Dell Inc.: Struggling To Stay On Top

July 26, 2006
No. 1 computer maker reworks its pricing structure and customer-service centers to win back consumers.

Dell Inc. has seen better days. The world's largest personal-computer maker, famous for its direct-to-consumer sales model, is struggling. Last week, the Round Rock, Texas-based company forecasted that its second-quarter 2007 earnings would dip from previously expected earnings of 32 cents per share to between 21 and 23 cents per share -- not the type of news investors had hoped for after a weak first quarter during which profits dropped 18% from the year-earlier period.

According to Dell -- one of Industry Week's IW 50 Best Manufacturers for 2006 -- the revised forecast reflects "aggressive pricing in a slowing commercial market."

Analysts have pointed to pricing pressure from competitors, poor customer service and stale product offerings as the main reasons for Dell's decline.

Part of the company's struggles stem from "the absence of good positioning in notebooks, international, consumer and retail" business, Goldman Sachs analyst Laura Conigliaro said in a report cited by Reuters.

Despite some criticism that Dell's business model has become outdated, CEO Kevin Rollins told shareholders at the company's annual meeting on July 21 that the company's direct-business system still works. "The direct model remains a powerful differentiator for our global business, providing a unique relationship with our customers and a clear cost advantage over our competitors," Rollins said.

Dell has made efforts to improve consumer relations. A week before its revised forecast, Dell said it would simplify its pricing structure by reducing the number of mail-in rebates for its products. The company hopes the move will make buying computers less cumbersome for customers and improve customer satisfaction.

"Through direct relationships and more than a million interactions with customers every day, it became increasingly clear that a simple pricing and sales structure would make it easier for customers," said Ro Parra, senior vice president, home and small business group, in a July 13 statement. "They told us what they wanted and we're delivering what they asked for."

Dell Inc.
At A Glance
Dell Inc.Round Rock, TexasPrimary Industry: Computers and Other Electronic ProductsNumber of employees: 66,1002005 In ReviewRevenue: $55.9 billionProfit Margin: 6.39%Sales Turnover: 2.42Inventory Turnover: 88.81Revenue Growth: 13.62%Return On Assets: 15.39%Return On Equity: 55.08%

Dell will begin its pricing initiative in August with the reduction of mail-in rebates on Inspiron notebook computers and Dell televisions. Eventually the company expects a 70% reduction in each product-line promotion and an 80% paring of promotions for individual products.

The move is part of Dell's $100 million customer-service improvement initiative announced in April. Dell's plan to regain customer confidence includes more than 2,000 new sales and support personnel, the addition of expansion of call centers in Ottawa, Oklahoma City, Manila and Nashville, Tenn. and the opening of 14 new manufacturing, call center and design and development facilities over a two-year period.

On a more positive note, a number of Dell's products made the government's list of environmentally friendly computers. Dell was one of three manufacturers whose products met the federal "green computer" EPEAT standard. EPEAT, which stands for Electronic Product Environmental Assessment Tool, is an electronic procurement database designed to help institutional buyers select computers based on their environmental attributes.

The EPEAT status could help Dell win government products, reports Network World, a publication for Network IT executives. That's because EPEAT registration is required for many federal and state contracts, according to Network World.

Dell's green efforts have been ongoing. In its April sustainability report, the company said it would triple the number of computers recycled by 2009, enhance product energy efficiency through improved product designs and comply with the European Union's hazardous substances restrictions.

"Dell is committed to being an environmentally and socially responsible market leader, and our public goals and annual reporting on global process underscores this focus," said Tod Arbogast of Dell's sustainable business group, in an April 5 statement. "We made significant progress against our goals last year and have identified areas in which we can extend that performance over the coming year."

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