Compaq’s got other worries besides DEC

A bloated Digital Equipment isn't the only thing weighing down Compaq. While the PC maker struggles to recast itself as an enterprise player and ward off accusations that it is losing touch with customers, down on the desktop, an inventory backlog is choking the life out of new PC profits. For users, the immediate concern is whether Compaq can successfully tackle the many challenges it faces, including diversifying its business into new arenas and redefining its core business.

A bloated Digital Equipment isn’t the only thing weighing down Compaq.

While the PC maker struggles to recast itself as an enterprise player and ward off accusations that it is losing touch with customers, down on the desktop, an inventory backlog is choking the life out of new PC profits.

Compaq is racing to refine its manufacturing and distribution processes to better compete with Dell Computer and prevent a repeat performance of the first quarter 1998 disaster that left it nearly profitless.

For users, the immediate concern is whether Compaq can successfully tackle the many challenges it faces, including diversifying its business into new arenas and redefining its core business.

There is no immediate light at the end of the tunnel, however. Analysts predict it could take the Houston-based company months to conquer the myriad challenges it faces, including the following:

-- Knee-deep inventory problems that have already resulted in a two-week factory shutdown and daily reports to chairman Eckhard Pfeiffer. It could take Compaq until year’s end to rid the channel of old PCs and servers at cut-rate prices.

-- The need to integrate products, personnel, support and services of its Tandem Computers acquisition and its pending Digital acquisition.

-- Finding the correct manufacturing and distribution model for what will be a low- to high-end range of products, from NetPCs to fault-tolerant servers.

But one of its biggest challenges lies in keeping in touch with an increasingly diverse set of customers.

“They have been bursting at the seams [with inventory]. What they haven’t been doing is taking care of their channel partners, suppliers and customers in some cases,” says Roger Kay, an analyst at IDC. He says inventory overloads have forced retailers to accept lower proportions of margin, especially on the lower-end PCs.

At Antelope Valley Healthcare in Lancaster, California, Chief Information Officer Ash Shehata says he recently switched from Compaq servers in favor of ones from Dell.

“We just felt that we were getting better customer service from Dell,” Shehata says. He says he likes having a direct relationship with Dell vsersus having a reseller in the middle because it brings more accountability.

Others say that although Compaq is able to get machines through the door in a timely fashion, the company’s configuration model is too rigid.

“They try to force Windows NT on us,” says Jim Snively, systems consultant at Sun Co. in Philadelphia. He said the company has to reload Windows 95 onto machines because Compaq preinstalls only Windows NT on its Pentium II-based machines.

Compaq two weeks ago announced price cuts of 20% on its servers and has been consistently cutting prices on its corporate desktops, as well, including offering free monitors as a promotion to sell more PCs.

Compaq has cut prices across its PCs and servers five times in the past several months.

“Some group of planners miscalculated demand and really pulled their guns out too early,” says Amir Ahari, an analyst at IDC. He says a result of the glut could be stalls in new product flow. He notes that Compaq failed to produce a server based on the new 350- and 400MHz chips with 100MHz buses.

Ahari and other observers say Compaq must finish its acquisition of Maynard, Massachusetts-based Digital in a timely fashion.

The merger will be voted on at a Digital shareholder meeting June 11. Pfeiffer says he will provide customers with a cohesive strategy map July 1.

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