'It's been a learning experience for me', says Ben Rosen. 'The difference one person can make to a large organisation.' He's referring to Eckhard Pfeiffer, the chief executive of Compaq Computer - and the tribute is especially remarkable, coming from a man of Rosen's immense experience as a venture capitalist. Pfeiffer proved himself the 'right leader' for a company in deep trouble by overcoming deep corporate resistance to a sea-change in policy: and Rosen has no doubt about the key to this success.
'The more you go down the organisation', says Rosen, 'the more of a job it is to get people to change. You really have to communicate'. A top executive, Gian Carlo Bisone, echoes this view. 'Eckhard really shared with us. There were a lot of sceptics'. Today a management communication group of 150-200 people from all over Compaq's world meet monthly to hear Pfeiffer explain his strategy in 'very clear terms', to question him, and to carry the message back home. During Compaq's crisis, these meetings were weekly.
The gravity of that crisis in 1991 can't be exaggerated. Passing through general recession is testing enough. But having its own private recession in the midst of general gloom gave Compaq one of the sharpest falls from grace of any major company. Its first-ever quarterly loss in April-June 1991, however, has been followed by recovery and resurgence swifter and fuller than has ever been made in any industry. Cutting jobs and costs was 'necessary, but not sufficient' to achieve this, says Rosen. The real driving force behind an astounding turnaround was a complete remaking of strategy.
The previous strategy had achieved equally extraordinary success. Compaq had passed $2 billion of world-wide sales faster than any company in history by concentrating on the higher-priced end of the personal computer market. By end-1990 there were one or two unfavourable trends - 'particularly the increase in market share of companies selling PCs on price'. But any fears expressed in the boardroom were 'allayed by management'. Any business always has problems at any time - and at first nobody suspected that the rise of the cut-price clones heralded fundamental change.
The first Compaq officer to spot that sea-change was Rosen himself. His special position as non-executive chairman, which derives from the role of his venture capital firm, Sevin Rosen, in Compaq's genesis, played a crucial part in its rebirth. Unusually, the small board (eight members) includes only one executive: the CEO. The board's ability to take an independent view is far stronger than in the typical company, where executives in general, and the CEO in particular, dominate the board.
In what he saw as Compaq's looming crisis, Rosen felt free to circumvent the CEO (and principal founder), Rod Canion, by sponsoring an independent, two-man mission to discover how quickly and cheaply the company could produce a counter to the clones. The time and cost were both much lower than planned by Canion (who knew nothing about the mission). Though 'brilliant and extremely competent', the CEO was unwilling to change the strategy and systems that had served Compaq and himself so well. Canion had to leave - and four other corporate officers went too.
Before Canion's fall, Pfeiffer, a German by nationality, had been transferred from Europe, where his build-up of Compaq had contributed vitally to group growth. Born in 1941, Pfeiffer spent 20 years with Texas Instruments, ending in top jobs in corporate marketing and marketing strategy. He masterminded Compaq's international expansion after joining the original executive team in 1983. Remarkably, he is the only member of that 13-man group who is still with the company.
That fact is evidence in itself of the unprecedented volatility of this industry. The timing of Pfeiffer's move to Houston from Munich was fortuitous: the head of North American operations had retired young to breed horses. Pfeiffer (who has an American MBA) was thus on the spot, serving as chief operating officer, when the need arrived to replace Canion - ousted, at a now-famous, 14-hour board meeting, on 24 October 1991. The day before, the first-ever redundancies had been announced, and a meeting with Wall Street investment analysts was scheduled for two weeks later.
There wasn't 'much time to provide the answer' to Wall Street's legitimate questioning: in Pfeiffer's words, 'Would Compaq go down the tube or would he bring about change?' The pressure of external communication, though, enforced a key element in tackling any crisis: speed of decision. The two weeks was all it took for Pfeiffer and Co. to redesign Compaq from top to bottom. Their aim wasn't short-term salvation, however, but long-term success.
Like speed, opting for a growth strategy was crucial. Cut costs when sales are static or falling, and you may eliminate losses. Cut costs when sales are rising, though, and you get a double-whammy: in two years, sales per employee doubled to 1993's huge $716,000. That year's profit levels (narrowly a record at $462 million) were left far behind in the next nine months; net income doubled on a 52% sales increase. Pfeiffer was as surprised as anybody by the turnaround's speed and scale: but both flowed directly from that fortnight of compressed, total rethinking.
