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Volume 5, Number 5______________________________________________
July 1986
On June 5, 1986, over
500 senior managers attended Digital's semiannual State of the
Company Meeting in Merrimack, N.H. The theme of the day, Digital's
"Window of Opportunity," was explored by the day's presenters.
Following are summaries of the speeches.
State
Of
The Company by Ken Olsen, president
Digital’s
Financial
Position by Jim Osterhoff, Vice President,
Finance
Our
International
Window Of Opportunity by Jack Shields, vice president,
Sales & Services
Digital's
Workstations
Opportunity by Steve Teicher, group engineering manager,
Worksystems
Today's
Window
Of Opportunity In GIA by Dick Poulsen, vice president, GIA
Taking
Advantage
Of Opportunities In
The U.S. by Chick Shue, vice president, U.S. Sales
Contributions
Being
Made By Field Service by Dave Grainger, vice president,
Field Service
Competitive
Advantage
Through Manufacturing by Bill Hanson, vice president,
Manufacturing Operations
We have a window of opportunity to strongly
capture the number two position. With the computers, the people,
the manufacturing capacity, the money and the networking we have,
we can capture the world.
Almost no big company has created the products
and the organization to exploit them. None has an equivalent rate
of technological and skill development that we have set out to
accomplish. We have to stop and ask, "Why e do we think we can do
it?"
What makes us so presumptuous to think that we
will do something that all the big companies in this country and
in Europe have failed at? We are not without a history of failure.
In the early '80s, we went for a long period without a significant
new product. We were on top of the world as far as orders,
deliveries, profit and growth. But we couldn't get out a new
product. We deteriorated in our marketing. The cooperation within
the organization fell apart. After six or eight years of great
success, we fizzled.
Now the question for each one of us,
particularly those of us who are managers, is, "What right do we
have to think we can do it and what do we have to do in order to
do it?" You heard through the years some simple explanations that
I presented. One of them was having the company broken down among
entrepreneurs. We had the motivation, the control, the
measurements to accomplish this. But to my dismay, that fell
apart. We discovered in time that the entrepreneur, by nature, is
the last one to delegate. The entrepreneur is the last one to
cooperate with someone else. And when success comes, the
entrepreneur is the first to become conservative and to rule out
ideas. The successful entrepreneur is the last one to learn
something. It was a very humbling experience for me when our
management system failed.
Now, humility, in itself, is not enough. People
who are overly introspective are a bore. To win in business, we
have to have enthusiasm and confidence and the selfish yearning to
go out and win. Yet we also need that introspection — that
humility — to learn from each other, to study, to go to school, to
learn from our customers.
There is good tradition for this. In science,
we are taught that the scientist is humble. He never knows the
answer, and is always searching, experimenting; frustrated that
he could have been so stupid two years ago, and ill at ease with
what he has today. It's that humility that builds science. In many
religions, the pilgrim humbly searching is the model of life.
We don't know everything about computers, and
we have a lot of reasons to be humble about our marketing. If our
marketing message were simple and were understood, we could own
the world.
Now, if I asked what advantage we have, I hope
you would say, "We have an environment which is conducive to
creativity and encourages people to do good work and to work
hard." In fact, when we started the company, there were a number
of ideas we took from MIT. One was the atmosphere. It produced
people who were creative, enthusiastic, interesting, exciting and
worked awfully hard and enjoyed it. At MIT, there was, and I
believe still is, enormous generosity on the part of the
management. They didn’t pay well, but enormous generosity in terms
of trusting people, not checking on them all the time. In the
group that I was in, there were also very clear goals so that
everyone understood where they sat relative to the project they
were working on. Secondly, their peers knew and that brought the
pressure for • driving hard. And thirdly, the boss was considered
to be relatively unimportant. At MIT, they had this enormous
intellectual challenge. That combination of generosity, trust and
intellectual challenge was exceedingly productive. It was this
that challenged me to go into business to try to generate that
atmosphere. This is still the challenge. If we generate that
atmosphere and if we keep it, we can do better than anyone else.
Our goal and the secret to our success is to
create and keep this atmosphere which generates creativity, makes
people work hard and enjoy working hatrd, and 'Challenges them to
learn, to do new things, and to take chances yet be careful in
their approach, so that we never gamble the whole company.
I am often asked by the press, "Who is your
replacement, Ken?" I have two answers. First, I am young and
healthy and it will be a long time before I make that decision.
The other answer is that you don't pick the leader by crowning
one. In our kind of business, you work people as hard as you can.
That’s how you find out who can do it and who can’t. You owe that
to the individual. Part of that is giving financial
responsibility, and this is something that we sometimes do very
well, and we sometimes do very poorly. If we are going to pick the
corporate leaders out of hundreds, thousands of managers, we owe
each one of them the right, the obligation to take financial
responsibility for what they do. Each of us should lay out our
plans and make our budgets. If things don’t work out during the
year, it is our responsibility to adjust the budget. If we did
things wrong, the company owes it to us to be sure that we live
with what we did wrong. If we do well, we should enjoy and learn
from things we did well.
Last year, New England's football team had an
interesting year. New England had previously had a losing team;
they were losers in spirit and losers in actuality. They got a new
coach who is quiet and humble and introspective. He went to work
on the team. They hired new assistant coaches who encouraged the
players, told them that they were winners and taught them the
techniques, and developed an atmosphere to learn and, above all,
to cooperate. The results were amazing. They were born losers
yet, in one year, they won the championship of the conference.
That set them up for a game which was the league championship. But
they had no more emotion left; they were drained. Their vision was
limited to the conference championship. They couldn't stir up one
more ounce of enthusiasm for that final game and, as you know, it
just fizzled.
There are a number of lessons to learn from
this team. One lesson is that we owe the people who are doing the
work the enthusiasm, the confidence and the goals. We owe them
knowledge about techniques and technology and methods and
everything that makes a good team or a good company. We also ought
to learn that, in spite of the skill and in spite of what they
did, largely with humility, the football team lost that final
game. We don't want to do that.
If we are enthusiastic and have fun, but
continue to learn, to work hard, to be humble — humble
technically, enthusiastic technically — if we worry about our
marketing and about doing a better job; if we do this in every
part of the company, and in all of our responsibilities, we can
take on the world.
Today, thanks to all you have accomplished in
the last year, I have the pleasure of reporting financial progress
in profitability, productivity of assets and the value of Digital
to our shareholders.
Operating profit margins have been our primary
trouble spot in the past*few years. We had fallen from a
historical range of 15 to 17% down to 6 to 8%. And, a year ago, we
were still headed down. Our absolute operating profits in FY85
were $450 million, substantially below what we had earned in
1981-82 on less than half the 1985 volume. We hit a quarterly low
at the end of FY85 with a margin of 5.2%. But at that point we
made a significant turnaround.
As we reported, QI was still our lowest normal
first-quarter margin in recent history, but by Q3 we had improved
to 11.6% — our first double-digit operating profit margin in 14
quarters. For the first three quarters of FY86, our operating
profits have totaled $502 million, already surpassing each of the
last three full years.
A year ago we stressed the significance of
break-even, which shows the trend of total cost that must be
recovered by revenue before earning a profit. Through nine months
of FY86 we have reduced the break-even to 83% of actual revenue
from 87% a year ago. The best way to return to the pre-1983 levels
of profitability is to stay on a flattened trend line in total
cost growth.
Another way of viewing our performance is by
comparing the trends of growth rates in revenues and costs.
Despite high revenue growth for most of the last five years, our
margins declined because costs were growing even faster than
revenues. This was not the way we planned it, but each year our
revenue budget proved to be too optimistic.
This year we took a different approach. We
budgeted resources to achieve an 18% volume increase, but we made
the assumption that 6 points of that would go into backlog and 12
points would flow through to revenue. Costs were budgeted at a 10%
increase to produce an improvement in margin even with just a 12%
revenue gain.
Year-to-date we have added all the sales
resources that were expected to produce an 18% volume growth. But
the industry has not cooperated. So, while we are substantially
out-performing the competition in the marketplace, our volume
growth is a third less than we had planned. Nevertheless, despite
being over budget in some areas of expense, our total cost
increase year- to-date has been held to 8% compared with the
full-year budget of 10%.
