Capellas details plans for Compaq revival

The beleaguered PC maker has faced financial woes, layoffs, and heavy scrutiny of its cost structure in recent months--leading to lost momentum at Compaq while competition from the likes of Dell Computer and others has increased.

Part of chief executive Michael Capellas's plan to turn the company around involves a new strategy "that will enable us to lead the next generation of PC evolution and innovation," according to an email message Capellas sent to Compaq employees recently.

He is focusing on resolving some of Compaq's cultural problems by driving a new organization of three groups: consumer, commercial computing, and enterprise solutions and services. Capellas also is planning a bold strategy for streamlining distribution and taking more business direct.

In a rare interview since taking over as Compaq's chief executive, Capellas spoke with CNET News.com about his plans to revitalize the struggling PC manufacturer.

CNET News.com: As you look forward, what do you see as your biggest challenges getting some momentum back into Compaq?
Capellas: I've sort of set out the priorities. First, we need to very clearly establish our product solution and road maps for those solutions. We need to decide what businesses we are going to be in, what businesses we're not going to be in, and in each of those businesses and markets what solutions we're going to offer. We have too much in the portfolio, so we need to streamline it down. And in some areas, there are gaps in terms of our coverage.

The second one is we've got to put some energy around marketing, defining who we are and having a strong communications story.

[Third,] there is no question we have to simplify our distribution model. This whole question of direct vs. indirect and the complexity of our whole distribution model, that problem needs to be fixed.

The fourth one is that our infrastructure costs still aren't competitive. We need to drive some cost out, and on the earnings call I think we showed we were making good progress in the first reductions. We need to do that again, and we need to get that behind us very quickly. So we need to get cost out and get on with life.

Then the last one is we need...some top-line revenue growth. We need to become more aggressive about getting deeper penetration of the market that we serve. Somewhere along the line, we still have a few spots in the management team to shore up, but the team is operating pretty well.

I'm optimistic. I do feel things are going in the right direction. It's a tough market. A brutal market.

Q: What are some of the challenges you've faced since assuming your role at Compaq?
A: The company has tremendous assets. That's why it's a $40 billion company. But through a series of acquisitions and for whatever reasons, the?biggest problem has been letting the world know--and the world is all your different constituencies, your partners, your customers, and your employees--what Compaq is.

It was really getting clarity around what the company [is], who we were, the different markets we participate in, but [also] having very clear strategies and road maps for each of those parts of the business. It's really a huge marketing effort, because the company lost its identity for a time.

Q: How do you see that identity changing?
A: As a foundation, the very first thing I did was to say we really do operate in three very different markets. We operate in the enterprise space, selling really complex solutions to business. We operate in the commercial space, selling personal computers.

And the way companies buy PCs vs. enterprise [computers] has changed over time. The [chief information officer] used to buy all the technology. Now we're seeing some changes in the buying patterns, so they're really becoming two different markets. And the third one is that the consumer world is another different set of customers with different challenges with different ways of going to market.

The first thing I did was to actually break the company into three global business units, each focused on the different customer types, and to give each of those general managers the end-to-end alignments to define what segments they wanted to be in with what products, to define the solutions, and create the go-to-market strategy.

Q: What were some of the major cultural issues that you faced?
A: In some cases you had a very strong engineering culture, [which] had a lot of focus on process [and] mission-critical environments where a system could never go down. That is one set of mentalities you have to have around that deep engineering culture, and a lot of focus on process.

In the personal computer world, it's sort of "damn the torpedoes." You have to be very, very quick to turn it over and get it almost always right. But speed is always of the essence, focus on creativity, and moving very, very quickly. "Damn the torpedoes" vs. focus on the process; those are very, very different cultures.

You take the Tandem culture, the Digital culture, and the Compaq culture--and even then we had a light-on-its-feet consumer culture as well--they came out of different worlds, serving different sets of customers.

Q: What is your typical day like?
A: My typical day is unbelievably breakneck. One of the things I pride myself on is almost an unending energy level. I work extremely long days. I haven't, I think, been in the office six or seven days in the last three months. You caught me back from Europe just last night. I've made hundreds of employee roundtables. One of my favorite techniques is to just get a large group of employees together and give them a 5- or 10-minute spiel on the company and then just answer questions forever. I've made unbelievably large numbers of calls on CEOs and CIOs and given them the status of the company. In three months, I think I've made five trips to Europe, so I've really been on the road.

Again, one of the real priorities is really to get this base-level strategy established and let people really know what we're doing. We've been doing a lot of good stuff--it's just that we're one of the best-kept secrets in the world.

I relate to our customers very well. Usually because, for CIOs, I've sat in their chair, and also help a lot of CEOs understand what is this technology--what does it mean?--so I can be really helpful in dealing with each of them.

Q: How much of an advantage is your background as a former CIO?
A: It's huge. It helps a lot. It helps an awful lot. In times of really, really radical change, understanding the bidding, understanding what business problems you're really trying to solve, and having lived through those business problems is just a huge advantage.

Q: Do you sometimes feel you could go in there and design the network for them?
A: Sure, I feel that way. What really helps is thinking through how you might organize for the problem, what your structure might be like, [and] what it means to the core business. The conversations are always pretty interesting, pretty fruitful.

Q: You spoke about direct vs. indirect. How do you plan to solve your distribution problems?
A: The market has already decided [about] the traditional two-tier distribution model. The traditional two-tier model where you put inventory into the channel and let people buy inventory out of that channel--that model can no longer work. That's clear now.

What that says isn't that the channel itself is a dirty word. It's just that you have to reengineer the process and the channel fits the role of, one, being an extension of your sales force into those markets you can't cover through a cost-effective model; and two, in all areas, they add value-added services downstream. They do things that you cannot do better, whether that's the implementation of complex systems, whether that's burning in specialized software, or whatever that customer needs.

Q: What are the areas you would most like to change about Compaq and what are strengths you see that are not well understood?
A: If you look at our enterprise business, we had a $600 million operating profit last quarter--pretty solid. We've done a good job defining this is the Business Critical Group--this is the Alpha plus the Himalaya [server] line in terms of these functions. We have industry standard servers and a tight relationship with Microsoft and Novell to go to market. We're growing our storage business. Our customer service is strong. We want to continue to grow our professional services business. So on the enterprise side, the true consultancy side of professional services, that's the hidden jewel but has not yet been developed. In all, the enterprise space is doing a good job getting itself on the right track and really making some inroads.

Our consumer business is very solid. We have great relationships with our retail channel, and consumers will continue to buy through retail. But we are starting to develop our e-commerce capabilities. And our share in the industry is quite strong.

The thing we really need to work at is remaking our personal computing business. I think that's...clear. It's about simplifying our products, getting our distribution [together], getting better competitive positioning around our direct capabilities, and that's the area where you will now see us put an awful lot of focus.