If Compaq can, you also can
Compaq Adjusts to a maturing computer industry
By Karim Md Rezaul | February 18th, 2012
The personal computer industry has quickly moved form the growth stage to the mature stage with important implications for its members. While revenues were growing at well over 20% per year not long ago, today they are growing only slightly faster than the economy in general, thanks to a brutal assault on prices across the industry. The price decline has taken place as computers have come to be seen as commodities, with clones offering performance that is equal or even superior to that of name brand machines. The result was an impact on profits as average net income as a percentage of sales fell from a very cushy 6.5% in 1986 to a deadly -0.12% in 1992.
Firms that had grown up on gross margins as high as 70% had to do some serious should searching in order to discover a strategy that would allow them to survive such changes. An analyst at Business Week explained, ‘they now have to choose at which points along the value chain they can most profitably apply their skills and resources. They may write software, build parts, or make complete systems. They may sell computers built by both others or they may just help customers choose and install computers to solve specific problems. But even the mightiest can no longer do it all.’
Regardless of the part of the value chain a firm decides to focus on, it is likely to be forced into competition on the basis of price, and learning to compete on price is often a difficult lesson for a firm raised on growth and healthy margins. Compaq provides a good example of these difficulties. When the company’s cofounder, Rod Canion, insisted that Compaq’s profit margins, which had fallen by half, were merely suffering from the effects of an economy wide recession, the board fired him. He was replaced by Eckard Pfeiffer, whose mission was clearly to cut costs and make Compaq price competitive.
Pfeiffer announced that it was time for the company to slash its costs and fight for the lower end of the market, a segment it had forfeited to lower-priced rivals. However, the message was just he opposite of everything the company had done historically, and, at least initially. It didn’t get through. Engineers who had been with the company during its heyday continued to push high-end products onto the market. They could not acknowledge that their machines had become gold plated, overengineered, overpriced easy targets for cheaper machines. However, Pfeiffer persisted and even made public announcements that Compaq would match any competitor in the world on price. Seeing that such a change was inevitable, many of the firm’s engineers and managers, including five of the top executives, left. Those who stayed on got biweekly briefings from Pfeifer on the importance of producing cost competitive machines.
Doing so required that the firm rethink everything from its product design to the business processes it was using to run the firm. Engineers took cost out of the new Pro-Linea product family by dropping gold-plated parts, such as reducing the layers of radio-emissions shielding from eight to the four required in almost all applications. It changed its business processes by consolidating the production of motherboards and chases in the same factory and by testing only completed units instead of every component.
