Dell's Attempt To Regain Past Glory

Last Thursday's Wall Street Journal contained an article detailing the many recent senior level management changes at Dell Computer. I won't go into all the details. Suffice to say, the article presented the situation as one in which Michael Dell has returned to the computer maker which he founded, and is evidently leaving no organizational or personnel stone unturned, in his determination to revive the firm's fortune.

Instead, I'd like to focus on a more strategic view of the Dell situation. For starters, consider the Yahoo-sourced price chart above, comparing Dell, H-P and the S&P500 for the past five years (please click on the chart to see a larger version). While H-P has outperformed both Dell and the index, it was effectively flat from early 2003 until mid-2005, or two and a half years. Dell, too, was flat for most of 2005, until it began its recent decline. Neither has been particularly consistently superior to the index over much of the five year period.

Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.

In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.

If price- and feature-based competition is so fierce, one would expect the performance differences among the firms to be in market segment growth or penetration. Here, Dell is notably scarce on dealer shelves, in a market in which buyers no longer seem content to wait for a 'custom' machine. So I don't really expect Dell to be returning to its past glory of nearly a decade ago. The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.

Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.

Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore.