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Volume 6, #5______________________________________________________________________ July, 1987

 

State Of The Company Issue

 

On May 19, 1987, over 500 senior managers attended Digital’s State of the Company Meeting in Merrimack, N.H. The theme of the day was "Digital’s Networking Vision is More than Connectivity." The following are summaries of the speeches.

 

State Of The Company Address by Ken Olsen, President

 

Digital’s Message by Ilene Jacobs, vice president, Treasurer

 

Overview Of Basic Industries by Jerry Witmore, vice president, Basic Industry Marketing

 

Problems Facing The Chemical Industry And Our Solutions by Robert Horne, director, Process Industries Marketing

 

Challenges Facing The Automotive Industry by Jerry Paxton, vice president, Discrete Industries Marketing

 

Manufacturing Problems And Solutions by Peter Graham, manager, CIM Market Development

 

Engineering Problems, Solutions And Marketing Messages by Don McInnis, manager, Engineering Systems Group Marketing

 

Service Industry Vision by Bob Hughes, vice president, Service Industry Marketing

 

Financial Services Problems And Solutions by Claude "Sandy" Thomas, director, Financial Services Marketing

 

Trading Problems And Solutions by George Chamberlain, vice president, M/E/M Finance

 

Digital’s Message And The Canadian Market By Ken Copeland, President, Digital Canada

 

Educational Services’ Message Delivery by Pat Cataldo, vice president, Educational Services

 

Financial Update by Jim Osterhoff, vice president, Finance

 

State Of The Company Address by Ken Olsen, President

 

Entrepreneurs play an important role in our economy. Entrepreneurs will try many things, and a small number will succeed. And overall, they make important contributions to society. The computer industry in the U.S. has gotten to where it is because we encourage entrepreneurship.

 

Entrepreneurship in a company like ours does not mean that we tolerate people running off in all directions. Entrepreneurship in our company obviously means that things have to fit into Ethernet and have to be con­sistent with our goals and our strategy. Without entrepreneurship, we would be limited to only what we do in centralized planning and be limited by the attention span and interest span of a small number of people. No matter how bright and competent those people are, they are a limiting factor.

 

When we were just a $14 million company, we were in bad shape for an inter­esting reason. We could only work op those problems which were of highest priority. We ran the company with a committee of 20 people, and we could only get them interested in the problems of highest interest. We couldn’t get anybody to work on the next level of priority. And if we were going to take care of those areas that were not burning issues to the corporation, we had to divide the responsibility. .

 

A few years ago there was great interest in breaking the company into divisions. And when I started studying about divisions, I found out some­thing interesting. One book said that when a company divisionalizes, it stops all creativity.

 

People want divisions because they want to be free of the corporate staff. But it doesn't work that way. Divisions mean more staff.

 

Now, staff are all good people, with good motivation. They are only inter­ested in the company; but just by the definition of their job, they avoid risk and duplication and fear any failure. So any proposal coming from a division has to go through the staff before it's brought up. The result is that divisionalization can stifle a company.

 

Freedom and entrepreneurship can be misunderstood, and that, too, creates problems. People develop the "emperor syndrome." They measure their power by how much they can spend without telling anybody, by firing people without any due process, by changing plans without telling anybody. But that's not true entrepreneurship.

 

If you are an entrepreneur in a separate business, you have to lay out plans in detail and report on them regularly in order to get initial money. You depend on all of those people looking over your shoulder, and you take that into account and exploit it as part of your planning; and then you have freedom on top of it. Freedom is not showing power without any responsi­bility. The entrepreneur who survives owns the budget and owns the profit and loss (P & L) statement, and true power comes from watching that P & L every day.

 

Problems arose in the past when the staff said, "Don't get involved in budgeting. We'll run the P & L statement." And the entrepreneurs lost all power because the plan that put everything together was gone.

 

Now it is asked today, why take good technical people and make them half- baked business people? Keep them pure, elegant and great technicians. And there's some validity to that. But we have to work out a system where people who make the technical decisions also understand enough to make business decisions.

 

People in a technical area make business decisions all the time. When we design a product, do we design it for lowest manufacturing cost, or do we design it for a return on assets? Do we design it so there is the least inventory risk? Do we design it so we get it out the quickest possible way? What is the cost and profit advantage of maintenance? So there's no such thing as being a pure technical person.

 

[Later, in answer to questions, Ken returned to this theme of entrepre­neurship and the role of staff.]

 

What's the job of staff?

 

I don't mean to be negative on staff at all. Staff is absolutely critical to a business. They just happen to have a very dangerous position, because they can have a lot of control, if you're not careful.

 

A few years ago when we had product lines, one year the staff said, "Oh, we'll do the budget this year; it’s too much trouble for these people who are supposed to generate products, do marketing and engineering — we'll do the budgeting." So by algorithm they turned out the same budget for every­body. That year the product lines were absolutely devastated.

 

The budgeting process is what gave them the power, the control, the under­standing of their business. Just like your home budget, every single business wants to do more things than they have money for. Travail is the only word I can think of for budgeting. You have to decide what you're going to leave off, and still get the job done. Going through that is the job of the entrepreneur. If that's done for you, you are nothing. If you don't understand and take part, or actually make those decisions, you do not have control.

 

Staff is important. Staff organizes all the options, makes sure everything gets covered, that nothing gets lost. Hopefully, the staff is educated in the areas in which the managers aren't and can say, "Here are the different points of view that the world looks at: return on sales, return on assets, return on this, return on that. Here's information about your future planning, your inventory, your inventory risks and all the other factors." They bring the data, do the analysis and bring all the points of view to your attention. But sometimes staff makes the mistake of making too many decisions on the way. And if the staff makes the decisions for you, you lose your control.

 

Internal competition in Digital between groups and individuals is frequently fostered. Could you please clarify your position on the importance of in­ternal cooperation versus competition for survival and success in Digital?" We have to foster internal competition. We have to have several approaches to the same problems, and pick the best ones. But we can’t tolerate any lack of cooperation, any political activity which is not fostering good things.

 

We've had some magnificent examples of competition that have really paid off. For instance, two computers are being developed more or less in the same space and for the same time frame. They represent different approaches, and the work is being done by two excellent groups. Some people have said, "We can’t afford both of them." And here they are turning out two magnifi­cent computers. Nobody else in the world has them. And to say we can’t afford them is just inconceivable.

 

Yes, the development groups are competing. When one does better, the other ends up doing better. I’m sure those machines are twice as fast and coming sooner than they would be if there wasn't competition. But they share technology, design tools and ideas. They cooperate and still are in compe­tition. So most of the time, the competition has been very positive, and we’ve come out wav ahead.

 

Can you help me understand the assignments of Product Business Units (PBUs)? It seems like there are unclear boundaries/ with too much overlap^

 

A few years ago, we tried to lay out business units so that they always added up to the corporation. And each business unit would have a group of lawyers make sure that they got their share of the orders, because the measurement became the goal. They figured if they earned money, then they could spend money the way they wanted. But that's not the attitude we want. We want people to have the drive that results in their being satisfied that they are doing a good job.

 

So we sliced the company in many ways. And in one direction, the pieces have to add up to the entire corporation. But you can break it up in many ways and measure each part for the satisfaction and motivation of that group; and sometimes you can have groups compete, without saying that the pieces always, mathematically, have to add up to the entire corporation.

 

When my kids were young, we used to walk along the railroad tracks in northern Maine and visit with the workers on the railroad tracks. The workers seemed to spend all day sitting in this little shack drinking coffee, complaining that they were understaffed and couldn't get all the work done. In years past they were given a section of track, and it was theirs and they took pride in making sure that those tracks were in good shape. Now they got job orders, and they had no motivation whatsoever. There's a difference between being motivated for the job because it's yours and you're trusted, and just being told what to do all the time.

 

So we have to understand all aspects of entrepreneurship. Wherever people can be motivated by being trusted for the job, we should give them the opportunity.

 

Digital’s Message by Ilene Jacobs, vice president, Treasurer

 

Ken wanted you to hear the company's message from a non-technical person, and that certainly describes me.

 

I've used our technology for years and know what a powerful set of tools we have. I have all the information when, where and how I need it. It stimu­lates initiative and unifies my organizations with each other and important­ly with the rest of the world.

 

We're so used to what we have, and how we all work together that we take it for granted. It's completely invisible to us, and yet it frees us up to get our work done efficiently. Delivering that message appears to be so diffi­cult, but why is that?

 

We can show others we understand their problems and can explain to them how our solutions work from a corporate-wide perspective; not just simple packages, but groups of solutions that work in harmony across an entire company, just like it works here at Digital. What we have is really a competitive weapon: the ability to work together sharing information easily. Communicating effortlessly allows us to benefit from solving problems together. Not having these tools traps people into seeing problems from too narrow a perspective. It causes them to sometimes miss the broader organizational inefficiencies, and the real solutions.

 

Perhaps we get too close to it to explain to others what we have. To us, these capabilities are like electricity. None of us can remember the world without electricity. We can buy a new clock or appliance, plug it into the wall and it will work. We don't think about how it works. We don't think about the source of the power. We can move from an old house to a new house and use the same appliances. We can go on a trip, and they work; unless we travel internationally. Suddenly we're confronted with different electrical currents and many different plugs. In England you can sometimes go into a hotel room and find two or three different versions of plugs in the same room. We never face those frustrations here at Digital.

 

I can travel around the world, and sit down at a workstation or a desk in any one of our offices and, within a few seconds, log into my electronic mail account back in Maynard, just as if I were sitting at my own desk. The first time I            did that, I was impressed, just                              like I was the first time I used the old electronic mail system. Now when I travel I just assume that I can read my mail and answer it. We've grown up with all                         of these conven­iences, with electricity, with telephones, and, for us old timers, even electronic mail.

 

Sharing data, sharing graphics, working together in teams -- no wonder we're so spoiled. No wonder we have trouble explaining it to others. We must realize that others are just beginning to grapple with what we've had for years. We can’t expect them to understand it and embrace it the way we do. We have to explain our vision of the future to them. We have to tell them we’re using it ourselves. We have it now. And they can easily have it too. We can tell them we can help them create an environment where everyone can work together sharing information around the world throughout their company. They can work in teams that are created to solve problems and can effort­lessly disappear when the resolutions are found. It's a whole new management style, a whole new way of working together. It's a tool for one person, for a group, for an entire company.

 

Yet, Ken wanted me to be able to understand and explain in simple terms the essence of how it works -— the technology that is such a powerful weapon. Of course I had to get help from others.

 

The technology is built in layers and is based on the objective that every­thing be designed with integration in mind. It all must be compatible.

 

The first layer is hardware. At Digital that means VAX hardware. The VAX architecture is the basis of our unique solution. The VAX family of systems extends from the desktop to the data center. No other architecture has been implemented so broadly and so consistently. Our single product family provides the maximum flexibility and is so simple and cost effective to use because it grows as needs increase.

 

The next layer is the DECnet communications architecture. This allows systems to connect and talk to each other, totally interactively. It also has the ability to allow other computers to tie into our networks.

 

The operating system, VMS, spans our entire architecture from the smallest VAX workstation to the largest VAX 8800. We don't produce different operat­ing systems for workstations, for batch processing, for timesharing. We have one, and that's VMS.

 

Together, these layers — VAX, DECnet and VMS — create our expandable and responsive network. Our network is more than connectivity. It allows data to be shared and allows capacity to be expanded automatically when you run out of space. The systems can be tied together in clusters, sharing data so intimately that the users don't even realize they're using more than one computer. But it’s not just in clusters that make it possible to share data. We can share it from anywhere in the network easily, totally interactively.

 

The next layer is Digital's Application Integration Architecture. VAX In­formation Architecture (VIA) is part of this layer which provides a way to share data and to retrieve it again. VIA supports writing programs to access the data or to be used in inquiring directly into the data file. One application of VIA that I'm familiar with uses our Employee Master File. The Employee Master File is accessed as a data file to run the weekly payroll system, by supervisors to do salary plans, and by all of the personnel people throughout the United States to update the employee records of the company.

 

The final layer is all of the applications written by Engineering, Software Services, third parties and all the various user groups. All of the appli­cation integrations are tied together to our Application Integration Archi­tecture .

 

These layers comprise what Digital offers the world technologically. Of course all these layers come together and work as one integrated whole.

 

With our network everyone can share data, software, graphics and documents. People can work in groups that evolve as needed, independent of where the people are located. That is the basis of our real competitive advantage. That is our vision.

 

Let’s not get caught up trying to explain it in technological terms. While that can be done simply, let's not explain our message that way. We need to emphasize the value of sharing information, the value of integrating work within an entire company. We need to explain how that creates tremendous motivation and synergy within an enterprise. The companies that are going to survive in the future have to integrate their enterprise, allowing employees to take part, using their creative ability. Our solutions provide information when, where and how it's needed, regardless of where people work. Our networks provide people with the tools they need to work in teams towards a common set of goals. It frees people up to focus on their real business problems. Our networks turn information into a powerful competitive advantage.

 

We need to explain this power to all the potential users in the world. We've got the responsibility to help them understand that Digital has the solution. The purpose of our company is not just to make a set of products,, but rather to give companies what they need to grow and to prosper. That is Digital’s real purpose for being. That is our message.

Overview Of Basic Industries by Jerry Witmore, vice president, Basic Industry Marketing

 

My group has the marketing responsibility for three major industries — discrete manufacturing companies, process manufacturing companies, and institutions. In FY87 this represented a $31 billion market for hardware, software and services.

 

In discrete manufacturing we are focusing on the aerospace, automotive and electronics industries. Among process manufacturing companies we are focusing on chemical, pharmaceutical, food and beverage, and oil and gas industries. Among institutions we are focusing on education, health care, and state and local governments.

 

We want to be the preferred vendor of solution systems for manufacturing companies in three mission-critical areas: create, build and distribute the product. That's what Digital worries about internally, and that's what all manufacturing companies worry about. By preferred vendor, I mean that when customers think about a new application or a new project, they think of Digital first.

 

In electronics companies, creation of products means design, which is largely electronic, using computer-aided engineering, computer-aided design (CAD), simulation of design, software engineering, computer-aided software engineering and electrical CAD. Mechanical design is also important, but the electronic areas are viewed as being the most mission-critical in electronics companies.

 

Aerospace companies also worry about design, but they look first at the mechanical portion of the design, mechanical CAD. They also deal with simulation, software engineering, and electrical and electronics design, but the mission-critical area that they focus on first is mechanical CAD.

 

When automotive companies deal with design, they worry about mechanical CAD, electrical CAD, testing and simulation. They use other tools as well, but again, the primary focus is on the mechanical and electrical design.

 

From a process manufacturing point of view, when you talk about creating the product you don't use the word "design." For instance, in an oil and gas company, they have to find the product and drill for it. It costs them just as much to dig a dry hole as it does one that produces oil. So, not sur­prisingly, it is mission-critical for them to optimize where they drill. They deal with seismic modeling, simulation, and interpretation of the data long before they drill the hole so that they can optimize the percentages of bringing in a profitable well.

 

Chemical companies create products by synthesizing them, typically in the laboratory, using instruments like mass spectrometers and electron micro­scopes. They take the data from those instruments, analyze it, and determine whether they have managed to synthesize the product they want. They use statistical analytical programming techniques to take the noise out of the data so they can see the real result.

 

Food companies create products not so much by synthesizing, but from brand management marketing. They want to determine the products grocers will stock their shelves with and customers will buy. In the United States, grocery-shelf space is relatively flat — there's no new shelf space. So the name of the game is to create products that will occupy the maximum shelf space and bring the grocer and the maker the maximum profits.

 

Making the product is the next mission-critical area. In discrete manu­facturing companies, that means dealing with a manufacturing plant.

 

Electronic companies worry about shop floor, production control, materials planning and quality control. Here we can tell them about the things we've done in our own manufacturing area using these same kinds of tools and approaches to help optimize the way we build products.

 

Aerospace companies also have plants, but they are huge. Not surprising, it takes a lot of space to build a Boeing 747. They worry about production engineering and planning, and shop-floor data collection. Much of the data collection is done by hand. Inventory control — getting the right part to the right place at the right time in the building process -- is absolutely crucial. And they think of quality control as data management. Every step of the process has to be documented, and the data has to follow to the next step; so that when the airplane is finished, it has a complete database explaining everything that occurred at each step of the process.

 

Automotive companies are interested in production scheduling and monitoring. They are concerned about shop floor control and, more importantly, quality control. The focus in quality control is on integrating the parts of the corporation together to look at quality.

 

In oil and gas, making the product involves refineries. Building refineries involves classic engineering-type application requirements, including mechanical and electrical CAD tools. But that doesn't happen very often. Running the plant is a matter of controlling and monitoring a continuous process, optimizing it using decision support tools, and scheduling pro­duction to get the right mix of products.

 

Chemical companies also use plants to make products. For them, running the plant is the main consideration. They worry about process control and monitoring, decision support systems, and production and scheduling tech­niques .

 

In food companies, the plants are not all that large. The industry worries about controlling the process and monitoring it. But they have an overriding concern about quality, which is absolutely crucial.

 

The third mission-critical application area is product distribution -- getting it to the ultimate consumer. In an electronics company like Digital, you get to the ultimate consumer by having a direct sales force and calling directly on the customer, or by having indirect channels, such as distribu­tors, and OEMs, and other third parties. You're concerned about getting the right order processed in the right period of time, getting demand forecast correct so you build the right product, managing inventory and logistics, getting the spares and parts that you require into the field to distribute the product and help maintain and support it.

 

By the way, distribution, in the application areas I'm discussing, involves bringing the customer and the enterprise together in an integrated way. And that is a critical part of the next phase of application requirements for Digital as we move into this market.

 

Aerospace companies take orders directly from the government or from air­lines and deliver them directly. What’s important when they're delivered is the database which has all of the job information in critical detail. This gives the people receiving the airplane all the data and quality-control records they need to maintain and support the plane themselves.

 

Automotive companies distribute their products through dealers.

