Strategic Focus

Strategic Management and Strategic Competitiveness

Compaq Is Flailing against Internet Technological Trends
In January 1998, Compaq Computer Corporation acquired Digital Equipment Corporation (DEC). This was ostensibly a defining moment for Compaq, showing that it was moving into a different league of competitors-ones offering larger machines and services as well as PCs. Eckhard Pfeiffer, then Compaq's CEO, was quoted as saying, "We want to do it all, and we want to do it now." However, a little over a year later, on April 18, 1999, Compaq chairman Benjamin M. Rosen, although praising Pfeiffer, announced through a press release that Pfeiffer was being asked to step down.

Pfeiffer had brought the company back from the precipice after Rod Canion, Compaq's founder, was deposed in 1991. Pfeiffer built the company from $3.3 billion to over $40 billion in sales since his 1991 ascent to the CEO position. In the process, Compaq became number one in overall PC sales in August of 1995. How did Pfeiffer's precipitous fall at Compaq happen? What went wrong?

In 1996, Compaq bought Tandem Computers, a minicomputer manufacturer focused on workstations. As already mentioned, in January 1998, it also purchased DEC, for $8.4 billion. The latter transaction was to help Compaq move into services, although DEC's business in workstations was declining. Thus, Compaq was moving into the territory of formidable competitors such as Sun Microsystems and IBM. IBM is excellent in services, but Compaq executives felt that acquiring DEC would help develop Compaq's services business in a growing high-tech world where services are the drivers that often foster sales in hardware and software. However, in so doing, Compaq executives lost focus on their main business, PCs, and were unable to execute Web-based direct selling as effectively as their main competitor, Dell Computer Corporation.

Compaq announced in February 1994 that by 1996 it would be implementing a build-to-order strategy that was similar to Dell's. At the time of the announcement, 55 percent of Compaq's PC sales were generated through direct and Web-based sales efforts. When Compaq announced a more significant move toward Internet sales, friction surfaced between the firm and its numerous resellers. This friction became especially pronounced when Compaq decided to sell its new Prosignia model exclusively on the Web. This decision was reversed in March 1999, following the initial announcement in November 1998. The reversal was due to an inventory buildup and an 8 percent drop in Compaq's stock price in 1998. Compaq subsequently announced that it would downsize the number of its resellers to 4 dominant distributors from approximately 20 major ones. This strategic decision was intended to provide Compaq more control over its resellers and allow the company to concentrate on its strategy of direct selling.

To add to Compaq's problems, the main strategist in charge of its service business, John Rando, resigned three weeks after Pfeiffer's forced departure. Compaq's service business ranked third behind IBM and EDS, just ahead of Hewlett-Packard (HP) and Andersen Consulting when Compaq acquired DEC in early 1998. Rando's departure created still additional uncertainty about the shape of Compaq's future. Before Rando's replacement was chosen, many high-tech customers changed from DEC and Tandem technology-based workstations to systems from formidable competitors such as HP, IBM, and Sun Microsystems.

It is not unusual for an acquiring firm to encounter problems when it tries to integrate high-tech acquisitions into its operations. Silicon Graphics had trouble with its acquisition of Cray Research, while AT&T's acquisition of NCR and HP's acquisition of Apollo Computers never resulted in the positive outcomes executives expected when they decided to buy these other companies. Thus, as an acquirer, Compaq may be learning what some others in this industry (e.g., Silicon Graphics, AT&T, and HP) learned previously: It is difficult to compete successfully on several major fronts in an industry in which change is constant and dynamic.

In the spring of 2002, Compaq merged with Hewlet-Packard Company to form the new HP. HP CEO Carleton S. Fiorina continues to serves as chairman and CEO of the company, while Compaq CEO Michael Capellas has stepped into his new role as president.

Questions

  1. Compaq's former CEO, Eckhard Pfeiffer, was quoted as saying, "We want to do it all, and we want to do it now." Discuss how this business mentality affected the company.


  2. Compaq's acquisition of Digital Equipment Corporation created some difficult adjustment challenges. How could strategic flexibility have helped Compaq to better overcome these challenges?

 

SOURCES: P. Burrows, I. Sager, & M. Moeller, 1999, Can Compaq catch up? Business Week, May 3, 162-166; L. Kehoe, 1999, Compaq at the crossroads after Pfeiffer's departure, Financial Times, April 20, 17; G. McWilliams, 1999, Head of Compaq services unit resigns in third recent high-level departure, The Wall Street Journal, May 12, http://interactive.wsj.com; G. McWilliams & J. S. Lublin, 1999, Compaq Computer's board removes Chief Executive Officer Eckhard Pfeiffer, The Wall Street Journal, April 19, M. R. Zimmerman, 1999, Compaq and the road not taken, PCWeek Online, May 3, http://www.zdnet.com; J. G. Auerbach & W. M. Bulkeley, 1998, Compaq seeks Digital's prized asset: its world-famous service business, The Wall Street Journal, January 28, 1998, Where Compaq went wrong, Fortune, April 23, http://www.fortune.com; http://thenew.hp.com.

back



Copyright © 2003-2005 South-Western, All Rights Reserved.