Sluggish sales growth and intense competition are dogging the PC giant, writes John Collins

The announcement by computer maker Dell last week that it expects its second-quarter revenues and profits to be lower than previously expected was hardly a surprise.

The Texan PC manufacturer, which employs 4,500 in Ireland and is the second-largest company in the country by turnover, has been struggling for almost a year with a combination of aggressive low-cost competitors and slow sales growth. This is the fourth quarter out of the past five in which the world's largest computer manufacturer has failed to meet its targets.

Despite this investors reacted badly to the latest profit warning issued by Dell and its stock hit a five-year low. Dell chief executive Kevin Rollins, who took over from founder Michael Dell in 2004, came in for criticism from analysts on the back of the news. Andrew Neff of Bear Stearns has suggested that if Rollins can't sort out the company's problems then Dell should look at changing its senior management.

Part of Dell's problem is that it is a victim of its own success. It has grown rapidly in the past 10 years from a company with annual revenues of $2.4 billion in 1995 to one with $56.7 billion (€44.8 billion) over the past four quarters. But continuing to deliver that kind of growth becomes harder and harder. Dell grew slightly ahead of the overall market in the past quarter but that was in marked contrast to arch-rival HP whose growth was twice that of Dell.

Dell drove growth over the past 10 years by selling the cheapest PCs and bringing new technology to the market quicker than its rivals. But aggressive pricing by Dell is causing its own problems. With PCs so cheap - the lowest priced laptop and desktops on Dell's Irish website are €379 and €249 respectively - consumers are less likely to switch brands for a small saving.

"The competitive environment has been more intense than we had planned for or understood," said Rollins when he announced disappointing first-quarter results in May. "Over the last year, we tried to achieve both growth and increased levels of profitability, which allowed our competitors to improve their relatively low levels of profitability and accelerate their growth."

Dell's direct sales model - it only sells via the web and over the telephone - has enabled it to keep costs down and develop a lean supply chain. But it has also undoubtedly fed into the customer service problems that have dogged the company. In tandem with the announcement of its latest financials, Dell said it was investing $100 million in customer service and has opened or expanded call centres in the US, Canada and Philippines.

The Irish operation has also had a cloud hanging over it in the form of a proposed eastern European manufacturing facility that will enable Dell to get closer to its customers in those rapidly growing markets. Dell is expected to announce a location imminently and once that plant is up and running it is bound to impact on Dell's Irish staffing.

Recent figures from analysts IDC show that Ireland is actually a bright spot in Dell's European performance. It had a 44 per cent market share for PC desktops in the first quarter of this year, compared to HP's 23.4 per cent, and enjoyed an impressive 40 per cent growth in unit shipments year on year.

IDC analyst Michael Larner says Dell's strong performance locally is due to a combination of aggressive pricing policy and the fact that Ireland's traditionally low PC penetration rates are growing.

With the PC market in the US continuing to be sluggish Dell is looking to grow outside its home market but in Europe at least the IDC figures confirm it is playing second fiddle with 17.3 per cent of the market compared to HP's 20.9 per cent.

Diversifying outside its core PC business has had mixed results as well. Desktop PCs still account for 36 per cent of revenues and mobility products, largely made up of laptops, add another 26 per cent. Powerful servers and network equipment, largely bought by corporate customers, account for just 9 per cent, while data storage contributes just 3 per cent despite a high profile partnership with storage market leader EMC. The rest of the revenues are made up of enhanced services (10 per cent) and software and peripherals (16 per cent), a category that has been helped by relatively strong sales of printers.

One possible way for Dell to deliver growth is through acquisitions but it is not a strategy that the company has ever pursued aggressively. The acquisition of Alienware earlier this year attracted a lot of attention but the boutique PC maker has annual revenues of just $225 million - small potatoes in the Dell scheme of things. What it did signal was Dell's intention to try and move into the market for high value PC systems - some of Alienware's machines for PC gamers retail for as much as €7,000.

While Dell has run into periodic difficulties in the past, many observers are suggesting that its current travails are more serious. When it announces its second-quarter results on August 17th, many interested parties both here and abroad will be watching for any signs of recovery.