Sept. 6 (Bloomberg) -- James Scott will tell you what's wrong with Dell Inc. The 74-year-old retiree from Grayslake, Illinois, spent $530 on a desktop personal computer he ordered by telephone from the world's largest PC maker in July 2005.

The Dimension 3000 didn't work, and Scott, a self-described technology novice, tried to get Dell to fix it. He says four calls to customer support in one week left him on hold for 108, 92, 88 and 75 minutes. Without a computer, he penned a three- page letter to Dell that came back as undeliverable.

In the end, Scott paid $140 to reinstall the operating system after a repairman said Dell had sent a damaged version. ``All I got from Dell was the runaround,'' Scott says. ``If I had to do it over again, no ma'am, I would not buy a Dell.''

In July 2006, a year after Scott's purchase, Dell refunded the $140. ``We regret the problems,'' Dell spokesman Michael Maher says. ``Issues like these will become fewer as we continue to invest in customer service.''

Until recently, Dell hasn't had many reasons to apologize. Now, sales growth is at its lowest point in more than four years and profit has fallen for two straight quarters.

Dell's shares, which peaked at $58.13 on March 22, 2000, have slid 61 percent since then to trade at $22.71 on Sept. 5. They're down 24 percent this year alone as financial analysts prepare for a company meeting in New York starting Sept. 12 to hear how Dell aims to resuscitate earnings and sales.

Best Performer

During the 1990s, the company that 19-year-old Michael Dell started at the University of Texas at Austin was the best performer in the Standard & Poor's 500 Index.

Dell returned 88,918 percent in the decade, bringing someone who'd invested $5,000 at the end of 1989 a $4.5 million bonanza on Dec. 31, 1999. Dell's sales increased an average of 48 percent a year from 1997 through 2000.

After a blip in 2002, when Dell's stock fell 2 percent amid the dot-com bust, the shares and sales resumed their climb. Dell became the world's largest PC maker in 2001, overtaking Compaq Computer Corp., and it outpaced Hewlett-Packard Co. even after Hewlett-Packard paid $18.9 billion for Compaq in 2002.

In November 2004, Chief Executive Officer Kevin Rollins was confident that Dell's good times would keep rolling. He predicted at a Forrester Research Inc. conference in Boston that the company would reach $60 billion in annual sales by January 2006, notching a 45 percent surge from $41 billion in the fiscal year ended on Jan. 30, 2004, 12 months ahead of schedule.

`$80 Billion and Beyond'

Six months later, at a briefing in Austin, Rollins, who runs the company with Chairman Michael Dell, set a new revenue goal: $80 billion by 2009. Dell, 41, who's boyish looking even with graying hair at his temples, attributed the glowing prospects to the company's ties with customers and feedback from its direct sales system. Desktop and notebook PCs, printers, monitors and even televisions would keep sales rising.

``The breadth and strength and depth of the customer relationships provide what we think is a very firm foundation to grow to $80 billion and beyond,'' Dell said.

That hasn't happened. In August 2005, the University of Michigan announced that Dell's customer satisfaction rating had fallen to 74 from 79 on a 100-point scale, the lowest level since 1998.

On July 21, Dell said earnings in the second quarter ending on Aug. 4 were likely to lag behind analysts' estimates of 32 cents a share, missing by at least 9 cents.

Recall, SEC Probe

Then on Aug. 14, Dell announced it was recalling 4.1 million batteries that Sony Corp. made for its notebook PCs because the batteries may burst into flames. It is the largest- ever recall in the consumer-electronics industry.

On Aug. 17, Dell reported profit of 22 cents a share, down from 41 cents a share a year earlier. It was the fourth time in 12 months Dell didn't meet either analyst forecasts or its own projections.

That same day, Dell said that the U.S. Securities and Exchange Commission is investigating its accounting, including revenue recognition and financial reporting matters for past years. Dell said it began its own investigation and is cooperating with the SEC.

Michael Dell, a billionaire before age 30, has been pounded along with the rest of Dell investors. His 245.7 million shares were valued at $5.58 billion on Sept. 5. At Dell's high, a 245.7 million-share stake was worth $14.3 billion.

Even before the July earnings forecast, executives were doing damage control. During three days in June, reporters and analysts converged on Dell's sprawling glass and steel campus in Round Rock, near Austin, to hear the company's pitch.

