Dell race to increase growth

Dell intend to "ignite growth" after being caught "flat-footed" by competitors' aggressive price cutting.

It's a difficult situation the PC manufacturers find themselves in. Until recently, the growth in the market has offset falling margins, but now PC sales are slowing and the manufacturers are finding their cashflows tightening. My guess is we are going to see further rationalisation of the market.

One of the biggest problems facing manufacturers is that their rock bottom margins leave them nowhere to move. The pressures on costs have been enormous and the vendors have been lucky that cheap Asian parts have seen the cost of systems drop dramatically in the last five years. Even that hasn't been enough and Dell have sought to cut support costs to make up for their falling margins.

This didn't work and Dell's reputation started to suffer as callers found the support lines were poorly staffed, badly trained and spoke poor English. These problems have been slightly fixed but the mud has stuck. Which makes it interesting that Dell have also announced they will spend $100m on customer service operations.

Dell customers will be thankful for that $100m investment, but I wonder how sustainable the model of increasing support while further slashing prices can be. If Dell want to have a low cost, low margin business model then support is going to suffer. It seems to me Dell want it both ways.

The big problem Dell have is their headline pricing: Desktops at $699 with notebooks and servers at $999. Of course they try to upsell customers for better warranties, more memory or bigger drives which helps pad the margin. But those headline prices are conditioning consumers to expect unrealistically cheap systems from Dell and their competitors.

If I were a Dell shareholder I'd be asking why they are spending billions on marketing so they can sell on price. Surely all that marketing spend could be spent trying to sell the message that Dell computers are better and deserve a premium price. That way they could ship a decent, well specced product, provide competent support and make a decent margin.