Mohan...Sorry if this article has appeared in the past but if it has it is worth the re-read. CPQ was named "Company of the Year" by Forbes in the JAN 12, 1998 issue. Keep in mind the analysis was written ahead of the DEC deal. The text follows but check their web site to see the charts that accompany the article.
forbes.com
Compaq Computer Corp.
By Eric Nee Forbes
WALT DISNEY WILL OPEN its
first high-tech entertainment
center, called DisneyQuest, this
summer in Orlando, Fla. As many
as 30 more will follow in other
cities. The five-story building will
be packed with computers that run
everything from the rides to the
kitchens. Disney is using
technology to pack into a medium-size building
most of the experiences that in the past took acres
of land to create.
No great surprise that the 100 or so PCs in the
buildings-for computer-based attractions, among
other things-will be Compaq's. But this is just the
visible part of the system. Hidden from visitors'
eyes will be large computers providing central
control and answering more demanding needs,
including hosting the DisneyQuest Web site and
providing ticketing and other business operations.
IBM mainframes? No. These boxes will also be
from Compaq.
A few years ago the big iron would almost
certainly have been provided by the likes of IBM,
Hewlett-Packard or Digital Equipment Corp.
These were the computer manufacturers with the
heft and experience to handle critical data
processing. Significantly, each had its own
operating system, with the result that software
written for one of these big hardware vendors
would be useless on a rival's equipment.
But in recent years Compaq has come roaring into
the big-ticket computer market with a line of
products based on standard microprocessors from
Intel running the standard Windows NT operating
system from Microsoft. If you buy from Compaq,
you are not locked into Compaq. That means
Compaq lacks a captive audience, but it also
means that Compaq is easier to sell.
To use a somewhat pejorative term, Compaq is a
cloning company-if you define a clone as a piece
of hardware that does not tie you to the vendor of
that particular brand of hardware. First Compaq
conquered the Wintel clone market on the desktop.
Now it wants to ride that victory right off the
desktop into the critical data processing operations
of large corporations.
Old-line data processing departments are still very
much the turf of old-line mainframe companies,
primarily IBM. But there is a world of businesses
like the new Disney centers to be won. Increasing
numbers of companies launching new divisions or
developing new business applications are doing so
on low-cost Windows NT servers, not on
high-priced proprietary systems.
In short, if you think Compaq is just an assembler
and marketer of boxes, you are behind the times.
Since taking over the Houston-based Compaq in
1991, Eckhard Pfeiffer has put together the
preeminent Wintel computer company, with $25
billion in sales for 1997. No other company-not
Dell Computer Corp., not Hewlett-Packard, not
IBM-even comes close in the clone business.
Until a few years ago the definition of a Wintel
computer vendor was simple. It was a company
using a low-cost operating structure to sell desktop
PCs using an Intel microprocessor, Microsoft
software and other standard computer
components.
Today that still defines most Wintel companies.
Firms such as Gateway 2000 and AST Research
remain stuck on the desktop.
What Compaq has done is extend the Wintel
model all the way into the corporate data center,
stealing increasing amounts of new business away
from the older minicomputer and mainframe
companies.
The vehicle for Compaq's territorial expansion is a
"server," a powerful computer designed to sit at
the hub of either a network of small desktop
machines or other servers. A decade ago a server
might have been just another PC, but one that ran
a little faster or had more memory than the other
PCs in a small departmental network. Nowadays a
server from Compaq can be a monster with 4
gigabytes (billions of characters) of
random-access memory, 708 gigabytes of disk
storage and 9,100 PCs hanging off it; with a price
tag of half a million dollars. Alternatively, it might
have no attached PCs but simply serve up data to
a world of hungry Internet customers. In the
rapidly growing intranet and extranet businesses,
the two worlds cross in a server that acts as an
Internet machine dedicated to a defined group of
employees, customers and suppliers.
As servers grow from departmental machines to
corporate central machines, they are turning the
computer industry upside down. Older mainframe
or minicomputer companies such as Unisys and
Digital have already been badly battered. IBM and
HP have done better at adapting, but they, too, are
under threat from the company in Houston.
PC power
In the last year Compaq has extended its lead
over the competition in PCs.
Consider these facts:
Compaq sells as many servers running Windows
NT, about 30%, as the next three firms combined.
Half of all corporate Internet and intranet servers
are powered by Windows NT-and are thus fair
game to Compaq. Unix ranks second, with about
one-third of the market.
With 1,460 installations through Aug. 31, Compaq
ranks behind only HP and IBM in number of
servers running SAP's R/3 software. This is the
software that integrates the critical databases of a
large corporation. Two years ago Compaq did not
even show up in the rankings.
Compaq has edged out EMC to become the
second-largest supplier, after IBM, of multiuser
storage systems. These are arrays of disk drives
that act as a corporate data repository and are
often sold in a package with a server.
