Problem Solving Case Study Merging Information Technology

Problem Solving Case Study

Merging Information Technology and Cultures at Compaq-Digital (B):

Becoming a Single Firm

The many challenges and opportunities evident for Compaq and Digital Equipment Corporation (DEC) illustrated in the case study Merging Information Technology and Cultures at Compaq-Digital (B): Becoming a Single Firm are analyzed and evaluated from a strategic perspective in this analysis. Both companies have drastically different cultures, which made the challenges, opportunities and threats of the merger not being optimal between both at a cultural and IT level evident . Compaq is a very centralized organizational culture that values and believes in a centralized IT system architecture and reporting system strategy. It is common for Compaq to rely on single-instance ERP systems throughout multiple regions of the world and seek out cost and time efficiencies based on the benefits of consolidated, highly controlled and centralized IT enterprise systems. Digital Equipment Corporation (DEC) is diametrically the opposite, with a very open and nearly egalitarian mindset to managing and implementing new enterprise systems. Not surprisingly DEC attracts those professionals who thrive in a diverse and highly distributed organizational culture, with many of them working remotely. Given the timeframes of this case study, the concept of virtual teams and telecommuting was ground-breaking at the time. DEC's senior management believes that a decentralized IT architecture is essential for innovation and creativity to flourish, while Compaq believed that IT needed to be managed as a centralized resource. Studies of enterprise systems in general and ERP systems specifically show that the greater the agility and speed of response the more effective a given technology manufacturer is in meeting rapidly changing needs in the market. This is especially the case in how Compaq was quick to standardized on mass production and driving inventory turns through price, all strategies reliant on their Enterprise Resource Planning (ERP) systems being able to keep up with increasingly agile competitors. It is no surprise that Compaq had a very difficult time competing with Dell, who had adopted a decentralized IT architecture while also pursuing aggressive configure-to-order and mass customization product strategies as DEC had also experimented with on specific product lines during the same period (Vijayan, Collett, 1999). Compaq attempted to replicate these strategies in configure-to-order yet found their IT staff too inflexible and lacking in agility, specifically in the pricing area, to challenge Dell's growing and formidable lead at the time (Zarley, 1997). As Compaq continued to lose competitive selling deals to Dell they also had to contend with the acquisition and assimilation of DEC which had a markedly different IT structure and corresponding company culture. The structural, cultural and strategic differences and their implications are analyzed in this case analysis.,

