Compaq–DEC Merger: IT Culture and Integration Strategy

Introduction: Two Companies, Two Cultures

The challenges and opportunities facing Compaq and Digital Equipment Corporation (DEC) — as illustrated in the case study Merging Information Technology and Cultures at Compaq-Digital (B): Becoming a Single Firm — are analyzed and evaluated here from a strategic perspective. Both companies had drastically different cultures, which made the challenges, opportunities, and threats of the merger far from optimal at both a cultural and IT level.

Compaq operated a highly centralized organizational culture that valued a centralized IT system architecture and reporting strategy. It was common for Compaq to rely on single-instance ERP systems across multiple regions of the world, seeking cost and time efficiencies through consolidated, highly controlled, and centralized IT enterprise systems. Digital Equipment Corporation (DEC) was diametrically the opposite, with a very open and nearly egalitarian mindset toward managing and implementing enterprise systems. Not surprisingly, DEC attracted professionals who thrived in a diverse and highly distributed organizational culture, with many of them working remotely. Given the timeframe of this case study, the concept of virtual teams and telecommuting was groundbreaking. DEC's senior management believed that a decentralized IT architecture was essential for innovation and creativity to flourish, while Compaq believed IT needed to be managed as a centralized resource.

Studies of enterprise systems in general, and ERP systems specifically, show that greater agility and speed of response make technology manufacturers more effective at meeting rapidly changing market needs. This was especially evident in how Compaq moved quickly to standardize on mass production and drive inventory turns through price — strategies that relied on their ERP systems keeping pace with increasingly agile competitors. It is no surprise that Compaq had a very difficult time competing with Dell, which had adopted a decentralized IT architecture while also pursuing aggressive configure-to-order and mass customization product strategies — approaches that DEC had also experimented with on specific product lines during the same period (Vijayan & Collett, 1999). Compaq attempted to replicate these configure-to-order strategies yet found its IT staff too inflexible and lacking in agility, specifically in the pricing area, to challenge Dell's growing and formidable lead (Zarley, 1997). As Compaq continued to lose competitive deals to Dell, it also had to contend with the acquisition and assimilation of DEC, which had a markedly different IT structure and corresponding corporate culture. The structural, cultural, and strategic differences and their implications are analyzed throughout this case analysis.

The architectural differences from an IT standpoint, and the resulting impact on each company's respective culture, became one of the most difficult hurdles for the Compaq–DEC merger to clear. Systemic and IT structural differences continued to fuel a highly regimented, centralized culture at Compaq, while DEC's structure was more open, organized into smaller virtual teams that allowed for flexibility. Not surprisingly, these two companies developed completely different perspectives on what constituted excellence and best practices in manufacturing and production, as well as what excellent execution looked like.

Mergers Often Fail Due to Cultural and Structural Differences

Compaq's manufacturing strategies had been extremely successful in meeting the expectations, needs, and wants of enterprise-class IT buyers globally, yet the company struggled in the consumer market, which required greater flexibility and customization. Compaq standardized its entire go-to-market strategy around manufacturing efficiencies and, as a result, sold hundreds of millions of dollars in laptops, PCs, servers, and high-end graphics workstations globally. Its entire service strategy was also architected around low-variation products to minimize cost variations. A Compaq manufacturing facility anywhere in the world would appear identical, as the company strove to reduce and eliminate any and all variation from its manufacturing process.

DEC took a different approach, using lean manufacturing and high-volume production to meet cost and pricing targets on its highest-volume products while also applying mass customization on higher-end, higher-margin servers and systems. To accomplish these product strategies, DEC created a highly decentralized structure focused on the immediate needs of customers in each segment. This decision had an immediate effect on supply chains, sourcing, procurement, and manufacturing, and also required a diverse IT architecture to support multiple product lines, each with a different production strategy. To Compaq's IT executives, this looked like madness — they considered it insane to deviate from highly standardized processes and from managing IT as a centralized resource.

Compaq had deliberately chosen a very regimented, highly controlled manufacturing process, while DEC chose one that capitalized on rapid response to customer variation, staying in step with customer needs (Vijayan & Collett, 1999). In a sense, DEC was actually more attuned to the broader trends in how PC and IT enterprise customers would choose to purchase systems in the future — opting for greater flexibility in mass customization and demonstrating greater loyalty to high-tech manufacturers who could consistently deliver on that dimension of their business model (Salvador, de Holan, & Piller, 2009).

The strong values of decentralization permeated DEC's product planning, product management, sales, and service management teams, and over time became deeply ingrained in its culture. A large part of that organizational culture revolved around the freedom to pursue individualized product and service strategies without being beholden to a centralized IT staff. A parallel development at the time was Dell's decision to pursue a highly decentralized IT strategy to support its rapidly growing build-to-order business. This decision proved to be the catalyst Dell needed to fine-tune its back-office systems and become a global leader in executing build-to-order strategies combined with lean supply chain practices (Kraemer, Dedrick, & Yamashiro, 2000). What Dell found during this period was that by closely integrating its pricing, supply chain management (SCM), and ERP systems at the process level, it could easily outperform Compaq and smaller competitor Gateway by achieving between 3X and 6X greater inventory turns (Huang, Huang, & Chen, 2009).

