Dell Drops Manufacturing Focus In Surge For Services - InformationWeek

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IT Leadership // CIO Insights & Innovation
Commentary
5/3/2010
01:03 PM
Bob Evans
Bob Evans
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Dell Drops Manufacturing Focus In Surge For Services

Just how far is Michael Dell willing to go in downplaying hardware and embracing services? "We are changing our business from being manufacturing-based to one that's focused on services and solutions. And no, we're not done."

Just how far is Michael Dell willing to go in downplaying hardware and embracing services? "We are changing our business from being manufacturing-based to one that's focused on services and solutions. And no, we're not done."Here's a summary of the situation facing Dell from a recent Barron's article, headlined The New Dell's Daunting New Challenges:

To address these problems, Michael Dell is taking a tack he long avoided. He is trying to retool a commodity-hardware manufacturer that championed direct sales, mostly in the U.S., and turn it into a full-service, global enterprise-technology concern, replete with high-priced consultants and commission-driven salespeople. Dell is even trying to push its wares through retail outlets and adding smartphones to its product lineup. It isn't just a major change in strategy, but a risky one that requires lots of long-term investment and that diverts Dell from its traditional, simpler position as a pure-play PC and server maker. Just last week, UBS analyst Maynard Um downgraded the shares because he doesn't believe the rising price reflects the conflicts between the PC business and Dell's new initiatives. He thinks the shares are fully priced. Credit Suisse analyst Bill Shope thinks they're overpriced; his target is 12.50, some 23% below recent levels.

The notion that Dell is in step with the broad industry trend of hardware companies adding services capabilities isn't a surprise-that's all part of the natural evolution of this business and was triggered by IBM's moves several years ago and more recently followed by Hewlett-Packard buying EDS, Dell acquiring Perot, and Xerox snapping up ACS.

What is surprising, however, is the depth of Dell's commitment to moving far beyond its manufacturing roots and prowess: "We are changing our business from being manufacturing-based to one that's focused on services and solutions. And no, we're not done."

Dell didn't say he's going to rapidly build up and expand the services businesses to complement and enhance its hardware; rather, the hardware and manufacturing expertise that propelled Dell to one of the world's top technology companies is going to be pushed to the background in favor of tech services and broader tech-based solutions.

Consider: Oracle and Dell work closely together in many respects to leverage Oracle's strength in software and Dell's strength in servers and storage. But now Oracle's deeply into hardware and systems with Sun's product line, and Dell says it's going to elevate services and solutions above its longtime emphasis on manufacturing. Does this signal a change in the Oracle-Dell relationship?

On the flip side, Dell has done a spectacular job in locking down huge accounts to provide many tens of thousands of servers for use in the data centers of some of the world's top online companies-so Michael Dell's comment about the waning emphasis on hardware has to be taken with some salt.

Rather, as the Barron's article points out, Dell is moving away from the heavy build-to-order manufacturing process the company pioneered and will instead compete for more of that high-volume data-center business.

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