In February 1982, Rod Canion, Bill Murto, and Jim Harris, three Texas Instruments alumni, founded Compaq Computer Corporation, launching what has become the fastest growing company in U.S. business history. In 1983, its first full year of operation, Compaq recorded revenues of more than $ 111 million—a record for the most successful first year of sales. In 1984, Compaq achieved sales of $ 329 million—a record for the most successful second year of sales. In 1985, Compaq’s sales of more than $ 503 million made it the first company in U.S. business history to reach the Fortune “500” in less than four years. In 1987, Compaq passed the $ 1 billion mark in annual sales, hitting this mark faster than any other company. In 1988, sales passed the $ 2 billion level. And in 1989, Compaq’s worldwide sales approached the $ 3 billion barrier. Behind this remarkable financial performance is Compaq’s unique management process. The company’s corporate culture is based on teamwork and consensus management and a continuous effort to maintain the benefits of a small company, even as Compaq experiences phenomenal growth. But what is most intriguing about Compaq is a series of counterintuitive notions that combine to create the company’s management process. For example, the CEO of the country’s fastest growing company insists that he is not an entrepreneur. While the company’s product-introduction strategy depends on speed to market, Compaq believes absolutely in a slow, methodical, decision-making process. In an industry that is driven by innovation, Compaq defines innovation as staying within the boundaries of accepted industry standards. Because the company’s labor costs are so low, says the CEO, the company must hire its people very carefully. In a company that has achieved such remarkable financial results, cost ranks relatively low on the list of manufacturing priorities. HBR: Compaq has spent a lot of time defining and developing its culture. How would you describe your corporate culture? Rod Canion: Compaq stresses discipline, balance, continuity, and consensus. That’s the way to survive in an industry that changes as fast as ours does. There are lots of values behind these characteristics, but perhaps the most important is teamwork. That means treating other people with respect and expecting to be treated with respect. No management system can force people to do things they don’t want to do. So when we started Compaq, our basic philosophy was to create an environment where people can stay enthused about the company and not be frustrated by red tape and unnecessary burdens. When you come to work day after day after day for a year, superficial things wear through quickly. You find out that either you enjoy work and get lifted by it or you get dragged down by it. It’s not how hard you work. People work as hard at Compaq as at any other company, maybe harder. But work here isn’t drudgery. It doesn’t use up their energy on negative things. It doesn’t mean fighting off people who attack you in the company or filling out forms or doing unproductive work. People don’t enjoy that, and they’ll leave eventually. But if you spend 80 % or 90 % or, if you’re really lucky, 98 % or 99 % of your time on productive things, you leave work feeling that you’ve accomplished something. Why is the corporate culture so important to you? Our culture is designed to keep the characteristics of a small company alive while the company grows. In 1983, we were growing by leaps and bounds. We saw bureaucracy creeping in and development cycles stretching out. At that point, I realized that the company was getting too big for me to be everywhere or for the management team to mandate and enforce short development cycles through strict planning and reporting. Trying to force short development cycles on people would have failed miserably. I concluded that what we really needed to do was tell people what was good about what they had been doing. I wanted to make them aware of the fact that they’d worked together as a team, that they’d done things in parallel. I wanted to get them to look at what we’d been doing that had worked and consciously try to keep the small-company advantage. We started doing that in 1984, and we’ve kept doing it. That’s what our quarterly company meetings are all about. We get everybody together at a companywide meeting to talk about Compaq. Typically, we hold four meetings over two days at a nearby church that holds about 2,000 people. We go over the past quarter’s performance, show a couple of videos, address issues as varied as speeding on campus or smoking in the offices, and then answer questions. Everybody takes it as a personal job to keep the culture—to keep the good qualities of a small company as we get big. What’s the secret to continuity? You can’t have continuity unless you retain people. We’re able to learn as a team and then build on stable layers of new people, year after year. Low turnover is fundamental and distinguishes Compaq from lots of our competitors, particularly those in Silicon Valley. Most companies would point to compensation plans, stock options, and bonuses as the way to keep people. But really, they’re just there to prevent people from being stolen. It’s not pay or stock or anything else that keeps people. It’s whether they’re drained or charged emotionally. People stay when they enjoy what they do. People stay when they fit the culture, when they are working in a supportive, helpful environment, and when they get fulfillment from working as part of a winning team. It’s dissatisfaction, more than money, that leads people to leave. I learned that lesson early in my career. Halfway through my tenure