Low-Cost Strategy Makes Compaq the Leader of the Pack

LAST September, Compaq Computer Corporation challenged itself to dislodge International Business Machines Corporation as the world's No. 1 seller of personal computers (PCs) 1by 1996. By keeping prices low, Compaq has achieved that goal ahead of schedule.

During the first half of 1994, Compaq captured 10.4 percent of the global market to IBM's 8.5 percent, according to market research by International Data Corporation of Framingham, Mass.

``It was quite a leap. They had to grow 50 percent [in volume of shipments] to get that leadership,'' says Philippe de Marcillac, director of worldwide PCs at Dataquest Inc., a market research firm in San Jose, Calif. During the same period, IBM sales in the US stalled, held back by high prices.

Is Compaq becoming complacent? A Texas-style ``not hardly'' is the impression given to a visitor to the computermaker's cluster of ultramodern offices and assembly plants set amid a 1,000-acre forest northwest of Houston. ``It's one thing to get [in the lead]. It's another thing to hold on to it,'' says David Schempf, Compaq vice president/treasurer.

Competition will remain stiff this year. Industrywide sales are projected to reach 9 million machines. Compaq wants a bigger chunk of those sales. ``We've got a lot of work to do,'' Mr. Schempf says. For three years at Compaq, ``work'' has meant finding ways to keep prices low. Mr. de Marcillac says Compaq started out designing machines that performed better and cost more than IBM's. That strategy worked until 1991, when cut-price competitors interrupted nearly a decade of record growth and handed Compaq its first quarterly loss. ``We were missing the entry-level customers,'' spokeswoman Debra Globe says.

After a management shakeup and employee layoffs, Compaq adopted a strategy of emphasizing price competitiveness and consumer needs over a range of markets rather than serving technological elitists. Since then, sales per employee have more than doubled. Schempf sounds almost apologetic about Compaq's high-gross profit margins earlier this year and promises it will reduce them to keep the heat on competitors.

Some analysts have expressed concern about an inventory buildup. But Compaq's fat margins indicate that the company has ample room to drop prices to move newer models and still be profitable, other analysts say.

COMPAQ has learned that selling PCs is fundamentally a low-margin, high-volume business, de Marcillac says. The newest models are priced to increase market share during the busiest buying season of the year. In September, the company launched a $20 million Christmas television advertising campaign promoting the latest models in the hot-selling Presario line. Introduced last year, the multimedia machine for home users sold twice as fast during its first 60 days as any product in Compaq's 12-year history.

At $1,499 and up, de Marcillac says, the Presario is priced competitively with other companies' multimedia machines. ``Today we can build a computer cheaper than anybody else based on delivered cost,'' asserts Brij Kathuria, manager of product integrity. He reels off statistics:

* Compaq needs half as many man-hours to build a computer as it did a decade ago.

* Assembly time, number of parts, and variety of parts are down by one-half or more.

* In 1991, the slump year, Compaq needed 1,100 employees in manufacturing support positions for every employee who actually assembled computers. Last year, the ratio was 400 to 1.

While similar efficiency gains have been made throughout the industry, de Marcillac says, ``Compaq is probably at the leading edge of those improvements and was the primary instigator.''

The consumer market is projected to account for one-half of PC sales by the end of the decade. Yet profit margins tend to be lower on consumer items. That's why Mark Vena, Presario product manager for North America, was selective and price-conscious when telling Compaq's engineers which features to design into the machine. Compaq chose not to use Pentium, the latest computer chip by Intel, but went with the slower, less-expensive 486 in order to include a compact disc player, TV (on some models), speakerphone, answering and fax machines, caller ID, and other features. ``All this functionality is great, but if a novice user can't access it, it's worthless,'' Mr. Vena says.

He is about to dial out on his Presario to demonstrate the speakerphone when he receives a call instead. Wrong number. Not even a Presario can screen out those. What remains to be seen is whether the machine will sell well enough this fall to cement the company's leading share of PC sales. And that's the number Compaq cares about.