Zenith Data Systems, Inc. Business Information, Profile, and History

History of Zenith Data Systems, Inc.

Zenith Data Systems, Inc. (ZDS), a wholly owned subsidiary of the French corporation Groupe Bull, is a global leader in the manufacture of microcomputers, specifically desktop and notebook computers, servers, and related peripherals. According to a company statement, "ZDS has one of the broadest product offerings in the industry." The company's major customers include businesses, schools, and government agencies.

Although ZDS's headquarters are located in Buffalo Grove, Illinois (northwest of Chicago), the company maintains facilities in other locations including St. Joseph, Michigan, Santa Clara, California, Billerica, Massachusetts, and Europe. The St. Joseph site, with 900 employees, houses ZDS's manufacturing facility for North American desktop PCs and the company's primary research and development program. ZDS's circuit boards are supplied by another Bull facility, located in Massachusetts. Notebook and subnotebook products are manufactured in accordance with ZDS specifications by outside suppliers.

ZDS was founded in 1979 when Zenith Electronics Corporation, a leader in the North American electronics industry, purchased the Heath Company, a manufacturer of personal computers and do-it-yourself electronics equipment. Following the acquisition, Zenith Electronics created Zenith Data Systems. Until 1992, a vestige of the organization's roots remained in the name of its Heath/Zenith Computer chain of retail outlets. In March 1992, however, the stores were closed.

ZDS initially prospered by selling personal computers (PCs) on college campuses. In 1984, after a failed attempt to convince college bookstores to carry its products, ZDS turned to fraternity houses and succeeded in penetrating the college market. Early years at ZDS were marked by technological innovation. For example, the company was the first to introduce a battery-operable portable PC with a backlit display.

By 1988, ZDS was the nation's number one laptop PC seller, with an estimated 23 percent share of the market. ZDS's reputation as a leading computer supplier was further bolstered when the company won contracts to sell computers to the U.S. Air Force and the Internal Revenue Service. According to one report, ZDS's revenues totaled $1.4 billion in 1988.

The company's fortunes soon shifted, however. One product introduced in 1989, a small notebook PC with a 2-inch floppy disk drive, failed to gain acceptance, and the company lost a major military contract to Unisys Corp. In an effort to increase sales of its desktop models, ZDS initiated a policy requiring its laptop dealers to sell its desktop models as well. Business Week estimated that 1,000 dealers, including ComputerLand Corp., stopped selling ZDS products rather than stock the unpopular desktop PCs.

Zenith Electronics Corporation, preparing to sell ZDS, cut research and development expenditures. The move left the company without new product offerings. Peter Burrows, writing for Electronic Business, noted that "products not at the cutting edge quickly lose their appeal, especially since most newer generation models are being priced competitively with their clunkier forerunners." As a result, ZDS saw its sales plummet and its inventories rendered obsolete.

In December 1989, Compagnie des Machines Bull (also known as Groupe Bull or Bull) purchased ZDS for $511 million. Groupe Bull, headquartered in Paris, France, was 75 percent owned by the State of France. Other shareholders included France Telecom (17 percent), NEC Corp. (4.4 percent), and International Business Machines Corp. (2.1 percent).

In January 1991, ZDS appointed Enrico Pesatori as CEO. Pesatori was given the responsibility of turning the company around and restoring its status. Under Pesatori's leadership, ZDS launched a new line of laptops and abandoned the requirement that dealers sell desktop models in order to carry laptops. Pesatori also focused research projects narrowly in order to provide more money for the most promising areas.

A new advertising campaign, with a budget 50 percent larger than previous campaigns, focused on business users. The company also continued expanding its distribution channels and reestablished a relationship with ComputerLand. Sales soon began to recover. According to an industry report, ZDS shipped an estimated 194,000 units in 1990 (down from 445,000 in 1988). In 1991, 228,000 units were shipped. Research and development investments were also increased; expenditures in 1991 were up 25 percent over 1990 and up another 20 percent in 1992.

