October 2006

Dell Freezes Over

The unthinkable has happened: the once impregnable computer behemoth has shown itself to be just another company—susceptible to the kinds of competitive pressures, stock-price plunges, and morale problems from which it was once immune. (To say nothing of laptops flambé.) Now what? Not surprisingly, a reboot is under way.

by S. C. Gwynne

LAST YEAR MY WIFE AND I BOUGHT A BRAND-NEW Dell computer. It was a handsome machine, sleek and gunmetal gray, with a swiveling screen and a set of speakers. Unlike our previous computer, it worked without wires, miraculously conversing with a small box of blinking lights in our bedroom. We were very happy with it—for about two hours. That was when the wireless feature started to go wiggy. Sometimes we would get an Internet connection, and sometimes we wouldn’t. We called the Dell folks for help.

What followed made me long for the days of carrier pigeons and slide rules. Dell’s response was to send a string of ever less intelligent and ever less reliable service people to try to solve the problem. We spent hours with technicians, both at home and on the phone. It took more than a month for them to determine that our cordless telephone was knocking the computer off-line, a solution so crushingly obvious that it only made us madder.

We later learned that what happened to us was not just some isolated, random piece of bad luck. At that very moment, tens of thousands of other people were having similar horrific experiences with Dell, a company long famous for its excellent customer service. And the incompetence of Dell’s help desk mirrored the bigger, deeper, and less tractable problems that would soon be flogged in headlines around the world: declining growth, a drop in global market share, an unprecedented descent in the company’s consumer satisfaction ratings, its consistent failure to earn as much money as it was expected to.

The precise details were ugly. In the first quarter of 2006, Dell was waxed by Hewlett-Packard, its resurgent main rival, in the fastest-growing component of the market: notebook computers. During the same period, Dell’s overall sales failed, for the first time ever, to keep pace with the computer industry as a whole. By the time the company reported in August that its quarterly earnings would decline for the eighth consecutive time—plummeting from $1.02 billion a year earlier to $502 million—business writers and stock analysts had all found their angle: Dell was rapidly losing its once huge price advantage and therefore its legendary ability to lowball its competitors. Amid such speculation, Dell’s shell-shocked shareholders watched the value of their holdings plunge earthward. On July 21 Dell stock closed at a five-year low of $19.04, down 54 percent from the previous July, and remained mired for the rest of the summer in the low $20’s. It was kept there, in part, by Dell’s announcement, in August, that it would recall 4.1 million batteries that could cause laptops to erupt into flames—the largest safety recall in the history of the consumer electronics industry.

To listen to this steady drumbeat of bad news, you might think that Dell is losing money or about to lay off workers. No and no. Dell is not in trouble in any conventional sense of the word. It is still growing, albeit modestly, and still making money. Dell’s problem is that it is not what it used to be, which is to say the world’s fastest-growing company with the world’s best-performing stock. The easiest way to illustrate this is to compare Dell with the most successful companies of our era. At the end of its first twenty years in business (2004), Dell’s revenues, adjusted for inflation, stood at $41 billion. Microsoft and Wal-Mart, by comparison, had revenues of only $10.7 billion and $4.7 billion, respectively.

No company in history has ever matched the speed or duration of Dell’s revenue growth, and few have left as many failed and bankrupt competitors in their wake. Dell inflicted such large losses on IBM that the computer giant got out of the PC business altogether, selling out to a Chinese company. Dell outmaneuvered Hewlett-Packard and Compaq so completely that they were forced into an initially disastrous merger that cost the combined companies 40,000 jobs. These triumphs in turn fueled the greatest sustained stock price rise in history—nearly 87,000 percent from bottom to top—and established Michael Dell as one of the richest people on earth, with a net worth, at its height in 2000, of $21.5 billion.

And so the mere whiff of mortality, of weakness, of the beginning of the end of Dell’s dominance, has sent the high-tech world into a little celebratory fit of schadenfreude. Making everything worse—or better, depending on your point of view—Dell has another, more serious problem that you have not read about in the headlines: a severe decline in company morale linked to both the fading stock price and to a crisis of leadership, which has spawned a radical, company-wide attempt to remake the Dell culture. While it wrestles with those demons, Dell must deal with the inconvenient fact that it is now widely perceived as decelerating irreversibly into a comfortable and somewhat stagnant middle age, taking its once high-flying stock down with it. Even two years ago, such a thought would have been unimaginable. Now it is common currency. Is the joyride finally over?

