Running Head: Compaq in Crisis 1

Compaq in Crisis

By

Date
Compaq in Crisis 2

Case Study No 4- Compaq in Crisis

Case Summary:

During the period of 1980’s the company of Compaq was considered as the leader in the

computer hardware market. The name of the company was considered as a brand which meant

high quality, cutting edge products which were sold at a premium price. This was the main

reason because of which the company was capable of spending more on its Research and

Development as compared to any of its competitors.

With the changes in technology, the markets also changed. This affected Compaq a lot as

it lost its capability to charge premium prices for its computer hardware products. The consumers

soon, however, become literate enough to know that they do not need to pay premium prices to

Compaq for its products. The expensive features of the Compaq products were becoming not so

important with the advancement in the hardware and software technology. Facing a decline in

the economic environment around it, the company started cutting its prices as much as to 34%

which led its second-quarter earnings in 1990 to drop by 80%.

Other than this, the company has also been witnessing a huge organizational crisis which

had been overlooked previously due to the significant sales growth. Lack of communication had

become a norm in the company culture among the divisions and the growing rift between the

founders of the company was signalling towards a bad time, if not approached in time.

Case Analysis:

Environment Analysis:
Compaq in Crisis 3

The USA is considered as the leader in the computer hardware market. The Japanese, on the

other hand, is considered as the large producers of the electronic components. However, the US

still possess the upper hand in terms of technology. The company Sony is fastly catching up in

the field of miniaturizing technology. Of this, the Walkman is one such example, as it made a

very bulky product so small.

However, US companies face a problem in terms of selling their high technology products

abroad by competing with foreign companies. The approval of the Federal Government is needed

to sale to foreign companies. Another reason is that most of the technological advancement is

kept limited to the US for national security reasons as well.

The advancement in technology has led the hardware industry to advance as well. These

advancements allow the market to bring new products at a faster pace while also bringing the

cost of productions down. With the maturity of the computer hardware market, companies are

finding new ways to use a desktop computer and developing new software to remain competitive

in the market.

Industry Analysis:

As the computer hardware industry is moving rapidly, the most funded companies like

IBM are also facing problems to meet demand. This has been one of the reasons behind the

success of Compaq. Even though the substitutes are not a threat to this industry, the threat of

entry is persistent. The ease of assembling computers provide ease of exit and entry to this

industry. The buyers’ purchasing power is becoming stronger day by day as more manufacturers

are emerging and the technology is becoming more advanced. The severe price decline is

causing a whole new set of buyers in the form of personal computers to emerge as well.
Compaq in Crisis 4

Alternatively, the suppliers’ are losing their power on pricing as components are becoming easily

interchangeable. The dominance of the Intel in the processor market is an example of this.

Competitive Analysis:

As the assembling of computers has become easy, new companies are emerging.

However, the main players of this industry are Compaq and IBM. Still, other larger companies

like AT&T are also trying to enter the market. Smaller businesses in the forms of DELL and

AST have also entered the market by offering cheaper products that are more customer-focused.

These smaller companies are utilizing alternative modes of operations.

Internal Analysis:

Even though the company of Compaq has been considered as a high-quality computer

manufacturer. The current market conditions have eroded its quality standards and have affected

its revenues. The retailers of the company are found holding large high inventory of overpriced

computers as the end-users are moving to cheaper options.

SWOT Analysis:

The strength of Compaq is that it is the market leader and can spend more on R&D. The

company has been however going through a changing period in which the direction of the

organization has not yet been decided. The company has also been facing communication lapses

among its divisions. Even with the internal problems, the company can still gain a lot if it fixes

these in time. Even though IBM is the second-largest market shareholders, however, it does not

have the reputation or hold as Compaq had in the market. Therefore, Compaq can use this

opportunity and produce products in enough numbers to seize the rising demand. The low entry

and exit costs, however, poses a threat from new entrants in this market, as smaller businesses
Compaq in Crisis 5

are welcomed. The competition from Olivetti and AT&T is a threat as they are trying to capture

the gap in demand and supply.

Strategic Analysis:

Strategic Alternatives:

1. Continue to invest in R&D as it has been done in the past by focusing on being the

industry leader in making high-quality products with premium pricing.

2. Change the focus of the company to the needs and wants of the individual consumers as

well as the corporate clients. The company can in this way focus on both high end and

low-cost products.

3. Increase its emphasis on the server market. The company can continue to make products

for its corporate clients instead of just making portable and desktop products.

Alternative Evaluation:

The second alternative is the best alternative for Compaq. The reason is that through following

this strategy, Compaq already possesses a strong brand name which is well recognized in the

corporate world. Therefore, it should continue developing products for its corporate clients.

Furthermore, it can meet demands which IBM has not been able to do. Thus, it is important to go

for the low-cost market segment as well, as new entrants are seizing this market share, and the

corporate market segment is also near its saturation point.

Strategy Implementation:

The resources from the R&D division should be diverted to the technical support while it should

be kept equal to the budgets of its competitors. The Marketing and Sales divisions should be
Compaq in Crisis 6

divided into Corporate and Consumer product lines. The need for identification and development

of strategies should be handed out to the marketing department. The sale department should be

responsible for communication with distributors. The production department should develop a

plan for meeting the changing demands of the market.