What he communicated to the analysts 'was exactly what was implemented all the way through today'. Crisis had come about because Compaq, blinded by vast success, was locked into its 'financial model'. That was based on lowering prices by somewhat less than rapidly falling unit costs and thus maintaining nice, fat gross margins: 45%. Its chosen criteria showed well in the six months to March 1991; so Compaq was 'not attentive enough to other signals' - notably that rising market share of rivals like Dell and the myriad smaller IBM clones.
Concentrating on the high end, Compaq insouciantly became the high-cost producer. The consequent crisis was fully shared by the dealers on whom it depended. They, too, badly needed communication and reassurance. At the nadir, 'the world around us', says Pfeiffer, 'was so confused, in doubt, lost'. The dealers, unable to sell the over-priced Compaq lines, asked, 'what do you want us to do?'. The only answer was to slash prices on 'high-cost products to keep our customers' while forcing through the foundation of Pfeiffer's new Compaq: an entry-level, low-margin line, designed to sell profitably at prices that matched the low-cost competitors, and acting as the base of a vastly extended range.
Pfeiffer told the analysts that, in addition to its traditional high-end products, Compaq 'would meet all other product requirements'. That positioning and the creation of 'low cost capability' would 'expand our reach into all sectors', and enable Compaq to be 'fiercely competitive'. That 'fiercely' gave the rethinkers some pause, but Pfeiffer used it all the same. True, it was the antithesis of Compaq's previous comfortable stance. But Pfeiffer's top team had exposed that stance's weakness by 'a very comprehensive analysis of what went wrong, putting aside all denials and all excuses'.
That's a third key to the perfect turnaround: (1) speed, (2) growth strategy (3) soul-searching, or 'interior communication', which, like all communication, depends on absolute honesty. Pfeiffer's group didn't look at the obvious symptoms of failure, but at 'the root causes' of weakness: and strength. The question 'What are our strengths?' came up with some encouraging answers. They included 'all that product and engineering capability, global manufacturing and presence, brand recognition and loyalty', plus a strong cultural base - a 'can-do attitude'.
Pfeiffer's task was to 'build on and leverage' these strengths. Here he faced an immediate, urgent and searching test in the new, low-priced line. Ben Rosen wanted the life-saver before the first quarter-end of 1992. That urgency left Pfeiffer with no option but to break with Compaq's past: an independent business unit (Project Ruby) was set up, well away from other activities on Compaq's glass and steel campus in Houston. 'One champion, completely tuned in' was given a free hand to pick his own team.
Richard Swingle was told to 'show the way to the lowest cost in the industry, whatever it takes'. As Pfeiffer says, the rush to end-March shipment 'almost precluded the obvious step of putting engineers to work' and thus getting imprisoned in the company's old mind-set. So 'we pursued OEM sourcing', buying-in all components. Only five or six weeks into the crash project, though, a fundamental conundrum appeared. Could the far cheaper PC still be called a Compaq?
The team, which didn't think so, adopted a brightly coloured design that looked neither like a Compaq nor anything else on the market: but Pfeiffer was deeply concerned about the customers. A fundamental difference between the old and new Compaq, according to Rosen, is another vital aspect of communication: 'we changed the whole customer satisfaction approach. Before, we never talked to customers.' When Pfeiffer initiated this dialogue, major buyers told him what they wanted: 'Do what you're doing, only competitively, and give us what we've been asking for'.
They didn't expect a clone from Compaq; and how could a non-Compaq Compaq fit the strategy of building on the corporate strengths? Shortly before Christmas, Pfeiffer was presented with a batch of component purchase orders to sign: but 'I just couldn't do it'. On the flight back home to Munich, intuition and analysis alike convinced Pfeiffer that the planned product 'wouldn't save our factories and our employment base'. At the risk of de-motivating the team, he 'switched gears'. The object was still a low-cost, low-price PC, but within a range covering all performance points all the way to the top, where Compaq had pioneered client-servers for networks.
Pfeiffer had to disappoint Rosen on time: the new PCs couldn't appear until 15 June. Before that, though, main dealer reaction, especially to a vague price of 'under $1000', was ecstatic. When the ProLinea finally appeared, at $900, it was Pfeiffer's turn for ecstacy. A flood of orders ushered in 'a new era' and in many ways a new Compaq. The cost base tumbled down as output shot up: the company was on its way to producing at five times the 1991 rate in the same square footage with the same number of people, at costs down amazingly from 31% of revenues to 13.5%.
Achievement of this order, visible to everybody, is powerful communication in and of itself. The scepticism mentioned by Gian Carlo Bisone could hardly survive this explosion of efficiency. Anyway, it was effectively lanced by the extension of Compaq's severance programme (needed initially to reduce labour costs) to volunteers. Those uncomfortable with the new era departed - and 'within six to eight weeks the number of sceptics fell pretty much to zero'. That echoes the famous Montgomery communication exercise on taking over the Eighth Army: 'If anyone thinks it [beating Rommel] can't be done, let him go at once.'
