The Hottest Entrepreneur In America Is The "Smart Team" At Compaq Computer

By Joel Kotkin and Karen Angeline
Inc.

February 1, 1986

In the beginning, there was the team. Bill Murto, Jim Harris, and Rod Canion were all senior managers at Texas Instruments Inc., in Houston. Each had been bitten by the entrepreneurial bug. Together they decided to strike out on their own.

Aside from that, little else was clear. Not the financing. Not the timing. Not even the type of business they would go into. As they gathered in the sweltering Houston summer of 1981, they considered starting a Mexican restaurant, a company to produce hard disks for microcomputers, and a business built around a beeping device to help find a misplaced briefcase or car keys. In the end, they decided to develop a portable personal computer compatible with the IBM PC.

The Compaq computer turned out to be well designed and well executed, a market sensation that generated $111 million in sales in its first year of operation. It was the hottest performance by a start-up in the history of American business, and success has since been piled on success. Compaq Computer Corp. has gone on to become the world's second-largest manufacturer of personal computers for business, with anticipated 1985 sales of nearly half a billion dollars. And, even more remarkable, profit margins have kept pace with growth.

Compaq's is the sort of story of which high-technology myths are made. But unlike many start-ups that have made countless fortunes in Silicon Valley and elsewhere, this one was different. There were no flashes of genius, no technical breakthroughs. If anything, say Compaq's founders, their story is something of a paean to dullness, a lesson in how a strong core of experienced executives managed their way to the top of high tech.

"I'm not a superstar with all the vision, just a guy who moderates the consensus among a pretty bright bunch of people," explains president Rod Canion in his austere office amidst the pine forests of suburban Houston. "Our way has been to work as a team to find out the market needs, and execute our product. If people say, 'Ho hum' and that we need more pizzazz, I think they miss the point."

Canion's point is that entrepreneurial success is far less dependent these days on the brilliant insights and force of personality of hard-charging chief executive officers. A growing number of companies are organizing themselves around a "smart team" of experienced, savvy managers who substitute collegiality for hierarchy and keep their focus on a single goal: building a company that's going to last.

The term "smart team" may have originated with management consultants Steven M. Panzer and Robert P. Kelley Jr. With veture capital tight, competition fierce, and product life cycles shrinking to spans of months instead of years, Panzer and Kelley argue that high-tech entrepreneurs have to adapt their management styles to a more demanding environment--one in which there is precious little room for error. Entrepreneurs must learn to invest their managers with a collective responsibility for even the most crucial business decisions. And managers have to learn to look beyond the narrow confines of disciplines to the broad concerns of the company as a whole.

"It's a new ball game out there," says Panzer. "The roles of CEOs are changing. They can't just be order givers. Instead, they are becoming coordinators, whose main task is to tap the potential of their teams. That's become the key factor for success."

High-tech entrepreneurs seem to agree. In a study of 90 West Coast companies conducted in 1984 by the Southern Califrornia Technology Executives' Network (SoCalTen), CEOs were asked for their number-one priority in running their businesses. Fully two-thirds cited the development of a strong management team.

Nothing prompts this concern for team management so much as the realization that in the recent shakeout in the micro-electronics industry, the victims have included some of high tech's most celebrated and charismatic entrepreneurs (see box, "A Rogues' Gallery of California Swashbucklers," page 55). "The era of the swashbuckler is over," proclaims management consultant William G. Ouchi. "No longer can you have an engineer in control of a body of technology and have no competitors to worry about. You can't sell something now if you don't sell it well or make it well. The era of the Steven Jobses--the guys who thought of themselves as antiorganization--is ending."

