E.B. Writers of Dallas

The HP-Compaq merger might have crowned a new King of the Hill, but don't count Dell out yet.

Esther M. Bauer correspondent | HostingTech Magazine, August 2002

The merger of the second - and third-most dominant computer companies, Hewlett-Packard and Compaq, has shaken the PC market. The newly unified company has done more than displace Dell Computer (www.dell.com) as the world's largest PC company in unit sales; it is a challenge to Michael Dell and his company.

"The merger of HP-Compaq is almost like a red flag in front of a bull for [Dell], creating a new internal incentive to rally the troops to push yet further," says Barry Jaruzelski, managing partner of Booz Allen Hamilton (www.bah.com), a management consulting firm in New York.

Regaining the top spot might be psychologically important, but Dell won't sacrifice profitability to achieve it. Along the way, however, Dell can make things difficult for competitors. "They have the ability to make money; their structure allows them to be profitable," Jaruzelski says.

"We've been No.1 in profitability and customer loyalty for several years. Being No. 1 in revenue and units will naturally follow," says Dell Chairman and Chief Executive Officer Michael Dell.

Although PCs have made Dell what it is today, desktops now are a commodity, and the higher margins on servers and storage is where Dell is headed.

Serving the server market
It's all about volume - the right kind of volume - and Jaruzelski predicts Dell can be No. 1 in revenue relatively quickly, due to its focus on valuable customers. For PCs, key customers are those in the institutional market, enterprise corporations, government entities, and power-user consumers.

For servers and storage products, the crucial clients are the large enterprises, small to midsize businesses, and Internet datacenters. Indeed, the marketing of its servers and storage products has brought Dell most of its unit growth and new opportunities in the last couple of years.

The service provider space had been a huge area of growth for Dell, but due to industry consolidation, Dell backed away from focusing on that market last year. Today, the design and technology of its servers are a good fit for enterprise and hosting companies, because the same issues affect both kinds of customers, Dell officials say.

In the next 12 months, modular computing (blade servers) is going to be a key area of opportunity for Dell.

"We expect to be in the forefront of the growth that takes place in that type of server design," says Darrell Ward, senior manager of Dell's PowerEdge rack server products.

The migration away from traditional rack servers to blade and modular servers will affect service providers and datacenters wishing to lower power, cooling, and per-server costs - in other words, the entire hosting industry.

"These dense environments are exactly what modular computing is about," Ward says. "Our modular strategy has several components and designs based on the performance requirements of the servers. Modular computing overall has been extremely well received ... just about anybody sees the value proposition."

Dell differentiates itself by adding flexibility into its modular design, Ward says.

"Our design is very unique in that we don't plan on giving the customer any limitations on flexibility or configuration, and we still maintain a great, proven density in ease of use and serviceability.

"The Dell direct model is continuing to prove itself to be a superior model in this industry. The direct model plays very well in many areas. It is going to be the fundamental cornerstone of any and all success we have going forward, regardless of the markets we address," Ward says.

Broadening horizons
Last fall, Dell partnered with EMC (www.emc.com), gaining the right to sell CLARiiON storage devices as a cobranded product and provide profitable professional services to enterprise customers.

IDC described the deal as a win-win proposition, giving EMC an "inside track" to Dell's installed base and giving Dell a higher-end storage solution for its customers.

Dell took steps with EMC in June to broaden its reach deeper into the storage market. It introduced enhancements to its PowerVault line of NAS (Network Attached Storage) servers that will allow consolidation of enterprise resources and integration with the Dell/​EMC SAN (Storage Area Network) component.

The offering allows growing companies with direct attached storage to migrate to a NAS device and, ultimately, a Fibre Channel SAN as their capacity needs dictate. The connectivity technology, jointly developed by the two companies, is among the first in the industry to add NAS servers in a heterogeneous environment.

Grand strategy
Fine-tuning its product and service offerings is part of an ongoing strategy for Dell to continue its profitability. Michael Dell knows his company cannot repeat its phenomenal growth of the 1990s and will have to be smarter to incrementally grab market share from competitors.

"Customers have become much savvier," Dell says. "Technology will remain a large part of their capital expenditures, but business leaders are going to be more concerned with buying technology that fits their needs and will deliver desired results. So, we're not planning for another dot-com boom. We do know, though, there's a lot of old equipment out there, about 150 million systems that need to be upgraded. It's not a question of if people will buy, but when.

"Dell is known for change. We're always making adjustments to bring more value to our customers by increasing our productivity and improving efficiencies. We don't have specific plans for a major operational shift, but everyone at Dell knows that we'll change to best serve our customers," he adds.

Lean, mean machine
Flexibility has been the cornerstone to the company's success. It has always maintained a lean profile and is always looking for cost-cutting measures, even before the economic slump and falling technology demands that led the company to cut $1 billion from its overhead to increase profits last year. Some of the reductions included cutting jobs, which had numbered more than 40,000 early last year. Today's head count is 34,800.

This year, Dell promises to cut another $1 billion - an action that many analysts say is likely to be a bone-cutting move. They say Dell's flat revenue, which is hanging at $31 billion, shows the company is sacrificing profitability to gain market share by lowering prices against rivals, then making up the difference by cost cutting.

"If the market isn't really growing very much ... they have to make it up on volume, which means taking it out of the hide of everybody else," says Jaruzelski. "They have to sell more just to stay even. If you are Dell management, you know you can always be the last man standing, because you have superior cost structure. They are lean to begin with. As bizarre as it sounds, their biggest problem is having been so successful. If you are already best in class, squeezing another one percent out of SG&A [Sales, General and Administrative] can be ungodly difficult. I'm really wondering if they can continue to improve their overhead structure."

Chairman Dell isn't worried. As he wrote in his 1999 best-selling book "Direct from Dell: Strategies That Revolutionized an Industry," people have been telling him it couldn't be done ever since he started selling PCs by going directly to the customer instead of through retailers and resellers.

Dell is a data-driven company always looking for ways to improve. "It is easy to fall in love with how far you've come and how much you've done," Dell wrote. "It's definitely harder to see the crack in a structure you've built yourself, but that's all the more reason to look hard and look often ... it can always be improved."

As long as efficiencies aren't at 100 percent, there is room to improve, as Dell says today.

"Until we get days of inventory down to zero, we still have room to improve our supply chain," Dell says. "Until customer service calls are down to zero, we still have plenty of room to improve the customer experience. The long-range impact? Better products, services, and value for our customers."

Dell credits his parents with teaching him to look for commercial opportunities. Today, he's just a grown-up version of the kid always on the look out for opportunity, and his company is a reflection of that philosophy.