Compaq Computer Corporation Business Information, Profile, and History

Company Perspectives:

Compaq has become one of the world's most successful companies and today leads the computer industry in market share performance and balance sheet strength. We've achieved this by consistently executing our strategic plans, delivering on our promises and striving to provide customers with the highest levels of innovation and flexibility at the lowest total cost of ownership. By continuing to do so, we believe that we will strengthen our capability to lead the future of computing.

History of Compaq Computer Corporation

Compaq Computer Corporation is the world's largest supplier of personal computers and, as a result of its acquisition of Digital Equipment Corporation in June 1998, is the second largest computer firm in the world (trailing only IBM). In addition to designing, developing, manufacturing, and marketing portables, laptops, desktops, workstations, and servers for businesses and consumers, the company also develops and markets computer hardware, software, solutions, and services. Compaq products are marketed in more than 100 countries worldwide.

Beginnings: Making IBM Clones

When International Business Machines Corporation (IBM) introduced its first personal computer (PC) in 1982, Compaq was among dozens of other companies entering the market with IBM clones--computers that look and perform like IBM PCs, and are often less expensive. Compaq set itself apart from other clone manufacturers by becoming an innovator itself, producing IBM-compatible PCs that were faster, superior in quality, and offered additional user features. Compaq's management team also set the company apart from others in the PC industry. Made up of seasoned professionals from Texas Instruments (TI) and IBM, the team's prior experience in the volatile computer industry gave Compaq the tools necessary to survive a period of phenomenal growth in 1983. Compaq's staff also had the technical and business grounding to establish new industry standards on its own--without following IBM.

Compaq's beginning was in the summer of 1981, when Joseph R. "Rod" Canion, James M. Harris, and William H. Murto, three senior managers from TI, decided to start their own company. They had not yet determined what their company would produce and market; managing a Mexican restaurant or manufacturing storage devices for minicomputers or beeping devices for finding misplaced items were among their original ideas. The entrepreneurs eventually decided to build a portable PC that met industry standards set by IBM. With only $1,000 each to invest in their company, Canion, Harris, and Murto approached Ben Rosen, president of Sevin-Rosen Partners, a high-technology venture capital firm in Houston. Rosen, who became Compaq's chairman, offered an initial investment of $2.5 million.

Compaq was established just after an era in which PC entrepreneurs had proliferated. The technological breakthrough of the microprocessor--an extraordinarily powerful semiconductor chip&mdash-abled smaller computers to be built that were also faster, less expensive, and easier to use. Because this much less expensive microprocessor served to miniaturize computers, the demand for PCs increased, and development costs decreased significantly. As a result, many new PC companies were established. While these early companies were successful in technological leadership and often had a flair for marketing, deficiencies in inventory management and quality control eventually led many of them to fail. When Compaq arrived on the scene, venture capitalists were beginning to force many entrepreneurs to turn over control of their companies to more experienced management professionals. As Rosen--who had lost a $400,000 investment in another PC start-up--explained in Management Today in 1985, "In the early days, it was an area for flamboyant people ... who transformed their personalities into companies. Now the business requires a very different kind of manager. It has become a very unforgiving industry."

Unlike most new PC companies, Compaq's management had the benefit of the experience of longtime professionals. Prior to joining Compaq, each of its original 20 employees had worked in the computer industry for 15 to 20 years. Their experience in management and engineering at such companies as TI and IBM--two pioneers in the industry&mdash′ovided Compaq with a solid foundation. Compaq's management style was of the kind that was scorned by early iconoclastic PC entrepreneurs. Compaq made decisions by a consensus approach, which allowed every division of the company a say in product development. Compaq also instituted some traditional corporate mechanisms, such as tight fiscal controls and a forecasting system.