 

Oil and gas companies distribute their products through pipelines, and huge tanks that serve as intermediate storage areas where trucks fill up with gasoline to deliver to local service stations. Here mission-critical questions include, how do you manage the terminal, how do you properly stage it for the demand that you have, and how do you process orders from your customers? Also, when they have excesses, oil and gas companies act like commodities traders, and move the product among themselves.

 

Chemical companies also deal with storage and distribution. Order pro­cessing, inventory management, logistics management, transportation, and transportation routing are all critical concerns that process manufacturers worry about.

 

Food companies distribute direct, through wholesalers, and through distribu­tors. They tie themselves to these distribution networks in terms of materials managment, demand forecasting, inventory control, and order processing.

 

Digital is unique in its ability to provide networks that bring together the mission-critical areas within these companies, as well as the suppliers and the customers. Through use of a network they can have the information they need, the ability to change internal and external environments, and the ability to react to what their competitors are doing, and at the same time maintain maximum efficiency. That is the reason Digital is in a fantastic position to penetrate manufacturing companies.

 

Problems Facing The Chemical Industry And Our Solutions by Robert Horne, director, Process Industries Marketing

 

Say the word "chemical," and the average person usually thinks of an alien and mysterious substance in a beaker. Actually, chemicals are an intimate and essential part of our everyday lives.

 

Every piece of fabric in this room, from the carpets on the floor to the clothes we're all wearing, owe their color to dyes produced by the chemical industry. Pharmaceutical companies have produced some truly remarkable chemicals, from aspirin a hundred years ago, to the latest drugs for heart problems and high blood pressure. These chemicals make life possible and productive for millions of people who wouldn’t otherwise be alive.

 

The microchips that provide the intelligence for our computers are based on chemical products. Tapes and disks we use in our storage systems are all chemically based. And all the cabinets for all our systems, from the VAXmate up to the VAX 8000 series, are coated with special protective paint that’s produced by the chemical industry.

 

The annual output of the chemical industry in the U.S. is about $200 bil­lion, which represents 5% of the country's gross national product. In America alone, chemical companies employ more than one million people.

 

Worldwide, the chemical industry amounts to over $700 billion in sales each year. Europe has been a major player in the industry since the turn of the century. More recently, Japan has established a very strong position. Each of the major participants competes in all the regions of the world.

 

The chemical industry is multi-national by nature. Raw materials are available in only a few areas in the world, and customers are spread out geographically; the manufacturing plants and research facilities must be located strategically.

 

Competition has increased dramatically in the last decade. The increase in the price of oil has tilted the economic balance toward those countries which are oil producers. In addition, the increase in the value of the dollar, which peaked early in 1985, presents U.S. chemical companies with an increasingly difficult competitive environment.

 

However, the U.S. chemical industry is fighting back with a variety of strategic and tactical measures designed to cut costs, increase market share, and protect assets and profitability against an uncertain future.

 

Since most chemical companies are made up of several divisions, their first step is to redefine their business. There has been a lot of shuffling of portfolios, divestitures of unprofitable or peripheral subsidiaries, ac­quisition of better positioned divisions, and mergers between firms with synergistic products, resources, and markets.

 

Their next step is to look at the product mix. There has been a general move away from commodity chemicals, where growth has been flat, into specialty chemicals formulated on a custom basis for individual customers.

 

With specialty products, chemical companies can charge for the added value of their research and development effort. Companies have also stepped up their efforts to find new products, particularly in the area of consumer products. Perhaps the most promising consumer market is health care, a traditional, high-profit segment which offers significant growth potential as we pay greater attention to curing major diseases and improving the quality of our own lives.

 

To maximize the competitive advantage of new products, companies must get them into the marketplace quickly. A new pharmaceutical product may cost $100 million to develop and take six or seven years to introduce, with such hurdles as government approvals. Anything a company can do to speed product introduction, even by a few months, whether by more creative research, or more efficient tooling up of production, means a longer period of exclu­sivity for that product, and that translates directly into profits.

 

Meanwhile, chemical companies are making tactical moves, attempting to better satisfy the needs of their customers by improving the quality of their existing products. Consistent product quality, lot after lot, is essential.

 

As in many other industries, chemical companies are placing heavy emphasis on reducing manufacturing costs, both through technological and organiza­tional innovations. This restructuring, which has eliminated entire layers of management, is aimed not just at reducing costs. It brings management closer to the customer and the decision-making action.

 

The U.S. chemical industry is now in a very strong position. They have focused on long-term winning strategies. The major decline in the dollar over the last two years is beginning to show a positive impact. And the stock market has reacted very favorably for the chemical segment over the last year.

 

It is in helping these companies bring new, high-quality products to market more rapidly and at lower cost that Digital will achieve its goal of becom­ing the preferred computing supplier to the entire industry.

 

In the area of research, molecular modeling applications are critical to developing new products and meeting time-to-market goals. Digital has a clear leadership in this market. All the major software packages run on VAX systems. With Digital's networking, researchers in the U.S. can work with scientists in other parts of the world, accelerating the development of new products. This gives our customers an edge over their competition, and it can also have a tremendous profit impact. For a product that will bring in $100 million a year, trimming the research schedule by one day can mean an additional profit of a quarter million dollars.

 

In the area of manufacturing, we offer several cost-cutting and quality­enhancing solutions. Our computer-aided design applications can help engineers design or redesign a plant more rapidly and at less cost. With the help of partners, Digital can offer the process control devices needed to insure consistent product quality. Our industrial VAX and real-time VAX systems add new important facets to our total computing solution. We also can help customers reduce cost with manufacturing scheduling and resource planning packages running on our larger VAX systems.

 

Digital's solutions are less well developed in the areas of distribution, purchasing, sales and marketing. However, several companies are using such All-in-1 functions as electronic mail effectively in these areas.

 

However, the biggest challenge facing the chemical industry, and the biggest area of opportunity for Digital, is not in any of these individual depart­ments. Instead, it involves a vision for the whole industry. The chemical companies that survive and prosper will be those that manage to link all the functional departments into a single, integrated enterprise, which meets the needs of today, and yet is flexible enough to meet the changes of tomorrow. This integration is the ultimate competitive edge, the way to fully maximize all the resources of a worldwide organization. And that's good news for us, because Digital is the vendor best positioned to bring true functional integration to the industry.

 

Right now, Digital's solutions can effectively integrate key activities between the research and manufacturing environments. Our Laboratory Infor­mation Management System (LIMS) enables researchers to monitor large numbers of samples which are collected from manufacturing processes for quality control. We are now developing a Computer Integrated Research (CIR) strat­egy, which will allow decision makers to integrate the research and manu­facturing operations. An important link is also being created between distribution and manufacturing by increasing our efforts on Computer Inte­grated Logistics (CIL), which is part of the broader based Computer Inte­grated Manufacturing (CIM) strategy. With this integration, we help chemical companies use electronic order processing to reach backwards to their suppliers and forwards to their customers, providing just-in-time delivery and reducing inventories at both ends.

 

Placing terminals in the hands of a customer's customer has even greater implications, however. By making ordering easy, an electronic ordering service can make the vendor that provides it the de facto supplier of choice. Potentially, it also lets the company collect feedback from its customers to help direct its research and development efforts. Finally, linking our customers to their customers creates an added benefit to Digital by introducing the advantages of our style of computing to an expanding network of industries and companies.

 

But we must always remember that senior management in the chemical industry is concerned not with the issues of computing, or even functional integra­tion. Their focus is on insuring a long-term profitability for their customers and enhancing stockholder value. In the future that we're helping to create, chemical companies will use their distributed computing and networking to pull all these activities together into income statements and balance sheets. These financial applications will bring the benefits of enterprise-wide integration to the final forum of decision making, the corporate board room.

 

As long as we keep our customers' business issues foremost in our minds, we can achieve our goal of becoming the preferred supplier to the industry.

 

Challenges Facing The Automotive Industry by Jerry Paxton, vice president, Discrete Industries Marketing

 

The automotive industry is typically front-page news -- with its myriad of problems, its performance levels, economic impact and production output. It is a volatile industry that evokes many emotions related to the U.S. posi­tion as a manufacturing nation in a world economy.

 

The U.S. automotive industry market is comprised of domestic manufacturers like GM, Ford, and Chrysler; foreign-based domestic manufacturers like Honda Motor Corporation of America in Marysville, Ohio or Nissan Motors in Smyrna, Tennessee; and foreign imports and suppliers of goods to the auto­motive industry.

 

These major players in the automotive industry represent a huge market, with revenues from U.S. manufacturers alone of $200 billion in 1986. A look at U.S. auto sales show the lion's share of the business going to U.S. manu­facturers .

 

General Motors (GM), the world's largest company with a 42% market share -- $103 billion in revenue —- employs 561,000. Ford has about half the market share of GM, with almost twice the profit. Chrysler has a 10% market share. This total market share of over 70% for U.S. manufacturers is a bit misleading, however. The foreign market share gain in recent years is exerting pressure on domestic manufacturers for a change in the industry.

 

Almost 16% of the GNP in the U.S. is either part of or closely linked to the automotive industry. Manufacturing cars is the nation's largest industry, drawing its machinery, raw materials, parts stock and accessories from every corner of the country. Consequently, whatever is good economically for GM, Ford and Chrysler, is by extension good for a very sizable portion of the U.S. population.

