Is the game up for Dell?

Dell’s business model is coming under scrutiny after the vendor failed to meet revenue expectations and saw its share price fall sharply. Facing greater competition and a fast evolving IT market, Dell needs to look again at its strategy if it is to maintain the awesome growth it has enjoyed in the last few years.

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By  Simon Duddy Published  November 6, 2005

|~||~||~|Dell has been one of the most consistent IT success stories of recent years. Even as competitors battled tough times, the US computing giant continued to grow at a pace others could only envy. Its direct, low-price, low-inventory model made it extremely difficult for bigger rivals to compete in what were cash-strapped times. But there are signs that this could be changing. Commentators are suggesting that a slowdown in Dell’s earning power shows that the model that has taken the company this far could hinder it from progressing further. Dell expects to announce Q305 revenue of US$13.9 billion, significantly less than its original prediction of between US$14.1 billion and US$14.5 billion. The expectation of this shortfall sent Dell’s share price tumbling by 8%. Financial analysts have expressed concern with the falling share price and cynics are lining up to take a pop at the firm. Some commentators are suggesting that Dell products are not as reliable as they once were, citing growing dissatisfaction expressed on online forums as evidence. Less nebulous is the evidence from Dell itself. In a recent press release, the vendor announced that it would incur losses of up to US$300 million to fix faulty motherboards on a generation of Dell OptiPlex PCs. Faults like this inevitably cast doubt on the wisdom of Dell’s strategy and leave the company open to suggestions that it is sacrificing quality for cost. Furthermore, new competitors such as Lenovo are likely to attack Dell very aggressively on price. The vendor’s price-focused strategy is also coming under fire from another angle, as customers increasingly put services and support above cost in their buying criteria. The direct model that Dell uses in most parts of the world can make it difficult for the vendor to ensure that customers receive timely and effective support. One of the areas where Dell works through partners, however, is in the Middle East, with companies such as Emirates Computers in the United Arab Emirates (UAE). These help Dell to provide effective support to customers. Recently I spoke with Neville Bryan, the network security supervisor at Emirates Media who singled out Emirates Computers for praise because of its ability to be on-site within 30 minutes in the event of a problem. Having partners with local knowledge and presence clearly works. Dell is facing some serious challenges as the IT market evolves from the box shifting environment in which it excels to a services focused model it is perhaps less well suited to. That said, the US firm is very much a formidable player in the IT world and should have the resources to effectively adapt its strategy to cope with an evolving market. In fact, perhaps the answer for Dell is to take the lead from its regional operation, where it has forged a successful strategy in partnership with powerful partners. While there are no indications that Dell will abandon its largely direct model, developing partnerships should help it to cash in the growing services segment of the IT market.||**||

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