Niche PC maker goes from strength to strength

As founder and chief executive of Dell Computer, university drop-out Michael Dell has transformed what was once a niche computer producer into the world's largest maker of PCs. It is also one of the Republic's largest employers in the IT sector, with 4,500 employees at plants in Limerick, Bray and Dublin.

His company's low cost base has enabled him to start a fierce price war that has allowed Dell to steal market share from rivals struggling in the current downturn.

While Mr Dell is clearly quite pleased with developments, he says he is never satisfied.

"We have plenty of opportunities to improve."

And he suggests that the opportunities might never be greater given Hewlett-Packard's $24 billion (€27.25 billion) bid for Compaq Computer.

He breaks into a big smile as he suggests customer "confusion" caused by the HP/Compaq transaction will provide his company with a two-year window of opportunity to gain market share at the expense of his rivals.

And to drive the point home, he boasts that his company is gaining market share faster than at any time in its history.

To venture that Mr Dell is gloating is perhaps stretching it, but not by much.

"It's just a delightful series of opportunities for us that emerge from this. [HP and Compaq are] going to be doing a lot of things that have nothing to do with adding value to customers, whereas we're going to be doing things for ours," he says.

HP and Compaq, of course, have a starkly different take on the matter. Mr Robert Wayman, HP's chief financial officer, argued that his company's better-than-expected fiscal fourth-quarter results demonstrated that HP was continuing to execute its business plan without being side-tracked by transaction-related matters.

But even when fully focused, rivals are having a hard time competing with Dell's direct-sales model and its cutting-edge supply-chain management, which enables the company to keep inventory levels to a bare minimum. Mr Dell's model is proving to be quite robust, even in this downturn.

HP's fourth-quarter revenue fell 18 per cent and earnings plummeted 89 per cent to $97 million. Last month, Compaq said its third-quarter sales fell 33 per cent as it swung to a $499 million loss.

Dell, which is more of a pure-play PC company, fared rather well in contrast, as third-quarter revenues slipped 10 per cent and earnings fell 36 per cent to $429 million.

Perhaps most telling, Dell was the only PC maker to increase its market share during the quarter. It now commands a 14.5 per cent worldwide share, against 11 per cent for Compaq, the second-largest manufacturer.

Merrill Lynch said Dell's results once again demonstrated the group's ability to achieve impressive share gains without sacrificing any profitability. However, Mr Richard Gardner, analyst at Salomon Smith Barney, says firmer component prices and cost-cutting by rivals could narrow Dell's cost advantage, making it difficult for Dell to profitably gain share in a weak economy.

Optimists hope that improving market conditions in the second half of 2002 will enable Dell to continue gaining share. And Mr Dell is clearly an optimist who aims high.

While short on specifics, he acknowledges that he would like to see his company attain a 40 per cent share of the global PC market. He is careful to point out that this is a "milestone" towards which to strive, not a target in "an SEC sense".

Not satisfied with simply wining the PC battle, Mr Dell has also set his sights on new market segments that are becoming commoditised and are now ripe for his low-cost, high-volume business model.

"There are certainly areas where the strategy needs to expand and take on new capabilities," he says.

The group is focusing on low-end servers and storage equipment for the enterprise market - a key customer base for Dell. The company also recently announced it would start producing low-end networking switches.

Dell appears to be making inroads into these markets, as it reported third-quarter sales of servers, storage systems and workstations up 20 per cent over the previous year.

Another priority for Dell will be to bolster its services business. Rivals such as HP have vowed to augment their services offerings in a bid to challenge IBM Global Services' dominance. "That's a big piece of the pie that Dell doesn't have much of," says Mr Roger Kay of IT consultancy IDC.

But Mr Dell says he will not go head to head with IBM's services unit. Just replicating IBM's services capabilities would take "an incredible amount of time".

The emphasis will be on strengthening services that are synergistic or supportive of the products business. When it comes to large consultancy or integration projects, Dell aims to continue partnerships with services groups such as EDS, Accenture and Cap Gemini.

Trying to deliver these would not be the best use of Dell's core strengths. And besides, Mr Dell has "bigger fish to fry". He smiles again and casually refers to that 40 per cent "milestone".