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Can Michael Dell Refocus His Namesake?
“Some of our competitors jumped over us in a Darwinian way,” Michael S. Dell says. “Now it’s our turn.” He recently returned as C.E.O. By STEVE LOHR
Round Rock, Tex.
ON a recent afternoon at his company’s headquarters here, Michael S. Dell is seated in a spacious conference room named Dobie Hall — in honor of the University of Texas dormitory where, in 1984, he started the computer giant that bears his name.
He boasts that Dell Inc. has just reported quarterly profits that exceeded Wall Street projections. It’s an encouraging sign, he says, that the company — buffeted by high-profile production problems and accounting shenanigans — is finally regaining momentum.
Over the last few years, Dell, once the gold standard among PC makers, has simply overlooked major growth trends in personal computing. It missed significant shifts in notebook computer sales and the consumer market as a whole, lagged competitors in international sales, and lost the profit edge that it enjoyed from its superior procurement-and-supply network. Hewlett-Packard, having overcome its own woes, passed Dell last year as the largest seller of PCs worldwide.
Dell’s ills also extend beyond the nuts-and-bolts of making and marketing PCs. After a yearlong internal investigation, Dell conceded last month that some managers had falsified quarterly results to meet sales targets from 2003 to 2006. The company expects to reduce earnings over those years by $50 million to $150 million, tiny sums compared with the billions of dollars in profits it earned during that same period. (Dell posted annual sales of about $57 billion last year.) Yet the accounting disclosures suggest a corporate culture in which at least some senior managers felt under such pressure that they doctored the numbers; the disclosures have prompted a Securities and Exchange Commission investigation.
“The company was too focused on the short term, and the balance of priorities was way too leaning toward things that deliver short-term results — that was the major root cause,” explains Mr. Dell, dressed for the Texas summer in a short-sleeved polo shirt and jeans.
The recent setbacks would be humbling for any company, but especially so for Dell, a smooth-running machine for years and a model of the efficiencies that the shrewd use of technology and customer information can produce. Dell was widely admired beyond the technology industry, and it was cited in business-school studies alongside companies like Wal-Mart Stores.
Successful entrepreneurs, of course, are hardwired by inclination and necessity to look beyond immediate hurdles for opportunities, and Mr. Dell is no exception. He says he is not leading a simple turnaround, but rather a long-term campaign to transform a company known for a cultlike adherence to a certain way of doing business.
As the company surged to the lead in the PC industry, the “Dell model” relied on direct sales over the Internet and by telephone rather than through retail stores, cutting prices to gain market share, focusing on computer hardware rather than services, leaning heavily on the American market and avoiding acquisitions. But since Mr. Dell reclaimed the role of chief executive in late January, he has changed all that.
At internal meetings, he repeatedly emphasizes that the Dell model “is not a religion,” according to staff members. Moreover, Mr. Dell — who once ran a company famous for its laserlike devotion to next week rather than next year — no longer champions short-term goals and fixes. “We’re moving the needle in terms of getting focused on the right long-term issues,” he says.
But re-engineering the Dell model will be a daunting challenge. “Dell continued to do the same old thing, when it was no longer working,” observes David B. Yoffie, a professor at the Harvard Business School. “This is going to be about changing the way they do business at many levels.”
“Dell can do it,” Mr. Yoffie adds, “but it’s going to take a lot more innovation on more fronts than the company has shown in the past.”
Dell computers at Wal-Mart. The company was built on phone and Internet sales but is now moving into stores.
LAST year was, to borrow a term, the annus horribilis for Dell. Its problems kept building throughout 2006: sluggish growth, disappointing financial results, complaints about customer service, even a high-profile safety recall of notebook computer batteries. Not all of these were the company’s fault. For example, Sony made the batteries that could overheat and catch fire, causing other companies like Apple to also issue recalls.
But there was no disputing that Dell had stalled. Wall Street, as well as Dell’s own board, had become impatient with the company’s management. So a change came quickly early this year, at the end of January. Dell’s outside directors voted unanimously that the company needed a single leader instead of having a chairman (Mr. Dell) and a separate chief executive (Kevin B. Rollins, who had been C.E.O. since 2004).
At the time, Mr. Dell was attending the World Economic Forum in Davos, Switzerland, and when the board asked him to become chief executive, he agreed. There were a few long walks, he recalls, when he was “deep in thought” about how to proceed, but he did not hesitate about taking over. He had built the company, after all, and his name was on every box it shipped.
“I have a responsibility,” he says.
So, on Jan. 31, Mr. Dell became chief executive — again — and Mr. Rollins, a former Bain consultant who joined Dell in 1996, was out. Mr. Dell describes Mr. Rollins as a “great business partner and friend.” Other executives at Dell also point to Mr. Rollins’s contributions over the years, as the operating field general beside Mr. Dell during the years of torrid growth. But Mr. Rollins, they say, was seen as the foremost practitioner, and advocate, of the old Dell model, even when pushing the same buttons no longer worked.
