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Dell: The Travails of a Comeback Kid

{complink 1544|Dell Inc.} isn't fighting for survival or relevance, and neither is it trying to convince shareholders the headwinds it faces cannot be contained. Not anymore.

Although problems remain in its operations, the embattled company has fought back gamely from the ugly fiscal 2010 revenue dip (down 13 percent to $52.9 billion vs. $61.1 billion in fiscal 2009) and handily exceeded analysts' average profit estimate in the just ended reporting period.

For the first time in several years, Dell is showing signs of increasing strength in its various markets, and it's even forecasting a stronger-than-expected sales performance for the ongoing quarter. The company estimates sales for the fiscal quarter ending July 30 will increase in the “mid-single digit” range compared with its traditional 2 percent to 3 percent. For fiscal 2011, ended January 28, revenue rose to $61.5 billion, finally edging past the $61.13 billion from fiscal 2008.

Dell, it could be said, is finally on a recovery path. “We're off to a solid start in our fiscal year 2012,” said Michael Dell, chairman and CEO in a statement announcing the fiscal first-quarter results. “Our substantial profit increase demonstrates that our strategy is working and our execution is improving.”

Please, hold the applause. For all its demonstrated strength and recent muscle flexing, the Dell story isn't any longer what it used to be except in the areas of supply chain management. Dell isn't growing as fast as some of its competitors, and the company remains locked into the PC market. Efforts to break out of the price-sensitive PC market through acquisitions — to lift enterprise business — and expansions into consulting and the consumer electronics markets have not produced results seen at rivals like Apple.

Dell's latest quarterly results have only confirmed what everyone believes: that the company is great at squeezing costs out of its operations and still has one of the more efficient supply chains in the industry. The gains made in the fiscal first quarter came on the back of cost-savings, and some industry analysts believe the company can still further reduce costs to boost its bottom line.

“If the company is able to optimize its future cost structure, minute changes to productivity or procurement improvements could lead to tremendous earnings upside,” said Brian Marshall, an analyst at Gleacher & Co., in a research report. “For example, if Dell were able to remove 1 percent of its total cost structure (total cost of goods sold and total operating expenses) in calendar year 2011, the tax affected savings would approach $600 million.”

That may be so, but personally I believe squeezing suppliers and contractors for cost-savings to boost your company's bottom line is an ineffectual strategy that will eventually backfire. Dell's $50 billion-plus in cost of goods sold gives it enormous leverage with its supply base, but with margins already razor thin at some of its business partners, many may walk away rather than yield additional gains to this OEM customer.

Dell's reputation as a cost-saving machine and supply chain expert has been well earned, and it's obviously becoming more difficult for the company to lean on its suppliers for cost-savings, hence the move to acquisition-fueled growth. Dell has completed about $7 billion worth of acquisitions in the last couple of years as it sought to beef up penetration into the enterprise market. That exercise has been fairly successful.

“Dell's long-term acquisition strategy is successful and it is able to integrate acquired products into its vast distribution channel, the portion of the company's revenue stream which is classified as high-margin and recurring should only expand in the future,” said Gleacher & Co.'s Marshall.

That's comforting, but the future still looks rocky for Dell, Marshall acknowledged. The company is now one of the five biggest vendors in the high-tech and information technology market (the others are Apple, IBM, Hewlett-Packard, and Microsoft), and its large exposure to the hardware market means it will remain under pressure for a while. He notes:

    Over the next couple of years as virtualization penetration rates of both servers and workloads rise materially higher (70 percent-plus), the computing hardware market (e.g., servers, desktops and notebooks) will become secularly challenged from a growth and margin perspective.

    Considering notebooks, desktops and servers represented approximately 67 percent of DELL’s total revenue in calendar 2010 , it is fair to assume the company will have some issues on its hands in the not too distant future.

Dell is fighting hard, but that Comeback Kid title remains elusive.

17 comments on “Dell: The Travails of a Comeback Kid

  1. eemom
    May 19, 2011

    Bolaji – thanks for the article.  I have always had a lot of respect for Dell, their market penetration and leadership strategies.  While Dell is showing ample growth now, it is concerning that the majority of that growth comes from notebooks, desktops and servers.  This market sector will continue to see a decline in price and therefore margins.  There is only so much Dell can squeeze out of cost before there isn't much left to tackle.  Dell needs to adopt a broader market strategy and start gaining ground in non-pc type markets in order to stand up to their competitors.

  2. Anna Young
    May 19, 2011

    As expressed by Gleacher & Co.'s Marshall, that  

    “Dell's long-term acquisition strategy is successful and it is able to integrate acquired products into its vast distribution channel, the portion of the company's revenue stream which is classified as high-margin and recurring should only expand in the future,”

    I am persuaded by Dell's strategy and fighting moves that Dell will somehow keep in the game and I hope Dell is able to seek broader market strategy to continue to compete

  3. SunitaT
    May 19, 2011

    Good to know that Dells gains made in the fiscal first quarter came on the back of cost-savings. But most important thing is Dell is planning to release variants of android based tablets. Dell's upcoming 10-inch tablet is taking a more defined shape ahead of its expected June release. This will definitely help DELL to improve its revenue stream.

