Dell has been in the news recently, and like many big companies that have had a glitch in their performance, not in a good way.

Slowing revenue growth, accounting scandals and customer service issues–you’ve heard it all before. By the way, where was the seminar that all big company managements attended, encouraging them to cut corners on their financial reporting practices? It seems that the same pattern has been replicated to an astounding degree across a broad array of large corporations. There has to be some root cause of this; too much smoke in this area to be a coincidence. And of course, the “Professional CEO” relieved of his duties–and replaced by the company founder, returning on a white horse to his original role to refocus the company.

These things have been so common in corporate America. Business writers may have been able to perform an automated “search and replace” in their word processor and write a new, yet the same, story for each additional corporation unfortunate enough to make the headlines. So what’s the deal with Dell–the details always tell the real story–and what happens from here?

ENORMOUS SUCCESS OVER TIME

First off, I want to give Dell Computer and Michael Dell their just due. This is one of the great success stories in corporate history. Started in a dorm room, Mr. Dell built the company into the dominant PC maker of its time, with a long history of exceptional growth and profitability. The company used the direct model at the time when it was counter-intuitive that this would allow a long run of success–which it did. The story of Dell is much more about what has been done right–than wrong. I had some limited contact with Mr. Dell years after Dell was already a large company. He was courteous and thoughtful and very impressive. I have nothing but great respect for the company and its founder.

Probably the strongest endorsement I can make of my opinion of the company, is that the last 3 computers that I’ve purchased have been Dells–even though I am a proud alumnus of HP.

THE FATE OF ALL BIG COMPANIES

But Dell has definitely hit a major pothole, and has had its reputation tarnished on many levels. As I’ve written before, these things inevitably happen to all successful large companies. Nothing great lasts forever–and it should be pointed out that at Dell, it’s lasted a very long time.

Growth has leveled off, and they are no longer the darling of Wall Street’s growth followers. Accounting scandals always reduce a company in the eyes of the public, and firing your CEO, who you’ve been raving about for a while, doesn’t exactly induce confidence in your future. But I think the biggest issue for Dell, is that they’ve taken their eye off of the ball when it comes to quality–and even more importantly–customer service.

I’ve written about this in the past, and I think it has played a primary role in Dell’s current problems. When I bought my first Dell computer, quality was almost unquestioned, and customer service and support was a real strength. Unlimited support was bundled in with the product, and it was great. Contrast that with the situation today: Now you are buying a product which is perceived as lower quality, and you almost can’t talk to anyone about anything without a charge. If you are allowed to speak someone in support, it’s hit or miss whether they are knowledgeable, or speak your language fluently. I really believe that the root of the problems has been what I’d call “too much of a good thing”: The relentless drive to reduce costs. As the PC business matured, Dell was far and away the low cost producer, and used this fact to great advantage. I believe that they got carried away with this strategy, and took their eye off of the ball of what made the company great in the first place. Service/Support quality has become such an issue for Dell that they’ve acknowledged it publicly, and announced plans to make significant investments to fix customer service. But real damage to the Dell brand has already been done, in my opinion. I, along with many others, will be looking closely at HP and other competitors when it comes to future computer and related technology purchases.

SO WHERE DO THEY GO FROM HERE?

All great companies hit this point eventually, and with all the company has going for it, the problems are imminently fixable. Unlike most companies that hit a bump in the road at this point, it doesn’t appear that it has happened because the company has become grossly “fat, dumb and happy”, with a bloated bureaucracy. No doubt there is some bureaucracy with a company this size, but ironically, cutting in the wrong places has been the major problem. Michael Dell has announced that he will look at “new strategies” for the company in his return to the CEO role. I consider this a positive. Often founders want to “go back to the future”, and return to what they know made them successful in the first place–I don’t believe that this is the right answer here.

THE OBVIOUS ANSWERS

The first thing is to fix customer service and support, regardless of the cost. The brand will continue to suffer without this, and that would ultimately be deadly. Mr. Dell has announced that he plans to greatly reduce the number of direct reports to the CEO. If done for the right reasons, I applaud this directive.

Even in a famously lean company like Dell, a company at this size tends to become pretty bureaucratic. There tends to be a lot of people around with curious, abstract job titles, who only serve to slow down, and get in the way of progress. Personnel in companies this size often end up spending a lot of time in large internal meetings–talking to each other, instead of listening to the market. Getting ahead in a company at this mature stage often is dependent on bureaucratic skills, rather that creating actual marketplace value. It’s usually important to cull the herd of extraneous roles, and simplify and focus business processes on only those things that create revenue and profit. This looks painful in the short run, but the company actually runs much more smoothly in the long run.

THE NOT SO OBVIOUS ANSWERS

A more difficult decision is whether to remain with a largely “direct-only” business model. This is particularly difficult for Dell, because it has always been what they’ve hung their hats on. In fact, years ago when I had a few discussions with senior managers at the company, the feeling among upper management was that they didn’t know how to do other forms of distribution, and that they had failed in their few toe dips into indirect waters.

In hindsight, at that time, the decision to remain primarily direct-only was the right one. Enormous value has been created with that strategy–you can’t question it in hindsight. But at this stage of the company’s development, I believe that they really need to rethink this. There is evidence that they’ve run out of steam with a direct-only distribution model. In fact, Dell has been dealing with the channel in a very low key manner for years. But both sides have sort of looked at it like “dealing with the devil”: do it because you have to, but be careful not to get burned.

In my opinion, while it may appear risky, it is time for Dell to look at becoming a company that wants to be a real business partner with the channel. Do they want to have a real chance to stay a growth company?(which I assume they do–this is where the high stock P/Es are). If so, there are few other choices other than indirect distribution, at their current size, that will enable the kind of growth opportunities required for real growth. As they’ve looked farther from their core computer offering, to find other things to push through their direct pipe, they’ve been much less successful–as generally is the case. They’ve not become a real player in consumer electronics, and
while they were initially pretty good at giving away printers–they were not so good at selling them, or more importantly, the consumables which are the money maker in that business. The company should proceed carefully and thoughtfully in this regard. I’m sure that Mr. Dell has other initiatives that he is considering, but I’d be shocked if consideration of a major indirect distribution push isn’t high on his list of possibilities.

SUMMARY

What happens from here? Your guess is as good as mine. It should be very interesting to watch what new strategy emerges, and if this company famous for execution can return to those ways–especially if the future includes a major strategy shift. Corporations that have been as successful as Dell for as long as it has usually have 9 lives (see Apple Computer), and Dell is only on its second, by my count. So I wouldn’t bet against them.

That’s my opinion–what’s yours? Post a comment or send me an email.

Phil Morettini
PJM Consulting
www.pjmconsult.com

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