`Going Fine'

Outside, it was approaching 90 degrees (32 degrees Celsius). Rollins, 53, looking cool in his tie, dress shirt and slacks, sat in a small conference room for a 30-minute interview. He says Dell's cut-out-the-middleman strategy is still working; it just needs some tweaks.

``Things are going fine,'' Rollins says, noting the business customers who represent 85 percent of Dell's sales aren't complaining. ``We've got some places we need to tune up and yeah, we'll do that,'' he says. ``It's not fundamental damage.''

Toni Sacconaghi of Sanford C. Bernstein & Co., who is ranked the top computer analyst by Institutional Investor magazine, says he doubts Dell can fix its troubles so easily. ``If this was just a tweak, we should start to see some things improve, and we haven't,'' he says. ``That suggests it's more than a tweak.''

Dell's U.S. shipments rose 0.3 percent during this year's first quarter -- the first time since 1996 that growth was less than 5 percent. Hewlett-Packard's U.S. shipments jumped 16 percent during the period, according to researcher IDC in Framingham, Massachusetts.

This Time, H-P

Apple Computer Inc., Toshiba Corp. and China's Lenovo Group Ltd., which bought International Business Machines Corp.'s PC unit for $1.25 billion in May 2005, all topped Dell's rate. Even Gateway Inc., with a $12.3 million loss during the first quarter, outpaced Dell with a 48 percent U.S. shipment surge.

On Aug. 16, Hewlett-Packard said worldwide PC shipments rose 14 percent and profit margins on PCs reached their highest level since 2002.

Cindy Shaw of Boston-based Moors & Cabot Inc., the first analyst to lower her rating to ``sell'' from ``hold'' this year, says the issue for Dell is that competitors are selling as cheaply as it does.

That's why Fred Bauer, an engineer at wireless technology company PacketHop Inc. in Redwood City, California, went with Hewlett-Packard.

``I always buy the cheapest machine or the ones with the most value for the dollar,'' Bauer, 45, says. ``The second-to- last time around it was Dell. This time around it was an H-P.''

Competitors Wise Up

In 1984, when Michael Dell began assembling his first PCs, he undercut rivals by buying parts for $600 to $700, building the machines himself and selling them directly to buyers, beating IBM's $3,000 models and snagging a big profit. In the early 1990s, Dell figured out that by buying parts one day at a time, his company could avoid carrying inventory. That let Dell price its models from 5 percent to 15 percent lower than competitors.

This decade, Dell's rivals have wised up. ``The competition, which was being killed by Dell's cost advantage, has taken costs out over the past five years,'' says Shaw, who's based in San Francisco. ``Dell basically changed the industry, and now Dell has failed to change. So now they're trying to catch up.''

Rollins says Dell made several mistakes in the past year -- especially in customer service. ``We did, in portions of our business, not invest enough,'' he says.

Customer Support

He says Dell will remedy that by spending $150 million to ramp up U.S. customer support, retraining 5,000 technicians and adding 2,000 more.

In the past, if a customer called Dell, he got a specialist in a specific area such as software. If software wasn't the issue, the agent passed the query to another specialist, lengthening the time on the phone. Now Dell is training its reps to answer more types of questions and striving to limit the phone call to four minutes.

Dell also underestimated how swiftly competitors might turn things around, Rollins says.

Like Dell, Hewlett-Packard suffered after the dot-com bust; its global PC shipments dropped 3.8 percent in the first quarter of 2002. CEO Carly Fiorina failed to deliver the 4 percent profit margin she promised from combining Hewlett-Packard and Compaq's PC divisions. Hewlett-Packard's board asked Fiorina to leave in February 2005 after she challenged management changes directors were pushing for.

Price Cuts

Former NCR Corp. CEO Mark Hurd took charge on April 1, 2005. He pledged to cut 15,300 jobs, or 10 percent of the workforce, and started trimming retirement benefits. Hurd showed that Hewlett- Packard could beat Dell at its own game. He slashed $1.9 billion in costs, giving Hewlett-Packard the breathing room to offer low- cost PCs while still boosting margins, says William Fearnley Jr., an analyst at Boston-based FTN Midwest Securities Corp.

Gateway, Acer Inc. and others piled on with price cuts of their own. On July 28, Hewlett-Packard's entry-level Pavilion and Compaq Presario desktop PCs sold for $250 after a rebate; Dell's lowest-priced system, the Dimension B110, was $299.

``Hitting the price button is more difficult because Dell's competitors are hitting the same price button,'' Fearnley says. ``For Dell, imitation may not be the sincerest form of flattery.''