Now let's look at asset performance and what
the improvements achieved in asset productivity have done for us.
A year ago we were seeing the beginning of some favorable trends
in inventories. Actual inventories have continued to decline,
aided in part by lower labor and material content in our new
products, but mostly by a continuing improvement in turn rate.
In 1984 our inventory turn rate was 2.1 turns,
and this year to date it is 2.7. This improvement has reduced our
investment in inventories by $675 million. Most of it has come
from a closer coupling of sales forecasts and production plans --
simply, improved coordination and teamwork between Manufacturing
and Sales.
There's continuing progress in receivables as
well, with the U.S. leading the way. A year ago we were feeling
pretty good about an improvement in D.S.O. (Days Sales
Outstanding) in the U.S. down to 76 days. But today in the U.S.
we're at 62 days — our lowest ever. Recently, excellent
improvements have been achieved in Europe as well. By a year from
now, we expect to see the same kinds of trends in GIA.
As with inventories, the improvement in
receivables can be measured in terms of cash. In Q3 of FY8.4, we
were at 88 days, adjusted for some currency effects. Improvements
in D.S.O. since then have saved the company $170 million.
Receivables can be viewed as a measure of
customer satisfaction, because most of the reasons customers don’t
pay within the standard terms are related to quality problems
--quality of product, delivery, paperwork, installation,
coordination with other suppliers, etc. You could say that
receivables measure how long it takes us to satisfy the customer
after shipment of the product. The improvement that we’ve achieved
in D.S.O. tracks with recent improvements we've made in customer
satisfaction. And while the D.S.O. and customer satisfaction
trends are good, there’s still plenty of room for improvement.
The other asset account that's been in the
spotlight is cash. At the end of FY84, our cash balance was $476
million.- A year ago we were closing in on $1 billion. And since
then, we've added another $1 billion.
Where did this cash come from? Ongoing
operations have contributed only $66 million. Cash earned from net
income of $882 million has slightly more than funded our growth,
which has consumed $450 million and paid for new capital
investments of $366 million net of depreciation. Nearly all of our
cash improvement has come from one-time events — new issues of
debt, including $400 million borrowed in the last half of 1984,
and the $675 million of disinvestment in inventories and $170
million disinvestment in receivables.
These numbers provide an obvious answer to the
question that we often get on dividends. A policy that would
commit the company to an ongoing use of cash should not be made on
the basis of cash generated from one-time events.
As a result of the improvements in inventories
and receivables and excluding the excess cash that has built up
(we define excess cash as all the cash over 15% of revenue, which
is our historical average), the total asset turn rate has made a
significant improvement to 1.2 turns. Continued progress requires
further reductions in inventories and receivables and a concerted
effort to hold down the costs of new facilities.
Our financial improvements have shown up in the
price of our stock. Today the value of our stock is 75% higher
than it was a year ago.
What’s different now from a year ago? The stock
market in general is much higher, but we have grown from 30% below
IBM to 20% above IBM (on a presplit basis). A negative factor has
been the unexpected weakness of the computer industry, and lower
anticipated future growth rates. Our new products were anticipated
so they should not have had a major impact on the investment
community. I think it's safe to say that most of the rise in our
stock price is the result of improvements in profit margins and
asset management.
Overall our financial progress report for the
past year looks pretty good. In a very difficult industry
environment, we have managed to grow by 12%. But most importantly,
we are gaining market share; asset turns have hit an all-time
high; and cost performance has been brought into line with revenue
growth for the first time since 1981. This success has raised
investor expectations and caused the price of our stock to
increase by more than 75%.
We see bright prospects for the company,
highlighted by a clear product leadership position. So let me
spend a few minutes on financial considerations affecting growth.
Shareholders obviously like growth because it
offers the opportunity for higher return on their investments.
Employees like to work in a growth environment because of job
satisfaction and personal reward benefits. Suppliers like to do
business with growth companies because growth translates into the
same benefits for their own operations. And to customers, growth
represents product and service superiority, and they like to do
business with a winner. There's one other benefit to growth that
we can all identify with — survival. In an expanding industry,
growth is defined as higher market share.
The management of growth is not a simple task,
and while the benefits are obvious, there are also risks.
One risk is underestimating the competition.
Although we truly believe we are the best, we are still a small
piece of the industry. IBM has rarely pioneered new products in
this industry, but even where they haven't pioneered, they have
dominated. For the past several years IBM's growth, on average,
has been $4.8 billion annually, equivalent to our total sales.
IBM used to be nine times our size. They are
still seven times our size. So you might say that every order for
which we are in competition with IBM is seven times more important
to us than it is to them.
Another risk related to growth is what I call
the "revenue cost race." It's based on the hypothesis that the
higher the growth rate in business, the greater the risk of damage
from a sudden interruption in that growth rate. The best analogy I
can think of is the rule of maintaining one car length between
yourself and the car ahead of you for each 10-mile-per-hour
increment of your speed. The faster your speed, the more distance
you should allow. Think of the car ahead of you as revenue and
yourself as cost. The distance between is profit. When the car
ahead of you changes speed, it takes time to react. It's the same
in business. There is a time delay between the action of revenue
and the reaction of cost. There’s also more inertia in cost than
there is with revenue. Much of the cost growth we will incur in
FY87, for example, will be set in place by actions we are taking
this year. It’s even more risky to speed up cost growth in
anticipation of a speed-up in revenue, especially when the
distance between the two is short to begin with. Imagine driving
down the highway at 55 miles an hour, with only three car lengths
between yourself and the car in front of you, and increasing your
speed in anticipation of the car in front doing the same. If the
revenue car, in this case, doesn't accelerate, or if it slows
down, the profit interval can disappear in a hurry. Comparing
ourselves with IBM in this way, we are traveling at a much faster
speed, with much less relative distance between revenue and cost.
You might say we're paid to take these risks
related to growth. I’d rather say we're paid to manage them.
Growth represents both the beginning and the
end of the financial cycle. It impacts both profits and assets,
which in turn determine the availability of internal and also
external funds required to keep the cycle going. All else being
equal, growth causes both assets and profits to increase. But all
else isn't equal. For example, the model indicates that growth
should cause profits to rise. But it doesn't always happen that
way, as we learned in FY83 and FY84.
Growth also causes assets to rise. Our total
assets have been in locked step with revenue as we have grown to a
$7 billion corporation. Our asset turnover rate has been
relatively constant, at least through FY85. But our recent asset
performance has caused this relationship to improve. That's a
result of managing inventories and receivables. This has enabled
us to halt the growth of total assets (excluding cash), despite a
continuing increase in revenues.
Right now we have the opportunity to take
advantage of competitively superior products. But along with this
growth opportunity, we need to consider our financial capacity for
growth.
Our "self-financing growth rate" indicates how
much growth we can finance from internally generated funds without
using our cash reserve or going to outside markets for additional
financing. The key factors in this equation for seif-financed
growth are profit margins and asset turns.
Our present self-financing growth rate is about
12%. In other words, we can support from internal operations an
annual growth rate of 12% over the prior year. Continuing to issue
new shares for employee stock programs and additional debt as our
equity base grows will support an additional three points of
growth, increasing our total annual financial growth capacity to
15%. The cash generated from operations can be improved by
improving the profit margin. The cash consumed by growth can be
reduced by improving the asset turn rate. Either of these actions
or the two in combination will increase the self-financing growth
rate.
Also, we have and we can use our roughly $1
billion dollars of excess cash. This cash provides us- with an
additional growth capacity of 20%, but for one time only, not on
an annual basis. It is clear that we must have significant further
improvements in our financial performance —- profit margins and
asset performance -- in order to finance the kinds of growth rates
we have the opportunity to achieve in the years ahead.
So the benefits of growth are obvious and
compelling. The risks are less obvious, and they can be dangerous
if we don't pay attention to them. But, clearly, the benefits
outweigh the risks.
Growth itself is not a formula for success,
it's the management of growth that adds the value and makes the
difference. Financing is not a practical constraint to growth in
the near term with our present cash position, and it should not be
a practical constraint in the future, providing we manage that
growth effectively and improve our our financial performance. The
opportunity for growth is here. I say, let's go for it . . .
carefully.