In some ways, the era of the swashbuckler was a reflection of the technology itself. The microprocessor--the "computer on a chip"--came along in the late 1970s, and fundamentally altered the nature of the computer industry. Where in the past, entry in the industry was limited largely to those companies, such as IBM, Digital Equipment, and Prime, capable of building big-ticket items like mainframes or minicomputers, microcomputers afforded entrepreneurs the opportunity to launch companies in their garages, with only a good idea and a few thousand dollars in savings. Each week brought fresh news of a successful start-up that lent credence to the notion that technological leadership and a flair for marketing could make up for deficiencies down the line in such mundane areas as inventory management and quality control. Computer swashbuckler Adam Osborne was even heard to declare blithely that IBM Corp. would soon "cease to be a significant force" in the small-business computer market.

"They thought they were writing new rules," recalls Ronald J. Brown, now president and chairman of Osborne Computer Corp. "It worked great in the short run, but ended up as a disaster." Brown ought to know. He took over at Osborne after the company filed for protection under federal bankruptcy laws. One of his previous employers: IBM.

"The Japanese and IBM created an environment in which there is no tolerance for sloppy management," says Benjamin Rosen, a venture capitalist who lost all of his original investment of $400,000 in Osborne. "In the old days, you could get away with it, because you were competing only with companies like your own. Now, the IBMs and the Japanese are in every field. You have to have a much deeper, more solid management. You don't have the luxury of making mistakes." Rosen now puts that advice into practice, as chairman of the board at Compaq.

When we left Texas Instruments, we were determined to start a company with people who could work in a Fortune 500 company," explaines Rod Canion. "We wanted to combine the discipline of a big company with an environment where people felt they could participate in a success. We wanted the best of both worlds. And we wanted to do it right."

For Canion, doing it right meant attracting seasoned professionals to his management team with generous offers of salary and stock. Among the first executives recruited to Compaq's smart team was John Gribi, a 14-year veteran of Texas Instruments who, as the new company's chief financial officer, set up a state-of-the-art accounting system that would not be overwhelmed by the company's growth. John Walker, once a senior vice-president at Datapoint Corp., was recruited to establish the sort of quality manufacturing operation that often eluded computer start-ups. And to make sure the new Compaq computers reached the retail market, Canion brought in H. L. "Sparky" Sparks, a 20-year IBM veteran who had managed sales and service of the IBM Personal Computer.

In the early months, Canion and his two co-founders invited their new managers to join them in the executive suite, which consists, appropriately, of modest private offices arranged in proximity to a large and comfortable conference area. There, all the key company decisions were hammered out. As the company grew, new managers were added, but the management process remained essentially unchanged. "We brought in people not to execute orders, but who could replace us," Canion explained. "We wanted people in place who could take us to a bigger size. Our feeling was that if you have a consensus team, it is not going to leave a stone unturned."

Early in 1983, this commitment to consensus management was put to the test. Canion had become enamored of the prospect of producing a "lap-top" computer small enough to fit inside a briefcase. Although there was general support for the idea, a researcher named Mary Dudley was assigned to survey the market. She concluded that the customers just weren't there. After Dudley presented, refined, and re-presented her negative assessment, Canion eventually felt compelled to retreat. It was a good thing, too: lap-top computers by Gavilan Computer Corp. and DAta Genral Corp. proved to be embarrassing market flops.

"I was the champion of that idea, but I was wrong," Canion remembers. "And what saved us was the consensus process--asking enough people, getting enough input. It's not like I'm the one who starts out with all the right ideas. I'm just part of the team process."

The smart-team concept at Compaq is an interdisciplinary approach to management: it assumes that the company's treasurer and top engineer, for example, have something valuable to contribute to decisions about marketing and manufacturing. And what works in the executive suite also works throughout the company. Because of it, Compaq now has a remarkable knack for developing, producing, and marketing new produces in very short order.

Consider the case of the Deskpro 286. In the waning months of 1984, Compaq was facing the formidable challenge presented by IBM's new "super" PC, which many observers were predicting would leave companies like Compaq in the dust. The task of developing a response fell to Kevin Ellington, a 21-year veteran of Texas Instruments. Ellington created his own smart team, drawing from every department of the company, its members working in parallel. Even as engineers were still designing Compaq's new product, manufacturing managers were setting up a new factory to produce it, a marketing executive was busily positioning it, an assistant treasurer was arranging to pay for it. Within six months, Compaq had begun shipping its Deskpro 286s to grateful retailers, while IBM's new product was still plagued by production problems and lapses in quality control. IBM had created a hungry new market and then stumbled; Compaq moved swiftly into the breach, shipping to 10,000 computers in the first 90 days. Today, the product stands as one of the company's most successful, commanding some 3% to 4% of the business-computer market.

