At Dell, problems came bit by bit - Computer maker's trail of shortcomings made an overhaul necessary

Each little cut only stung a bit, but the cuts kept coming -- and coming -- until they killed Kevin Rollins' career at Dell Inc.

Slowing sales growth. Falling profit margins. Customer complaints. Boring products. Surging competitors. Government investigations.

No one thing derailed Dell, the Round Rock, Texas, company that once ruled the computer industry.

Together, however, these problems necessitated big changes at Dell, which just ousted Mr. Rollins and brought chairman Michael Dell back for a second tour as chief executive.

"If you wanted to sum up the problems at Dell, you'd probably say that the company has repeatedly failed to adapt to changing market conditions," said Robert Kieschnick, a finance professor at the University of Texas at Dallas.

Dell built itself into the world's largest computer maker with operational efficiencies that let the company undersell competitors by $200 or more per machine.

But the world of technology has changed, as Mr. Dell acknowledged Friday in an e-mail to employees that was posted online by the Austin American-Statesman. Mr. Dell's missive focused largely on cutting bureaucracy. But it also spoke of the need to update the company's business model.

"We're moving fast. There is no luxury of time," wrote Mr. Dell, who pledged to "build, partner and buy" in the effort to increase its service business. Company officials declined to comment further for this story on Mr. Dell's plans.

The company's product design group, the e-mail continued, "will shorten design cycles, increase speed and innovation/design that create real differentiated value for our customers."

Dell's competitors began closing the price gap a couple years ago by cutting costs. Hewlett-Packard, for example, has slashed annual costs $1.9 billion by cutting 15,300 jobs, reducing employee benefits and outsourcing much of its production.

Dell rarely undersells competitors by more than $100 these days, says John Spooner, an analyst at Technology Business Research in Hampton, N.H.

And competitors are working hard to start underselling Dell.

H-P, particularly, is striving to streamline operations. The Palo Alto, Calif., company is consolidating 100 major work sites to 29 and reducing the total number of software applications used by company employees from 5,000 to 1,500.

"Dell effectively lost its price advantage, which means that customers are thinking more about design and service and other factors," said Mr. Spooner, who noted that Dell has never excelled in any of these areas.

A recent Technology Business Research study shows that business customers, who once ranked Dell above all competitors, now prefer products and service from other firms.

Consumer Reports rates Dell's customer service below that of every other company it examined, a group that includes Apple, Sony, Gateway and Hewlett-Packard.

Plain products

And Dell has never won plaudits for sleek or sexy machines. Even Consumer Reports takes a crack at Dell's "decidedly plain" devices and notes that consumers "can get a comparable but more stylish PC from H-P."

Dell has made an effort of late to improve design, but such efforts have yet to change popular perceptions.

Attempts to woo hard-core gamers and other tech nuts have likewise lagged.

Dell first courted that demographic, which does much to shape public opinion of technology companies, when it launched its XPS line of computers in 2003.

Kyle Bennett, the Plano-based editor in chief of the computer news and review site Hardocp .com, remembers that his reviewer blasted the XPS as needlessly bloated in 2005.

"That was the most read article that we did all year," said Mr. Bennett, noting that 2 million people saw that review in its first week online.

Dell's efforts to expand into other markets have fared even worse. The company spent three years trying to dethrone Apple's iPod by building and marketing a line of music players. The last of those devices, the Dell Ditty, was discontinued in August.

Dell is still financing efforts to expand beyond computers and into printers, cameras, televisions and other consumer electronics, but many observers doubt such efforts will benefit the company.

"Fierce competition is driving down profit margins in all those product categories, so I'm not sure how Dell will ever make decent money on its investments there," said Trevis Certo, a management professor at Texas A&M University in College Station.

"The key for all these electronics companies is to get into higher-margin businesses, which is why they are all moving into service," Mr. Certo said. "The problem for Dell is that it has been slower to get into service than its competitors."

Rival H-P generated about $15 billion last year in service revenue, helping businesses manage their technology. Dell generated less than a third as much.

This discrepancy in service revenue has a particularly large effect on profit. Dell and its competitors typically make less than 5 cents on every dollar of hardware revenue, but they typically make 10 cents or more from every dollar of revenue they collect for services.

Turnaround efforts

A bid to boost its profitability also led Dell to launch a major customer service initiative in the fall. The company has publicly acknowledged many of its problems in recent months and announced plans for fixing them.

Dell will spend $150 million on a service improvement plan that will boost staffing at its tech support center from 1,000 to 4,500. The company also plans to double its design staff and streamline operations -- by halving its list of vendors, for example -- to regain its cost advantages.

Mr. Dell's e-mail suggested that the streamlining effort will go all the way to the top. The number of senior executives who report directly to the CEO will fall from more than 20 to 12, and Mr. Dell wants all his team members "to look across your organizations and eliminate redundancies." The company will also create a new position of chief marketing officer.

The company's recent profit warning shows that such efforts have yet to help the firm's bottom line, but there are some signs of a turnaround.

Blogger Jeff Jarvis, who documented his frustrations with the company's customer service in a series of infamous "Dell Hell" posts at BuzzMachine.com, has offered more positive comments in recent months.

He has praised Dell's corporate blog, direct2dell.com, for openly discussing the need to improve customer service and said improvements do seem to be taking place.

In an interview Friday, Mr. Jarvis said he met Mr. Dell at the recently concluded World Economic Forum in Davos, Switzerland.

"In terms of the relationships to customers that the Internet now allows, they've woken up, and I see big and important changes, and I told him that," Mr. Jarvis said.

Mr. Jarvis said the changes can bring customers back.

Case in point, Mr. Jarvis bought his son a Dell monitor for Christmas.

Even Mr. Bennett, whose Web site panned Dell's top machine, says the company took complaints seriously and made tremendous improvements.

"Am I going to buy one?" he said. "No. I'm going to build my own. But I don't hesitate to send anyone else to buy one."