We use the image of the "window of opportunity"
because a window not only opens, but can close as well. At the
moment, Digital faces an incredible window of opportunity. We must
exploit this opportunity and continue to keep the window open.
That window is open today because of a number
of factors. Most of them have been internally driven. In other
words, steps we have taken have put us in a position to exploit
certain advantages. Other factors are environmental — that is the
economy and our competition.
So we need to look at these opportunities from
the point of view of the steps we have taken to position ourselves
and the relative strengths or weaknesses of our competitors.
We see a four-to-five-year period of
extraordinary opportunity. And over that time we expect to gain
market share. This isn't just growth for growth's sake. Rather, we
must take advantage of the opportunity while it presents itself
and use it to our strategic advantage and enable Digital to
accomplish significant market-share improvement. We have prepared
by investing in various areas. We have the company together. We
have the strategy. We have the teamwork. We have all of the assets
that we believe are needed to exploit this window of opportunity.
Let me review our situation and the criteria
for success.
Success in this industry and this environment
requires superior products and technology. Next we need to
participate in a broad set of markets, because you can’t be a
niche supplier and be successful. We need to be a general- purpose
supplier and have the size so adequate funds are available to
reinvest in technology and the engineering of products to
maintain our leadership. All these elements are interrelated, and
the process is reiterative.
We need a multi-faceted distribution capability
and a strong direct sales organization. We need to have that
complemented with an indirect or OEM distribution capability. And
we need wide geographic dispersion so that we can take advantage
of the opportunities that present themselves around the world.
Loyal, satisfied customers are essential. Our
manufacturing capability is critical to both customer satisfaction
and our financial performance. And of course, we must have the
financial performance and the investors’ support to sustain our
growth.
So much for the criteria. Now, let’s review our
position.
Simply stated, with our VAX line of computers,
we have the finest product offering in the industry — from the
desktop to the data center — compatible products which use the
same software. We’re the only company in the industry with that
capability. Add to that our networking and software advantages,
and you can see the window.
We not only have the advantage today, but our
technological capabilities are far beyond that of most companies
our size. This technology provides more competitive products. And
because our products are more competitive, we can price them in a
way to support a cost structure to keep the company growing.
On the marketing side, we’ve traditionally
participated in the scientific and manufacturing markets. We have
not been as much of a participant in other areas such as the
financial services market. However, we’ve taken steps over the
last months to establish our industry marketing capability. So
while growing in our traditional markets, we also expect to take
market share in new markets. These new markets represent a major
part of the opportunity before us.
On the distribution side, we’ve changed from a
company primarily dependent on indirect distribution channels,
such as OEMs, to one which depends primarily on direct sales.
This year we’ll sell 65% to 70% of our products directly. That's a
major change in the way the company does business. It gets us
closer to our accounts. It requires that we understand more about
the customers' problems and solutions for those problems, and it
gives us the additional advantage of account control. While we
still see large growth in our indirect distribution channels, we
believe the increased direct selling effort will provide more
stability during varying economic cycles.
We've always had a commitment to customer
satisfaction, and that is a critical part of our overall
opportunity. It is the number one goal of the Executive Committee.
We believe that if we have loyal, satisfied customers, they'll
continue to use and purchase our products, and it is almost
impossible for the competition to extricate us from those
accounts. Our services are the best in the industry, and this is a
major advantage in customer satisfaction.
There have been incredible improvements in the
links between our manufacturing and sales organizations. These,
in part, are reflected by lower inventories, as well as shortened
customer payment time — a sure sign of high quality and customer
satisfaction. We’re working together, communicating well
together, and reviewing performance together weekly.
So during this window of opportunity, we intend
to capture an even larger customer base and continue to achieve
excellent customer satisfaction. Meanwhile, we have to watch our
financial performance and ensure the revenue growth is achieved
before we allow expense growth. As we accomplish these objectives,
our vulnerability will be minimized, and we'll have the financial
size and strength to be a formidable competitor long into the
future.
We have the goals in place. We have
organizational focus. I have no doubt • we’ll continue to improve,
and absolutely no doubt that within five years we'll be recognized
as number one in the industry in every dimension except perhaps
size — which will take a little longer.
Digital's philosophy is that productivity and
innovation are a result of people having direct access to
computing. When computers were unapproachable and kept in computer
rooms with people in white coats, we made them simple, convenient
and local. When it was clear that what was needed was access to a
common set of programs and a common set of data for an entire
team, or an entire company, we introduced timesharing and made it
work. With the introduction of VAX computing in the 1970s,
Digital offered the most powerful t computing environment ever.
All VAX languages could make use of the same data files. We
enhanced our networking to the point that we could support
worldwide electronic mail systems. We can even do programming
across the network. We debug programs between California and
Maynard. These systems work so reliably that we run our company
with them.
As we all know, personal computers are not
quite enough for many types of serious work. Many businesses are
run bv teams of oeonle that have tn work
together. These teams need the advantage of
personal computing in terms of the interactivity, but they also
need the services, multi-tasking and ease of management that
timesharing offers. So they need combinations of things.
For a time, our customers had to buy
special-purpose workstations, for instance for integrated circuit
layout, from several vendors. And we did, also. Inside of Digital,
you saw workstations from many of the vendors with whom we compete
today.
But now things are different. We at Digital now
offer VAXstations that combine the power of the VAX computing
environment with VMS or ULTRIX operating systems, with graphics
and other kinds of workstation software. VAXstations are
general-purpose delivery vehicles for VMS and ULTRIX computing.
They offer many advantages over timesharing terminals as a way for
people to use the computer environment.
VAXstations actually allow you to do more
things simultaneously on the screen. This capability is very
important. Because as the price of computing power goes down, to
keep our revenue moving up we have to provide people with the
tools that let them use computers better.
VAXstations can also do the things that
competing workstations do. Over 90% of the applications that our
customers want to run on workstations run on VAXstations today. In
addition, with VAXstations, customers get a better way of using
VMS and ULTRIX and an opportunity to do all computing on the same
system. No longer do customers have the expense and effort of
dealing with several different vendors for different types of
jobs. And in fact, most of the workstations from competitors are
going to be connected to a VAX computer. So with VAXstations,
customers can reduce their total cost by having one type of system
and one vendor.
We will offer VAXstations over a wide range of
price and performance. No other vendor anywhere can offer the
range of compatible computing that is offered by Digital, and no
other vendor anywhere will offer the range of compatible
workstations that we will offer. No other vendor has made the
investment in technology that we have made to reduce cost and
improve performance for entire systems, not just central
processors.
We're winning with VAXstations. This is a
company-wide effort, it is not an effort of my group or some small
part of the company. Our goal is to be number one in the
workstation business -- not two or three. We are already number
one in the technical computing space. And we ought to be able to
do even better in workstations.
We have a set of enthusiastic people in Europe.
They are very stretched, working long hours, but their motivation
and drive help them to overcome these difficulties. Half the
population in Europe has been in the company less than two years.
We have a lot of new managers, and they are all excited. The
biggest problem is to make sure they don't run too fast. And
that's a good problem to have.
We are in a winning and non-complacent mode at
this time. But most important, we are working toward this result
together as a very strong team.
And we always talk about Europe, but Europe is
really an assembly of countries. The U.K., the largest subsidiary,
is approaching 500 million. We are in a winning and non-complacent
mode at this time. But most important, we are working toward this
result together as a very strong team.
And we always talk about Europe, but Europe is
really an assembly of countries. The U.K., the largest subsidiary,
is approaching 500 million pounds in annual revenue. In three
years, Germany has multiplied its revenue by 2.5 times, and
increased its profit by five times.
France has grown significantly with a very
young population during a period when there was a capital-spending
shrink due to government policies. Italy has grown its revenue by
3.5 times in three years. The conservative Swiss have about
tripled their revenues, too. Spain quadrupled its revenue in three
years, and about 90% of their management is new.
Denmark, to give you an example of a small
country, in three years has quadrupled its gross revenue. By the
way, Denmark won the team award for this year.
All of this performance has put us in the
number two position in Europe. Major companies that are really
important in Europe are now using Digital. We have a very good
image and have easier access to large accounts.
