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Digital Equipment Corporation Business Information, Profile, and History

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146 Main Street
Maynard, Massachusetts 01754

History of Digital Equipment Corporation

Digital Equipment Corporation is a leading worldwide supplier of networked computer systems, software, and services. Its products serve a variety of applications, such as scientific analysis, industrial control, time-sharing, commercial data processing, graphic arts, word processing, office automation, health care, instrumentation, engineering, and simulation.

Digital is best known for introducing the minicomputer to the information processing industry, a development that altered the way potential customers perceived the computer. In addition to being more accessible to non-specialists than traditional mainframes, the minicomputer was smaller, faster, and less expensive. In defining the needs of a new generation of computer users, Digital set the stage for the development of the personal computer and the workstation in the mid-1980s. Content with its dominance in the core minicomputer market, however, Digital was slow to adapt its product line to these new markets. The company's entry into the personal computer arena in 1982 was a failure, and later PC collaborations with Olivetti and Intel achieved mixed results. In the early 1990s, after several years of indecision, Digital's focus shifted to a new series of machines, primarily workstations, based on the company's own ultra-fast Alpha microprocessor.

Digital is noted for its entrepreneurial style of management. For that reason, it was much watched during the 1970s and early 1980s when it experienced its fastest growth. In 1982 the company's management structure was praised in Thomas J. Peters's and Robert H. Waterman's In Search of Excellence, but Digital's success was not without turbulence. After a period of phenomenal growth in the 1970s, Digital began to outgrow the unique entrepreneurial structure that had made it a serious challenger to the industrial computer giants.

In the summer of 1957, Ken Olsen asked American Research & Development (ARD), a venture capital firm in Boston, for $70,000 to establish a computer company. Olsen and his partner, Harland Anderson, were 31 and 28 years old respectively and had just come out of the Digital Computer Laboratory at the Massachusetts Institute of Technology (MIT). General Georges Doriot, the head of ARD and a professor at the Harvard Business School, encouraged them to write a business proposal but advised them not to use the word 'computer,' since large corporations like General Electric and RCA were already failing in the nascent industry. Doriot, who later joined Digital's board of directors and influenced Olsen's leadership style, was concerned also that a proposal from the young, inexperienced engineers would not be well received.

Heeding Doriot's advice, Olsen and Anderson proposed the production of printed circuit modules instead of computers, and promised to turn a profit in their first year. ARD offered them $70,000, and the two engineers located their company in the small mill town of Maynard, Massachusetts.

In early 1958 Digital shipped its first products, the Digital Laboratory Module and the Digital Systems Module. The company sold $94,000 worth of these modules to research facilities. Despite the recession of the late 1950s, Digital turned a profit at the end of its first year.

The Whirlwind and Sage computers which Olsen and Anderson had worked on at MIT influenced Olsen's commitment to producing interactive and interlinked computers. The Whirlwind was used to power a cockpit flight simulator for the navy. While other universities were designing computers to calculate complex equations, MIT designed the Whirlwind for immediate interaction with the user. The SAGE (Semi-Automatic Ground Environment Defense System), a U.S. Air Force project during the Cold War, was a massive network of computers and radar systems used to detect enemy aircraft in the nation's airspace.

When Olsen and Anderson established Digital, the only computers commercially available were million-dollar mainframes from companies such as IBM, Univac, and Burroughs. The people who worked with these computers were programmers provided or trained by the company. Olsen had observed students waiting in line to use Whirlwind's interactive offspring, the TX-O, an early transistorized system at MIT's Lincoln Laboratory, while an IBM machine was virtually ignored. Seeing the need for more interactive machines, Olsen sought to wean computers away from programmers.

In 1960 the company introduced its first computer, the PDP-1 (Program Data Processor). The PDP-1 came with a cathode-ray tube (CRT), a screen which allowed the user to see what was being entered and received from the central processing unit. This novel addition demonstrated Olsen's commitment to making computers accessible to users. Unlike the room-sized mainframe computers of the day, the PDP-1 was no larger than a refrigerator. It cost $120,000 at a time when comparable machines by rival manufacturers were selling for $1 million.

In 1963 Gordon Bell, who would become Digital's most eminent engineer, designed the PDP-5. The PDP-5 was the forerunner of the PDP-8, the industry's first minicomputer. That same year, Bell also designed a large-scale computer, the PDP-6. Together, the PDP-5 and the PDP-8 illustrated the company's versatility and creativity. By 1964 the PDP-5 was Digital's cheapest computer at $27,000, while the PDP-6 was the most expensive at $300,000.

