USA: THE COMPAQ COMEBACK.

USA: THE COMPAQ COMEBACK. - When Pfeiffer took over as CEO, Compaq was in crisis. Basking in success, it had become complacent. In two weeks he redesigned the business; in two years it was a turnaround triumph.

by Robert Heller.
Last Updated: 31 Aug 2010

When Pfeiffer took over as CEO, Compaq was in crisis. Basking in success, it had become complacent. In two weeks he redesigned the business; in two years it was a turnaround triumph.

Turned-around companies seldom recover their full, earlier strength and vitality. And very rarely does the firm, in Compaq Computer's phenomenal style, emerge from crisis to seize leadership: trebling global market share in personal computers, doubling sales to $7.2 billion, and rising 253% above net income at the trough to new peaks - in just two years.

The stunning speed and smashing success go hand-in hand. When Eckhard Pfeiffer became CEO, after founder Rod Canion's firing on 24 October 1991, Wall Street's questioning was legitimate: in Pfeiffer's words, 'Would Compaq go down the tube, or would he bring about change?' There wasn't 'much time to provide the answer'. The day before Canion's ousting, at a now-famous, 14-hour board meeting, the first-ever redundancies had been announced. An analysts' meeting was scheduled two weeks later: it took Pfeiffer and Co that long to redesign Compaq from top to bottom.

Their aim wasn't short-term salvation, but long-term success. Like speed, opting for growth was crucial. Cut costs when sales are static or falling, and you may eliminate losses. Cut costs when sales are rising, and you get a double whammy: in two years, sales per employee doubled to $716,000 in 1993. But that year's profit levels ($462 million) were left far behind in the next nine months; net income doubled on a 52% sales increase.

The turnaround's speed and scale both flowed directly from that fortnight of total rethinking. What Pfeiffer communicated to the analysts 'was exactly what was implemented all the way through today'. Crisis had come because Compaq, blinded by success, was locked into a 'financial model' which generated fat gross margins: 45%. The model's criteria showed well in the six months to March 1991, so Compaq was 'not attentive enough to other signals' - notably the rising market share of rivals such as Dell and smaller IBM clones. Concentrating on the high end, Compaq insouciantly became high-cost. When the dam broke in 1991's second quarter, the business plunged into a crisis fully shared by its dealers.

In early 1992, 'the world around us', says Pfeiffer, 'was so confused, in doubt, lost'. Desperate dealers, unable to sell over-priced Compaqs, asked, 'what do you want us to do?' The only answer was to slash prices on 'high-cost products to keep our customers' while forcing through an entry-level, low-margin line designed to sell profitably at prices that matched low-cost competitors.

Pfeiffer told the analysts that, in addition to traditional high-end products, Compaq 'would meet all other product requirements'. With creation of 'low-cost capability', expanding 'our reach into all sectors' would enable Compaq to be 'fiercely competitive'. That 'fiercely' was the antithesis of Compaq's previous comfortable strategy. But Pfeiffer's top team had exposed its weakness by 'a very comprehensive analysis of what went wrong, putting aside all denials and all excuses'.

After speed and growth, this soul-searching strategy - looking at the 'the root causes' of weakness, and strength - was the third turnaround key. Pfeiffer's group asked 'What are our strengths?' They included 'all that product and engineering capability, global manufacturing and presence, brand recognition and loyalty', plus a strong cultural base - a 'can-do attitude'. Pfeiffer wanted to build on and leverage these strengths. He faced an urgent, searching test: the new, low-priced line.

This issue had fatally split Canion and non-executive chairman Ben Rosen. Sure that the PC world had changed irreversibly, Rosen showed by an extraordinary undercover operation that products meeting the price targets could be created faster than Canion planned. Now Rosen wanted the life-saver before end-March 1992. Pfeiffer had no option but to break with Compaq's past: an independent business unit (Project Ruby) was set up, well away from other activities on Compaq's glass and steel 'campus' in Houston.

'One champion, completely tuned in' was given a free hand to pick his own team and 'show the way to the lowest cost in the industry, whatever it takes'. The rush to end-March shipment 'almost precluded the obvious step of putting engineers to work' and thus getting imprisoned in the company's old mind-set. So 'we pursued OEM sourcing', buying-in all components. Only five or six weeks into the project, though, a fundamental conundrum appeared.

Could far cheaper PCs still be called Compaqs? The team, which didn't think so, adopted a brightly coloured design that looked neither like a Compaq nor any other PC. But Pfeiffer was deeply concerned about the customers. Major buyers told him: 'Do what you're doing, only competitively, and give us what we've been asking for'. They didn't expect a clone from Compaq; and how could a non-Compaq Compaq fit the strategy of building on corporate strengths?

Shortly before Christmas, Pfeiffer was asked to sign a batch of purchase orders for components for the new-look line: 'I just couldn't do it,' he recalls. Intuition and analysis alike convinced Pfeiffer that the planned product wouldn't save the business. He switched gears. The object was still a low-cost, low-price PC, but within a range covering all performance points up to the top, where Compaq had pioneered client-servers for networks.