at Texas Instruments, I left to go to a small company here in Houston. I did it basically for money. I wasn’t looking for a job. They came to me and showed me all this money, and I thought, “That’s great.” Six months later, I realized that there’s a lot more to life than money. Money is important, but even more important is enjoying what you do and being really excited about it. So I went back to TI. Compaq wouldn’t be here today if TI had continued to be a challenging place to work. I enjoyed most of my career there, and it was only in the last year that I really got frustrated. That was the critical factor in my deciding to leave. But can’t you live with a little bureaucracy as long as the company keeps growing? Growth has a way of curing all ills. I would say that growth hides all ills—until the growth stops or slows down. At Compaq, we know that growth is a two-edged sword. It does a lot of good things for a company, and it’s an environment that you want to maintain. But depending on growth as the antibiotic for what ever ails you will eventually get you into serious trouble. In fact, growth can be a disease, rather than a cure. We’re trying to manage growth, and whether or not it’s fatal, by managing the culture. That doesn’t sound like the ideas of a typical entrepreneur. I never viewed myself as an entrepreneur, either when I quit TI or when I started Compaq. I always thought of an entrepreneur as someone who can’t work for anybody else and has a burning desire to make his or her own idea known. That just didn’t fit me or any of our team. And our not being classic entrepreneurs has been a real benefit for Compaq. The typical entrepreneur has the problem of dealing with all the things success brings, things he or she didn’t really want in the first place. But because we were really more typical businessmen starting our own company from scratch, when we did grow successful, we had the skills and orientation necessary to manage that growth. We’ve talked about continuity; what about discipline and balance? Our entire orientation toward customers and technology—and the process that brings the two together—depends on discipline and balance. Our management process is designed to meet customers’ needs, use the latest technology, and—most important—get to market quickly. The last part of that—getting to market quickly—allowed us to come from behind in the early days, to pass the competitors, and to continue to be out in front of our bigger competitors who don’t have short development cycles. To accomplish that in a way that doesn’t burn out our people requires discipline and balance. Where does the sense of discipline come from? I think it comes from our roots in engineering. Both Jim Harris, the vice president of engineering, and I were engineers, and Bill Murto, our former vice president of sales, had worked closely with us. That background created a sense of tough-minded pursuit of facts, of pushing until you get to what you think is really the right answer. That attitude was there initially. It was the way people operated with each other—and it grew. It wasn’t viewed as threatening because it went hand in hand with the consensus process. But consensus doesn’t work unless you have the discipline to keep digging for the facts that you need to make a good decision. Consensus isn’t getting everybody to agree to vote for the same thing. Consensus is getting people to believe that you’ve got the right facts and the right reasons to make the right decision. How important is the consensus process to Compaq’s mode of operation? It is fundamental. Our management process is based on the concept of consensus management. The real benefit of the process is not that you get the answer but all the things you go through to get the answer. You get a lot of facts, you get a lot of people thinking, and the result is that everybody owns the decision when you get through. Originally, we used consensus management at the top to address the really tough, critical, long-term decisions. But as people participated in the process, they could see how to use it at all levels. Today it permeates the company all the way down to the manufacturing floor. When something isn’t working right, the teams get together and try to figure it out. Isn’t that quite a lot to invest in a decision-making process? It’s what makes Compaq so successful. I remember when I was moving into the ranks of management at TI. I was worried about making the wrong decision. So I talked to one of my mentors, and he said, “As long as you’re right 51 % of the time, you’re OK.” I accepted that answer at the time. Today I’d say that you need to be right 100 % of the time. You may not achieve it, but that should be your goal—to be right all of the time. You need to keep striving for that goal, which means paying attention to every detail and putting everything in its proper order. Being right all of the time also means that you don’t just do the best you can as an individual. You use all the resources that are available to you. You use the whole team. And the team keeps pushing and digging until everyone can agree on the decision. If you do the best possible job, then the best the competition can do is tie you. Our basic philosophy is to push harder and more thoroughly, to push until we get more facts and the best answer. It also means recognizing that there are times when the right decision is no decision. I used to hear the saying, “Any decision is better than no decision.” But that didn’t seem right to me because when you make a decision, it ripples, it propagates. If that decision has to be changed, then other things have to be changed too. What role does the