Still, Dell executives are quick to say that Mr. Dell’s return as chief executive has nothing to do with any sharp differences between him and his predecessor. Rather, it was due to the depth of Dell’s troubles and the need for someone to assume control and forcefully take the company on a different path.
“It’s not all about Michael versus someone else before,” says Paul D. Bell, a senior vice president. “Michael was here. He was chairman. But it was up to Michael to take the first-mover role in driving change and he did it.”
Mr. Dell began shaking things up immediately. He has recruited senior executives to lead the company’s marketing, consumer products, operations and services business. He is also paring layers of middle management as part of a plan to trim Dell’s payroll by 10 percent, or roughly 8,800 workers.
In recent months, the company has stepped beyond selling over the Internet and by telephone — the famous Dell direct model. It has forged retail agreements to sell computers at Wal-Mart stores in the United States, at Carphone Warehouse outlets in Europe and at Bic Camera stores in Japan. More retail deals are in the works.
Rethinking the retail business was a matter of necessity. A lot has changed, Mr. Dell notes, since the company tried and abruptly exited retail sales in 1994. The shift in the consumer computer market and toward notebooks, which customers want to touch before buying, is part of it. So is Dell’s need to do better in markets abroad, where people are less comfortable buying computers by phone or over the Internet. “We’re going after those new customers with retail partners,” Mr. Dell says.
He also moved quickly on another front. Whereas the Dell of old shunned acquisitions, the company is now willing to go shopping. It has made three deals in the last two months — business and consumer software companies — and there will be more, Mr. Dell says. But he says that they will be limited to purchases of smaller companies and start-ups, with 50 to 500 employees, to add technology and expertise that promise to “turbocharge growth” in businesses earmarked for investment and rapid expansion, like services, consumer offerings, international sales and building data centers tailored for big Web companies.
The consumer market looms large for Mr. Dell. Consumers were traditionally an afterthought at Dell, which garners more than 80 percent of its sales from corporate customers. Home computer users generally had to settle for business computers that were tweaked a bit for the masses and were little more than bland, generic boxes.
But in recent years, consumers became picky. Where users once focused on price, processing speed and storage capacity, they now looked for stylish, well-designed machines as well — a trend common throughout the entire consumer electronics business, but one that was lost on Dell.
“On the consumer side, we’re drastically changing what we’re doing,” Mr. Dell says. “We’re only touching the surface of the opportunity now.”
Ronald G. Garriques, who joined Dell from Motorola in February, is guiding the change in Dell’s consumer strategy. Selling machines with more flair in retail stores is part of the plan, said Mr. Garriques, president of the global consumer group, a new position at Dell. But he suggests that Dell will take a hybrid approach, offering hardware options, extra features and services through its Dell.com site on machines that it also sells in stores.
Dell’s direct online relationship with customers, Mr. Garriques says, can help it develop services that link PCs, software and cellphones. To illustrate Dell’s thinking, he describes as a possibility a service that would allow parents to use Web maps and cellphone signals to track family members on the screen of a Dell PC in the kitchen. “With Dell’s direct-to-consumer model,” he says, “we can bring that as a solution to families.”
Such offerings, he says, don’t have to generate big profits on their own. “Great services sell a lot of devices that use those services,” says Mr. Garriques, noting how Apple’s iTunes music service has fed iPod sales.
Dell also hopes to offer services on hardware beyond PCs. Last month, the company agreed to buy Zing Systems, a Silicon Valley start-up that makes software for hand-held devices that manage and exchange entertainment wirelessly, without the need for a PC. Zing’s founder is Tim Bucher, a former product designer at Apple.
Stale design remains an issue, and something the company has to continue to address if it wants to lift consumer sales. It recently recruited designers from around the world and more than doubled the size of its design group, to 80, in the last year. Dell designers now speak of product “love” and “lust,” observes Ken Musgrave, the director of industrial design — a far cry from just a few years ago, when design always took a back seat to competitive pricing.
Jose Bacerra at a Dell plant in Austin, Tex. Dell was passed last year by Hewlett-Packard as the biggest seller of PCs.
In June, Dell introduced notebook computers in eight colors. And color, Mr. Musgrave says, is merely the “first level of personalization” for Dell. He showed off prototype notebook shells in different materials and designs, noting that Dell’s build-to-order system gives it the freedom to make highly stylized and personalized machines in limited runs of just dozens to a few hundred. “There are a lot of different design levers to pull for the future,” he says.
AS soon as he took over as chief executive, Mr. Dell declared a two-month “amnesty” to encourage people to discuss problems and deal with them quickly, without fear of being fired or demoted. Otherwise, Mr. Dell says, managers might have understated troubles and defended past decisions.
One common issue, he says, was that there was “no central leader” in areas like manufacturing, services, sales and marketing. A decentralized organization of many go-it-alone groups, focused on regional markets, made sense when Dell was growing from $5 billion to more than $55 billion in annual revenue over the previous decade, faster than any technology company in history. Then, chasing growth opportunities was the priority.
Dell’s marketing epitomized the fragmented approach. When Mark Jarvis joined Dell as its chief marketing officer in April, he did an inventory of the advertising and marketing firms that worked for the company worldwide. The total count was 869. “The company didn’t really evolve, it just grew,” he says.
