Dell's Extreme MakeoverBy
When a wave of mergers swept the tech industry in 2004, Michael S. Dell promised investors they wouldn't see his computer company anywhere near a negotiating table. "When was the last time you saw a successful acquisition or merger in the computer industry?" he asked at the time. Five years later, it's a different story. Round Rock (Tex.)-based Dell is weeks away from closing its largest acquisition ever, a $3.9 billion deal for tech-services provider Perot Systems (PER). The chief executive says more deals are likely, and this won't be the end of his changes in strategy. "Everything's on the table," he says.
And with good reason. The company Michael Dell started in his college dorm and built into the preeminent personal computer maker has fallen on hard times. As the center of the tech industry has shifted from the PC to the Internet, Dell has struggled mightily to find its place. While Hewlett-Packard (HPQ), IBM (IBM), and other rivals transformed themselves in recent years by acquiring new companies and capabilities, Dell long stuck with its old playbook of cranking out PCs as efficiently as possible. It's hard to remember that in 2005 Dell was valued at $100 billion, or more than HP and Apple (AAPL) combined. Today, it's worth $30 billion, less than a third of its rivals' market values.
While such signs of struggle are clear to the public, what isn't apparent is the steady overhaul Michael Dell has been working on since he returned to the chief executive role in 2007. The 44-year-old has been making sweeping changes in everything from personnel and partnerships to acquisitions and distribution. He hasn't talked publicly about his comeback strategy before. But in interviews with BusinessWeek, the CEO made it clear he is determined to change almost everything about the company he started 25 years ago. "There's been a pretty ginormous shift in our business over the last several years," says Dell, dressed in a black suit and tieless white shirt in the sprawling conference room next to his office. "We can do, and must do, more."
He has installed an almost completely new management team to help with the turnaround. Seven of his ten direct reports are new to their posts, including veterans from General Electric (GE), IBM, and Motorola (MOT). The company has been restructured to sharpen the focus on customers. And it is branching out into services, software, and new hardware categories, including smartphones and tablet-like devices. Sources say Dell is even preparing to add social networking features and music and video services to Dell.com. The old Dell is history, the CEO vows, and a new one is just beginning. "We're not trying to become like our competitors," he says. "We're digging our own path."
It's not at all clear Dell can pull this off. The old Dell succeeded because of its mastery of logistics and the supply chain, allowing it to sell computers directly to customers at prices no rival could match. The new Dell requires completely different skills—flexibility, customer focus, and innovation. Leadership experts say changing a management approach is one of the toughest undertakings in business, particularly for a founder who has had early success. "He's got tremendous challenges ahead of him, because he's in an industry that itself is undergoing rapid, sweeping change," says Warren Bennis, chairman of the Leadership Institute at the University of Southern California Marshall School of Business.
A SLOW RESTARTInvestors have given Dell virtually no credit for his work so far. The company's stock is off about 40% since the start of 2007, while Apple shares have more than doubled and HP's have risen about 10%. David Eiswert, manager of T. Rowe Price's Global Technology Fund, sold his last 140,000 Dell shares last fall because he thinks Dell has too many rivals in its PC business and doesn't spend enough on research and development to create stand-out technology. Dell is "saying, 'Don't worry, we have a lot of ammo,' " says Eiswert. "The problem is the invading armies have a lot more troops and a lot more ammo."
Dell is convinced he can prove the skeptics wrong. He understands that only a handful of former chiefs have returned to lead their companies to brighter futures. For every Steve Jobs there's a Jerry Yang, the Yahoo! (YHOO) co-founder who struggled after retaking the helm. Yet for Dell, this is an opportunity to prove himself, to show he not only can launch a great business but revive a struggling one. "What you do is walk outside the building, you pretend you're the new guy, and walk back in," he says. "You force yourself to do what you need to do."
He has already pulled off a more extensive overhaul than most outsiders realize. He still has a long way to go, but insiders say the CEO is as driven as ever, back to working the kind of hours he did when he started the company. Ronald G. Garriques, head of Dell's consumer division, fields questions from his boss after midnight these days. "I get these e-mails from him saying, 'Hey, Ron, I was on this Web site, and wouldn't it be really cool if our product does this or does that?' " he says. Roger L. Kay, founder of researcher Endpoint Technologies Associates, got a call from Dell one weekend late last year. "He wanted to know if I knew any people who might be good as head of marketing," says Kay. "On a Saturday when I'm repairing my garage door, he's making calls to analysts."
