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Can Rod Canion Stop Compaq's Erosion?


Information Processing

CAN ROD CANION STOP COMPAQ'S EROSION?

It has been a painful year for Compaq Computer Corp.'s Rod Canion. Battered by competition from the IBM PC clones that it always disparaged, the company that once set growth records for U. S. industry stopped growing. For the year, Compaq will show a 10% to 15% drop in revenues, to about $3.1 billion, analysts figure. On Oct. 23 came the biggest blow: A $70 million loss and plans for the company's first-ever layoffs, 12% of its 12,000 workers.

That kind of wrenching change has become commonplace in the computer industry, but CEO Canion, 46, had hoped Compaq could be spared. Now that it's happening, he's focusing on the future. From his office at the company's sprawling, tree-lined Houston headquarters complex, he talks breathlessly about the sweeping changes he's implementing. His executives are working on a new distribution strategy, new customer-support programs, and aggressive new pricing. And Canion is engineering a massive internal reorganization. The goal is to put Compaq back where it has been for most of its eight-year history--several lengths ahead of other makers of IBM-compatible PCs. "We didn't take them seriously enough before," Canion says. "Now we are."

'NEW DESIGN.' Indeed, Canion now concedes that while Compaq was plying its tried-and-true formula--selling premium-priced PCs through a faithful network of dealers--the market was changing. Not only were PC clonemakers becoming more technically adroit, but they were using new channels, including direct marketing, mass merchandisers, and computer superstores. On top of that, sluggish economies in the U. S. and Europe slowed buying by the corporations that Compaq relies on most.

Part of the comeback plan--expanding distribution and cutting prices--began last spring. But the boldest move is the reorganization. On Oct. 23, Canion split the company into two semi-autonomous units: one to develop and market high-end systems such as network servers, another to handle mainstream PCs.

"We're effecting more change in 1991 than in any year in our history," says Chairman Benjamin M. Rosen. "It will all pay off next year." Lately, Rosen has been putting in more time in Houston, helping with strategic planning. A onetime securities analyst, he has also been trying to rekindle Wall Street's love affair with the stock (which went from $11 at its IPO, split, then peaked at $74). But it has been a hard sell. It didn't help that Canion sold $9.8 million in stock last February at about $70, before the shares plunged 60%. But analysts responded favorably to the Oct. 23 announcement. "Now, they can accept lower margins on PCs and compete on prices--run lean and mean," says Prudential Securities Inc. analyst Rick Martin. Until now, Compaq has been heavily centralized, with units for marketing, development, and such. Decision-making has been by consensus-building, a slow process in the current market. Canion figures smaller, separate units with their own staffs of engineers and marketers stand a better chance against rivals. "We need a new design," he says, "so people can view these businesses on their own merits." Each business will have its own cost structure, so the price of a low-end PC won't have to help fund research for more expensive machines.

SHRINKING SALES. Canion had better hope that all this works--and fast. Compaq sales dropped 17% in its quarter ended Sept. 30, to $709 million. And earnings, before the $135 million restructuring charge, were just $27 million, vs. last year's $124 million. For the year, net profits will be $130 million to $150 million, down from $455 million in 1990, figures Prudential's Martin.

There is no mystery behind Compaq's profit problems. With demand flagging, PC makers have been slashing prices. Compaq was slow to catch on, but it eventually lopped as much as 34% off its price tags. Even so, some customers and dealers say it was too little, too late. Martin Marietta Information Systems in Chantilly, Va., has 2,000 Compaq PCs. But it's buying 1,000 NEC Corp. PCs: At $ 1,500 each, they're 20% to 25% cheaper than similar Compaqs, even after price cuts, says Steven D. Birgfield, Martin Marietta's manager of computing standards. "Compaq narrowed the gap," he says, "but it wasn't enough."

Some dealers say that price cuts have revived demand. Micro-Center in Akron, for instance, says notebook sales have jumped 15% to 20%. Still, Compaq has lost market share. In the first eight months of 1991, the company supplied 28.5% of all PCs sold through U. S. dealers, down 2 points from a year earlier, says Computer Intelligence/Storeboard.

All year, Canion has resisted pressure to slash overhead. Indeed, Compaq's costs continued to rise. In the second quarter, sales and marketing expenses were $105.9 million, up from $101.7 million a year earlier, in spite of a 17% revenue falloff. In the third quarter, the company trimmed operating expenses to 30.4% of sales from 32% in the second quarter. But that compares with 22.5% at AST Research Inc. "Compaq is running a very expensive organization," says Safi U. Qureshey, president of AST. One example: Compaq just stopped paying boarding fees for the pets of traveling executives. Other perks will disappear, too, as will up to 40% of top management's compensation, says Canion, who was paid $2.3 million in 1990.

But Canion's cuts aren't so deep that the fundamental nature of the company will change. Compaq's fate, he reckons, still depends on its technological edge. And that means a hefty research and development budget--more than 7% of sales, vs. less than 3.8% at AST. Its most ambitious effort is a new line of workstations due in 1992 that are based on reduced instruction-set computing (RISC) technology. To get into RISC, Compaq bought a 13% stake in workstation maker Silicon Graphics Inc. and earmarked $50 million for joint development.

This fall brought a rush of new PCs, starting with "modular" desktop computers that can be upgraded with new processors and peripherals. In early October came a color portable based on Intel Corp.'s speedy 80486 microchip.

Then came a slimmed-down Systempro, its minicomputer-like file server for networks. The original Systempro, using multiple microprocessors, fell short of the company's expectations, partly because there was little software for it.

HEAVY PORTABLE. The new lineup may not make much difference, however. Upgradable PCs, for instance, aren't new. And starting at $3,099, Compaq's are about $900 more than those from rival AST, says Matthew Fitzsimmons, owner of ComputerLand of White Plains, N. Y. Compaq's design makes upgrading easy, but many customers question the concept. "The direction is toward cheaper, smaller machines," says Donald W. Matto, manager of technical services at Chevron Corp. "Within three years, I should be able to buy a new 486 as cheaply as I can upgrade."

The color portable, the machine that Compaq cites as evidence that its technical prowess is intact, may be the biggest question mark. It's among the first portables to use the 486, but it won't run on batteries, weighs 18 pounds, and is priced at $10,000--when competitors are showing battery-powered color notebook PCs listing for half that. "I heard Compaq introduced an 18-pound portable, and I want to know who buys it because maybe I can sell them some of our Mac portables," says Apple Computer Inc. Chairman John Sculley, referring to his company's 18-pound "luggable," a flop.

On the marketing front, Compaq is still revising its distribution plans. Dealers such as ComputerLand Corp., will still be the biggest channel, but it's adding other resellers, too. Its basic PCs are now available in 10 Biz-Mart Inc. and Tandy Corp. superstores, and the company says it will be in 100 such outlets by 1993. With its new systems division, Compaq will move more high-end sales to specialized consultants and away from dealers, who have had mixed results with SystemPro. In September, for example, Compaq signed Electronic Data Systems Corp. as a distributor.

Executing the new plan will fall largely to Eckhard Pfeiffer, a German who formerly headed Compaq's European operation. Last January, he was given the new job of chief operating officer with responsibility for worldwide operations. Reporting to him will be Gary Stimac, head of the systems division and H. Douglas Johns, who runs PC operations.

Canion figures that he has finally made the tough decisions that will get Compaq back on track. "With our new structure, we think we can get more aggressive and gain market share," he says. If he's wrong, 1992 could be another painful year.Mark Ivey in Houston, with bureau reports


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