 

Unfortunately, the automotive industry exhibits a far more pronounced impact on the U.S. economy than on Digital's business — a situation we're working to change.

 

The automotive industry is in a state of turmoil that started with the prosperity and record profits the industry enjoyed between 1983 and 1986. The industry is characterized by the over-capacity (an estimated 30+ vendors are expected to be competing for a flat market) that is likely to be a key factor in shaping the automotive marketplace through the early to mid-1990s.

 

Opportunities exist for those who are prepared to face increased competition and real problems for those who are not. Automotive suppliers are looking for increased revenue through market share growth. They need vendors as partners who can respond to their needs for engineering and manufacturing innovation.

 

Today, people are demanding and getting new levels of quality in American cars. It is design, quality, and innovation that make the difference. The world is shrinking, with increased competition for automotive manufacturers worldwide. A key issue facing the domestic automotive industry is how to remain profitable in the U.S. market and survive the market share battle that is in its early phases.

 

We have witnessed some far-reaching market shifts in automotive buying criteria from price to quality and innovation; from mass markets to a more segmented or fragmented market; from a high degree of brand loyalty to little brand loyalty; to customers rather than vendors defining the product; and from a growing market to a flat market.

 

Digital already has a strong presence in the market from both an account (GM and Ford), and an applications (engineering, manufacturing, and office) perspective. The U.S. is faced with increasing competition and the need to reduce the cost per vehicle enjoyed by the Japanese. Digital's strengths in engineering, computer integrated manufacturing, office applications and communications networks are a real answer to automotive industry problems.

 

Employee productivity and changing skill requirements will require careful planning and organization in the automotive industry. Decreasing time to market with improved cross-functional, cross-geographic communications is a necessity to answer this problem. And Digital is addressing these challenges today.

 

To meet the time-to-market problem, the major functions to addresss are engineering and manufacturing. We already have a presence in engineering — in such areas as computer-aided design and finite element analysis -- although not to the degree that we could. In manufacturing — for shop floor control, cell control, production scheduling and monitoring — we do, in fact, sell a significant number of point solutions which we either provide directly, or in conjunction with third parties. But these specific solutions are not really our competitive edge.

 

Central to our competitive edge is our interactive, flexible, networking capability that allows automotive companies to address the revenue side of the profit equation (Profit = Revenue - Cost).

 

Why is this significant? The U.S. auto industry has focused more on the cost side of the equation in response to Japanese competition in recent years. They have spent billions on programs aimed at reducing production costs. Improved design and innovation is increasingly important. The market now favors well-designed, innovative cars — even at a premium price.

 

The auto industry is beginning to place more emphasis on the revenue side of the equation in response to the demands of a changing market. Lower cost for U.S. cars has not made the expected impact in market share. Quality may be even more important than design, emerging as a determining factor in the buyer's decision. Buyers are increasingly discriminating. Fords's success in the introduction of the Taurus/Sable line indicates that people are buying innovation and design.

 

This shift represents a tremendous opportunity for Digital. Automotive manufacturing functions, and departments which impact revenue —- engineer­ing, manufacturing, and research — are where Digital is a significant player right now.

 

The factors that contribute the most to revenue -- especially design, quality and time to market -- require a high degree of integration and are communication-intensive. Auto manufacturers really would like to recapture the kind of physical integration they had when they were small. Design teams were co-located and could meet in a conference room. More discussion took place. More decisions were made at the knowledge worker level because of cross-functional physical integration. It is this model of physical integration that needs to be emulated in the automotive industry to meet current challenges.

 

As companies grew larger, there was a natural migration to the cost side of the equation to take advantage of the economies of scale and other effi­ciencies, and because maintaining the small company environment became more difficult. Today's challenge for the industry is how to reap some of the benefits they experienced when they were smaller, benefits such as entre­preneurial spirit, innovation, design, and time-to-market without having to back away from successful programs that address cost reduction and quality.

 

Our solution supports cross-functional and cross-geographic integration. It enables companies to operate in a way that contributes to creativity, inno­vation, quality and reduced time to market. This peer-to-peer communication is equal in importance to information management. Conceptually, this creates an environment like what they enjoyed when they were smaller and could physically integrate. It is the link between a customer's point problems and solutions, and is the overall corporate business problem. It is this kind of communication that contributes to innovations, that is the glue which links all the necessary players throughout an organization for the best combination of functions and geographies.

 

Our unique networking capability can provide the linkage between the de­partmental solution and the corporate business problems. This is at the heart of Digital's unique solutions capability.

 

Manufacturing Problems And Solutions by Peter Graham, manager, CIM Market Development

 

I'm here to tell you about Digital's manufacturing solutions, and how these solutions can enable companies to solve today's problems in new ways.

 

In the years following World War II, many companies ceased to perceive manufacturing as a critical corporate function. In the old environment, markets were national, not global. U.S. companies made shoes, textiles, televisions, etc., for the U.S. market. The major competitors were known and familiar; they were similar companies with similar products and similar management practices. Nobody "rocked the boat," and nearly everybody progressed at the same rate. This meant that product life cycles were relatively long, and corporate performance was measured in a specific competitive advantage in the areas of marketing, sales or finance leader­ship, but not manufacturing. Computers were expected to automate limited tasks, in which the benefit could be measured in labor or material dollars saved, and Digital excelled in providing point solutions for these needs. Computer-integrated manufacturing (CIM) was a buzz word, a vision, but not a reality.

 

In the new world, markets for most basic goods are global. Competitors have a different mix of management attitudes, values, and cost factors that they bring to the game. In addition, the application of technology to product development has increased dramatically in the past few years. Consider the changes resulting from technological developments in areas such as informa­tion processing, telecommunications, or materials. These factors have led to shorter product life cycles, and more competition. The new environment requires a totally new approach from manufacturing companies. Flexible manufacturing systems were an option in the old world; they are a require­ment in the new world. Manufacturing companies need to adjust their product mix, and their production volumes, quickly and easily. To enhance producti­vity, they must be able to share information and decentralize control of the production process. In the old world, automation was a productivity tool. In the new world, survival will be based on CIM -- the integration of automation and information management across the entire manufacturing enterprise.

 

CIM goes beyond intra-company communication to allow a manufacturing company to deal more directly with its customers and suppliers. Today, when we buy a car, the dealer can order the vehicle on-line at the dealership, using the car maker's production scheduling system to quote a build date.

 

CIM is a management approach through which a company can address its criti­cal success factors — product cost, time to market, asset management, and customer satisfaction. Within the manufacturing department, CIM specifically addresses:

o the need for local, high-performance production, management and control — how you make things cheaper, better, and faster;

o the need for information sharing; and

o the need for complete solutions.

 

According to a recent survey, the single greatest barrier to the imple­mentation of automation is technical planning difficulty. These needs for planning, customization, service, delivery and support, are key elements of CIM, and must be included in any solution which Digital provides.

 

In the old environment, purchases were made based on price, performance and operating system software. In the new environment, CIM solutions do not necessarily begin with the purchase of a computer. Rather, they usually begin with simplification of the organization, the manufacturing process, and the way information is used. This distilled structure can then be automated and integrated. Automation and integration require comprehensive networking for sharing of data, and they require the ability to collect and disseminate information among people, and to all kinds of devices that ac­tually perform the production tasks. Finally, a full range of services and support complete today's CIM solution.

 

Through various cooperative marketing programs, we are today developing the broadest and deepest portfolio of software for manufacturing applications available from any vendor. Over the past two years, the business leveraged through all of the partners in the manufacturing market has grown at a rate in excess of 75% per year. In addition to expanding the application port­folio, our plans include integration of these applications. For example, a bar-code reader on the shop floor will be able to collect and send informa­tion to the inventory management application in the plant manager's office.

 

Several recent market-research studies indicate that manufacturing companies increasingly are making decisions which limit the number of computer archi­tectures they will use. Digital's VAX VMS architecture, and DECnet Ethernet networking, are simply the best products for the implementation of CIM. Our base products in networking are the building blocks for CIM solutions. The recent introduction of the industrial VAX family extends this base-product strength to the production environment. The industrial VAX systems are uniquely designed to withstand the harsh conditions, such as dust and temperature, which exist in many factories.

 

CIM also requires sharing information in the multi-vendor environment that is typical in manufacturing departments. Multi-vendor solutions need to address two very different problems, at two very different levels. A higher-level problem is integrated networking, which can tie together all functions of the enterprise, including communications, down to the super­visory or cell-control computer. Planning for factory automation should start with the enterprise network. The fullest benefits of CIM can be realized only if you have a single networking approach. We need to highlight the proven performance, the reliability, and the simplicity of our integrated networking solutions for manufacturing.

 

On the other hand, the lower-level problem is interconnection of the super­visory computer, or cell controller, to the hundreds of devices that perform production. These devices include meters, motors, robots and controllers. Digital has a family of products, like BASEWAY, which allow device inter­connect today. We also support the development of industry standards, which will make this problem of interconnect easier to solve in the future.

 

Some of our customers are starting with the lower-level problem. We must advocate a broader vision, which clearly illustrates the benefits of begin­ning with networking.