There was virtually no organizational structure during Digital's early years because Olsen was committed to creating an environment much like the research labs at MIT. A temporary position as liaison between MIT and IBM in 1959 convinced Olsen that the hierarchy at companies like IBM did not allow for creativity and the flow of ideas. Unlike other computer companies at the time, Digital did not lease its computers. Leasing computers, with a contract for support and services, kept customers in a dependent relationship. Since Digital's customers, mostly scientists and engineers, did not require technical support, the company provided virtually none of the software and maintenance services offered by its giant competitors. Digital did not spend its capital on software design and maintenance services, and passed its savings along to customers. Olsen also felt that leasing hindered technical development by creating a reluctance to allow a product to become obsolete.

Digital survived without an organizational structure for seven years. By 1964 various engineering groups were no longer coordinating with the company's other divisions, causing bottlenecks in certain areas of manufacturing and order processing. As a result, product shipments were often delayed. That year, Digital's revenues dropped to $900,000, down from $1.2 million in 1963.

As a result, Olsen decided to structure the company into a team of product line managers. In this model, the product line manager became an entrepreneur within the company and competed with other teams for centralized manufacturing and sales forces. Each manager had complete responsibility for a product line from conceptualization to sales, and was accountable for its performance. This matrix organization, as it was called, was responsible for an abundance of products developed over the next 15 years. By the mid-1970s the company developed more than 20 new product lines. While the matrix organization resulted in dynamic growth, it also created uncertainty among some of Digital's employees, and in 1966 Olsen's partner, Anderson, resigned.

In the fall of 1965 Digital unveiled the PDP-8. This machine triggered the explosive growth of the minicomputer industry, and the company grew from a small technical company to a major computer manufacturer. The PDP-8 was small and attracted users who wanted to integrate it into their larger mainframe systems. It sold for $18,000, which at the time was a very low price for a high-performance general-purpose computer. Digital sold 50,000 PDP-8s over the machine's 15-year life span; the model contributed significantly to growth in revenues and profits of between 25 percent and 40 percent per year. Between 1965 and 1967 alone, revenues multiplied sixfold to $4.5 million.

Because Digital's computers were versatile and accessible, they attracted an entirely new class of customer: the OEM, or Original-Equipment Manufacturer. Under this system, outside companies bought Digital's computers and integrated their own hardware and software programs for specific applications, such as scientific instrumentation. They then sold the package as their own product. This unique arrangement saved Digital the costly, labor-intensive job of writing software and servicing its machines. As a result, overhead costs remained stable while revenues poured in. OEMs also opened up new markets to Digital. Because of their adaptable nature, Digital's computers were used for a wide variety of applications, from calculating scientific problems to running electronic scoreboards in sports stadiums.

The business world now began to view computers as a viable industry. Attempts by larger companies to buy Digital were rebuffed; Olsen firmly refused to sell out, and for many years Digital in turn resisted the trend to buy out smaller, dynamic companies. By the early 1990s, Digital's outside holdings were still modest by industry standards. As Digital's entrepreneurial style permeated the industry and the availability of investment capital increased, engineers began to dream about starting their own companies. In 1968 Edson de Castro, an engineer who had worked on the design of the PDP-8, left Digital to start his own company. Data General would become Digital's first serious competitor in the minicomputer market.

In January 1970 Digital announced plans to build the PDP-11, to be sold for $10,800. It was the first time that Digital had announced a machine still in the design stage. Data General had already announced a machine in the same class of computers a year earlier and was beginning to encroach upon Digital's customer base. When Industrial Research named the PDP-11 one of the most significant technical products introduced in 1970, sales increased. Eventually, 600,000 PDP-11s were sold. By 1972, Digital was back on top of the minicomputer market.

Digital has been a pioneer in community and labor relations. To bring growth to otherwise depressed communities, the company established plants in cities hard hit by recessions, such as Maynard and Springfield, both in Massachusetts. Until the late 1980s, Digital was especially known for its no-layoff tradition. During the recession of 1970, while the rest of the industry was laying off hundreds of people, Digital put its employees to work in other areas of the company, from sweeping the parking lot to sales. Digital also funded a study of the reproductive health of women who worked in one of its semiconductor plants. The study found a correlation between high exposure to semiconductor material and miscarriages, and Digital publicized the study despite the potentially negative consequences. Digital's lack of rigid hierarchy during this period was much-admired, as was the ability of employees to directly influence decision making. Decisions were made by a consensus of engineering, marketing, design, and review committees. Olsen's fundamental corporate values, which he summarized as 'honesty, integrity, doing the right thing,' became formalized policy in 1974.

Reacting to market pressure and the enthusiasm of its engineers, Digital entered the personal computer market. On May 10, 1982 Digital announced three personal computer products, the Rainbow 100, the DECmate II, and the Professional 350, but internal competition to build a personal computer had drained the company's marketing resources. While Digital hesitated and its engineers warred internally over competing products, other companies had already entered the market.