So we have set very ambitious revenue goals for
Europe. To reach those goals, we have to make sure the goals of
all the functions converge. We did that in 1983, but it is time to
review it, given our new ambitious goals. It is crucial that
everybody knows our objectives. So we printed 25,000 copies of a
brochure that we will distribute to employees in sessions where
managers explain what those words mean and how we're going to meet
our goals. We must have everybody's participation behind those
goals.
We have to continue to improve our
productivity. And the first element of productivity is to continue
to improve in quality. We strongly believe that quality is
synonymous with productivity. Doing a good job the first time is 8
the cheapest way to do it.
We created a senior manager group to focus on
what we need to get better productivity through quality. And our
number one measurement of quality is D.S.O. (days sales
outstanding). We've integrated service and software. And we have
adopted many quality programs from Manufacturing.
We all depend on one another for quality. There
must be no break in the cycle from taking an order and processing
it, to manufacturing the product and distributing and servicing
it. We all have to work together to make sure we save the money
that is savable.
We have significantly reduced the inventory
between Manufacturing and the Field. We also have increased
flexibility so that today we can ask Manufacturing for a system
that is not yet in the plan, and they will deliver it quickly —
within a month. This was unthinkable only a couple of years ago.
We are starting a new project to make a quantum
leap in our ability to process orders faster.
Also, we have to do away with islands of
automation in manufacturing, in distribution and in the office. So
we're conducting a study called "information architecture," to
make sure we understand how we want to process our data and
operate our business, to optimize our organizations and systems
design.
On the selling side, one of our objectives is
to put our sales people in front of customers more than before. On
the average, our sales people are out 26% more time this year than
last year. And in the offices where they've been running the Field
Sales Operation Model (FSOM) for a full year, they are out about
50% more time than before. Interestingly, those are the offices
that are way above budget.
Also, we have introduced a quotation system
that on the average throughout Europe has decreased the time spent
to quote by 27%. And again, in the offices where they had the new
system for a full year they have cut that time in half.
One big problem was the number of change
orders. Basically, 68.5% of orders needed to be recycled at least
once; and some orders as many as two or three times. That was a
tremendous waste of energy. So we put a lot of effort in that area
and reduced the number of change orders by 84% on the average.
Meanwhile, we are focusing on expanding our
customer base, and we are doing so -- with new customers, not just
new applications — at a pace of about 10% a year.
In one year, we tripled our sales of software
products and doubled the amount of business in projects and
consultancy. That is one of the main reasons why our sales in the
financial market are up more than 50%. Banks buy systems, not just
hardware; and to sell to a bank, you have to consult with them.
Another area we’re focusing on is sales to our
installed base. In 1984, about 13% of our revenue came from our
installed base. This year it is in excess of 23%.
Our goal is to dramatically improve our market
share in the areas where we feel there is greatest potential, such
as manufacturing, financial services, telecommunications,
education and research. Our manufacturing and Engineering presence
in Europe is fundamental to achieving the volume of
business we want. Customer visits to our plants
are an important sales tool. On the engineering side, we could and
we must expand more, taking advantage of the engineering talent
that exists in Europe. There are also opportunities for joint
activity in such areas as product development and marketing
partnerships.
Everything we do has to be oriented to our
customers, because customer loyalty is a tremendous asset.
In striving for our goals, our biggest risk is
the availability of people and the ability to integrate them into
the company. We need to do a lot more training than we're doing
today and, of course, continue with external and internal courses
for management development. It's a top priority not only to get
the right people, but also to help our existing people become even
more capable than they are today.
I would like to have a new slogan: We are the
number one place to work. We want it to be known that Digital is a
company where you can have freedom, where your ideas are welcome,
where you can grow. Then we can attract the best people in
engineering, software and sales. Those people only go where they
can add value, where they don’t have to deal with a lot of
bureaucracy, within the context of professional discipline. And I
think that Digital's values are providing the balance that people
want. And if we keep that balance, we will be able to take full
advantage of our window of opportunity.
Our business in GIA encompasses half the
world's area and over 70% of its population. Today we contribute
about 12% of the company's total business. We’re making
significant strides towards the $1 billion mark. And we are taking
the necessary steps to ensure that Digital takes full advantage of
the vast windows of opportunity in GIA markets.
We operate under widely varying conditions,
over a broad geography, with cultural, language and time-zone
differences that make communications difficult. Computer literacy,
too, varies dramatically from country to country; and we must take
that factor into consideration when we develop our plans.
The good news is that what's good for the U.S.
and Europe is certainly good in our area. The U.S. computer
industry is recognized around the world as having technologically
superior products, and Digital's are at the top. Our product set
and our architecture enjoy worldwide acceptance, and we’ve ^gotten
good press coverage and have a very positive image.
Multi-nationals are very important in emerging
and developing marketplaces and these customers are a key strength
for Digital in GIA. They pull a lot of our products into these
countries early and help establish a user base that we can build
on later.
Our management strategy is to install strong
teams within each country. The business resides in the countries.
Our role from Acton is to help develop and strengthen the local
organizations and make them self-sufficient entities. This
decentralization enables us to deal with the vast differences
between countries, the multiple time zones, and the diversity of
business environments.
In many respects, the industrialized countries
of GIA are very similar to what we would see in the U.S. and
Europe. The growth industries are the same — finance,
telecommunications, government, engineering and manufacturing.
Canada is a mature market. IBM currently has a
44% share of this $5 billion market. They're particularly strong
in the banking and finance industries. This is the market we must
penetrate if we are to seriously expand in Canada. Our two-year
marketing strategy focuses heavily on penetrating this market. A
number of factors are helping us meet this goal. For instance,
Canadian banks are deregulating, so newer, non-IBM banks and trust
companies are emerging in a very competitive banking industry.
Also, we’re relocating our Canadian executive offices from Ottawa
to Toronto, Canada's finance and corporate office capital. About
45% of Canada's gross national product is generated within 200
miles of Toronto, and over 80% of Canada's Fortune 500 companies
have their headquarters there. Our new executive offices will
include an Application Center for Technology to demonstrate our
commercial and financial application packages to corporate
officers and senior managers.
Japan is the second-largest computer market in
the world — close to $20 billion. We have a very small share of
that now, and we see tremendous opportunities for growth. Over the
past five years, our growth there has been nearly 35% compounded
annually. In fact, we are growing faster than the industry and
faster than our major competitors -- Fujitsu, NEC, IBM and
Hitachi.
A deregulated telecommunications industry in
Japan will present us with the same opportunities to compete as we
now have in the U.S. Additionally, Japan has an enormous
semiconductor industry, with 41% of the global market share. Our
Japanese subsidiary has already sold over 200 VAX systems in the
CAD-CAM market for simulation work and design. Other important
opportunities in Japan include computer-integrated manufacturing,
artificial intelligence and financial applications.
We must have a strong local presence, and we
must invest some of our capital spending in Japan if we are to
become known as a local company with high- quality products.
The South Pacific Region — Australia and New
Zealand — attracts just about every competitor in the world. As a
bounded environment and an English-speaking country, Australia
makes a good test market.
We believe the economic environment in that
region will be favorable over the next few years. Our greatest
success there has been in the health and education markets. As in
Canada and Japan, financial services and government hold a key to
our future success. Recently, the Australian Department of
Aviation (which is comparable to the Federal
Aviation Administration in the U.S.) selected Digital from a field
of 39 competitors to build multimi 11 ion-dollar computer
networking systems. We're extremely proud of that sale .
The main challenge in Australia is compliance
with the Australian government's "offset" requirement program.
This program has been in place for a number of years, but only
recently did the government decided to enforce it. Basically, we
have to offset the flow of money out of the country that occurs
when we import our products, by investing in the in-flow of
technology into the country.
The emerging countries of GIA include India,
the People's Republic of China, Taiwan, and Korea. These locales
are rapidly industrializing to serve their great masses of people.
Banking, transportation and telecommunications are moving quickly
to adopt sophisticated technologies supported by computers.
Emerging countries, especially the smaller ones, want technology
transfer. To the politicians, that simply means "give us a
factory." Our notion of technology transfer is to provide the
infrastructure -- the people to engineer, manufacture, market,
sell, train and service our products. Developing a pool of
knowledgeable users of computer systems and applications is the
real technology transfer. Therefore our strategy in these
countries is to transfer technology through direct presence in
these markets rather than building plants.
