Compaq's Ride From Casualty To Conqueror of the PC Market

FOR two years, Frances White wanted to join booming Compaq Computer Corporation in Houston. One attraction was co-founder and then-president Rod Canion. Compaq employees ''worshipped'' him, she says, because he promised eternal job security.

Mrs. White got her wish in 1988 when the company hired her to work on advertising campaigns for Compaq's laptop and notebook computer models.

But three years later, Compaq revenue dropped when it failed to adjust to shifting consumer tastes. As a result, the company laid off 1,700 employees, including White. Mr. Canion was fired the next day.

Had it only downsized as a cost-cutting move, executives say, Compaq would have achieved nothing. Instead, the layoffs freed up resources the computermaker was then able to apply to a new strategy, which turned its corporate philosophy inside out and produced spectacular results.

Compaq has transformed itself from near-casualty condition to undisputed conqueror of the personal-computer market. It vaulted from being the third-largest seller of personal computers in 1993 to the world leader in 1994. And the company did it in only half the time it allotted to reach that once far-fetched goal.

''It's been incredibly successful,'' says Robert Corpuz in San Francisco, who tracks the personal-computer industry for Dataquest Inc., a high-tech market-research firm.

One result: Worldwide employment has rebounded from 11,420 before the layoffs to more than 14,000 today. Yet, revenue per employee, which was declining before Compaq restructured, has experienced ''record-breaking growth,'' Mr. Corpuz notes.

Phenomenal growth was the hallmark of Compaq's early years. Founded in 1982, the company amassed a decade of ''fastest ever'' business accolades by focusing on product quality. Build the best, the company believed, and the customer would buy it.

Compaq wasted no money on luxury and perks for its employees. Then as now, for instance, executives fly coach class. But when it came to product quality, it spared no expense: Glossy brochures, expensive packaging, and computers with right-angle corners that can only be made with specialized, multi-million-dollar tools.

Compaq even had a whole department of engineers working to perfect the internal power supplies, although it could have purchased them from third-party vendors for a lot less.

Missing the market

Customers flocked to Compaq until 1991, when sales declined suddenly. Top management went into denial, blaming the United States recession. ''That was untrue,'' admits Gian Carlo Bisone, vice president of North America marketing. ''Companies like Dell were growing like crazy.''

But Compaq, long intent on winning the business market, was missing the exploding consumer market. Consumers had begun to accept low-cost clones, such as those made by Dell Computer Corporation in Austin, Texas, as reliable and, therefore, a better value.

''Compaq was the Mercedes-Benz,'' Mr. Bisone says. ''Sure it can run 300,000 miles, but how many people can afford it?''

Why hadn't Compaq foreseen this development? ''We only saw our own success,'' Chief Financial Officer Daryl White says. Mr. Bisone adds: ''Growth is the worst deodorant. It hides a lot of things.''

True, the company was not losing money -- yet. But top management was scared. It wanted to act before sales slipped further. In mid-1991, Mr. White calculated the necessary employment cuts and presented the figures to Canion.

The layoffs that October fell well short of Mr. White's target. ''I'm not aware of any company that does it right the first time. It's too painful,'' Mr. White says, even though it would have been better for Compaq to chop the payroll all at once. Instead, the company had to cut another 1,000 jobs a year later.

When employees got word of coming layoffs two months early, Mrs. White knew what to expect. ''I was the low man on the totem pole'' in her small department, she says. ''I was the most expendable.''

Mrs. White was called into her director's office one Friday morning. The director was ''very compassionate'' and handled her termination ''tastefully,'' she says.

Were the layoffs necessary?

''Yes. They had no choice. They would have gone belly up,'' says David Wu, an analyst at S.G. Warburg, a brokerage house in New York. ''Compaq had uncompetitive products and uncompetitive prices. They cut the prices. They couldn't afford the people.''

Layoffs and other restructuring costs pushed 1991's otherwise profitable third-quarter into the red -- Compaq's first and only quarterly loss.

Meanwhile, the company adopted a new strategy that called for manufacturing a quality product that was affordable to a broad range of consumers. Compaq would become the industry's price leader.

Layoffs alone, Mr. White says, couldn't have achieved the required 20 percent reduction in costs. Personnel-related expenses, which were only 15 percent of a computer's retail price before the layoffs, fell just 3 points, to 12 percent now.

Materials, in contrast, accounted for 64 percent of the retail price. Compaq aimed to slash those costs by 30 percent and wound up reducing costs by 40 percent.

Austerity pervaded Compaq headquarters. Trash collection declined from daily to twice a week. Seasonal flower plantings and landscape maintenance came to a halt. The grass is being mowed again, but the agony of layoffs ''is very fresh in our memories,'' Mr. White says. ''We're still very much in a transformation as a corporation,'' with task forces scrutinizing anew Compaq's internal business processes.

Management's new dictate is to ''re-invent ourselves before we're forced to,'' Mr. White says. If that implies constantly adding and eliminating positions, it's preferable to massive layoffs again, he adds.

Compaq says it does expect further surprises from the market. Even as it announced last month that net income for 1994 was almost double that of 1993, the company warned of flat earnings ahead as it brings its prices down further.

'Best business model'

Corpuz says the elements of Compaq's manufacturing, marketing, distribution, and strategic alliances add up to the best business model in the industry. ''They've been hitting on all cylinders,'' he says.

As for Mrs. White, leaving Compaq proved to be for the best. She says her 55-hour weeks there probably contributed to her divorce. That's one reason why she rejected a job offer from Dell right after her layoff. ''I knew it would be just another slave pit,'' she says.

Now remarried, she is self-employed, selling graphic-design services. Compaq has been a customer. She earns $28,000, compared with $40,000 at Compaq, but she works only 30 hours a week.

''I have control over my own destiny,'' she says. ''There's no job security in being with a large corporation.''