Patience Pays Off
SEPTEMBER 4, 1984, 10:00 A.M.
A product strategy meeting is under way in the main conference room on the sixth floor at Compaq’s headquarters in northwest Houston. Our product strategy team is deciding what to do in response to the IBM AT.
I say, “We obviously need to get a 286 product to market. How are we going to differentiate ours from the AT?”
The marketing team looks at each other. Then Swavely says, “We don’t think we should rush to market with a 6-megahertz 286 product like the AT. We succeeded in positioning the Deskpro as the performance leader in the XT segment and in doing so added performance leadership to our brand.”
He pauses for a moment, looks at me, and says, “Even though the AT is at a higher performance level than the Deskpro, it’s also at the beginning of a new, more expensive price segment. We think we should wait and be the first to market with the 8-megahertz 286 so we can leapfrog the AT in performance. Not only that, we want to launch a portable 286-based product at the same time.”
I think about this for a moment. “When will the 8-megahertz chip be available?”
Stimac responds, “It should be early next year, but there’s some risk if Intel has problems.”
I look at Swavely. “Aren’t you concerned we’ll be perceived as late getting to the 286 market?”
“If we rush to market with a ‘me too’ product, it’ll hurt our brand image,” he points out. “It’s more important to get there first with the next speed increase and retake the performance lead from IBM. Plus, the Deskpro is just getting ramped up and we need to give our dealers time to absorb it. And it’ll give us time to get both a desktop and portable product out together. That’ll really make a strong statement about our leadership.”
Everyone nods in agreement.
In making the decision to wait for a faster chip, we were sacrificing short-term sales for the long-term benefits of strengthening our upscale, high-performance brand image. The patience this decision demonstrated came from the maturity and experience level of our team. Most of our competitors rushed to get their 6-megahertz products to market and were forced to set prices well below IBM’s.
Since time to market had been so crucial with the Deskpro, we had created a separate division for increasing focus and minimizing distractions. Now we were faced with developing both a desktop and a portable version of essentially the same basic product. It was an easy decision to combine the desktop and portable development teams to leverage the common features of these new products and thereby significantly improve our efficiency. Compaq was becoming a big company in some ways, but we had not lost the ability to quickly make product and organizational decisions when it made sense.
We had also developed and refined a process for ensuring a smooth transition from design to production. The strategy team would meet every week to quickly address any problem that arose. The team included representatives from every part of the company: engineering, software, marketing, sales, materials, manufacturing, production test, field service, training, and finance. The meetings were time consuming, but our experience with the Deskpro had proven its value. Swavely, who had become our key marketing executive and a strong leader, was assigned the job of leading these meetings.
We developed a close relationship with Intel by helping them find and fix compatibility bugs in their first 80286 chip. Since most of Intel’s customers clamored for the original version of the chip, the one that ran at the same 6-megahertz speed as IBM’s, we were able to get commitments for significant deliveries of the second version with an 8-megahertz clock speed. Ours would be 33 percent faster than the AT’s.
The stage was set for us to further widen our portable lead.
With most of the media attention focused on the desktop market after the introduction of the AT, the portable segment was out of the spotlight. IBM had not followed up with a hard-disk version of its portable, and Compaq’s Portable and Plus were satisfying most of the demand for portable PCs. The stage was set for us to further widen our portable lead with a high-performance 286 model.
APRIL 30, 1985, 10:00 A.M.
We’ve assembled several hundred shareholders, reporters, and analysts in a hotel ballroom in Houston. They’re here for the 1985 Compaq Annual Shareholders Meeting, which we’ve combined with new product announcements.
After conducting the annual meeting business, I say, “We’ve now come to the point in our program that represents one of the main reasons we’re here today, and why we’re so excited. In fact, we’re so excited we’ve recruited some help to get us started on the right note . . .”
As I step away from the podium, the room fades to black and a strong beat vibrates through the dark. Spotlights hit the mockup of a huge computer that is the backdrop on the stage. Then, as though performing at a concert, the Pointer Sisters, one of the hottest R&B groups, dance onto the mock computer’s giant keyboard that forms the stage floor. As lasers flash, they enter in pastel-colored dresses singing their hit song “I’m So Excited.” As they sing, images of our new generation of computers flash across the backdrop screen. This is not how the computer industry does things. Until now.
After they exit the stage and the applause fades, I step up to the microphone and say, “Today, Compaq is announcing not one, but two new 80286-based personal computers, the Deskpro 286 and the Portable 286.”
Then I list the advantages of the Deskpro 286 over the IBM AT: a higher-speed processor, a dual-switching monitor, built-in tape backup, room for more storage devices, and more expansion-board slots.
Next I shift to the Portable 286, listing all its advantages over the AT, which are essentially the same as the Deskpro 286, but with the added advantage of rugged transportability. Then, to make a dramatic point, I show a slide listing all the competitive portable products on the market. The list is blank. There is laughter in the audience, but the point is clear: The Compaq Portable 286 is the first—and only—fully compatible, 80286-based portable personal computer on the market.
During the Q&A session, I take a question from the French audience through a satellite video connection to Paris. “Will Compaq continue to introduce new products that are compatible with the industry standard, or will you deliver innovation?”
The implication, amazingly, is that a company has to choose between compatibility and innovation, a belief still held by many in the PC industry.
I answer, “Compaq has delivered clear differentiation and innovation in every product we’ve introduced. Our strategy is to continue delivering innovative new features on top of compatibility with the industry standard. This is what customers want, and it’s the secret to success in the PC market.”
Later, I take a question from the audience watching via satellite from Munich. I paraphrase, “The question is what will Compaq do if the PC standard changes?”
