Head on the block: Why Compaq needs to change direction

Compaq is in turmoil. It's had a disastrous quarter which culminated in the departure of CEO Eckhard Pfeiffer at the weekend. But the roots of these major ructions go back a long way, as Sarah Left explains

Wall Street was shaken last week when Compaq - one of the strongest brands in the industry - warned of alarmingly low earnings this quarter. A week later, Compaq's board has forced out the architect of the company's success, Eckhard Pfeiffer. All of this can be traced back to the company's failure to capitalise on two major acquisitions: Digital and Tandem. Analysts are now saying it's time for some soul-searching at Compaq. Pfeiffer has built a successful PC brand since he took over the company in 1991, but lately the company has lost its focus. It's losing the PC war and it hasn't gone anywhere else to make up for the lost business. When the profits warning hit, Compaq immediately blamed the North American PC market - a line of logic that doesn't hold up against the roaring success of fellow Texan outfit, Dell. Robin Bloor, CEO of Bloor Research, commented: "Compaq is taking a hammering in the PC market, and they've managed to keep a lid on it until now. The problem is that Compaq is stuck between new players like Dell, who are eating their PC business from the bottom, and older vendors like IBM, HP, and even Sun, who are supplying the mid-range market with great success." Although Compaq has shaken off its obsession with the channel, the company simply doesn't do direct sales as well as Dell, Bloor concluded. Beyond the PC market, Compaq has struggled to make the expensive acquisitions of Digital and Tandem work in its favour. A new ad campaign trumpets the fact that Compaq technology is behind 75 per cent of the world's cash machines - most of which it acquired in the Tandem deal. Digital brought a successful services division to the mix, but analysts say the company hasn't taken advantage of either. Martin Butler, CEO of analyst firm, Butler Group, explained: "I think if you ask most people what Compaq is, they'll say it supplies PCs and that it acquired Digital and Tandem. Somehow Digital and Tandem are out there on their own. But what Compaq could be is a supplier of high-end systems and services to the corporate world of ecommerce." Butler noted that under Pfeiffer, Compaq has been "appallingly bad at communicating its potential to the marketplace". Chairman Benjamin Rosen, he said, was ready to make the company Internet-ready. "Rosen has obviously been watching what's been going on with some alarm," said Butler. "The company has the mechanisms to re-orientate itself. It's just late." As for Pfeiffer, he just didn't reinvent the company fast enough. "Somebody has to lose their head after a quarter like that," agreed Bloor, who feels the next quarter won't be much better. What's clear, in light of strong quarters for competitors Dell and Sun, is that Compaq's struggles can't be fobbed off on a sluggish market or the millennium bug. The company needs a change of direction, and that's something Rosen seems ready to provide.