down--it's an explanation," Rollins says. "We are going to take [prices] down to ignite growth. So it wasn't a mistake. And we'll stay with it for the foreseeable future."
Rollins is accelerating the construction of a new assembly plant in India, due to be operational by next year. Dell also struck a deal with Google, reportedly worth hundreds of millions of dollars over three years to Dell, to install the search giant's software on nearly every PC. Dell also recently said it will open its first retail stores, in Dallas and New York, where people can configure PCs for delivery a few days later, an idea that the company says has worked well at the 160 kiosks Dell now operates in shopping malls. Retail stores can go either way. They flopped for Gateway but have added sparkle to Apple Computer.
Then there are the big fixes, like improving customer service for U.S. consumers. To save money Dell had moved toll-free service and tech support to India in 2001. Consumers started grousing, but executives downplayed the complaints, pointing out that corporate clients, who provide 85% of Dell's business, were happy. (Dell did shift customer support for business clients back to the U.S. in 2004.) "The consumer business was having some trouble," says Rollins, "but we thought that was in containment."
He got a splash of cold water to the face last November from Dell's own employees. In the semiannual "Tell Dell" survey, workers bluntly signaled they were losing confidence in their leadership. "They felt we might not have been listening enough and that they didn't think we were positioning the company for success," Rollins recalled. "We felt terrible. We thought we could do better."
Late last year Dell hired 2,000 people in its U.S. call centers and stepped up its training programs for 5,000 other reps. The company will spend an additional $100 million this year to improve customer service. It is already seeing some gains, with call-wait times down 50%. "We get it," Rollins says.
Dell has always been at its best when under attack. Alone among PC makers, it grew through the industry slump that began in 2000. It is still extremely profitable. Last year it netted $3.6 billion, to HP's $2.4 billion.
And Dell's efficiency remains tough to match. It takes under an hour to assemble a laptop or desktop PC. This year Rollins wants to whittle down $3 billion in costs without laying off employees, in part by scraping a few dollars off the material costs of every PC.
But Dell no longer has the benefit of an archrival distracted by merger drama. HP now builds laptops in its China plant in under three hours. It is capitalizing on the extensive network of partners it has in Asia, where it was the number two PC vendor last year, with 11.6% of the 41 million units shipped. Dell is third with 8.2%. (Lenovo holds 18% of the market but is in perilous shape outside of China. It snared Dell's Asia boss William Amelio as its new chief executive late last year.)
"HP understands Asia," contends Ann Livermore, an executive vice president at HP. "We've passed our twentieth year in China. We have 4,000 partners in China and 2,000 retail centers," she says. Those partners help introduce HP's newest technology and provide service. In India HP has retail outlets in 100 cities, as well as extensive support and service centers; 200 shops carry only HP's gear. Equally critical: the deep expertise in setting up and running computer systems.
HP brought all those elements into play when the Bank of India was looking for a partner to put computers into 900 branches. "We needed a partner with experience in hardware, software, implementation, as well as training in banking and services--and competitive pricing," says D. Krishnamurthy, general manager of information technology for the Bank of India. HP beat out 21 other bidders and is now two years into the ten-year program, which it is using to showcase its work with Asian banks.
Rollins has been looking for such service deals to help fuel Dell's growth. And for the past few years they have grown: Even in its tough first quarter, Dell's services business rose 28% to $1.4 billion. Dell uses its affordable hardware as its calling card, then offers services along with storage and networking.
Boeing and DaimlerChrysler are leaning on Dell to manage and update thousands of their PCs and printers both in the U.S. and worldwide. TRW Automotive standardized all of its 24,000 PCs in 165 sites using Dell. "We decided that the PC was a commodity and we could get the best price from Dell," says Joseph Drouin, a vice president at TRW Automotive. Dell also put together a service package for TRW that includes software updates and a server network that runs cheap open-source software.
Dell executives say they find plenty of business without channel partners. "Every time we went into a new market, people would say, 'Oh, the direct model won't work,'" says Rosendo Parra, who now heads Dell's Americas group. "When we first went to Japan [in 1991] we actually listened to what the market said. Our initial implementation wasn't a pure, direct model. And we failed," he says. "We actually had to hit the reset button and began to apply the elements of our model."
For consumers Dell's "buy direct" model means you have to place an order over the phone or via the Web. For businesses Dell's "direct" means you get to hear from Dell's sales force and then order PCs off a customized Web page. Direct sales are always the best way to get to know customers, points out Stephen Felice, who now runs Dell's operations in Asia. Even so, if necessary Dell will deliver its products through another company, something that happens to about 20% of Dell's products in China, where Dell has been actively selling since 1998. Felice is trying to reduce that number. "We're adding infrastructure," Felice says. "You won't see cost-cutting here."
Dell managers concede that growth comes hard to giant firms, which is one reason why they might consider splitting the company into autonomous chunks. One possibility is to operate its brands more independently, just as Toyota does with the high-end Lexus and budget-priced Scion. Dell took a step in this direction by acquiring Alienware, which makes expensive PCs for gamers. Dell will leave that brand alone.
Rollins is staying mum about other plans. "Dell is a very dynamic company," Rollins says. "So if anyone says, 'Well, that's not what you said a month ago,' I'll say, 'You're right.' And I'm not going to apologize for that. We'll change things the minute we have new data."
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