Mergers Often Fail Due to Cultural And Structural Differences

The architectural differences from an IT standpoint and the resulting impact one ach company's respective culture became one of the most difficult hurdles for the merger of Compaq and DEC to clear. Systematic and IT structural differences continued to fuel a highly regimented and centralized culture in Compaq while the structure of DEC was more open, in smaller virtual teams that allowed for flexibility. Not surprisingly each of these companies over time developed completely different perspectives as to what was excellence and best practices in manufacturing and production. Both also had significantly different perspectives of what excellence of execution looked like as well. Compaq's focus in its manufacturing strategies had been extremely successful in meeting the expectations, needs and wants of enterprise-class IT buyers globally yet they struggled with the home market that required greater flexibility and customization fo systems. Compaq also standardized their entire go-to-market strategy around these manufacturing efficiencies and as a result sold literally hundreds of millions of dollars in laptops, PCs, servers and high-end graphics workstations globally. Compaq also architected is entire service strategy around low-variation products to ensure cost variations were minimized. Walking through a Compaq manufacturing anywhere in the world would appear identical as the company strove to reduce and eliminate any and all variation from the manufacturing process. DEC took a different strategy, using lean manufacturing and high volume production to meet their cost and pricing targets on their highest-volume products while also using mass customization on their higher-end, higher margin servers and systems. In order to accomplish these product strategies, DEC had to create a highly decentralized structure that concentrated on the immediate needs and expectations of customers in each segment. This decision had an immediate effect on not only supply chains, sourcing, procurement and manufacturing, it also required a diverse IT architecture to support multiple product lines, each with a different production strategy. To Compaq IT executives, this looked like madness; they though it was insane to deviate from highly standardized processes and approaches to managing IT like 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, looking to stay in step with customer needs (Vijayan, Collett, 1999). In a sense DEC was actually more in tune with the broader trends of how PC and IT enterprise customers would choose to purchase systems in the future, opting for greater flexibility in mass customization and being more loyal 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 the product planning, product management, sales and service management teams within DEC and over time became engrained in their culture. A large part of their organizational culture became engrained in a sense of freedom in attaining individualized product and service strategies without having to be beholden to a centralized IT staff. A parallel industry development at the time was the decision within Dell 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 their 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 is that by closely integrating at the process level their pricing, supply chain management (SCM), and ERP systems they could easily outperform Compaq and smaller competitor Gateway with between 3X to 6X 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 their balkanization of efforts to lower the investment level, thereby creating a more diverse manufacturing strategy (Gunasekaran, Ngai, 2005). Given DEC's focus on having build-to-order strategies that were only for specific product lines while lean manufacturing flourished on low-end systems, the corresponding impacts on everything from corporate culture to multichannel retailing suffered form a singular lack of focus. As DEC insides viewed this diversity of manufacturing strategies as a strength, in reality it dissipated the company's ability to stay focused on one single strategy long enough to dominate a global market. As a result of this highly fragmentized focus in strategy at DEC and the highly insular, low-cost manufacturing and product strategies at Compaq, Dell emerged as the global leader in PC and server manufacturing. Dell also was able to begin selling more customizable, higher-end back office systems that could still be configured to enterprise customers' requirements, while also continually improving their cash conversion cycle by reducing inventory turns (Huang, Huang, Chen, 2009). DEC had read the direction and growth of the PC market much more correctly that Compaq however, and despite their fragmented focus, they still had greater potential to accomplish market share and financial performance gains based on a more agile strategic plan. With DEC and Dell finding success with a mass customization and build-to-order strategy in specific areas of their product strategies, Compaq firmly believes that a continual focus on low cost manufacturing and removing all possible variation from product strategies would eventually lead to market dominance. The Compaq view of the PC market, namely it being a game of following and excelling at Moore's Law, eventually permeated the entire company, making it singularly focused on low cost IT decisions made internally and a very high level of standardization across all internal systems as well. All emanating from their mass production focus to PC manufacturing, Compaq also forced the new DEC employees into their culture where variation in work approach and structure was minimized. Compaq made it clear to incoming DEC employees and managers that their build-to-order strategies would be evaluated and very likely minimized or even cancelled as they did not fit with the new direction of the company. As a result, many DEC product designers, engineers, managers and executives quickly realized their roles would be diminished and over time made irrelevant in the new Compaq/DEC organization. It was not surprising that the highest performing DEC employees quickly found jobs in new companies. The highly decentralized nature of DEC's workforce had allowed many to work from home, which was diametrically opposed to the philosophy and operating approaches at Compaq.

The basis of the conflict between Compaq and DEC operating units would not be resolved quickly, even after the smaller disagreements the case alludes to were solved. Both company's IT departments continued to be at odds with each other, with DEC's highly decentralized IT architecture and organization forced to become more centralized and controlled by a single IT department. DEC had however grown their mid-range server and high-end workstation businesses into global market leaders using the build-to-order strategies of Dell and others as a model. Compaq could not abandon these product liens after the merger; they represented too much gross margin and profits. As a result, Compaq integrated these more agile production methods and sourcing strategies into their business forcing the company to have a low-cost manufacturing strategy on one hand while attempting to be an agile, build-to-order manufacturer on the other (Vijayan, Collett, 1999).

Compaq never was able to make this hybrid strategy work profitably, as can be inferred from the case study results. The case also infers that the strategic goal of having Compaq cross-sell to DEC customers and vice-versa, in effect creating a significantly larger prospect base for each company. Figure 1, Compaq Selling Strategies Following DEC Merger shows how the flexibility of DEC systems were a selling advantage yet the constrained nature of Compaq's IT platform actually slowed down more sales than enabling profitable ones, even for larger, less complex orders. The highest margin sales of Complex Orders shown in Figure 1 were not salable by Compaq given their IT infrastructure,. Despite DEC having cultivated sales opportunities in these areas for years. The result was the Compaq IT infrastructure drastically slowing down sales into the DEC prospect base for the most profitable systems.