boss play in this process? That’s one of the key differences in the consensus process. The normal way a company works is that a team comes to the boss at the end of the process and presents its results. So if the boss has something to contribute, he says, “No, we really want to do it this way.” Since he’s the boss, he usually gets his way. But a lot of bad things happen right there. The people feel that he’s changing the decision just because he wants to or because he can. Also, the boss doesn’t have all the information they do, so his critique may not even be correct. At Compaq, the consensus process does not assume that because I’m the boss, I have the final answer. It’s built around a team, and any time there’s a team of people, you expect everybody to contribute in one way or another. If I’m going to contribute an idea, experience, or knowledge, the best time for me to do it is early in the process rather than at the very end. That way people don’t think of it as getting my stamp of approval; they think of it as getting my contribution. What’s an example of the decision-making process making a difference at Compaq? Take our approach to the laptop market. The first time we looked at that market was back in 1984. Following our usual methodical approach, we did some market research to find out what was out on the market and what the technology allowed people to do. We were researching companies that took the latest, smallest technology and did the best they could with it. Then we tried to figure out the number of potential customers there were for that type of product so we could make a go or no-go decision. In parallel, we were doing a number of other things, including preliminary design work and even prototyping for our own laptop. Now in the laptop case, the go or no-go decision came down to one meeting. And what made it particularly interesting was that I was the driver behind the project. I liked having a laptop with me, and I wanted us to produce one that was better than anything else on the market. At this meeting, a fairly young researcher presented her facts and recommendations. Her conclusion was that there was a market for a Compaq laptop, but it wasn’t very big. We looked at how she had come up with her numbers, and we came up with a set of facts we could all agree on. In the end, we concluded that while we could sell some laptops, those sales didn’t justify the effort we were going to put into it. There were better opportunities, like the desktop line. So in spite of a strong desire on my part to go into the laptop market, the process worked and we decided not to do it. Yet here you are in the laptop market now. Sure, because that meeting was not the end of the story. We decided to focus on other opportunities—on getting into the desktop market, which turned out to be the right decision. But we continued to look at laptops, which is also part of the process. We did several more prototypes and more market research, and the next time the issue came to a head was in early 1986. At that time, the laptop market was beginning to grow with Toshiba. We considered getting into it then. But once again, the laptop was up against another opportunity, the 386 desktop product, which provided a tremendous differentiation opportunity, a chance to establish real leadership. So again, we decided to focus our resources on that product. And again, I’d say that our process produced the right decision. What led to the decision to launch the laptop? The way we finally developed our laptop reflects another important thing that distinguishes Compaq—our attitude not to accept the general preconceptions of the industry. Every time we spot an industry preconception, we see it as an opportunity and test it. Most of them may be right, but often enough they’re wrong. We feel that if we follow our processes—and we’re confident they’re right—we can go against the industry’s conventional wisdom. In the case of the laptop, all of the products that came out in the last part of 1989 demonstrated a set mentality. Every one of our competitors came out with a small, notebook-size computer with a floppy disk and no hard disk. The reason was obvious: you couldn’t get a hard disk into a computer that size. The conventional wisdom was that if it can’t be done, nobody will do it. And if nobody else does it, you’re safe if you don’t do it. We came at it another way. We said, we’re not going to offer a computer that doesn’t have a hard disk in it. So much of the market today demands it, we’ve got to deliver it. Let’s figure out what it takes. Sure enough, we found out we could do it. So when we finally made the decision to go with our own laptop, we were able to use technology to meet our customers’ needs and be the first to market. And again, we were fortunate to make the right decision. The laptop was one success that went against conventional wisdom. How important is that approach to Compaq’s success? A lot of the things that helped Compaq move out in front went against generally accepted opinion. I think that gets back to discipline, thoroughness, and our decision-making system. A part of the consensus process is not just coming up with the best decision that the group can make today. It’s being willing to recognize when you really don’t have enough information to make the right decision. So you say, “Time out, let’s go get more information.” And you keep doing that until you have enough information to make what the group believes is the right decision. Another part is keeping an open mind so that people feel that it’s OK to ask questions and test assumptions. In many company cultures, if you question people, they think that