 

The last component of the CIM solution -- service -- starts with the ongoing expansion and refinement of our service offerings, in Educational Services, Field Service, and Software Services. In addition, several new service offerings will be of particular significance in this market. For example, the Manufacturing Systems Integration Service (MSIS) positions Digital as a provider of complete solutions, such as integration of Digital products with third-party applications and customer software. In addition, Manufacturing Resource Centers (MRCs) are opening that are focused speci­fically on CIM solutions and staffed by people with years of hands-on experience implementing CIM. They are located today in Detroit, Enfield, and Santa Clara, and will be expanding to other areas over the next 12 months. Today, MRCs address the needs of more than 60 manufacturing customers, and we expect this number to grow rapidly over the next few years.

 

Taken together, these new service offerings represent significant new directions for Digital, offerings which are very much in tune with the needs of the manufacturing market.

 

To summarize, many of our manufacturing customers assume that the answers to their problems lie in their traditional ways of thinking. It is our job to expand our customers' approaches to problem solving, to show them how simplicity, elegance, and completeness of our CIM solutions can empower them to move beyond current limits, and to achieve their manufacturing objectives in totally new ways.

 

Engineering Problems, Solutions And Marketing Messages by Don McInnis, manager, Engineering Systems Group Marketing

 

Many people in large companies view the engineering department as a black box. You feed it a set of requirements; you fund it to the projected level; and you expect to receive products, after a certain time. In some companies, the black box may be more like a black hole into which you continue to pour money, and eventually you might get a product out.

 

The most common or first problem of any engineering manager is the late- schedule nightmare. One of the major goals of any project is achieving the best time to market -- the time from initial concept to the start of ship­ping. A late schedule will limit the total market opportunity, and signi­ficantly reduce the total potential revenue. For "Fortune 100" companies, a single product slip can mean tens of millions of dollars of lost business per day.

 

Why do product design efforts often miss the mark by a wide margin? In engineering, the typical causes include: poor team productivity, inability to manage the new technology incorporated into the product, poor management, lack of sufficient computing resources to completely simulate the design and poor communication across the engineering team. A poorly documented product can cause manufacturing delays, even in the start up.

 

How can Digital help? VAX workstations can increase greatly the producti­vity of engineers. For mechanical and electrical design, we have the most complete set of leading-edge computer-aided design (CAD) systems in the industry, plus complete simulation and project management tools. VAXclusters are an excellent offering for any size project that cannot anticipate its growing computing requirements, because new capacity can be added as required.

 

For many of our targeted accounts, a large project involves managing engi­neering and manufacturing resources around the world. At Digital we have found that our interactive, flexible, worldwide network and mail system is equally as valuable as any CAD tool, because it provides the timely, needed level of communication. We also have integrated excellent documentation facilities in our key CAD tools. All of these solutions have enabled the Digital engineering community to introduce new products at an ever-increas­ing rate.

 

The second nightmare that bothers engineering managers is the "we cannot ramp" syndrome. Sometimes the team does a great job and meets the time- to-market objective. However, they don't meet the time-to-volume objective, because the product could not be built to the expected volumes. The effects of these are lost opportunities in the total revenue stream. For example, when Union Carbide introduced artificially manufactured diamonds in the 1950s, it took them five years longer than planned to get a high-volume process. This delay cost them hundreds of millions of dollars in lost opportunities.

 

Some of the leading causes for not being able to ramp up include: a poorly designed manufacturing process (the responsibility for which is owned by engineering in a fast-moving industry), and continuing to confront manu­facturing with many engineering change orders (ECOs). Even if the ECOs are small, each one causes manufacturing to stall for a period of time. The specification of a component may be inaccurate or incomplete. Engineering may do a poor job of preparing the whole manufacturing and service popu­lation, due to poor communications, training, or integration for data exchange.

 

What can Digital do to help avoid this set of problems? Once again, we can provide CAD tools, VAXclusters, interactive networks and mail, and documen­tation tools. For electronics customers, simulation and automatic test generation could help the specification problem. In the discrete manufac­turing industries, Digital is committed to a large and ever-growing number of standards, all of which can help in integrating applications and manufacturing.

 

Another class of engineering problems I call "the big hiccup nightmare." Things are looking great — time-to-market schedule is right on time, and market acceptance and manufacturing ramp-up are right on the best-case target. Then because of some unexpected problem, you cannot ship any product for a significant period of time. The necessary design changes cause a big delay and loss of opportunity. Immediately, your biggest winning product becomes second-rate, or even a loser in profits.

 

The most common cause of this nightmare is an engineering fix that takes a long time to introduce into high volume. Another cause is the loss of a process formula. Suddenly, you cannot control the manufacturing process, because you’ve failed to understand it completely in the beginning. The solutions to the big hiccup problem are good CAD tools, a thorough design methodology, and very complete simulation, to discover potential design and process problems before beginning to build product.

 

Basically, we have the best base of product capabilities and services, and literally hundreds of applications to avoid these and other engineering nightmares. We have VAX computers on the desktop, with the tools to make the designers more productive. We have VAXcluster systems, which today are the preferred solution for engineering departmental computing needs. The same engineering application that runs on the desktop also runs in the large computer center. Nobody else can do that. Our networking and mail are the best in the industry, and our worldwide service offerings are second to none.

Service Industry Vision by Bob Hughes, vice president, Service Industry Marketing

 

More than half the market for computers and supplies and peripherals, exclusive of telecommunications costs, is in what we call "service indus­tries." But in FY85, when we started our industry marketing activity, we were losing market share in this fastest-growing segment of the computer world. In FY86, we kept pace with market growth. And in FY87, we're gaining market share.

 

Part of our success comes from efforts to organize and focus our marketing and sales force. When you dedicate sales people to an account, you get results. But much of the success comes from better understanding where our customers are headed and what they want to hear -- our message and our vision.

 

Many companies in service industries deal directly with you, the ultimate consumer. Telecommunications and utilities companies have wires running right into your house. Others have subscription services that go right to your door. Others have credit-card information on you. Others offer profes­sional services, like accountants and lawyers.

 

Based on what they know about you, these companies want to offer you more information-based services, first from their corporate offices, and ultim­ately out on the user premises. For example, by 2007, your children will be able to apply for a mortgage at home and have the mortgage approved without ever having to see a banker.

 

One important trend in service industries relates to market redefinition and the consumption function. I'll use the airline industry as an example to explain this concept, but it applies to many industries.

 

Four years ago, the large database in your typical airline was organized by ticket number, and about all the airline could tell you was the number of seats that were filled on a given flight. About two and a half years ago, they began throwing more computers at the problem and building larger databases so they could organize databases by individual traveler. At this point, they could tell you the number of flights you took on their airline, and where you went. About a year and a half ago, they added database cuts by "consumption function" or "affinity grouping." An "affinity group" is a list of products and services a targeted consumer is likely to buy. People who fly usually rent cars, stay in hotels, eat out, etc.

 

In another example, the L.L. Bean catalog now comes in six editions, in­cluding the old standard catalog, a hunters' edition, a children's edition and a yuppies' edition. The one you get is a function of how they classify you.

 

The insurance industry does likewise. Your first policy triggers other affinity groupings. Is that policy for your child as well? Does your child need a car seat? Do you need car financing? The airline industry targets you for mail about frequent-flier programs, hotels, cars and travel, based on affinity groupings.

 

All service industries are beginning to organize around consumption func­tions. Fortunately, we have organized our marketing the same way. We call our groups "Financial Services," not banking; "Travel Services," not air­lines; "Media Services," not books. From the customer's point of view, this is a subtle but very important point. In IBM, the banking manager and the insurance manager and the investments manager all work for different mana­gers. The customer tells us, "They don’t understand these affinity group­ings. It’s hard to get things done with them." And we'll probably reorgan­ize our group as the industry reorganizes around these groupings.

 

Another important concept and trend is client-based delivery of services. Each of these corporations deals through an intermediary, as a way of delivering its services. Over the next 20 years, they want to reduce their dependence on intermediaries, if not do away with them.

 

For example, in the airline business, there are vendor and non-vendor airlines. Vendor airlines are those that sell their reservations database to travel agents. Sometimes these travel agents have inexperienced help and don't provide the best route or the least expensive travel option. Companies are waking up to the fact that this approach is not efficient. So a new breed of intermediary is popping up. Within the last four months, two new data-services companies have started offering customer-oriented services — access to the most convenient route, at the least cost. They're buying all these services from the vendor airlines and car rental companies, putting them together in a database and selling them to companies like Digital. Leaders in that service area will be large conglomerates like American Express Travel-Related Services. Eventually, companies that are big enough to afford their own travel-related services operation will get into that business and cut out that intermediary. First, they'll offer those kinds of services through the headquarters location. Ultimately, you'll be able to access them from your personal computer at home. You will be able to go from vendor to personal use, without the intermediary.

 

Moreover, service industry companies are worried that they can't make a profit delivering all these services to the user. So they are setting up new data-services organizations, such as GTE Data Services, American Airlines Data Services and Banker's Trust Services. They are taking the service industry equivalent of manufacturing and distribution, under the MIS mana­ger, and setting up a profit center. That trend is extremely important to Digital's success. When they (MIS executives) start thinking in terms of profit and loss, they are open to change, and ready to talk to us.

