Business | Technology
Dell's revival plan under scanner
Computer major's shift from direct sales to retail stores met with scepticism.
- By Kevin Allison , Financial Times
- Published: 00:39 April 12, 2008
- Image Credit: Arshad Ali/Gulf News
- Michael Dell addressing a press conference at the Emirates Towers in Dubai last week. Dell has begun efforts to turn its flagging business model around, but whether it will succeed is an open question and any results remain too far off to make its shares palatable in the near term.
Dell has begun efforts to turn its flagging business model around, but whether it will succeed is an open question and any results remain too far off to make its shares palatable in the near term.
That was the view to emerge last week among many of the stock analysts who travelled to Round Rock, Texas, to attend the struggling computer maker's first meeting with Wall Street in three years.
"There is a lot of opportunity, but it's clearly a 'show-me' stock," says Toni Sacconaghi, an analyst at Sanford Bernstein. "In the absence of any guidance and absent a recent track record of success, it means the stock is probably going to be range-bound."
For many analysts, the meeting was a welcome opportunity to reconnect with Michael Dell and the team of new executive talent he recruited after he replaced Kevin Rollins as chief executive last year. Dell and his team spent the better part of two days outlining a handful of broad initiatives at the computer maker.
The company has been struggling to right itself for more than two years after its belated response to fierce competition and changes in customer buying habits led sales and profits to slip. Plans include $3 billion in cost cuts, a new product design strategy and a renewed push into some of the fastest-growing segments of the PC business, such as services, emerging markets, and small- and medium-sized businesses.
"These are things we should have done a few years ago," Dell told the assembled crowd of analysts during a question-and- answer session.
The Dell chief acknowledged that the company had developed a case of tunnel-vision around its sales model, which for nearly two decades had relied on direct sales of highly customisable computers to customers over the telephone and internet. For years, this "direct model" was a near religion at Dell. It allowed Dell to ship custom-built machines, while avoiding the costly inventory that weighed on the profits of rivals. Ironically, Dell said last week that it was the flexibility of the direct model that had contributed to Dell's troubles.
Strategy
For years, Dell had made profits by convincing customers to upgrade from its basic models by adding more memory or processing power. That strategy ultimately unravelled as customers began to place a greater emphasis on price over performance. "With the very rapid move to lower price points, flexibility has worked against us," Dell said.
"We found that we were putting features into our products that customers didn't value enough to pay for." Over the past several quarters, Dell has sought to put sales back on track by launching an aggressive push into retail stores. It is also trying to sell more computers to specialist companies that design and install computer systems for other companies.
That should help Dell better compete in some of the PC industry's most promising markets - fast-growing economies in Asia, Latin America and eastern Europe, and small- and medium- sized businesses, for example.
But sales to retail outlets and channel partners are also less profitable than direct sales - a fact that makes it even more essential for Dell to deliver on its promised $3 billion in cost cuts. Analysts remain sceptical, but hopeful. "There is a sense of urgency," said one analyst from a big Wall Street bank. "That's what I came to see."
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