Dell: The Erstwhile PC King Aims for the Middle

Whether No. 1 or No. 2, it’s a dubious distinction to be one of the biggest suppliers of machines now considered products of a bygone era, as the computing world moves onto tablets and mobile devices. But Dell sees the business he once dominated as a springboard to greater things.

Through a string of 10 acquisitions in less than two years, Dell has branched into areas such as IT services, computer networking, and data storage. He thinks the kind of low-cost, low-margin hardware Dell is known for—the company sold about $39 billion worth of desktops, laptops, and related products last year—can open the way for sales of higher-margin enterprise products. At the same time, and in a nod to reality, Dell is winnowing its troubled line of consumer products and focusing its attention on the small- and medium-size businesses and government agencies that already account for more than half its sales. “Some of this we kind of did to ourselves,” says Dell. “We are consciously pruning the business [and] replacing a lot of low-margin revenue with a lot of high-margin revenue.”

The shift comes at a tricky time: Dell is expected to make less in profits this year (the consensus forecast is $3.7 billion for the fiscal year ending in January) than it did in 2005. The company’s shares have lost 40 percent since Jan. 30, 2007—the day before Michael Dell ousted former CEO Kevin Rollins and returned to the helm—which is in part a reflection of Wall Street’s uncertainty about his strategy. “It’s hard to say he’s come in and saved the company like Steve Jobs at this point,” says Jayson Noland, an analyst at investment bank Robert W. Baird.

The consumer market has been vicious to everyone but Apple (AAPL), and Dell whiffed a few times too many: Its Adamo computer, a $2,000 high-design laptop that launched with a splashy ad campaign two years ago, failed to find many buyers, and last month the company killed off its oddly shaped 5-inch tablet, the Streak. On the other end of the scale, enterprise giants such asIBM (IBM), Cisco Systems (CSCO), Oracle (ORCL), and HP already hold sway over data center sales to Big Business.

By focusing his company’s efforts on cost-conscious IT officers at organizations with 100 to 5,000 workers, Dell is betting it can stay out of its larger rivals’ cross hairs while avoiding the expense and risk of keeping up with consumers’ whims. David Johnson, the head of M&A at Dell, says recent acquisitions such as Compellent Technologies and Force10 Networks will let Dell offer its existing PC customers technology to move, store, and analyze their data. It’ll be less complicated for them to buy directly from Dell, he says, than from resellers used by IBM, HP, and Cisco. The direct approach means “we’ll attain more margin, but the value the customer gets will also be greater,” says Johnson. In smartphones and tablets, the company plans to augment Windows and Google’s (GOOG) Android software with its own security software to keep corporate data walled off from users’ personal apps, a move to woo cautious IT officers.

Yet even after those acquisitions, Dell is either way behind or absent in many of the high-margin enterprise technologies now in demand, including data analysis software and cloud computing. In the first week of September, IBM acquired two data analysis software companies in as many days, and HP bought enterprise search company Autonomy for $10.3 billion on Aug. 18. Cloud computing services from (AMZN), Microsoft (MSFT), and others are replacing traditional server sales, instead letting users tap computing power over the Internet. And then there’s Dell’s reputation. “A lot of enterprise wants a fairly sophisticated vendor, and Dell’s not that,” says Noland. “They’re the low-cost vendor.”

Johnson admits that shedding Dell’s reputation as the cheapest box builder is an ongoing effort. “It takes time to change the perception of a company,” he says. Michael Dell, for one, isn’t concerned about the wait. “I think 46 is still pretty young,” he says.

The bottom line: Dell is struggling to shake its low-cost vendor image as it tries to sell more enterprise services to midsize businesses.

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