Management: How to blast off without burning out

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The Independent Online
It's a sadly familiar story. The growth rocket soars into the stratosphere, to universal applause. Then, suddenly, the engine starts to sputter, and the phenomenon falls to earth - and, very possibly, burns out as it re-enters the atmosphere.

By all the odds, that should have happened to Compaq Computer. But in 1993 the Texan personal computer company had its best year - indeed, one of the best for any big corporation, ever.

Sales rose by three-quarters to dollars 7.2bn, net income more than doubled to a new record, and earnings per share mounted by 112 per cent. This was not a recovery year. Compaq's annus horribilis came in 1991, with its first quarterly loss and a 71 per cent slump in the net profit. The next year saw a 58 per cent bounce-back. The sheer speed of that nine-month turnaround helps explain why Compaq is back in the stratosphere.

In growth-star burnouts, the problems that caused decline are grossly compounded by delay. A management that has waxed fat on the rise takes too long to realise that its world has changed, and that its internal model must change - or the corporation will crack.

In that awful year, Compaq drastically altered its model, completely changed its product strategy and ruthlessly expelled its founding chief executive, Rod Canion. His loyalists inevitably left too.

Action must not only be swift, but decisive. The old Compaq paradigm was that of engineering excellence, which earned premium prices from top-of-the-market computers sold exclusively through dealers. That strategy was doubly destroyed: plummeting prices of cloned PCs left Compaq with an overpriced product line that, even worse, missed out on vital segments of the market - above all the smaller business and the private user.

The fact that Compaq's machines were 'too expensive, not affordable' had been noted internally, says Andreas Barth, the European head. This feedback from customers could not be drowned out. But most top executives failed to realise that only an extensive restructuring could save the day.

One man did: the nonexecutive chairman, Ben Rosen. He acted as catalyst, going behind Mr Canion's back to discover that a new, low-cost line could be produced much more quickly and more readily than the chief executive had proposed.

In so doing, Mr Rosen demonstrated far more than deep understanding of high-tech industry trends. First, it is pointless listening to customers if you fail to act on what you hear. Second, no company can afford sacred cows - or sacred people. Third, every company needs a long-stop: somebody, or a group of people, with enough power to enforce decisive action if top management baulks at necessity. In turn, the long-stop needs new executives who can step into the breach.

Eckhard Pfeiffer was Mr Rosen's answer. German-born, but with wide experience of US companies and business, Mr Pfeiffer had engineered Compaq's success in Europe. Here, its market share was larger, second only to IBM - the target against which Compaq had always aimed its strategy. But IBM was no longer the right model.

In accomplishing what Mr Barth calls 'a paradigm shift', Mr Pfeiffer's job was, first, to put together a survival strategy; second, to ram it through; third, to go beyond survival to create a new growth platform.

The old mentality to be best - never mind the cost - went out of the window. An 'independent business unit' was given full powers and freedom, but also a rock-hard cost objective, to produce the new low-end line.

The concurrent attack on costs all over Compaq brought the expense ratio down from 31 per cent of revenue to today's 13.5 per cent - another demonstration of the needless spending that can hide behind fat, 45 per cent margins.

Under the relentless pressure of price competition - in which the new Compaq is an aggressive leader - margins have halved. But another vital number has soared: outlets, only 3,000 worldwide under Mr Canion, have quintupled. That goes far towards explaining a surge in market share, from 3.8 per cent to 10 per cent. At this level, Compaq is breathing down the necks of IBM and Apple.

With help from McKinsey, the management consultants, Mr Pfeiffer has moved beyond survival strategy to rethinking the corporate vision, business processes and aims. There is a prime objective: to become world market leader in 1996.

That has been thrown down as a public challenge to competitors and to Compaq's own management and workforce. Even R&D has been caught up in the revolution, but its share of revenues has fallen as it has been subjected to the same productivity improvement rules imposed on the rest of the company.

Today, every decision is supposed to be determined by the new strategic imperatives - leadership in areas that include customer satisfaction, total delivered cost, technology and distribution.

Gearing managers' performance, and hence their pay, to these objectives has plainly helped to achieve what has been an impressive momentum. Will it be sustained or does this most volatile of markets hold a second nasty surprise in store?

Not if Compaq remembers the lessons of the 'mini-crisis' (Mr Barth's description), which could easily have become maxi-catastrophe, that no business dare leave well enough alone.

Apparently, benign neglect leads to malign under-achievement. On the other hand, as Mr Barth says, and the comeback shows, 'you can achieve anything if you know what you are doing'.

The author was the founding editor of Management Today and is a freelance writer on management issues.