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SUBJECT: DIGITAL REPROGRAMS THE WAY IT DOES BUSINESS/ IRON-FISTED VP TURNS
COMPUTER MAKER FROM A NO-SHOW IN PCS INTO A MARKET-SHARE
CONTENDER.
SOURCE: Southam via First! by Individual, Inc.
DATE: March 2, 1995
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The Financial Post via First! : When Enrico Pesatori joined Digital
Equipment Corp. two years ago to take over its fledgling personal-computer
business, he saw a no-brainer: Digital's best PC prospects were its current
big-systems customers.
So he targeted those customers, telling salespeople to pitch the virtues
of Digital's small but powerful new products that could be integrated into
the customers' current mainframe systems. He worked with manufacturing
executives to crank out more PCs. He hired his own advertising agency, Young
& Rubicam, to look for new ways to promote Digital's brand name and the
user-friendliness of its products.
And he refused to have anything to do with Digital's idiosyncratic
''matrix'' management style of making decisions by consensus. He set up firm
lines of authority and responsibility, and walled off his business from the
rest of the company, even moving the PC unit to another Massachusetts town,
farther away from the parent in Maynard.
Digital's ''functional (management) model wasn't in tune with the speed
and the changes of the marketplace of the 1990s,'' says Pesatori, vice
president and general manager of the company's computer systems division.
That's putting it mildly. A lot about Digital had been out of tune, a
sorry legacy of its founder and guiding light, Kenneth Olsen, who believed
in matrix management and didn't believe in personal computers. His
apocryphal remark about PCs being destined for closet-clutter status in
homes and offices serves as a painful reminder about how disadvantaged he
left Digital by the time he was ousted in 1992.
Pesatori and a cadre of other senior executives under president and chief
executive Robert Palmer have undertaken a complete revamping of the way
Digital does business, particularly in marketing. It sharply cut its in-
house sales staff and farmed out smaller business accounts to resellers,
while focusing on its 1,000 largest customers, such as General Electric Co.
and Ford Motor Co.
The effort is starting to pay off. PCs now account for about a quarter of
all product sales, and Digital recently posted its first quarterly profit
since July 1993, and only its second profitable quarter in the last three
years. The company had posted losses totalling $6 billion over the last four
fiscal years.
And Digital's stock has started to climb out of the cellar, giving
shareholders encouragement. It's been trading recently above $30, after
hitting a historical low of 18 1/4 last April, and was near $38 in mid-
January - good, but cold comfort for anyone who has held Digital shares
since 1987, when they reached $190. Digital hasn't paid a dividend since
late 1989, when it gave shareholders rights to buy new shares - at $400
each.
Analyst Richard S. Chu at Cowen & Co. was among the first on Wall Street
to revisit the stock, raising his recommendation last fall to a ''strong
buy'' from a ''neutral'' on signs that demand for the company's Alpha AXP
computer line was strong and profit margins were stabilizing. By the end of
the year, even Prudential Securities' Laura Conigliaro, who had been among
the most bearish analysts about Digital, moved the stock up to a ''buy''
from a ''hold.''
Pesatori, with his PC background, says the entire computer industry is
becoming like the PC segment, with profit margins razor-thin and the need
for ever speedier delivery of new products to beat the competition.
''The dynamics of the marketplace are so violent that in just two years,
what was good enough to make a PC company successful is now what's needed to
make a (big-computer) company successful,'' he said. Pesatori said he knew
he'd have to act so unilaterally that he demanded freedom from Digital's
matrix management as a ''necessary condition'' for taking the job. His iron-
fisted style has turned Digital from a no-show in PCs into a market-share
contender.
''In PCs, there was no question about who was boss - it was Enrico,'' said
Franc Romano, an independent high-technology analyst in Littleton, Mass.
The Italian-born Pesatori, 54, joined Digital in early 1993 after leaving
Zenith Data Systems, a supplier of desktop and notebook personal computers
owned by Groupe Bull of France. Since last spring, he has been responsible
for all of Digital's computer businesses, including PCs, midrange computers
and large systems, which reaped more than half of Digital's $13.45 billion
in annual sales.
In the 1980s, Digital thrived while many business customers were still
buying full front-to-back computer systems from single suppliers, which made
hefty profits on the systems. Then the industry changed fundamentally, as
proprietary systems such as Digital's VAX and Wang Laboratories Inc.'s VS
gave way to ''open architecture,'' or common standards, in the industry.
Customers were free to piece together computer networks with equipment from
a variety of suppliers, so competition intensified and industry profit
margins dwindled.
Several of Digital's businesses were performing according to plan,
including its semiconductor, storage devices, components and peripherals
businesses, as well as its new servers, or host computers, for the nascent
home-video market.
But its traditional large-systems unit was bleeding so much red ink it was
washing the whole company in losses.
As Digital relied less on big systems and more on lower-margin PCs and
workstations, it needed to get its sales costs down. So Pesatori has been
paring the in-house sales staff to target its 1,000 biggest customers for
new business. Resellers and other third-party distributors will handle
smaller accounts.
To woo the distributors, he cut the prices Digital charged to assure them
enough profit margin. ''We've made sure our partners have all of the
opportunity to be profitable,'' he said. Digital got 58% of product sales
through third parties at the end of the second quarter, up from 43% a year
ago.
Pesatori couldn't afford to take half-measures if he wanted to succeed.
Last July, Palmer announced a major restructuring of the nation's third-
largest computer maker that would entail a $1.2-billion charge and 20,000
more job cuts, leaving its workforce less than half the size it was four
years ago. Most of those job cuts, 14,000, would come from Pesatori's side
of the business, primarily in sales and marketing.
Palmer, already criticized for taking too long to act on Digital's
problems, was under severe pressure to do something.
And he was blindsided by the company's $183.3 million loss in its third
quarter ended April 3, four times worse than analysts expected.
Once he moved up to take charge of Digital's entire computer line,
Pesatori named German-born Bernhard Auer to succeed him as manager of the PC
business.
Pesatori still has a long way to go, and not everyone is impressed by
Palmer's right-hand man. Analyst Romano noted that morale is still at a low
ebb among Digital employees, and customers are quietly ''showing up at the
doorsteps of competitors.''
He says Pesatori underestimates the difficulty of solving even basic
problems and isn't forthcoming about specific solutions.
Steven Schur, an industry analyst at Productive Methods Inc. in San Mateo,
Calif., says he isn't convinced that customers should again buy from
Digital, and advises his Fortune 1000 clients to have a backup computer
supplier if Digital goes under.
[03-02-95 at 17:52 EST, 1995, Southam Electronic Publishing, File:
j0302021.721]
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