With HP Gaining Ground, Can Michael Dell Find His Mojo?With HP Gaining Ground, Can Michael Dell Find His Mojo?

Michael Dell is returning to take the helm of a much different company than the one he left just two-and-a-half years ago.

When he stepped down as CEO of Dell in July 2004, the company he had founded 20 years earlier dominated the PC business. It eclipsed other PC manufacturers, which had faltered when the dot-com bubble burst at the turn of the century. Dell, the company, was firing on all cylinders, maintaining robust growth and a wide gap between itself and its closest competitor, Hewlett-Packard.

But times have changed. Dell lost its mojo.

Since Dell left the day-to-day operations to Kevin Rollins, the company has stumbled. Dell had to recall more than 4 million potentially faulty laptop batteries. Its accounting practices have come under federal scrutiny, and the company's customer service ratings have dropped to dismal levels.

Dell, the company, probably could have overcome those problems without too much trouble. But what it hadn't counted on was the revival of long-time rival HP, which got its PC house in order and outpaced Dell in terms of growth and PC sales for the last two quarters. In the fourth quarter of last year, HP boosted year-over-year growth to 24%. Dell couldn't keep up. On top of that, IDC reported that HP pulled ahead of its once-dominant competitor in terms of worldwide fourth-quarter PC shipments in 2006, grabbing 18.1% of the market to Dell's 14.7%.

On Wednesday, Dell warned that its fourth-quarter results for fiscal year 2007 are expected to be below the average of First Call Estimates for both revenue and earnings per share.

Rollins, the company announced late Wednesday afternoon, stepped down from his posts as CEO and a member of the board. Dell, the founder, is back in to rebuild the company he built in the first place.

"This might bring some thunder back to the company, and they need that," says Art Hogan, a chief market analyst for broker and investment bank Jefferies & Co. "It's exactly what Dell might need. He needs to shake things up. The big thing will be to get investors' and customers' ears and tell them what will be different. They need a real driver. Now they've got the founder coming back, and people will sit up and take notice."

Dell, the man, now finds himself in a position both lofty and challenging. Dell, 41, joins the short list of former CEOs such as Steve Jobs who returned to their leadership positions to right a wayward ship. Dell has a lot going for him. Industry analysts are quick to describe him as charismatic and sharp, even brilliant. They were equally quick to applaud his decisions to retake the reins of power.

"He has a built-in credibility factor that someone new who comes on board, no matter how good, doesn't have," says Jonathan Eunice, a principal IT advisor at Illuminata. "When you shake things up and bring back that charismatic leader, it communicates that change is important. It's saying they're hunkering down. It creates an attitude and a sense of urgency. If Michael Dell is willing to resume the day-to-day grind, it's obvious they're looking to fix things. Dell is coming back," Eunice says.

Investors and industry pundits have been calling for Rollins' removal for months, but Dell himself had been saying that just wasn't going to happen. At a press conference in September, Dell said the company had begun what he called a metamorphosis. He denied rumors that there was pressure to replace Rollins and even took some of the blame for the company's miscues.

Just this past Monday, Rollins shared a stage with industry heavyweights Bill Gates and Steve Ballmer as Microsoft launched its Vista operating system. What a difference a few days can make. Rollins, for his part, was a man experienced with Dell -- both the company and the man. In various interviews, Dell, the man, called them "two in a box" and talked about how well they worked together. Many in the industry expected a smooth transition and continued strong momentum when Rollins became CEO in July 2004.

Rollins deserves more credit than he's getting. He joined the company in 1996 and played a major role in running the efficient operations that put Dell on top. But things started going downhill in the last couple off years.

"[Rollins] was doing a good job, but the environment turned sour on him very quickly and he hasn't been able to adjust adequately or fast enough to please investors and shareholders," says Richard Shim, an analyst with IDC.

That Dell started to slip so quickly surprised many. For a long time, Dell was the shining example of how to make money in what had become a low-margin commodity PC business, something other vendors had a hard time accomplishing. The company had been innovative with its direct-to-the-customer sales approach, avoiding the channel -- the retailers, resellers, and systems integrators that wanted a cut of every PC sale. That sales approach, combined with its highly efficient, low-cost supply chain and manufacturing operations and the economies of scale that a market leader enjoys, let Dell offer the lowest prices. Customers, knowing they could call Dell and order a computer built the way they wanted it, caused sales to boom.

Times were good for Dell. In the third quarter of 2004, the company had 17.9% of the worldwide PC market. HP had 15.9%. Here in the United States, there was a much bigger gap, with Dell holding on to 32.9% while HP only had 20.5%. (Other players, including Acer, Lenovo, and Toshiba, were so far back that they posed no challenge to the two market leaders.)

Dell's good times, though, didn't last. The company began to stumble just as HP woke up and got back in the game.

HP and other manufacturers figured out Dell's supply-chain voodoo and improved their own logistics, cutting costs and becoming more agile. That took away a major weapon in Dell's arsenal. Another problem for Dell: It doesn't spend much on research and development. That's easy on the budget, but not so great for innovation. When new enterprise technologies such as blade servers began to emerge, companies like HP and IBM responded quickly with products while Dell trailed behind. At the same time, two other trends hurt Dell. Businesses and consumers increasingly bought notebook PCs rather than desktop machines, and they often wanted to touch and play with the computers before they bought them. That gave an edge to vendors that sold their products through retailers. You can't test the keyboard of a Dell notebook that's only sold on its Web site.

