Armchair Quarterback - Our Turnaround Strategy

It’s easy to be an armchair quarterback and criticize. We want to be more constructive.

Overall, with the exception of the past three years, Dell has known nothing other than spectacular growth. They had a very large number of mediocre managers (who made millions on the stock) hanging on for the ride thinking they were great. Have you ever tried doing business with Dell? It’s not fun. They are NOT your partner. It is very much an adversarial relationship.

Everyone wants to do business with Dell owing to Dell’s size. However, once they try to do business with Dell, they realize that they will be treated poorly by Dell. As a vendor, one is forced to sign a vendor agreement which specifies that that the payment terms are Net 50. However, Dell processes all receivables once a month, so if you miss the submission date, (because you delivered one day past the cut-off date), then add another 30 days to your payment expectations. In addition, even though the vendor agreement says 50 days, one should expect that your payment won’t arrive until 75 days after you submit your invoice – meaning that payment typically occurs in 90 days. Dell stretches out its payment terms to its own advantage – which is smart. However, payment terms are typically much longer than vendors agree to, which simply angers their vendors. As a result, few companies WANT to do business with Dell as they dislike being viewed with derision by Dell staff. (An offshoot of the lousy corporate culture).

Three years ago, the PC market went against Dell, and their general weaknesses were exposed. Now Michael thinks he can fix everything bringing in high priced help that collectively have little relevant experience. Unfortunately, Dell is not even close to understanding just how messed up they truly are.

To begin with, Dell must re-build its culture. While this is the most difficult thing to do, it is, without a doubt, the single most important thing that Dell must do to re-build itself. People must have the opportunity to make mistakes, as the mistakes will very often lead to great insight that will mean success down the road. The cut-throat culture of “stepping on your grandmother to get ahead” must stop. The accepted wisdom of being ruthless to your colleagues must stop. Moreover, Dell must begin to treat its vendors as partners – and that means even the smallest vendors.

Next, the market has dramatically changed. Other than Apple, very few of the traditional PC companies are still innovating. Most now have shifted their dependencies to the ODM's (Original design mfgr's) to come up with all the hot new products. Therefore, the major differentiation between them in the future will be my logo on the box vs. your logo. They'll all run the same software so unless you are willing to be different - like Apple - you can't create any product differentiation or separation.

Services will help the turnaround to some extent, but it will not be enough for long term market dominance.

Imagine this scene: a Dell person walks into your office. He/She smiles, extends their hand, and says: “Hi, I’m from Dell, I’m here to help you!”

Replace the word “Dell” with “Government”, and you will get the joke. Unfortunately, the customer will not.

In any event, Dell is playing significant catch-up here. Carly Fiorina was credited with destroying HP’s engineering culture to get to where they are today. There is no engineering culture to destroy at Dell, so that may be Dell’s advantage. However, Dell must create a services culture. You know, one where a company does whatever they need to do in order to make a customer happy. Ok – so that is 180 degrees opposite to where Dell culture is today. This will be a long long road to travel. Hence, the significant execution risk in the company and in the stock.

Unfortunately, the only apparent vision at Dell is to build services in order to compete with IBM and HP – in those spaces.

Next, Dell really needs a winning consumer strategy. Mobile phones have the volume, but it has been all about the software for several years - where Microsoft “owns” the market. Everyone agrees that RIM’s Blackberry software is pretty bad – but it does email really well, so people overlook the software. Therefore, even if Dell buys Motorola’s handset division, they still don’t have the software to make the products “cool” and “must-have” handsets.

Moreover, a big acquisition in this space will mean another 2 years (minimum) of turnaround as there is no software. Roger McNamee at Elevation Partners was quoted last summer (when Elevation made a significant investment in Palm), that people don’t have enough time. As a result, people need to do more tasks more productively and efficiently, and they will do those tasks on their mobile phones during the 45-60 minutes between travelling from the airport to the hotel, or during the commute home. Verizon Wireless announced that it was going to open its network, with the phrase: “Any apps, any device”. Google’s Android software platform recognizes that it’s all about the software that needs to be innovative and something that handset owners must have. In other words, software is the key, and Dell is nowhere to be found.

Next, Vizio came out of nowhere in 2002 with low cost big screen TVs. Dell resells SONY, Phillips, and Sharp units. According to reports, Vizio generated revenues of $2 billion in 2007 (representing only a 2% market share), but competes very well with Samsung and SONY – two much larger players in the market. Is Dell too late to acquire Vizio, or perhaps, Syntax-Billion or Wesinghouse Digital Electronics? Perhaps not. However, what Dell really needs is someone with a vision of the market, such as William Wang at Vizio.

This leads to the last point, where is the “skunk works” to develop and bring to market the next “Hot” product? In fact, where is the culture of the skunk works? Dell has frequently been quoted as suggested that it allows others to be on the bleeding edge. Unfortunately, it is Dell that is now bleeding – with no end in sight.

“Skunks works” and innovation has to be in the blood of every employee, and it has to be in the culture that CEO’s drive. Every single employee must come to work each day thinking: How do I do this better today? How do I do this better tomorrow? Innovation has to be bubble up from the thousands of people, who need to crystallize these new ideas. How do you get people to buy into this? You make this the behavior that you want, and you reward it. You make these people heroes. You exaggerate their successes. You put them on stage. You hand them checks, because money talks.

Bottom Line: This is not a “wait and see” story. This is a turnaround, with heavy emphasis on the “turn.” This will take years, not a few quarters as some other Wall St. types suggest. It took Steve Jobs over 2 years to get Apple turned around. The difference was that Jobs has a vision, and was driven to innovate. Dell has none of these attributes. Dell shares are down more than 30% since Michael returned to CEO position. He has a lot more work to do restructure the company.

We have lots of other ideas about fixing Dell, but Michael has already paid millions for a bunch of guys that will not get him much further than he already is. Where is the vision? Where is the ability to see what something can be when nothing currently exists? Where are the new markets?

Unfortunately, the analyst’s meeting gave the impression that the company’s strategy has been defined, and its’ all systems “Go” to profitability and new wealth. We disagree with that view.