Compaq Computer Case





I. Strategic Profile and Case Analysis Purpose


During the 1980's Compaq Computer Company was a leader in the computer hardware industry. Its name became synonymous with cutting edge, high quality, products that sold for a premium. This premium price for its products allowed Compaq to outspend most of its competitors on research and development (R&D).

As technology and the marketplace changed, Compaq lost its ability to charge a premium price for its products. Consumers, who were quickly becoming computer literate, were realizing that paying Compaq's premium prices was no longer necessary. Hardware and software advances where taking away some of the importance of the expensive features that Compaq's products offered. In addition, a declining economic environment was making even the larger of Compaq's end-users looking for ways to cut their growing computer budgets. Facing its third major crisis in a decade, Compaq was looking like it would become another Texas corporate statistic if it did not do something to reverse the downward trend of its sales.

The company was also showing signs of organizational problems that may have been overlooked previously because of its remarkable sales growth. The organization's culture was suffering from a lack of communication between divisions as well as a growing riff between even the company's founders. The company was in two camps struggling for control of the its destiny.

II. Situation Analysis

A. General Environmental Analysis (socially, economically, globally, demographic, legal...)

The United States is a leader in the computer hardware industry. While the Japanese are a large producers of electronic components, U.S. companies are still among the leaders in high technology. Sony Corporation is fast catching, especially in the area of miniaturizing technology. The Walkman is one example of the Sony's ability to make a bulky product smaller.

One potentially big problem for U.S. companies will be their ability to compete with foreign companies to sell high technology products abroad. Sales to foreign companies and governments must be approved by the Federal Government. The latest technological advances are often limited to sales within the U.S. for national security reasons.

The computer hardware industry is benefiting from great technological strides. These advancements have resulted in bringing new products to market a fast pace and bringing the costs of producing components down as well. As the computer hardware industry matures companies are finding new uses for products, especially desk top computers. New software is being developed and marketed aiding companies in becoming more effective and cost efficient.

B. Industry Analysis (buyers, suppliers, substitutes, potential entrants, and present competition)

The computer hardware industry is growing in leaps and bounds. IBM one of the best funded companies in the industry is having problems meeting demand. This has helped Compaq's growth. While there are relatively no substitute products for computers the threat of entry by new firms is growing. There are limited barriers to entry or exit due to the ease of assembling computers (can be done in one's own barn).

Buyers of PC's are benefiting not only from a growing number of manufacturers, but also rapidly developing technology. A whole new group of buyers (for personal use) are emerging due to severe price decreases in the computer industry. These new buyers are becoming a stronger force influencing computer firm's pricing, product, and user support strategies.

Suppliers of computer components are losing their pricing power as new companies come on line, since components are easily interchanged. One notable exception to this in the Intel Corp. which has successfully dominated the processor market. Like Compaq, Intel spends a great deal of their resources on the development of superior technology. They have been able to convince the consumer base that their product is vastly superior to other processors on the market.

C. Competitive Environmental Analysis (evaluate each present competitor)


New companies are constantly entering the market place, since personal computers can be assembled in an entrepreneur's garage. Although the major players, Compaq and IBM have a good foot hold smaller companies are starting up. Larger companies wanting a piece of the pie are also entering the arena, e.g. AT&T.

New smaller businesses (e.g. Dell, AST) are entering the market with cheaper consumer oriented products. These firms are using alternative measures of operation (e.g. selling direct, custom assembly).

D. Internal Analysis (Resources & Capabilities - Internal environment)

Compaq's internal culture has shifted toward greater complacency, with top managers having taken a quasi "early retirement" reducing their workday to just 6 hours. With a history of technological capabilities Compaq has been repeatedly successful in launching the next generation of products to market. In this way Compaq has demonstrated a leading edge in quality, affording them the ability to charge a price premium.

However, present competitive conditions show that their quality advantage has been seriously eroded, dramatically impacting sales to end-users. Retailers are left holding the bag, with a high inventory of overpriced merchandise.

III. SWOT Analysis


Strengths:

Compaq is a research and development (R&D) driven organization that has out performed its rivals including the much larger IBM by being a leader in creating state of the art computers for its customers.

Weaknesses:

Currently, Compaq is going through a dynamic period in which there is not a great deal agreement as to the direction the organization should pursue. In addition, there is a breakdown in communications between many of the company's divisions.

