A Quick Glance Shows Business Challenges for Dell

In Dell’s case, unlike many others today, layoffs could be a sign that troubled times are ahead for its competitors.

If you take a quick glance at what’s been going on at Dell Computer lately, you might get the impression that it has succumbed to the woes facing just about every other high-tech firm: profit warnings, cost-cutting measures, layoffs, and diminishing gross margins. However, take a closer look, and you’ll see that in many ways, Dell is in a stronger position than ever to dictate the twists and turns of the PC industry.

True, the company’s fourth-quarter gross margins declined to 18 percent from 19.2 percent in the year-ago period. It’s also true that while the financial community had gotten used to Dell reporting as much as 50 percent annual revenue growth, the company’s 2000 revenue grew just 26 percent from 1999 levels. Nonetheless, Dell now finds itself in the driver’s seat.

“They consciously decided about three months ago to take their corporate gross margins down from 21 percent to 18 percent this year,” says Gartner Dataquest analyst Todd Kort. “They’re in market share acquisition mode, whereas everyone else is trying to maintain profitability.”

Dell’s history of consistent profitability has put it in a position to sacrifice margins for market share. The strategy has worked so far–the company is the No. 1 worldwide PC seller. While the global PC market as a whole grew only 3.5 percent in the first quarter, Dell’s market share increased 34.3 percent over last year’s levels, according to Gartner Dataquest. Meanwhile, its U.S. market share grew 30.7 percent. Of its four main rivals–Compaq, Hewlett-Packard, Gateway, and IBM–only IBM saw growth in the U.S. market. Dell now commands 23 percent of the U.S. market; it has led in U.S. market share for the past eight years.

“I wouldn’t be surprised to see them grow to one-third of the U.S. market,” says Roger Kay, an analyst at IDC.

While Dell is increasing market share, it also is streamlining its operations. The company laid off 1,700 employees earlier this year–the first large-scale job reduction in the company’s 17-year history–and announced a new round of 3,000 to 4,000 layoffs this week.

“If they can cut costs, they can get their margins higher again,” Kay says.

In Dell’s case, unlike so many other companies that have recently announced job cuts, the layoffs could be a sign that troubled times are ahead for its competitors.

Business Resources for Dell

“When you start getting that large, and you’ve put a lot of pain on all your competitors, then you’re in a position to start dictating to the market,” Kort says.

“If Dell lays people off, a few thousand people this month, you should expect that to trickle down and see similar cuts follow from other companies just to try to maintain some level of parity. They’re telling their competitors, ‘This is what we’re going to do. Are you willing to endure the pain to chase us?'”

Right now, as Dell goes, so goes the rest of the industry. After the company announced a 10-percent price cut on its corporate desktops last week, Compaq and HP followed with even deeper price cuts. That’s a situation that suits Dell just fine.

“It’s actually kind of scary to all their competitors, to have someone that is able to do what they’re doing,” Kort says. “What they’re doing now is sending a lot of fear throughout their competitors.”

Posted by on May 7, 2001