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A Black Turtleneck for Michael Dell

By Tim Beyers - Updated Apr 5, 2017 at 9:45PM

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Can a copycat growth strategy work?

With apologies to the rockers at R.E.M., it's the end of Dell (Nasdaq: DELL) as we've known it. Mike Cannon, president of global operations for the PC maker, just said so.

Quoting from his comments at a meeting with analysts, held in Austin earlier today:

Our environment has dramatically changed, particularly in the last five years. The direct model and competitive supply chain was the right approach at the time. But we have to evolve our model because our competitive environment is changing.

What Cannon could mean is that fellow Stock Advisor selection Apple (Nasdaq: AAPL) has risen as Dell has fallen. A series of strategic moves by CEO Steve Jobs is to blame. Two come immediately to mind:

  • Retail: Apple beats both Best Buy (NYSE: BBY) and Circuit City (NYSE: CC) in sales per square foot at its 180-plus retail stores. Having them as a try-before-you-buy demo lab for new iPods and iPhones has been a boon to sales.
  • Contract manufacturing: For years, Apple has maintained relationships with Asian suppliers to build its products, cutting costs by outsourcing its supply chain.

Dell has been toying with retail for some time thanks to a deal with Wal-Mart (NYSE: WMT). But contract manufacturing? That'd be heresy. Dell, after all, is a build-to-order shop that practically invented the idea of lean manufacturing and, in the process, created what many viewed as a sustainable competitive advantage.

Many including Cannon -- until recently. Quoting once more:

A typical desktop program for Dell can have over half a million different configurations. Why did we do that? Because we could. But now, if customers don't need that, we've got to go rip that cost out.

Translation: We're going to simplify the product line and outsource some manufacturing. So, yeah, we like what Apple's doing.

Don't look at me that way. Rumors of Dell imitating Apple have been flying for months, if not years. And for good reason. Dell hired Ron Garriques away from Motorola (NYSE: MOT) last year to run its consumer group, leading some -- including yours truly -- to speculate that a Dell-branded smartphone was in our future. More recently, the rumor has changed to a deal with Google for an Android-powered device.  

Cut to run
There's more than Apple envy at work here, though. Dell says it will be more aggressive with job and cost cuts. Roughly 8,800 employees will get pink slips. Some of them may have already -- a manufacturing plant in Austin was shut down earlier this week. All told, executives expect to cut $3 billion in annual operating costs.

No doubt that'll help. Sales were up 10% in the fourth quarter, but operating margin slipped to 4.8%. Inventory was up more than 78%. And Hewlett-Packard (NYSE: HPQ) is still the PC market share leader. All of that and more speak poorly for the team managing Dell's operations.

But I, too, should eat some crow. Much as I've poked fun at Dell for its seemingly ludicrous cut-to-grow strategy, CEO Michael Dell was right: His company needs to shed a few pounds.

And after that, what's next, Mike? When Dell is a lower-cost version of Apple, with fewer products, a limited R&D budget, a decent retail presence, and a vastly diminished build-to-order business, isn't it just ... Gateway?

There's more to Steve than the black turtleneck, Mike.

Apple, Best Buy, and Dell are Stock Advisor selections. Dell and Wal-Mart are Inside Value picks. Get 30 days of unfettered access to the research and recommendations of these market-beating services for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers didn't own shares in any companies mentioned in this article at the time of publication. The Motley Fool's disclosure policy will stand in the place that it works, thanks.

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Stocks Mentioned

Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$127.66 (0.04%) $0.05
HP Inc. Stock Quote
HP Inc.
HPQ
$32.13 (-3.95%) $-1.32
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.21 (0.20%) $0.34
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$75.89 (-3.37%) $-2.65
Motorola Solutions, Inc. Stock Quote
Motorola Solutions, Inc.
MSI
$250.37 (0.90%) $2.22

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