 

There's also a move to get away from "brick and mortar" retail banking, because it's unprofitable. Bank buildings are usually old and inconveniently located, and hard to staff and maintain. They are looking for a more efficient distribution model. We have some products today, and some under development, that will help them do that. Today, the most common approach is the automatic teller machine (ATM). In the future, they’ll be moving toward "smart cards."

 

Insurance is going through a major change. It wasn't too long ago that you received one insurance policy a year. Now it seems that every time you turn around your agent's calling you up: new this, new that, combine this, do

 

that. It's very confusing for you and for insurance agents. Right now, they have PCs and their only connection with the region and from there to headquarters is by "sneakernet."

 

Well, we could put it all on one electronic mail system. Then as soon as you sell a $5 million policy to John Doe on the West Coast, you can put a message on the mail system telling your fellow sales reps the objections, how you overcame them and how you closed the order.

 

Recently Prudential Insurance bought Century 21. That’s an interesting affinity grouping. They want to capitalize on all the people applying for mortgages. Savings and loan companies are also getting into real estate.

 

There are experiments going on right now to develop consumer-based products that will allow you to download the file of houses, and all the data on those houses, to your lap; and, using graphics techniques that don’t exist today, allow you to shop at your convenience. If you want to see seacoast homes, you get on the value-added network for seacoast homes, download it while you sit on your couch at home, and go up and down the Maine coast. If you see a town you like, you move into that town. If you see a house that's up for sale, you move into that house. You can take a tour of that house, either on the value-added network or downloaded. You can apply for credit, apply for the mortgage, and buy the house, if you choose.

 

In the loan business, there are 150 subscribers to the 1-800-LOAN, USA Loan system, where you never have to go to a credit store and you never have to go to a bank, and you get your loan approved today.

 

There are already 10,000 people in the U.S. today doing 24-hour stock trading, using their personal computers, bypassing the dealers. They pay more than the standard commission charge just for the convenience and the ability to get more data.

 

Probably no greater area for change exists than in the retail trade and consumer banking market. Today we're all familiar with credit cards. You carry them around in your wallet today. When you buy something, you have a certain amount of float, caused by the amount of time it takes to debit and credit your account. There are experiments going on today with debit cards which allow you to go into the gas station, put your debit card into the pump, pump the gas, and immediately your account is debited and the gas station's account is credited. "Smart cards" are about the thickness of a small calculators. They're now being used primarily in the Far East. They have on them every piece of data you ever need to know about yourself: your life history, your family's life history, what you like to eat, your bank balance, how much you get paid, insurance policies — every critical number you ever wanted.

 

In the Far East, retailers and bankers are experimenting with using that smart card to distribute pay. In Europe, they are experimenting with "hypermarkets" with 178 checkout counters. You walk up to the item you want and stick your smart card in. The system picks the item and packs it and and deducts the amount of that item from your smart card. When you walk out, you have your purchase bagged and give them your card to verify the purchase; or you can do your own checkout.

 

Already today, 20% of all the retail sales in the U.S. is done through the home. About 80% of that 20% is done through affinity-group catalogs, and the other 20% is done through home shopping networks. People are working on ex­periments to make home shopping more efficient and effective. In the home shopping network, you've got to listen to the sales pitch that goes along with the fuzzy picture of the item you don't want to buy. And when you read the catalog, you can't see a demonstration of the product. GTE and others are working on full-motion videos and value-added networks that will allow you to see a demo of the product in a window, while you read the text on the screen.

 

This is going to change retailing from the way you and I know it. You'll see clusters of durable-goods companies, like the Auto Mile on Route One outside Boston, where every major automobile company has show rooms. They'll be supplemented by the finance block, the insurance store, and the accessories department.

 

By 1995, travel-related services will become the second-largest industry in the world. Here again, you can see the vendor airlines playing a dominant role in the sale of their database, dealing with the agents that distribute the product to you. Eventually, you will be able to sit on your couch, call up the planned tour, and see a full-motion video of the hotel or the sea­coast, the airplane, the routes, and buy your tickets.

 

Today, phone companies and utilities have a wire going into your house. They're all searching for ways to keep that wire busy. The longer the wire's busy, the more money they make. The wire used to be busy with voice. Now they want to make that a digital network and put value-added services on that network. 1-800 is a value-added network service. If someone isn't home when you call, a value-added network service allows you to digitize that call so the system can call them back later and deliver your message.

 

In the area of media services, did you know that Business Week today comes in six different flavors? There's a traditional Business Week, a videotex version without ads, a videotex version with ads, a floppy-disk version, a Braille version, and a CDROM version. There are 50,000 subscribers, via PCs, to videotex Business Week with ads.

 

It’s not at all unreal to think about a MicroVAX computer in every city in the United States, tied to a cable system, and each week, the providers of information download their edition to each MicroVAX system and the infor­mation is accessible to you, from your home, page by page as you want it, in high-quality form. These information services will replace local bookstores for the majority of your reading requirements by 2007.

 

Today, the data services organizations in these companies are experimenting with "participa-stories" -- novels, using artificial-intelligence concepts, that allow you to follow any path through the story that you choose as a reader. It's the grown-up version of "Dungeons and Dragons." You buy War and Peace; and if you're a warmonger, you go down the war route.

 

To execute all these visions of the future, information officers today are saying that they need a single hardware architecture, a single operating system, a single networking scheme. The reasons vary bv the industry, but it's extremely difficult to execute a global 24-hour trading system when you go from PCs to System 36s to 4300s to VAX computers to Prime machines, to DG machines to 3090s. A trade- is supposed to be quick, immediate, global. And you shouldn't have to spend all your time going through layers of software to do it. Information officers immediately recognize the value of what we have to say. They even have a picture in their mind of the information center of the future. It's a menu-driven device that you can use on your couch, that has flat 35-millimeter print-quality images of the person you're talking to, a window into the public network that gets you into value-added networks, and access to the range of services you need in the home.

 

By 1995, almost every one of these visionaries of service industries sees the world divided into three parts. There will be information providers, like McGraw-Hill; information distributors, like Sprint and AT&T; and infor­mation systems managers, like Digital and IBM.

 

Where's the profit? We don’t know. Is it in the transmission line? Is it in the database? Is it in the computing system? Is it in all three? How do you protect yourself when you're building a company and a vision out over 20 years, so you don't miss out?

 

Executives in these industries, having seen that we understand where the industry's going, say, "Yes, it's clear to me what you're doing. You want to get a VAX system at every switch for every information distributor (like the phone companies), and you want to get a VAX system at every database, for every information provider. So no matter what value-added network I choose to implement in the future, no matter what company I choose to buy, no matter what service I intend to implement, I've got a common architecture. That makes sense, I like it. You're on the right path. But only do it for mission-critical applications in these industries."

 

What are mission-critical applications, and how do you identify them? There are thousands of applications in each one of these industries, but only a handful of them make the CEO stop whistling during meetings and listen to what you have to say. Those are the ones for which the customer pays money. If the press stops running, if you can’t connect the phone call, if the bill can't be collected, if the transaction can't be concluded, if the customer request goes unsatisfied, you have failed in your mission-critical appli­cation .

 

I put electronic publishing at the top of the list because almost all of the visions for the future that I just laid out for you are the problems faced by today's media executives: the collection, manipulation, display and distribution of electronic picture books. While they’re often thought of as experiments today, it is the road to the future; it’s what they're trying to implement. They're also trying to meet deadlines, and collect page-usage rates. And the systems are multi-department systems, involving many disci­plines, usually within a function.

 

As you go about your daily business, think about the role Digital might play 5, 10 and 15 years from now in the aggressive pursuit of value-added net­works, supplying the hardware, the operating system, the software, the network, the network management, perhaps even the database management, for a variety of service industries. Think about our role as the tax collector or the toll collector, negotiating with the utilities companies for line usage rather than the way it is today, where they collect the money. Think about how we'd manage the company in that kind of environment.

 

Financial Services Problems And Solutions by Claude "Sandy" Thomas, director, Financial Services Marketing

 

Banks, insurance, investment managers and brokers are changing. Technology, formerly used for operations and accounting, is now driving the sharp end of the business -- revenues. The role of technology in the financial industry was to support traditional products: deposits and loans in a bank, policies and claims in an insurance company, stocks and bonds in an investment firm. Systems were organized around production functions that handled the debits, credits, record-keeping and statement production of those traditional functions. They weren't really marketing organizations because they sold what they made. The more they could make of it, the better profits they could make, because of the efficiencies of scale. So they operated in high volume and centralized computing to reduce costs and improve productivity.

 

But these companies want a new focus on individual customers and on corpor­ate clients. They are shifting their attention away from their traditional products and functions and are looking at new channels of distribution; making professionals more effective; moving products and services closer to the customer at the point of sale and service; and ultimately integrating the customer into this process.

 

In fact, in the financial services industry, information is the product; information is money. These organizations are playing the role of inter­mediaries between information users and information providers. And they want to do so in a way that enables clients to have what they want, the way they want it.

