Is Dell Too Big for Michael Dell?
Welcome back, Michael. Don't get too comfortable.
By returning to the top job at Dell (DELL), replacing departing Chief Executive Kevin Rollins, founder Michael Dell takes on perhaps the toughest job in the computer industry. Since mid-2005 the PC maker has battled problems with customer service, quality, and the effectiveness of its direct-sales model. Lately, rivals Hewlett-Packard (HPQ) and Apple (AAPL) have been gaining in sales and market share. On Jan. 31, the day Rollins' departure was announced, the Round Rock (Tex.) company disclosed that its fourth-quarter earnings and sales would fall short of analyst estimates. It's also under scrutiny by the Securities & Exchange Commission and a U.S. Attorney for accounting irregularities.
As recently as last November, Dell insisted to BusinessWeek that Rollins' job was safe. Now, in an interview, he insists the decision to push Rollins out started with him. "I recommended to our board that I become the CEO," Dell says. For years, Dell and Rollins were held up as a prime example of the company's "two-in-a-box" management structure, in which two leaders worked together in lockstep. When Rollins was president, Michael Dell was CEO; when Rollins was promoted to CEO in 2004, Dell remained chairman.
Job No. 1: Streamlining
But financial performance has been deteriorating for a while now, and Michael Dell apparently ran out of patience in light of the latest disappointment. "People are looking forward to a change," said an analyst at one of Dell's largest institutional shareholders. Indeed, the company's share price jumped 3.6% in the couple of hours after the shift was announced.
But does Michael Dell have what it takes to turn the company around? It's been years since he shouldered day-to-day operational responsibility on his own. Since the early 1990s, Dell has always had a strong No. 2; back then, the company had less than $3 billion in yearly sales. Today it is a $60 billion company. But Dell says he has a clear plan. He believes the company's supply chain and manufacturing can be improved. "I think you're going to see a more streamlined organization, with a much clearer strategy."
None of the paths to improve performance will be easy. Dell doesn't have the innovation DNA of an Apple or even an HP, should it want to overhaul its utilitarian products and services. Any effort to crank up R&D would crimp margins. Trying to win over more consumers, the fastest-growing part of the market, may well require a move away from its direct-sales model into retail. That could prove costly as well. Dell himself says he doesn't anticipate leaving the direct-sales model behind: "It's a significant strength of the company." Nor does a big acquisition seem to be an option, given that Dell has never done one in the past.
But standing in place also looks hazardous, since Dell may now be slipping in its core corporate business, too. According to a Jan. 30 study done by Goldman Sachs (GS), Dell is losing share in business spending for PCs. (Hewlett-Packard is also losing share of spending, while Lenovo (LNVGY) and Apple are gaining.)
"Dell's troubles seem to be bleeding into its corporate business, which, up until now, had been a stronghold," the report said. Dell has also lost the top spot in the worldwide PC market-share rankings. In the fourth quarter, Hewlett-Packard's worldwide market share grew to 18.1%, while Dell's share dropped to 14.7%, according to market researcher IDC.
Dell also has several slots to fill in the executive suite; Rollins is only the latest departure among key managers. But for the first time in years, the tough choices will be solely in the lap of the man who started the company in his University of Texas dorm room back in 1984. "I'm not hiring a COO or a CEO," Dell says. "I'm going to be the CEO for the next several years." He adds: "We're going to fix this business."
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