Dell hasn't had any time to waste since beginning his second stint as chief executive. It was January 2007 when Dell told his board he thought it was time to replace Kevin B. Rollins, his hand-picked successor. With the company losing share in the PC market and struggling with an investigation into its accounting practices, the directors agreed. Dell told them he was ready to step into his old job, but before they accepted, Donald J. Carty, the longest-serving director, stopped into Dell's office for a frank, one-on-one talk. "This is not going to be a stopgap thing," he cautioned the founder. "You're going to have to take the reins for a very long time." Dell pledged his commitment. "I'm going to care about this company when I'm dead," he told Carty. Dell's return was announced Jan. 31.
The business Dell took over was floundering. Corporate PC sales were slowing, while HP under the direction of CEO Mark V. Hurd was pulling consumers into stores—and away from Dell—with its stylish notebook PC designs. Dell suffered the consequences. It lost its position as the largest PC maker in the world to HP, and profits tumbled. Dell's net income dropped 28%, to $2.6 billion, for the fiscal year ending Feb. 2, 2007, while revenue inched up 3%, to $57.4 billion.
Dell's first move was to try to stop the bleeding in the consumer business. The head of the division left in February, and Dell started looking for a replacement by working his jam-packed Rolodex. He wanted someone who could cut costs and also guide the company's foray into retail chains around the world.
One name stood out: Garriques, head of Motorola's (MOT) mobile devices business. When he and Dell had met years earlier, Dell had been impressed with how Garriques had guided development of the hit Razr phone. His broad experience dealing with top executives at retailers and wireless carriers would be invaluable as Dell tried to build a distribution network from scratch. Dell picked up the phone to call Garriques—no headhunters got involved—and quickly persuaded him to take the job. Dell's marching orders were simple: Create a profitable consumer business with designs that rival Apple's or HP's.
Garriques took a step back before moving forward. He killed a line of less-than-flashy consumer PCs Dell planned to introduce, called Mantra, and halted plans to copy Apple by opening more than a dozen Dell-owned stores. "The first order of business was to slow Dell's go, go, go mindset and stop to think about what we were trying to do," he says.
Then Garriques went hunting for a heavy-hitter to go up against Apple and HP. In March 2007, he approached Ed Boyd, a 42-year-old designer at Nike (NKE). Boyd had worked on sunglasses and running shoes but didn't have experience in computers. Garriques told Boyd he would have the opportunity to make design matter at Dell; Boyd jumped at the chance. "Here was a great company founded on the notion of customizing products and shipping them to people, yet it was missing the fact that people want to convey a sense of personal style with their products, too," Boyd says.
The changes sent a clear signal to Dell employees. The consumer business, long considered a professional dead end, was going to be a priority. What's more, Boyd launched experiments that showed it could be an exciting place to work. At one point, Boyd hatched a plan for customers to pay an extra $75 to get certain designs on laptops, which so unsettled Dell's manufacturing team that they balked. Boyd appealed directly to Dell, who green-lighted the move.
Later that year, Dell broke for good with its tradition of selling only direct to customers. It announced plans to sell its machines at Wal-Mart (WMT), in what the CEO called a "first step" in using retail stores to reach customers.
COMPLETE RESTRUCTURINGEven more far-reaching changes were in store for 2008. Dell knew he wanted to change the company's management culture, to get executives to jump on new business opportunities and take more risks, but he wasn't sure how to go about it. He turned to Brian Gladden, a 20-year veteran of GE, the bastion of modern management. In March that year, he asked Gladden to fly to Texas to talk about a job as chief financial officer overseeing day-to-day operations. Dell was in such a rush he didn't even tell Gladden he had the job before slapping an inch-thick sheaf of confidential documents on the table. "I said to myself, there's a lot of inside information here that I really shouldn't see," Gladden says. "But he was like this mad scientist saying, 'Brian, you can help with this, and you can help with this.' "
Gladden quickly slipped into an easy rapport with Dell. But the lack of structure at the massive company surprised him. "The processes, the tools, the culture here didn't support a $60 billion business," Gladden says.
