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Turnaround time for Michael Dell

His credentials as a tech entrepreneur can't be questioned, but why does Michael Dell find himself reinventing his company and career?

A correction was made to this story. Read below for details.
Turnaround time for Michael Dell

news analysis The latest Dell executive to leave as a result of Michael Dell's housecleaning was the man perhaps second-most responsible for the company's once-remarkable success.

Kevin Rollins came into Dell in 1996 as the operations and business expert ready to help a 31-year-old Michael Dell make his direct-mail company grow. Together, the two built a PC powerhouse that changed the industry and made billions of dollars for shareholders. Dell played the technology visionary, Rollins made sure the factories kept humming, and the company found new ways to grow.

But their meteoric rise to the top of the tech industry slowed dramatically in 2006, Rollins' second year as Dell's CEO. He paid the price Wednesday for Dell's slipups in 2006, resigning as CEO and stepping down from the company's board of directors.

So what happened? Dell appears to have fallen prey to a common problem for those on top: quite simply, the world changed, and Dell did not change quickly enough.

"The usual bag of tricks--leveraging the supply chain and their economies of scale--hasn't worked," Richard Shim, an analyst with IDC, said after Dell announced the departure of Rollins.

Dell has lost both its market share lead and most-favored hardware company status on Wall Street to Hewlett-Packard. In trying to regain market share, Dell may have spent too much time bottom-feeding on the low end of the PC market, eroding the operating margins that were once the envy of the entire PC industry.

"The usual bag of tricks...hasn't worked."
--Richard Shim,
analyst, IDC

And perhaps most ominously, the company is under investigation by the Securities and Exchange Commission for accounting irregularities that occurred on Rollins' watch.

But there are problems at the PC maker that even Michael Dell won't be able to fix overnight. Dell thrived during both the dot-com boom and resulting bust, when competitors like Hewlett-Packard and Gateway foundered. During the boom, it rode the wave of corporate PC purchases. After the bust, it established itself as the low-cost leader in a market where people were just looking for PCs: nothing fancy, just a PC that will get the job done.

With additional gains in servers and storage sales, Rollins began talking about ambitious revenue goals of $60 billion by the end of 2006 and $80 billion by 2008 or 2009.

But those goals depended on Dell expanding into other markets. Rollins knew the PC market was maturing, and so the company devoted almost all of a three-day analyst meeting in April 2005 trying to convince analysts and the media that Dell was no longer a PC company; that it was on the cusp of becoming a broad IT powerhouse. The message was that even if the PC market slows, Dell has the ability to continue growing at leaps and bounds.

Fast-forward to 2006, when the company that perfected nimble PC production looked decidedly flat-footed when reacting to changes in the market:

• The corporate PC market slows, as businesses stop a three-year post-Y2K binge on PCs and wait to see how Microsoft's Windows Vista will fit into their application environments.

• Consumers grow increasingly tired of boring PCs and shoddy customer service, and start flocking to retail stores to search for new PCs that have style and panache.

• Advanced Micro Devices carves out a significant chunk of market share at Intel's expense and establishes itself as a credible player with both businesses and consumers.

• Notebooks threaten to overtake desktops in mature economies like the U.S., and hold a solid majority in retail stores by the end of the year.

 

Correction: This story gave an incorrect age for Michael Dell in 1996. That year, he turned 31 years old.
Those changes appear to have caught Dell off-guard. One of Rollins' goals as CEO was to find a way to make Dell more than a PC company. But in focusing on new products and forging into new markets, the company may have taken its eye off its core business.

Ticked off Dell customers were documenting their concerns all over the Internet in 2004, but the company didn't significantly address the problem until May 2006 when it announced plans to spend $100 million upgrading its customer support. It later announced plans to simplify the customer experience on its Web site with more transparent promotions and a redesign of the page. in hopes of reaching customers more directly.

"Our intention with this blog is to address issues that are important to our customers. Give us some time and we'll prove it," wrote Dell's Lionel Menchaca on the second day of Dell's blog.

Michael Dell Michael Dell

Likewise, PC customers are becoming more concerned with the look and feel of their systems these days, and have little time for boring boxes. Dell recognized this by introducing its XPS lineup of flashy high-end PCs, but did not start overhauling its mainstream units until late last year under a design initiative previously headed by product guru John Medica.

"We are seeing that the product design expectations from small businesses and consumers are becoming more different. It is very likely that in the future we will deliver products that are more tailored to those specific customer expectations," Medica told CNET News.com in November.

Demand for AMD's processors was strong throughout 2005, as the company enjoyed a performance lead over Dell favorite Intel. But Rollins stuck with Intel until 2006, just as Intel started rolling out chips based on a new design that erased AMD's performance advantage. The company adopted AMD much later than the competition, and alienated a long-time partner just as it was reasserting itself.

And Dell's famous cost advantage throughout all those years became less important as the industry shifted to notebook PCs, which are generally built and assembled by third parties in Asia. Dell chose to do much of its notebook assembly in-house, actually creating a situation where its costs were higher than those of its competitors.

Rollins' departure follows a steady exodus of longtime Dell executives from Round Rock, Texas over the past few months. Company veterans such as Medica, small-business sales chief Joe Marengi and Chief Financial Officer Jim Schneider have all left or signaled their intentions to leave following a tough year for the PC company. New executives--many from outside the tech industry--have joined Dell in hopes of injecting new thinking into the company.

Unfortunately for Rollins, however, his ultimate legacy might be the outcome of the accounting investigation. His mantra as the business side of Dell's two-headed leadership team placed responsibility for accounting squarely on the shoulders of both him and Schneider: both of whom are now gone.

Michael Dell was in an enviable position when he announced plans to hand over the CEO reins to Rollins. The company was at the peak of its powers and seemingly could do no wrong. Now Dell gets a chance to add to his legacy with a bid at a turnaround project that was already under way in Rollins' last days with the company.

"The company is going to be invigorated with the change," said Samir Bhavnani, an analyst with Current Analysis. "Even though Michael Dell was around the last two years, he wasn't able to have the impact on the company that he had when he was the CEO. Now he can."