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Compaq Stretches For The Crown


Information Processing

COMPAQ STRETCHES FOR THE CROWN

Compaq Computer Corp. is the company every computer maker wishes it could be. Revenue per employee is a mammoth $713,000--the highest in the computer industry and more than double that of Dell Computer Corp. and IBM. Its personal computers fly off the production line at a rate of one every 10 seconds. Market share doubled last year, and the stock is now trading at $32 a share, or $96 before a 3-for-1 split in May--a long way from the low 20s where it lingered two years ago. Sales have zoomed from $3.3 billion in 1991 to $7.2 billion last year, making the PC maker one of the top computer-hardware suppliers in the U.S.

Call it King Compaq. Having conquered the desktop and laptop PC markets, Compaq is now in a position to become the most influential player in all of computer hardware--not simply PCs. It has already created a range of new services and products to accelerate the PC's push into corporate computing worlds long dominated by the mainframe and minicomputer. Next year it will launch an assault on new consumer markets, from stand-alone home PCs to game players to set-top TV boxes. On June 27, the Houston company made its boldest play yet: the introduction of a six-foot-high computer code-named the Armada (page 142) that is designed to wean major corporations off their mainframes. Compaq hopes it can leverage its lead in the $5 billion PC-server market to take on IBM, Digital, Hewlett-Packard, and other old-line computer makers.

HAPPY CUSTOMERS. Certainly the timing is right. Servers such as the Armada are replacing the big iron minicomputers and mainframes that have handled most corporate jobs. IBM CEO Louis V. Gerstner Jr. admits that IBM's biggest mistake was waiting too long to address the client-server market. Now, Compaq may be able to take up the old IBM mantle. "They have the momentum right now and the vision," says International Data Corp. analyst Richard Zwetchkenbaum.

And they have the customers. Compaq sold more PCs in the first quarter than any other manufacturer, although IBM and Apple Computer Inc. are still expected to lead for the full year. In May, Compaq overtook IBM for PC leadership in Europe. And in Japan, the company's sales growth will comfortably outstrip the 20% to 30% growth analysts predict for total unit shipments.

To Compaq CEO Eckhard Pfeiffer, the future's so bright he has to wear shades. "We're generating demand, and we're going to grab everything we can," says the normally low-key German. Pfeiffer's stated goal: Overtake IBM as the world's No.1 PC supplier by 1996. Given a sudden slowdown for IBM, Compaq could fly by Pfeiffer's goal a year early with such hot products as the Presario home PC, the ProLinea models, and the new Elite notebook PC.

So what makes Compaq so hot? Nothing all that original--just price-busting products that create megavolume demand. "A ground rule," says Pfeiffer, "is to set very aggressive cost goals to get very attractive entry-level products." Take the entry-level Presario home PC, for example. It's an all-in-one machine--the monitor is built into the computer. That's an approach consumers love, as the numbers prove: Compaq sold $500 million worth of Presarios in 1993, and expects $1 billion this year.

Granted, not everything Compaq touches turns to gold. Last year, its pen-based Concerto PC fizzled, and it folded its laser-printer line, taking a $10 million charge. But those mistakes were offset by its best-selling PC servers, which grabbed 37% of the market, up from 26% in 1992. All the while, Compaq has been cutting costs better than anyone else in the business. Gross profit margins--at around 23% since 1992--are the envy of its rivals. "Our profit margins are not as good as a Compaq," IBM CFO Jerome B. York concedes. "Compaq is doing a very fine job."

So what could go wrong? Plenty. The history of the PC industry is marked by the spectacular fall of companies that once seemed to do no wrong. Struggling competitors Dell, Apple, and most recently IBM could easily stage a comeback. Compaq might also suffer from its aggressive production schedule--nearly double last year's rate--if demand drops substantially. Already, the signs of a slowdown are mounting, what with recent earnings troubles at Lotus Development Corp. and Gateway 2000 Inc. And, of course, the company could take its eye off the ball as it did three years ago. That's when Chairman Benjamin M. Rosen booted founder Joseph R. Canion because he persisted too long in producing high-feature/high-cost computers when the competition was cutting prices. Rosen says that's unlikely to happen again: "Fortunately, the two-by-four that hit us in 1991 is still indelibly etched in our foreheads."

As it should be. After all, there's nothing inherently unique to Compaq's products or marketing strategy. If the company has a secret formula, it's on the execution front. Pfeiffer's first priority on taking the helm was to cut costs and prices, not come up with some brilliant new engineering feat. Compaq now pores through heaps of market research before developing a new product. Marketing then comes up with a price target and calls in manufacturing, engineering, and sales to hash out the best combination of features and components to meet it.

