NY Times article on Dell - Can Michael Dell Refocus His Namesake?

http://www.nytimes.com/2007/09/09/te...pagewanted=all

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Keith wrote:
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Why fart around with that? here's the text of the article:

September 9, 2007
Can Michael Dell Refocus His Namesake?
By STEVE LOHR

Round Rock, Tex.

ON a recent afternoon at his company’s headquarters here, Michael S.
Dell is seated in a spacious conference room named Dobie Hall — in honor
of the University of Texas dormitory where, in 1984, he started the
computer giant that bears his name.

He boasts that Dell Inc. has just reported quarterly profits that
exceeded Wall Street projections. It’s an encouraging sign, he says,
that the company — buffeted by high-profile production problems and
accounting shenanigans — is finally regaining momentum.

Over the last few years, Dell, once the gold standard among PC makers,
has simply overlooked major growth trends in personal computing. It
missed significant shifts in notebook computer sales and the consumer
market as a whole, lagged competitors in international sales, and lost
the profit edge that it enjoyed from its superior procurement-and-supply
network. Hewlett-Packard, having overcome its own woes, passed Dell last
year as the largest seller of PCs worldwide.

Dell’s ills also extend beyond the nuts-and-bolts of making and
marketing PCs. After a yearlong internal investigation, Dell conceded
last month that some managers had falsified quarterly results to meet
sales targets from 2003 to 2006. The company expects to reduce earnings
over those years by $50 million to $150 million, tiny sums compared with
the billions of dollars in profits it earned during that same period.
(Dell posted annual sales of about $57 billion last year.) Yet the
accounting disclosures suggest a corporate culture in which at least
some senior managers felt under such pressure that they doctored the
numbers; the disclosures have prompted a Securities and Exchange
Commission investigation.

“The company was too focused on the short term, and the balance of
priorities was way too leaning toward things that deliver short-term
results — that was the major root cause,” explains Mr. Dell, dressed for
the Texas summer in a short-sleeved polo shirt and jeans.

The recent setbacks would be humbling for any company, but especially so
for Dell, a smooth-running machine for years and a model of the
efficiencies that the shrewd use of technology and customer information
can produce. Dell was widely admired beyond the technology industry, and
it was cited in business-school studies alongside companies like
Wal-Mart Stores.

Successful entrepreneurs, of course, are hardwired by inclination and
necessity to look beyond immediate hurdles for opportunities, and Mr.
Dell is no exception. He says he is not leading a simple turnaround, but
rather a long-term campaign to transform a company known for a cultlike
adherence to a certain way of doing business.

As the company surged to the lead in the PC industry, the “Dell model”
relied on direct sales over the Internet and by telephone rather than
through retail stores, cutting prices to gain market share, focusing on
computer hardware rather than services, leaning heavily on the American
market and avoiding acquisitions. But since Mr. Dell reclaimed the role
of chief executive in late January, he has changed all that.

At internal meetings, he repeatedly emphasizes that the Dell model “is
not a religion,” according to staff members. Moreover, Mr. Dell — who
once ran a company famous for its laserlike devotion to next week rather
than next year — no longer champions short-term goals and fixes. “We’re
moving the needle in terms of getting focused on the right long-term
issues,” he says.

But re-engineering the Dell model will be a daunting challenge. “Dell
continued to do the same old thing, when it was no longer working,”
observes David B. Yoffie, a professor at the Harvard Business School.
“This is going to be about changing the way they do business at many
levels.”

“Dell can do it,” Mr. Yoffie adds, “but it’s going to take a lot more
innovation on more fronts than the company has shown in the past.”

LAST year was, to borrow a term, the annus horribilis for Dell. Its
problems kept building throughout 2006: sluggish growth, disappointing
financial results, complaints about customer service, even a
high-profile safety recall of notebook computer batteries. Not all of
these were the company’s fault. For example, Sony made the batteries
that could overheat and catch fire, causing other companies like Apple
to also issue recalls.

