Last month, I attended Dell DELL 0%’s annual industry analyst conference in Austin, Texas. At the event, Dell outlined its plans for growth in end-to-end solutions incorporating hardware, software and services. Of intense interest was the plan for the PC business, which, up until last quarter, had experienced market share losses. After dissecting Jeff Clarke’s keynote speech, who is Dell’s Vice Chairman and President of Global Operations and End User Computing Solutions, and talking at length with Sam Burd, VP and GM of Dell’s PC Product Group, I want to share with you my take; the plans have less to do with cutting margins and price and is more of a multi-faceted, comprehensive growth strategy.
Having spent nearly a decade as a PC maker and over a decade serving the PC makers as a chip guy, I can tell you that PCs are a tough business. There are a few tenets I have learned along the way that apply to this column. Primary is that you have to be “in it to win it”. In other words, you have to address the business like you want to win at everything. PCs are a volume game. Once you start deprioritizing your PC business, this is usually the start of the death spiral. PC margins will never look as good as the rest of your portfolio, unless you are Apple AAPL -2.65%. Once companies start using phrases like “we will be competitive ‘here’ but not ‘there’ ”, it’s the beginning of the end. PCs are a volume business and you need to be a large player in every channel, country and price point. Just ask IBM IBM -0.98%, DEC, Packard Bell, Compaq, NEC ,Sony and NCR. Dell’s Jeff Clarke made it perfectly clear that Dell is “in it to win it”.
Jeff rolled out the comprehensive plan which I’ll get to later, but the most profound statements he made were around the company’s planned success in every country, every channel and at every price point. He said, “we won’t walk away from business like we have in the past”. This says everything, as Dell plans again to be a volume, “in it to win it” PC player. Growth plays require this kind of public proclamations, as it sends the right message to your customers, suppliers, investors and employees that Dell is committed.
Dell’s “end user computing” growth plan is based on four primary elements designed to:
- Simplify the product and services
- Obtain new customers
- Win with industry-leading end-user computing solutions
- Scale alternative computing solutions
Let’s start with simplification.
Dell’s goal of simplifying its offerings is encapsulated in a program called “Smart Selection”. It’s an offering that I’m sure will be of interest to a large number of Dell’s current and potential customers. Today, Dell can literally sell tens of millions of different kinds of configurations driven by its CTO (configure to order) model. In the CTO world, every order is custom and is built only after the order is placed. For commercial customers, this meant that the typical wait time from receipt of order to shipment time was around a seven to ten days. With Smart Selection, Dell pre-builds what they it believes will be the most popular configurations, or SKUs, and will ship them within 24 hours. This can be considered BTO (build to order), something HP and previously Compaq (my alma mater) have been doing for a while. Large enterprises can even get their approved custom software image by adding another 24 hours. This is a monumental step for Dell and one that has other positive outcomes as I’ll illustrate below.
From my experience, there are many advantages to BTO. First is supply chain and manufacturing. Because your builds are very high volume and manufacturing scheduled in advance, your total supplier cost and manufacturing cost is much lower. CTO manufacturing lines are designed to do one custom SKU at a time versus BTO lines designed to make thousands. Yes, there is an inventory tradeoff, but total success is typically driven by how close you are to knowing what your customers want. Dell’s long history of direct sales gives it a wealth of customer intelligence and, as a result, can be competitive advantage. If Dell can effectively mine its reported two billion customer conversations they have per year, this could work out very well.
BTO configurations are easier to service as well. Every CTO configuration is unique and so is a service event. BTO configurations can be built in volumes of 100,000 each and as an OEM, you know exactly what is inside, making it much easier for the customer to do self-diagnosis and fixes. Dell has rolled out new PC diagnostics and easier to find and use drivers and downloads, again, made easier by Smart Selection SKUs. Why is this important? Literally, two phone calls can eat all the gross margin in a product. In my experience, a satisfied self-service customer is a much happier and lower cost one.
