Dell struggles as others copy its blueprint

Rivals join low-cost market.

Times should be good for Dell as enterprise buyers gravitate toward the low-cost, standards-based systems that the computer maker is known for building. But Dell is facing rough waters as competitors including HP, IBM and Sun, with their extensive enterprise resources, also take up the low-cost mantle.

Analysts and industry experts point to a number of reasons for Dell's troubles, including customer-service issues that have dogged the vendor over the past year, an inability to effectively communicate enterprise-class strengths to buyers and slowness in responding to a shifting IT market in which customers are looking beyond bargain hardware to competitively priced IT services. In addition, a consumer PC market weighted heavily toward retail sales isn't helping the bottom line for Dell, which has made its business selling built-to-order products directly, either over the phone or via the Internet.

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Times should be good for Dell as enterprise buyers gravitate toward the low-cost, standards-based systems that the computer maker is known for building. But Dell is facing rough waters as competitors including HP, IBM and Sun, with their extensive enterprise resources, also take up the low-cost mantle.

Analysts and industry experts point to a number of reasons for Dell's troubles, including customer-service issues that have dogged the vendor over the past year, an inability to effectively communicate enterprise-class strengths to buyers and slowness in responding to a shifting IT market in which customers are looking beyond bargain hardware to competitively priced IT services. In addition, a consumer PC market weighted heavily toward retail sales isn't helping the bottom line for Dell, which has made its business selling built-to-order products directly, either over the phone or via the Internet.

'The perfect storm'

"In a sense this is the perfect storm for Dell," says Matthew Eastwood, vice president, enterprise server research at IDC. "Dell's strategy has traditionally been one of low cost and velocity, getting products to market in a timely fashion that have broad appeal across many different industries. . . . But there are new types of buyers emerging inside IT organizations, and they're focused increasingly on growing the business and a little bit less on taking cost out."

Where cost does come into play, Dell finds its advantage is not as great as it once was. "Competitors are reacting faster to price reductions," says Brooks Gray, a vice president at Technology Business Research.

Dell's core PC business grew at about the market rate in the second quarter, increasing 6%, while its market share remained steady at 34%, according to IDC. Meanwhile, HP gained ground, boosting PC shipments in the United States 16% to increase its market share from 18.6% to 20%.

Dell CEO Kevin Rollins acknowledged his challenges in May, when the company, which ranked fourth in the NW200 with $56 billion in revenue in 2005, delivered another quarter of disappointing earnings, reporting first-quarter net income of $762 million, or 33 cents per share. This was an 18% drop from the year-ago quarter, when its profits reached $934 million, or 37 cents per share.

"The competitive dynamic has been more intense than we planned for or understood," Rollins said in a conference call with financial analysts, according to a transcript posted to stock market opinion and analysis Web site SeekingAlpha. At the time, Rollins outlined a number of steps Dell is taking to get its business back on track, saying that pricing shifts were a small part. "We are rebuilding our model," he said, listing as priorities customer service, cost cutting and innovation.

Yet challenges continue

Nevertheless, Dell continued its bad news in July, when it announced its second-quarter earnings early, and said they would miss analyst estimates and be about $14 billion, or 21 cents to 23 cents per share. The news sent Dell's stock price tumbling to $19.91, the first dip below $20 since 2001. When Rollins took the CEO reins from Michael Dell in July 2004, Dell's stock price hovered around $35.