Pfeiffer had to disappoint Rosen on time: the new PCs couldn't appear until 15 June. Before that, though, main dealer reaction, especially to a vague price of 'under $1,000', was ecstatic. When the ProLinea appeared, at $900, it was Pfeiffer's turn for ecstacy. A flood of orders ushered in a new era. The cost base tumbled down as output shot up: and the new top management (Canion was followed by a few colleagues) revelled in the change.

The head of North American marketing (half of world sales), Gian Carlo Bisone, moving from Olivetti to Compaq, found gratefully that managers spend 'time and effort trying to deliver' a clear strategy. They understand it thanks partly to a world-wide management communication group of 150-200 people. They meet monthly to hear Pfeiffer explain the strategy in 'very clear terms', question him, and carry back the message.

During Compaq's crisis, these meetings were weekly. That's the fourth key element in a turnaround - 'intense communication'; Pfeiffer adds that 'in hindsight, it's never enough'. Bisone says that 'Eckhard really shared with us. There were a lot of sceptics'. The scepticism, though, was lanced by the extension of Compaq's severance programme to volunteers. 'Within six to eight weeks the number of sceptics fell pretty much to zero.' Bisone's strategic role was pivotal. To serve all segments, Compaq had to use all channels of distribution, including retail. Bisone had a thick file of complaints from would-be individual customers unable to find Compaqs. The difficulty was that Compaq had flourished on supplying only major dealers who dealt with corporations. How could they be appeased? Bisone asked the dealers to agree that the customer was king. How many, then, wanted to sell to individuals? And stay open on weekends and nights? 'Few hands went up.' Bisone's task since has been to regulate prices, allocation and support programmes so that there's no favouritism between channels. Outlets have sprouted from 3,000 to 31,000. Yet 'traditional' resellers still account for 80% of US business and 90% elsewhere. Along with brand awareness, profitability, cost control, customer satisfaction, and people development and morale, raising market share leads Bisone's own performance and pay criteria - but some of these are not within his sole control.

Marketing efforts, for instance, have been hindered by 'shortage in some significant products'. Bisone, though, readily accepts collective responsibility. Vice-president Bob Stearns regards this as an old strength that greatly eased emergence of the new Compaq. His role - corporate development - covers its future. A recent McKinsey consultant, he notes that, unlike many companies in crisis, Compaq didn't have to modify culture and behaviour. In addition to working cross-functionally, management could 'focus on what's important' - and ignore what wasn't. The culture is also 'remarkably competitive'. In Stearns's vision of the future, Compaq maintains its position on the desktop, becomes a major force in consumer electronics, and completes its advance into 'enterprise computing' - the arena now occupied by mainframes, minis, and, above all, IBM. But every hi-tech force in the world is actually or potentially in Compaq's sights, and Compaq's in theirs. Stearns's job (with a dozen staff) is to assist competitive advance by broadening vision, spotting the unseen, taking different angles and fresh looks. Many of his concerns hinge around these now vital external partnerships.

'I don't ever want Compaq to feel too successful,' says Stearns: managers need to be very hard on themselves, he believes. A basic hardness is typically exercised by US financial controllers, and Compaq is no exception. Financial laxity had nothing to do with Compaq's crisis, according to chief financial officer Daryl White. 'Even in the worst year' Compaq earned 4% on capital after tax and had no cash fears. But corporate philosophy was wrong - and 'financials reflect the philosophy', not the other way round. When Rosen as chairman and Canion as CEO disagreed on speed, White took a clear position: 'If you know what to do,' he says, 'do it', which Pfeiffer did in 'masterful' fashion. White's task wasn't to reform base systems, but to make their use for reporting 'very much different'.

Using activity based costing, White can now 'check on and balance what's happening on a worldwide basis' across five regions and three product divisions (desktop, portables and systems). The clear focus won by shifting from functional to divisional organisation is the fifth crucial element in the turnround. Business heads running their own P&Ls (and, says Pfeiffer, 'good at it') generated dramatic change as they enjoyed 'a lot more delegation of responsibility and authority'.

White stresses that manufacturing, although it employs 'a huge chunk of money', isn't a profit centre. Its control (controllers report direct to him throughout Compaq) is operated via unit costs. External and internal benchmarking aims to keep costs to 'best-of-class levels'. Within a strict financial control framework, the company should 'run unencumbered by rules and hurdles'. If managers can explain why they want to invest money, the only restraint is the need to allocate limited resources.

The needs of manufacturing supremo Bill Ramsey, who heads the North and Latin American operations, have had obvious priority, given the product shortages. During Project Ruby, Ramsey was told to drive down material costs by 30% and to demonstrate that the ProLinea could be made in-house, rather than in Asia. Had the team not proved 'that we could build at a competitive price internally', the work would have gone off-shore, and the new Compaq might have been stillborn. As it was, what the company learned, as the 'almost impossible' goals were exceeded, ran across the company. The key Ruby principle, designing to cost to meet price points, is now axiomatic.

