Dell (NASDAQ:DELL) is running out of options.
Once the most successful computer company in the world, Dell has since slipped behind HP in global computer market share.
But this is old news, Michael Dell is back to change things around, right?
Well, he is back. But will he be able to change things around?
Dell’s original business model was a stroke of genius. It was one of the only computer companies to only sell direct. Not only that, they made it very easy for small business to partner with them, making it a dominant player in the small business industry. Additionally, their corporate partnerships division allowed major corporations to benefit from volume purchases while Dell was laughing all the way to the bank.
Dell computers were also once viewed as state-of-the-art, top line computers. Their brand allowed them to put big price tags on a cheap product, cut all the middle men out and have huge profit margins. What happened?
Several things. Most importantly, Michael Dell left the position of CEO and their whole business model changed. Instead of selling direct, they dumped resources into a retail division of the company. This is a space that other computer companies such as Toshiba, HP & Acer have been in for decades. Needless to say, they dumped their money into this division and saw that sales and profit margins were just not hitting their targets.
So what did they do? Lowered prices! That ought to boost sales, right?
Well, sure retail sales got a slight boost, but the damage to the brand is irrevocable, and profit margins suffered significantly. Now instead of a prestigious computer brand that you could only purchase through a partner or online, you have a cheap computer that is competing with the likes of small-timers like Lenovo (OTCPK:LNVGY).
Now Dell is in a tough position. Last year they lost 2.5% of their market share, and in a 25 Billion dollar a year industry, that is a significant loss. Their business model is not as profitable, and competition is getting stiff, especially with an Apple (NASDAQ:AAPL) revolution already in progress, things are looking grim for poor old Dell.
Disclosure: Author has does not have any long or short positions in Dell.