A Compaq data processing system runs Nasdaq.
That 1.4-billion-share day in October didn't faze it.
Compaq's revenues are still very much tied to the
desktop. The company moved 9.5 million PCs last
year, which account for about two-thirds of its
revenues. As the number one PC clone maker,
Compaq can spread its marketing and
development costs over a wider base than its
competitors can and thus make more money on
each PC it sells. Compaq's estimated 1997 net
profit margin of 8.4% puts it comfortably ahead of
both IBM and Dell. With those profits piling up,
Compaq has $6 billion in the bank and almost no
debt.
Compaq is now preparing for the next stage in its
growth. Its future lies in those Wintel servers that
will run Disney outlets and, someday, banks and
airlines. How did Compaq transform itself from a
company almost wholly dependent on the PC to
one that in 1998 will get perhaps $10 billion in
revenues from servers.
Credit Eckhard Pfeiffer, the 56-year-old
German-born M.B.A. who has been running
Compaq since 1991. If your idea of a leader is
Steven Jobs, Pfeiffer may not impress you. He
speaks in a low monotone that has been known to
put listeners in darkened convention rooms to
sleep. But he is intense, focused and perfectly at
home in the frenetic turmoil of the computer
business. "He demonstrates that you don't have to
have a charismatic persona to be a successful
chief executive," says Noel Tichy, a professor at
the University of Michigan Business School who
has studied Pfeiffer's management.
Pfeiffer joined Texas Instruments at the age of 22
and stayed there for 20 years, rising to vice
president of corporate marketing. He joined
Compaq in 1983, one year after the company was
founded.
When venture capitalist Benjamin Rosen
engineered the ouster of founder Rod Canion and
his replacement by Pfeiffer, Compaq was in crisis.
A company that had grown accustomed to a
comfortable 35% gross profit margin was under
siege from price-cutters like Dell and AST
Research.
Pfeiffer found a way for the company to live on a
27% gross margin. He slashed prices, making up
for the lost revenues by firing nearly a quarter of
the work force, or 2,700 employees, and boosted
the number of resellers handling Compaq's PCs.
Sales responded, climbing from $4.1 billion in 1992
to $7.2 billion in 1993.
But if Pfeiffer's most visible impact was in the
commodity side of the business, his most lasting
may prove to be on the other side. Pfeiffer knew
that if it was to be more than a box assembler and
seller, Compaq would have to graduate from
cheap PCs into high-ticket machines that run
whole corporations.
Compaq had introduced its first server in 1989, but
the product was languishing. "The server product
wasn't a focused organization," remembers
Pfeiffer. "It was somewhere on the fringes."
Within weeks of taking command Pfeiffer
reorganized the company. He rearranged the
functional divisions of the company
(manufacturing, sales, engineering) into product
divisions (servers, desktops and portables,
networking products). Then he told the server
division to take itself more seriously. It invested in
a technology that it calls PCI Hot Plug, which
allows system users to replace disk drives, tape
drives and power supplies without having to shut
the server down. The division set up partnerships
with outfits like Corollary, Inc., which writes the
intricate software that allows one server to keep
eight Intel processors running simultaneously
without bumping into one another.
Along with Pfeiffer two others deserve credit for
turning Compaq into a powerhouse. Neither of
them works for Compaq. They are Andrew Grove
of Intel and William Gates of Microsoft. Each has
come up with products that Compaq has known
how to exploit brilliantly.
The steady march of Moore's Law has meant that
a $738 Intel Pentium II microprocessor can do ten
times the instructions per second as a mainframe
of vintage as recent as 1990. The next generation
Merced processor from Intel will be more
powerful still.
Microsoft introduced Windows NT four years ago
and since then has steadily improved the product.
While NTstill has a ways to go before it offers all
of the power of IBM's OS/390 operating system
or Sun Microsystem's Solaris, it is clearly headed
in that direction. NT Server 5.0, due in 1998, will
be able to handle up to 32 gigabytes of main
memory, dumb terminals and an improved
directory of user names, all essential if NT is going
to replace Unix in the very largest server
installations.
Adding to NT's capabilities is a growing
aftermarket of companies that are developing NT
add-on products. One of these is Tandem
Computers, which Compaq bought in 1997 for
more than $3 billion in stock. Tandem started out
two decades ago making fault-tolerant machines
that had their own operating system. But Tandem
has recently converted its technology to run on NT
servers.
Surging ahead in storage
Compaq's sales of disk drives used to store
corporate data have jumped, vaulting it into
second place behind only IBM.
The beauty of Wintel is that Compaq can leverage
the research efforts and volume manufacturing of
Intel and Microsoft. This allows Compaq, even
after its acquisition of Tandem, to keep its
research budget at a low 3.5% of sales. By
contrast, Sun spends 9.6% on research and
Hewlett-Packard spends 7.2%.
