How to fix Dell

December 6, 2007: 8:27 AM ET
Dell briefing center
The executive briefing center on Dell's campus. Image: Dell

Dell is held up as one of the business world's train wrecks of the moment, sort of a tech version of Britney Spears. The stock is down near the levels where it traded when founder Michael Dell re-took the reins as CEO in February, and the pundits have plenty of questions about the company's prospects. How could things have gone so wrong? Can Dell ever top the charts again?

Dell YTDTruth be told, things aren't hopeless at Dell. Despite all the hand wringing over its deflated stock price, Dell's (DELL) revenues and profits haven't evaporated -- they're just not nearly where they should be considering the global boom in PC sales and overall high-tech spending. And Dell continues to be a cash machine, generating about $1 billion per quarter. A tech company could do worse -- and many do. (See Advanced Micro Devices (AMD), Yahoo (YHOO), or Hewlett-Packard (HPQ) circa 2004.)

The problem for Dell is growth. Well over half of the company's revenues come from PCs, yet its sales are sputtering while others surge; this year for the first time Hewlett-Packard shipped more desktop PCs than Dell, while HP's laptop sales are outpacing Dell's by more than 50 percent, according to researcher IDC.

If Dell's going to grow again, it needs to start by doing two previously un-Dell things: One, consistently design and deliver beautiful laptops. Two, make peace with the middleman.

A financial edge from edgy PC design (Photos 1-7)

The Money in Mobility

Laptops will have to be the first order of business. Michael Dell himself mentioned this month that mobility is king: Industry trends show the laptop market growing six times faster than desktops. In Dell's most recent quarter, 30 percent of revenue came from mobile products, up 19 percent from a year before; desktop sales were stagnant. Do the math, and it's clear that for Dell can't move the needle on market share and profits without a lineup of must-have mobile PCs.

Dell doesn't have that kind of laptop lineup now. The real standout is its XPS M1330, a surprise hit that is drawing raves because it's so atypical for Dell. What's different about it? It's thin, sculpted, and comes in multiple colors, giving it a look that laptop connoisseurs associate with design-conscious competitors like Sony (SNE), Apple (AAPL) and Toshiba. Even HP has lately won more kudos for its designs, and that's no accident -- HP's computer marketing is now led by Satjiv Chahil, a veteran of Apple and Sony who is has an eye for beautiful objects. In the past, Dell was criticized for churning out cookie-cutter gray boxes, and not paying enough attention to pizzazz.

Designing better-looking laptops is only half the battle -- Dell will also have to get them in front of consumers, and improve customer service. That has proven to be a bit of a challenge lately. This summer, the company couldn't keep up with demand for its colorful M1330 or Inspiron laptops, leaving customers irate that their purchases were weeks late. (Dell blamed problem paint jobs for the delays.) And the company still lacks the retail reach of rivals like HP and Apple, which helps explain why quarterly U.S. consumer sales were down 6 percent from a year ago. It also explains why the company was eager this week to announce that its XPS and Inspiron PCs will soon be available in more that 900 U.S. Best Buy (BBY) stores.

New design in HP's business displays (Photos 1-5)

Making Peace with the Middleman

Second, but also important to any turnaround: To boost its fortunes with business customers, Dell needs to make peace with the middleman. And since the company until recently spent a lot of time trying to eliminate the middleman, that will involve eating a little crow.

In the business technology, the middleman is often called a "value-added reseller." These are typically smaller shops that sell gear to small and medium-size businesses, and even handle customer service.

Many resellers have suffered mightily from Dell pushing its business model, which was built on the idea that companies could save money by dealing directly with Dell. It's not that Dell has never dealt with resellers at all -- the company says its partners generated about $9 billion in Dell-related revenue in the past year. Still, Dell tended not to give them much special attention, and its culture was focused on its own deals whenever possible.

That old Dell strategy doesn't work as well anymore. Now that technology costs have come down, purchasing tech gear is sometimes less of a hardship than making sure it runs smoothly -- and many resellers have made themselves indispensable by keeping servers and other equipment running. For Dell to grow, it will have to get some of those trusted resellers to stock more Dell products and offer them to customers.

Now there's more special attention for resellers. Wednesday Dell launched a program called PartnerDirect, designed to help resellers feel more comfortable dealing with Dell, and to help them finance and service Dell equipment.

If Dell makes all this work, will the shares perk up? Sure. But along the way the company also will have to keep costs in check, and prove to Wall Street that it can still reliably deliver strong operating margins and healthy stock buybacks.

Sound hard? Just remember, today Dell is much better off than HP was a few years ago.

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