Dell's new focus: Don't look back

With a new management team in place, the computer maker could be preparing to make changes to some of its core ideals.
Written by Tom Krazit, Contributor
After a year spent discussing the sins of the past, Dell could finally be ready to focus on the future.

Dell is expected to unveil its financial report for its 2007 fiscal year Thursday after the stock market closes, bringing an end to one of the worst years in the company's history. It's also expected to disclose some of the findings from an internal investigation into its accounting practices, one of the darker clouds hanging over the company.

A lot has changed at Dell over the last fiscal year. Kevin Rollins, the management wizard brought in a decade ago to help run the company, is spending more time with his family after resigning in January. Rollins is just one of several Dell executives to head for the exits after a tumultuous year that included several earnings misses, an enormous battery recall, the accounting investigation, and the loss of its status as the leading PC company on the planet.

"For years they didn't have to (change) because they kept winning."
--Richard Shim,
IDC analyst

So what's next? With a new management team in place, Dell & Co. are likely to focus on strategy. The company has already warned investors that its fourth-quarter revenue and profits would be worse than expected, but Dell has shown a penchant for making big product announcements along with bad earnings news, such as adopting Advanced Micro Devices' processors and sinking $150 million into new customer support problems.

While it's hard to say if another big announcement is coming, it's clear to some that Dell has to show it can change, maybe even tweak its devotion to selling directly to customers and controlling as much of its own manufacturing process as possible.

"For years they didn't have to do that," said Richard Shim, an analyst with IDC, "because they kept winning."

During its rise to the top of the PC market, Dell boasted of its manufacturing and supply-chain efficiency. It still builds just about all of its PCs internally in manufacturing plants around the world, when most other PC companies pay companies in Taiwan or China to build their boxes. This allowed Dell to enjoy some of the best margins in the PC industry for several years.

But Dell and the market have changed. Notebooks make up an increasing percentage of PC sales, and Dell's costs to build a notebook itself are actually a little higher than those elsewhere in the industry. And for all the talk about efficiency, Dell has lost a little of its momentum in this area and is actively looking for ways to improve, said Roger Kay, an analyst with Endpoint Technologies Associates.

Enter Michael Cannon, the former CEO of outsourcing powerhouse Solectron. Cannon was given control of Dell's entire manufacturing organization, which was previously run on a regional basis. Given his background, Cannon's appointment has touched off a lively discussion within Dell about the merits of how far Dell should go in a potential shift toward using more of the "ODM (original design manufacturer)" model used by HP and others, Kay said.

But the most prominent change at Dell could involve a change in its distribution model. The company has been experimenting with a Dell-branded store in Dallas, and plans to open others in upstate New York and Austin later this year. These stores don't carry inventory, but allow consumers to get their hands on Dell's products before making a purchase.

This is especially important for products like notebooks and gaming desktops like Dell's XPS line, which look better in person than they do on a Web page. But these types of stores don't allow for instant gratification, always high on a shopper's mind, said Samir Bhavnani, an analyst with Current Analysis that tracks the retail PC industry.

If Dell wants to reach more consumers--and decides to shed the direct-model dogma--there are a few routes it could take, Bhavnani said.

The current approach, experimenting with the inventory-free stores, allows Dell to gain experience in retail environments without diving in head first, Bhavnani said. But it runs the risk of turning out like Gateway's experiment with its own retail stores, which also didn't carry inventory and did not end well.

If that's not enough, Dell could follow Apple's lead and open company stores that carry inventory. Not necessarily a lot of inventory, but perhaps products that don't age as quickly as PCs, which tend to turn over every three months in the retail industry, Bhavnani said. This could include digital televisions and smaller items like printer cartridges.

Or Dell could jump into the commercial retail business, fighting for shelf space with Hewlett-Packard, Gateway, Acer and others. This would be a tough way to go, given Dell's lack of experience in this area, but two or three executives from the right PC company might make all the difference. Of course, acquiring the right PC company itself might also make the job easier, an idea that was floated by Sanford C. Bernstein analyst Toni Sacconaghi this week in a research note discussing a potential Dell purchase of Acer.

If it decides to go this route, Dell might find it easier to strike up an exclusive partnership with a retailer like Costco or Radio Shack. This would prevent it from having to slug it out with its competitors, but still give it a prominent place to showcase its products. Dell already has a relationship with Costco dating back to 2005, when it used certain Costco stores to rid itself of outdated components, Bhavnani said.

A retail strategy would also give Dell a local place for customers to go with support problems or questions. Dell has taken many steps to improve its customer service operation after finally realizing that customers were fed up with poor support, but some people find it easier to seek help in person or just drop off their PC for repairs, Bhavnani said.

In the midst of all the turmoil at the company, Dell has shown a willingness to listen to new ideas. It launched a new Web site called IdeaStorm that is taking suggestions from customers, and has at least paid lip service to one of the most popular suggestions--Dell PCs running Linux--by announcing plans to work with Novell to certify Linux on Dell PCs.

Still, don't expect Dell to radically change overnight. The company has invested a lot of time and money in its direct model and manufacturing strategy, and can't abandon either just yet. But mixing in the right combination of changes could breathe life back into a company that, despite all its problems, is still expected to post a healthy profit for 2006.

"The point is that there are no sacred cows," Kay said. "(They're) not just going to insist that the model is great. The model should be a living, breathing thing."

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