February 29 2008: 2:52 PM EST
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Why Dell finds turnaround so hard

Despite a firm desire to compete with traditional retailers, the Texas-based PC maker finds itself hemmed in by competition on all sides.

By Scott Moritz, writer

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Dell finds itself squeezed by low-cost computers on one side, and ultra-portable computers and smart phones on the other.
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(Fortune) -- Trying to turn Dell around has been like trying to maneuver a huge SUV through a very narrow alley. The company's fiscal fourth quarter earnings performance was another flop, as profits and sales came up slightly short.

And what ails Dell may strike suppliers like Intel as concerned investors watch for more signs of a dual slowdown in tech spending from corporations and consumers. Intel (INTC, Fortune 500) is expected to share its outlook on business at an analyst day conference Wednesday.

What has been the problem? It's been a year since Michael Dell made his triumphant return to the Round Rock computer seller and in that time, the stock has lost nearly a quarter of its value amid a swooning market. Dell's latest challenges haven't been minor. The company's core business of supplying computers and servers to big companies in the U.S., Europe and Japan is mature - that is, not many new pockets of growth are waiting to be picked. Instead, PC sales tend to track well established trends like employment, which lately seems to favor firing over hiring.

Michael Dell's strategy to get out of that rut was to take a run at Hewlett-Packard (HPQ, Fortune 500) in the retail consumer market with a big push to get in stores like Wal-Mart (WMT, Fortune 500), Best Buy and Staples (SPLS, Fortune 500). As Fortune's Jon Fortt reported, Dell was off to a good start with a sleek and colorful new laptop aimed squarely at the hip gadget crowd.

And there have been a few glimmers of hope, at least on the sales front. The consumer market has now inched up to 13% of Dell's overall revenue, an improvement on the 10% level it enjoyed as an exclusively online, build-your-own style PC maker. Bulls continue to want to run with this notion that Dell (DELL, Fortune 500) has been underestimated, and that it's only a matter of time before it strikes again with its nimble low-cost business model.

But with already narrow margins going in, the costly dive into the retail distribution game pulled the consumer business into the red ink in the most recent quarter. To be sure, cracking a massive new market is expensive, but some analysts and investors don't see any sign of a big payback in the near future. The biggest fight in this arena is heavy competition in an environment where consumers are cautious about spending. Notebooks and laptops are the fastest growing segment of the PC business, and HP with its 50% growth rate is the most formidable foe in the group. Plus, new slim designs from Lenovo, Sony, Toshiba and Apple (AAPL, Fortune 500) have caused Dell's efforts to get lost in the crowd.

It's a squeeze from all sides, says one tech investor who has steered away from the PC market. In addition to HP's dominance in retail, Dell is getting crushed on price and margins from Beijing's Lenovo. At the other end of the spectrum, Apple's expensive line-up of notebooks has caught fire with tech trendsetters.

And if that's not enough to spoil Dell's party, PCs are starting to get shoved aside in favor of so-called ultra-portable computers and rapidly improving smart phones. Of course ever since Dell picked up Motorola's handset chief Ron Garriques last year, there have been persistent rumors that the PC maker would try it hand in mobile phones. But with so little progress made in getting the big ship turned around, Dell seems unlikely to jump into even more treacherous waters.  To top of page