In addition, Dell remained loyal to Intel chips much longer than other PC and server makers, which put it at a disadvantage when Advanced Micro Devices forged ahead of Intel in chip design, reduced power consumption, and chip prices. Dell has since started using AMD chips, but it lost sales to PC and server buyers that weren't willing to pay extra to have "Intel Inside."

"Scott McNealy put this very well when he said Dell is a great supermarket for Microsoft and Intel computing," says Eunice. "That's a little pejorative, but the idea is sound. Dell sells you stuff that is pretty standard and that somebody else has done all the research and development on. When it gets more complicated, other people do better."

On top of all of this came Dell's well-publicized customer-service problems that left a lot of would-be repeat buyers cold. That was followed by the major battery recall and the U.S. Attorney's Office investigation of Dell's financial reporting. During all of this, Rollins caught some flak for making the now notorious comment that the iPod was just a fad, while launching what would be an unsuccessful foray into the music download business.

"These things have been adding up over time, and eventually it takes its toll," says Dan Olds, a principal analyst with the Gabriel Consulting Group. "On the other hand, HP has been aggressively changing." HP, in the last few years, was one of the companies that got the kinks out of its supply chain, giving it a huge boost. Analysts say HP's sales strategy, using a vast army of retailers, resellers, and systems integrators, has paid off. HP, after eliminating the significant price advantage Dell once held, was able to gain strong sales from places where Dell products weren't available, including Best Buy, Circuit City, and Costco. In the enterprise market, HP also jumped on the blade server wave and focused on manageability with products such as its System Insight Manager. At the same time, HP has been quick to market with high-performance PCs, media center PCs, and laptops.

HP has been on such a roll that even its recent spying scandal, which received a huge amount of press, indictments, and even Congressional hearings, didn't impede its momentum.

One of the things that has kept HP on track in recent quarters is that the company keeps hammering away at pricing.

"We've gotten to the point where there's not much differentiation between computers," says Jefferies & Co.'s Hogan. "What drives your [buying] decision right now? It's price. That presses down on their margins. With that being the case, these guys will just continue to beat each other up. HP has the momentum. But to hold onto that momentum, you have to discount your products. Am I going to buy HP because it's cheaper? Sure. But that's not the best way to run a business," he says.

The price war has been great for consumers and corporate IT buyers, even if it has hurt profits at the Dell and HP. With two industry giants vying for the top spot in the market, it's always going to be a win for the users. Each company is playing at its highest level, prices are down, and new products are quick to hit the market. So, what can Dell do now that he's back in charge?

Don't look for any dramatic changes in the near term, says Charles King, a principal analyst with Pund-IT Research. "HP's resurgence has certainly not been a happy thing for Dell," he says. "After a company goes through a tough time, you want to maintain as much balance as possible. I would be surprised if the company made any kind of radical change or shift over the next few months. They may be running behind HP a bit, but Dell is still the largest selling PC vendor in the U.S. HP has been doing great, but they're not running away with the race by any means."

It's too early to say exactly what Dell has in mind, but analysts say he needs to make some course corrections.

While Dell does a great job with technology such as LCD monitors and rack-based servers, it needs to do a better job of selling complicated technologies, Illuminata's Eunice says. "They have to become better at sourcing blade servers and somewhat more technically integrated products," he says.

"IBM has had a great business increase by rebadging Network Appliance gear instead of competing with them. That could be an interesting strategy for Dell," Eunice continues. "They have an excellent route to the market. They don't have excellent R&D. Instead of trying to build their own blades, which is a strategy they've tried unsuccessfully about three times, they should go buy them from someone that is successful. Use the fact that they do a great job connecting with customers and have a great order Web site. That, I think, would be the right strategy."

Eunice also is one of several analysts who say Dell should focus on improving the manageability of its systems. Dell isn't doing badly in this area, but HP is building quite a name for itself with its suite of systems management products. That's important for IT managers who have to wrangle 1,000, 10,000, or even 100,000 computers.

"If you can help better manage that fleet of computers or offer a better financial model for how to refurbish them, you can be a better supplier," Eunice says. "Then, even if the product is identical, you're going to get a leg up."

A top priority: Improve customer service, say several industry watchers. While Dell already has moved some call centers from offshore locations back to the United States, it needs to do more to get rid of its reputation for poor customer service.

The company also has to find new sales avenues. "With laptops, especially, people can go out and touch and feel them in stores," says Gabriel Consulting's Olds, adding that while Dell sells online and at kiosks, HP's computers are sitting on brightly lit store shelves from Staples to Best Buy. "HP's channel strategy has really paid off. I don't know about you, but I don't buy a PC or laptop sight unseen. I want to see it, touch it, romance it, get to know it before I buy."

There is no single or simple answer to turning around the fortunes at Dell. It will be a series of steps that will boost the company, and ultimately benefit users as well.

"It's going to be a long-haul kind of thing," says Eunice. "Dell would be well served to get their systems into some retail stores, to be a bit more innovative, and to fix their customer service. For HP, they need to keep pushing a wide range of PCs for various purposes and not stop innovating. They have to keep up their offensive on the customer service front. This will continue to be a dog fight."