One project was to redesign the company's portable and desktop PCs and monitors. The new design featured lines intended to produce a quality product image. The resulting Z-Series was released in June 1992. When initially introduced, the Z-Series notebooks were the lightest laptops available with color display technology and the first ones to offer built-in networking capability. The Z-Lite, a subnotebook, weighed in at only 3.9 pounds.

Although the Z-Series received industrial design awards, some reviewers complained. Gary McWilliams, writing for Business Week, suggested that ZDS had placed an emphasis on "style over function." McWilliams noted, "Critics say the design fails basic laptop ergonomics--for example, by using latches that require two hands to open."

Other good news for ZDS was also mixed with unfavorable criticism. The company's Z-NOTE was named among the 40 "Best Products of 1992" by PC Magazine. In another article, however, PC Magazine criticized ZDS for scoring lower than average in a reader survey measuring overall PC reliability and satisfaction with repair service and technical support.

ZDS also continued losing retail market share. The company's 3.4 percent in July 1991 fell to 1.0 percent in July 1992. ZDS officials claimed the sales decline was indicative of shifting consumer buying habits and a new preference for superstore outlets, a market in which the company had little presence. Total sales for 1992 were estimated at $900 million. European sales accounted for 55 percent of the total; 40 percent of the total sales were attributed to notebook models.

To help bolster U.S. sales, ZDS reorganized its field sales force in 1992. Company representatives began working directly with corporate accounts rather than exclusively with resellers. In another attempt to enhance distribution, one million copies of a 32-page "Z-Direct" catalog were mailed offering desktop, server, and notebook products via a toll-free phone number. The catalog also featured peripheral equipment from other manufacturers and software products produced by Microsoft Corp., Novell Inc., and Lotus Development Corp.

ZDS officials hoped that the direct sales effort would increase brand recognition and reach customers who were not served by other marketing channels. A company representative quoted in the Wall Street Journal stated that although ZDS did not expect a dramatic increase in sales to result from its direct mail efforts, the company hoped to "grow our business across the channels." Industry watchers questioned, however, whether the objective would be achieved. Some noted that other mail order firms, involved in steep price cutting, were experiencing dwindling margins. One critic expressed the opinion that the move would place ZDS in the position of competing with itself.

ZDS began 1993 with another change in leadership. Jacques Noels, former president of Nokia Consumer Electronics, replaced Pesatori as CEO. Noels expected to focus on bringing new products to the marketplace and faced the continuing challenge of improving the company's relationship with its dealers. In addition, Noels sought to recapture a U.S. government contract, termed Desktop IV, involving the sale of more than 300,000 PCs. ZDS had provided computers to the U.S. government under the Desktop I contract in effect from 1983 to 1986 and Desktop II from 1986 to 1989. Although the Desktop IV contract was initially awarded to a competitor, after judicial review, ZDS received the contract valued at approximately $724 million. By 1994, ZDS reported having installed a total of more than 700,000 PC's for the U.S. military and civilian agencies.

Products introduced in 1993 included the Z-NOTEPAD, a pen-capable version of Z-NOTE (a notebook PC) and Z-LITE 425L, an extension of the ZDS subnotebook line. The company also unveiled its Z-STAR 433VL series. The Z-STAR series, comprised of three models, was a 486-based notebook PC featuring a 33 MHz 486SLC microprocessor. One of the key advantages of the 486SLC microprocessor was its ability to conserve power. Although battery life for notebook computers varied during actual usage depending on attached peripherals and power management features, the monochrome Z-STAR model was able to provide up to three hours of computing ability using a removable nickel cadmium battery pack. The Z-STAR notebooks also featured a "J-Mouse" key. A "J-Mouse" used the "J" key to function as a built in mouse for controlling cursor movement when light, continued pressure was applied. When used in conjunction with other keys, the "J-Mouse" was able to provide all the functions of a three-button mouse.