"I don't believe any other company could have done this," boasts Ellington, still amazed by the feat. "The first, second, and third reason for that was teamwork. . . . That's what has kept Compaq free from the perils of this world."

The momentum away from swashbucklers and toward smart teams is now so far along in California's high-tech industry that even the venture capitalists have caught on. It was largely venture capital that bankrolled the swashbuckler. And it is venture capitalists who lately have forced many of the swashbuckers to turn control of their companies over the more experienced managers as things have begun to go sour. For most, the period of transition has been costly.

"It used to be thought that you could start a company and then replace entrepreneurial types with {managerial types} later on," notes L.J. Sevin, who has backed such poorly managed companies as Osborne and Synapse Computer Corp. "But now I believe in original sin: if you don't get the right team from the start, you're wasting valuable resources to turn it around. Now if a deal doesn't include deep management, we don't get into it."

So these days it is such companies as Linear Technology Corp. that attract the venture capital. Like Compaq, Linear was founded by a group of executives and engineers who had worked together for many years--this group came from the giant National Semiconductor Corp. And like Compaq, Linear's first move was to assemble a management team much larger and more experienced than a relatively small new company would initially require. "In a start-up, you don't have time to train people," explains Robert Swanson, Linear's president. Venture capitalists responded enthusiastically to Swanson's plea for front-end loading Linear's management team, with three rounds of financing that raised $22 million. Investors read like a veritable who's who of high-tech backers, from Hambrecht & Quist to Ing. C. Olivetti & Co. Calls from other interested investors, including the Japanese, still come in three times a week.

"Linear is the kind of company that's flourishing with investors now," notes venture capitalist Don Valentine, himself a Linear investor. "People are reviewing the pas and figuring out the clues of what works and what doesn't. And what seems to be working are those firms that have a combination of technical people, people with manufacturing skills, experienced sales- and businesspeople--where all critical areas are well staffed."

If today that sounds rather obvious, understand that it is a realization that has only recently come to such entrepreneurial hotbed as California, where team management often was scorned and careful planning was thought to be the enemy of growth. This was a business culture dominated by brash autocrats who had made millions doing things their way and didn't think it necessary to bring in a team of seasoned professionals to keep things on track.

Perhaps none of California's entrepreneurs was more headstrong than Sirjang Lal "Jugi" Tandon, whose Chatsworth, Calif.-based disk-drive manufacturer was one of the fast-growth darlings of the early 1980s. Tandon worshiped at the altar of expansion, ramping up production at a frenetic rate to meet the soaring demands of such ravenous customers as IBM. To keep costs low, much of its production was shifted offshore to Tandon's native India and to Singapore, putting the company in the anomalous position of laying off its U.S. workers even as its sales were expanding. As growth turned into hypergrowth, however, Tandon's widespread production system began to strain the company's slender management resources. Board members called for an infusion of experienced managers, but Tandon stoutly refused. Before long, the company's glaring weaknesses produced unpleasant results: defective quality and late entries of products. Today Tandon is reeling--from a general downturn in the industry, dramatically reduced orders from IBM and foreign competition. Sales, which reached $400 million in 1984, were down to $269 million for 1985, with a loss of $135 million. Belatedly, Tandon has brought in some strong management: as president and chief operating officer, longtime IBM veteran Dan H. Wilkie; and as new senior vice-president, "Sparky" Sparks, who played such a key role as a member of Compaq's smart team.

