How Michael Dell Could Reinvent His Company

In 1989, a 24-year-old Michael Dell told Inc. magazine that he planned to be CEO of his company for at least 60 years. "But if for some reason that's not in the company's best interest," he said at the time, "I'll find something I can do that will add value."

Michael Dell may get his chance to make good on that promise to add value--at a time when the company needs it the most. Earlier this year, he announced plans to take the company private again. Dell reasoned that going private was the only way to invest in the company's future, because the public markets do not respond kindly to any sort of investment that might eat away at company's near-term proft margins.

Now it is up to company shareholders to determine if Dell, who was reinstated as the company's CEO in 2007 after a three-year hiatus, can make good on this plan. They must either accept his bid to buy out shareholders for $13.65 (or about $24 billion), or vote it down, forcing Dell and his backers into an even more protracted battle with activist shareholder Carl Icahn. Either way, it's likely to be a close fight. The vote was scheduled for Thursday but news sources are reporting that it has been delayed until next Wednesday so that Dell can consider raising his offer to better his odds. 

It will be no small task to reinvigorate the company. The market for PCs is shrinking--global demand dropped 11 percent in the last quarter alone--and Dell's market share has been on the decline for nearly a decade. According to the company's last earnings report, its PC profits took a nose dive--falling about 79 percent. Despite modest growth in the company's enterprise department, the macro-level picture is not pretty: In March 2012, the company was worth about $100 billion; today, it's valued at a fourth of that. 

But let's imagine for a minute that the deal is accepted. How could Dell turn it around?

The founder's master plan rests on the conviction that he can turn the PC-based business into what he likes to call an "enterprise solutions and services" business. Essentially, that means that, similar to IBM, Dell is looking to corner the market on software that appeals to small- and mid-sized businesses. That won't be easy, and Michael Dell knows that. What he also knows is that the PC businessis is dead--and the company must move on. 

"Two-thirds of Dell's profit is not the PC," he told the Wall Street Journal in 2011. "Of the one-third that is the PC, the vast majority of that is not consumer. I'm just level-setting what Dell is today, because I think a lot of people look at Dell and they go, "Oh, Dell is a consumer PC company." That's not really at all what Dell is today." 

In 2011, the company started betting heavily on the tablet market, specifically business tablets. But the tablets have, for the most part, failed. A 2013 tablet traffic reportcompiled by Chitika shows that Dell tablets--which run on Windows 8--barely even register on the charts compared to the Apple iPad, Samsung Galaxy, and Amazon Kindle. 

So, what's Dell to do? He needs to get his entrepreneurial groove back. Dell didn't respond to my requests for comment. But after looking at a range of company documents, filings, and analysts' opinions, I think there are five key ways to do it. Feel free to disagree or suggest your own initiatives in the comments below. 

Focus on R&D.

According to a "Dell Special Committee Investor Presentation" compiled, in part, by the Boston Consulting Group and filed with the SEC on July 15, it's clear that Dell has a spending problem. Not that it spends too much--but that it doesn't spend enough. 

The report acknowledges that Dell has a "weak position" in "key growth segments" including cloud and software as a service. Part of the problem is that, compared to the company's competitors, Dell simply hasn't spent enough on research and development. 

 

Michael Dell knows this needs to happen. In a letter to shareholders filed with the SEC in April, Dell said:

We anticipate making significant investments in research and development, capital expenditures and personnel additions. This includes hiring additional R&D, services and sales personnel in order to extend the depth and breadth of our capabilities and to increase the number of customers to whom such services and solutions are provided. Dell’s strategy of becoming an integrated provider of end-to-end IT solutions is expected to require additional investments in converged infrastructure solutions, software, cloud solutions, application development and modernization, consulting and managed security services. 

Acquire new enterprise companies.

Since 2008, Dell has spent $13 billion on acquiring at least 20 B2B companies. Most recently, the company acquired Enstratius, a cloud management firm. However, the company acknowledges these acquisitions have only resulted in "modest revenue contributions."

Perhaps Dell should take a page out of the Marissa Mayer playbook--find and acquire disruptive, scalable tech companies early in their lifecycle. Dell knows that these types of acquisitions will be necessary ("it is likely that we will need to make additional acquisitions to complete our transformation," he noted in the April letter) but it will be key not to overpay.

Michael Dell doesn't talk specifically about the companies he's interested in, but according to an April 2012 Forbes interview, Dell said he, personally, looks at over 250 companies every year that might fit into the company's acquisition strategy, even if the company only acts on a few.  In all likelihood, Dell will focus the company's future acquisitions towards enterprise software companies, which, he says will create "long-term value and growth for our company and for our stockholders." 

Reinvent the broken customer experience.

One of the core frustrations among users is Dell's customer experience. (Among some 2,100 reviews on consumeraffairs.com, for instance, Dell has a 1-out-of-5 average rating). Michael Dell knows this is a problem.

"In 2012, we began an effort to simplify every aspect of the customer relationship," he noted back in April. "If successful, we believe this initiative will make it easier for customers to do business with Dell, eliminating friction and complexity and enabling more rapid response to customer needs. We expect to make significant operating expense and capital expenditure investments to accelerate this effort."

Part of Dell's plan was linked to beefing up its social media wing, which monitors the social Web for complaints and reacts accordingly. According to an April 2013 report by Dell's director of social media, support analysts respond to about 3,000 posts per week--in 11 languages. 

This isn't the first time Dell has tried to reinvent its customer service model. In 2007, the company spent $150 million to try to improve it. It didn't help--a few months later, customer servcie complaints increased by about 5 percent, according to the American Customer Satisfaction Index. But by 2012, the same Index showed a six-point jump to 81--a sign that its efforts may be paying off. 

Invest in the private cloud.

This may not be the sexiest component to Dell's transformation, but it's integral to the company's success. Here's a slide from a recent filing to get a sense of what Dell is after:

Dell is shifting away from public cloud model--a strategy favored by tech companies like Google, and Amazon. This makes sense, given the company's limitations. Instead,Dell will sell OpenStack-powered private clouds that run on Dell technology.

As Slashdot points out: "given the broader trends within the tech industry, any company that refuses to offer cloud-based products risks appearing obsolete (just ask Oracle about that one). But starting up any sort of public cloud infrastructure requires considerable investment, and Dell may lack the internal drive and resources to make such a thing happen at this time."

Expand overseas to emerging markets. 

This one is a no-brainer. In order to expand its small and midsize business market, Dell will need to invest and market its products to an international clientele. In another April letter, filed with the SEC, Dell acknowledged the role of international expansion in the long-term overhaul of the company. He wrote:

We anticipate making significant investments to enhance our presence and ability to compete in emerging markets, including the BRIC countries (i.e., Brazil, Russia, India and China). In addition, we expect to expand aggressively in other parts of Asia, Latin and South America, Central and Eastern Europe, the Middle East and Africa.

Of course, these five steps are just a working theory of an effective Dell turnaround. Execution will be everything. But the need for investment is real--and Dell knows it. Right now, the company has about $13 billion in cash on hand. How he chooses to deploy it may make all the difference. 

INC.com