Dell's Little Hire

If I were saying the same things about my life that Michael Dell is saying about his company, I'd be forced into therapy. Quoting from Wednesday's press release announcing Michael R. Cannon, former CEO of Solectron (NYSE: SLR  ) , as Dell's (Nasdaq: DELL  ) new operations chief:

" ... It is important that we increase our ability, via the Direct Model, to manufacture close to our customer and fully integrate our supply chain into one global organization. This will allow us to drive for even greater excellence in quality, cycle time, and delivered cost. We will innovate and adapt our supply chain model to help drive differentiated product design, manufacturing, and distribution models."

Translation: We need to do more, faster and at a lower cost.

That sounds good. So good, in fact, that CNN praised the move by calling Cannon's addition a "big hire" in a screaming headline.

But both Dell and CNN are in denial. Cannon appears to be a perfectly capable operations executive. Look at his record while leading contract manufacturer Solectron from January 2003 till now:

Metric

2003

2004

2005

2006

Return on assets

(0.9%)

1.2%

1.9%

1.7%

Return on capital

(1.2%)

1.9%

3.1%

2.8%

Return on equity

(96.4%)

(13.5%)

(0.4%)

4.9%

Source: Capital IQ

Impressive. But even Cannon will only be able to do so much in his new role at Dell. Why? Because supply chain gains are, by their nature, incremental, and low-cost suppliers in Asia, such as Acer, are very likely to duplicate whatever pricing advantages Dell is able to produce.

In fact, they already have. Acer's Aspire 5670 is a Core Duo-powered laptop similar to Dell's XPS model, but it may be obtained for at least $199 less. My guess is that Acer, based in Taiwan, will do just about anything to keep that price advantage. So will China's Lenovo. And so will Gateway (NYSE: GTW  ) . Of the majors, I expect only Hewlett-Packard (NYSE: HPQ  ) and Apple (Nasdaq: AAPL  ) to resist a price war with Dell.

Which brings me back to the point I made two weeks ago. Dell 2.0, as Michael Dell calls it, could be a great company. But only if radical, margin-boosting changes are made. Fine-tuning operations, as good as that sounds, isn't enough.

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Fool contributor Tim Beyers, ranked 1,685 out of more than 22,700 in our Motley Fool CAPS investor intelligence database, didn't own shares in any of the companies mentioned in this story at the time of publication. All of Tim's holdings can be found at his Fool profile. His thoughts on tech stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy is a smooth operator.


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