It's been our experience that to achieve our
market-share goals in these high-growth markets, we must sell
directly rather than relying on distributors.
One recent success in India points to the
magnitude of the opportunities. We installed a passenger
reservation system for the Ministry of Railroads. The Indian
Railroad moves 10 million passengers daily. That’s the equivalent
of half the population of Australia. People typically wait in
lines for four and a half hours just to buy a ticket. As part of a
pilot program, we installed in New Delhi two VAX-11/750 systems
supporting 50 ticket sales windows. We use LA50 printers for
cutting the tickets, and VT220 monitors for handling the
transactions. Each station handles 300 transactions per shift, or
30,000 train tickets a day. That program was extremely successful.
We have received orders and export licenses for two clustered VAX
8600 systems. And if we expand and automate the complete railway
system, there's an opportunity here for almost 40,000 terminals
and about 700 VAX-11/750- class computers to handle ticketing
transactions in India.
While India has the most passenger-seat-miles,
China has the largest railroad organization in the world, with 3
million employees. So the same opportunity for serving and
supporting masses of people exists in the ^People's Republic of
China. In China, Digital is the number one computer supplier. This
year we will sell and install more computers in China than IBM. We
don't want to lose that lead.
In
Taiwan, we have an agreement in principle to buy out the local
distributor which is currently responsible for the marketing of
hardware and software products there. We already own our own field
service subsidiary. We plan to combine the two operations and sell
and service our products directly in Taiwan. Similar discussions
are under way in Korea.
Latin America is a highly volatile economic and
political marketplace. We need a local presence to successfully
market our products there, but relatively small market size and
continuously changing government policies have dampened our desire
to invest in a direct presence there. We still cover most
countries in this area through distributors. The exceptions are
Brazil, Mexico and Puerto Rico.
Because government policies restrict foreign
participation in the Brazilian computer industry, we are
associated with a local company there. We sell our high-end
products directly. The mid-range products are sold through the
local company since the government has protected this market for
local manufacturing and marketing companies. The low end is
totally protected for Brazilian-designed, engineered and
manufactured products.
We recently opened a small manufacturing plant
in Mexico to make MicroVAXs for the Latin America marketplace.
Having that plant gives us access to the Mexican market for all of
our products. Basically, we can import a dollar's worth of product
for every dollar we export.
We market to the rest of South America and the
Caribbean through distributors. We're in the process of
relocating our management center for distributors near Miami,
Florida, to provide better marketing support for these small
markets.
To maximize our window of opportunity
throughout GIA, we are investing in sales, sales support and
marketing — specifically, industry solutions marketing. We're
hiring seasoned, savvy, mid-career sales reps who understand the
business of selling solutions from our customers' perspective.
With the support of local industry marketing
groups, we're getting to know the customers better, understanding
their needs, talking in their terms and building relationships for
the future. Finally, we're investing in teamwork. This year we
implemented team awards for subsidiaries that have achieved all of
their team goals.
The global benefits of this complete
integration and the resulting synergy cannot be emphasized enough.
We have created an Asian-based Systems Software Engineering Group
responsible for assuring that our base software and our layered
products are available in Japanese, Korean and Chinese languages.
In conclusion, we just can't afford to forget
that it's our customers who keep that window of opportunity open
for us or close it. We must focus our attention on them.
Aviation (which is comparable to the Federal
Aviation Administration in the U.S.) selected Digital from a field
of 39 competitors to build multimi 11ion-dollar computer
networking systems. We're extremely proud of that sale.
The main challenge in Australia is compliance
with the Australian government's "offset" requirement program.
This program has been in place for a number of years, but only
recently did the government decided to enforce it. Basically, we
have to offset the flow of money out of the country that occurs
when we import our products, by investing in the in-flow of
technology into the country.
The emerging countries of GIA include India,
the People's Republic of China, Taiwan, and Korea. These locales
are rapidly industrializing to serve their great masses of people.
Banking, transportation and telecommunications are moving quickly
to adopt sophisticated technologies supported by computers.
Emerging countries, especially the smaller ones, want technology
transfer. To the politicians, that simply means "give us a
factory." Our notion of technology transfer is to provide the
infrastructure — the people to engineer, manufacture, market,
sell, train and service our products. Developing a pool of
knowledgeable users of computer systems and applications is the
real technology transfer. Therefore our strategy in these
countries is to transfer technology through direct presence in
these markets rather than building plants.
It’s been our experience that to achieve our
market-share goals in these high-growth markets, we must sell
directly rather than relying on distributors.
One recent success in India points to the
magnitude of the opportunities. We installed a passenger
reservation system for the Ministry of Railroads. The Indian
Railroad moves 10 million passengers daily. That’s the equivalent
of half the population of Australia. People typically wait in
lines for four and a half hours just to buy a ticket. As part of a
pilot program, we installed in New Delhi two VAX-11/750 systems
supporting 50 ticket sales windows. We use LA50 printers for
cutting the tickets, and VT220 monitors for handling the
transactions. Each station handles 300 transactions per shift, or
30,000 train tickets a day. That program was extremely successful.
We have received orders and export licenses for two clustered VAX
8600 systems. And if we expand and automate the complete railway
system, there’s an opportunity here for almost 40,000 terminals
and about 700 VAX-11/750- class computers to handle ticketing
transactions in India.
While India has the most passenger-seat-miles,
China has the largest railroad organization in the world, with 3
million employees. So the same opportunity for serving and
supporting masses of people exists in the People's Republic of
China. In China, Digital is the number one computer supplier. This
year we will sell and install more computers in China than IBM. We
don’t want to lose that lead.
In Taiwan, we have an agreement in principle to
buy out the local distributor which is currently responsible for
the marketing of hardware and soft
ware products there. We already own our own
field service subsidiary. We plan to combine the two operations
and sell and service our products directly in Taiwan. Similar
discussions are under way in Korea.
Latin America is a highly volatile economic and
political marketplace. We need a local presence to successfully
market our products there, but relatively small market size and
continuously changing government policies have dampened our desire
to invest in a direct presence there. We still cover most
countries in this area through distributors. The exceptions are
Brazil, Mexico and Puerto Rico.
Because government policies restrict foreign
participation in the Brazilian computer industry, we are
associated with a local company there. We sell our high-end
products directly. The mid-range products are sold through the
local company since the government has protected this market for
local manufacturing and marketing companies. The low end is
totally protected for Brazilian-designed, engineered and
manufactured products.
We recently opened a small manufacturing plant
in Mexico to make MicroVAXs for the Latin America marketplace.
Having that plant gives us access to the Mexican market for all of
our products. Basically, we can import a dollar's worth of product
for every dollar we export.
We market to the rest of South America and the
Caribbean through distributors. We're in the process of
relocating our management center for distributors near Miami,
Florida, to provide better marketing support for these small
markets.
To maximize our window of opportunity
throughout GIA, we are investing in sales, sales support and
marketing — specifically, industry solutions marketing. We're
hiring seasoned, savvy, mid-career sales reps who understand the
business of selling solutions from our customers' perspective.
With the support of local industry marketing
groups, we're getting to know the customers better, understanding
their needs, talking in their terms and building relationships for
the future. Finally, we're investing in teamwork. This year we
implemented team awards for subsidiaries that have achieved all of
their team goals.
The global benefits of this complete
integration and the resulting synergy cannot be emphasized enough.
We have created an Asian-based Systems Software Engineering Group
responsible for assuring that our base software and our layered
products are available in Japanese, Korean and Chinese languages.
In conclusion, we just can't afford to forget
that it's our customers who keep that window of opportunity open
for us or close it. We must focus our attention on them.
The opportunities in the U.S. are outstanding.
It's my pleasure to share them with you and also tell you how we
plan to go after them.
As a company, we've been doing better than the
market for the past three years. We've been growing at a time when
IBM's performance was flat to negative in the U.S. And in cases
where we sell directly against IBM, our win rate has been high.
Quite simply, our goal is to be the number one
sales organization in the industry. And to us that means
satisfying customers, winning new business, and returning the
highest yields per sales person.
To do that, we have had to simplify things. We
started at the top. We simplified the country team. In the U.S.,
there is one sales organization and one sales support
organization. We have one industry sales marketing plan with an
all-channels strategy.
