What's wrong with Dell?

Changing market and increased competition inflict financial havoc on Dell

Dell’s run as the financial darling of the technology world may have come to an end, as the company announced last week it would miss its quarterly revenue target for the second straight period. The company blamed a shortfall in its U.S. consumer business and its U.K. operations, but competition around the world and a changing market may also be dragging Dell back down to earth.

In addition to its third quarter revenue shortfall, Dell also disclosed plans to take a $450 million charge to cover the expected costs of replacing faulty capacitors in its OptiPlex desktops, a write-down of excess inventory, and layoffs in its Texas and U.K. operations.

Dell made its mark in the technology industry by growing at phenomenal rates even amid the rubble of the dot-com bust. The company’s famous dedication to inventory management, build-to-order products, and aggressive cost-cutting has allowed it to become the worldwide leader in PC shipments and a considerable source of pain for traditional server vendors such as Hewlett-Packard, IBM, and Sun Microsystems.

This week, during the company’s earnings call, Dell CEO Kevin Rollins is expected to shed more light on the factors plaguing Dell this year, but analysts already have their own ideas.

Even though Dell cited slowdowns in its U.S and U.K. businesses as problem areas, the company could also be missing out on accelerating growth in parts of the world where it doesn‘t dominate the market, analysts said. HP, for example, has a stronger presence in Europe than does Dell, and Dell is under significant pressure from the Lenovo Group in Asia.

On the server end of Dell’s business, several converging trends, among them virtualization, blade servers, and sophisticated server-management software, are presenting new challenges for a company that is used to selling servers as commodities, said Gordon Haff, principal analyst at Illuminata.

“Dell has had a really good run selling essentially cookie-cutter rack-mount servers,” Haff said. “But the era of solving problems by just buying more boxes is coming to a close.”