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A tale of two business models

A tale of two business models

A post mortem of Eckhard Pfeiffer's surprise resignation last week as CEO of Compaq might reveal a company torn between two business models.

Though Compaq released few details concerning the resignation of Pfeiffer and Compaq's chief financial officer Earl Mason, analysts and observers say the company is caught in the middle of divergent strategies, one represented by computer services professional IBM and the other by fleet-footed direct PC seller Dell Computer.

"Compaq has spent the last year trying to be all things to all people," said Stephen Minton, senior analyst with IDC. "They had their fingers in every pie."

Following a bold plan laid out by Pfeiffer, the PC giant in recent years has fashioned itself as an integrated computer vendor that one day hopes to rival IBM. Big Blue, over the past few years, has shed its former reliance on hardware sales and rapidly grown its systems integration and computer services business - in short using its hardware, software and expertise to build integrated "solutions" for corporate customers.

With the computer services market growing at an annual clip of 14 per cent by some estimates, Compaq had hoped to grab a slice, using as leverage its bold acquisitions of Digital Equipment and Tandem Computers. Beyond technology and products, both companies have legions of field engineers that Pfeiffer thought would form the backbone of a global computer services business. As Compaq embarked on its acquisition spree, Pfeiffer predicted the company would grow its revenues to $US50 billion by 2000 on the strength of its new-found services push. The company's revenues last year totalled $US31.2 billion.

"We have transformed Compaq from a PC company to a global IT leader," Pfeiffer said confidently at a recent press event.

But while Pfeiffer had his sights set on IBM, Austin, Texas-based Dell - happy to remain a "PC company" - ate into Compaq's core PC business. Shunning the services strategy, Dell focused on being the best at selling PCs directly to customers over the telephone and the Internet. The strategy has paid off: though Dell was number three behind Compaq's top spot in worldwide PC market share last year, the company's share jumped 56 per cent year-on-year, eclipsing Compaq's 17 per cent share growth.

Compaq has tried its own built-to-order sales operation, but its historic ties with resellers got in the way. Loathe to upset the very partners that helped it become the world's largest PC vendor, the company's direct scheme was too little too late and was half-hearted.

Though Pfeiffer continually talked up Compaq's services, the company's hardware sales still make up the largest chunk of its revenues. Analysts said the company will have to choose a path that doesn't rely on the slim margins of PC hardware.

"They can't turn back the clock: they can't go back to being just a PC company," said IDC's Minton. "The PC market can't support the kind of earnings that Compaq is shooting for."


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