CEO Dell on his company's shifting strategy

ROUND ROCK, Texas - Michael Dell is in a very good mood.

Companies are buying new computers, servers, and other technology again. An improving economy helped push Dell Inc. to a record third quarter. The company's leadership team shook off a recent setback - losing data-storage-maker 3Par to Hewlett-Packard Co. - and is relentlessly optimistic about the company's transformation from purveyor of commodity computers to provider of more profitable data-center technology and consulting.

And in Michael Dell's pocket is a slick-looking phone prototype even Steve Jobs might admire.

But the company faces some daunting challenges. As it enters new categories, such as tablet PCs and smartphones, its products must hold their own against Apple Inc.'s iPad and iPhone. Unlike Apple - a name Michael Dell did not mention during a recent interview - Dell does not control the software that runs on its devices, and recent attempts to build brand lust for its products fell short.

To supply corporations with data-center technology, Dell is up against HP and International Business Machines Corp. Those rivals have more established reputations and a higher-end selection of servers and other gear.

At the same time, Dell is revamping the way it makes PCs, which still account for more than half of its revenue. Dell's model of enabling customers to pick features and have the PC shipped directly - cutting out the middleman - could not compete when other PC-makers slashed costs by outsourcing.

In a rare interview, Michael Dell sat down with the Associated Press to talk about the company he founded 26 years ago.

Question: In the last few years, Dell reorganized the structure of the business, laid off a 10th of its employees, scrambled to fend off competing PC-makers, and tried to reinvent itself as a data-center expert. What's the status of the turnaround?

Answer: I'd say we're really doing two things at Dell right now. One is a turnaround, and the other, you'd sort of say, is a transformation. They're pretty distinctly different.

If I look at the turnaround side, there's actually some pretty nice progress. We had record profits in the third quarter, margins are on the rise. . . .

On the transformation side, that's really about how companies change and evolve and renew themselves so that they can continue to thrive and be great. We're doing a lot of reinventing the business model and the strategies of the company.

Q: When the company was struggling, how did you keep employees focused?

A: The great thing is, we have fantastic people. They love to win. When they're not winning, it's like, "What happened? Who turned out the lights?" Nobody likes that. Especially when you've been winning for a long time, you get addicted to it. . . .

So you come up with the strategy and you start communicating - aggressively and consistently and on a repeated basis. Then you have a series of determined actions and investments that reinforce the strategy. And what happens over a period of time - in our company, I'd say it's a relatively short period of time - is people start to believe that this change is real and they see it happening because they're a part of it and they're living the changes. And that's where it gets really exciting. That's where we are right now.

Q: Dell is entering the market for smartphones and modern tablet devices. What is it like to be launching those products when the bar has been set by longtime rival Apple? And what do you think about the iPad?

A: There are many great products out there, and that's certainly one of them. And you've heard plenty of people talk about that.

Here's the way I think about it. The IT industry, depending on how you define it, is somewhere in the vicinity of $1.8 trillion. It's a pretty big industry. Within that are all sorts of opportunities to provide products and services, and all of that goes into what we call the modern world today in terms of how businesses operate and are productive.

When you zoom down to the device level, you have all kinds. You have five billion cellular telephones. The vast majority are not smartphones, but they probably will be in five to 10 years. [Add in PCs and other connected devices] and that has all kinds of implications in terms of opportunities in what happens to the network, what happens to the data centers and servers and storage.

The devices will morph and change form, and there will be many of them. . . .

Q: When many people hear "Dell," they think "laptop." But the Dell of today is equally focused on the data center. We hear about virtualization and cloud computing, two data-center trends that make it possible and more affordable to switch on a lot of computing power, fast. What are the real-world implications?

A: If you think about data, your cell phone used to have no camera. Then it had a 1-megapixel camera. Then 2 megapixels, then 5 megapixels, then 8 megapixels, then 10 megapixels. And all of a sudden you're taking videos with your camera.

The amount of data is roughly expanding by 35 times during this decade. Inside that data are the answers to the questions that unlock value for individuals, for businesses, for schools, or hospitals.

Almost all of [the world's unsolved scientific problems] can be somewhat expressed in a mathematical sense, but we don't have enough computing power yet to solve that.

But computing power is [rising sharply], so what you're going to see is that these problems are going to be solved at faster and faster rate. You're going to see accelerating progress among humankind.