Why Big Businesses Fail: A Case Study of Compaq's Downfall

Why Big Businesses Fail: A Case Study of Compaq's Downfall
Why Did Compaq Fail, A Case Study

Compaq dominated the PC industry in the 1980s and 1990s. It was the first brand to develop a legal IBM PC clone successfully. They set ultimate standards in the desktop computers and servers market space. Their service was so good that they dethroned IBM as the best PC brand.

Compaq once was the epitome of innovation and success. It took the computer world by storm. It had quite a remarkable journey that ended in disastrous failure. It was a former computer retailer giant until its acquisition.

This is the story of its unfortunate downfall. What could have ended its glorious reign? Time to find out!

A Quick Compaq Backstory
Beginning of a Downfall: A DEC Merger Gone Wrong
Reasons for Compaq's Further Failure
Was Compaq's Downfall a Preventable Disaster?
Compaq's Failure: Key Highlights

A Quick Compaq Backstory

The 1990s saw Compaq reach its peak. It became the biggest PC (personal computer) supplier across the world. However, its rise was not sustainable. Why? It failed to adjust to the changing times. Compaq could not cater to the consumer preferences.

Its focus was on low-quality PCs with low cost. Their emphasis was always on affordable products. Hence, they could not grapple with the new technology trends. Overlooking user-friendly technology and connectivity led them to lose the battle against other big forces like Dell, HP, and IBM.

Unfortunately, Compaq lost its battle against big companies. Finally, in 2002, HP acquired the company.

Global PC Market Share by Units, Percent in 2000
Global PC Market Share by Units, Percent in 2000

Beginning of a Downfall: A DEC Merger Gone Wrong

Many would argue that the merger with Digital Equipment Corporation (DEC) was the beginning of Compaq's inevitable downfall. In the beginning, Compaq was still at the top of the industry. On paper, this merger was everything good. However, practically, it did not play out properly. Let's understand how this merger contributed to Compaq's downfall:

  • Compaq emphasizes functionality and power. Their focus advertisement was in the opposite direction of other contemporary companies. It did not move towards nix Systems and minicomputers like DEC. The merger first got a push from 42nd to 28th in the Fortune 500, putting it ahead of Intel.
  • DEC and Compaq were a great match. However, DEC also had other products like minicomputers, computer chips, and Unix systems. These had no use to Compaq. But still, it did invest in these products as well.
  • Compaq paid almost $9.6 billion to DEC in 1998. The company divested some of the DEC's parts that it did not want. Then, Intel bought what was left of the chip-making business. This happened before the Compaq-DEC merger came into effect.
  • After a year, Compaq sold the search engine to Altavista, and DEC sold its printer business to Genicom. The rough estimation of the deal was nearly $2.3 billion.

Soon after the merger, the CEO and CFO of Compaq had to resign from their positions. Their sales dropped, and they fell into the trap of many scandals. According to surveys, in 1999, companies like IBM, Dell, and HP saw a rise in their sales. Consequently, Dell took over Compaq and reached the top of the PC industry.

Hewlett-Packard | American Multinational Company | Company profile |
Founded in 1939, by William R. Hewlett and David Packard, HP is an American manufacturer of software & computer services. Know more about its business model

Reasons for Compaq's Further Failure

Compaq's merger with DEC is not the only reason for its downfall. There are other factors at play here. Let us take a look at these reasons:

  • Failure to Cope with Changing Technologies

The company faced a drastic sales dent in 1999. Businesses were worried that their ancient technology would succumb to the Y2K bugs. Dell, HP, and other big companies saw technology as an opportunity and acted upon it. However, Compaq failed to see a loss in revenue and surplus inventory.

  • Deteriorating Company Culture

Workplace culture is more important than we might understand. The merger did not improve company morale. The differences started to degrade the workplace culture. Employees missed deadlines, and sales dropped. Retailers felt compelled to sell the products at insanely low rates. Partners were not happy, given such a culture.

  • Failure to Battle with Increased Competition

Intel took over the status of Compaq. It began a campaign that developed the idea that a computer's most important part is the CPU.

The competitors sold products at a less expensive rate. Moreover, they also offered essential computer parts. Intel was a large company that easily beat Compaq in profits and revenue. Finally, HP acquired Compaq after losing its market value and shares.

  • Failure to Walk in Sync with the Market Trends

The company could not embrace the retailer-to-consumer business model. Its other contemporary companies did not commit this mistake. Compaq and Dell were traditional retailers.

However, Dell adjusted to the change to better consumer interaction and better customer service with quick delivery. When Compaq could not adapt to the direct consumer sales, others overtook it in the race.

  • The Bust of Dot Com Bubble

The dot com bust was harmful to Compaq in two most prominent ways. First came the quick fall of several internet startups. Next, Compaq lost a big chunk of customers because dot coms usually bought huge numbers of apparatus.

Some may not even be in use. Compaq had to fight its surplus until the market could absorb it. When the company liquidated its assets the market was also dwindling with surplus equipment flow.

Why Did PC Industry Boom in 2020?
As the pandemic made everyone of us to work from home, PC demand swiftly went up and gave rise to the PC industry.

Was Compaq's Downfall a Preventable Disaster?

The early 1990s and 2000s gave Compaq a tough time. A wrong merger is a huge dent in a company's reputation and revenue. They could apply proper strategies to combat difficult times if they could adjust to the market's needs.

The company could have used technology to its advantage. However, it did not innovate nor create any counter-business model. After the merger, they could have made the next destructive wave in their counterattack.

The new technology core has several advantages:

  • Capitalizing on these new opportunities could help Compaq to please consumers and predict their preferences.
  • The company could have focused on cost-saving, efficiency, and affordable pricing.
  • Consumers are now picky about pricing and product preferences. So, Compaq could create a positive effect by focusing on smartphones and other advanced gadgets.
Why Did Compaq Fail | Compaq Downfall Timeline
Why Did Compaq Fail | Compaq Downfall Timeline

Compaq's Failure: Key Highlights

  • As we have learned, several factors have contributed to Compaq's downfall. A once-celebrated Compaq was now like a fallen angel.
  • Hewlett-Packard (HP) acquired Compaq in 2002 for approximately $24.2 billion.
  • After the acquisition, Compaq products got a rebranding as lower-end HP PCs.
  • In 2013, the Compaq brand was discontinued.
  • Several companies often fail due to a lack of innovation, changing market trends, underestimating competitors, etc.
  • Brainstorming and constant innovation are what businesses need to have a sustainable future.
  • So, streamlining your business with proper management processes improves engagement and sales.

To Wrap Up

There is a good chance that people think of Microsoft, Apple, Dell, and HP when they think about big PC players. However, the scenario was a bit different two decades ago. The big brand was none other than Compaq. People would have considered Compaq their first choice when purchasing their personal computers.

Compaq did put up a fight until the very end. It tried to battle the inevitable. However, Compaq could not stop the pending doom. The merger with DEC started a domino effect that caused irreversible damage. Next was the dot com bust that added to the fire. It hurt Compaq in its own market space. The company had quite a good run. However, its shortsightedness resulted in a spectacular failure.


What was Compaq known for?

Compaq was a leading PC manufacturer in the 1980s and 1990s. It was the first brand to develop a legal IBM PC clone successfully.

Which company acquired Compaq?

Hewlett-Packard (HP) acquired Compaq in 2002.

What lessons can we learn from Compaq's downfall?

To stay competitive, businesses must adapt to changing markets, embrace innovation, and maintain a strong company culture.

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