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Dell Computer Corp. made its name and money by focusing on one thing: building low-cost PCs and servers using highly efficient manufacturing processes and selling the hardware directly to customers.
But over the past year, the computer maker has embarked on a new strategy that is pushing it into services, printers and PDAs (personal digital assistants). Chairman and CEO Michael Dell and company executives tout the initiatives as a natural evolution for Dell. However, enterprise customers and analysts say that to be successful with the new push, Dell must overcome several obstacles, including its reputation as just a PC maker; its increasing reliance on partners to provide technology; and the danger that, as it expands into new markets, the company could stretch itself too thin at the expense of its current user base.
While Dell may be gambling by attacking several new markets at once, the company has a distinct opportunity to gain ground against rivals that are struggling, notably Hewlett-Packard Co., which is still digesting its acquisition of Compaq Computer Corp. “Theres churn in Hewlett-Packards customer base because of uncertainty,” said Russ Holt, vice president and general manager of Dells enterprise systems group. And analysts say if Dell can undercut HPs prices for printers, ink cartridges and PDAs, that will do further damage.
In interviews with eWeek editors at the companys headquarters here, Dell and his top executives contended that rather than representing a departure, the expansion plans are a natural part of the companys growth. For example, last year Dell began selling network switches, which it contends is a natural fit with sales of its servers. In just over a year, the company has shipped more than 1.8 million switch ports.
“Many network switching customers are server and PC customers. They really like having one phone number to call,” said Kim Goodman, vice president of Dells networking business. Goodman asserted Dells approach to networking gear is the same as its traditional approach to PCs. “If its not fully standardized, were not likely to have a Dell product.”
However, one Dell customer raised concerns the companys current users may suffer as the computer maker shifts its attentions to new markets. Brian Potts, network manager for Associated Food Stores Inc., in Salt Lake City, said hes already noticed a change in the service he receives from Dell since being persuaded to switch from Compaq hardware early this year.
“We got wooed by the sales A-team, but it seems like lately that we have been traded down to the B-team,” Potts said, contending that his new Dell representatives are less knowledgeable and attentive than the ones he first dealt with.
While Dells plans to compete in new markets are still in their infancy, the companys actions have already drawn an aggressive response from industry leaders HP, in Palo Alto, Calif., and Cisco Systems Inc., in San Jose, Calif. Following Dells move into printers and networking hardware, HP and Cisco in recent months canceled their reseller agreements with the computer maker covering HP printers and supplies and Cisco networking devices.
And although in services, Dell retains partners Unisys Corp. and Getronics, the company will increasingly provide services to customers itself. For example, Dells services business has grown steadily over the last four years and accounts for about $3.5 billion of the more than $32 billion in annual revenues.
“We did 2,000 engagements in the last year,” Dell said. He said the company over the summer acquired Plural Inc., a services provider specializing in Microsoft Corp. applications, and said the company is shopping for other small services providers to build out its portfolio of offerings.
Gary Cotshott, vice president of Dell services, said the services strategy is the same as ever for Dell. “Were trying to take cost out of the processes. Were not trying to be like IBM Global Services and [Electronic Data Systems Corp.],” Cotshott said. The idea is to offer flexible service packages, not custom-tailored solutions, he said. Still, he added, bigger things are in store: “We will carefully move up the food chain in professional services.”
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Partnership Pitfalls
Partners also play a role in Dells expansion into printing products, with Lexmark International Inc. producing Dell-branded printers and supplies. In Dells forthcoming Pocket PC devices, an unnamed Taiwan contractor is rumored to be handling manufacturing.
In its year-old partnership with EMC Corp., of Hopkinton, Mass., Dells manufacturing magic is the key ingredient. “We cut costs of EMC technology by 45 percent,” said Russ Bailey, senior manager of the Dell-EMC relationship. Bailey said to look for more influence from Dell. “Well roll out more Dell-EMC products. This is the first generation weve had input to,” he said.
