Will Fast And Cheap Be Data General's Salvation?Gary Mcwilliams
Until December, Data General CEO Ronald L. Skates had spent five years in the shadow of the minicomputer company's legendary founder, Edson D. de Castro. True, Skates had risen from a minor financial post to be chief operating officer and then CEO. But de Castro, as chairman, ruled--and the company drifted. At de Castro's Data General, advanced technology seemed to come before advanced profits.
After five consecutive quarterly losses, though, Data General Corp.'s directors decided they had had enough. On Dec. 12, they ousted de Castro and put Skates fully in charge, just in time to see a $75 million cut in annual operating expenses yield a $15 million quarterly operating profit. That restructuring, plus a hot new line of computers, suddenly gives the Westboro (Mass.) company its best prospects in years. Wall Street certainly thinks so: In the past two months, DG's stock has risen 185%, to 11 3/4, or 12 times the increase in Standard & Poor's computer index.
The price of this rapid turnaround is greater vulnerability. To make DG profitable again, Skates is paring the company down and planning its future around a single, relatively bare-bones product line, called AViiON. He's taking Data General back to its roots as a lean, mean maker of the fastest computers for the lowest prices. And he's leaving most programming chores and specialization up to the customers. That's how de Castro built up DG in the 1970s, developing "hot box" minicomputers that outran whatever Digital Equipment Corp. built.
Skates has had to wield a heavy ax to get back to that strategy. He has pulled funding from several major development programs, including one with Nippon Telegraph & Telephone Corp. to build a special computer for telephone companies and another to build superspeedy versions of Motorola Inc.'s 88000 reduced instruction-set (RISC) microprocessor. A promising office-automation software project was spun off into a Japanese-funded startup named HyperDesk Corp. All told, Skates has cut total research and development spending to about 8% of annual sales, well below de Castro's absolute minimum of 12%. His latest move, on Mar. 12, was a deal to sell DG's Japanese arm, Nippon Data General, to Omron Corp. for $46 million.
ECLIPSED PROFITS. All that, Skates says, should leave DG better able to concentrate on what must now become its flagship products, the AViiON workstations and minicomputers introduced in 1989. They're based on Motorola's 88000 chips and are designed to compete with similar machines from Sun Microsystems, IBM, and DEC. Sales of DG's older Eclipse minis, which produce the bulk of its $1.2 billion in revenues, fell 24% last year. The company is counting on AViiON sales, about $120 million last year, to pick up the slack.
The danger, though, is that DG may not be able to push AViiON's price and performance fast and far enough to succeed in today's fiercely competitive "open systems" market. There, all computers run essentially the same industry-standard software packages, beginning with American Telephone & Telegraph's Unix operating system. With little room to differentiate products via software, every supplier is pushing hardware price and performance. To succeed, DG will have to outrun the pack.
To Skates, it's all in the engineering. New AViiONs, scheduled for release on Mar. 13, will run three times as fast as DEC's VAX 9000 mainframe but will sell for a third of the price--around $100,000 and up. Barry F. Bosak, an analyst at Smith Barney, Harris Upham & Co., reckons that the new machines will drive DG's profits to $46.5 million in 1991 on flat sales of $1.2 billion. Says Skates: "It won't take much for us to be back in the swing of things."
Easier said than done. The new AViiONs may have only a fleeting moment on top. Hewlett-Packard Co., eager for a comeback in workstations, plans to unveil machines on Mar. 26 that it says will be even faster and cheaper than the new AViiONs. DG contends that it's still in shape to keep up in such games of technological leapfrog. But, says Judith S. Hurwitz, a market researcher at Patricia Seybold's Office Computing Group in Boston: "When you cut R&D that much, you have to ask: Long-term, how is DG going to compete with Hewlett-Packard, IBM, Sun, and DEC?"
Pursuing the hot technology/low price strategy also involves wrenching boom-and-bust cycles between generations of new products. So even though Data General seems to be on its way up again, Skates had better hang on to his hat. Data General is back on its roller coaster ride.