Dell

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HKU575

ALI FARHOOMAND

DELL: OVERCOMING ROADBLOCKS TO
GROWTH
You don’t get a big result if you don’t challenge people with big goals. - Kevin Rollins, president and CEO, Dell1

In spring 2005, Dell, Inc. (“Dell”), the world’s largest personal computer (PC) maker, announced a new goal: to reach US$80 billion in annual sales by 2009. The goal was fairly ambitious for Dell, which at the time had revenues of about US$49 billion.2 In an effort to meet its goals, Dell had woven together a broad set of PC products and services, pushed new products aggressively, and strengthened its marketing efforts globally. Dell planned to use its direct sales business model to continue growing its PC business in emerging markets, while also expanding in new product markets for printers, flat TVs and other consumer electronics products.

While analysts generally applauded Dell’s efforts to diversify and move away from being a PC company, they also feared that Dell could miss its high-flying sales goal. This was because Dell’s financial performance was still heavily dependent on the PC business.3 At the heart of the PC industry’s troubles was a steep drop in prices and sluggish revenue growth. On August 11th 2005, Dell saw a 7% slump in stock price after it announced its second quarter revenue of US$13.4 billion. The revenue figure fell short of the market estimate of US$13.7 billion. It was not the kind of surprise investors had come to expect. For years, Dell had been recognised as one of the most outstanding companies in the technology market—famous for high earnings and surging stock prices. It had consistently outpaced its major competitors, Hewlett Packard Company (HP) and International Business Machines Corporation (IBM), on revenue and earnings growth [see Exhibits 1A to 1C].

1

Breen, B., “Living in Dell Time”, Fast Company, November 2004. As per Dell’s income statement for the fiscal year ended January 31st 2005. 3
About 79% of Dell’s sales in 2004 came from desktops and notebook computers. 2

Mary Ho prepared this case under the supervision of Prof. Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 06/285C

1

06/285C

Dell: Overcoming Roadblocks to Growth

Market worries over Dell’s future growth had held down its shares. From the end of 2004 to late December 2005, Dell shares were down by about 28%, while those of HP had soared more than 36% [see Exhibit 1D]. Dell’s management blamed the earnings shortfall in part on its over-aggressive pricing strategy. Although Dell had managed to achieve higher unit shipments, such volume growth did not translate into earnings growth. In spite of the slump in share price, president and CEO Kevin Rollins remained confident of Dell’s future success. In November 2005, he issued a warning about the company’s third-quarter financial performance in 2005, but also defended the company’s unfulfilled ambitions: [T]he sky is not falling. We failed to meet our own expectations, which were high … We still have an outrageous track record. Our model still works very well.4

Given the dip in revenues, investors began to question whether Dell was still the high-flying growth company it used to be. Could Dell bring its growth back on track to realise its bullish vision by 2009? Could the company capture the opportunities available outside the US where its presence was younger and its share smaller? As Dell expanded into new product markets, could it replicate its past success with the direct model and find new drivers for growth?

The Founding of Dell
Dell was launched by Michael Dell from his...
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