Dell's big leap forward

It started as a young bloke building PCs in his front room. Now Dell is starting to look like one of the world's technology powerhouses.

It started as a young bloke building PCs in his front room. Now Dell is starting to look like one of the world's technology powerhouses. But does it have the courage to make the final leap?

I remember clearly meeting Michael Dell in 1989 when he was 23 on his first trip to the UK to promote his new PC-building company. The conversation was all about the direct model and how this meant he could build PCs cheaper and faster than the competition. I believed him but there were so many other companies out there doing something similar that it was hard to see how this could work, especially when he was shipping them from Texas. What would be different? And how could he make a profit that way?

When you see how many ramshackle PC-building operations have since gone by the wayside, and how Dell is still here, it's a testament to the company's ability to execute on that direct model, the foundation stone on which the company's financial success has been built.

Clearly, in today's commodity PC market, that's not enough. Dell has since moved to bolster its position as a complete services and technology company for business, with the acquisition of Perot Systems for $3.9 billion in 2009, of EqualLogic for iSCSI storage in 2008 for $1.4 billion, and this week's snapping up of 3PAR, a high-end block-level storage vendor, known for its innovation, for $1.15 billion.

3PAR fills a big hole in the company's storage portfolio, making it much more of an end-to-end vendor, although it remains to be seen just how successful it is at integrating the pieces -- something it's been less than totally good at, not least from a branding perspective.

But there's a bigger challenge, in my view. There's no doubt that research and development (R&D) brings in the cash: IBM and HP didn't get to the size they are without being able to innovate and deliver products and technologies on the back of the unique knowledge that R&D brings. Yet R&D has been Dell's Achilles heel, with only just over one percent of revenues devoted to it, compared to IBM's over six percent. Even HP, which has salami-sliced its R&D budget over the last ten years, spends twice as much in percentage terms as Dell.

Dell seems to have most of the pieces it needs now to satisfy most customers' needs, large and small. What it needs to do to make that final step up to the big time is to spend seriously on R&D. Integrating R&D across its disparate divisions, so many of them acquired and each with their own culture and ways of operating, will be a challenge. But it's a nettle that Dell needs to grasp.

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