The failure of the personal computer project foreshadowed other problems resulting from Digital's once vaunted matrix management system. The consensus required to initiate product lines made it difficult for Digital to respond quickly in an increasingly fast-paced market. Another problem was the existence of too many independent product domains within the company. While Digital had an array of new products and established itself in a number of different markets, customer territories became unclear and intense competition between the domains drained Digital's resources. Furthermore, the company's growth in new market areas overwhelmed sales and service forces as they tried to meet the demands of new customers. With nearly 70 minicomputer manufacturers to compete with, DEC's sales force was also busy defending its lead in the minicomputer market.

Other product line teams developed technologies which brought Digital successfully into the new decade. In the late 1970s the engineering group headed by Gordon Bell developed the VAX line of computers. The VAX architecture evolved into a range of computers from small desktop machines to computer clusters which could compete with mainframes. Interlinked, these machines gave companies complete automation throughout their various divisions.

Olsen had the foresight to realize that Digital's sales and marketing force was not ready for the potential success of the VAX systems and the more businesslike customers that it would attract. Thus, Olsen began to transform Digital into a unified marketing organization by redirecting its product lines into a market-oriented scheme. Rather than simply allowing the product line teams to develop and sell any product, Digital identified markets to target, assigning product lines to each area.

By 1984 Olsen had completely reorganized Digital. This change shifted profit and loss responsibility away from product line managers. It took five years to dismantle the matrix organization, which had existed for 19 years and was a symbol of Digital's growth and success. Due to the shift in power, more than 50 managers left to start their own companies or to join others.

The timing of Digital's new direction could not have been better. By the early 1980s the corporate world had become a multivendor environment where machines of different sizes and applications could not communicate or share information. Over the next 18 months ten new VAX minicomputers were unveiled. These machines could network not only among themselves, but with other vendors' products as well. Consequently, Digital lured an estimated $2 billion in sales away from IBM. In 1986 Digital's profits rose 38 percent in an industry which was declining, and by 1987 the company was threatening IBM's number one position in the computer industry. The trend was, however, short-lived. By the late 1980s, it became clear that Digital's commitment to producing a wide range of consummately-engineered and competitively-priced machines was being compromised by problems with timing and with a confusing management structure. This was reflected in plummeting sales and revenues, culminating in a fiscal-year loss of $617 million in July 1991, Digital's first. Digital was also forced to abandon its longstanding no-layoff strategy and cut its work force by 6,000 in fiscal year 1991 through a combination of layoffs and voluntary retirement packages.

The company's difficulties were exemplified by the introduction of a new mainframe in 1990. Ignoring predictions from industry analysts on Wall Street that the market for large, expensive mainframes was dead, the company embarked on a $1 billion research and development program to extend its VAX technology to a mainframe environment. The result was a series of machines, including the flagship VAX 9000, which were more powerful and complex than any in the company's history. Due to last-minute design modifications and production delays, however, the VAX 9000 line was not introduced until 1990, two years later than originally planned, and first-year sales fell far short of the $1 billion goal which had been established. Sluggish mainframe sales were not Digital's only miscalculation. Undaunted by its failure in the PC market in the early 1980s, in 1991 the company introduced a new line of personal computers based on the powerful Intel 486 microprocessor. Once again sales failed to live up to expectations.

In April 1991 Digital joined Compaq Computer Corporation, Microsoft Corporation, and 18 other computer companies in endorsing the development of a new computer standard, the Advanced Computing Environment (ACE) initiative. Although the system would have enabled machines of all sizes and configurations to communicate with each other through the use of the same software, attempts to agree on a single operating system failed. By early 1992, three ACE operating systems had been proposed, and only the simplest software packages were capable of running on all machines. IBM's PC design remained unchallenged. Nevertheless, Digital's joint ventures with such companies as Intel, Italy's Olivetti, and Microsoft Corporation represent a growing trend toward standardization and cooperation among manufacturers.

Meanwhile, Digital turned its attention to workstations, a market it had long neglected. The key design element in the new series was the company's own Alpha chip, based on a new technology called Reduced Instruction Set Computing, or RISC, which had already catapulted Sun Microsystems ahead of all competitors in the workstation sector. The new workstations were scheduled for release in 1993. During the same period, Digital turned increasingly to the sale of services and consulting as a means of shoring up flagging computer sales.

By this time, the personal computer market had become intensely competitive, and as hardware prices fell, companies found it increasingly difficult to recoup the tremendous research and development costs associated with introducing a new product. Much higher margins were forthcoming in the software market, an area that had never been Digital's strength. Traditional companies such as Digital and IBM, with large bureaucracies and entrenched cultures, were compared unfavorably with smaller, less hierarchical organizations which seemed to be more successful at adapting quickly to changes in technology and customer needs.

