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Change in direction - Company getting into phones, information technology
NEW FORMULA: OUT WITH THE OLD
AP file photo
Michael Dell has been changing the company’s direction since becoming CEO.
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Published: November 1, 2009
AUSTIN, Texas -- Although Michael Dell reclaimed active control of the company he founded nearly three years ago, the outlines of the new Dell Inc. are only now starting to emerge.
The revamped computer-maker is leaner but sells a wider variety of products, some of which are winning plaudits for design and innovation, not just function or price.
More of those products are being made by international contract manufacturers, not in Dell's own factories.
Customers can buy them through a growing global network of retailers and resellers, as Dell shifts away from the direct-sales model on which it was built.
And Dell is about to jump into smart phones, a market that lies well outside the basic computers that have been its staple products.
Most important, Dell is paying $3.9 billion to acquire Perot Systems Corp. in an effort to become a serious player in advanced information-technology services.
Dell already sells basic services tied to installing, repairing or monitoring the computers it sells.
Perot goes further with its services, developing customized processes and software that enable customers to run their businesses better.
Dell "is facing a new marketplace and is looking to get its soul back as a driver of change," said Peter Bendor-Samuel, the chief executive of Everest Group, a consulting company based in Dallas. "They have been on their back foot" -- that is, playing defense -- "and they want to be back on their front foot. They are used to driving disruptive change in the industry. You can see them trying to get back on the offense with services, and that is why they bought."
Called to services
Dell is changing because it has to.
The old direct-sales formula, which drove the company's rapid growth in its first 20 years, has run up against the new realities of the global PC marketplace, in which prices and profit margins are declining rapidly for computer hardware -- the source of more than 70 percent of Dell's revenue -- and the biggest growth opportunities are in emerging markets overseas.
"You're starting to see a real reshaping of the Dell portfolio and Dell business away from some things that were pretty important for us in our first 25 years," Michael Dell told Bloomberg News last month. "We're doing some new things that will be more important for our next 25 years."
Michael Dell has been charting a new course for the company since January 2007, when he forced out CEO Kevin Rollins and took on that job himself, in addition to his duties as chairman.
The Perot deal is potentially one of the most important turns on that new path. The deal will become Dell's biggest acquisition when it is completed this year.
Dell caught some criticism from analysts for offering a premium price for the Plano, Texas-based company. But Dell has said that Perot will become the base for a larger services business, with more acquisitions to come. Plano, not Austin, will be the hub of that new venture -- and the jobs it creates.
Services revenue tends to be steadier and more profitable than computer-hardware revenue. And, analysts note, once Dell establishes stronger services ties to businesses, it's likely to be able to sell them more hardware.
Analysts say that Dell lacks the stature in services to help companies with their most complex and important computer-related issues. Hewlett-Packard Co. and IBM Corp., with larger and more established operations, rank ahead of Dell as services providers for big corporations.
"This is the hole in Dell's portfolio that they are now attempting to fill," said analyst Roger Kay with Endpoint Technologies Associates Inc. "It is a very big bet, but I would say a necessary bet."
PCs to smart phones
While Dell pursues closer ties to its corporate customers, it is also working harder to entice consumers with sleekly designed products, such as superthin laptop computers, with such features as personalized colorful designs and touch-screen displays.
In March, Dell introduced the upper-end Adamo family of laptops, which are thinner than Apple Inc.'s Macbook Air. A yet-to-be-released version, the Adamo XPS, has a lid that opens with a touch mechanism and a keyboard that tilts.
Another laptop, the Latitude Z, has attracted good reviews for its wireless recharging feature, an industry first.
Analyst Rob Enderle with the Enderle Group calls the computers "halo products" that build the company's consumer brand and that can attract buyers to other products.
"When you are struggling, halo products are particularly important," Enderle said. "You can build a lot of positive buzz around products like that."
More plans are in the works. Dell says it will introduce its first smart phone in the U.S. early next year. The phone, reportedly based on Google Inc.'s Android software, is designed to make Dell a player in a large and growing market that is becoming the newest way to access the Internet and online services.
Technology Web sites such as Gizmodo have reported that Dell also is working on a mobile Internet device -- slightly larger than a cell phone -- with a bigger screen designed to attract mobile gamers.
Analysts say the new emphasis on design innovation is part of Dell's effort to catch up and become a stronger player in selling to consumers.
Because of its heavy reliance on sales to corporations, Dell has lost market share to rivals with stronger consumer offerings. In the third quarter, Dell fell to third place worldwide in shipments, its lowest ranking in 11 years.
The new No. 2 is Acer Group, based in Taiwan, which is surging on the strength of its low-cost netbook computers.
"The core business for Dell historically has been desktop computers and notebooks," said analyst Ashok Kumar with Northeast Securities Inc. "We are seeing a shift away from desktops to (low-cost) notebooks and from enterprise customers to consumers and from North America to emerging markets. And none of those trends favor Dell. All of those trends play into Acer's business model. Dell has been late in reacting to some structural changes in the industry."
While the company moves to introduce new products, it also is putting more effort into building its business in emerging markets, particularly China, Russia, Brazil, India and eastern Europe. That means moving more manufacturing overseas, developing ties to international retailers and expanding its operations abroad to win over consumers and business customers.
Plans at home, abroad
As Dell morphs and expands into a new company serving new markets, it continues to cut away at its operations, especially in North America.
The company cut 9,300 jobs, or about 11 percent of its global work force, in the fiscal year that ended Jan. 30. It is only partway through an aggressive move to pare $4 billion from its annual costs by early 2011.
In the past year and a half, Dell has closed major factories -- including a PC factory in North Austin -- and customer support call centers around the country. In its latest move, Dell told about 900 workers at its plant outside of Winston-Salem, that it will close that plant by January. The plant, once a monument to Dell's customized manufacturing process, was built only four years ago.
After that plant closes, Dell will have only six major manufacturing facilities worldwide, four of them in Asia.
Dell said in January that only one-third of its workers were in the United States. That included about 16,000 people in Central Texas, who are involved in product development, marketing, sales, administration, finance and server manufacturing.
"They are going to be investing people where the market growth is, and right now the market growth is not in the U.S.," Enderle said. "It will be a truly multinational company. The PC business is a global industry where the center of command and control seems to be shifting outside the U.S. -- and more so every day."
Kirk Ladendorf writes for the Austin American-Statesman.
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