The man who saved Compaq from clones

Prospects are bright for the PC maker: sales up, profits up, market sha re up - all thanks to Eckhard Pfeiffer. Tim Jackson reports

When the definitive history of the computer industry is written, Eckhard Pfeiffer is certain to merit a paragraph or two. Mr Pfeiffer, a German-born engineer of 43, has been responsible for saving Compaq Computer, one of the world's great personal computer makers, from disaster. When the company produces its 1994 results on 25 January, Mr Pfeiffer is likely to be able to claim that Compaq is now the world's biggest and most profitable maker of PCs. Yet investors are rarely grateful for past achie vements. Instead, the stock market will be asking Mr Pfeiffer and his colleagues an urgent question: where do they intend to take Compaq next?

The story of how Mr Pfeiffer turned Compaq around is startling even by the roller-coaster standards of the computer industry. In the late 1980s, Compaq boasted of being the fastest-growing company in history. By 1991, it had stalled. With makers of "clone" machines eating into its core market, the firm was being forced to retreat into a smaller niche, selling high-performance machines at high prices to demanding corporate customers. The only bright spot in the firm's performance was in Europe, where it was making money and growing.

Late in 1991, Ben Rosen, the legendary New York venture capitalist who had helped the company to raise its early financing and later became its non-executive chairman, became concerned that the company was paying too much for components. He sent a pair of Compaq engineers to a trade fair with instructions to pick up the components to build a PC in the open market. Their report made damning reading: it showed that an incognito buyer could get a better deal on parts than Compaq - and could pu t together an almost identical machine more cheaply. In a dramatic boardroom coup, Mr Rosen ousted Rod Canion, the company's chief executive and co-founder, and replaced him with the man who had been responsible for the firm's European successes - Eckhar d Pfeiffer.

The new chief executive started to make changes immediately. He fired Compaq's ad agency, and ordered its first tentative steps into selling computers directly to consumers by mail. He also embarked on a cost-cutting campaign, which began to bear fruit within a year in the shape of higher margins and rising market share.

But that was not the end of the Pfeiffer revolution. He pushed hard for the company to expand into new markets and new sources of manufacturing. As a result, it now has a fast-growing sales operation in Japan - the world's second-biggest PC market, whichCompaq had neglected for years - and manufactures its machines in Brazil and China. He established a team to expand Compaq's market base from stand-alone PCs to more powerful servers and machines that could offer the performance of mid-range and mainframe computers at a fraction of the price.

More radically still, Mr Pfeiffer pushed his colleagues into looking for a second source for the microprocessors that are at the heart of the PC. After years of relying on Intel, the company that dominates the world market, Compaq last year started buying processors from its smaller rival, AMD. The decision produced an unusual public dispute, when Mr Pfeiffer launched a bitter attack on Intel's strategy, accusing the chipmaker of using its Intel Inside advertising campaign to undermine Compaq's own attempts to establish its brand as more reliable than the competition. When he spoke to the Independent, Mr Pfeiffer was unrepentant: "I don't regret what I said."

Today, with a new management team in place, Compaq is a formidable business. A visit to its Houston headquarters reveals a distinctive corporate culture that is neither so hierarchical as IBM nor so informal as Apple. In the corporate block, suits and ties are much in evidence, as is talk about market share and gross margins.

One of Compaq's most startling achievements is its inventory operation. In a single hi-tech warehouse inside the Houston complex, where incoming machines from the factory are automatically sorted and crated by bar-codes, the firm built up at the end of last year a stock of PCs worth almost $1bn. This provoked concern from its insurers - who insisted that the firm should stop expanding the warehouse once it reached 250,000 - and also among stock market analysts, who felt that Compaq's stocks of unsold machines had become dangerously high. The publication of the year-end results will put Compaq under pressure to justify its earlier claims that the inventories were necessary to fulfil an expected end-of-year sales rush.

But the core of Compaq's advantage is its well-oiled manufacturing machine. The company demands the best possible terms from suppliers - and since in many cases it accounts for most of their output, it gets what it wants. To make manufacturing easier, ithas also changed its approach to design. Compaq computers are now radically simpler: not only does the number of chips fall year after year, but also, on some models, the dozen screws holding the machine inside the case have been replaced with a simplersnap-together system.

The Houston plant is experimenting with a new manufacturing method imported from the Compaq plant at Erskine in Scotland. Instead of standing at a production line, performing the same job every 30 seconds, workers sit in workshops and build computers from scratch in teams of three or four. This approach was tried by Volvo in the car business in the 1970s, and proved costly; with smaller, more fiddly computer parts, it has proved a resounding success. Productivity and quality have risen, and more machines can be made in the same space.

These improvements have turned Compaq into the star of the PC industry. Daryl White, the company's youthful chief financial officer, expects to report 1994 sales up, market share up, profits up and gross margins on course. Although Compaq has now fully recovered from the dark days of 1991, many analysts expect its stock to rise further still. Michael Kwatinetz, of Paine Webber in New York, believes that earnings per share will continue to grow at 30 per cent a year until 2000.

But for Mr Pfeiffer, these achievements may not be enough. Other companies are certain to follow Compaq's lead in trimming costs and sharpening manufacturing skills, and this may leave the Houston firm vulnerable. To secure the company's long-term future, Mr Pfeiffer is pushing into new areas.

Not content with its co-operative projects with Microsoft and with Oracle, a leading database provider, Compaq is quietly looking at deals with other partners ranging from US telephone companies to software houses specalising in "edu-tainment". With a war chest of $700m, the firm is also ready to go shopping to acquire smaller companies that could add value to its core business.

But the most significant new departure for Compaq could be its aggressive attempts to push the PC as a home consumer product rather than something that really belongs in the office. Last autumn, it introduced a new, competitively priced home PC into the US market that includes not only a bundle of software but also fax, telephone, answering machine and television. The machine, called the Presario, is due in the UK in the spring.

The Presario may be only the beginning. Bob Stearns, who heads the company's internal think-tank, believes the future of household computing will see telephone-like appliances in the kitchen, computerised music centres in the sitting-room and standard desktop screens in the study - all linked by a server in the basement. If this comes to pass, Compaq will become one of the world's biggest makers of consumer products, and will be forced to do battle with Japanese giants like Sony and Matsushita. Winning that fight may tax the patience and determination even of Eckhard Pfeiffer.