Can Dell succeed in getting its mojo back?

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Kevin Rollins, the chief executive of Dell, is bracing for a bumpy ride as he attempts to put the company back on course following a year of unexpected turbulence.

His decision to re-shuffle the management of the company’s $36bn Americas business is only the most recent example of moves under way to jump-start sales growth and improve customer service at the world’s biggest personal computer maker.

“This whole year is going to be an evolution both for us and for the market,” says Mr Rollins, the former Bain consultant who, together with Dell’s founder and chairman Michael Dell, helped transform the company from an upstart with $2.4bn in annual revenues into the uncontested $56bn king of the personal computer world.

Slowing sales growth and increased competition from the likes of Hewlett-Packard, Acer and Lenovo have taken their toll on that reputation this year. Dell’s revenues grew just 6 per cent last quarter, well below the double-digit growth rates many investors had come to expect.

Shares in the company have plunged more than 40 per cent over the past 12 months following worse-than-expected results in three of the past four quarters.

Seated at a conference table inside Dell’s Round Rock, Texas, headquarters, Mr Rollins says he prefers not to dwell on the missteps that have led to Dell’s recent troubles. But he acknowledges that a period of difficult adjustment may be in store.

“We believe that we should be running the company for the long run and that means multiple years and not quarters or weeks,” says Mr Rollins. “That means that we will make decisions that might be tough in the short term but will be appropriate for our shareholders and our employees over the long haul.

“Have we had issues and problems that we’re solving? Yes, we do all the time. Last year our company grew 14 per cent on revenue and 21 per cent on earnings. I think when we look at it with a bit of perspective, which is the way we have to think about running our company, that’s pretty good.”

Yet Dell’s recent performance has led even the most optimistic observers to question whether the company’s vaunted business model, which focuses on direct sales of computers to customers over the telephone and internet, can continue to provide Dell with the advantages it needs to reach its long-term goals. It is aiming for $80bn in annual revenues in an environment of falling prices and intense competition.

“Dell’s single biggest problem is that over the last five years they have lost 50 per cent of their cost advantage,” says Richard Gardner, an analyst at Citigroup. “It used to be the primary reason that people bought Dell was the massive price advantage.”

Mr Gardner says that, in spite of Dell’s efforts to accelerate $3bn in cost cuts this year, “if the price advantage is now 5 per cent or less, then the sustainable competitive advantage in the Dell model has shifted from price to the direct contact the company has with every customer”.

Such news should contain a silver lining for Dell, where direct contact with the customer has long been a point of pride. Recently, however, even Dell executives acknowledge that the company seems to have fallen out of touch.

Ro Parra, the newly appointed head of Dell’s US consumer business, which accounts for about 15 per cent of the company’s revenues, says he first noticed the disconnect when he saw his teenage daughter studying for her school exams.

“She was listening to music on the internet, she was chatting with her friends online, and she was doing research at the same time,” says Mr Parra. “There is a dramatic change going on in the way people use computers. You can argue our products probably lost some of their sizzle and lost excitement relative to our competitors.”

Andrew Neff, an analyst at Bear Stearns, agrees. “Sony had the Vaio and IBM had the ThinkPad. The question for Dell is, how are they going to get their mojo back?”

To close the gap, Dell has launched several new items designed to enliven its product line, including a portable multimedia computer and a high-end machine geared towards hard-core gamers.

The company is also preparing to launch a new ad campaign designed to show how customers can customize their computers by ordering directly through Dell.

Dell’s customer service reputation among US consumers has also suffered. Mr Rollins says Dell plans to invest $100m to boost customer support staff and make other improvements this year.

In March he appointed Dick Hunter, former head of manufacturing operations, to lead a turnround at Dell’s call centres.

Outside its US consumer business, Dell faces broader challenges.

Martin Reynolds, an analyst at Gartner, says that HP, which has begun to enjoy the fruits of a $1.9bn restructuring under Mark Hurd, chief executive, has begun to regain lost ground at Dell’s expense.

“HP is getting smarter,” he says. “What this means is that what was easy meat for Dell to pick up has become the low-hanging fruit for HP to pick back.”

Mr Rollins discounts the idea that good news for HP necessarily means bad news for Dell. “It doesn’t appear that one of us has to shrink for the other to grow,” he says.

He compares Dell and HP to two fighters in a heavyweight boxing match.

“So far, we’ve won most of the rounds,” he says. “But we may not win every one of them. The question is, can we win enough to win the fight? So we’re going to keep plugging along and win more than our fair share of the rounds.”

In response to a maturing US market, Dell has mounted an ambitious push into emerging economies. But some analysts are sceptical of Dell’s ability to jump-start growth by expanding its direct model abroad.

Mr Reynolds says the company has so far been unable to equal its US success in developing markets. “They’re doing nicely in China right now but the problem is the direct model runs out of steam when people expect a relationship with suppliers due to cultural differences,” he says.

Over the past few years, Dell has staked out a retail footprint with 120 small kiosks inside US shopping malls. The company also recently announced plans to experiment with two larger retail stores. But Mr Rollins dismisses suggestions that Dell may have to look beyond the direct model for new sources of growth, pointing out that business customers account for 85 per cent of the company’s sales.

Mr Rollins says the company’s priorities are clear: “It’s investing in product and technology, it’s price direction so we take share in markets that we need to be accelerating in. Now we’re going to do that with balance but there’s going to be turbulence there. Margins might be bumpy for a while.”

“For people who want to day trade that’s a little uncomfortable but we believe as managers that we owe it to our people and our shareholders to build the company in a long term fashion and we’re very comfortable with that.”

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