The Reprogramming of Digital

By Leslie Wayne
The New York Times

September 4, 1983

Boston -- IT was a high-tech lover's dream. Assembled under one roof here late last month - and covering some 60,000 square feet - was the largest single exhibit of computer products ever displayed by a computer manufacturer. The Digital Equipment Corporation, the nation's second-largest computer maker, was showing its stuff - and in style. Minicomputers, personal computers and hundreds of software products were displayed in mock settings - fake hospitals, phony offices and even a false battlefield - while thousands of Digital employees and customers scrutinized the wares during a week- long show.

Digital's publicity department likened the event to the ''legendary city of Brigadoon,'' the magical locale that rose briefly and later disappeared. But while the event was decidedly upbeat, its purpose - to whip up enthusiasm among Digital salesmen and whet customers' appetites - was deadly serious. Digital, one of the stars in the computer industry, has stumbled into tough times. After nearly two decades of almost 30 percent annual growth of sales and profits, Digital reported a 32 percent earnings drop, to $284 million, for its 1983 fiscal year, which ended July 2, the first such drop in 12 years.

''This year,'' said Carol Muratore, an industry analyst with Prudential- Bache Securities, ''has not been a graceful one for Digital.''

Particularly troubling has been Digital's lateness in entering the explosive $5 billion personal computer market. The delay reflects the company's careful and methodical approach to doing business - an approach that some say is inappropriate in an industry where being first with new products is becoming increasingly important. Never before has Digital had to rush a new product to market and, given its size and slow planning cycle, it did not do so with its personal computer. This, critics say, has been a mistake. While Digital tinkered with its personal computer, others - primarily I.B.M., which is expected to post $2 billion in sales from personal computers alone this year - gobbled up market share and forced Digital into the position of playing catch-up.

''I just don't see how they can resume their great growth rate in the short run,'' said Frederic G. Withington, an industry analyst with Arthur D. Little Inc. ''They're not offering the right products in the right way.'' Added Ulric Weil, a computer industry analyst with Morgan Stanley & Company: ''You wonder why Digital can't do better than it's doing.''

It may be some time before business gets better at Digital. The fast growth of the company's core business - making powerful minicomputers and super-minicomputers for technical, scientific and corporate uses - is slowing as the smaller and cheaper desk-top personal computers, also known as microcomputers, become more popular and more powerful. A number of key Digital executives have quit this year, and the company is undergoing a painful corporate re- organization as it tries to re-program itself to sell to a new and less sophisticated personal computer market. Considered somewhat of a battleship in the computer industry, Digital, which had $4.3 billion in sales last year, is now finding it must turn on a dime.

THIS is especially ironic for a company that had been a computer pioneer - making its mark in the minicomputer business. Formed by its current president, Kenneth H. Olsen, 57 years old, in 1957 with $70,000 in seed money, Digital specialized in products that were smaller than the huge mainframe computers produced by I.B.M. Digital's machines were about the size of a small refrigerator and were quickly dubbed ''minicomputers.''

Digital gained a reputation as a sophisticated engineering company making high-quality products for scientific and technical uses and for such office functions as payroll accounting and data processing. (Mainframes, by contrast, are used for large, complex computations and huge information storage.)

With prices that were low and quality that was high, Digital had no trouble gaining a lock on the minicomputer business. It is said to have more minicomputers in place - an estimated 400,000 - than any other maker. Minicomputers vary in price from as low as $9,000 to as high as $500,000 - and more depending on the system's sophistication.

But, as the pace of change accelerated in the computer business, Digital found it was being squeezed from two ends. From the top, big mainframe computers, especially those produced by I.B.M., began to fall in price, putting Digital in direct competition with the nation's largest computer maker. And new competitors, like Data General and Prime Computer, were coming up with rival products employing even newer technologies than Digital's main VAX and PDP-11 minicomputers. They use technologies at least five years old and, as a result, have intrinsically higher manufacturing costs.

These rivals were able to offer technically superior minicomputers - like Data General's MV/10000 series - that often offered more performance for about the same price. And, waiting in the wings is I.B.M.'s new Glendale series, which is expected to put even further pressure on Digital's minicomputer margins. Digital plans to fight back with five new VAX machines to be introduced in 1984, but success remains unclear.

At the bottom end of the market, Digital is being squeezed by the growth of personal computers that can do much of what the larger minicomputers can do - and for a lot less. Thus, Digital must defend its position in the maturing minicomputer market with an aging product line, while making inroads into personal computers and office automation, markets where others have already established beachheads. It is uncertain whether the revenues to be gained in these new areas will offset declines in the old.

''Just to stay where it is, Digital needs to find new markets and new markets of multi-billion size,'' said Mr. Withington. ''And their penetration in the office automation and personal computer markets is so far not at that rate.''

Mr. Olsen, who presided over the 10-day show, is far more optimistic about Digital's prospects. ''Things have never been better,'' he said in an interview at the crowded Digital show in Boston's Hynes Auditorium. ''I've never been as happy with our products as now, and even though there's been a slight drop in earnings, we've had no layoffs. I see no real problems with our business.''

To some extent, Mr. Olsen's idea of holding a show has paid off. The stock, which had traded as high as $132 last March, but which had sunk into the mid-90's this summer, has picked up about $10 a share since the show.

Indeed, Mr. Olsen sees the personal computer and the minicomputer as one large market and believes that the explosion in personal computers will provide a boost to minicomputer sales. ''We see personal computers as an important factor in the growth of minicomputers. When people want to do more with a personal computer, they grow into minicomputers.''