He dove into figuring out how to change that, in consultation with Dell. After months of study, they became convinced the company had to be restructured around customers. It was a radical move: Most tech companies organize around the products they sell, such as computers or software. But Gladden and Dell thought that by focusing outward they could give top managers more responsibility and more flexibility to respond to clients. On Dec. 31, Dell said it would restructure into four customer groupings: consumers, corporations, small and midsize businesses, and governments and educational buyers.
With the global economy in crisis, almost no one took notice. Dell's stock, which had topped $25 the previous August, closed the year at $10.24. It kept falling with the market, and dropped below $8 in February, off 70% in five months.
Still, in those dark days, Dell began to gain confidence his company finally had a solid foundation for the future. He saw his executive team quickly take to the new management approach, which was modeled after GE's. Leaders of each division are responsible for meeting financial targets and have broad authority to figure out how to reach them. The main beneficiaries have been the consumer, government, and small and medium-size business units, which in the past often received less attention as Dell focused on large corporations. "[It's] a different dynamic than [Dell] is used to," says Gladden.
In the small and midsize business group, led by Steve Felice, salespeople have been given incentives to offer a broad range of solutions, instead of just hardware. It seems to be working. Mark Konik, vice-president for technology at the marketing and ad shop GA Communications in Georgia, says Dell's regional sales manager showed up at his door six hours after he made an inquiry. Though the deal was only for $1 million, Dell offered to help integrate the company's Macs into the package and volunteered to talk to software providers VMware (VMW) and Microsoft (MSFT) about including their products in the purchase. "The speed and competence Dell brought to the table in such a short period of time was really quite different," says Konik.
Garriques' consumer group has been making some dramatic changes. In October, to coincide with the launch of Microsoft's Windows 7 operating system, Dell will begin selling the world's thinnest notebook, at 0.39-inches thick. The Adamo XPS has a heat-sensing strip on the lip that, when swiped with a finger, glows white and automatically opens the aluminum lid. Garriques says the $2,000 computer will serve as a statement about Dell. "This isn't going to be a high-volume product for us, but it's going to be a product that says, 'Wow! Dell did that. What else does Dell have?' " he says.
With Garriques and the other division heads taking more control over operations, Michael Dell has been freed up to explore new opportunities. Over the summer, he had dinner at the Four Seasons in Washington's Georgetown neighborhood with James W. Breyer, a Dell board member and founding partner of the venture capital firm Accel Partners. Over steaks and red wine, Dell talked about prospects in mobile phones and other products. He then pulled out a half-dozen smartphone prototypes. "The way he laid it out, his thinking, led me to believe that in many ways the journey at Dell is just in the first or second inning," Breyer says. The company is expected to introduce its first smartphones early next year.
Dell is beginning to show improvement in its financial results. In its most recent earnings report, the company handily beat Wall Street's expectations. Dell shares have doubled since their low in February, to $16, as hopes mount that the company will benefit from a surge in PC purchases tied to Windows 7.
But Michael Dell is clearly looking for more than incremental improvements. He wants his namesake company to be the kind of force it was in the past, when it drove IBM out of the PC business and humbled industry giants like HP. "He's thinking, 'I'm going to make this company what it should be again," says Alex Mandl, a longtime Dell board member.
Rivals contend that Dell has waited too long to take the initiative. In an industry undergoing rapid consolidation, companies that haven't already positioned themselves to withstand the cyclical nature of technology will have a hard time thriving over the long term. That means Dell itself may be forced to merge with another company or become takeover bait. "Being a fast follower doesn't work in an industry that is moving faster every day," says Shane Robison, chief technology officer at HP.
Dell is more reflective than usual these days. During the interview in his conference room, he acknowledges he stuck with the one innovative idea of selling computers directly for too long. "Mea culpa," he says. But he says talk that he and his company aren't moving fast enough now is nonsense. "We're going to be stronger, faster, and more hyper than we've ever been," he says. "If you don't believe, then just sit back and watch."