From the Sunday NY Times business section - Article on CPQ...
John
April 25, 1999
Compaq at a Crossroad: The Challenges
for the Next Chief
By SAUL HANSELL
s it searches for a new chief executive, the Compaq Computer
Corp. will be forced to confront the question of just how complex
a business it really wants to be.
"When we saw Compaq buy Digital, we said they want to be IBM," a
top executive of IBM recalled last week. "We said they just don't know
hard it is to be IBM."
A week ago, Eckhard Pfeiffer, who had been Compaq's chief executive
since 1991, learned just how hard it is. He was ousted after the company
said first-quarter profit would be half of what analysts had expected, the
latest in a string of earnings disappointments.
It is only recently that even IBM figured out how to be IBM. Louis V.
Gerstner Jr., IBM's chairman and chief executive since 1993, has been
fighting a long time to tame a sprawling herd of businesses that, when he
took over, resembled dinosaurs awaiting extinction.
He shifted to faster-growing lines like computer services. And through
the masterful "E-Business" advertising campaign, he found a way to
position fuddy-duddy IBM as the best way for big companies to get hip
to the Internet. The moves are paying off: Last Wednesday, IBM
announced earnings of $1.47 billion, 10 percent above analysts'
expectations.
Pfeiffer chose to take on many of Gerstner's problems. By buying the
Digital Equipment Co. last year and Tandem Computers in 1997,
Compaq added a great deal of complexity to what had been a simpler,
fast-growing personal computer company.
The acquisitions were meant to help it compete with IBM, selling large
computer systems and the services to help companies use them. Pfeiffer
also began an aggressive assault on the cutthroat business of selling cheap
PCs to consumers who are technology novices, a business that has
bedeviled IBM and nearly everyone else who has tried it.
It is clear why the new areas appealed to Compaq. "The traditional
hardware businesses are becoming harder and harder," said Mike
Nevens, a consultant at McKinsey & Co. "Everyone is on a treadmill
running away from the trap of commodity products, trying to differentiate
themselves, moving into services or software."
Yet these new lines have been slow to take hold at Compaq, and the
effort appears to have distracted the company from its traditional
business of selling PCs to corporations, the very model of a commodity
business. Compaq found its profits wiped away by excess inventory and
unexpected price competition in PCs.
So the challenge facing the new chief executive, who will be selected by
Benjamin M. Rosen, the chairman and a founder of the company, is what
to make of Pfeiffer's sprawling legacy.
Can it be whipped into shape the way IBM was by Gerstner? Or should
it strive for a pared-down business model built around corporate PCs
and servers based on PC technology, like Dell Computer?
While Compaq under Pfeiffer had ambitions to dominate nearly every
corner of the computer industry, Dell is defined largely by what it doesn't
do. It doesn't sell through dealers. It doesn't spend money on research
and development. It doesn't sell machines that appeal to novice
consumers who need a lot of help.
In other words, it avoids big swaths of the computer market, but
dominates segments where its build-to-order models can be profitable.
"It's a rare company that can be all things to all people," said Lawrence
A. Weinbach, chairman and chief executive of Unisys, which has stopped
trying. Unisys, once a full-line computer maker, dropped out of PCs and
some other lines and now gets 70 percent of its revenue from services.
Analysts say such a tight focus is a better strategy for Compaq than
aiming at IBM.
"They have to simplify the company," said Steven Milunovich, an analyst
with Merrill Lynch. "They need a stronger definition of what Compaq
stands for."
One place Compaq can look for simplicity is in its high-end corporate
systems. Compaq has yet to get the combined sales force of Digital,
Tandem and Compaq to sell the company's full line of products with
equal skill. Compaq will also have to decide whether to pare even further
Digital's product line and research facilities. (Compaq has already shed a
net 15,000 jobs since it bought Digital.)
Another question mark for the company is its consumer PC business, a
market in which leadership passes quickly to whoever offers machines
with the lowest prices. Analysts and other manufacturers argue that this
piece of the market is suicidal.
Even Compaq, which says it now makes money even on PCs it sells for
just $600, expects that in the future it will lose money on the cheap
hardware itself but profit later by selling Internet services and advertising.
A third potential source of simplification would be to abandon Pfeiffer's
plan to add a direct-sales capability for corporate PCs to Compaq's
traditional approach of selling through dealers. These and other changes
in the company's production process are meant to reduce Compaq's
vulnerability to excess inventory, but so far the complex plan has not
shown many results.
For now, Rosen is saying he does not want to pull back from Pfeiffer's
strategies. All the company needs, he says, is management that is better
able to cope with the diversity of its product line and distribution
channels.
After discarding two chief executives in eight years -- Rosen ousted the
company's co-founder, Rod Canion, before elevating Pfeiffer -- Compaq
might appear to be a company that top-flight executives would shy away
from, especially since there is no immediate prospect of Rosen's ceding
the chairmanship.
But John T.W. Hawkins, head of the director and chief executive
practice at Russell Reynolds Associates, an executive search firm, thinks
Compaq will have no trouble attracting strong candidates. "It's a premier
company, and the wealth-creation opportunity there is terrific," he
observed.
And with the right executive, analysts say, there may be an opportunity
for a more favorable comparison between Compaq and Big Blue.
"It's hard to kill a computer company," said Andrew J. Neff, an analyst at
Bear, Stearns. "The right management can turn things around "Look at
Apple. Look at IBM."
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