Opportunities:

Despite its current internal problems, Compaq has a great deal to gain if it can quickly fix its problems and seize the changes that are going on in the marketplace. Compaq is seen as a high quality producer of desk top and portable computers. While IBM has also stood for quality, it has never been able to take advantage of its resources and produce products in sufficient numbers to meet customer demand. This has left its customers disappointed and forced to depend on other sources. Compaq has also successfully been able to develop products that have surpassed IBM's. Demand is still greater than supply, however this gap is quickly being eroded.

In addition Compaq has the following opportunities which it must recognize as such:

* A rapidly changing marketplace.

As the cost of making portable and desktop computers decreases, new markets for these products will open including smaller businesses and consumers.

Threats:

Because the industry has low entry and exit barriers new challengers are entering the market on a continual basis. These potential competitors include entrepreneurs as well as large well financed companies like AT&T and Oviletti, who are eroding the excess demand in the market. Compaq must focus on a strategy that will successfully manage the changing external industry environment.

In addition Compaq faces the following threats:

* A rapidly changing environment where technology has a short half-life

Improvements in technology by suppliers as well as rivals makes it necessary to continuously create new and better products that will either meet or exceed that of the competitions.

* Increased consumer education

As consumers become more educated about computer products, they will better understand what are the cost benefits between competitors.

IV. Strategy Formulation

A. Strategic Alternatives

1. Continue on R&D as they have in the past: In this case Compaq continues to focus on being industry leaders in quality affording them the luxury of a price premium. 0

2. Increase focus to server portion of the market: In this case Compaq continues to emphasize products for corporate users, instead of desktop and portable products.

3. Change customer focus to the wants and needs of individual consumers, in addition to corporate users: In this case Compaq responds to changes in computer demand from high end rich featured products to low cost products with good performance.

B. Alternative Evaluation

1. One of Compaq's core competencies is its ability to develop and bring to market leading edge technology faster than its competitors. The recent downturn in the market should be temporary as competitors catch-up with Compaq's earlier advances. Compaq should invest its energies in developing the next generation of hardware that will give its customers and edge over their competition. A new product line of sophisticated hardware products will make Compaq number again, as companies realize 'that you get what you pay for.'

2. Compaq should continue to focus on their corporate customers, the most lucrative segment of the market. Networking technology is beginning to realize companies many benefits, e.g., electronic mail. As companies network desktop computers, the demand for high quality leading edge servers will skyrocket. Compaq is in position to take advantage of their strong technology based core competencies to develop hardware that will help companies realize the economies their seek.

3. Compaq must recognize that the market place has evolved from corporate users of hardware products to a mix of corporate and consumers. As hardware and software costs decrease the consumer portion of the market will increase their demand. Lower cost products will determine which makers capture the majority of the market. This strategy will aid Compaq in maintaining their position as an industry leader.

In order to implement this strategy, Compaq will have to either strengthening its network of distributors or looking for different ways to bring their products to market. This will help ensure that they are able to reach new consumers. In addition, Compaq will have to provide technical support to this new group of end-users, as local vendors will not be able to support and service such a large segment without help from Compaq.

C. Alternative Choice

Alternative three is the best strategy for Compaq to pursue for several reasons. First, Compaq has a strong brand recognition of being an industry leader in producing high quality products. Many consumers currently use Compaq's products at work, so they feel comfortable using them. Second, Compaq has built its business by being able to meet the excess demand that other computer companies could not. IBM, for example, has never been able to meet demand, this has frustrated many of its dealers. With new entrants it is vital to long-term viability of Compaq that it competes in this growing segment of the market, as the corporate segment will quickly reach saturation. Lastly, unlike the other two alternatives, alternative three requires that Compaq respond to changes in the industry environment. Alternatives one and two wrongly assume that Compaq can continue to do business as usual.

V. Strategic Alternative Implementation

A. Action Items

* Shift resources from research and development to technical support.

* Evaluate (ask employees to make suggestions) processes for ways to decrease costs.

* Increase production capacity.

* Continually survey changing consumer tastes.

* Divide sales and marketing to target corporate and consumer customers.

B. Action Plan

* Resources from the R&D department should be immediately decreased to better match the budgets of its competitors.

* The Sales and Marketing department should be broken up into two product lines, consumer and corporate.

* The Marketing departments should research consumer needs and develop strategies.

* The sales department should call on current distributors and develop relationships with new ones.

* The production department needs to determine how to meet the capacity requirements that sales and marketing is estimating. The department also needs to be able to quickly retool in order to meet the changes of a dynamic environment.

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