Dell’s Digressive Transition

I agree with the market analysts who have observed that Dell is a company in transition. What concerns me, however, is that Dell doesn’t seem to know where it wants to go or how it intends to get there.

As I reviewed Dell’s latest quarterly results, released to the world yesterday, I was stuck, not for the first time, by the contractions between the company’s words and actions. There were also a few contradictions between what the company said from moment to moment.

At a fundamental level, Dell must make a definitive decision about whether it’s a purveyor of IT solutions for businesses or whether it is consumer-oriented computing company. It is unlikely to succeed at both. The world has changed since Michael Dell first steered his company to prominence as the direct-to-customer PC vendor with the lean supply chain.

For every move Dell makes in the right direction, it seems to take a countervailing misstep. This quarter’s results, like those in the previous quarters, tell some of the story.

As reported in Computerworld by the IDG News Service, Dell’s net income for the three months to Oct. 30 was $337 million, or 17 cents per share, down from $727 million, or 37 cents a share, in the same quarter last year. Revenue declined 15% to $12.9 billion.

Sales were down from last year in all of Dell’s main business units, including the large-enterprise division, where revenue dropped 23 percent. Dell’s revenue fell 19 percent in the small-and-medium-sized business (SMB) segment.

The results were worse than expected. Dell’s profit before one-time charges was 23 cents per share, below the 28 cents per share financial analysts had forecast, according to Thomson Reuters. Its revenue also came in below Wall Street’s target.

It’s baffling that Dell, which isn’t exactly a public-market ingenue, could have allowed itself to miss expected targets so badly. Savvy public companies — Cisco, Apple, HP of recent vintage — take considerable pains to ensure that analysts that follow them don’t get carried away with boundless optimism. It isn’t for nothing that the truism “underpromise and overdeliver” was coined. Too often, Dell has adhered to an inversion of that adage: overpromise and underdeliver. Unfortunately, that credo doesn’t impress the investment community, as evidenced by Dell’s stock price, which is down nearly 10 percent today as I type this post.

According to Brian Gladden, Dell’s CFO, the company will continue to put profit before market share. In the last quarter, he said, Dell walked away from some consumer retail deals for PCs because “the margins weren’t acceptable for us.”

That’s a worrisome statement, primarily because Dell has provided scant insight into how the situation will be reversed. If the company struggles mightily to sell PCs to consumers at a profit, it begs the obvious question: Why is Dell toiling in the consumer market at all?

If there is some master plan as to how Dell will arrest declining market share and brand value in the consumer space, the company should articulate it.

Otherwise, Dell might want to think about putting its resources into areas other than the consumer space, areas where it will be more likely to see healthy margins in tandem with market-share gains. I think even Dell would agree that it would be a Pyrrhic victory to maintain acceptable PC margins in the consumer space while seeing its market share plummet into a tenebrous abyss. That would be a vicious cycle, with market-share losses eroding both Dell’s economies of scale and its brand value relative to other consumer-market PC players.

Similarly, what’s the point, and the big-picture strategic plan, behind Dell’s half-hearted foray into the smartphone market, first in China and Brazil and then presumably in the USA?

The entire exercise smacks of a bunch of marketing executives huddling optimistically in a boardroom, with one of them musing, “If we could capture one percent of the smartphone marketplace, we’d generate a huge new revenue stream.” Regrettably, that sort of wishful thinking — unsupported by dispassionate logic, a systematic strategic plan, and carefully tested assumptions — usually ends in tears. Dell will need more than a me-too Android-based handset to capture a meaningful share of the smartphone space, even in China and Brazil, national markets that are more exacting than Dell assumes.

It’s not as if Dell doesn’t have other opportunities.

Michael Dell himself is looking ahead to a corporate PC refresh cycle triggered, in part, by Windows 7. There’s nothing wrong with Mr. Dell’s reasoning on that point. Businesses of all sizes largely skipped Windows Vista, and it’s reasonable to expect that they will, as Dell suggests, look to upgrade their PCs before long. Dell thinks it will happen over the next 18 months. I think it might take a little longer to play out, but it seems destined to happen.

Dell, which has a relatively good reputation in the SMB space, should be putting considerable resources into positioning itself as the go-to vendor for those upgrades. I wonder to what degree distractions from the consumer side of the house might detract from emphasis, focus, and resources that could be directed at the SMB opportuinity.

Similarly, Dell has a tremendous opportunity to convert its $3.9 billion acquisition of Perot Systems Corp. into lucrative returns. During these hard times, Michael Dell realizes the same thing GE CEO Jeffrey Immelt recognizes: government-stimulus spending can be a vendor’s friend.

With Perot, which generates about half its sales from healthcare customers, Dell is well placed to benefit from the allocation of $20 billion in U.S. stimulus funds toward the purchase of healthcare-related information-technology products and services. Again, Dell should not take its eye off that prize.

Even in large enterprises, Dell seems slowly but surely to be piecing together a data-center plan that will allow it, with the assistance of Perot, to compete effectively in certain vertical markets. Strategically, with its partnerships and thinking, Dell is following a path strikingly similar to IBM’s, even down to having the same networking-equipment OEM partners in Juniper and Brocade.

Michael Dell’s oft-stated long-term goal is to reduce Dell’s reliance of personal computers, which account for approximately 60 percent of his company’s revenue. Meanwhile, Dell as a company derives about 80 percent of its revenue from business customers of varying sizes, with the remaining 20 percent coming from consumers.

If the company already is ceding large chunks of consumer territory to competing PC vendors because it can’t make money in that market, perhaps the time has come for the company’s executive braintrust to expedite the transition away from both PCs and consumers. The smartphone should probably be kicked into touch, too, unless Dell’s goal is to tie it to an enterprise push in conjunction with Google, which also aspires to grow its enterprise presence.

I said before that Dell is a company with too many fingers in too many pies. Dell only has so many fingers, and not every pie it sees is worth eating.

One response to “Dell’s Digressive Transition

  1. nice article on dell products

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