Dell's identity crisis

Michael Dell

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(Fortune) -- Dell's earnings are due later on Thursday, and expectations are predictably low. There's the economy, of course, but investors are also still wondering about the company's turnaround efforts.

One tough trend for the company is that sales of PCs and servers, once Dell's bread and butter, are on the wane. (Fortune's Jon Fortt noted recently that revenues from services are rising).

And while the downturn in hardware sales is hurting Dell's competitors too -- see H-P's latest earnings -- the Round Rock, Texas, company feels the brunt more strongly because it's less diversified, product-wise and geographically. Dell is focused on computer hardware in North America, whereas H-P, for instance, gets two-thirds of its sales from outside the United States and is also invested heavily in printers and services help.

"They're in an identity crisis," says Shaw Wu, an analyst for Kaufman Bros.

Wu points out it's hard to know where Dell fits in relative to its competition. H-P (HPQ, Fortune 500) and IBM (IBM, Fortune 500) benefit from an emphasis on non-PC products like software and printers, and Apple (AAPL, Fortune 500) has a lock on its reputation as an innovative company. Meanwhile, there are companies in Taiwan who are leading the charge toward lower cost computers.

One notable part of Dell's reinvention has been a new emphasis on design, which perhaps moves it closer to Apple's niche. And the new products being unveiled are nothing like the boxy utilitarian computers you may be used to seeing from Dell (DELL, Fortune 500). There's a new brand Adamo with an ultra slim version that weighs less than four pounds and is about a half-inch in thickness. It's Dell's version of Apple's Air. Dell also just launched a new 10-inch netbook with a larger keyboard to capitalize on that growing segment.

In another nod to making better-looking computers, Dell has introduced a design studio where consumers can pick artists' designs to put on the outside of their laptops. "If you think about Dell and its conception, this is taking the idea of customization to a whole new level," says Ed Boyd, a former Nike designer hired by Dell to get consumers excited about Dell¹s products.

It's a tough time to be introducing new products, but Dell may not have an alternative. "Dell has to invest to move forward," wrote Roger Kay, president of analyst firm Endpoint Technologies, in an e-mail. "Adamo looks pretty good, but its premium pricing strategy is worrisome in an environment in which consumers have become more price-sensitive."

Even if Dell does take on Apple on design, cautions analyst Wu, the company can't replicate Apple"s operating system, which many fans purposefully seek out. "To charge people on the way it looks when everything else is the same -- that's tough," adds Wu.

As for another direction Dell might go in, there have also been persistent rumors that Dell will enter the smartphone market. That would make sense given how much faster the mobile phone business is growing compared to PCs.

And if Dell can translate its new emphasis on design to a phone, it could really pick up some buzz.

On the up side, Dell's balance sheet is impressive with roughly $9 billion in cash, which should help the company through the recession. "The irony is," says Wu, "the tough environment perhaps buys them some time to figure out their strategy."