Customer Acquisition and Impact Moves
If you look back a year ago, Dell was uttering the “we’re not going after that kind of business” phrase, which concerned me, for reasons I outlined above. Dell now plans to be competitive in more price bands and says they it won’t be walking away from business like it had in the past. To help accomplish this, it plans on developing specific SKUs for specific markets, broaden their its portfolio with tablets, and better optimizing their its channels of distribution.
When you offer BTO in addition to CTO models, you can get very, very specific and custom with SKUs for different countries and channels. This can drive lower costs and higher margins. For example, Dell plans to start developing specific models for education that are a lot more durable and higher performance. For China, they are optimizing its plans to optimize its offerings with different colors, richer configurations, and thinner form factors. In U.S. retail, Dell says its Inspiron line will be “priced to win” at retail and for the holidays, driving touch-based products at “compelling prices”.
In tablets, Dell plans on driving tablets into the enterprise with the Latitude 10 and into consumer with the XPS 12. I believe Dell has a big opportunity with the Latitude 10 to displace iPads as Dell’s solution is much more of what enterprises businesses want and need. Enterprises are today deploying iPads because for almost three years, there was no alternative. Now there is a very strong one. I am a fan of the XPS 12 but it’s really more of a notebook first, then a tablet. The biggest missing piece on Dell’s tablet strategy is around 7-8” tablets, where today’s volume growth is. Dell’s response is that it’s an interesting market and they’re looking at it. This isn’t exactly a definitive statement, but if Dell wants to tap into this volume unit opportunity that I believe will be larger than notebooks, they need to do something here.
While 37% of Dell’s revenue comes from the channel, it knows it has a lot of work to do, particularly emerging regions. In China, for example, Dell is stronger in the tier 1-3 cities and will be investing in the tier 4-6 cities. The same is planned to happen in India, Indonesia, and Brazil.
Finally, and much more straight-forward, Dell is investing in what they call “sales makers.” This is its fancy name for salespeople, but if you’ve ever spent time on a Dell sales floor, you know why they have a fancy name. They’re sharks, and Dell plans on aggressively pursuing new commercial customers to take business from Hewlett-Packard and Lenovo.
Scale alternative computing solutions
Unbeknownst by many, Dell’s Wyse business is on a $1B run rate. This is the cloud-client computing business, which includes thin clients, but it’s a lot more than hardware. It’s an entire chain of hardware, software and services that goes from the end point to the servers, networking, storage and security in the cloud. If you think of it, this could be the real, future volume play, not cheap tablets. I believe in many forecasts that the “Internet of Things” (IoT) could be 20B units in 2017 and Dell’s Wyse business plays right into this field. While not as sexy looking as a new Dell XPS 11, it could be Dell’s cloud client computing business that drives long-term growth.
How Does Dell Pay For This?
If you’re like me, you’re wondering, how does Dell make all these investments, operate in new price points, not walk away from business, and grow margins. Its chance of success first starts with its chance of success in Smart Selection. Smart Selection has the ability to lower cost and drive revenue. It sounds counter-intuitive, but this is what HP and Lenovo have been doing for years and the cost reductions come primarily out of the supply chain and support. By driving additional margin dollars, Dell could better afford more salespeople and more marketing, something Dell needs to do a better job of to surface the time and effort put into very high margin, differentiated product lines like XPS and Latitude. And if Dell can get more of a beach-head in higher-margin products and services, this enables investment in even more growth.
To be successful as measured by profitable growth, Dell needs to hit on all cylinders on every part of their strategy. You can’t have one without the other. On the other hand, Dell doesn’t have to execute on everything to increase revenue and unit market share. And as a private Dell, does it matter in the short term? Going private is a smart, long term, not short term play for the company. Whichever way it goes, both HP and Lenovo will need to rethink parts of their PC strategy and execution, because Dell has thrown the proverbial axe into the sea and is preparing for a prolonged war.