THERE HAS ALWAYS BEEN SOMETHING disquietingly calm about Michael Dell. In an industry where change comes at you like telephone poles on a country road, he ought to look a great deal more worried, harried, driven, nervous. Unhappy, perhaps. But he shows no scars; his trademark is still that engaging, guileless, dopey grin spreading across that creaseless, unmarked, choirboy face. If you did not know that he was the greatest industrial genius of our age, you would never guess it. When I first interviewed him, in 1997, he was only 32 and already worth more than $10 billion. Back then he still looked a bit like a pudgy kid and had this slightly confused, deer-in-the-headlights expression on his face when meeting someone new, which made for a profound disconnect between the innocent he seemed and the hypercompetitive monster he actually was.

The main purpose of that interview was to get him to explain how Dell, which had been growing like bacteria—doubling in size every few years and already sprawling all over Austin and Round Rock—could possibly keep up that pace. The conventional wisdom said that it could not. Such runaway growth was unmanageable and certainly unsustainable; Michael Dell might be smart, but he wasn’t that smart; and so on. We now know that, even as I was tossing questions at him, his company was embarking on a period of expansion that would make all that had gone before in the history of human business enterprise pale by comparison. That year the company had $7.8 billion in sales, a number that would jump to $18.2 billion by 1999. This year Dell’s sales will top $60 billion.

And so it is ironic and even funny that I am back again, nine years later, to badger him on what is, by and large, the same topic. The context, admittedly, is very different. The company he founded is now a global behemoth (75,000 employees in 180 countries) that makes desktop and laptop PCs, servers, storage systems, printers, work-stations, and even TVs, and is beset with all those nagging recent troubles that the press, financial analysts, and competitors have been trumpeting with such unrestrained glee. Dell himself has hardened into a fully configured adult who looks and seems more like the chairman of the world’s largest computer company. His curly black hair is finally showing a few touches of gray. He is slicker and just the slightest bit world-weary, or at least media-weary, or at least tired of having to account for himself, considering who he is and what he has done.

Another difference is that he now shares power with a whip-smart, data-obsessed 53-year-old former consultant named Kevin Rollins. Rollins started working with Dell in 1993, joined the company in 1996, and quickly made himself indispensable, setting up many of the management systems that allowed the company to sustain its growth. He became president in 2001 and chief executive officer in 2004. The two run the company from large, airy, blond-wood offices that overlook the lobby of Building One at Dell’s headquarters, in Round Rock. Their offices are separated by a glass door that they say is never closed, even when they are in private meetings. Although Rollins runs the day-to-day operations of the company, you get the sense that there is a good deal of collaboration going on here. They are highly compatible; each seems perfectly content to be interrupted by the other.

When I ask the two men—who have agreed to be interviewed together—the inevitable is-this-the-end-of-the-world-as-we-know-it question, they respond with a sort of Bob and Ray routine:

Dell: “People have been saying for a long time that Dell is a niche company, that it won’t work here and it can’t work there. It was never supposed to work.”

Rollins: “It was never going to work, and they would say, ‘Oh, look, it’s about to hit the wall.’ But then it wouldn’t, and they would say, ‘Well, that wasn’t really the time, but now is really the time. Okay, now Dell is hitting the wall and now it’s really over.’”

Dell: “‘It worked in the U.S., but it’s not going to work in the U.K.’”

Rollins: “‘Okay, it worked in the U.K., but it’s not going to work in Japan.’”

Dell: “‘Not going to work in France. Not going to work in China. It worked in desktops, but it isn’t going to work in notebooks.’”

Rollins: “‘And it won’t work in servers. Never in servers.’”

Dell: “‘And no chance in printers.’”

Rollins: “‘Printers will never work.’”

“It won’t work” refers to Dell’s direct model of sales, in which the company deals directly with its customers instead of through retailers, distributors, and resellers. In this system, Dell builds a computer only when a customer orders one and then ships it directly to the customer; its competitors, by contrast, build products first and then stack them in distributors’ warehouses or in stores and hope customers buy them. Dell’s model has been challenged, unsuccessfully, every step of the way by vast numbers of competitors and industry experts, most notably in 1989 and 1993, when the company stumbled badly. And Dell has been wildly successful in all the areas where it was not supposed to succeed, particularly overseas.

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