But there was no disputing that Dell had stalled. Wall Street, as well
as Dell’s own board, had become impatient with the company’s management.
So a change came quickly early this year, at the end of January. Dell’s
outside directors voted unanimously that the company needed a single
leader instead of having a chairman (Mr. Dell) and a separate chief
executive (Kevin B. Rollins, who had been C.E.O. since 2004).

At the time, Mr. Dell was attending the World Economic Forum in Davos,
Switzerland, and when the board asked him to become chief executive, he
agreed. There were a few long walks, he recalls, when he was “deep in
thought” about how to proceed, but he did not hesitate about taking
over. He had built the company, after all, and his name was on every box
it shipped.

“I have a responsibility,” he says.

So, on Jan. 31, Mr. Dell became chief executive — again — and Mr.
Rollins, a former Bain consultant who joined Dell in 1996, was out. Mr.
Dell describes Mr. Rollins as a “great business partner and friend.”
Other executives at Dell also point to Mr. Rollins’s contributions over
the years, as the operating field general beside Mr. Dell during the
years of torrid growth. But Mr. Rollins, they say, was seen as the
foremost practitioner, and advocate, of the old Dell model, even when
pushing the same buttons no longer worked.

Still, Dell executives are quick to say that Mr. Dell’s return as chief
executive has nothing to do with any sharp differences between him and
his predecessor. Rather, it was due to the depth of Dell’s troubles and
the need for someone to assume control and forcefully take the company
on a different path.

“It’s not all about Michael versus someone else before,” says Paul D.
Bell, a senior vice president. “Michael was here. He was chairman. But
it was up to Michael to take the first-mover role in driving change and
he did it.”

Mr. Dell began shaking things up immediately. He has recruited senior
executives to lead the company’s marketing, consumer products,
operations and services business. He is also paring layers of middle
management as part of a plan to trim Dell’s payroll by 10 percent, or
roughly 8,800 workers.

In recent months, the company has stepped beyond selling over the
Internet and by telephone — the famous Dell direct model. It has forged
retail agreements to sell computers at Wal-Mart stores in the United
States, at Carphone Warehouse outlets in Europe and at Bic Camera stores
in Japan. More retail deals are in the works.

Rethinking the retail business was a matter of necessity. A lot has
changed, Mr. Dell notes, since the company tried and abruptly exited
retail sales in 1994. The shift in the consumer computer market and
toward notebooks, which customers want to touch before buying, is part
of it. So is Dell’s need to do better in markets abroad, where people
are less comfortable buying computers by phone or over the Internet.
“We’re going after those new customers with retail partners,” Mr. Dell says.

He also moved quickly on another front. Whereas the Dell of old shunned
acquisitions, the company is now willing to go shopping. It has made
three deals in the last two months — business and consumer software
companies — and there will be more, Mr. Dell says. But he says that they
will be limited to purchases of smaller companies and start-ups, with 50
to 500 employees, to add technology and expertise that promise to
“turbocharge growth” in businesses earmarked for investment and rapid
expansion, like services, consumer offerings, international sales and
building data centers tailored for big Web companies.

The consumer market looms large for Mr. Dell. Consumers were
traditionally an afterthought at Dell, which garners more than 80
percent of its sales from corporate customers. Home computer users
generally had to settle for business computers that were tweaked a bit
for the masses and were little more than bland, generic boxes.

But in recent years, consumers became picky. Where users once focused on
price, processing speed and storage capacity, they now looked for
stylish, well-designed machines as well — a trend common throughout the
entire consumer electronics business, but one that was lost on Dell.

“On the consumer side, we’re drastically changing what we’re doing,” Mr.
Dell says. “We’re only touching the surface of the opportunity now.”

Ronald G. Garriques, who joined Dell from Motorola in February, is
guiding the change in Dell’s consumer strategy. Selling machines with
more flair in retail stores is part of the plan, said Mr. Garriques,
president of the global consumer group, a new position at Dell. But he
suggests that Dell will take a hybrid approach, offering hardware
options, extra features and services through its Dell.com site on
machines that it also sells in stores.

