Pfeiffer's fall may be due to his own success

In any other industry, a chief executive who increased sales tenfold in less than a decade might reasonably expect to win admiration…

In any other industry, a chief executive who increased sales tenfold in less than a decade might reasonably expect to win admiration, if not plaudits.

But for Mr Eckhard Pfeiffer, former Compaq chief executive who was forced to resign over the weekend, along with Mr Earl Mason, chief financial officer, the reality is somewhat different.

Compaq's revenues have grown from $3.3 billion (€3.1 billion) in 1991 when Mr Pfeiffer took over as chief executive, to $31 billion last year as the Houston-based group rode the information technology spending wave. In the process Compaq overtook International Business Machines to become the world's largest personal computer manufacturer.

More recently, under Mr Pfeiffer's close direction, Compaq aimed to become a broad global computer group following the acquisitions of Tandem Computers and Digital Equipment - both within the past 18 months.


Ultimately, it was Wall Street's loss of confidence in Compaq's senior management after the company issued a shock profits warning 10 days ago that led to the boardroom coup. But the seeds of Mr Pfeiffer's downfall may actually have been sown in his own success.

Mr Pfeiffer knows the PC sales business very well. Indeed, when he was picked by Mr Benjamin Rosen, Compaq chairman, to become chief executive, the company was floundering in the US, hit by competition from manufacturers of low-cost "clone" PCs. Yet in Europe, where Mr Pfeiffer was in charge, Compaq was thriving.

Within a year of taking the top job, Mr Pfeiffer had put his experiences in Europe to good use. In June 1992 he made the crucial decision to go after market share by slashing prices on existing systems and introducing a new line of low-cost PCs.

The strategy paid off. Although the move marked the beginning of an era of PC price wars, Compaq gained market share and cut costs, enabling it to outflank rivals such as IBM, Digital and Hewlett-Packard.

However, Compaq soon faced fierce new competition from Dell Computer which pioneered a "direct sales" approach in the PC market, selling computers via telephone sales agents and later via the Internet. Despite the cost advantages of direct sales, Mr Pfeiffer was reluctant to abandon the thousands of third-party resellers on whom Compaq had always relied.

Recently, Compaq adopted a modified direct-sales model in which it generated orders for PCs via its website, but fed those orders to resellers for fulfilment. The plan was "too little, too late", critics charged.

Compaq's indirect sales model has made it difficult for the company to compete with Dell, and other direct sellers, on costs.

Another drawback, which emerged a year ago, was that without a direct link to endusers, Compaq could not accurately forecast demand. This was highlighted early last year when Compaq shocked the industry by disclosing that it had a huge inventory overhang, which took six months to dissipate.

Mr Rosen, while praising Mr Pfeiffer's achievements over the past seven years, said the company's performance had suffered as a result of slow decision-making. The biggest decision facing Mr Pfeiffer's successor may be how to unravel the company's complex distribution systems so that it can compete more adroitly with direct PC sellers.

But Compaq is also in catch-up mode in the e-commerce arena. Perhaps distracted by the complex task of integrating Digital's operations, it has been slow to respond to a fundamental shift away from PC-Server, or distributed "client server" networks, towards the "Internet computing" mode in which desktop computers link to a central database.

Compaq has failed to position itself clearly as a supplier of e-commerce systems, complained Mr Steve Milunovich of Merrill Lynch during a Compaq conference call with analysts earlier this week. Responding, Mr Rosen said that Compaq had a unique breadth of technologies and products for e-commerce, but had failed to take full advantage of these assets.

The roots of Compaq's recent problems may lie in its ambitious expansion, through acquisitions. Despite repeated reassurances from both Mr Pfeiffer and Mr Rosen, there is a widespread industry perception that the integration of Digital, in particular, is proving much more complex than Compaq envisaged.

Ironically, having "enthusiastically and unanimously endorsed" Mr Pfeiffer's expansion strategy, Compaq's board of directors determined over the weekend that "new leadership" was now needed to manage the increasingly complex business created by these acquisitions. For Mr Pfeiffer, it must seem that sometimes you just cannot win.