We also need to simplify the roles of our sales
and sales support people, sales reps need to know how to sell and
must know their customers and the needs of the industry, they must
have general product and application knowledge, they have" to know
our customers' requirements, the competition and technology
trends, and when to bring in the heavies for extra support.
We'll focus on geographies, accounts and
solutions. We started the year with seven area teams and 32
districts. There are now nine area teams and 48 districts. The
South Central Area out of Dallas began in January. And on June 2,
the ninth area team, the East Central Area, turned the lights on
in Detroit.
We will focus on accounts. DNA600 is a U.S.
Designated Named Account strategy. Out of 600 top accounts, 100
will be designated "corporate accounts." We expect each of those
accounts to deliver over $30 million per year. Another 200 will be
named "industry accounts." These leadership accounts have been
identified by the areas and the Industry Marketing groups. And the
remaining 300 accounts will be sponsored and invested in within
the areas. Collectively, we antcipate up to 50% of our business
will come from these 600 accounts between now and 1995.
We also need to focus on solutions. This means
that sales support represents an increasing part of our strategy.
Our sales support strategy is a fieldbased model — close to the
customer. We've been hiring some outstanding people: high-level
experts specialized by application, product or technology.
While we have increased the direct sales
population by 20%, we have more than doubled our sales support
people. We'll end this year with about 1,000.
We’ve also added what I refer to as the
"district manager on the bench" program. We brought in some top
sales managers from the outside, people who perhaps could fill
that next district opening. And while they're learning Digital,
they're sharing successful ideas from their previous companies.
In addition, we have a U.S. manager of Sales
Methods and Technology to drive productivity gains. Besides adding
new people, we must continue to grow through gains in each
individual's productivity.
Our program of "Sales Selling Services" has
been very successful. The job of selling services is done by every
person in the field organization. And Sales Selling Service units
are amplifiers -- not just selling products, but also selling the
Digital advantage, up front.
Our Applied Centers for Technology are growing
rapidly from eight to 17, and Digital Network Teams are growing to
leverage our tremendous advantage in networks.
Our Information Systems Sales Teams give
information systems directors an opportunity to join the Digital
club. Not long ago, only one out of 100 of them was ready. Today
it's closer to two out of 10. The Executive Partnership Program
continues to drive large account development, as we attach our
senior executives to relate in a strategic way with our top 100
accounts.
We're kicking off industry training this
summer. Eight industry groups are ready. We’re sending them to the
Industry Summer Training School at Boston University, and we're
ready with eight outstanding industry programs.
In closing, I would like to make a prediction
and offer a challenge. In the early '70s, Digital was the number
one small computer company. In the mid- '70s, we were the number
one timesharing company. In the early '80s, we were the number one
distributed data processing company. And here we are in the
middle-to-late '80s — the number one company in networks. All
tremendous milestones, and yet . . .
I have a dream that I'd like to share with you.
I think secretly many of you have the same dream. I can see a time
when we'll be number one overall in revenue and profits. The year
. . . 2007 . . . March or April!
How well a company satisfies its existing
customers, and how well it presents its service message, plays an
increasingly important role in the overall selling process.
In terms of our financial performance, service
accounts for more than 25% of Digital's total operating revenues
(nearly $2 billion this year), and significantly more than that
in profits.
This year, because of very aggressive
management, we've made major contributions to the corporation's
cash flow. We've actually reduced inventory while raising our
level of service and the quality of material that we supply to our
offices. Rather than using more cash to finance receivables, we've
used less. And we've reduced the amount of capital needed to
deploy our technology. The net result is a cash-flow improvement
of nearly $150 million over the budget to the corporation this
fiscal year.
But the service contribution goes far beyond
the balance sheet. Service is an integrated part of Digital's
total solution strategy. Service is an asset for the sales force
to use in improving business performance and achieving team goals.
Customers not only want quality products, they want quality
support — and they're willing to pay for it.
Quality support begins long before a product is
installed or even introduced. Our products must be designed,
packaged and marketed with reliability and maintainability in
mind. One of the primary functions of our CSSE (Customer Services
Systems Engineering) organization is to work with product and
application engineering to establish the base-level service
elements that are necessary to successfully launch new products.
Product quality is on a fast track at Digital.
We're driving that message home by incorporating longer service
warranties and increasing our level of service commitment to
customers. For example, each of the new members of the VAX family
introduced this year includes a one-year warranty. In Europe,
virtually all of our products are moving to a one-year service
warranty during this calendar year. These warranties eliminate a
lot of selling, invoicing, and other administrative costs, so
we're able to pass savings along to our customers. They also
position us as the most competitive vendor in the industry.
Marketplace reaction has been exceptionally positive.
In Channels Marketing, we're also providing a
range of service offerings that our OEMs and Cooperative Marketing
Partners require.
Nowhere is our leadership in service more
evident than in our Customer Support Centers. With our new
Colorado Springs center and 13 others around the world, we offer
the most complete, sophisticated support capabilities available
anywhere. Over the course of the next five years, Digital will
invest over $1 billion in these centers.
We are entering our second decade of remote
diagnostic centers, having introduced the concept in 1976. Today's
centers monitor systems hundreds of miles away, detecting possible
failures before they ever actually occur.
These detections are then relayed to the local
service office, where they can decide what action to take at the
customer site, if necessary. The end result is higher system
availability for the customer.
A year and a half ago we introduced artificial
intelligence into the service environment. Expert systems are
making the cumulative knowledge of our best service people
centrally available to analyze system problems at any hour of the
day. Some of the top Al engineers in the corporation are working
on designing new and enhanced service capabilities.
Like so many of our state-of-the-art methods of
service delivery, both remote diagnosis and Al technology help to
lower our service costs. That means we're able to use our
organization more productively, and therefore provide the best
price performance in the industry.
The technology also helps Digital maintain
leadership by yet another measurable standard — speedy response.
In most cases we provide service from a remote center within 20
seconds. IBM, in contrast, has support centers which act as
message centers. You call them and they call you back, typically
within 15 minutes. We use computer-based systems for call
handling, literally connecting the call to the first available
engineer. It’s so fast, we actually created a new metric called
ASA — Average Speed of Answer. The goal was 30 seconds, and we're
performing at 20.
For on-site service, our average response is
now running at about 30 minutes. We guarantee to never exceed two
hours. Our guaranteed response time and guaranteed system
availability go well beyond anything IBM will commit to. We offer
the most price-competitive service maintenance products.
Digital's style of service complements
Digital's style of computing. In the same way that our compatible
product architectures protect customers' investments, we're
committed to supporting what we sell as long as our customers
continue to need it and to need us.
Under our DECcompatible service program we
offer customer support for over 175 products manufactured by other
vendors which are part of a Digital system. In doing so, we are
not only meeting an expressed need for our customers, we are
ensuring account control for over $2 billion of Digital- installed
hardware. Multi-vendor service has also helped us leverage
significant system sales. In a major prime contract opportunity
at Boeing, for example, we leveraged $10 million in VAX 8800
system sales primarily because we support a mixed-vendor
environment.
The success of the DECcompatible service
program has also given us a real edge in developing a program for
network service, which is one of the most critical service issues
facing the industry today.
Phase one of Digital's Netcare service is
designed to give customers a single service contact. We'll act as
an agent on behalf of the customer for equipment which is part of
a DECnet-based system, regardless of the mixture of hardware
vendors or technologies involved. Under the Netcare program, we'll
identify faults in the customer network and notify the responsible
vendor. We'll track their response to the problem. We'll ensure
that each repair is successful and that the network availability
has been restored.
We at
Digital know how to connect computers. We’re the best at it. We
can put systems together so that they can do electronic mail,
share files, or use a common disk for backup capability or
storage. We can enable users to share expensive high-speed or
multi-color printers. The successful personal computer vendors
have exposed a great deal of the marketplace to the kinds of
things that we do well — merely by their inability to do those
things themselves.
This is a major window of opportunity for
Digital and our networking products. These customers are now well
aware of the need for connecting up their personal computers, and
I think most of them know that Digital is best at it.