you’re trying to shoot them down. The result is that people won’t speak up. They may speak up if it’s important but not if it’s just a little deal. But then a lot of those little deals add up, and they can end up getting you off the right track. Is there something in particular that distinguishes the way you approach a problem? We work hard to ask questions. If I had to characterize our way of thinking, it is “Why not do that?” It’s practically an inside joke. If somebody says that we can’t or shouldn’t do something, the automatic response is, “Why can’t we do that.” If there’s a good reason, then that’s the end of it. But if the “reason” is just a blanket statement or a remark in the trade press that “this is what everyone is thinking,” we know that’s not a good reason. We can see today that what separated Compaq from the pack were decisions that other companies didn’t make. We’re testing ideas, getting people to think in a different way, and asking questions. We’re looking for the assumptions that aren’t justified. As I listen to people, I listen for what fits together, for where the holes are, or for the one assumption they’ve made that may not be right on. It comes to the point where the more traditional a thing is, the more you question it. If it’s traditional, maybe you’re just accepting it without really testing it. How did that attitude get started? We’ve always been caught up in the idea of testing boundaries. You never know unless you try. At the beginning of 1983, we were just starting to ship our first product, and we needed to find a new vice president of sales. We sat down and asked ourselves, if we could have anybody in the world to do this job, who would we get? It seemed obvious that he or she should be somebody who had been through it, who knew all the dealers, and who had a lot of experience. Only one person fit that description: the IBM PC sales manager. Of course, conventional wisdom says you can’t hire away a guy with 20 years experience at IBM. It’s a safe company, a good job, a key role. You can’t get him to leave that and come to a startup. But as luck would have it, when I ran into him at a PC conference, I approached him, and he didn’t turn me down. A month later, we had gone through the process, negotiated with him, gotten him comfortable with a small company, and hired him. How has this attitude affected the way you do business? It’s one of the things that has distinguished Compaq. For example, to some people, a slow, methodical process conflicts with speeding a product to the market. That may seem to be true because of history or other people’s expectations. In fact, we’ve heard a lot of criticism from other companies that like to run and shoot. They announce a product early, but then something goes wrong, and they end up with six-month delays. There is a very strong, fundamental belief at Compaq that following a methodical approach as quickly as you can almost always leads to the best and fastest solution. When you seem to be moving slowly, if you’re taking careful steps that turn out to be right, you get where you want to go faster than by speeding along and making mistakes that slow you down or permanently derail you. Is it true in technology as well? That’s exactly what happened with our decision to go with the 386 processor. What was working in our favor was our mind-set and attitude. The industry tends to follow certain preconceptions about how things ought to work. One of those is that IBM is the company that always has to bless a new processor design. It’s interesting how quickly that attitude evolved. After all, when IBM entered the PC market, there were already a lot of companies out there with “better” products. But IBM dominated and became the standard. Any company that jumped out in front of IBM risked being incompatible. In fact, we realized that IBM had done such a good job of setting the standard that it wasn’t an IBM standard anymore—the industry itself was now supporting the standard. So the key to any next product was to be compatible with existing standards and offer improvements. In the processor area, there weren’t a lot of choices. Intel was developing the next step beyond the 286, the 386. Because of our attention to compatibility all along, we understood where the risk areas and the safe areas were. We looked at the 386 and concluded that we could offer a compatible product that ran all of the software and delivered the advantages of speed and power that the 386 processor had. And we could do it first. We could use conventional wisdom about IBM’s leadership to take a position ahead of IBM. And we could do it without sacrificing compatibility. It sounds as though Compaq adopted a long-term orientation toward the business right from the beginning. Our business changes so fast that the only way to survive is to think for the long term. When things change as rapidly as they do in our industry, the long term comes sooner rather than later. So thinking long term turns out to be just a commonsense thing to do. We have an aversion to making bad short-term tradeoffs, seemingly for a short-term good. When you think that way, and it becomes a part of your culture, it affects everything you do. For example, you don’t try to squeeze the last dollar out of a supplier or try to trick a dealer to get a small advantage, because those things never last. They may last for six months, but problems will catch up with you the next time around. If you want to be around for the long term, you have to invest in developing a supplier, developing a dealer. You have to create a stable, fair, and win-win situation every time you can. There’s another element to the long-term