In 1983 Compaq's consensus management proved valuable. Canion, Compaq's chief executive officer, strongly supported the idea of producing a briefcase-size, or laptop, computer. The marketing research director, however, concluded that the market for such a computer did not exist. Canion relented, and Compaq waited while other companies, including Gavilan Computer Corporation and Data General Corporation, attempted to market such a product and failed. Meanwhile, Compaq shipped its first two products, the Compaq Portable and the Compaq Plus. These computers set the standard for portable--though larger than a briefcase--full-function PCs. In 1983 Compaq shipped more than 53,000 portable PCs throughout the United States and Canada. That year, the Compaq workforce grew from 100 to 600, and production increased from 200 machines in January to 9,000 in December. The company recorded $111.2 million in revenues, the most successful first year of sales for a U.S. company.

A key factor in Compaq's growth was a strong cooperative relationship with its dealers. With nearly 90 PCs on the market aimed at business professionals, shelf space was very competitive. Compaq did not have a direct sales force of its own, and thus did not compete with its authorized dealers. This arrangement gave dealers more incentive to carry Compaq computers. Compaq also motivated its authorized dealers through what was called "Salespaq," whereby Compaq paid a percentage of the dealer's cost of advertising, sales training, or incentives.

Compaq's ability to develop, produce, and market new products in a very short time period was another key ingredient in its success. Once a product was approved, Compaq undertook all aspects of its development simultaneously: factories were built, marketing and distribution arrangements were made, and engineers refined the product design. The product cycle in the PC industry was typically 12 to 18 months; Compaq delivered in six to nine months. This fast turnaround in product development enabled Compaq to introduce the latest technology before its competitors. In 1984, for example, IBM announced a new version of its PC that experts felt would set back other PC manufacturers. Compaq pulled its resources from every branch of the company, and within six months introduced and shipped its DESKPRO line of desktop PCs. Fifteen months later IBM shipped its portable PC, which was two pounds heavier and offered fewer features than Compaq's portable model. From the first quarter of 1983 to the last quarter of 1984, Compaq's production increased from 2,200 computers to 48,000. Despite the 1984 industry shakeout, Compaq reported an increase in sales to over $500 million. In March 1985 Rosen's original investment of $2.5 million increased in value to $30 million.

The Late 1980s: New Products and Markets

Expediency in product development also led to a turning point in Compaq's history. In 1985 Intel, a leading manufacturer of microprocessors, wanted to market its powerful new microprocessor, the 80386, as soon as possible. Intel felt confident that a Compaq product based on the new microprocessor would see a quick entry into the market. Compaq and Intel worked together to correct defects in the 80386 microprocessor, and Intel redesigned many features of the chip to meet Compaq's standards. Their collaboration resulted in Compaq's 1987 introduction of the DESKPRO 386. Based on Intel's new chip, this new PC performed over three times faster than IBM's fastest PC, and nearly twice as fast as Compaq's closest competitor. It took IBM nine months to introduce a comparable machine using Intel's 80386. By then Compaq was developing a portable version of its new PC.

In 1986 Compaq became the first company to achieve Fortune 500 status in fewer than four years. From 1986 through 1989, Compaq's revenues increased fivefold to $3 billion, while other PC manufacturers--including Apple Computer and Sun Microsystems, the two top contenders--had setbacks. Much of this growth was due to Compaq's successful marketing efforts in Europe. Led by Eckhard Pfeiffer, former head of TI's European consumer electronics operation, Compaq began its European campaign in 1984, before most other U.S. vendors. In 1989 Compaq became the number two supplier of business PCs to the European market, achieving $1.3 billion in international sales. With the PC market in Europe growing about 33 percent faster than the U.S. market, Compaq had an edge on other PC manufacturers.

In November 1989 Compaq introduced the Compaq SYSTEMPRO personal computer and the Compaq DESKPRO 486. These PCs utilized a technology known as Extended Industry Standard Architecture (EISA), a hardware design that Compaq developed to challenge IBM's Microchannel hardware design for its PS/2 PCs. These technologies increased the speed of PCs, enabling them to perform such complex operations as networking and multitasking. An added advantage of EISA was its ability to attract customers accustomed to using more powerful minicomputers and mainframe computers. By incorporating EISA into its new products, Compaq began to set industry standards. While IBM was producing computers based on the Microchannel technology, many other manufacturers were using EISA technology. Initial sales of the SYSTEMPRO were slow but, as CEO Canion told a Business Week correspondent, "We realized we were opening up a whole new market .... We knew it would take some time."