No such late refresher course on sound management has been necessary for another disk-drive company, Quantum Corp., located in Milpitas, Calif., about 400 miles from Tandon's San Fernando Valley headquarters. While the high-profile, charismatic Tandon was busy grabbing most of the headlines, Jim Patterson, a former IBM executive who founded Quantum, was quietly building a smart team of managers drawn from such companies as Hewlett-Packard, Digital Equipment, Shugart Associates, and Control Data. Early on, Patterson and his team opted for growth that was slow and steady, and not overly dependent on one customer or one product. They refused any large orders that they feared would stretch management and financial resources beyond capacity. "We'd like to have that IBM business, but not on terms that make no sense for a company at this stage of development," Patterson explained.

For five years, Quantum was content to play the tortoise to Tandon's hare. But now the company's obsession with team building has begun to pay off. Sales in the fiscal year that ended in March of last year soared 79%, to $120 million. Profits have nearly doubled, to $21 million. And industry analysts expects a steady upward climb.

Quantum's president is anxious to hold on to his success. And Patterson thinks the key is to make it impossible for singleminded egoist to enter his organization. Prospective managers are subject to as many as a dozen interviews to ensure that they have the sensibilities and temperament of team players. Explains program manager Jim Parson, "Here you not only have to be good, but you damn better fit this culture."

Part of that culture involves a rare commitment to employees. In an industry traditionally dominated by engineers with limited interest in manufacturing and even less in the people on the line, Quantum has stood out during the current industry shakeout by retaining its entire 160-member manufacturing staff. Even when the company shifted its mature product line to a new factory in Puerto Rico last year, company officials used the occasion not to lay off "excess" workers but to train them to produce the next generation of product. That loyalty, Patterson feels, is more than rewarded--in quality production and in low employee turnover, which, at 5% to 10%, compares favorably with the 30% to 50% turnover common in Silicon Valley.

Many of the smart teams of California high tech are started by refugees from corporate America. But not all. Meet Albert Wong, Safi Qureshey, and Tom Yuen, founders of AST Research Inc.

In many ways, theirs is a typical start-up tale. There was no business plan, very little management experience, and only a shoestring budget. What they really had back in July of 1980 was a notion: that the IBM PC would create a huge market for add-on products that could enhance its computing power and expand its functions. Working out of a garage in Santa Ana, Calif., the chores were quickly divided. Wong, the technical genius, handled basic engineering. Yuen, like Wong a native of Hong Kong, directed marketing and sales. Qureshey, a Pakistani took on administration and planning. Members of Wong's family pitched in stuffing boards when they could. And by year's end, sales had nearly reached $400,000 and business was booming.

Today, AST Research is a $140-million company, earning $19 million. And despite the building of elegant new headquarters in Irvine, Calif., and the hiring of dozens of high-powered managers, the essence of this company has remained very much the same: a partnership built on friendship and equality among three young immigrants who run their business by talking things over, as if they were still back in the old garage.

"I have to admit at first I was reluctant to join such a young group of guys, but their openness has really amazed me," says Don Williams, a veteran of Beckman Instruments Inc., who was brought in to take over manufacturing operations. "These are not your typical know-it-all, smart-ass entrepreneurs. They are very into listening."

With help from Williams and other seasoned executives, AST has emerged as perhaps the dominant player in the world market for add-on enhancement products, not just IBM but also for Apple Computer and AT&T. Yet even though the company is now public and its founding fathers are worth more than $40 million each, there seems no intention to alter their management style. For like their smart-team soul mates at Compaq, Quantum, and Linear Technology, they do not appear to be driven by the prospect of making the next million or engineering the next great technological breakthrough. The ego is tightly tethered, fame and fortune do not inspire. What distinguishes the soul of this new entrepreneur is simply and overriding interest in building a company that lasts, an economic institution that endures.

"Our goal is to build an organization for the long term, a company like Hewlett-Packard or IBM, something that's good for all the employees," explains AST's Qureshey.

Quantum's Patterson agrees. "The important thing is not how big you are in your fifth year or where you rank among the fastest-growing companies. The issue is where you are going to be in 25 years. That's the standard to use to judge the really great companies."