Dell: to Hell and Back Again? - Too Little, Too Late?
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Within a few months it was clear that Dell was experiencing difficulties. As quarterly financials became grimmer, Dell tried to improve its odds of continued growth by acquiring fringe-market leader Alienware.
Alienware was a leader in producing high end computer systems for whom a typical Dell system would never be sufficient. This turn of events was noteworthy because it seemingly went against the founding principles of Dell with its emphasis on using off-the-shelf components in a highly efficient production method. Alienware was a leader in providing unusual and innovative component configurations which included bleeding edge graphics cards and sophisticated water-cooling setups for their machines.
The acquisition seemed to renew investor confidence in the Dell machine to allow it to again become a market leader and a market innovator. Additionally, Dell started to make available systems utilizing processor chips from AMD. The use of these chips again increased investor confidence in Dell as it had long used Intel chips exclusively for their computer systems. However, even these two significant changes did not provide the rebound Dell desperately needed.
Since then things have gotten worse.
CEO Kevin Rollins stepped down from his position with Dell in a very sudden announcement on January 31, 2007. The removal was welcomed by many investors in the company who laid blame for the years of declining performance directly at his feet and no one else's. The removal of Rollins as CEO was not the only change in the upper echelons of the Dell structure. Several weeks earlier chief financial officer James Schneider resigned from his position in the company, though he remained as senior vice president. The resignation of Rollins and the announcement that Michael Dell would be returning as CEO resulted in a 38 cent jump in share value for the manufacturing behemoth and a raising of its rating by CS First Boston of Dell shares from a "neutral" to an "outperform."
However, this bright ray of light in the world of Dell was not the end of its troubles. Shortly after this announcement allegations of a lucrative kickback scheme between Dell and Intel have surfaced. These "secret" and "illegal" kickbacks were allegedly used to discourage Dell from using other chip providers, notably AMD, and Dell reportedly used these kickbacks to inaccurately inflate its profits by hiding various Intel rebates. A 251 page complaint filed with the courts alleges that Dell's profits were improperly inflated by as much as $1 billion per year from Intel in rebates that were not properly accounted for in any of the company's financial statements. This class action suit against Dell was initiated by a number of its current shareholders.
The return of Michael Dell is clearly being seen as a new chapter in the company's history and has been dubbed "Dell 2.0" by many. The change has certainly been welcomed by the market as a whole as is evidenced by the jump in share values. However, the true question is "what can he do to restore Dell to its previous position at the top of the manufacturing mountain?"
A large part of the problems Dell has experienced has fallen to its emphasis on the lowest cost possible and the various cuts needed to maintain this price edge in a very competitive market. As costs were cut and after-sale support was slashed, outsourced consumers became disenfranchised with the Dell experience. Therefore, as the next buying cycle came around, they did not look to Dell for their next computer purchase. The short term success of the outsourcing and support savings clearly did not prove beneficial for long term success.
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