DEC had the potential to compete on a global build-to-order strategy at the same level of efficiency as Dell, yet allowed a balkanization of efforts to reduce investment levels, thereby creating a more fragmented manufacturing strategy (Gunasekaran & Ngai, 2005). Given DEC's focus on applying build-to-order strategies only to specific product lines while lean manufacturing handled low-end systems, the corresponding impacts — on everything from corporate culture to multichannel retailing — suffered from a singular lack of focus. While DEC insiders viewed this diversity of manufacturing strategies as a strength, in reality it dissipated the company's ability to stay focused on one strategy long enough to dominate a global market.

As a result of DEC's highly fragmented strategic focus and Compaq's highly insular, low-cost manufacturing and product strategies, Dell emerged as the global leader in PC and server manufacturing. Dell also began selling more customizable, higher-end back-office systems configurable to enterprise customers' requirements, while continually improving its cash conversion cycle by reducing inventory (Huang, Huang, & Chen, 2009). DEC had, however, read the direction and growth of the PC market far more correctly than Compaq and, despite its fragmented focus, still had greater potential to achieve market share and financial performance gains through a more agile strategic plan.

With both DEC and Dell finding success with mass customization and build-to-order strategies in specific product areas, Compaq remained firmly convinced that a continual focus on low-cost manufacturing and eliminating all possible variation would eventually lead to market dominance. This view — that the PC market was fundamentally a game of following and excelling at Moore's Law — eventually permeated the entire company, making it singularly focused on low-cost internal IT decisions and a very high level of standardization across all internal systems. Emerging from this mass production mindset, Compaq also forced incoming DEC employees into a culture where variation in work approach and structure was minimized. Compaq made clear to incoming DEC employees and managers that their build-to-order strategies would be evaluated and very likely minimized or cancelled, as they did not fit the new direction of the combined company. As a result, many of DEC's highest-performing designers, engineers, managers, and executives quickly realized their roles would be diminished over time and found positions elsewhere. The highly decentralized nature of DEC's workforce — which had allowed many to work from home — was diametrically opposed to the philosophy and operating approach at Compaq.

IT Architecture as a Driver of Corporate Culture

The conflict between the Compaq and DEC operating units would not be resolved quickly, even after smaller disagreements were settled. Both companies' IT departments remained at odds, with DEC's highly decentralized IT architecture and organization being forced to become more centralized and controlled by a single IT department. DEC had, however, grown its mid-range server and high-end workstation businesses into global market leaders using build-to-order strategies as a model. Compaq could not abandon these product lines after the merger, as they represented too much gross margin and profit. As a result, Compaq was forced to integrate more agile production methods and sourcing strategies into its business, attempting simultaneously to maintain a low-cost manufacturing strategy and to operate as an agile, build-to-order manufacturer (Vijayan & Collett, 1999).

Compaq was never able to make this hybrid strategy work profitably, as the case study results suggest. The case also infers that the strategic goal of having Compaq cross-sell to DEC customers — and vice versa — to create a significantly larger prospect base for each company was similarly compromised. The highest-margin sales of complex orders were not achievable within Compaq's IT infrastructure, despite DEC having cultivated sales opportunities in these areas for years. The result was that Compaq's IT infrastructure drastically slowed sales into the DEC prospect base for the most profitable systems.

Being an engineering-centric company, Compaq had become firmly driven by analytics and dashboards throughout its culture, while DEC was more focused on creative, collaborative product planning that eventually led to a build-to-order selling and manufacturing strategy (Hindus, 2006). Both Dell and Compaq were corporate cultures highly driven by accountability and analytics; DEC also used these measures, but its culture additionally concentrated on collaborative product development and the creation of cross-functional workflows across engineering and supply chain management to increase time-to-market effectiveness. Eventually DEC became more metrics-driven, which helped make the integration of its build-to-order strategies into Compaq's IT infrastructure more feasible.

Both Compaq and DEC had been managing their suppliers largely through manual methods, while Dell had created its own automated, highly tailored replenishment and demand management system (Kirche & Srivastava, 2010). Dell had turned its supply chain into a competitive advantage in the manufacturing process, drastically reducing time-to-market for new models sold through existing and emerging distribution channels (Alt, Gizanis, & Legner, 2005). Compaq and DEC were losing time due to the exceptionally high level of confusion both had in the areas of IT architecture, change management, data and product management, and the need to gain internal consensus on build-to-order strategies. The IT infrastructure reflected this confusion clearly.

Conclusion

Both Compaq and DEC needed to find a unified strategic direction to pursue, rather than continuing to fight over which programs or software platforms by business unit would survive. The case study is a classic example of what happens when IT infrastructure becomes more important than the strategic growth of a merged organization. It also illustrates how powerfully IT infrastructure and information flows shape — or undermine — an effective corporate culture. Had the management team focused more on IT initiatives that would unify and capture the best of both companies, there is a reasonable argument that the combined entity might have remained independent.