Wintel's virtue-that it is "open" to all computer
manufacturers-is also its weakness, from
Compaq's point of view. With virtually all the
manufacturers acquiring the guts of their machines
from Intel and Microsoft, what's to differentiate
one machine from another?
Nothing, which is why Grove's dictum that you
have to be paranoid to survive probably applies
even more forcefully in Pfeiffer's business than in
Grove's. In the last year Dell has turned around its
server business, demonstrating that mail-order
sales, which have worked so well with personal
computers, could work as well in the low end of
the server market.
At the high end of the server market Compaq
faces a challenge from another set of companies.
Hewlett-Packard and IBM continue to have an
edge over Compaq in selling the largest servers
(systems costing over $1 million, capable of
managing terabyte databases or handling tens of
thousands of banking transactions each day). IBM
has been working with banks, petroleum
companies and insurance companies for five times
as long as Compaq has been in business.
But its giant rivals will no more be able to crush
Pfeiffer's company in servers than they have in
PCs. Compaq has economies of scale working in
its favor. Compaq is by far the largest customer
either Intel or Microsoft has. Because of this,
Compaq is assured of getting from both firms the
best prices, fastest deliveries and earliest insights
into future product plans.
"From Andy's mouth to Eckhard's ear," says
Howard Anderson, president of Boston-based
market watcher Yankee Group. "It's kind of like a
marriage." Compaq also has its choice of dancing
partners when NT software vendors look for a
computer company to hitch up with.
One of the most important of these is SAP AG,
the German software giant that is the leading
supplier of software used to run the operations of
large companies. SAP is the fourth-largest
software company in the world, growing its
revenues at 60% per year.
When SAP started, the bulk of its software ran on
IBM mainframe computers. That was followed by
a period when Unix computers (where Sun
Microsystems is big but Compaq is insignificant)
were the dominant platform. We are now entering
an era in which NT will be the dominant platform
for new SAP installations.
In the third quarter of this year about 450 SAP R/3
software applications, or 45% of the total, were
installed on NTmachines. That's up from 25% in
1996. Next year more than half of all shipments
are likely to be on NT.
Unix retains a small but dwindling advantage in the
very largest R/3 installations. But the difference
will be largely irrelevant by the end of 1998, says
Jeremy Coote, president of SAP America. By
then NT platforms will have gotten more powerful,
with the release of NT 5.0 and faster hardware
from Intel and its partners, and SAP will have
improved its software to run efficiently on a
network of medium-size servers instead of one
large server.
The company benefiting most from this move to
NT is Compaq. It accounts for nearly half of all
NT servers running R/3. It is likely to extend its
lead with a new offering it and SAP recently put
together called Ready-to-Run R/3. Configuring
R/3 on a server has been a complex task that
usually required armies of consultants to
implement. With Ready-to-Run, SAP and Compaq
will configure the software for the customer and
ship a system that's one stop short of turnkey.
As it moves more directly into competition for the
heavy stuff, Compaq still has some growing up to
do. For one thing it has to ante up for sales and
service. An insurance company is not going to buy
a $5 million system from a corner store. A bank
expects a problem at its ATM network to be
corrected in hours, not days. Is Compaq up to the
task?
Compaq went a long way toward building up its
field sales force when it bought Tandem last year.
The acquisition instantly doubled the number of
people Compaq had in the field. And the Tandem
people had much more experience in the data
center than those in Compaq's sales force, who
are accustomed to servicing PC retailers.
Even with the Tandem acquisition, Compaq has
only 8,000 sales and support people in the field,
one-twentieth the number that IBM has. Don't be
surprised if Compaq spends some of that cash
hoard buying part or all of Digital or Unisys.
Digital has 25,000 engineers and support staff in
the field.
Another challenge for Compaq is to broaden its
product line, particularly in networking gear. The
biggest challenge many companies face is not
buying computer servers but finding hardware and
software that can tie all of their computers
together.
Last year Compaq acquired Microcom, a company
that provides devices for remote access. With
Microcom's Network in a Box, your branch office
can have an Ethernet local area network and
high-speed ISDN Internet access for $899. In
September Compaq and Intel announced an
agreement to jointly develop networking products
like switches and hubs. These are the electronic
boxes that route data files among computers.
Cisco has a commanding lead there-and enviable
profit margins.
In choosing Compaq as our Company of the Year
for 1997, we are recognizing more than its swift
growth rate and admirable returns. We are
recognizing as well the accomplishments of a tall,
soft-spoken immigrant who has been known to
stride around Compaq's headquarters in cowboy
boots. Finally, we are looking beyond the next few
years and betting that Pfeiffer can utilize
Compaq's current momentum to cement the
company's position as a force in the computer
business.
Sidebar: Picking The Winner
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By Eric Nee
On the Cover
From January 12, 1998 Issue |