Hewlett-Packard is using another weapon to fight Dell: more than 140,000 stores where customers can see and touch PCs.

Wal-Mart Sales

At a Wal-Mart Stores Inc. superstore off Interstate 35, a few minutes' drive from where Rollins shares an office suite with Michael Dell, the world's largest retailer displays Hewlett-Packard PCs, printers and ink cartridges just past the shoe department.

Signs with colorful hands feature the slogan ``The computer is personal again.'' It's Hewlett-Packard's most-expensive PC ad effort ever, says PC marketing chief Satjiv Chahil, who won't say how much the campaign is costing.

Roger Kay, who spent eight years as a PC industry analyst for researcher IDC before founding Endpoint Technologies Associates in Wayland, Massachusetts, last year, says with prices fairly even, U.S. consumers may prefer going to a store instead of buying from Dell sight unseen and waiting for the PC to be shipped.

``What can H-P offer through its retail channel that Dell can't?'' Kay asks. ``Instant gratification.''

Dell's Kiosks

Dell has taken tentative steps into retailing. In 2002, it started 10-foot-by-12-foot (3-meter-by-3.7-meter) kiosks in malls and airports. Customers who walk up can peruse and test about a dozen PCs. If they want to buy, they have to order online with the help of two or three salespeople who staff the booth. Dell's 160 kiosks account for about 4 percent of its U.S. consumer sales.

Thomas Schoenwaelder of Doylestown, Pennsylvania, says he liked a Dell he saw online but didn't want to order without checking it out. ``I guess if I went to one of those kiosks I could see it, but I have to drive 20 miles,'' says Schoenwaelder, 47. ``That's not convenient.''

Instead he bought a Hewlett-Packard Pavilion Slimline desktop model for his daughter at his local Staples Inc., five miles from home.

Dell expanded the kiosk concept in July. It opened a 3,000- square-foot (280-square-meter) showroom in Dallas's NorthPark Center, a favorite venue for affluent shoppers. Customers can test about 36 products. Unlike Apple stores, Dell doesn't offer products for carry out. That may frustrate buyers, Kay says.

``This is getting Dell in front of high-traffic areas, and that's good,'' he says. ``The bad news is, they don't have any inventory, and so there's nothing to sell.''

Online: The Future

Rollins says Dell will use showrooms to gather feedback. ``We're not anticipating these stores will be the growth vehicle,'' he says. ``We're investing in the online site, in the ability to buy, to experience Dell and be serviced by Dell on line. That is the future. Period. Full stop.''

Dell's Web site, dell.com, handled $16 billion of sales, or 29 percent of the company's $55.9 billion of revenue, in the fiscal year ended on Feb. 3. The rest of Dell's orders came in by phone or were gathered by sales staff working with business customers.

To pump more sales through the Web, Dell revamped the U.S. site in May. Instead of splashy banners screaming out discounts -- including many that urged a buyer to act immediately -- the new site shows close-up and three-dimensional views of PCs, printers, servers and TVs.

`Just Not Happy'

Dell plans to scrap as many as 80 percent of its promotions, while keeping effective prices the same, after customers said they worried they weren't getting the best deal, says Rosendo Parra, a 13-year Dell veteran named to run the U.S. consumer and small business division in May.

``There's no question that our consumer business is down,'' Parra says. ``Customers have told us that they are just not happy with the level of service and support they're getting from Dell. What you have seen is an effort to fix that as quickly as possible.''

Even the best customer support won't boost sales if Dell doesn't have appealing products. By keeping its focus on price and low-cost parts from suppliers, Dell never had much need for in-house research and development. It spent less than $500 million a year in each of the past five years compared with $3.34 billion a year for Hewlett-Packard. One result is that Dell's machines lack pizzazz.

`Can We Do Better?'

``Did we slip a little bit in terms of the feature set? Yeah, we might have, either through looking at costs too closely and not looking at a competitive feature set,'' Rollins says. ``We're not perfect. Can we do better? Yes.''

John Medica is spicing up Dell's offerings. A former Apple executive who helped develop the Macintosh PowerBook computer, Medica points to a new game PC, the XPS 700, which is shaped like a parallelogram instead of the typical rectangle. A bright red grille covers the front panel, a contrast to Dell's usual black-and-silver motif.

Medica says a notebook called the XPS M2010, which resembles a briefcase with a handle and a detachable wireless keyboard, was born after customers asked for a portable entertainment system they could move from the kitchen to the living room to the patio to play music and games and watch videos.

