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IT STRATEGY – When the IT world moves too fast for Compaq, what

First let’s get one thing straight: shed no tears for Earl Mason, the (suddenly ex-) chief financial officer at Compaq who resigned in April along with his boss, CEO Eckhard Pfeiffer. Quite apart from the fact that he is moving into “the top executive position at an as-yet-undisclosed company outside the computer industry”, he should have known better: CFO, pah! He was a finance director! Here at Financial Director, we call a spade a spade, and an FD an FD. We may buy most of our IT from the US, and that means we are always being sold their ideas, but that doesn’t mean we have to use their job-titles! (Besides, we tried to interview Mason, but he was always too busy for us …) But there is more to this drama than the departure of a high-profile FD. Although Mason was obviously a vital member of the management team at Compaq, and it has been Compaq’s terrible financial performance over the past year which has created the need for blood on the carpet, it is Pfeiffer and his sudden departure which tells us something very interesting about the IT world. What it tells us is that he couldn’t stand the pace of change. For instance, while Dell has risen from nowhere to be a major challenger in the PC market and re-define it around a direct sales model, Compaq has been stuck with a dealer channel that is just too inflexible. When Compaq wanted to sell PCs directly, it worried that its dealers would take their business clients elsewhere. So all the directly-taken orders were fulfilled through these third parties, just as before. Compaq told Financial Director in the July/August issue last year that it was still committed to the dealer channel, despite being all too aware of the direct threat. “What we perhaps haven’t done is a very good job of marketing why people should buy through resellers,” said Ian Jackson, director of channel sales for Compaq UK. Well, at least he has been proved right. The trouble is that while Compaq was working out how to sell this message, Dell was practising what the IT industry was preaching about e-commerce (get closer to the customer, cut out big chunks of the supply chain and pass on the benefits to the buyer etc.) and getting it right. Dell has established a solid brand, a reputation for innovation and cheapness, and is rapidly building its profile as a corporate supplier, effectively moving into the area that Compaq dealers had thought was all theirs. Never mind that Compaq has built – and bought, with server company Tandem and, of course, the $9.6bn deal to acquire Digital – an impressive enterprise computing business. Even that solid strategy, designed by Pfeiffer to ensure that Compaq got your whole IT budget, faltered. Where competitors have innovated, Compaq merely dithered. This was well articulated at a seminar on the supply chain hosted recently by Andersen Consulting and Sun Microsystems. Whereas companies like Compaq that are locked into traditional distribution channels have a major headache changing their practices, the likes of Dell can move quickly to react to shifting market conditions. Andersen partner Andrew Berger cited the number of inventory turns that these companies were executing each year as an example. While Dell was able, in one year, to move from 28 turns to about 56, poor old Compaq was struggling to shift up from 12 to around 18 – not ideal in a fast-moving industry like IT. Dell and Cisco have simply proved that even low-margin, commodity sales are worthwhile with the direct (and usually Internet-enabled) model. Pfeiffer could not – or would not – move Compaq the same way, and had happily attacked selling high-volume, low margin products like modems, in favour of hi-tech, hard-to-install technology in the networking market. “The computer world is in a lot of turmoil,” said Benjamin Rosen, Compaq chairman and co-founder after his top men had departed. “The issues are very complex and we felt we really needed a change in the leadership in order to keep our position as the industry leader.” That’s going to be tough though. Hewlett Packard is also looking for a new CEO, and IT visionaries are clearly not ten-a-penny. But it is the financial problems at Compaq that will ring bells with FDs elsewhere. Dataquest research analyst Kimball Brown, quoted on ZD Net, claimed Compaq needed to ditch its policy of price protection (offering its precious dealers a guarantee on the price of PCs). Dell and the other direct sellers can shift prices daily, even hourly, to satisfy customers and match their costs accurately. You do not need to be worried about the effects of full-scale e-commerce to know that keeping your prices or reseller margins artificially high is a recipe for disaster. And if even Compaq has a problem with its strategy in terms of what it sells and how it sells it, what hope have client companies got when it comes to buying? If Eckhard Pfeiffer has mis-read trends in the way that IT will change businesses, how is a humble FD supposed to keep up? What that tells us – and what it should have told Pfeiffer and Mason – is that you cannot separate IT strategy and business strategy any more. It’s just no good changing what you sell, you have to keep changing how you sell it. It’s no good taking orders over the Internet if you’re then reliant on some local dealership delivering the product to your end user – you just miss out on all the benefits that other, more IT savvy companies are getting. As Andersen’s Berger points out, the companies best able to compete in an “eSynchronised” world – where the Internet has totally streamlined the supply chain – will soon start trading exclusively with each other, leaving all the laggards on their own. If you do not practice what you preach, you have no one to blame but yourself. At least Pfeiffer, the man who took Compaq to the heights from which it now risks falling, had the decency to realise that and fall on his sword.

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