Dell’s direct online relationship with customers, Mr. Garriques says,
can help it develop services that link PCs, software and cellphones. To
illustrate Dell’s thinking, he describes as a possibility a service that
would allow parents to use Web maps and cellphone signals to track
family members on the screen of a Dell PC in the kitchen. “With Dell’s
direct-to-consumer model,” he says, “we can bring that as a solution to
families.”

Such offerings, he says, don’t have to generate big profits on their
own. “Great services sell a lot of devices that use those services,”
says Mr. Garriques, noting how Apple’s iTunes music service has fed iPod
sales.

Dell also hopes to offer services on hardware beyond PCs. Last month,
the company agreed to buy Zing Systems, a Silicon Valley start-up that
makes software for hand-held devices that manage and exchange
entertainment wirelessly, without the need for a PC. Zing’s founder is
Tim Bucher, a former product designer at Apple.

Stale design remains an issue, and something the company has to continue
to address if it wants to lift consumer sales. It recently recruited
designers from around the world and more than doubled the size of its
design group, to 80, in the last year. Dell designers now speak of
product “love” and “lust,” observes Ken Musgrave, the director of
industrial design — a far cry from just a few years ago, when design
always took a back seat to competitive pricing.

In June, Dell introduced notebook computers in eight colors. And color,
Mr. Musgrave says, is merely the “first level of personalization” for
Dell. He showed off prototype notebook shells in different materials and
designs, noting that Dell’s build-to-order system gives it the freedom
to make highly stylized and personalized machines in limited runs of
just dozens to a few hundred. “There are a lot of different design
levers to pull for the future,” he says.

AS soon as he took over as chief executive, Mr. Dell declared a
two-month “amnesty” to encourage people to discuss problems and deal
with them quickly, without fear of being fired or demoted. Otherwise,
Mr. Dell says, managers might have understated troubles and defended
past decisions.

One common issue, he says, was that there was “no central leader” in
areas like manufacturing, services, sales and marketing. A decentralized
organization of many go-it-alone groups, focused on regional markets,
made sense when Dell was growing from $5 billion to more than $55
billion in annual revenue over the previous decade, faster than any
technology company in history. Then, chasing growth opportunities was
the priority.

Dell’s marketing epitomized the fragmented approach. When Mark Jarvis
joined Dell as its chief marketing officer in April, he did an inventory
of the advertising and marketing firms that worked for the company
worldwide. The total count was 869. “The company didn’t really evolve,
it just grew,” he says.

Mr. Jarvis is now moving to streamline Dell’s marketing. In the last
month, he has cut in half the number of the company’s marketing and ad
agencies. By the end of October, he says, Dell will select a lead
worldwide agency. One goal, he says, is greater consistency in the
themes, message and approach of the company’s marketing. The new
internal marketing slogan is “One Company, One Brand, One Beat.”
Already, there is a change in the look of Dell ads. Themes like ease of
use and personalization are prominently featured.

Mr. Jarvis, a former Oracle executive, says Dell’s brand is widely known
and respected, but often not linked to a clear message. So he wants to
give the brand a makeover, saying that in the consumer market, it needs
to be “much cooler and go away from low prices; a lot of people see us
as a cheap PC company, and that’s not where we want to be.”

In the corporate market, Dell plans to pitch itself as the company that
can simplify information technology for businesses, part of an effort to
gain market share from competitors like I.B.M., Hewlett-Packard and Sun
Microsystems. When asked how his long-term agenda will change the
company, Mr. Dell is direct: “It will push us much more into solutions
and services from products. That doesn’t mean products go away. But
there’s going to be a big element of doing more for customers through
services.”

