From Fortune.Com
Eckhard's Gone but the PC Rocks
On
Compaq's CEO blames his ouster on a savagely competitive industry.
But other PC makers are fine.
David Kirkpatrick
Just a week before the board of directors ousted him
as CEO of Compaq Computer, Eckhard Pfeiffer was
feted at a University of Houston gala to celebrate
the endowment of a new chair in his name. A portrait
of Pfeiffer was auctioned off. Guests received MCI
30-minute calling cards decorated with his photo.
Close friend Carolyn Farb, the socialite who chaired
the gala, hailed Pfeiffer as "one of the world's
boldest thinkers." Cynics in Houston refer to the
event as a "coronation." But Pfeiffer's reign, such as
it was, would soon end.
The real ruler of Compaq, almost from its inception,
has been soft-spoken, unassuming venture
capitalist Ben Rosen. For years he has been
answering his own phone in the small office he
keeps in New York's Met Life building, high above
Grand Central Terminal. Rosen takes great pride in
having funded Compaq in its early years and having
helped it grow into one of the world's most
important companies. He now holds about $100
million of stock and has maintained an insurance
policy to safeguard his baby. He has never let the
CEO sit as chairman of the board. He does that
himself.
The basic facts of Pfeiffer's firing are well known.
The PC industry has been getting more challenging,
and Compaq has been handling the challenges
poorly. Since late January it has lost almost half its
market capitalization. A week after Pfeiffer
announced that first-quarter profits would be only
half what Wall Street had been led to expect, Rosen
convened the board, sans Pfeiffer. It voted him out.
Now Rosen and two other directors are running the
company as they seek a new CEO. The trio fits
comfortably into Pfeiffer's corner office at Houston
headquarters.
Pfeiffer blames Compaq's woes on aggressive
pricing by IBM that destabilized an already shaky
industry. We'll address that later; first, let's take a
look at what happened behind the scenes during the
waning of Pfeiffer's reign.
Eckhard Pfeiffer was in many ways a very effective
CEO, but he suffered shortcomings of both style
and substance that became more problematic as
Compaq grew. Stiff and imperious, Pfeiffer has a
single-mindedness that helped push Compaq into
the forefront of computing. But he created a
contentious atmosphere in the executive suite, as
top managers battled to win his favor. Says longtime
chief strategist Robert Stearns, who left last June: "It
felt like we were the Olympic dream team of the PC
industry, but over a period of about three years,
most of the real players were either forced out or left
in disgust." Among the many other top execs who
left--for whatever reasons--are CFO Daryl White,
North American chief Ross Cooley, server boss
Gary Stimac, two general counsels, and
manufacturing head Greg Petsch. Says Pfeiffer: "I
delegated authority and responsibility to a point
that exceeded some people's ability to fully live up
to that expectation."
Pfeiffer introduced a whole series of executive perks
to a company that had always had an egalitarian
culture. Where parking places had never been
reserved, Pfeiffer oversaw the construction of an
executive parking garage. The executive floor was
repeatedly remodeled, with access increasingly
restricted.
These trappings of power would be mere curiosities,
were they not signs of a more substantial problem.
Says a former executive: "Eckhard saw himself
growing in prestige by merely having a large
headcount and a large revenue number." Compaq
has gotten huge, that's for sure: When Pfeiffer took
over in 1991 (at Rosen's request), Compaq had
21,000 employees and $3.3 billion in annual
revenues; now it is the largest PC maker in the
world, with 69,000 workers and annual revenues of
$31.2 billion in 1998.
Pfeiffer talked constantly about being No. 1. Says
Stearns, "In his quest for bigness, he lost an
understanding of the customer and built what I call
empty market share--large but not profitable." Jim
Moore, a technology strategy consultant with
GeoPartners Research in Cambridge, Mass., says
Pfeiffer "raced to scale without having economies of
scale." Pfeiffer denies this, insisting that he always
focused on profitability. But the colossus he built
does now seem unable to move nimbly enough to
thrive in the fast-changing computer industry. Last
year, for instance, Compaq forecast demand poorly
and shipped distributors too many PCs. When
resellers dumped them at fire sale prices, Compaq's
operating profit disappeared for two quarters, since
it protects resellers from heavy losses. Dell, of
course, has no such problem: Since it builds PCs
only after they're ordered, it can respond more
quickly to shifts in demand.
Next Page: The CEO's ultimate grab for growth was
the acquisition of Digital Equipment Corp. |
