Dell Shifts Gears.(International Edition)

DELL COMPUTER SOARED TO THE TOP OF THE PC INDUSTRY IN THE 1980S AND 1990S by innovating not so much on the machines themselves but on the way they're made and sold. Michael Dell started the company in his dorm room at the University of Texas at Austin, assembling the components and shipping them directly to customers, bypassing the big retail markups of electronics stores. As the company grew and brought in investors, it made its mark with efficient manufacturing, direct Internet sales, and good customer service.

Today Dell is no longer the largest computer maker--Hewlett-Packard took the lead two years ago--and there are signs that its old model isn't working as well as it used to. In late August, Dell announced a 17 percent drop in second-quarter profits; in response, the firm's stock dropped from more than $25 a share at the time of the announcement to less than $17 last week. Sales of Dell PCs have been rising lately, but growing costs and slimmer margins have put the Round Rock, Texas, company on the defensive. Morale is low, says Steve Kleynhans, a Toronto-based PC-market analyst with the research group Gartner. Dell has discovered it is "going in the wrong direction," he says. Now, a company that was once seen as a model for the PC industry, perhaps even as the future of all manufacturing industries, is changing its model.

The ailing PC maker has abandoned two of its core principles: exclusively online sales and owning its own factories. Dell has long been touted as proof that retail intermediaries can be cut out profitably. Last year, however, in a dramatic about-face, the company ended its Internet-only sales model, joining the other major PC brands on store shelves. J.P. Gownder, a senior analyst at Forrester Research in Cambridge, Massachusetts, says being present in stores is even more important this year as manufacturers increasingly compete on fashionable design. "In the case of Dell," he says, "there was really no outlet for people to get their curiosity sated."

The company's move into retail, says one Dell executive who requested anonymity while discussing company strategy, was a response to "pent-up demand." Now Dell products can be purchased at more than 15,000 stores worldwide including the chains Best Buy, Staples and Wal-Mart in the United States, Tesco in Britain and, in China, Gome and Suning. The rush into stores, the executive concedes, may have been executed hastily, but Dell is now "getting much more deliberative." Retail has become crucial as growth in PC sales is increasingly driven by the world's emerging economies. First-time computer buyers in Asia, and particularly in China, want help from a store clerk.

The firm's manufacturing strategy is also being rethought. Last month ...