I pause, shift to a more philosophical tone, and begin to address the issue of the industry standard. “Because of the millions of people who’ve already bought industry-standard products, the thousands of software programs already available for the industry standard, and the thousands of peripherals already available for it, the standard will not change any time soon. In fact, every day, every year, the standard keeps getting stronger.
“IBM’s introduction of the AT extended and strengthened the industry standard. If IBM were to introduce a new product that isn’t compatible with the standard, it would need to address an entirely different market because to not be compatible would put it at a severe disadvantage.
“In today’s market, it takes more than a strong brand to be successful, as IBM found out recently.” I’m referring to the poor reception its portable received. “I believe IBM understands this because they’ve continued to bring their own new products to market that do support the standard.”
We launched the Compaq Deskpro 286 and Portable 286 at the same time.
At the reception after the formal presentation, in response to another question, I elaborate on the issue of compatibility. “Most of the press and analysts are aware of the significant number of PC and XT programs that wouldn’t run correctly on the AT. Due to the advanced compatibility technology that is proprietary to Compaq, both the Deskpro 286 and the Portable 286 run all the software available for the industry standard, which includes all software written for the IBM PC, XT, and AT.
“The issue for customers is whether or not they have to buy new versions of programs they’ve already purchased when they upgrade to a new 286-based PC. With the IBM AT, there are many popular programs that customers could not use, so they’ve got to spend additional money buying new versions just to keep doing what they are already doing. With our new products, customers will be able to use all their existing software programs. That’ll save them money and make the cost of upgrading to a Compaq 286 lower than upgrading to an IBM AT.”
After the meeting, there was definitely a different feeling in the audience. It was as though they were seeing Compaq as more than just a fast-growing start-up and IBM clone for the first time. In just over two years we had expanded our line from one product to seven, covering a broad range of performance and price. We had demonstrated our ability to continue to beat IBM in performance and features, and even had our own proprietary compatibility technology, which IBM didn’t come close to matching.
No longer was the main question whether dealers would carry Compaq’s new products. It was just assumed we had done our homework, already knew customers would want our new offerings, and were confident our dealers would happily sell them.
I had taken a slight risk by openly describing our fundamental product strategy of innovating within the industry standard, but I believed no other company had the technology to do what we were doing.
The industry standard was growing more resistant to change with every day that passed, as the number of industry-standard PCs, software programs, and peripherals continued to multiply. And now, since we had demonstrated complete backward compatibility with our 286 products, customers’ desires for, and expectations of, backward compatibility would begin to grow rapidly. All the while, the PC industry standard was becoming more independent of IBM.
It was about this time that we decided to give the industry standard a shorter name. The original idea had been to create separation from IBM by not using the term “IBM compatible” anymore. That had worked pretty well, but I found myself saying “industry standard” so much that I wanted something shorter and more official sounding. So we added “architecture” to the end to make it “industry standard architecture,” and then created the acronym ISA. It was quickly accepted and began showing up in the press and in conversations. To me, it made the industry standard seem even more independent of IBM.
Still, IBM had been the market leader almost from the day its first PC was announced, and it looked like it would continue to be for the foreseeable future. So it was impossible to be sure what would happen if it decided to try to change the standard. It would be a perfect example of an irresistible force (IBM) colliding with a (hopefully) immovable object, the industry standard.
The Compaq Deskpro 286 and Portable 286 were very well received. Analysts liked them and the press coverage was quite favorable. Customers buying 286-based PCs were after performance, and our new products delivered the most available at the time.
We knew our performance lead wouldn’t last very long, so it was extremely important to fill demand as quickly as possible. Our manufacturing team came through by quickly ramping up production quantities for the new products. Our dealers were able to get them into the hands of waiting customers and capitalize on the initial attention the new products were receiving. That, in turn, made the dealers very happy with their increased sales and profits.
THE US PC MARKET experienced a slowdown starting in late spring of 1985. That led to another round of IBM price cuts during the summer, followed by significant cuts in clone prices as usual. We also reduced our prices somewhat, but the strength of our new 286 products helped our sales continue to grow at a reasonable rate.
Compaq finished 1985 with $503 million in sales, a 53 percent increase over 1984. That was much lower growth than our previous year, but the industry slowdown caused severe problems for most PC companies. Our 53 percent growth was viewed as a sign of strength.
In December 1985, we moved our stock listing from the Nasdaq to the New York Stock Exchange. It was a move designed to get business customers to take us more seriously and also to gain more attention from the business media. We still had to deliver good financial results, but when we did, they were more widely reported. We also had more analysts begin to cover us with regular reports.
Then, in February 1986, we announced the Compaq Portable II, a smaller and lighter version of the Portable 286. Before an audience of 3,000 employees, dealers, analysts, and media personnel packed into Jones Hall in downtown Houston, I announced, “Compaq has made the Fortune 500 list of the 500 largest industrial companies in America. And we did it in the shortest amount of time ever.”
The Compaq Portable II, a smaller, lighter version of the Portable 286.
The celebration included a live performance by Irene Cara singing our theme song, “Flashdance,” accompanied by the Houston Symphony Orchestra. More than 2,000 exuberant Compaq employees in the audience created an atmosphere of incredible energy that seemed to impress the media and analysts present. Employees left the meeting more pumped up and motivated than ever. The Compaq engine was hitting on all cylinders. Our decision to wait on a higher-performance 286 chip succeeded in strengthening our positioning and fueled a third year of record sales. Our shift to the NYSE and our entry into the rarified air of the Fortune 500 resulted in an incredible flow of positive publicity. The addition of the Portable II further strengthened our lead in the portable market. We continued to expand our dealer network around the world, and our relationships with dealers had never been better. Compaq’s name was finally beginning to become a household word.
The stage was being set for the world to learn the answer to the continuing question of what would happen if IBM were to try to change the standard. But there was one more act we had to perform before that final scene could take the stage.