 

To meet these needs, the financial industry is investing heavily in "mission critical" systems -- technology that creates and delivers products and services at the point of sale and consumption. The traditional functions of technology were in the back office, organized around the products or the functions performed by the organization, to improve efficiency and to process high volumes of transactions. Now technology is moving out of the back office and into the front office, as it increasingly is used to support professionals — loan officers, insurance underwriters, financial advisors and stockbrokers -- who create and deliver financial services to different markets. Eventually technology will move into the client's place of business and into the home itself.

 

Let's look at the business model for a bank. It consists of a large central headquarters, where professionals — account officers and loan officers -- are located. There are branch offices where customers access financial services. And there is some consumption going on in the home, primarily balancing of checkbooks and a little home banking.

 

That business model is changing, and technology is changing with it. Technology centralized in the headquarters and the back office is moving out to the branch offices with automatic teller machines (ATMs), and teller terminals are linked to platform systems across a network to deliver ser­vices. Already, corporate customers are linked to these systems for cash and portfolio management. Tommorrow, the promise of in-home financial services will be a reality.

 

Digital is already successful in financial services applications that are compute-intensive and that have to do with supporting professionals — for example, funds transfer in corporate banking markets, trading in capital markets, and portfolio management and trust applications. We have been successful in the more valuable transactions, the more information-intensive applications. We are supporting a financial professional who needs access to computing.

 

So what's the market opportunity for Digital that is emerging? The tradi­tional business was organized around products and protected by geography and regulation. There was a lot of inertia. Customer relationships, particularly corporate relationships, lasted for decades. The technology was transaction-based. It was batch, and centralized in one place, primarily for efficiency because highly trained people had to take care of this expensive gear, and because there were efficiencies of scale, from centralizing these very large processors.

 

IBM is the traditional provider to this industry in the operations and back-office type of functions. Interestingly, as we move out to support professionals at the point of sale and the point of service, we see Digital well-positioned for increased rates of growth. It's estimated that the traditional types of back-office computing will only grow about 20% between • now and 1990. But the mission-critical applications that we are targeting are growing at a rate of 60%. That's why Financial Services Industry revenues are growing at twice the average for the company.

 

We are selling the products we have today, based on the strength we have in these markets, now. Investment in the future means we are creating new solutions by integrating Digital platforms, third-party and customer appli­cations in three mission critical systems: branch delivery, professional

worksystems for traders and relationship managers.

 

The marketplace is responding to the networking, the VAX/VMS architecture, and strategic solutions from Digital and third-parties. Over time, we can help these companies change the way they do computing, to distribute those applications and data to where they're most needed for business success. This industry is ready for Digital today, and we plan to increase invest­ments in people, products, partners and programs to leverage this success.

 

Trading Problems And Solutions by George Chamberlain, vice president, M/E/M Finance

 

The trading market consists of a large number of major institutions that operate around the world — companies like Citibank, Morgan Bank, Banker's Trust and Merrill Lynch.

 

A decreasing share of the income of these institutions comes from loan revenue, and an increasing share comes from trading profits. During the first quarter of 1987, eight out of the nine largest U.S. banks made more than 10% of their profits from foreign-exchange trading. For Morgan, Citibank and Banker's Trust, that amounted to in excess of $80 million each. These institutions trade a wide variety of instruments, all of which are connected to one another. So when a factor changes, like the prime interest rate or the Federal Reserve's discount rate, something happens to the market value of all of these instruments. And it’s that kind of change that creates opportunity for trading profits.

 

The trader's job is to make money by "buying low and selling high." For example, sometimes in a single day, prices of a particular currency can fluctuate widely, creating opportunities for those who know when to get in and when to get out. But that's not an easy task. Information is arriving all the time — market data, prices, analysis. The trader has to put it all together and make decisions, and keep in touch with the back office for record-keeping.

 

Increasingly, these organizations look to technology for a competitive ad­vantage. And they are willing to spend in the range of $150,000 per trader station, because of the profit potential they see.

 

Real-time information is very important to a trader — on stock markets, international financial markets, etc. There are about 150 different on-line information services that a trader might wish to use, and obviously there’s a limit to how much of this information a trader can absorb.

 

Recently, I was on the floor of a foreign-exchange trading operation. It was early in the morning, and things were quiet. The traders were waiting for word to come across the wire on what the German central bank was going to do about interest rates. It turned out that the bank was not going to change its interest rate. This caused significant, immediate activity. People were on the telephone modifying the positions they had taken, because some of them had been anticipating that the rate was going to change, and therefore they felt they were exposed. The ability to collect that information and to react to it quickly is what interests them.

 

The second major category of activity a trader engages is analyzing the data. Today, the most widely used set of analytical tools are a calculator, a pencil, and a piece of paper. Traders, in action, are often furiously calculating things to determine whether or not some particular rate makes sense, and whether any activity is justified. Many traders will retain these pieces of paper, so that at the end of the day, they can reconstruct what has happened.

 

In addition, the back office must be kept informed of trading activity. Today, the connection between the trader and the back office is by paper. Every time the trader engages in a transaction, he or she has to fill out a trading ticket, which records the amount of the transaction, the name of the other party, and other relevant information. That paper is then sent to the back office, either by messenger or by facsimile machine. This procedure can lead to significant delays -- up to 45 minutes in some cases -- which means that the trader cannot retain on-line information on the position. When trading becomes fast and furious, traders have to go back to pencil and paper to keep track of what is going on.

 

Trading also has to operate around the clock. Just as a New York operation may be closing, Hong Kong may be opening up. So these organizations have to be able to protect or enhance their trading position, as the activity moves around the world.

 

What solutions does Digital offer for this market? To meet the need for real-time information, we are working with media companies and third-party software houses to digitize the market information that is fed to traders. To help traders make better decisions, and be able to respond more rapidly, we want to introduce a set of VAX-based decision tools, such as expert systems, so that the incoming market data can be combined with historical information and trend information. That way traders would no longer be dependent on their own individual memories or handwritten logs, and they would be able to integrate what they have seen on the screen. These capa­bilities are important because competitive advantage in this business comes from the ability to spot anomalies in the market more quickly than the next trader, and to be able to respond more rapidly.

 

It's conceivable that all of this historical data will reside on a VAX- cluster system and be available to other traders in the same institution over a local area network.

 

To enable traders to trade more and manage their positions more effectively, we're introducing the concept of the trader’s workstation. This might consist of a large screen with multiple windows or, conceivably, multiple screens. It's also important to provide the ability to combine the output from analytical tools, using multiple colors, or flashing, or some other means of signaling which trends are taking place, or when action is re­quired .

 

We’re considering the possibility of an electronic transaction ticket. This means that real-time information on the transactions can be recorded on the workstation to keep the trader informed of what the position is, and also be communicated to the back office. This will enable both the workstation and the back office to know simultaneously what is going on, and update posi­tions immediately.

 

In addition, use of a wide-area network will make it possible to manage trading globally. It's possible for complete information on the position to be available to all traders, no matter where they are in the world, from New York to Hong Kong to London. As one office closes and another in another part of the world takes charge, everybody knows everything that's occurred, in terms of positions, transactions. There is no important information left on a slip of paper or a desk in New York.

 

By capitalizing on Digital's strengths, such as a common architecture and networking, we are able to offer to our customers an integrated solution that can provide competitive advantage.

 

Digital’s Message And The Canadian Market By Ken Copeland, President, Digital Canada

 

I represent 3,000 Digital people in Canada, who know the importance of sharing ideas, directions, and strategies, in an international corporation.

 

Canadians in general, including our government officials, are very aware, and immensely proud, of Digital's presence in Canada. We incorporated in 1963 — Digital's first subsidiary. Our 3,000 employees are in 40 sales and service sites, plus our Kanata, Ontario, manufacturing and distribution plant. In Kanata, Digital manufactures backplanes, PDP-lls, and VAX 8250 and 8350 systems for export.

 

Speaking of exports, 25% of Canada's gross national product is exported. Canada is the largest trading partner of the U.S. In fact, U.S. imports from the province of Ontario alone are greater than those from Japan.

 

Canada presents interesting opportunities for Digital. The size of the geography and the nature of the economy, lend themselves to our strengths in networking and distributive computing.

 

We segment our markets by geography. Starting from the West Coast, in British Columbia, we have mining, pulp, and paper; in Calgary — oil and gas; in Ontario — manufacturing; in Quebec — basic manufacturing, pulp and paper. Within Ontario, two cities are particularly important: Ottawa, the seat of our federal government, and Toronto, the commercial and financial center of the country.

 

Next to the federal, state and local government sector, finance is the largest sector of data processing expenditures in Canada, and represents approximately $1 billion in hardware and software expenditures. IBM has over 50% of that market; and up until recently, Digital had very little penetration there. It's an industry in a state of flux and a major growth opportunity for us.

 

Recognizing the opportunity, two years ago we decided to invest heavily in this market. We moved 120 field management and support jobs, including nine members of the ten-person country management team, from rural Kanata to downtown Toronto, the heart of the financial area. In this new location, we have a finance industry group and an entire new finance sales and services district, which includes both Toronto and national targets. We also estab­lished an applications center for technology (ACT) on the ground floor of our new location and very visible to the passing public, to highlight the Digital style of computing.