Justifying in-house manufacture still enforces continuous improvement. One route is cellular manufacturing, piloted in Scotland and producing such benefits in productivity, efficiency, space utilisation and flexibility that cells will obviously spread company-wide. Effort is also going into an ambitious, extremely complex switch from manufacturing on forecast demand to real-time, 'build-to-order' production.

'We're re-engineering the core process to get better supply,' says senior vice-president John Rose, a 1993 recruit from Digital. His is the 'most challenging' sector: the desktop, where Compaq faces its greatest competition. Rose's task ranges from making sophisticated office desktops which form networks with powerful servers, to supplying 'plug-and-play' Presarios behaving 'much like a stereo system' to domestic buyers. US demand for home computers will match business sales this year, and 'our vision of the desktop is that it becomes the information and communications centre' for home and office alike.

Compaq is 'integrating more and more technology into the chip-set', getting down to 'custom silicon' to achieve 'best cost'. That's the foundation for a 'multi-faceted attack - products, channel expansion, demand creation, brand awareness'. For clones to compete on all four costly dimensions, with their lowest-price platform removed, is a daunting task. Hugh Barnes, who heads portables, believes that the stronger players will get stronger.

Compaq came into 1994 holding a narrow lead in portables over Toshiba and Apple, with a trailing IBM still regarded as a strong competitor. Meeting IBM's continuing challenge is another theme: recently IBM has been struggling through technological and management upheavals to make a profit from an allegedly 'unmanageable' mass of PC proliferation. Pfeiffer's range is just as broad, though with more commonality. 'It is manageable,' he says. 'But you need a whole new set of tools and processes.' If market imperatives demand covering the waterfront, that's what you cover. That strategy aims at IBM's heartland: the large-scale corporate system. Michael Lambert, who came from NCR in January to head systems marketing, has been 'up-sizing', rather than down-sizing, with each new hierarchical product acting as another 'stepping-stone to the replacement of the mainframe'. A new super-server, the Armada, is the latest piece to fall into place - and it is very powerful. 'Our inhibitor is not power,' says Lambert, 'but getting major users comfortable.' The switch to client-server computing demands 're-engineering your business'.

With so much, and such broad, success, the universal question is 'could crisis happen again?' In so volatile an industry and technology, anything can happen. Pfeiffer can only dispel the doubts by piling on the achievement. Britain was first to meet his original target: number one worldwide by 1996. All Europe followed, then America. Whether or not this lead holds next year, beyond primacy lies the aim of building 'a significant leadership position' - much larger than the odd percentage point.

With Apple partly sidelined by incompatibility, only IBM looks in a position to mount an effective onslaught against Compaq across the board. And margins have stabilised at around 24% despite constant industry-leading price cuts (11-22% on virtually all desktop products on a single August day). Given that it keeps low-cost, low-price leadership, Compaq looks more vulnerable to industry and economic downturn than competitive threat.

The most serious threat, though, lies within. 'You always run the risk of "we have it made - we're unbeatable",' says Pfeiffer. Complacency, indeed, was the root of the crisis. To prevent a recurrence, the five pillars of the turnaround triumph will be required continuously - speed, a strategy of growth, self-critical soul-searching, focus, and communication; plus the ultimately decisive 'can-do culture'. Even Pfeiffer hadn't thought that Compaq could 'execute so well, with so broad and enthusiastic an acceptance'. In this industry, nothing less than a philosophy of continual turnaround can assure continuity. That's a paradoxical lesson which other, slower-moving industries are having to learn. It's a paradox which Compaq, after its awful shock, seems unlikely to forget.

ECKHARD PFEIFFER - CAREER LADDER

Born 20 August 1941

Lauban, Germany

1963 BS degree in business from Kaufmaennische Berufsschule, Germany

1964-73 Marketing director, Texas Instruments Deutschland, Freising

1974-79 Manager of consumer products division, (European HQ), Texas Instruments, Nice

1980-83 Vice-president, Texas Instruments marketing group, Texas Instruments Inc, Dallas

1983 MBA Southern Methodist University, Dallas

1983 Vice-president (Europe) of Compaq, directed the opening of wholly owned Compaq subsidiaries in Germany, France and UK

1986-89 Senior vice-president, Compaq, international operations

1989-91 President of Compaq Europe and International

Jan 91-Oct 91 Executive vice-president and chief operating officer, Compaq, responsible for all day-to-day operational functions - sales, marketing and manufacturing worldwide

Oct 91-President and chief executive officer, Compaq Computer Corporation with responsibility for corporate strategy and operations worldwide.

COMPAQ: FINANCIAL FACTS

Sales Turnover by Origin ($m)

1991 1992 1993

US/Canada 1,388 1,833 3,670

Europe 1,724 1,886 2,718

Other countries 159 381 803

Total 3,271 4,100 7,191.

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