  4. hwong
    May 19, 2011

    I can't wait for the stocks to come back up. It's been way too long since their success about 10 years ago. We used to have textbooks with Dell case studies about how they have the best supply chain because they cut down on the middleman. But you know, whatever happened in the past 10 years to Dell doesn't matter anymore as long as they can comeback up.

  5. AnalyzeThis
    May 19, 2011

    @tirlapur, I actually disagree with Dell's decision to attempt to jump into the already over-crowded tablet market: I just don't see how this will help improve their revenue stream at all and I don't anticipate their tablet efforts to be a success.

    Dell does not need to compete head-on with Apple. They shouldn't attempt to. Yes, I agree that Dell should be expanding outside its traditional product catalog, but I think they need a more focused strategy: like others have said, they are starting to stray a little too far away with what they used to do best.

  6. Taimoor Zubar
    May 20, 2011

    I have read reviews about Dell's upcoming tablet (Dell Streak) and it seems to be very cool.  I think it would make some impact in the enterprise as well as home users market. Given Dell's brand image, I agree with tirlapur that Dell can make a comeback through success of the tablet. Already the tablet market is expected to expand considerably in the upcoming years.

  7. t.alex
    May 21, 2011

    Anyone laid hand on the Dell steak before? I am afraid it is just another android tablet in the market. Given the fast coming of Android armies, like the Samsung Galaxy Tab, tablet may not be long-term for Dell.

  8. Anna Young
    May 21, 2011

    @t.alex, you may be right that “tablet may not be long term for Dell”, however, why would Dell venture into area that is already crowded. Dell targets low range market, it should focus more and innovate on that in order to excel.

     

     

     

     

     

     

  9. Clairvoyant
    May 21, 2011

    I believe Dell trying to get it's hand into the tablet market is a good idea. Companies need to get into as many markets as they can to be successful. Even if some products don't sell as well as others, they balance it out and keep the company running if one product was to do poorly.

  10. itguyphil
    May 21, 2011

    I don't necessarily agree with that. Companies should focus on their core strengths and do that to the best of their ability. If you divert from that and do not have a good strategy, the company's resources will be wasted (to be honest) and even worse, you may not even be successful in the new market.

  11. SunitaT
    May 22, 2011

    ” I actually disagree with Dell's decision to attempt to jump into the already over-crowded tablet market”

    @DennisQ, Competition is everywhere, be it notebook market or tablet market. I dont think competition should scare Dell from releasing their own tablet. Dell realises tablet will eventually replace notebook and PC's. So for Dell iIts better to take plunge now rather than left behind.

  12. AnalyzeThis
    May 22, 2011

    @tirlapur, I disagree that the tablet will eventually replace notebooks and PC's. Tablets aren't even intended to be a replacement for laptops or notebooks; they're a complimentary device. Can you imagine how horrible it would be if your PC and/or laptop were taken away and you had to work on a tablet full-time? It would be a miserable experience. Just typing a fairly long forum comment would be unnecessarily difficult.

    Yes, perhaps someday it will be common for “tablets” to essentially be laptops with detachable screens (or tablets with attachable keyboards, whichever way you'd like to refer to it), but PC's aren't going away for many reasons: for one, you can upgrade a PC's components, you obviously can't with a tablet, a PC is easily shared with large numbers of people, the most powerful PC will always out-perform a tablet, you can hook a huge number of peripherals to a PC, etc.

    It's also silly to say that tablets will replace PCs when — outside of the iPad — no one has made a really commercially successful tablet yet: is there really even a tablet market, or is there just an iPad market?

    The future does not involve most of us using a tablet as their primary computing device. Just isn't going to happen. It isn't really practical to carry one around all the time anyhow.

    There are too many tablets on the market right now and the majority of these products will fail. There is no need for Dell to add itself to the list of disappointments and failures.

  13. SP
    May 22, 2011

    I agree Dell has not been doing very well from past 6 years.

  14. mario8a
    May 22, 2011

    I agree wirh Dennis Q, DEll must be looking for opportunities innovating on segments called “blue Ocean” Tablet markets has been over rated and I don't think Tablets will ever replace Lap Tops.

    “Dell's latest quarterly results have only confirmed what everyone believes: that the company is great at squeezing costs out of its operations and still has one of the more efficient supply chains in the industry.”

  15. Susan Fourtané
    May 23, 2011

    Clairvoyant, 

    Do you really think that getting into as many markets as possible is a good recipe for a company's success? 

    As I see it, it only leads to disaster. When a company chooses to divide its effort in many markets also divides its attention and therefore the quality put in each of the products launched to each of the many markets. 

    It is wiser and more advisible to focus the attention of the company in just a few markets to be able to deliver good quality in its products and good customer service. 

    Unless such company is coming up with something new and innovative. This is a rarity, though. 

    -Susan

  16. Clairvoyant
    May 23, 2011

    I'm meaning in markets that relates to products the company already builds. If tablets really are the way of the future, if Dell does not try to get into the market now, they may always be left out.

  17. Susan Fourtané
    May 24, 2011

    Clairvoyant, 

    Desktops, laptops, netbooks and tablets are all products of the same species. I would put them in the same market: computers. 

    Different it is when a company starts manufacturing a totally different product to enter a totally different market, say, if Dell would start to manufacture phones or Nokia would start to manufacture computers. 

    -Susan 

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