Moreover, he is not concerned about Digital's lateness in getting into personal computers. ''We're sticking with the same old strategy, even though it doesn't look too exciting,'' he said. ''We may be the last kids on the block, but we wait until we have a better product.''

Since January, Digital has shipped about 65,000 units of its three personal computers and plans to ship a total of 100,000 before the end of the year. But that represents only a tiny fraction of the market - about 2.4 percent, according to Dataquest, a California research firm - while rival I.B.M. has a 29 percent market share.

Digital claims it will recover the start-up costs from its three personal computers sometime in its 1984 fiscal year. But its entry into this business hasn't been the smoothest. Since introducing these microcomputers last year, sales of the top-of-the-line Professional personal computer, which cost up to $8,500, have been disappointing, largely because it can run only with Digital software - the instructions that tell a computer what to do - and because Digital has been late in getting this software to market. The lower-cost Rainbow computer, which sells for about $3,000, suffers from being unable to use generic - and cheaper - diskettes, which store information. It also makes the DECmate, a word processor.

Theoretically, the large number of Digital minicomputers in place should give the company a competitive advantage, since many computer customers remain highly loyal to one product line and because it is easier to maintain one brand of computer products than several connected ones. But, many Digital minicomputer owners gave up waiting for Digital's personal computer and have bought I.B.M. personal computers instead - thus eating into Digital's existing customer base.

''DIGITAL'S size guarantees it will have a presence in this market, but the delays represent a permanent setback,'' said Marc G. Shulman, an industry analyst with First Boston. ''I.B.M. succeeded in penetrating Digital's customer base and much of that was due to the fact that software features Digital promised weren't available when promised.''

Still, entering these new computer markets is more than merely coming up with new products. Digital's difficulties are compounded further by the fact that its essential personality has been that of a company dominated by engineers who sold to engineers and let the technical razzle-dazzle of the machines do much of the selling. Unlike many companies, the Digital sales staff is on salary, not commissions, a practice that Mr. Olsen defends as bringing in higher yields per salesman. But others see it differently. ''Digital salesmen don't sell, they visit,'' said Adolf F. ''Sonny'' Monosson, author of a newsletter on Digital. ''And a lot of these machines have to be sold.''

As a result, Digital is finding that it must change directions from a company driven by products to one with a marketing orientation. For instance, salesmen who once could talk only in technical terms now have to teach unsophisticated customers - usually office workers and business executives - how to use their new personal computers. ''This audience is more interested in a smoothly working machine than one that will crunch numbers at the speed of light,'' said J. Terence Carleton, an analyst with Kidder, Peabody & Company.

Many pin Digital's problems on its unwieldy corporate bureaucracy - a matrix system of management in which many managers report to more than one boss - and to its size. They say decisions cannot be made quickly enough, thereby increasing the product development time, and a sense of entrepreneurialism and autonomy can get lost when a company approaches $5 billion in sales.

To remedy some of these problems, Digital has been undergoing a huge and painful reorganization to relieve the marketing groups of some nonsales tasks and permit salesmen to sell a full range of Digital products to one account instead of representing one product to many accounts.

So far, this attempt at decentralization has only created chaos and confusion, while not providing sufficient autonomy or speed, analysts say.

''For the last five years, Digital has ceased to be innovators in the markets they are in,'' said Donald Mitchell, managing director of Mitchell & Company, a Cambridge, Mass., consulting firm. ''Now they are in the situation of having to be a quick follower and they've had trouble organizing quickly.''

Mr. Mitchell said that Digital has created ''something resembling choas more than decentralization'' and that despite the changes, ''you still don't get big decisions without Ken Olsen and you can't force that many decisions through that small an opening. The quicksand of decentralization is slowing them down.''

Avram Miller, a former Digital computer group manager and now an executive at Franklin Computer, stressed that while he wished Digital success, he felt that the reorganization should be ''more drastic'' with more automony provided, similar to the relatively autonomous structure at I.B.M. ''Someone other than Ken Olsen is going to have to have the responsibility for a business line. And that doesn't exist at Digital.''

Further, Digital has suffered the losses of top executives who have gone, oftentimes, to smaller, more entrepreneurially oriented companies. The most significant loss has been C. Gordon Bell, Digital's chief engineer who directed Digital's research and development for more than 11 years. Mr. Bell left to become chief technical officer of the Encore Computer Corporation, a newly formed company that plans to acquire existing computer companies. Since 1978, seven vice presidents and corporate officers have left Digital along with scores of underlings. ''It's not an insurmountable problem, but I just don't see how you can take the turnover of your senior individuals and make a positive out of it,'' said Kidder's Mr. Carleton.

But this doesn't trouble Mr. Olsen. ''I've been criticized for holding on to my friends too long,'' he said. ''Some were so rich they didn't want to work hard and some want to become so rich. A gentleman never explains why someone left, but I'm happy with the people we have today.''

As for Mr. Olsen himself, the former Massachusetts Institute of Technology engineer, shows no signs of pulling away from the company he has nutured through these years, nor of indicating an heir apparent. ''My plan is to stay here as long as I stay healthy and you don't indicate an heir apparent when you have a president who's healthy and who has a number of years left.''

GRAPHIC: photo of Ken Olsen; Graph of Digitals finances

Copyright 1983 The New York Times Company