Figure 1:

Compaq Selling Strategies Following DEC Merger

Being an engineering-centric company, Compaq had become firmly driven by analytics and dashboards throughout their culture, while DEC was more focused on creative, collaborative product planning that eventually lead to a build-to-order selling and manufacturing strategy (Hindus, 2006). Both Dell and Compaq are corporate cultures that are highly driven by accountability and analytics, while DEC also used these measures their culture also 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 would become more metrics-driven, which helped to make the integration oft heir build-to-order strategies into the IT infrastructure of Compaq possible.

The case mentions often the lack of Enterprise Resource Planning (ERP) system integration between the two companies. A centralized ERP system could have accelerated the unification of Compaq and DEC cultures. In contrast to the many problems that resulted as a lack of unification, Dell's IT architecture had solved that problem early on in the development of an enterprise systems strategy. Figure 2 illustrates the Distributed Order Management System and ERP systems Dell had development to ensure real-time availability of product, pricing, manufacturing and service information globally.

Figure 2: Dell's Enterprise Systems Framework

Source: (Kraemer, Dedrick, Yamashiro, 2000)

It is evident that the entire IT infrastructure of Dell was designed to support a very rapid, accurate build-to-order strategy. The integration of Electronic Data Interchange (EDI) also made it possible for Dell to move into 3rd aprty distribution channels effortlessly from an IT perspective. Finally the IT infrastructure has been designed to allow for greater flexibility of transaction workflows, with increasingly complex build-to-order and engineer-to-order product sales on its existing IT infrastructure (Vijayan, Collett, 1999).

Compaq had been managing their suppliers through basically manually methods as had DEC while Dell had created their own automated and highly tailored automated replenishment and demand management system (Kirche, Srivastava, 2010). Dell had turned their supply chain into a competitive advantage in their 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, data and product management, and the need to gain consensus on their build-to-order strategies internally. The IT infrastructure reflected this confusion.

Strategic Recommendations for Compaq & DEC

Compaq's IT platforms were too inflexible to stay in step with the rapidly changing market requirements including streamlining the build-to-order process (Barrett, 2007). Compaq would eventually fail to stay relevant to how both consumer and enterprise buyers wanted to configure and buy PCs (Salvador, de Holan, Piller, 2009). Where the case squarely shows Compaq and DEC is in bad need of streamlining their supply chain, manufacturing and selling systems so that customers can purchase from them how they choose to. Dell customers can purchase products from multiple divisions on the same purchase order, at the new Compaq/EC organization, IT systems will not be able to handle that transaction for nearly five years (Bois, 2004). Compaq and DEC needed to concentrate on creating an IT architecture flexible enough to compensate for mass customization and build-to-order on higher-margin servers and workstations while sharing expertise in lean manufacturing to drive down production costs on laptops and low-end systems. The fatal mistake both companies made was to focus on protecting their IT infrastructures as relics of their rapidly antiquating market strategies instead of focusing on how to create a shared, hybrid and more agile market-driven IT organization.

Second, the combined companies of Compaq and DEC needed to create a distributed order management system capable of managing the wide diversity in production and manufacturing approaches (Alt, Gizanis, Legner, 2005). Instead of choosing to let go nearly one in five works (the 18% layoff referred to in the case) which spent morale into free-fall, the focus should have been on automating their production strategies in the highest margin, build-to-order server and workstation businesses first. Creating a hybrid IT architecture that took the best of what Compaq and Dell had to offer would have been far more effective than the "I win (Compaq)/you lose (DEC) approach management took to integrating vastly different IT architectures and system platforms. Getting the merged IT organizations to focus on a common goal was critical to their success, with build-to-order and engineer-to-order being the most crucial (Kraemer, Dedrick, Yamashiro, 2000). Mass customization as a strategic initiative has the potential to disrupt traditional manufacturing operations regardless of how lean they are, as customization stays in step with customer requirements (Salvador, de Holan, Piller, 2009). Choosing to go in this direction would have been the best for the hybrid Compaq/DEC organization. Organizing their IT infrastructure to support the go-to-market strategies shown in Figure 3, Compaq/DEC Mass Customization Strategic Direction would have been far more effective.