Michael Dell May Not Be the Answer

Boardroom coups are supposed to occur in Silicon Valley, not Texas. Yet that's what we have this morning. After two-and-a-half miserable years away, Michael Dell is once again CEO of Austin-based Dell (Nasdaq: DELL  ) , and Kevin Rollins is outta there.

So long, Kevin
Foolish colleague Rick Munarriz saw it coming. Heck, everyone did. Dell's worst years came during Rollins' tenure. Failed products, poor service, a mind-numbing chip cuddle with Intel (Nasdaq: INTC  ) , and brutal competition from Apple (Nasdaq: AAPL  ) and Hewlett-Packard (NYSE: HPQ  ) handed Rollins more than he and his team could handle.

In response, executives may have jimmied the books to make earnings look better than they were. The SEC is now investigating. No charges have been filed, but a big fine for improper accounting seems inevitable. So does a restatement of several years' worth of earnings.

But for investors, Rollins will be remembered as the guy who drove the consummate multibagger stock into what has been a bottomless ditch. From July of 2004, when Rollins took the reins, to yesterday, Dell's stock is down more than 30%.

Is Michael Dell really the answer?
But that may not last. Dell's return has sparked a small rally in the shares, as many must have visions of a Jobsian triumph.

Not so for Fools. Poster doubtit at our Dell discussion board says, "Up $1 on Mike Dell CEO news [is] silly. Mike Dell has been running Dell since inception."

Exactly. Dell's return isn't really a return at all. Rollins was Dell's man. Often, the two were thought of as partners in running the business. Now one of them is gone, and there's absolutely no evidence that the once-and-future CEO will offer a different vision for the company he founded.

Instead, Dell told BusinessWeek last night to expect more of the same. "I think you're going to see a more streamlined organization, with a much clearer strategy." Really, Mike? A more streamlined supply chain will save Dell? Sure -- when piglets start winging through a frosty Hades.

More than a marginal problem
Dell already collects cash before it builds products. And it keeps just four days' worth of inventory. Hewlett-Packard, meanwhile, which recently took over the top spot from Dell as the leading PC maker, keeps nearly 39 days of inventory on hand and needs 22 days to convert inventory into cash. Obviously, efficiency isn't the problem.

Margins are:

Gross Margin

Q1 07

Q2 07

Q3 07

Actual

17.5%

15.5%

17.0%

YoY Gain

(1.1)

(3.1)

0.8

Source: Capital IQ, a division of Standard & Poor's

The lesson? Dell's legendary efficiency, once a sharp weapon in the PC business, has gone blunt. But instead of switching blades, Mike hopes to polish Dell's worn shiv by trimming its supply chain to the bone. I'd applaud his thinking, except I could swear that Rollins already tried that and got nothing to show for it but blood on the floor at Dell HQ.

Services, schmervices
But that's not the only strategy Michael Dell hopes to pursue. From the press release announcing the management mix-up:

"I am enthusiastic about Dell 2.0, which includes our plan to provide the best customer experience, build a strong global services business, and ensure our products deliver the best long-term customer value." [Emphasis mine.]

Dell 2.0. That's cute, but is this suggestion anything more than Dell 1.0 with lipstick and a new gown? Look in the mirror, Mike. See those blotches? That's your customer service record. Forget getting to best. How about starting with adequate?

And services? IBM (NYSE: IBM  ) once tried to use services to boost its flagging PC business. That didn't work, and now it's called Lenovo.

Steal from Steve
The simplest truth of business is that there are only two ways to make money. Either you become a premium supplier or a low-cost leader. For years, Dell has been the low-cost leader. Lenovo, Acer, and others are challenging that position daily.

Dell can continue to cut prices to stay with the pack. It has the cash to do so. But that means margins will continue to suffer till, someday, Dell becomes just another Gateway (NYSE: GTW  ) . Don't let that happen, Mike.

A better idea might be to steal from Steve Jobs over at Apple. You needn't make Dell into the premium supplier that Apple is. But you've also got to realize that -- in a market where everything has gone cheap -- customers are flocking to quality and innovation. Apple has both. So does HP, in its printer division. You've never had those qualities at Dell.

That can change. You've got the cash to hire experts to help, beginning with a CEO who can become the partner Rollins was. Only this time, instead of a corporate soulmate, you'll need to hire someone who thinks differently than you. Someone who's an innovator, who can dream big while you focus on keeping operations fit.

You're right, Mike, Dell 2.0 could be great. But only if you're willing to toss away almost everything that looks like Dell 1.0.

Dell is a selection of both the Inside Value and Stock Advisor stock-picking services. Try either of them free for 30 days by clicking on the appropriate link. There's no obligation to subscribe.

Fool contributor Tim Beyers, ranked 957 out of more than 21,000 in Motley Fool CAPS, thinks Dell used to be a great brand. Tim owns shares of IBM. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. Intel is an Inside Value recommendation. The Motley Fool's disclosure policy is as sharp as ever.


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  • Report this Comment On July 03, 2008, at 8:57 PM, sbVBsbVB wrote:

    The analysis of the strategic options for DELL are nice. However, I believe there's one element missing: Linux.

    My feeling is that the era of unquestionable usage of Windows is definitively over.

    Users demand to have what they want, and Windows Vista, notoriously troublesome, are making users feel robbed for paying for it. Some PC makers are not making available the necessary device drivers for WinXP, to forbid users to do the downgrade from Vista to XP. This is anti-capitalism behavior, that infuriate customers.

    I believe that a winner strategy for a supplier like DEL should be this:

    *) listen to customers; if they dislike Vista, don't stuck that into their throat.

    *) MANY users are using Linux instead of Windows. Offer customers a chance to buy PC's with Linux (and don't charge the customer for money spent for Windows)

    *) Make easily available in a web page all drivers for Vista, XP and Linux.

    *) Find related products that work with Linux (printers, scanners, etc.) and sell them in a bundle with the PC's that have are purchased with Linux.

    *) Help and make incentives to communities of Linux users.

    []'s

    sbVB

    www.sbvb.com.br

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