In Digital Equipment Corp.'s long quest to transform itself from a technology-heavy money-loser into a profitable market-driven winner, its frail personal-computer business is a key harbinger. The results so far speak volumes: While its $2 billion in PC revenues accounted for 15% of fiscal 1995 revenues, they made up just 2.5% of the world market. DEC remains the industry's distant No.11.
That's why Digital's Oct. 27 announcement that it had hired an outsider to head its PC unit is so critical. The new guy is Bruce Claflin, 44, a 22-year veteran of IBM. Claflin led the effort that produced the ThinkPad, a slender laptop that is one of the bright spots in IBM's PC lineup. And he helped streamline IBM's PC development process, closing down the company's manufacturing plant in Boca Raton, Fla., the birthplace of the IBM PC.
Claflin is a heavyweight, in other words. Digital nabbed him after he lost out on the job of running all of IBM's PC business. His mandate now: to put Digital on the PC map--and to make money. "I don't accept the argument that if you're on a high-growth strategy you can't be profitable," Claflin says. But while the company's PC business has shown some signs of life--sales rose 32% in the quarter ended Sept. 30--it hasn't earned a profit for at least six months.
"VOLUME GAME." Claflin's first task probably will be to light a fire under Digital's PC marketing corps. Chairman Robert B. Palmer and his lieutenants have set a demanding timetable, requiring that shipments of desktop computers, laptops, and servers grow at least twice as fast as the industry rate. That means going retail. While Digital has snared some corporate customers, "PCs are a volume game," says Enrico Pesatori, vice-president and general manager of Digital's computer-systems division. "If you really want to drive volume up, the retail channel is what you need."
In retail, however, Digital has barely made a dent. Sales to stores in fiscal 1995 accounted for just 10% of overall PC revenues. Since September, the company has added Circuit City Stores and OfficeMax to its retailer lineup. Even with an advertising blitz scheduled to begin Nov. 5, though, the lack of a retail brand name remains a problem. "Digital is going to have a tough go [becoming] one of the five or so shelf-space grabbers in the consumer and retail market," says Richard Zwetchkenbaum, an analyst at International Data Corp.
CHOICE GOODS. Palmer has an ulterior motive here. Success in PCs depends on carefully balancing supply and cost, rolling out a steady stream of new products, and working closely with distributors--all the things, in short, that Digital's traditional computer-systems business could use. "Digital's success or failure in this market is more important than just the PC business," says Lynn Berg, an analyst with Gartner Group Inc. "It's a bellwether of where the company will go from here."
The question: Can Digital ever make money selling plain-vanilla desktop machines through CompUSA? Some analysts believe it would be better served by aggressively pushing products for which it has an advantage, such as servers and laptops. Profit margins are higher, and while both servers and laptops lag behind the consumer desktop market in sheer volume, analysts see opportunities for growth. "Digital should be trying to go upstream where the profit is," says Jon Oltsik, an analyst with Forrester Research Inc.
The computer maker is trying. DEC won raves earlier this year for its HiNote laptop. It lost sales when managers failed to forecast demand, but analysts say the HiNote, while expensive, still has untapped demand. DEC also boasts a broad alliance with Microsoft Corp., which blessed Digital's servers as the platform of choice for the NT operating system, a growing favorite with business users. Will that be enough for Claflin, the career IBMer, to turn DEC's PC unit around? "We're trying to take a hill, not defend it," he says. "I much prefer that, having been on both sides." If nothing else, the new guy is up for a good fight.