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Compaq's plan spells lower costs

The PC giant declares a new world order by trumpeting an "ODM" business model. Translation: price war.

"ODM" is the new mantra at Compaq Computer (CPQ), and translates to lower prices for consumers.

The acronym, which stands for Optimized Distribution Model, represents the guiding principle behind the next wave of growth for the Houston-based computer maker, declared chief executive officer Eckhard Pfeiffer in a presentation in New York this morning. The model is a combination of manufacturing and distribution methods designed to slash operations costs by building PCs to individual customer specifications, thereby eliminating waste.

The strategy for Compaq, Pfeiffer and others explained, is to take the sting out of the lower prices that can be offered by mail-order computer makers like Dell and Gateway.

Ideally, the new methods of manufacturing will lower computer costs and, at the same time, allow Compaq to sell to its computers through its worldwide network of distributors and resellers. "With ODM, we have created a new model of distribution and in fact the most efficient in the computer industry," Pfeiffer said.

The change at Compaq, however, is not as revolutionary as the company may claim. Compaq is essentially emulating a system already pioneered by Dell and Gateway 2000.

But the move by Compaq, the largest PC manufacturer in the world, is already sending shockwaves throughout the PC industry because of the lower prices it promises to create. Compaq is bringing out new desktop PCs priced as much as 22 percent below existing models.

For example, a Deskpro 2000 PC with an Intel 166-MHz Pentium processor will now be $999, a drop in price of 16 percent, the company said. New prices for Deskpro 4000 models range from $1,389 to $2,089.

In addition, ODM pricing will be extended across the entire product line, including workstations, portables, and servers, to all geographies. The company also claims that the "build rates" for products will jump 33 percent, boosting shipments significantly.

Compaq will start a European pilot program in about a month, according to vice president Mike Winkler.

Although its new models will drop Compaq's prices up to 20 percent or more, the company has vowed that it will not affect profitability. "All this pricing is not at the expense of margin," said Earl Mason, Compaq's chief financial officer.

Pfeiffer took a jab on this point at rival Hewlett-Packard, which is planning price cuts of up to 25 percent across the Vectra line Monday. "Competitors will be taking it out of their margins. The price cuts at HP are strictly reactive."

The first phase, called build-to-order, starts immediately. Under that stage, Compaq will begin to assemble Deskpro 2000 and 4000 models only after orders are received from customers or resellers. Later in the year, Compaq will unveil a "configure to order" program under which large corporations can get large numbers of specially ordered computers.

To accomplish the shift to build-to-order, Compaq will begin to inventory more components and less finished systems, said Jim Schraith, vice president of North America. The company will also begin to rely increasingly on common component designs and modular computer designs.