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Pfeiffer Ousted

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Compaq Clean-Out
Compaq fires CEO and CFO nine days after the company warned Q1 profits would miss estimates by half
Pfeiffer's Fall: How Ousted CEO Led Compaq to Strategy He Couldn't Deliver
By David E. Kalish  Associated Press
NEW YORK — Compaq's chief executive, Eckhard Pfeiffer, told the world he would outdo himself.

After building his company into the world's largest maker of personal computers, Pfeiffer aimed to stretch Compaq well beyond its roots, creating a technology conglomerate that would sell a spectrum of machines and high-tech services to rival the likes of IBM.

But Pfeiffer fell short of this goal and was ousted this weekend by Compaq's board of directors.

While Compaq Computer Corp. remains a formidable competitor, it choked on other manufacturers it acquired, didn't foresee the importance of Internet sales and stumbled while trying to emulate the more efficient sales model of arch rival Dell Computer Corp. First-quarter revenue is expected to total $9.4 billion, well short of expectations, raising doubts that Compaq will achieve Pfeiffer's annual sales goal of $50 billion by the year 2000.

Pfeiffer, some say, left his company too spread out to effectively defend the cheap-PC strategy he pioneered in the early 1990s.

"It's all the classic signs of a Greek tragedy," said Roger Kay, an industry analyst with the International Data Corp. research and consulting company. "They were the creators of their own demise."

Compaq chairman Ben Rosen, who is acting as chief executive until a replacement is found, defended Pfeiffer's vision, but said the company will try to improve its execution.

"Compaq's strategy is fundamentally sound," Rosen told analysts in a conference call Monday. But, he added, "we plan to speed up decision-making. We plan to anticipate and get ahead of industry changes."

Pfeiffer, who took over as CEO in October 1991, beat by two years his initial goal of building the No. 1 PC maker by 1996. He passed IBM and Apple by peddling affordable machines using popular Microsoft Windows software and Intel chips, establishing the dominance of so-called "Wintel" computers.

But competing mainly on price made it tougher for Compaq to earn money. A crop of upstart competitors such as eMachines is pushing prices down so low that it has forced the personal computer industry to rewrite its business model. As of January, sub-$600 computers accounted for nearly one-in-five desktop PCs sold in U.S. retail channels, according to high-tech publisher Ziff Davis.

Tumbling prices of PCs haven't been Compaq's only problem. While prices of PCs sold to businesses dropped by 16 percent in the three months ended February, prices of more profitable business computers known as servers, which help run networks of desktops, plunged by 31 percent, according to Ziff Davis.

While other companies such as IBM and Hewlett-Packard also suffered, they sell a wider range of products than Compaq, which helped mitigate the damage.

Pfeiffer began stretching in new directions. He introduced new machines that combined the functions of PCs and TVs, hoping to create a new entertainment category.

His success in pushing Compaq to the head of the PC pack gave him the clout to pull off two major acquisitions these past two years. The idea behind buying Digital Equipment Corp. and Tandem Computers Inc., makers of powerful business systems, was to help Compaq offer customers a range of computers. Compaq's sales channels, went the thinking, could peddle Digital computers, and vice versa.

But PC-TVs never took off. And analysts said Pfeiffer never fully exploited the acquisitions.

Unit sales of Digital's Alpha computers, which are targeted to large corporations, dropped 12 percent in the six months since Compaq completed the Digital acquisition last summer, according to the researcher International Data Corp. Revenues from Alpha machines slipped 5 percent.

One problem has been a lack of new Alpha models, though Compaq recently introduced new products, said International Data analyst Jim Williamson.

"A lot of people hoped Compaq would bring something of volume strategy to Digitals' Alpha line and other products," he said. "A lot of that hasn't happened."

Compaq was forced to backtrack from a recent attempt to compete more effectively against Dell, the world's largest seller of computers directly to customers.

Unlike Dell, Compaq sells most of its computers through distributors, who get a cut of the profits. By cutting out these middlemen, Dell bolsters its profits and nurtures long-lasting relationships with customers.

Last fall, Compaq began selling a new line of computers on its Web site directly to small businesses.

Jump-starting Internet sales could have helped Compaq catch up to Dell, which sold $14 million worth of computers online each day by the end of the first quarter.

But Compaq's Web sales fell short, and the company was forced to retreat from its direct-only strategy. This year, it began offering the same machines through distributors.

Compaq isn't the only company having difficulty trying to sell both ways. IBM and Hewlett-Packard also have had mixed success.

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