In an attempt to reorganize along leaner lines, Ken Olsen restructured his company three times between 1988 and 1991. The result was confusion and a lack of direction at all levels of Digital, for which many industry-watchers held Olsen personally responsible. Amid the turmoil, some top managers resigned, including the chief financial officer and the president of Digital's European operations. In April 1992 Digital announced a shocking $294 million quarterly loss, and critics commented that only a massive cost-cutting initiative could save the company. Under increasing pressure from the board to improve performance, Ken Olsen surprised outsiders by announcing that he would step down as president and chief executive officer of the company effective October 1992. His successor was Robert B. Palmer, vice president of worldwide manufacturing, logistics, and component engineering.

With a new chief executive at the helm, Digital faced the challenge of maintaining its status as a major computer corporation in a quickly changing environment. Like other large manufacturers, it downsized its operations and became more flexible in order to remain competitive. The company's strengths continue to be its dedication to engineering excellence and willingness to take risks with new technologies. Its future success depends on its ability to pursue the timely introduction of new products.

Principal Subsidiaries: Computer Insurance Company of Rhode Island; Computer Insurance Company Limited (Bermuda); Digital Computer Taiwan Limited; Digital Equipment Aktiebolag (Sweden); Digital Equipment B.V. (Netherlands); Digital Equipment Betriebliche Altersversor-gungsgesellschaft m.b.H. (Germany); Digital Equipment of Canada Limited; Digital Equipment Caribbean, Inc.; Digital Equipment Centre Technique (Europe); S.A.R.L. (France); Digital Equipment China Limited; Digital Equipment do Brasil Ltd.; Digital Equipment Co. Ltd. (U.K.); Digital Equipment Corporation A/S (Norway); Digital Equipment Corporation A/S (Denmark); Digital Equipment Corporation (Australia) Pty. Ltd.; Digital Equipment Corporation (Consultancy) Ltd. (U.K.); Digital Equipment Corporation Espana, S.A. (Spain); Digital Equipment Corporation Finance B.V. (Netherlands); Digital Equipment Corporation GmbH (Austria); Digital Equipment Corporation International (Switzerland); Digital Equipment Distribution (Ireland) Limited; Digital Equipment Corporation OY (Finland); Digital Equipment Corporation (New Zealand) Limited; DEC Digital Equipment Corporation S.A./A.G. (Switzerland); Digital Equipment (DEC) Limited (Israel); Digital Equipment (DEC) Technical Center Limited (Israel); Digital Equipment Filipinas Incorporated (Philippines); Digital Equipment Foreign Sales Corporation B.V. (Netherlands); Digital Equipment France; Digital Equipment GmbH (Germany); Digital Equipment Hellas S.A. (Greece); Digital Equipment (Holdings) B.V. (Netherlands); Digital Equipment Hong Kong Limited; Digital Equipment International B.V. (Netherlands); Digital Equipment International Betriebliche Altersversorgungsgesellschaft m.b.H. (Germany); Digital Equipment International GmbH. (Germany); Digital Equipment International Limited (Switzerland); Digital Equipment (Korea) Inc.; Digital Equipment (Malaysia) Sdn. Bhd.; Digital Equipment de Mexico, S.A. de C.V.; Digital Equipment N.V./S.A. (Belgium); Digital Equipment Panama, Inc.; Digital Equipment Parts Center B.V. (Netherlands); Digital Equipment Portugal, Limitada; Digital Equipment PRC Limited (Hong Kong); Digital Equipment S.p.A. (Italy); Digital Equipment Scotland Limited; Digital Equipment Services, Inc.; Digital Equipment Singapore (PTE) Limited; Digital Equipment (Thailand) Ltd.; Digital Growth Inc.; Digital Incorporated; Digital International Sales Corporation; Old Colony Insurance Limited (Bermuda); Cascade Computing AB (Sweden); Digital Equipment Beteiligungen GmbH (Germany); Digital-Kienzle Computersysteme GmbH & Co. K.G. (Germany); Digital Equipment Corporation International (Europe); Digital Equipment Corporation Japan; Digital Equipment Corporation de Puerto Rico; Digital Equipment Corporation Services-Europe; Digital Equipment China Incorporated; Digital Equipment Czechoslovakia, spol. s.r.o.; Digital Equipment Export (India) Ltd.; Digital Equipment Finance Corporation; Digital Equipment (India) Ltd.; Digital Equipment (Hungary) Ltd.; Digital Equipment International Limited; Digital Equipment Maroc S.A.R.L. (Morocco); Digital Equipment Properties Limited; Digital Equipment Service Industries Solutions Company Limited; Digital Equipment (Small Medium) Enterprise B.V. i.o. (Netherlands); Digital Equipment Turkiye A.S. (Turkey); Digital Realty Corporation; EA Systems, Inc.; Kienzle-Miete GmbH (Germany); PCS Computersysteme GmbH (Germany); Procad GmbH Rechnerunterstutzte Konstruk-tionssysteme; Société Civile Immobiliere (SCI) Parc du Boids Briard (France).

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