How much trouble is Dell really in?

Don Reisinger wants to know what's going on at Dell. After announcing more layoffs and experiencing slow growth, is the company in trouble?

Is it just me or was Dell on top of the world a few years ago? Not only was it pummeling just about every other PC manufacturer in the industry, its online business was buzzing and its business integration was better than ever. And then it all came crashing down.

Last year, Dell announced that it was cutting 8,800 jobs from its payroll and Thursday the company said that it has already laid off 5,550 employees in an attempt to cut costs and make the company more financially sound.

"We are not satisfied with the current state of affairs and are on a mission to fix it," Reuters quoted Dell saying. "Every area of the company is being pursued" for cost cuts.

To make matters worse, last week Dell announced that it was closing one of its desktop manufacturing facilities as part of its layoff program and indicated that it wants to reduce expenses by as much as $3 billion per year over the next three years.

And while many would say that Dell is moving in the right direction, I'm not so quick to agree. How can a company that sat atop the entire computing industry for so long become a shadow of its former self in just two years? Is it that Dell has had a string of bad luck or did Hewlett-Packard, Acer and the rest finally find a way to take the company down?

Sadly, it looks like the latter.

Over the past two years, Dell has been subject to a litany of issues that most of us never saw coming. By the second quarter of 2006, Dell commanded 19 percent of the worldwide PC market share and led its closest competitor, HP, by about 3 percent. Since then, the company's worldwide market share has slipped to below 13 percent, while Acer and HP gained ground. So much ground in fact, that HP is currently the world's largest PC manufacturer and controls almost 19 percent of the market, while Dell commands just 14 percent. And to make matters worse, HP's growth was estimated at 30 percent in 2007, while Dell's was just 1.7 percent.

So what's going on at Dell? Did it stem from its need to restate financials after alleged corporate malfeasance? Was it the fact that Dell executives relied too heavily on the company's tried and true business structure that was dominated by online and business sales? Or was it simply that Dell's popularity has run its course and HP realized what consumers want today before Dell?

Unfortunately, the answers to those questions are locked deep within the company's headquarters where Michael Dell is trying to do all he can to right the ship and turn things around. But will he?

At this point, Dell is in deep trouble. The company's stock price has plummeted in the past six months and, although it's turning a profit each quarter of well over $200 million, its practice of selling computers just doesn't work anymore.

Years ago, Dell's idea of direct selling through its telephone and online channels worked better than most thought it would. After pulling its computers out of retail outlets in 1994, some wondered if Dell would be around much longer. After some impressive quarters and a new business model emerged out of its gamble, the world became believers and both companies and consumers jumped on the Dell bandwagon.

On top of that, Michael Dell was one of the first CEOs to realize that if people used a Dell computer in the business, they would like it, understand it, and want one in the home. And although some doubted the rationale, it worked and Dell walked away from a future-proof company--or so he thought.

In recent years, Dell's tried and true business model has changed and suddenly people are more likely to buy a computer at their local Best Buy than ever before. Realizing this, Dell was forced to start selling its computers in retail outlets once again, but the company was too late--HP already owned that market.

Fast-forward to today and Dell is in trouble. Sure, the company may be turning a profit, but its growth has slowed to an alarming rate and HP is making the company look bad. But let's be honest--what can Dell do about it?

The company may be able to turn things around in retail outlets, but the computer industry has quickly become a commoditized business where a Dell desktop is the same as an equally equipped HP computer. Realizing this, a price war has emerged and so far, Dell has come out on the losing end in many of these battles, which tells you exactly why it's trying to reduce overhead and maintain costs at a far more manageable level.

Sadly, there's not much more Dell can do. In an environment where margins are extremely low and companies are forced to find innovative ways to entice customers, Dell is fighting an uphill battle. And although its revenue has grown, its growth has slowed to a crawl and things may get worse if they ever get better.

Trouble is on the horizon for Dell, and if you ask me, that's a sad development.

About the author

Don Reisinger is a technology columnist who has covered everything from HDTVs to computers to Flowbee Haircut Systems. Besides his work with CNET, Don's work has been featured in a variety of other publications including PC World and a host of Ziff-Davis publications.

 

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