ZDS also unveiled a new series of desktop PCs in 1993, the Z-SELECT 100 line. Z-SELECT 100 desktop PCs featured pre-installed network software for Novell NetWare, Banyan VINES, and Microsoft LAN Manager. With this feature, by taking the computer out of the box and making a simple menu selection, a user was able to operate on a network without figuring out how to load and configure the system. David O'Connor, executive vice president of ZDS Worldwide Product Group, stated in a company press release "Z-SELECT 100 is destined to become a market leader in cost-effective, high performance desktop computing." Prices for the network-ready Z-Select models began at $999 for a system that included a 25MHz Intel 486SX microprocessor, 4MB of RAM, and a 170MB hard drive. Another feature of the Z-SELECT 100 line was its power management capability. Users were able to define the time period of inactivity after which the system would enter a rest mode without losing data. Full operation was resumed automatically upon engaging the mouse or keyboard or in response to input from a modem, network, or other device. According to a company statement, in the rest mode, Z-SELECT 100 products used only 60 watts, less power than the average light bulb.

In another 1993 move, ZDS's parent company, Groupe Bull, acquired a 19.9 percent interest in Packard-Bell. Packard-Bell, headquartered in Chatsworth, California, held a 37 percent share of the discount PC market and was the fourth largest PC seller in the United States (behind Apple, IBM, and Compaq Computer). Only five percent of Packard-Bell's sales were for notebooks, compared with an industry average of almost 20 percent. Under the terms of the acquisition, ZDS agreed to provide private-label versions of its notebook and subnotebook PCs to Packard-Bell. The two companies also agreed to work together in the design and manufacture of future desktop PCs.

By the end of 1993, ZDS reported an overall increase in worldwide revenues of 30 percent. North America revenues were up 53 percent, and European revenues were up 22 percent. The number of units shipped was also up (89 percent in the U.S. and 62 percent worldwide). ZDS products were being delivered to the marketplace by seven major distributors (BSM Computers, Inc., Gates/FA, Ingram Micro, Merisel, Microage, ROBEC, and Tech Data), and the company had sales outlets in more than 30 countries.

For ZDS, 1994 opened with the announcement of a new PC product line: the Z-STOR Personal Server. Z-STOR was designed to make networking simple and affordable. The line was developed by the Desktop Workgroup Computing Initiative, a joint effort conducted by ZDS and Novell, Inc. Novell was a leading developer of network services designed to facilitate the sharing of information resources within local area networks, wide area networks, and inter-networked information systems. Z-STOR products were designed to connect desktop or notebook PCs, or remote office locations, with a central facility in order to access sharable information. The Z-STOR line, with some models priced under $1,000, provided "plug-and-play" convenience because all the necessary software and network connections were pre-installed and pre-configured. Z-STOR, called the most innovative networking solution, won the "Highlight '94" award at CeBIT, the world's largest computer exhibition (held in Hanover, Germany).

Other product lines launched in early 1994 included an extension of the Z-STATION desktop system, called Z-STATION 500, and a new addition to its notebook family, the Z-NOTEFLEX. Z-STATION 500 PCs featured improved video capability, better power management, and greater system performance (achieved via higher data transfer rates, a wider data path, and increased expandability). They were designed for use by interconnected workgroups, irrespective of their location. The Z-NOTEBOOK was a modular notebook computer featuring interchangeable video displays, user-removable hard disk drives (allowing users to secure sensitive data or upgrade to a higher storage capacity without the use of tools), and a floppy drive that could be removed to accommodate an optional second battery pack.

Battery life was an important issue in notebook computing technology. To provide its customers with longer run-times, ZDS entered into an agreement with AER Energy Resources Inc. in 1994 to develop a product using AER's patented, rechargeable zinc-air battery. Although battery life depended on many variables such as power requirements, computer configuration, and user work habits, the zinc-air battery had the ability to operate for an estimated 10 to 20 hours without recharging.

During the first quarter of 1994, ZDS reported significant revenue increases in both its North American and European markets. A comparison of the first quarters of 1993 and 1994 showed an increase of 132 percent in North America and an increase of 42 percent in Europe. Combined, the figures yielded a 73 percent increase in comparative first quarter revenues. According to a company statement, ZDS's annual sales revenues of about $1 billion accounted for approximately 40 percent of its parent company's total hardware revenues. ZDS revenues were split approximately evenly between North American and European markets and also between desktop and notebook products.