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Where Compaq's Kingdom Is Weak


Information Processing: COMPUTERS

WHERE COMPAQ'S KINGDOM IS WEAK

When Compaq CEO Eckhard Pfeiffer took over 31/2 years ago, he had a bold but simple plan to put the troubled personal computer maker back on top: slash prices, expand distribution, and snap up market share. It worked better than anyone imagined. Compaq blew by rivals and, with $10.9 billion in revenues, is king of PC makers.

But all is not well around Compaq Computer Corp.'s Houston castle. The company is stronger than ever in its core business of selling desktop PCs and network servers to businesses, but it's underperforming in two critical markets--laptops and home PCs. Because it failed to get new models out, Compaq last year lost the top spot in laptops to Toshiba Corp. In the sizzling consumer market, Packard Bell Electronics Inc. overwhelmed Compaq--selling 787,000 home PCs in the fourth quarter vs. Compaq's 549,000, says CS First Boston analyst J. William Gurley. Unless Compaq performs better in these growth businesses, it may not achieve Pfeiffer's next goal: to reach $30 billion in sales by 2000 and eventually grab twice the market share of its nearest competitor.

BIG QUESTIONS. It's far from panic time. Compaq's first-quarter sales jumped 30%, to $2.96 billion, while the rest of the industry grew around 20%. But earnings for the quarter were flat, and Compaq stock trades at about 39, 13% off its 52-week high. The big concern is the short-term impact on earnings from a massive transition to new models across the company's product lines. There are also questions about how quickly Compaq can turn around the home-PC and laptop businesses.

So, Pfeiffer is hatching some new plans to get Compaq firing on all cylinders. There's a companywide reengineering effort that includes a new information system to speed up the process of turning signals from the market into new models and getting those models into production as soon as possible. In desktops and servers, it's business as usual: a barrage of new products larded with advanced features. But in laptops and consumer lines, Pfeiffer is taking a new tack. He's betting that in both markets, brand name, competitive pricing, and consistent availability--rather than whizzy technology requiring costly and hard-to-come-by new components--will keep market share on the rise. "We want to adapt fully to the consumer market," says Pfeiffer, who started his career selling calculators for Texas Instruments Inc.

At the heart of the new plan is a truly radical departure for Compaq. After a decade of telling customers its engineering and manufacturing prowess are what distinguish it from ordinary PC clonemakers, Compaq has announced plans to buy laptop and consumer PCs from Taiwanese subcontractors. Under agreements announced in February and April, Inventec Group and Mitac International Corp. will provide multimedia laptops and home PCs, respectively. And that's only a start. "This isn't a one-shot deal but rather a continuous effort," says Mitac Chairman Matthew Miau. Adds Pfeiffer: "We're opening up and are very receptive to new proposals."

By tapping these outside suppliers, Compaq can quickly and economically fill holes in its product line and make sure it has enough inventory on hand to keep store shelves filled--a chronic problem for the company in 1994. There are risks to the plan--big ones. Con-sumers may not want to buy a Mitac, even with a Compaq nameplate. Also, they may be unwilling to give up the latest features just to get the Compaq name. After all, one reason Packard Bell cleaned up last Christmas was that it was selling Pentium-based machines against Compaq's 486-based lineup.

Even now, Compaq is a step behind. The company says half of its shipments will be Pentium models by July, but rivals are well ahead in the move to the faster chip. In laptops, Compaq execs concede that they won't come up with the models they need to retake the market lead until 1996. "I don't know if it's arrogance or someone is asleep at the switch," says Rodney Keller, a former Compaq marketing exec and now a Digital Equipment Corp. vice-president. "It's not that you always have to have the sharpest feature set, but you can only ride brand name for so long."

Compaq's response? "Not everything hinges on whiz-bang technology. You also have to have the product available," says laptop marketing manager Sharon Francia. "We don't want to be waiting around like last year," when shortages of screens and custom chips helped delay the LTE Elite laptop by six months.

As Compaq tries to get the most out of its highly regarded brand name, the company is also out to discredit Packard-Bell's. On Apr. 10, it brought a civil suit charging Packard Bell with re-

using parts from returned PCs in new products. Not only did Packard Bell outline the practice in the prospectus for an aborted 1992 public offering, it says it hasn't gotten any complaints. "If there was any customer backlash, we would have heard about it--and we haven't heard a thing," says Alan C. Bush, president of Tandy Corp.'s Computer City superstores, a major Compaq and Packard Bell outlet. Says Packard Bell CEO Beny Alagem: "Compaq's trying to create doubts among our customers."

NO WORRIES? Compaq's biggest threat may not be from Packard Bell but from Intel, which has been instrumental in the home-PC leader's success. By designing prototype motherboards that incorporate its latest chips for PC makers, Intel allowed Packard Bell--as well as Dell and Gateway among others--to bring out new models quickly and cheaply. That's how these companies jumped into the Pentium business ahead of Compaq, which designs its own motherboards. Now, say industry sources, Intel has motherboard designs for multimedia PCs and network servers, too.

Pfeiffer says he's not worried. He compares the doubts now to those that clouded the company three years ago. Back then, few industry-watchers figured Compaq could really take on companies such as Dell Computer Corp. with new low-price products. "I kept meeting with the heads of major resellers, telling them, `You have to be patient, we'll deliver,"' says Pfeiffer. Next stop: $30 billion.

Compaq's Two Laggards...And How to Improve Them

INCREASED OUTSOURCING To cut costs, Compaq will buy multimedia laptops and low-end home PCs from Taiwanese subcontractors

FEWER GEE-WHIZ PRODUCTS Instead of focusing on the latest bells and whistles, Compaq will push PCs that don't require exotic components that are often in short supply

DATA: BUSINESS WEEK, COMPANY REPORTSBy Peter Burrows in Houston, with bureau reports


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