The services strategy is long overdue. Services is a bigger market than
hardware, and corporate customers were asking Dell to do more to help
them manage their data centers more efficiently, according to current
and former company executives. But Dell was slow to react, and the lapse
illustrates the perils of doggedly sticking to the old model and
ignoring a promising new market. Instead of making long-term investments
in building a services business, Dell just kept its eye on hitting
quarterly sales targets by peddling Dell hardware and other companies’
software.

Dell recruited Stephen F. Schuckenbrock last December from Electronic
Data Systems to lead its services business. Today, Dell garners $5
billion a year in services revenue, but most of that comes from
technical support and maintenance on Dell machines.

Mr. Schuckenbrock wants Dell to help corporations run their data
centers, while reducing hardware budgets, energy consumption and
staffing. Mr. Schuckenbrock predicts that services will grow three to
four times faster than the company’s overall growth rate. A former Dell
executive, who requested anonymity because he is forbidden to discuss
company matters, said a recent internal report concluded that the
company’s annual revenue from services could reach $20 billion over the
next five to seven years.

Dell is already a major reseller of VMware, the dominant maker of
virtual machine software used to juggle operating systems and
applications on a single server. Dell plans to expand the relationship
with VMware by offering virtualization services and its own data-center
tools. In July, Dell bought SilverBack Technologies, a start-up that
makes software to monitor and manage computers. The goal, Mr.
Schuckenbrock says, is to offer “the best point of view, technology and
solutions to optimize industry-standard data centers.”

Until a year or so ago, Dell tried to sell its standard products to
leading Web giants like Yahoo, Salesforce.com and Microsoft. But those
customers wanted something different. Eventually, Dell listened and
designed circuit boards, cabling, racks and power management systems to
suit the requirements of large individual customers. (Google, which
still designs and builds its own computers, is not yet among them.)
Prototypes can be built in weeks, with thousands of the custom-made
computers shipping in months. That rapid response, says Brad Anderson, a
senior vice president, is “really back to Dell’s roots.”

Mr. Anderson says that the biggest initial hurdle for Dell on these big
deals is its reputation as a producer of commodity computers. “It takes
time to convince them that Dell is committed to novel products and real
innovation,” he says.

DELL still faces formidable obstacles as it tries to regain its footing.
Just three years ago, Dell’s hyperefficient operations gave it margins
that were six to eight percentage points higher than those of its
principal rival, Hewlett-Packard, according to a recent report by
Sanford C. Bernstein. Today, Dell has no such edge.

“We created this incredible supply chain, and that sort of stagnated,”
Mr. Dell acknowledges. “We squandered that away. Some of our competitors
jumped over us in a Darwinian way. Now it’s our turn.”

To solve his operating headaches, Mr. Dell brought in Michael R. Cannon,
the chief executive of the Solectron Corporation, a contract
manufacturer, as Dell’s head of global operations in late February. Mr.
Cannon is convinced that Dell can regain its advantage by tightly
integrating regional operations into a close-knit global network.
“Manufacturing is going to be a core competence at Dell,” Mr. Cannon
says, “and there is a lot of room for innovation.”

But the Dell manufacturing machine has sputtered recently. It has had
trouble perfecting the bright colors on its new notebook computers,
resulting in shipment delays and irritated customers. Dell says it is
moving swiftly to correct the production problem, caused in part because
it significantly underestimated demand for its new notebooks.

Dell’s corporate comeback, its founder says, will not always go
smoothly. “Hey, we’ve got a lot of work to do,” Mr. Dell concedes, “and
we’re just getting started.”

And the man once known as a by-the-numbers, short-term thinker is now,
apparently, planning many years ahead. Asked about how long he intends
to remain chief executive, Mr. Dell compares himself to Wal-Mart’s founder.

“I’m 42 years old. I think that would put me on the young side for
C.E.O.’s,” he says. “I don’t think Sam Walton became a C.E.O. until he
was 45.”

So how long will he remain C.E.O., then? “A long time,” he responds.

Copyright 2007 The New York Times Company

http://www.nytimes.com/2007/09/09/te...=1&oref=slogin