Dear Michael: Dell 2.0 Needs a Strategy

Dear Michael....Dell 2.0 needs a strategy. To develop that strategy we have to first decide what kind of company Dell really is, and then what it could be.

1. Dell is not a consumer company.

Your consumer segment revenue has hovered around 10-15% of total US revenue for many years (look at your recent 10-K). So why all the product development investment in PDAs, music players and TVs? Dell is not Apple (AAPL). You don’t have the R&D investment (all your product development is done by other companies and rebranded), innovation or brand to play in the consumer segment. You have shown no product leadership. So cut it loose and keep a small consumer segment alive selling byproducts (Laptops, desktops, monitors) from your core business - selling to corporations. Put your investment in improving customer call centers somewhere else.

2. Dell is a utility supplier to businesses.

You said it yourself in your 2006 Annual Report. Dell supplies 90% of Fortune 500 companies with PCs (and 70% of your revenue is from the US). You’ve been so good at this for the last 10 years; please continue to make this your bread and butter. Improve quality (take all your engineers in the consumer segment and turn them into quality assurance engineers for PCs and laptops) and customer service to corporations and small businesses; keep optimizing the supply chain, especially as you build your international business. Others have been able to match the costs in your supply chain, but you can stay ahead by increasing your volume. Buy an Asian PC manufacturer (think Lenovo or Acer) to jump start your market share in that region.

3. Dell can be an awesome services supplier. Consider selling some PCs to yourself.

Think outside the PC. You’ve already taken baby steps towards advanced services (at 10% of revenue in FY06, you’ve almost matched your consumer segment revenue with less investment), but there is limitless opportunities for innovation in the services space, such as:

Continuing to up-sell your sales and support model with your customers. Don’t just sell them a PC, sell them a package including software deployment, on-site software and hardware support and managed replacement cycles (hint: if you know when your customers are going to replace their PCs, it will help you reduce costs even further in the supply chain). Instead of selling a $2000 PC, why not sell a $1000/yr support contract which include PC replacement every 4 years. Then make sure your quality is good enough and your support model is cost effective so that you don’t spend more than $2000 over 4 years supporting the PC. Now you’ve increased your margins without doing anything other than business model innovation. This has got to be easier than competing with the iPod!

Data centers. Other people are buying your PCs and offering web services and storage to consumers and small businesses (look to Amazon’s (AMZN) web services for the bleeding edge). I’ve got to believe you can build your own data centers using your own servers and compete in this space as the low cost player.

More Data centers. Run your customers datacenters. Offer secure backup, software deployment, intranet hosting, SAS deployment, Email servers … Charge by the GB!

Even more… why not add inventory control, fulfillment services (partnered with Fedex), linux farms.

In short, ask every one of your large customers what they need computers for and then build a strategy to offer it to them. Then, take these services and offer them to your small-medium business customers.

The Wintel/Dell dynasty of the last century is about to be replaced with a world built on web services. As the winning hardware supplier of the last decade, Dell is really well positioned to supply the infrastructure for the new web services era. It has the customer base and the technology to succeed.

Michael, your company can be the next IBM of the 70s. But it can’t be the next IBM and Apple simultaneously. Focus on the customer - CIOs of the Fortune 500.

Disclosure: Author has no position in DELL.

Comments

[Julian Ivan...:]

MIchael Dell's email to employees:

"We will have clear priorities and a focused strategy.
We will grow Small and Medium Business and expand Services.
We will continue to build the enterprise Server/Storage business. In Services, we will build, partner and buy.
Product Group will shorten design cycles, increase speed and innovation/design that create real differentiated value for our customers.
We're going to introduce new brands and products with a focus on Consumer and Small Business. We will ensure quality, stability and predictability for our larger customers.
We will complete our dual processor supplier strategy.
We'll restore loyalty and continue CE (consumer experience) improvement. . . . We will bring excitement and pride back to our brand.
In emerging markets, we'll take new approaches and introduce new products."

.. TRANSLATION: "Help. I am crapping myself."

2007 Feb 05 05:35 AM

[RichardatDELL:]

Hi Patrick

wanted to thank you for the input, as we review various options and all work together on clear priorities and a focused strategy. Your input and perspective is appreciated.

Tommo, appreciate the translation. However, thats not the way we at Dell see things. In fact you are wrong. Michael is energized to be back in the CEO role and so is the organization. We have come from behind before and every time, stronger and better. For a 23 year old company, we have always learned our lessons and moved forward. No company has a perfectly linear growth path, and so we move through this curve...like the rest, learning and maturing and getting better all the time. It how we became number one.

2007 Feb 06 12:03 AM