Those who stayed had the excitement of 'almost impossible' goals - and often exceeded them. One member of Project Ruby, Bill Ramsey, was told to drive down material costs by no less than 30%: and to prove that what became the ProLinea could be made in-house, rather than the Far East. That was 'very important'. Had the team not proved 'that we could build at a competitive price internally', the work would have gone off-shore, and the new Compaq might have been still-born. As it was, 'what we learnt ran across the company' - another exercise in practical communication.
So was Pfeiffer's choice of goal. Often vision and mission statements are inspiring, but insufficient - not precise enough to act as target and spur. That didn't apply to Pfeiffer's commitment to become world leader in personal computers in 1996. His ambition once sounded wildly optimistic for a company which, at its previous peak of profits, trailed IBM by three-to-one. The trebling of market share since then, though, took Compaq into the lead, at least temporarily, in 1994 - two years ahead of a schedule that now looks highly conservative.
Britain was first to meet the original turnaround target. The whole of Europe followed, then America. Whether or not this lead holds in 1995, beyond primacy lies the aim of building what Pfeiffer calls 'a significant leadership position' - much larger than the odd percentage point. A business, says Rosen, that 'was a portable company, then a PC company' has plainly moved into a new zone; it 'is now a computer company', capable of meeting any needs from the fast-growing home market to the corporate territory once occupied exclusively by mainframes - mostly from IBM.
Thse aren't opportunities that could have been taken with equal speed and success under a founding regime which, in only ten years, had become more conservative, 'less experimental'. But despite Pfeiffer's remarkable success, the crisis that might have laid Compaq low leaves a crucial question. Could it recur? Rosen's answer is an unequivocal Yes. He adds, however, that 'having been through it once, we're less likely to get complacent. We're much more on guard, much more willing to make changes'.
The dangers of getting smug, arrogant and complacent must increase when a company is 'riding high, as we are now'. But Rosen points to a difference which could well prove to be a saving grace. What happens if performance - in the market place, say - diverges from plan? In the past, dishonest interior communication held sway: 'If we saw differentials we didn't like, we would explain them away'. Two little words almost always betray this common and pernicious failure of inner strength: 'yes, but.'
For instance, Canion explained away ('yes, but') IBM's success in beating Compaq to the punch with a PC using Intel's 486 microprocessor: yes, IBM announced first, but when the chip came into full production, Compaq quickly took the market lead. 'Now', says Rosen, 'we try to avoid denials' - and to act swiftly to remove differentials and their root causes. IBM played a more general role in Compaq's old culture of denial: 'We denied that we had any other competitor'.
That's utterly changed since 1992, when Compaq removed the price umbrella that used to protect the clones. They have been left with 'little to sell on', which explains much of Compaq's sales surge. Stealing from the clones has helped make Compaq easily the 'fastest-growing computer company'. As Rosen wrily points out, expanding sales in 1993 by 75% from a $4 billion base was 'non-trivial'. The 'most formidable competitor prospectively', though, remains the old enemy: IBM.
The latter's 'costs are still high', however, 'which will limit what they can do'. Compaq's sales per employee are approaching four times those of IBM. The giant is struggling with a culture change that has already taken several years, compared to the nine months or so which remade Compaq. The IBM PC Company has been striving through technological and management upheavals to make a profit from an allegedly 'unmanageable' proliferation of models. Pfeiffer's range is just as broad, though with more commonality. 'It is manageable', he says unemotionally. 'But you need a whole new set of tools and processes'.
That's the 'can-do' culture at work. Provided that it keeps low-cost, low-price leadership, Compaq looks more vulnerable to industrial and economic downturn than any competitive threat - though, as Pfeiffer says, you can't exclude wrong products (as Compaq found recently with a line of laser printers that was rapidly axed). The most serious threat, though, lies within. 'You always run the risk of "we have it made - we're unbeatable"', says Pfeiffer.
That complacency was at the root of the crisis. To prevent a recurrence, the five pillars of the turnaround triumph will be required continuously: speed, a strategy of growth, focus, the decisive 'can-do culture' (even Pfeiffer hadn't thought Compaq could 'execute so well, with so broad and enthusiastic an acceptance') - and 'intense communication', in Pfeiffer's own phrase. Much of the excellence in execution and acceptance, along with the stunning speed and smashing success of the turnaround, can be attributed to that intensity. The ace communicator adds a powerful thought about communication: 'In hindsight, it's never enough.'
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