Dell Computer: It Ain't Your Grandfather's Beige Box
Since Dell not only announced it's results this morning and surprised everybody, perhaps itself also, with pretty good numbers we thought a deeper dive on what's going on might be appropriate. And a test of our various toolkits for enterprise and industry analysis. Here we're going to dive into Dell's strategy, commenting along the way, as they see it themselves. And base it on their most recently available analyst presentations. We've argued before that Dell's downturn was visible at least three years before the fecal matter hit the impeller for two reasons. First off their core business - selling cheap beige boxes to large enterprises - was maturing and headed down. Now we also admit that we though their basic business model of low-cycle-time, customized order fulfillment would adapt nicely to a lot of other opportunities. Second we argued that they were cutting way too many corners since their whole business model was based on trust, reliability and outstanding, responsive customer service. When they started off-shoring and that service became non-responsive what had been a competitive weapon devolved into a cost to be shrunk. We won't mention the disingenuous accounting that went along with all this. Well let's not get to excited but things may in fact be turning around...and not because of the numbers. We still have to see how sustainable those are and how the economies hold up. Nonetheless DELL goes on our watch list as a strategic buying potential. Let's talk about why. 
The two major challenges Dell had was they needed to re-think their business model for a new world. AND they needed to completely re-think, transform and re-build their operational capabilities to support whatever they finally came up with. Dell had three key initial challenges: 1) face reality, 2) re-think, re-craft and adapt their historic business model and 3) translate that re-thinking into new execution capabilities. We'll take a deeper dive on major aspects of these after the break but here's a composite picture of two key charts from their Apr08 analyst meeting.
The top half lists out the key challenges, where they want to go and where, according to their dashboard they think they're at. Refreshing and honest on many levels take a careful look. The bottom chart focuses on the two key strategic elements of profits and costs. Re-thinking product design and development, both as a cost control and a strategic marketing initiative. And reducing on-going operating expenses. Again both appear well-thought thru and accurate. The proof of course will be in the pudding. 
That is are the new ideas and business models being translated into the key strategic initiatives required to implement them. Well take a look at another composite chart which certainly indicates somebody has done some serious thinking indeed. The top sub-chart shows key strategies combined with the major, DIFFERENT, markets they are going after. Each of which requires different capabilities, business model adaptations and NEW operational capabilities. From marketing to customer service to go-to-market channels, logistics, manufacturing and product design and development.
So the next critical questions are they being put in place - which is preceded of course by recognition, acknolwedgment and commitment. And are they working as planned - likely in the face of economic turbulence and worldwide competition as well as the inherent challenges of doing business in unfamiliar markets. But it is the right, componentized, modular and adaptive Chinese menu of re-structurings that suits the markets they propose to tackle.
Consumer Markets (US, RoW, Emerging)
One key area they intend to tackle, looking at the preceding charts, is consumers. In both the US and worldwide. Now bear in mind while Dell has sold to consumers they made their bones selling cheap to big corporations and government organizations. Now they're trying to "re-vitalize" their US consumer image, increase their share in the developed world and go after the emerging world big time. Part of this is operational capabilities because this requires new channels, i.e. the direct order model doesn't work well. Which in turns means a complete re-think of of manufacturing and logistics since their old system was rigidly designed and built for their old strategy. It also means re-branding themselves. Well from the chart at right at least they get the point...we'll have to see but you'll be able to tell for yourselves to some extnet by watching their advertising, web site and the trade press. In any case just starting these sorts of strategic marketing efforts breaks new ground for Dell. They are clearly adapting.
Business (Large and SMB)
Again across geographies Dell is trying to re-vitalize it's enterprise business but this time it's looking to go after not just desktop PC's for large enterprises. It's also looking to go both worldwide and after the Small/Medium business. Now several years back it was my opinion that Dell's existing business model would readily extend beyond PC's to go after servers, networking gear, printers, etc. in the market segments it was already well-established in. And that it's responsive logistics and order fulfillment ought to give it a leg up on the SMB space. Unfortunately they lost ground in those spaces for the same reasons they lost ground overall...which was really dangerous because it was home turf and the cash cow.
Now it looks like they've come up with the right strategies and value propositions along with a pretty good notion of the necessary operating capabilities needed to go after the large enterprise and SMB spaces. The latter is particularly important if you'll recall some of our earlier work on the structure of the IT marketspace.
Go-to-Market Channel Strategies
Whether it's large or SMB, whether it's developed or emerging world the old direct model isn't appropriate for all the target customer sets. In fact for consumers they really do need to go after retailers - this is especially true in the developing world. Which means they need to build a robust channel management capability built around partners that they've never had to have before. And, the good news is that they not only realize that but it appears to be coming into place. Again if these two charts are a fair representation of the thinking and capabilities Dell is well on its' way to building the kind of channel management capacity required. Again of course we'll have to see but this is NOT just a proof of the pudding sort of thing - if you stick with it after getting the initial idea right it becomes a major new competitive weapon.
Services
For Consumers, SMB and Large enterprises the "undiscovered country" for almost everybody is services (recall HPQ's recent acquisition of EDS). Computers are still no easier to use than they were. The catch is that services are hard to do, require lots of bodies and capabilities and can be low margin businesses if you screw up any of these requirements.
Dell appears to be addressing this in several ways (& being more than a bit disingenuous along the way). They've id'd addon services as a huge marketspace but their counting includes all services, e.g. hugh server install and applications support. Which they are not proposing to do. So the addressable marketspace is much smaller than they told the analysts. Nonetheless by focusing on the picky little stuff they're focusing on stuff that costs their customers, that fixing adds value, are common and repetitive and therefore modularizable. So even if they leave most of the total market on the table the parts they're going after suit them, are amenable to cost efficient management, synergize with their core offerings well and could double the revenue over time. Albeit at lower long-term margins.
Bottomline
At long-last Dell is saying and, apparently, doing a lot of the right things. There's a long way to go before all this stuff is in place and begins to fire on all cylinders. But it wasn't that long ago that they stood up at major national conferences and could NOT present a clear, simple picture of who they were going to become and how they were going to do it.. Now they can. If they can turn these good ideas into new parts of their enterprise DNA they will build a new set of moats behind them and create major new value propositions. I don't know yet whether this can result in returning them to their glory days. Frankly I doubt it. But it will turn them into a large, growing, profitable and well-run company with great, sustainable strategic opportunities in the developed and developing worlds.
All of which doesn't mean they're yet an immediate buying opportunity. Depending on how you think the economy is going, and will go, and how that impacts Dell's business a downturn is likely to take down earnings and therefore the stock price. You'd also want to start testing at least the obvious signs of whether or not they're delivering on these initiatives - from the web site to word of mouth to quarterly analysts reports and annual updates. But right now Dell looks like it goes on your long-term watch list in our humble opinion !
And a final caveat, and a major one. Each of these new structural changes/strategic initiatives has a major weakness to be overcome. In the consumer space it'll be re-thinking the product design for appeal as well as function and then marketing it. In the enterprise space it'll require a commitment to on-going innovation in larger servers and networking. As well as the appropriate sales, marketing and channel operations. ALL of which are new capabilities. And future growth is critically dependent on services yet Dell's not equipped to go after the more complex services and isn't. And so on and so on thru each line-of-business, initiative, target market and geography. YET...this is a SEE change.