Among the improvements we've introduced over
the past year or so are the Optimum Package and Sales Selling
Services. About a year ago, a customer buying a system from us had
to deal with a Sales person, a Field Service person, a Software
Services person and an Educational Services person. Our customers
told us they didn't like that, and we reorganized to have Sales
sell service. The Optimum Package is what Sales now uses to sell
those services.
Today, with one order, customers can buy the
right set of educational, field and software services to meet
their needs. Sales is now the focal point for managing the
customer's requirements rather than forcing the customer to learn
and select among many possible service offerings.
As we focus our marketing more clearly on
industries, technical support knowledge has had to shift from
product and systems expertise to under- « standing how to solve
customers' problems. We're now hiring high-level sales support
experts, with typically 15-20 years in the given industry. They'll
have specific application expertise and they'll reside in local
offices, close to where the the action is.
Another recent project is the opening of
Application Centers for Technology. Not long ago, if a customer
wanted to see a computer-aided design demonstration, we would
take them to one of our many CAD/CAM Centers. If the same customer
wanted to see some office automation, we'd tak^ them across town
to an Office Solution Center. And if they weren't confused and
still wanted to buy from us, we'd take them to a Field Application
Center, where software support specialists design real solutions
for real customers.
Now we are putting those three together in the
Application Centers for Technology, where the real power of
Digital Equipment Corporation is exemplified. They can see demos
of everything from laboratory applications to office automation to
manufacturing solutions. They can discuss alternatives with
engineers who have actually designed and implemented solutions to
difficult problems.
There are 17 of these centers in the U.S.
They'll all be up and running within the next 6-8 months. In
addition, there exist or will exist six in Europe and three more
in GIA.
While we have improved in the eyes of our
customers, we also have made progress in productivity, for
instance in the area of material asset management. Over the last
year, while raising our overall level of service to our local
offices, we've managed to trim our inventory from 52 weeks to 42
weeks.
We're investing in two major facilities. One,
in Nijmegen, Holland, handles distribution for Europe. The other,
in Andover, Mass., will allow us to integrate, under one roof in
500,000 square feet, all of the activities that are now going on
in five buildings. The payback period of that program is under 22
months. These facilities at the central level complement our
district logistics operations (four in the U.S. and one in each of
our subsidiaries) which, in turn, support the 400 Field Service
centers.
In 1977, we had $2 billion worth of installed
equipment that Digital serviced. We had a little over 4,000
engineers. That’s about $550,000 per on-site engineer. We only had
about a hundred people in the remote service centers.
By 1985, we had over $18 billion worth of
hardware we directly serviced, 12,000 engineers and about 2,000
people in our Customer Support Centers. That's about $1.5 million
per on-site engineer, a three-fold increase in productivity.
But ultimately, service means insuring customer
satisfaction. In 1986 we will make over three million service
calls. Every one of them is important, because every one
represents an opportunity to reinforce that the customer made the
right decision with Digital — and to help them make that next one.
We at Digital know how to connect computers.
We're the best at it. We can put systems together so that they can
do electronic mail, share files, or use a common disk for backup
capability or storage. We can enable users to share expensive
high-speed or multi-color printers. The successful personal
computer vendors have exposed a great deal of the marketplace to
the kinds of things that we do well — merely by their inability to
do those things themselves.
This is a major window of opportunity for
Digital and our networking products. These customers are now well
aware of the need for connecting up their personal computers, and
I think most of them know that Digital is best at it.
Among the improvements we've introduced over
the past year or so are the Optimum Package and Sales Selling
Services. About a year ago, a customer buying a system from us had
to deal with a Sales person, a Field Service person, a Software
Services person and an Educational Services person. Our customers
told us they didn't like that, and we reorganized to have Sales
sell service. The Optimum Package is what Sales now uses to sell
those services.
Today, with one order, customers can buy the
right set of educational, field and software services to meet
their needs. Sales is now the focal point for managing the
customer's requirements rather than forcing the customer to learn
and select among many possible service offerings.
As we focus our marketing more clearly on
industries, technical support knowledge has had to shift from
product and systems expertise to understanding how to solve
customers' problems. We’re now hiring high-level sales support
experts, with typically 15-20 years in the given industry. They'll
have specific application expertise and they'll reside in local
offices, close to where the the action is.
Another recent project is the opening of
Application Centers for Technology. Not long ago, if a customer
wanted to see a computer-aided design demonstration, we would
take them to one of our many CAD/CAM Centers. If the same customer
wanted to see some office automation, we'd take them across town
to an Office Solution Center. And if they weren't confused and
still wanted to buy from us, we'd take them to a Field Application
Center, where software support specialists design real solutions
for real customers.
Now we are putting those three together in the
Application Centers for Technology, where the real power of
Digital Equipment Corporation is exemplified. They can see demos
of everything from laboratory applications to office automation to
manufacturing solutions. They can discuss alternatives with
engineers who have actually designed and implemented solutions to
difficult problems.
There are 17 of these centers in the U.S.
They'll all be up and running within the next 6-8 months. In
addition, there exist or will exist six in Europe and three more
in GIA.
One of the trends we've seen developing is that
our business opportunities are getting bigger. It's not just a VAX
or two VAXs, it’s a system of VAXs. It requires different
disciplines to both quote the business and deliver the business.
The vehicle for doing that is Project Management.
Most of the Project Management that's done in
the Field is done in Software Services and CSS, but we need a lot
more of it and we need to organize it better. We need to pick our
shots more clearly so that we get the best, the biggest and the
most strategic business that's available. Then we need to report
and manage the results of those projects. We are in the process of
formalizing both the requirements for, and the assigning of,
project management resources. This will help increase our capture
rate at the time we bid business, and make it a lot easier to
schedule internal resources. Project managers need the right
resources from Engineering, Marketing, Software Services and Field
Service. I expect that this kind of Project Management in the
Field will result in a major increase in our ability to land these
large project contracts.
Another program we're working on is Assets.
When Software Service Engineer™ ing writes applications for
specific customers, the result is often useful in other
applications for other customers. This is how ALL-IN-1 and BASEWAY
were born. Reinventing that code is inefficient. So far, we’ve
established two facilities where we keep a library of useful
routines and applications. One's in Charlotte, N.C., for office
applications. The other is in Detroit for manufacturing
applications. We still have to iron some things out, but I think
we'll see a major breakthrough in terms of consulting capability —
the ability to land more business and deliver more solutions in a
shorter time frame.
We're currently working on a project called
Electronic Publishing, with VMS • Engineering, the Software
Distribution Center and the Field. The goal is to create, edit and
finalize in engineering all the technical documentation that
currently ships with the system — and never print it until it
reaches the customer's site, and then only as particular pieces
are required by the customer. The payback is in the forests not
cut, in palette loads of documentation that we now pay shipping
charges for, and in more professional installation generally. So
much of it is never read; it’s there for reference. Electronic
Publishing will make installation easier and simpler, and
information more easily available.
We’re also exploring the great potential of the
Digital Video Network, which is managed by Educational Services.
The way we do training has really evolved, from classrooms to
publishing books to computer-aided instruction to IVIS. The latest
technique is the Digital Video Network, or "classroom via
satellite." We have our own educational television station with a
transmitting facility in Bedford, Mass., and the two-way audio you
wouldn’t find in a normal television broadcast. Right now, we can
broadcast to 21 locations in the U.S. and one in Canada. This
capability can be used not only for training employees, but also
customers. We foresee the day when customers will have receiver
stations, through which we can downline-load information,
educational material or even take advantage of our promotional
capabilities.
We see tremendous opportunities, not only
because of our approach to computing and technology, but also
because our customers are changing. Today they are finding that it
is too complicated to keep up with the plethora of companies they
have been doing business with. So they are looking to develop
long-term relationships with a smaller number of vendors. The good
news for Digital is that in almost every case they see us as one
of those strategic vendors.
Also, our customers are moving toward large
project purchases as opposed to buying specific point products.
They are looking for large incremental increases in their business
-- in market share, in competitive advantage, in their return on
equity. And as they reposition their companies, they are looking
at information technology and the purchase of computers in a more
integrated fashion. This is entirely consistent with our approach
to computing, and puts us in a position to take on more large
projects.
Businesses are trying to determine how to get
strategic advantage over their competitors. And they see computers
and information technology as one of the ways of doing that. So
decisions on computer purchases are being made higher in the
organization, by senior management. This means that our sales
force has to spend more time calling at the senior levels of
companies.