Company sales for 1990 reached $3.6 billion, with net income of $455 million, record figures for the eighth consecutive year. During that year, Compaq lengthened the list of countries in which it operated, opening new subsidiaries in Austria, Finland, and Hong Kong, and authorizing dealers in the former East Germany, Hungary, Yugoslavia, Argentina, Mexico, and Trinidad. International sales accounted for over half of Compaq's total revenue in 1990, eclipsing North American sales for the first time. Nine new products were introduced during that year. These included updated versions of the DESKPRO 386 desktop PC and a high-performance notebook PC, the Compaq LTE 386s/20. By the end of 1990, Compaq had 3,872 authorized dealers throughout the world, over 2,000 of them in North America.

1991 Brings a Slump

However, Compaq slumped badly in 1991. For reasons ranging from economic recession and price competition to problems with the flow of distribution, Compaq's sales and earnings fell for the first time in the company's history. Once again, the DESKPRO 386 PC series was the bestseller, with desktop PCs accounting for close to three-fourths of Compaq's total revenue. In September 1991, a new line of Compaq computers was introduced that had a new feature known as "Intelligent Modularity." This system, the DESKPRO/M, enabled users to more readily upgrade key components as their needs and the available technology changed. This was possible by organizing components into five easy-to-access modules: memory, input/output, EISA/ISA expansion cards, processor, and video graphics controller. It was hoped that customers would prefer upgrading with ease to purchasing a new computer every time their needs increased.

Compaq was forced to alter its established distribution strategy somewhat in 1991. By that time eight of the company's ten most important dealer chains had merged into four. This led Compaq to gradually start authorizing computer consultants and discount chains to sell its products. Direct sales techniques of its own, such as a toll-free hotline, were stepped up as well.

In late 1991, a dramatic management shake-up took place. Following a gloomy board meeting at which a $70 million third-quarter loss was announced, company founder and CEO Canion was forced to resign. Pfeiffer, who had been promoted to executive vice-president and chief operating officer, was immediately named to replace Canion. A major reorganization of the corporate structure ensued. The company was realigned into desktop and systems divisions. As part of a 1,440-person staff reduction program, about 12 percent of the company's entire work force was laid off. In addition, five high-ranking executives left the organization, including senior vice-president of engineering James C. Harris, the last remaining company founder.

In June 1992 Compaq introduced an incredible total of 16 new products. The new machines were of several types, including the company's first low-cost desktop PCs (COMPAQ ProLinea), low-cost notebook PCs (Contura), and upgradeable desktop PCs with advanced graphics and audio capabilities. The same month, Compaq announced the initiation of a new Peripherals Division, a worldwide arm whose mission would be to develop printers and printer-related items. The division's initial line of products, including the August 1992 debut of the Compaq Pagem printer, launched Compaq into the rapidly growing market for network printers. The printer line was a failure, however, and was abandoned in 1993.

Presario Leads a Consumer Push in the Mid-1990s

Under the leadership of Eckhardt, Compaq also began a major push into the consumer and home office markets. This effort was centered around the Presario line of home computers launched in August 1993. The company's hottest new PC in company history, the Presario line included models selling for less than $1,500; Compaq sold more than 100,000 Presarios in the first 60 days after introduction, with sales fueled by a $12 million television advertising blitz, the company's first such campaign in three years. In 1993 alone, Compaq sold $500 million worth of Presarios. By aggressively pricing its PCs, Compaq placed itself in a better position from which to compete with manufacturers of lower-cost PC equipment, manufacturers that had helped put the brakes on Compaq's previously unchecked growth. By 1994 the company managed not only to fend off its low-price competitors, it also surpassed IBM as the number one seller of PCs worldwide.

Not content with its PC dominance, Compaq in the mid-1990s aimed to capture a much wider market. It had already introduced the Proliant server PCs as its entry into the market for servers (powerful computers used for corporate networks and Internet web sites). The company then went after the corporate mainframe and minicomputer market with the launch of the Armada mainframe-class server, the top-of-the-line model which sold for upwards of $100,000. On the lower-end server front, in 1994 Compaq launched the ProSignia VS server, which cost only about five to ten percent more than a desktop PC.