focus. A company that wants to be a leader for a very long time has to apply its limited resources, energy, and people to the most important things. Dealing with short-term issues, such as constantly changing suppliers or dealers, wastes energy and resources. It keeps you from getting on to other opportunities. If your focus is on the long term, how do you set company plans? We set directions rather than goals. We pay more attention to managing the direction we are going in, how we are making progress, and how we are doing things than we do to setting a specific goal and then meeting it. In other words, someone who is meeting goals but doing it in the wrong way—not building a team that could keep it going year after year—might have to be replaced. But someone who isn’t meeting goals but is really doing all the right things to get us there over the long term may actually be a hero because he or she is laying the pieces in place to get the job done right. How far do you take this idea of setting directions rather than goals? You shouldn’t get the idea that we don’t have plans. In order to be able to buy land and build buildings, we do have to plan. But the plan doesn’t drive the company. The plan is a tool that we use to communicate with groups that need coordination. We have certain revenue targets for a year, for example. We have a goal, but we all know that it’s a goal for planning purposes and that the numbers are wrong. We say that a lot: “These numbers are wrong. We just don’t know if they’re high or low.” Saying it out loud reinforces the idea that those aren’t magic numbers that we have to do whatever it takes to hit. We learned that from the beginning when it became clear that we had no way to set and then meet company revenue goals. Our first year, we had revenues of $ 111 million. When we started, if we had set a revenue goal for everyone to hit, it certainly wouldn’t have been $ 111 million. At the outside, it might have been $ 50 million. If we had passed the $ 50 million goal in the third quarter, everybody probably would have coasted on to the end—at least, that would have been the temptation. On the other hand, what if we had set that goal and come in at $ 35 million? Now, $ 35 million would have been a phenomenal first year. But everybody would have said that we didn’t meet our goals. That’s why today we accept that things change. What’s really important is that we’re doing the right things in manufacturing and marketing and throughout the company—the things that will give us maximum growth. We believe those things will work over the long term—even if they seem not to be working now. You don’t just abandon them to hit the numbers. You have to have consistency and continuity; you can’t switch back and forth. You can’t tell people to think long term and next quarter tell them to make their numbers. You train people by all your actions over time. You communicate more strongly with your actions than your words. How would you describe Compaq’s approach to competitive manufacturing? There’s a whole science to our manufacturing approach, and it begins with carefully setting priorities. What do we want our manufacturing organization to gear itself to do? When we asked ourselves that question, quality turned out to be number one but keeping costs low was not number two. In fact, cost was way down the list, after flexibility in shifting the product mix and speed in bringing products to market. We geared our manufacturing to the change that is such an important part of the industry, rather than to trying to change the industry. Our approach was to stress flexibility and speed, rather than assume that the market wouldn’t change. Or take our view of our work force. Since we have relatively low labor costs, we feel we should hire our people very carefully. Some people might consider that counterintuitive, but we think it’s common sense. After all, if you look at a typical computer that we build, the actual human labor that goes into it compared with the material that we buy outside is pretty small. So we feel that we can afford to increase that percentage with slightly higher labor costs if the result is reduced quality problems and more efficient teamwork. Rather than squeeze labor costs down by 10 % and reduce the quality of people, we are willing to increase it by 15 % and get the best people who are going to make everything work better. How did you come up with these manufacturing priorities? Our manufacturing priorities grew out of the consensus process, out of different teams bringing up issues for discussion. The marketing people would look at our costs and tell us that we needed to lower them. Our factory people would say that we could have lower costs, but that would mean that we’d have to give up some flexibility. We talked about it, gathered facts, and finally concluded that to get lower costs on a repeat product basis, we’d have to build in a pipeline, which automatically reduces flexibility. In the early days, IBM, the King Kong of the industry, had a manufacturing philosophy that believed in 90-day windows during which nothing changed. They tried to get dealers to give them a 90-day order that didn’t change. But of course, in the computer industry, that isn’t the real world. The dealers never had the right amount of inventory; they had either too much or too little. They would cut way back on their orders, or they would double their orders. So it was clear that in the PC market, a pipeline wouldn’t work; there just wasn’t the stability. The environment forced us to decide that there was real value in being able to switch our production from one model to the next—say, from one desktop or