While EMCs dominant position in the storage market has facilitated Dells entree, EMC could prove a liability as well. The storage company has seen its debts increase and stock values plummet. EMCs troubles have fueled speculation that the storage company may be bought* by an investor or rival. Such a scenario would prove costly and embarrassing for Dell, whose storage strategy is closely tied to EMC, say industry observers. “We are continuing to monitor the situation with EMC. Their health is of concern to us,” said Bailey. In an indication that Dell is keeping its options open, he said, “We like EMCs strategy, but we will continue to evaluate others.”
Another partnership that has also proved somewhat troublesome for Dell has been its relationship with Intel Corp. While Dell has historically relied solely on the company to provide all the microprocessors that power its computer products, recently Dell executives have found themselves at odds with Intel, of Santa Clara, Calif., over the chip makers design of its first 64-bit microprocessor, called Itanium. The chip, co-developed by HP, features a new architecture that is largely incompatible with existing Windows-based applications. Dell executives privately admit they would have preferred a chip design that was fully compatible with existing applications.
“This is a raging debate that is going on right now,” Dell said.
Advanced Micro Devices Inc., of Sunnyvale, Calif., plans early next year to introduce a server chip—called Opteron—that will preserve compatibility with existing applications. Although, analysts said, a Dell decision to adopt Opteron would anger key partner Intel, Dell officials said they are considering it. “We are evaluating that technology and will have a definitive response by [years end],” said Holt.
The companys partnership with Microsoft, of Redmond., Wash., likewise has been a cornerstone of the companys success. Although a few years ago, Dell might have avoided loading the Linux operating system on some of its servers to avoid upsetting Microsoft, fully 12 percent of Dell servers run the operating system, according to Peter Morowski, vice president of software for Dells enterprise systems group. “We look at Linux as our Unix,” Morowski said, adding that the Intel architecture is penetrating deeper into the data center.
Indeed, in recent years, Dell has extended its enterprise product lines by offering more rack-mounted servers, powerful four- and eight-way Intel Xeon-based systems, and high-performance computing clusters.
Nevertheless, some IT managers are skeptical the company can offer the enterprise-class products they depend on to run their businesses.
“We buy a lot of their stuff … but when it comes down to doing the things youve got to count on, we tend to be pretty risk-averse,” said Robert Reeder, senior vice president and CIO of Alaska Airlines, in Seattle. “You dont want transaction systems failing, and you dont need to be hooking up with a vendor that thinks the system is just another PC.”
Some system managers said past problems with Dells enterprise equipment have made them reluctant to try the company again.
“At the time we evaluated them [18 months ago], they were going through the process of changing their server management tools, and they were not very complete for doing remote server management. They also had announced a new RAID controller but were shipping the old one but promising a free upgrade later that would require a server rebuild,” said Larry Shaw, senior systems engineer for Nordstrom Inc., also in Seattle. “There were a number of little things that were a pain.”
Whether Dell can successfully integrate and build these new ventures on top of its core business will prove challenging but not impossible, said Andy Neff, an analyst with Bear Stearns & Co., in New York.
“If we talked about Dell getting into storage five years ago, we would have said, Well, they cant do storage. Neff said. “Skepticism is healthy, but they have a history of doing this.”
Stan Gibson contributed to this report.
Related Stories:
- Interview: Dell: Direct, as Always
- Editorial: Dell: Triumphs and Challenges
- Dells Printer, PDA Bids to Put Pressure on HP
- Commentary: Dell Applies Winning Formula to New Areas
* An earlier version of this story inaccurately implied that EMCs financial challenges could result in its filing for bankruptcy protection. eWeek regrets and has redacted the implication.
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Expanding Dell
Recent business initiatives by the computer maker
- September 2001 Dell announces its first LAN switches
- October 2001 Dell, EMC sign five-year agreement to jointly market storage products
- April 2002 Dell discloses plans to start selling projectors in May
- May 2002 Dell acquires Plural, a 200-employee New York-based Web hosting company that recorded $46 million in sales last year
- July 2002 HP cancels reseller agreement following news reports that Dell will launch its own branded printing products
- August 2002 Dell confirms rumors that it will sell its own brand of PDAs; Dell announces it will sell unbranded “white box” PCs to independent resellers and small computer vendors
- September 2002 Dell signs deal under which Lexmark will produce Dell-branded printers and supplies; Cisco cancels its reseller agreement with Dell covering network switches