Also in 1994 Compaq revamped its logistics system in order to begin building its PCs to order from a huge stockpile of parts. Previously Compaq had estimated how many units of each product it wanted in its inventory and then had that number built. Under this build-to-inventory system the company risked making too many of a particular product and being stuck with excess, unwanted inventory, as well as not having enough of a particularly hot product on hand. With its build-to-order system Compaq would realize significant inventory and manufacturing cost savings.

Other Compaq initiatives of this period included moves into high-speed networking equipment and Internet services/products, as well as the October 1996 launch of a highly successful line of engineering workstations. The highly aggressive Compaq thereby realized astounding growth: revenues increased from $5.79 billion in 1992 to $20.01 billion in 1996; net income, which had peaked in 1990 at $577 million, registered at $988 million in 1994, $893 million in 1995, and $1.32 billion in 1996. Reflecting its wider range of products, Compaq generated about 15 percent of its revenues from the consumer PC market, 48 percent from corporate desktop PCs, and 35 percent from servers and workstations in 1997.

Acquisitions in the Late 1990s

In February 1997 Compaq released a $999 PC, the Presario 2000, in another aggressive, low-price move aimed at attracting the 60 percent of U.S. households without a PC. Later in 1997 the company made two significant acquisitions. In August Compaq acquired, through a stock-for-stock transaction valued at about $4 billion, Tandem Computers Incorporated, a leader in fail-safe high-end servers with annual sales of $2 billion and a sales force 4,000 strong. Compaq also spent $280 million for Microcom, Inc., a provider of devices for remote access to networks.

Moreover, Compaq had its eye on an even bigger deal. In June 1998 the company completed its $9.1 billion acquisition of Digital Equipment Corporation, the number four computer maker in the United States. Digital, which became a subsidiary of Compaq, was a leading maker of high-end workstations and servers, giving Compaq an even greater presence in those markets. Digital also brought to Compaq a 22,000-person service operation for large companies--computer services having been one of Compaq's weakest areas. The deal not only increased Compaq's annual revenues to more than $37 billion and vaulted the company into the number two position among all the computer firms in the world (behind only $78.5 million-in-revenues IBM), it also positioned Compaq as one of the world leaders in just about every computer sector. The company was number one worldwide in desktop computers, number three in portable computers, number three in workstations, number one in both PC servers (costing less than $25,000) and entry servers (less than $100,000), and number six in midrange servers ($100,000 to $1 million). In computer services, Compaq was suddenly number three, behind IBM and EDS.

Integrating the operations of Compaq and Digital was sure to be difficult and costly. Compaq took a $3.6 billion charge against earnings in 1998 related to the acquisition and announced plans to cut 15,000 Digital jobs and 2,000 at Compaq. Areas of overlap began to be addressed, such as the folding of Digital's PC production into that of Compaq and the scaling back of Compaq's network equipment unit. However, it would take some time before the full impact of this combination--at the time the largest merger in the relatively short history of computers--could be assessed.

Principal Subsidiaries: Digital Equipment Corporation; Microcom, Inc.; Tandem Computers Incorporated; Compaq Computer Australia Pty. Limited; Compaq Computer GesmbH (Austria); Compaq Computer N.V./S.A. (Belgium); Compaq Canada Inc.; Compaq Computer A/S (Denmark); Compaq Computer OY (Finland); Compaq Computer S.A.R.L. (France); Compaq Computer GmbH (Germany); Compaq Computer Hong Kong Limited; Compaq Computer S.p.A. (Italy); Compaq K.K. (Japan); Compaq Computer B.V. (Netherlands); Compaq Computer New Zealand Limited; Compaq Computer Norway A.S.; Compaq Computer Asia Pte. Ltd. (Singapore); Compaq Computer S.A. (Spain); Compaq Computer AB (Sweden); Compaq Computer AG (Switzerland); Compaq Computer Taiwan Limited; Compaq Computer Limited (U.K.).