Digital. David H. Ahl.
Digital Equipment Corporation, DEC for short, was founded by Ken Olsen and several other MIT-trained engineers in 1957. Funded with $70,000 in seed capital from American Research and Development Corporation, DEC has been a darling of the stock market since it went public in 1966--and with good reason.
Its return on sales has never been less than 10%, and earnings have been on a steep upward path for 12 of the past 13 years. Unfortunately, the year DEC missed was FY 1982. Net earnings dropped a whopping 32% to $284 million, and return on sales was 8.5%, the lowest ever. The stock sank to $65 a share from $132 last April. What went wrong?
DEC cites a number of factors--a massive foul-up in order processing, administrative problems resulting from a year-long reorganization, and sluggish sales of its three microcomputers.
Sluggish is right! DEC does not reveal production or sales figures, but an analyst at Shearson estimates that DEC manufactured 35,000 personal computers last quarter but shipped only 19,000. While to many manufacturers, this is a number to be envied, to DEC it is less than 6% of corporate revenues, and, more important, it is a fraction of the volume being sold by IBM. Egil Juliussen of Future Computing estimates that IBM is outselling DEC by more than ten to one.
(In an uncharacteristic move, Olsen revealed in November that sales of DEC personal computers in the first nine months of 1983 totaled 69,000 units, just slightly more than the independent estimates.)
People Don't Need Their Own Computer
How did this nimble, street smart company get in such a position? The easy answer is that, like many companies that started small, grew fast, and became giants, DEC's CEO, Ken Olsen was unable to make the switch from entrepreneur to professional manager. But that answer doesn't hold much water considering that under Olsen's direction, DEC somehow managed to grow to over $4 billion while many other mini and mainframe manufacturers were left in its dust.
The real answer is that DEC's decision-making process is incredibly conservative and follows the tradition that any decision worth making is worth making ten times. Thus, when Dick Clayton's advanced development group presented two prototype personal computers to the operations committee in May 1974 (long before there was an Altair!), the committee was divided and the decision as to whether to proceed was left to Olsen. At the time, timesharing was the rage and telephone rates were low, so Olsen's reaction was that he couldn't see any reason why a person would want his own computer when he could have easy access to a PDP-10 (a powerful time-sharing system).
Until recently, DEC was structured around some 18 semiautonomous business units known as product lines, although some were market-oriented groups, such as the education product line. Thus, the killing of Clayton's personal computer project didn't prevent others from springing up. Three years later, about the time the Apple was announced, another personal computer prototype was developed by Bill Turner's group, and met, unfortunately, the same fate as the earlier effort.
Olsen sees DEC as an industrial supplier rather than a consumer marketer. The company builds high quality machines and believes that sophisticated customers will eventually see their merits and buy them in large quantities. In the minicomputer industry, this is known as "pumping iron,' and, indeed, the road by DEC's Marboro facility was renamed Iron Way when DEC moved in.
So when Olsen finally conceded that the company should go ahead with a personal computer, it was industrial users he had in mind as the major customers. He believed that the Professional machine ($8500 plus), derived from the 16-bit PDP-11 series, would be the big seller. However, it was released with a minimum of software and fell flat on its face in the market.
The midrange DEC mate II (around $4500) is a repackaged version of DEC's PDP-8 based word processing system which allows the machine to be programmed (the word processor can't be). It bears an uncanny resemblance to one of the 1974 prototypes, which shows how product groups manage to keep things alive. That it is selling at all is testimony to its solid design; on the other hand, its price/performance is not up to the level of today's latest entries.
Of the three DEC entries, the only new design is that of the Rainbow 100 ($3500 plus), and its sales are dramatically ahead of its two big brothers. It is able to run both CP/M and MS-DOS (see review in Creative Computing, November 1982, and 1984 Buyer's Guide).
Although DEC contacted outside software vendors to convert packages to the Rainbow, the process of dealing with DEC was so cumbersome, that many vendors decided to focus on other machines first. Finally, today, a year after the scheduled delivery date, the Rainbow 100 is on dealer shelves with a reasonable selection of software. Frequently, it stays on the shelf. Why?
It Takes Marketing Too
DEC has never been a marketing-oriented company. All too often, advertising was placed by individual product lines and not by the corporation centrally. As a result, DEC is hardly a household word. Olsen, incidentally, insists on referring to the company as Digital, despite the fact that both customers and insiders alike refer to it as DEC.
How many people know that DEC is the second largest computer maker behind industry leader IBM? Fewer than one in ten according to one study. Yet in the past, campaings to build company image got little support from the product line managers.
Since these managers were judged on the performance of their products, they were reluctant to divert a portion of their product maketing dollars to corporate advertising programs. As a result of this coupled with the furious infighting among product line managers for the backing of the centralized engineering and manufacturing departments, Olsen wiped out most of the product line system in one bold stroke. But problems remain. As recently as November, Win Hindle, vice president of administration, was looking into ways of more effectively integrating the engineering, manufacturing, sales, and marketing functions. Given the size of the company, it would be unreasonable to expect results overnight.
One of the most ridiculous marketing decisions with respect to the line of personal computers was that of distribution. In September 1982, Andrew Knowles, then the vice president of the personal computers and terminals group, told us that the personal computers would be sold through several outlets: independent retailers, industrial distributors like Hamilton/ Avnet, DEC's own Digital Business Centers, and by a direct sales force to large customers. It sounded like a thorough approach.
A few months later, however, DEC decided it was having trouble positioning the three products so it would solve the problem by distributing them through different outlets. Digital Business Centers got the DECmate, independent retailers got the Rainbow (and Pro if they wanted it--most didn't), and the industrial distributors got the Pro. One problem: the ads showed all three machines and didn't tell the customer where to go far what. The result was massive confusion and lost sales.
Getting Their Act Together
Digital Business Centers can now sell all three computers and DEC is now throwing in one year of free service on the customer's premises in an effort to stimulate sales. DEC sees little risk in this offer as its products are over-engineered and reliable. On an optimistic note, Olsen recently said, "We believe that more and more people are beginning to realize the importance of quality and ergonomics.' But whether all of this is too little and too late is something we won't know until well into 1984.
Olsen feels that "this first round of personal computers is not the important one. The major contest will be the 32-bit machine.' In this arena, DEC seems to be taking an early lead with its Micro VAX, a system slated for first shipments in March 1984. Unfortunately, DEC has not met its product release dates on 75% of the products released in the last ten years, so March is probably optimistic.
Recognizing that it will take more than a new 32-bit machine to be successful in the personal computer market, Olsen has appointed Ed Kramer, corporate marketing vice president, to oversee four task forces in the areas of personal computer marketing, sales, administration, and engineering. A company spokesman acknowledged that they were formed "to identify the personal computer group's problem areas and to implement corrections.'
We talked to several former top DEC executives--more have left in the past year than in any other--and almost all were disgruntled about the marketing, or lack of it, at DEC. One complained that "Ken (Olsen) would rather print 10,000 handbooks than run a page of advertising.' But all had great respect for Ken and felt that eventually he would see the need for more aggressive marketing. When is "eventually?' No one was saying.
Photo: DEC refused to furnish photos of Ken Olsen or any other managers unless we furnished our story to them for approval. We didn't and they didn't.