A bloated Digital 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 the likes of Dell 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 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 company's US channel of old PCs and servers at cut-rate prices.
- The need to integrate products, personnel, support and services of its Tandem 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," said Roger Kay, an IDC analyst. He explained that inventory overloads have forced retailers to accept lower proportions of margin, especially on the lower-end PCs.
The merger will be voted on at a Digital shareholder meeting on June 11. Pfeiffer said he will provide customers with a cohesive strategy map July 1.