``Dell is described as a distributor in the worst light,'' Medica says, a nod to Dell's reputation as a packager of PC technology in nondescript cases. ``We're going to do a better job going forward so you become more aware there's a purpose in our industrial and product design.''

Austin and Singapore

Dell has 50 designers in Austin and Singapore. It plans to hire an additional 20 in the next two to three years, Medica says. At the same time, Dell is searching for ways to streamline its eight factories after Rollins set a goal of paring $3 billion in manufacturing, warranty and parts costs during the fiscal year ending in January 2007.

At its 350,000-square-foot plant in Austin, workers pass through metal detectors and into the din of the factory. Some, wearing protective goggles, stand at stations for 8 hours to 10 hours.

Bins, each containing a PC chassis, disk drive and other parts for an individual computer, rumble overhead on a network of conveyer belts, delivering a kit to each station.

The assemblers are timed, so they move quickly, following step-by-step instructions on an overhead computer screen and hitting a key to show when they've completed a task. They push the assembled PC back onto the conveyor belt, where it moves to an automated testing bay and then to shipping.

Less Touching

Dell now packs its flat-panel monitors inside the box with computers instead of shipping two cartons. That change cut shipping costs and reduced the amount of packing material, says Dell spokeswoman Amy King, who declines to quantify the savings.

At WS1, Dell's newest and biggest factory, at 750,000 square feet, outside Winston-Salem, North Carolina, the company produces a computer every five seconds. By year's end, the goal is to crank out machines every 2.5 seconds.

Robots, instead of people, handle heavy manual jobs such as putting completed PCs in boxes and picking up monitors. The telephone system relies on voice over Internet protocol to cut telecommunications costs.

``We're working on ways of building more quickly and touching products less,'' says Travis Simpson, who runs the plant.

Rollins says Dell will cut more than its projected $3 billion next year, though he declines to be specific. ``We'll be bigger, and the competition will be stronger,'' he says. ``We will have to find new ways to be more efficient.''

`I've Had Enough'

Daniel Morgan, who helps manage $5.45 billion at Synovus Investment Advisors in St. Petersburg, Florida, is skeptical.

``At some point, you can't keep cutting costs,'' he says. After being a Dell booster for 15 years, Morgan dropped the company from the stocks he recommends in October because he expects margins will shrink as lower prices cut into profits. ``I just didn't like it,'' Morgan says. ``I've had enough.''

Dell's sales will rise 4.9 percent to $58.7 billion this year, according to the average of 23 analyst estimates in a Thomson Financial survey.

Analysts peg Hewlett-Packard's revenue growth at 5.2 percent to $91.2 billion, and Dell's Palo Alto, California-based rival is reporting the best sales and profit margins in its PC business in four years. PC margins widened to 4 percent in the third quarter ended on July 31, the highest since the Compaq takeover four years ago.

Margins at Dell are narrowing as the company cuts prices to try to win back market share.

`Dirty Laundry'

A week after Dell reported its first-quarter profit miss on May 18, Michael Dell, the company's largest shareholder, with an 11 percent stake, spent $70 million buying 2.92 million shares.

At the June meetings in Round Rock, he was upbeat as he detailed the advantages he says direct sales will continue to yield. When pressed on how a company that has prided itself on its ability to collect perfect data from buyers could have misread the U.S. consumer market, Dell showed some exasperation.

``Customers don't necessarily tell you what competitors are doing,'' Dell said. ``We understand the things that have happened that caused that to occur, and we've taken a number of steps to address those. I'm not going to give you the dirty laundry.''

For now, Dell is pulling out the stops to repair its image with U.S. consumers, the millions of descendants of Michael Dell's dorm-room customers who have championed Dell's low-cost machines and reinforced its mantle as industry leader and investor favorite.

Tough Sell

Scott, the Illinois retiree, will be a tough sell. He says he has warned at least six friends and family members against buying PCs from Rollins and company. ``Don't waste your money on Dell,'' he tells them.

By injecting $150 million into customer service, sprucing up designs and slashing $3 billion in costs, Dell is adapting the strategy Michael Dell pioneered two decades ago to the realities of today's competitive PC market.

There's at least one sign the effort is working. In August, the University of Michigan said Dell had boosted its customer satisfaction rating to 78 from its eight-year low of 74.

If Dell can keep up the momentum, consumers and investors may find fewer reasons to follow Scott's advice.

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net.

Last Updated: September 6, 2006 01:06 EDT