July 15, 2004 12:40 PM PDT

Rollins to take up the reins at Dell

Twenty years after starting in a University of Texas dorm room what is now the world's largest PC company, Michael Dell is handing the reins over to a new CEO.

On Friday, Dell President Kevin Rollins will also assume the mantle of CEO and will be nominated to the company's board of directors at the annual shareholder meeting. The change is part of a plan Dell announced in March.

Unlike IBM's recent shift in leadership, which brought sweeping changes for the company, Dell's transition is expected to cause few ripples. Rollins is taking over the post during good times for Dell, and he has already assumed many of the PC maker's day-to-day operations since rising to the post of president and chief operating officer in 2001.

News.context

What's new:
Dell No. 2 Kevin Rollins is taking over as CEO of the PC maker as founder Michael Dell steps aside.

Bottom line:
The shift should cause few ripples as Rollins continues with Dell's strategy of pricing aggressively in PCs, building business markets and expanding into consumer devices.

More stories on Dell

The decision to tap Rollins for the CEO job is seen by many as a reward for his service and a signal that Dell wants more of the same.

And why not? Even during a two-year industrywide slump that began in late 2000, Dell thrived by sticking to its knitting: It maintains a laserlike focus on reducing costs, leaves much of the R&D expenses to others, focuses on building largely commodity boxes and retains a good reputation for quality. That combination is paying off. Dell was the leading maker of PCs in the first quarter--edging out Hewlett-Packard--and has been profitable for its last 10 fiscal years.

Although Rollins, a 51-year-old former vice president and partner at Bain & Co., will undoubtedly make some adjustments, he's expected continue the practice of using standard components and low-cost manufacturing to enter new markets, while keeping up Dell's efforts in business and consumer PCs. The company is aiming to provide larger numbers of servers, storage systems and professional services to corporations, while simultaneously serving consumers with PCs and related products such as televisions and printers.

Even with the change in CEOs, founder Michael Dell will still wield considerable influence. Dell, who spent more time focusing on strategic initiatives as Rollins took on more day-to-day management, will continue as company chairman, meaning the two executives will still run Dell together.

Rollins "is really running the show side by side with Michael Dell," said Brooks Gray, an analyst at Technology Business Research. "The company will continue down the same path. This is very different than the (Lou) Gerstner to (Sam) Palmisano change at IBM, and the quick actions that Palmisano took. You won't even see Dell (under Rollins) skip a beat."

Palmisano took quick action after becoming IBM's CEO on March 1, 2002. He moved to create strategies such as the On Demand push and the purchase of PricewaterhouseCoopers' consulting arm. He also cut costs through layoffs and the divestiture of unprofitable businesses, such as IBM's disk drive group, while realigning units such as IBM Microelectronics, which was merged with IBM's server group this year.

Staying ahead
Dell is in a much different position, having weathered the PC market downturn by taking market share from competitors. During that time, Dell's low-cost manufacturing allowed it to offer aggressive prices for its PCs and servers, which helped it gain market share and still turn a profit. Many other PC makers suffered share declines.

Thanks to those practices, Dell was been able to increase its unit shipments by about 20 percent annually over the last three years, company executives have said. It has expanded in Europe, Japan and China and has increased its share of the worldwide PC market by four points since 2001, giving it nearly 17 percent in 2003. It was the top PC maker during the first half of 2004, accelerating its lead during the second quarter, according to results published by Gartner and IDC on Thursday.

Over the same period, the company reported a string of quarterly revenue and profit records. Dell took in revenue of $41.4 billion during fiscal 2004, up from $35.4 billion in fiscal 2003 and $31.2 billion in fiscal 2002. It's on the way to its goal, first announced by Rollins, to hit $60 billion in annual revenue.

Dell's rise has not stopped it from working on and expanding its PC market share even further. Still, to reach its goal of $60 billion in sales, Dell will have to increase its PC market share to nearly 30 percent--the company has said it takes in an additional $2 billion in annual revenue for each PC market share point it gains. Alternatively, it can concentrate on bulking up sales in professional services and new markets.

Of late, Dell has turned to building partnerships in software to help win more business server customers. It has inked deals that place VMWare's ESX Server Software virtualization software on its servers and also extended pacts with Oracle and SAP. Dell is the only manufacturer that can bundle Oracle Standard Edition One with its servers at the factory, for example.

Even though the corporate niche ranks as Dell's highest priority, printers have the potential to bring the company billions of dollars in revenue, analysts have said, as customers would return to Dell to purchase ink and other supplies.

The road ahead
Although it may seem like a PC juggernaut, Dell still faces challenges. Short-term trends, such as volatility in the cost of PC components, could put a strain on its profitability. Prices of parts such as RAM and LCD screens crept up through the last part of 2003, for example, putting some pressure on Dell's profit margins.

However, recent reports show that component prices are falling, which could be a boon for Dell.

In PCs, Hewlett-Packard has remained a huge rival to Dell, moving aggressively to compete since its merger with Compaq Computer in May 2002. It has cut its costs and lowered its PC prices in an effort to negate some of Dell's price advantage.

Though these measures have helped HP lift its PC market share, Dell has always managed to grow more quickly and stay ahead--it shipped about 1 million more units than HP in the first quarter of this year. HP has admitted that it has been too aggressive on prices at times, but it's unlikely to let up any time soon.

Dell and HP are also going head to head in printers and, increasingly, in consumer electronics--HP has said it plans to start selling televisions later this year.

Meanwhile, Dell's growth has strained its customer service and warranty support system, leading to lower customer satisfaction ratings in recent evaluations by Consumer Reports and by Technology Business Research. The company had led or tied for top place in service and support for businesses for years, when compared with HP and IBM. But it sank below the other top-three PC makers in TBR's first-quarter 2004 report on business customer satisfaction.

Although Dell has hired more support technicians and sales representatives, the task of living up to its reputation for excellent service while keeping costs low appears to be a challenge for the PC maker right now, analysts have said.

Further down the road, Dell may have to contend with the trend toward on-demand, or utility, computing. Under these strategies, developed by IBM and HP, computing power would be delivered to businesses immediately when needed and in variable amounts, like electricity. So far, Rollins and other Dell executives have said that the company prefers to provide customers with inexpensive and easy-to-use gear, which allow companies to manage their own computing needs.

Dell declined a request to provide an interview with Rollins for this story.

Over the next few years, Dell will have to continue to expand its current products and choose its new ones carefully. That will provide the best test for Rollins and Dell as a company, said Roger Kay, an analyst with IDC. Ultimately, Dell can become whatever it needs to be, and that will be the engine for growth, he said.

"How does it spend the money it garnered selling PCs?" Kay asked. "Dell basically has to find business opportunities that take its wealth and reinvest it in the business of the future."

 

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