What Should Dell Do Next?

Chris Conroy works at a publisher of scientific journals in Washington, D.C. He first logged on to Dell Inc.'s Web site to browse personal computer offerings online. His laptop was dying quickly and the 31-year-old figured buying a PC on the Internet and getting it shipped home would take too long. Conroy went to a consumer electronics store, which doesn't stock any Dell computers. There, he checked out several laptops before snapping up a Hewlett-Packard Co. model. "I could get my hands on it right then, without having to worry about it being shipped," he says. Conroy's experience signals a fundamental problem facing Dell. For years, Dell-famous for selling products directly over the phone and Internet-was a dynamo thanks to bulk sales to corporations, mostly of desktop computers. Its direct-sales business model made the Round Rock, Texas, company a widely admired paragon of efficiency as it under-priced rivals such as H-P and Gateway, Inc. (now part of Acer Computer). But in the past few years, buying behavior in the PC world has changed. Much of the growth has come from consumer demand rather than the business market on which Dell focused. What's more, people looking for a new home computer are increasingly turning to laptops and netbooks. There Dell is particularly weak (according to some observers): its models lack the pizzazz and features of its rivals. For laptops, especially, consumers prefer to hold and test models in a store; Dell computers are not sold in stores. Dell still considers consumers an important market. The company has poured money into corporate products such as printers, storage systems, and computer servers. It declined some overtures from retailers to sell its wares in stores. Yet the company has one retail store to display products (but not sell them), and operates more than 170 kiosks in malls around the country, where consumers can see and order a selection of Dell products. At the same time, rivals such as H-P and Apple Corp. have charged ahead in the consumer PC market. In particular, H-P cut costs to become competitive with Dell, began working more closely with retailers, and redoubled its marketing efforts. As Dell cut prices, H-P invested in consumer-friendly features on its notebooks. Early in 2006, Dell expanded more slowly than the overall U.S. PC market for the first time in more than a decade. Consumers make up about 30 percent of H-P's sales, in contrast to 15 percent of Dell sales. In 2007, Dell began scrambling to contain the damage. It has overhauled its Web site and streamlined its pricing, and has introduced a new consumer advertising campaign with the tagline "Purely You." One of Dell's acquisitions was Allenware Corp., a maker of high-end videogame PCs. The company has said that deal, which boosted its offerings for consumers, was personally pushed by Michael Dell. In 2007 Michael Dell returned to his CEO role, taking over after releasing CEO Kevin Rollins. Later that year Dell began selling $700 desktop computers at 3,400 Wal-Mart Stores. The desktop market began cooling a few years ago as many companies slowed the pace of upgrading their computers. Meanwhile, consumers gravitated to laptops as prices fell and new wireless technology made them more useful at home and on the go. While corporate demand focused on replacing the desktops employees already had, consumers were adding second, third, and fourth computers at home as mom, dad, and the kids listened to digital music, shared digital photos, and played games. By 2010, consumers were buying more laptops than do corporations. In late 2004, the profitability of Dell's consumer business began deteriorating. Dell told Wall Street its competitors were cutting prices to gain market share at the expense of profit, and said its focus was the high-end PC consumer. But Dell was also participating in a price war, dropping its prices as low as $299 for desktops. Dell rolled out some new products to woo consumers. In October 2004, it released its first plasma-screen television sets, a digital music player, and a new photo printer with a built-in display to preview photos. But many consumers were wary about buying some of these products sight unseen from a company not known as a consumer electronics maker. In May 2006, the company pledged $100 million to improve the "customer experience" and hired more than 2,000 new U.S. sales and support staff. It has since added another $50 million to the effort. Internal Dell data show that its efforts are reducing call volumes and call transfers for customers. In 2008, Dell released a plan for several years ahead. Company representatives outlined several actions to reduce total product costs across all areas, including design, manufacturing and logistics, materials, and operating expenses. Dell was looking to accelerate growth in five areas-global consumer, enterprise, notebooks, small and medium enterprise, and emerging countries-while improving profitability and cash returns. A specific part of the growth strategy was to assist customers with their IT infrastructure. This included delivering, over the Internet, the integration of softwareas-a-service applications and remote management tools. By 2009, Dell had been restructured to intensify its focus on customers. The four customer groupings on the organization chart became consumers, corporations, mid-size and modsize businesses, and government and educational buyers. Seven of Michael Dell's direct reports were recently appointed. The company had branched into information technology and maintenance services, software, and new hardware categories including smart phones and tablet-style computers. Rumors had it that Dell was preparing to add social networking features as well as music and video services to Dell.com. Michael Dell wanted to create a profitable consumer business with designs as appealing as those of Apple or HP. Retail sales, including products sold at Wal-Mart stores, reached about $6 billion by 2010. By then, the consumer unit accounted for nearly 25% of Dell's revenue, but only 3% of its profits. The consumer products group therefore decided to hold back on expansion, and focus on cost control. By 2010, Dell returned to its marketing tactic of discounting in order to win business. Among the beneficiaries of the discounting was the Indiana Office of Technology that operates more than 25,000 Dell desktop computers for state employees. Dell said that he welcomed the challenge to prove that he could found an exceptional business and then come back in to revive a business that started to struggle. Dell also admitted that he stuck with the innovative idea of selling computers directly (Internet and phone) for too long. He added, however, "We're going to be stronger, faster, and more hyper than we've ever been. It you don't believe, then just sit back and watch."

Discussion Questions

1. Identify several business strategies Dell has used so far, including the strategy that made the company famous.

2. Suggest a plan to Dell executives for continuing its past successes into the future.

3. What is your opinion of the quality of Dell desktops and laptops based upon what you have observed personally and what people in your network have said?

4. How has the transformation of Dell worked out as of the present?