In addition, our customers are looking for us
to provide total solutions. So they can reduce their own internal
staffs, they want us to take on more consulting and
service-related responsibilities. They also demand that their
vendors form strategic partnerships with them and understand how
they run their business and how we can help them with information
technology. They want us to help them solve their business
problems.
What are we doing to exploit this window of
opportunity? We're conditioning the environment -- making it
easier to sell. There will of course be a DECWORLD '87. And in
addition, industry and applications and product marketing people
will work together to create executive seminars, to attend trade
shows, to put together specific advertising campaigns and to do
whatever else it takes to make an industry see Digital as a
significant player.
Digital is already a leadership vendor with
leadership companies in almost every major industry. We want to
get significant market share in all the industries we’ve targeted.
In the U.S., between 70 and 80% of the total available revenue for
electronic dat$ processing comes from 600 companies. By focusing
on those 600 accounts in depth and breadth and achieving greater
penetration there, rather than spreading our efforts over about
five million accounts, we can get a tremendous market-share
increase.
Over the last six months, industry marketing
people have been defining the accounts within their industries and
working with our application people to define the opportunities
within the accounts. Once we have targeted the accounts, we also
have to target the applications and products.
We have to be able to determine which ones we
should walk away from, versus the ones where we have a tremendous
opportunity. That's going to be part of qualifying the application
opportunity in those industries.
To track how well we're doing, we're building a
marketing customer data base. Our goal is to be able to tell
weekly how much business we did with a specific customer, what our
position is within that account, how profitable we are and whether
we're accomplishing our objectives in terms of a strategic market
plan. We need to create a closed-loop environment between a
marketing strategy and a sales plan and a set of results.
We try to judge ourselves the same way we judge
our vendors. It starts with meeting our delivery commitments.
We've been under 10% slips for the past 15 months and under 5% for
the past five months. But even with this performance, we are not
satisfied. Our objective is zero slips and 100% on-time delivery.
Being predictable is important, but we must be
responsive to customers' needs as well. One test of responsiveness
to customers is our lead times. Two years ago, we were quoting
lead times of over 60 days for 70% of our products. Today, 10% of
our products are off-the-shelf items (including some MicroVAX II
systems), and 90% of our products are available in less than 60
days.
Historically, we were operating with a huge
backlog of orders and high levels of inventory. At the beginning
of a typical quarter, we were 70% loaded with only 30% of capacity
available for new orders. Today, we enter a quarter only 40%
loaded, which means we have 60% of our capacity available to
respond to new orders. Contrary to historic thinking, being only
40% loaded at the start of a quarter is not bad. Rather, it's a
profile of a responsive company, and assumes we will get the
needed orders during the quarter.
To remain a quality
vendor we will have to make continuous improvements in all
dimensions of our operations:
in costs, people productivity, quality,
predictability, responsiveness and asset
management. And I am very confident that we have the programs in
place to ensure that we will continue to achieve improved
performance.
In addition, we need customer contact to
leverage the opportunities we've created. This customer contact is
key for three reasons: Our customers need e to
understand our capabilities; we need to learn from our customers;
and our customers want to learn from us.
First, we must communicate our capabilities.
For example, one major customer I spoke to was concerned about our
ability to deliver some 15 VAX 8650 systems over the next 18
months. I asked them if they wanted them that day. They simply
didn't understand our capabilities. By setting up visits to a
couple of our plants, and by providing an overview of our
operations, we are able to remove all doubt as to our ability to
be a reliable vendor.
We also need to learn from our customers. We
operate in a complex and changing environment. There are many
areas where our customers have more
experience than we do. For example, companies
like RCA manufacture millions of units per year. Someday soon,
we'll be manufacturing products that approach that kind of volume.
We can benefit significantly from the experience of a company
like RCA. Likewise, General Electric's knowledge of laser
technology could help us as we make use of lasers in printed
circuit manufacturing. Similarly, we would like to draw on Ford
Motors' expertise in automated material handling and robotics.
Digital is a hot company. We’ve got the
products and the world knows that we've worked a lot of hard
problems. In manufacturing we've successfully addressed problems
in population, deliveries, inventories and gross margins. The
knowledge we've gained in working these problems is something the
customers want from us. And we welcome the opportunity to share
it with them.
We've had to reduce our manufacturing
population by more than 5,000 people. We've worked with our people
to develop voluntary programs to accomplish this. We also
recognize that new technologies and business strategies will
require significant shifts in our skills. Therefore, we have to
ensure that we have the human resource plans and the training
programs to prepare our people to respond to these future job
needs. But people management and reskilling is a universal
problem, faced by our customers as well as by us.
We have learned a lot in the last two years. We
understand the pain, the frustration, the anxiety that comes with
re-sizing and re-skilling the work force. But we also know the
kind of results in terms of increased productivity and
responsiveness, improved gross margins and, most importantly, a
healthier work environment.
By standards that we set for ourselves, we
still have a long way to go before we are truly an international
company. But by the standards of many of our customers, we are a
successful multi-national manufacturer with 20 years of
experience.
Currently one-third of our manufacturing people
are internationally based. We have plants in 10 countries, and we
buy one-third of our raw material in Europe and the Far East. Our
most recent international investment has been in Mexico where, in
order to open that market for our products, we had to rapidly
establish a manufacturing presence. We leased a facility, hired a
work force, set up the process and shipped product within nine
months. Forty-five of the first 46 hires, including the plant
manager, are from Mexico, and our total start-up investment was
less than $3 million.
Another area in which customers want to learn
from us is computer integrated manufacturing (CIM). We don't see
CIM as some all-or-nothing turnkey system; this approach is bound
to fail. The opportunity in CIM is to go after pieces of the
operation that make sense for a given business. Its strength is in
its flexibility. While none of our plants are totally integrated,
most all of them can demonstrate effective use of CIM. Several
plants see CIM opportunities in flexible manufacturing and
process controls, while for others it is resource planning and
vendor linkages.
Assets, population reduction, international
manufacturing and CIM are on everybody's mind. They are the
traditional areas that all manufacturing
companies are concerned about, and we are
pleased that we have made real progress in these areas. We have
also made significant breakthroughs in some unique areas, such as
inner-city operations, high-performance work systems and
artificial intelligence (Al) systems. Our success in these areas
has helped us to improve our operating performance and provide
opportunities for our customers.
Many companies think building plants in the
inner-city is too costly and ineffective. Our experience proves
this to be wrong. Our plants in Boston and Springfield are among
the most competitive operations we have. Boston is in a leadership
position in inventory turns. They are currently turning their
inventory 20 times, and they have their sights set on 50 turns per
year. An average plant is around 8 to 10 turns. Boston is also
meeting aggressive cost and delivery objectives. Springfield is a
leader in CIM applications and in the use of flexible
manufacturing systems. Springfield has developed a competitive
assembly line that has the flexibility of building small disks and
small tapes simultaneously.
Robotics and automation alone do not provide
competitiveness. The real breakthrough comes with the development
of work systems that achieve synergy among groups of people and
technology. This is what high-performance work systems are all
about. Like CIM, there's no one answer. Different plants will
apply different elements of the concept. Ayr, Enfield, Albuquerque
and Phoenix are the among the plants that are working these
concepts.
As in the field and service areas, Digital
Manufacturing is recognized as a leader in the practical
day-to-day applications of expert (Al) systems. These tools are
helping us to achieve our business objectives of shorter cycle
times, better quality, improved indirect labor productivity and
lower costs. Beyond the development of practical applications,
another dimension of our work with Al has been the generic
learning of how to effectively transfer technology from an R&D
environment to practical applications. We've been working closely
with Carnegie-Mellon in this effort.
All of this adds another dimension to the role
of manufacturing plants. Customers want to see what we're doing
first-hand. In the past 12 months we’ve had more than 500 customer
visits to Digital plants. These visits have been very beneficial
to us and we are preparing our operations to handle even more
visits.
All of these programs that we’ve been talking
about will pay dividends. More business will be ours, and our
effectiveness will be enhanced. Our performance in manufacturing
will continue to improve because of the programs we now have in
place. And it will improve as we increase our collaboration with
our vendors and customers.