Dell gets in touch with its inner entrepreneur

November 29, 2011, 10:00 AM UTC

To compete with full-service tech giants such as HP, Oracle, and IBM, Dell is going back to its roots.

Dell's Norrod sometimes held his unit together with duct tape.

Forrest Norrod knows all about running a scrappy operation: Five years ago, when he started a business to design computer data centers for big corporations, Norrod’s outfit was so lean that his team used dollar bills to measure server racks when they couldn’t find rulers. One engineer built a special chassis in his garage. Another time, an employee used duct tape to attach a power supply.

But Norrod wasn’t working for some little startup. He was launching a unit for Dell (DELL), the computing giant. His marching orders from CEO Michael Dell? To manage the data center business much the same way Dell did when he founded the eponymous computer maker in his University of Texas dorm room 28 years ago.

Dell Inc., once the No. 1 PC maker in the world, now ranks third, behind Hewlett-Packard (HPQ) and Lenovo. In corporate computing Dell finds itself competing with HP, IBM (IBM), and Oracle (ORCL), which sell broader portfolios of hardware, software, and services.

So as Dell pushes into new areas, such as cybersecurity and data center design and management, executives are allowing those businesses to operate more creatively and less bureaucratically — returning the company to its entrepreneurial roots. “We’re moving from a company that is predominantly known as a PC company to a solutions company,” says Steve Felice, a Dell group president. “A lot of this transformation requires innovation.”

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Dell is taking a hands-off approach: Norrod’s unit is housed at Dell’s Parmer South campus, eight miles from headquarters in Round Rock, Texas. The 46-year-old executive says he has permission to ignore some of the corporate office’s “help,” such as painstakingly crafted product guidelines. When you’re building a company, Norrod says, “you need a crayon drawing on a napkin.” Today the business boasts some 500 employees (up from about 10) and more than $1 billion in annual sales. Similarly, Dell last year acquired KACE, a systems-management firm that has separate headquarters and management.

Not every internal innovation effort is a success: Dell’s independently managed communications group disbanded last year after its smartphones flopped. And in fact, many big corporations fail when they try to infuse startup thinking because they are allergic to risk, says Baba Shiv, a professor at Stanford University.

But for Dell, acting more like a startup may be the best way to outmaneuver bigger tech rivals. Luckily the company has role models like Michael Dell. And Forrest Norrod.

This article is from the December 12, 2011 issue of Fortune.