Dell Apes Apple
BURLINGAME, CALIF. -
Taking a page from Apple's playbook, Dell is hiring designers as it moves away from its old model of building custom-made computers and begins bypassing traditional retail outlets in order to sell its machines directly to customers.
Dell (nasdaq: DELL - news - people ) employees say the company is snapping up design talent as it hustles to crank out fresh PC and notebook designs, and theWall Street Journal reported Friday that Dell is trying to sell its factories as well.
The moves come as the Round Rock, Texas-based company is struggling to improve its profitability, even as it slashes prices to keep sales growth on track. Dell shares fell 11.9% on Aug. 29, the day after the company reported earnings of $616 million, or 31 cents per share, well short of the consensus estimate of 36 cents per share (See "Tech Tanked By Dell.")
The news was another setback in Dell's efforts to get its profit machine back on track. In the late 1990s, Dell tore through the PC industry with its hyper-efficient, built-to-order manufacturing model.
The problem: Much of the PC business has shifted to laptops. Unlike PCs, the slim machines are labor intensive to build. Moreover, their light weight makes it easy to ship them directly from overseas contract manufacturers to customers in the U.S. market, analysts say.
"With the shift to notebooks, and even the mini-notes and the low-priced, low-featured notebooks, all of that will be made offshore," says Shannon Cross, an analyst with Cross Research.
Meanwhile, the drab designs that once appealed to business customers who were more concerned about price than good looks won't work in retail, where Dell has turned in an effort to bolster its consumer business. It's also a channel where Dell's build-to-order advantage does it little good.
By contrast, Dell competitors Apple (nasdaq: AAPL - news - people ) and Hewlett-Packard (nyse: HPQ - news - people ) have long concentrated spending heavily on design and new product development, while relying on overseas contract manufacturers to build their machines.
That means Dell could have a tough time getting top dollar for its factories, particularly in the U.S.
Cross, however, believes Dell needs to shift its focus to research and development and design, rather cranking out custom-built computers and selling them directly.
Dell is already moving to produce machines, especially laptops, with more distinctive designs and features aimed at setting its wares apart from Apple's and HP's (see "Dell's Laptop Strategy.") However, Dell still doesn't sink as much into research and development as its rivals.
For its latest quarter, Dell spent just 1% of its sales revenue on research and development. Apple, by contrast, sank 3.9% of its sales into research and development.
Dell, however, may have little choice.
"Their core differentiator no longer works," Cross says.
Dell did not immediately respond to a request for comment.
Dell now owns 12 manufacturing and distribution centers, including 5 million-square-feet of space and 850,000 square-feet of leased space, according to its latest annual report. In March, however, Dell announced it would close its Austin, Texas factory--the one closest to its Round Rock headquarters--leaving it with 11 facilities.
While the factories are scattered around the world, five of them--excluding the Austin facility--are based in the U.S., where labor costs are high. They include a factory in Winston-Salem, N.C., facilities in West Chester, Ohio, Lebanon, Tenn., Nashville, Tenn., and a facility run by Dell's high-end Alienware unit in Miami.
Overseas, Dell has one facility in Hortolandia, Brazil, two in Ireland, one in Poland, and one each in China, Malaysia and India. By contrast, Apple owns just one factory, in Cork, Ireland, relying on contract manufacturers to do the rest of its work.