portable to another—to get the sales that existed. We wanted to be able to deliver whatever the dealers ordered. The way we looked at it, it wasn’t cost versus flexibility. It was how we were going to respond to the market. If quality is the top priority, what is the Compaq idea of quality? Quality isn’t whether or not your products work. Quality is how people do their jobs. Quality is defining your job and then meeting the expectations. When you do that, you raise everyone’s consciousness that everything is important. Every piece of the company is important. How did you arrive at that definition? I think that attitude goes back to the first two or three years of the company, when there were relatively few people. Back then, there was a lot of opportunity, certainly a lot more than we could possibly handle. Everyone in the company had to organize his or her own tasks, and we had to decide how many people we were going to hire and which areas would get the people. We realized that there shouldn’t be any jobs in which it didn’t matter whether you were there that day or not. We were counting on everyone, no matter the function or part of the process. It’s important, or it’s not there. We try to communicate this feeling throughout the company. It’s not one little piece that you could look at and say, “That’s it.” The feeling has to be everywhere. It’s in the factory, in the way it looks. It’s an open, pleasant factory with trees in it. The Cokes are free. And that’s not by accident, that’s by design. We have company picnics. We have company meetings. Those events mean different things to different people. It’s a half day that you get to do something that’s different and maybe a little fun. How would you describe Compaq’s approach to innovation? In any situation where we’re looking for creativity, we begin with the customers’ needs. We always start by trying to figure out what we must not change in order not to violate the needs of customers. They define the boundaries, the framework of things that are fixed. Then, in the areas where we can innovate, we try to be as creative as we can. This has really been our approach to the whole product area: innovating within a framework. We knew from the very beginning that we had to produce not only a good hardware product but also one with good software. And that meant the product would have to be compatible with the IBM PC. So we told our engineers—we drilled it into their heads—that they couldn’t violate anything that would prevent the software from running. Be creative, but don’t violate these fundamental rules. That approach has made the difference. Early on, a lot of companies had products that the industry magazines reviewed as being more innovative than Compaq’s products. It amazed industry experts that these products didn’t sell. It took a long time before people understood why our products sold and other people’s didn’t. Do you apply this notion of innovation in other parts of the company as well? We had the same attitude when we opened our Scotland factory. Our approach reflected a clear and thorough understanding of our target. We wanted to create a model of success for any foreign factories we would build in the future. The thing we worried about the most was that something wouldn’t work. Here, in Houston, we live in an ideal world, a controlled, self-contained factory environment. Since we were going across the ocean to a different culture, we wanted to be conservative about everything. We decided to take what worked and transplant it carefully to the new factory. The Scottish teams were eager to improve on the process. But we told them, don’t improve it now, let’s get it up and running with no problems. We can improve it later. What is your approach to new-product development? The whole new-product cycle from the concept definition, research phase, design, testing, and into manufacturing has been the heart of the company’s success. It’s the foundation of everything else. It has meant having the right product at the right time—consistently, over and over again. The reason for it, I believe, is our use of a process that doesn’t rely on luck or the vision of just one or two people. Our process involves a team that deals with new-product ideas. There’s a core—people who are involved all the time—and others who are part of the team, depending on their area or the type of product. But it’s not just a matter of focusing on a specific product. The team also deals with long-range strategic issues, for instance, how RISC-processor technology is going to affect the market. Some people see that issue as black and white. We see it as a force that will affect things in many different ways. The team also looks at what our competitors are doing. We identify things we don’t know or aren’t sure about and ask a team to research carefully a specific question, gather more information, and then revisit the question a few weeks later. It’s a building process. It’s not one 15hour meeting. It’s five 3-hour meetings over a period of months, where we build our knowledge and understanding until finally everything we need is there to make a decision. What is it that makes a company a leader in a certain industry? To be a leader, you have to do more than just get out in front. A lot of small companies go for the headlines by announcing a product first. That works to get headlines, but it doesn’t work well to get sales because you have to combine being first to the market with having credibility with customers so that they’ll follow you. Leadership to me is about not being held back by your competition and also having credibility and clout with the customers so they’ll go with you.