BIG BET. That's the formula Compaq used to develop the ProSignia VS server. Marketing saw a big opportunity for a server costing only 5% to 10% more than a desktop PC. Engineering and manufacturing scrapped expensive features such as high-end graphics, while adding critical software to manage networks. And they wrangled a good deal on a key chip from Advanced Micro Devices Inc. The result: Compaq figures the ProSignia will help double its share of the PC-server market this year.

A product's success can backfire, though, if the supplier can't meet demand, as Compaq knows only too well. "Last year, we could have grown 20% to 30% more than we did [in servers]," says systems division chief Gary Stimac. To avoid such supply shortfalls this year, Compaq is investing $110 million to boost factory capacity. The company also can't afford to overestimate a product's appeal. Guess too high, and it risks falling back to earth under the weight of excess inventory like so many other former PC juggernauts. As it is, Compaq carries almost $1 billion in finished-goods inventory. That's 70 days' worth, twice that of Dell.

Compaq is betting big on a new logistics system to avoid that fate. Come July 1, it will begin building PCs to order from a huge stockpile of parts. It opened a sprawling Houston warehouse in mid-May where suppliers will store and own their goods until parts are ordered by a Compaq assembly plant. By the end of next year, says Gregory Petsch, senior vice-president for operations, Compaq should be building every PC to order.

Few companies have the major-league clout to make such demands on suppliers. But Compaq is increasingly calling the shots with industry powerhouses. Most PC makers, for example, simply shove the latest feature from Microsoft Corp. and Intel Corp. into their machines. Compaq is one of the few bold enough to break from the pack: All of its PCs include software that improves the way Microsoft's Windows manages files. Compaq also doesn't slap the "Intel Inside" sticker on its PCs--it would rather promote its own name. Besides, it's not always Intel inside. In January, Compaq told Intel that it will also buy from Advanced Micro Devices. "Here's a company that's actually talked back to Intel," says analyst Martin Reynolds with market researcher InfoCorp.

LAST FRONTIER. But much to the relief of its rivals, Compaq is not abandoning the Intel/Microsoft standard. Compaq's success "supports the business model all of us have been pushing--standards-based computing," says Safi U. Qureshey, president of PC maker AST Research Inc. To push the PC standard forward, Compaq has become the quintessential facilitator. For example, it's at the forefront of efforts with Microsoft and others to push Plug and Play standards that will make it easier for consumers to operate peripherals.

That's because Pfeiffer is determined to move into the last frontier of the PC industry: the home. Compaq has been publicly silent amid all the Information Superhighway hoopla, but it has been quietly talking with potential partners from edutainment-software makers to telephone companies about making the PC the center of a range of consumer appliances. Pfeiffer's vision: to churn out all shapes and sizes of PCs in the next few years, including models that can double as telephones or cable-ready TV sets.

It's all part of a concept the company calls "lifestyle computing." An array of PC-like products will be geared for a particular room--a gadget, say, for the kitchen with hands-free phoning, a stereo-equipped box with high-quality graphics for the kid's room, or a big-screen PC-TV for the living room. Says Pfeiffer: "The PC is cutting across the entire marketplace--from the consumer to the corporation."

With all these projects under way, Compaq could be stretching its resources thin. Its new Elite notebook PC, for example, was supposed to ship a few months ago but is just going out the door now, having been plagued by startup glitches. True, this can't be considered a significant blooper. But if Compaq wants to become the ruler of all Computerdom, it can't afford many such mistakes. After all, it wasn't too long ago that IBM was King Computer, and look what happened: It got pushed aside by an upstart Compaq.

HOW COMPAQ DOES IT

DIVIDE & CONQUER

Separate product and geographic regions have their own business models. Top management meets monthly to monitor the units and allocate resources.

PEOPLE POWER

Shipments have soared, but not hiring. Result: outstanding productivity--sales of $713,000 per employee vs. $383,000 at Dell.

PRECISION LOGISTICS

A just-in-time supply chain cuts inventory and manufacturing costs. More PCs are being built to order--not for the warehouse.

DESIGN IN SAVINGS

Engineers work with manufacturing and purchasing to make sure parts are shared across product lines.

CUT YOUR LOSSES

When a product or marketing approach isn't paying off, kill it fast. For example, last year laser printers got the ax.

TIMING IS EVERYTHING

Having the right products at the right price is better than being first. That's how Compaq went from nowhere to No. 1 in notebooks. Extensive market research helps. So does common sense.Peter Burrows in Houston, with bureau reports


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