Mr. Jarvis is now moving to streamline Dell’s marketing. In the last month, he has cut in half the number of the company’s marketing and ad agencies. By the end of October, he says, Dell will select a lead worldwide agency. One goal, he says, is greater consistency in the themes, message and approach of the company’s marketing. The new internal marketing slogan is “One Company, One Brand, One Beat.” Already, there is a change in the look of Dell ads. Themes like ease of use and personalization are prominently featured.
Mr. Jarvis, a former Oracle executive, says Dell’s brand is widely known and respected, but often not linked to a clear message. So he wants to give the brand a makeover, saying that in the consumer market, it needs to be “much cooler and go away from low prices; a lot of people see us as a cheap PC company, and that’s not where we want to be.”
In the corporate market, Dell plans to pitch itself as the company that can simplify information technology for businesses, part of an effort to gain market share from competitors like I.B.M., Hewlett-Packard and Sun Microsystems. When asked how his long-term agenda will change the company, Mr. Dell is direct: “It will push us much more into solutions and services from products. That doesn’t mean products go away. But there’s going to be a big element of doing more for customers through services.”
The services strategy is long overdue. Services is a bigger market than hardware, and corporate customers were asking Dell to do more to help them manage their data centers more efficiently, according to current and former company executives. But Dell was slow to react, and the lapse illustrates the perils of doggedly sticking to the old model and ignoring a promising new market. Instead of making long-term investments in building a services business, Dell just kept its eye on hitting quarterly sales targets by peddling Dell hardware and other companies’ software.
Dell recruited Stephen F. Schuckenbrock last December from Electronic Data Systems to lead its services business. Today, Dell garners $5 billion a year in services revenue, but most of that comes from technical support and maintenance on Dell machines.
Mr. Schuckenbrock wants Dell to help corporations run their data centers, while reducing hardware budgets, energy consumption and staffing. Mr. Schuckenbrock predicts that services will grow three to four times faster than the company’s overall growth rate. A former Dell executive, who requested anonymity because he is forbidden to discuss company matters, said a recent internal report concluded that the company’s annual revenue from services could reach $20 billion over the next five to seven years.
Dell is already a major reseller of VMware, the dominant maker of virtual machine software used to juggle operating systems and applications on a single server. Dell plans to expand the relationship with VMware by offering virtualization services and its own data-center tools. In July, Dell bought SilverBack Technologies, a start-up that makes software to monitor and manage computers. The goal, Mr. Schuckenbrock says, is to offer “the best point of view, technology and solutions to optimize industry-standard data centers.”
Until a year or so ago, Dell tried to sell its standard products to leading Web giants like Yahoo, Salesforce.com and Microsoft. But those customers wanted something different. Eventually, Dell listened and designed circuit boards, cabling, racks and power management systems to suit the requirements of large individual customers. (Google, which still designs and builds its own computers, is not yet among them.) Prototypes can be built in weeks, with thousands of the custom-made computers shipping in months. That rapid response, says Brad Anderson, a senior vice president, is “really back to Dell’s roots.”
Mr. Anderson says that the biggest initial hurdle for Dell on these big deals is its reputation as a producer of commodity computers. “It takes time to convince them that Dell is committed to novel products and real innovation,” he says.
DELL still faces formidable obstacles as it tries to regain its footing. Just three years ago, Dell’s hyperefficient operations gave it margins that were six to eight percentage points higher than those of its principal rival, Hewlett-Packard, according to a recent report by Sanford C. Bernstein. Today, Dell has no such edge.
“We created this incredible supply chain, and that sort of stagnated,” Mr. Dell acknowledges. “We squandered that away. Some of our competitors jumped over us in a Darwinian way. Now it’s our turn.”
To solve his operating headaches, Mr. Dell brought in Michael R. Cannon, the chief executive of the Solectron Corporation, a contract manufacturer, as Dell’s head of global operations in late February. Mr. Cannon is convinced that Dell can regain its advantage by tightly integrating regional operations into a close-knit global network. “Manufacturing is going to be a core competence at Dell,” Mr. Cannon says, “and there is a lot of room for innovation.”
But the Dell manufacturing machine has sputtered recently. It has had trouble perfecting the bright colors on its new notebook computers, resulting in shipment delays and irritated customers. Dell says it is moving swiftly to correct the production problem, caused in part because it significantly underestimated demand for its new notebooks.
Dell’s corporate comeback, its founder says, will not always go smoothly. “Hey, we’ve got a lot of work to do,” Mr. Dell concedes, “and we’re just getting started.”
And the man once known as a by-the-numbers, short-term thinker is now, apparently, planning many years ahead. Asked about how long he intends to remain chief executive, Mr. Dell compares himself to Wal-Mart’s founder.
“I’m 42 years old. I think that would put me on the young side for C.E.O.’s,” he says. “I don’t think Sam Walton became a C.E.O. until he was 45.”
So how long will he remain C.E.O., then? “A long time,” he responds.
