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Compaq's corporate chutzpah

Strategos analysts Peter Skarzynski and Mike Cornell fault the computer maker for taking a me-too approach to its business that makes a poor substitute for real strategy.

Is there such a thing as corporate chutzpah?

PC maker Compaq Computer comes close, spinning its $279 million second-quarter loss as "smaller than expected," never mind the $388 million profit it posted in the second quarter of 2000. With revenue down from a year-earlier level of $10.1 billion to $8.5 billion, and revenue from the company's vaunted enterprise computing business dropping 21 percent, Compaq took the opportunity to warn that third-quarter revenue would likely be even lower.

Could this be the same Compaq that just three years ago shelled out nearly $10 billion to buy DEC, creating what was, at the time, the second-largest computer company in the world? At the time, the DEC acquisition, in the words of one leading business publication, was "getting good reviews from most analysts."

Most, but not all.

Credit our colleague, Gary Hamel, with giving the Compaq-DEC marriage two thumbs down. At the time Compaq swung the DEC deal, Hamel wrote in The Wall Street Journal that when it comes to strategy, "simply buying up someone else's creativity is a poor substitute. If (the Compaq-DEC) merger signals a retreat to safety, it will be remembered not as the birth of a new industrial star, but as the flaring of a dying one."

Or in other words, all the money in the world won't help you if you lack the next big idea.

Imitation may be the sincerest form of flattery, but as strategy, me-tooism has little going for it. Consider Compaq's planned shift from hardware to services: A carbon-copy of the IBM strategy that, executed at this late date, puts Compaq on course to become the computer industry's next Unisys.

The DEC merger masked a simple fact: Compaq's strengths as an innovator first to promote the portable computer and as a pioneer of built-to-order manufacturing using toll-free phone lines had atrophied.

In three short years, systems that were to be Compaq's salvation have found their way into the company's bargain bin. Take Alpha, for instance--DEC's answer to enterprise computing, and a big draw for Compaq. Alpha processors would help Compaq attain, in the words of DEC's then-CEO, "global leadership in enterprise computing."

But that was then.

Last month, after pouring tons of money into Alpha's development (by some estimates, as much as $250 million each year), Compaq surrendered, selling--or, as Compaq gently termed it, "transferring"--Alpha to rival Intel, whose Itanium chip has captured the market Alpha never made for itself. Under the new agreement, Compaq will transfer Alpha tools and technology to Intel under a multiyear plan, with Compaq shuttering its Alpha assembly line altogether by 2003.

Compaq CEO Michael Cappellas spun the Alpha deal as one that "fundamentally lowers our costs significantly. There will be cost improvement, and we'll see some benefit accruing almost immediately." Entirely possible, as short-term gain goes. The big question is whether the Alpha-to-Intel trade will transfer Compaq's revenue to Intel as well.

Take the biotech sector, for example. With so many other black clouds, this is one space where Compaq has done quite well, forging a position as key supplier of supercomputers to pharmaceutical researchers. But those systems are Alpha-driven. Now that Compaq is selling off Alpha, allowing Intel to consolidate Alpha's best into an even better Itanium-plus chip, how likely is it that drug researchers will come back to Compaq when Intel's got the next-gen chip they need?

So now that Compaq's strategy comes down to rearranging the DEC chairs, what's next? Reports say that the company has set aside $500 million this time to buy an IT firm. "When the going gets tough, the tough go shopping": funny enough, when it's emblazoned on a T-shirt. For Compaq shareholders, however, it's not nearly so amusing as a corporate strategy.