 

Part of our ACT is an executive briefing center, where we demonstrate customer solutions. And adjacent to it we have 15,000 square feet of training space, including a very profitable bookstore.

 

As part of the all-channels industry marketing strategy, we encourage both OEMs and CMPs to use our ACT to joint-sell to our prospects.

 

Our finance investment plan is working. At the Bank of Montreal (with 1,600 branches and 3,000 data-processing employees, all IBM-trained), we sold the first implementation of a commercial banking application using All-In-1. At Financial Trust and Council Trust, we sold an OEM's retail banking appli­cation. At London Life, we are in the midst of installing a 200 MicroVAX network, to assist sales people in marketing financial products. The Toronto Stock Exchange uses VAX systems to assist communications with their trading floor.

 

Even with these wins, we still see significant challenges ahead of us if we’re going to succeed in challenging the competition in this marketplace. The mission-critical applications that Bob Hughes and Jerry Witmore dis­cussed, in such areas as office systems, corporate banking, international banking, and trader work systems, will be part of our continued success.

 

Educational Services’ Message Delivery by Pat Cataldo, vice president, Educational Services

 

Educational Services provides a worldwide network of training, education, and communication services. We do this for both employees and customers.

 

Retraining is now imperative in the workplace, as jobs continue to change and worker skills become obsolete. And, important innovations in communi­cations and in learning technology are changing the ways we deliver our training.

 

We work collaboratively with engineering, product business units, marketing, and the field organization on products, markets, applications, and strategic information that go into the course materials and documentation we supply. Our added value is designing, developing, delivering, and measuring these programs. Our goal is to provide training and communications solutions that are timely, high-quality, locally available and cost-effective.

 

The size of our training organization has been compared to that of a univer­sity with a population of over 25,000 full-time students. Every Monday morning, from San Francisco, California, to Sydney, Australia; from Reading, England, to Rio de Janeiro, Brazil, we start over 5400 students in classes. This year, we'll teach over 500 different courses, in 17 different langua­ges, in over 100 training centers around the world. This will result in us delivering over 10 million hours of education to over 250,000 students.

 

We have the potential not only to deliver training, but to deliver our message to Digital's end users — to deliver information about our ability to make our customers more competitive.

 

Educational Services provides a full range of communications services, from slides and scripts to closed-circuit TV, videotapes, and manuals. We also oroduce technical books and publish under the name of Digital Press.

 

Information-age education is no longer just an instructor in the classroom. It's a richer, more exciting, more flexible environment for students to learn, not only about computers, but how to use computers integrated into their job. It extends beyond the format of lecture-lab training, to indivi­dual, self-paced, instructional courses; to videotape programs; to audio cassettes, for reinforcement of the learning; to computer-based, computer­managed, and highly interactive programs, with laser videodisk; and even to programs being broadcast over private satellite communication networks.

 

Here are a few examples of what Educational Services is doing to solve the training problems of Digital and its customers.

 

When Field Service needed to train a large, decentralized population of its engineers on disk and tape products, we solved this problem by simulating the instructor in the classroom with interactive video courseware. At the same time, we created the concept of an individualized learning center, where an administrator was available to help students with this self-paced material.

 

When the Sales organization found that the average sales rep received over 700 pages of information a week, and didn't read them all, and spent an average of six to eight hours a week commuting, we responded with a sales training audio cassette learning program, to reinforce the important prod­uct, market, and selling messages.

 

Finally, when the Field asked us to train 8,000 people, simultaneously at 80 sites, on the new Digital Business Architecture that we introduced this past March, we used our own private satellite communication network, DVN, to deliver the training, at a cost of only $62 per student.

 

We're working on a systems approach to learning, to lead our customers to achieve a more comprehensive and competitive advantage, in their market­place.

 

We're not only designing, developing, delivering, and measuring these programs, we're also being called upon by our customers to actually manage this life-long learning process. And this will require the development of customized curricula for each student, designed to meet individual training needs.

 

Customers like DuPont not only have asked us to develop these plans, but also have asked us to manage Digital training at their site. We've responded by establishing and staffing a Digital learning center, to help them train their employees on their Digital systems. We've also provided on-site customized training and support to the Hong Kong Jockey Club.

 

We're meeting the training needs of aerospace companies, such as McDonnell- Douglas, which need to train their engineers to design products with com­puter-aided engineering and computer-aided design workstations. We solved their training problem with interactive courseware, on laser videodisk, and we're using this same methodology for other customers.

 

Our customers today are looking for an educational partner, who can work with them to train their people on today's problems, and prepare them for tomorrow's solutions. We're listening and responding.

 

Financial Update by Jim Osterhoff, vice president, Finance

 

We tell our customers that we want to be business partners. To sell Digital in that role requires that we sell them on more than our products -- that we sell them on our company. And an important part of this is our financial message.

 

Early this year, Moody's moved our debt rating up two notches, to the highest level they award: AAA. You might be inclined to dismiss this rating as not very important in a broad business context. But in fact, such ratings are based on a complete evaluation of a company's business -- product strength, position in the market, management depth, etc. Debt ratings recognize that without excellence in all critical areas of operations, a business cannot show consistent excellence in its financial statements. They are a measure of the overall quality of a company.

 

The Moody's AAA signifies a level of excellence matched by only 11 other U.S. industrial corporations, of which four are pharmaceutical companies, and two are oil companies. There's one other computer company, plus Eastman Kodak, General Electric, Procter & Gamble, and 3M. In addition to our strong capital structure and financial self-sufficiency, Moody's attributed our recent upgrading to the size and strength of the company and our product leadership.

 

In the "Fortune 500" ranking of U.S. industrial corporations, we have an unbroken record of progression, achieved entirely by growth from within. Our first year on the "Fortune 500" list was 1973. And in only 14 years, we have reached the top 50, the top 10% of the "Fortune 500." Based on revenues of $7.6 billion in calendar year 1976, Digital ranked 44th among all U.S. industrial companies.

 

In addition, a recent sharp recovery in operating results has made a strong statement to the investment community, and Wall Street has responded with a tripling of our stock price in less than two years. Like the debt rating, this part of our message can come across as cold and empty, if it's not understood in its proper context. We need to recognize the distinction between financial results and operating results. The investment community responds to operating results -- not what hte numbers are but, rather, what they indicate is happening in the operations of the company.

 

As a result of our stock appreciation, Digital now ranks as one of the 10 most valuable companies in America. S. investor is a voter. Based on share prices on March 20, in a report published by Business Week, Digital had a market value of $22 billion and was the eighth most valuable company. The fact that we ranked eighth in value and 44th in size is a clear indication that size doesn't necessarily create value.

 

When presenting Digital to customers, we don’t have to compare ourselves with IBM. It's almost immaterial that IBM is six times our size. Compare Digital with the top companies in the country, as represented by debt rating, by size, or by value. We are among the very best, in any category you choose. It's a position to which every company aspires, and, as we like to say, "Digital has it now."

 

Those three elements constitute the message we want the outside world to hear. Now let's look at how we evaluate ourselves internally.

 

In terms of profit margins, our performance over the past couple of years has been nothing short of outstanding. From a low point of 7% in FY85, our profit margin has improved to 17% in less than two years. An excellent job has been done in reducing costs, helped substantially by new products, but also reflecting important contributions by working smarter, in virtually every area of the company. Our profit recovery has occurred because cost growth was held to only 8% in FY86, when revenue grew by 14%. Through nine months of the present fiscal year, we held cost growth to 14%, while revenue went up by 24%.

 

Cost trends, obviously, have an important effect on margin performance, and they have to be watched very carefully. In the latest cycle, the decelera­tion of cost growth was begun early in FY85, but it was a full year later, Q2 of FY86, before we saw an improvement in profit margins. Each quarter since then our margins have shown a year-over-year improvement. For the better part of two years, our cost growth was in the 10% range. Recently, we have been increasing our investments to take advantage of a strong competitive product position. As a result, our rate of cost growth has been increasing.

 

The consequences of this cost growth are not clear, without the revenue piece of the puzzle. But certainly, the higher this growth rate becomes, and the faster it occurs, the more vulnerable we make our profitability to a shortfall to our volume plans.

 

Another significant change is taking place in the composition of our cost structure. Since the late 1970s and early 1980s, about nine percentage points of our cost have transferred from cost of goods sold, which is essentially variable, to research and engineering, and selling and general administrative expense, which are more fixed in nature. This shift toward a greater fixed-cost component is good for our profit margins when volume growth is accelerating. But when volume growth slows, it increases our vulnerability to a margin decline. So our present investment strategy, while aimed at faster growth, also contains increased risks.

 

Now let's look at asset performance. Traditionally, this was an area of low productivity for Digital, in comparison with other computer companies. Both profit margin and asset performance have improved sharply over the last two years. The difference is that while profit margins have returned to histori­cal levels, the improvement in assets has taken us to performance levels never before achieved by Digital, and among the best of any company in our industry.

 

The usual performance measure here is asset turns, which is the amount of revenue generated for each dollar of assets. Historically our asset turn rate has been relatively constant, at about 1.15. Last year we improved to 1.27. And through nine months of this year we're running at 1.39.

 

These asset turn numbers are quite small, and changes, for example from 1.15 to 1.39, don't appear very impressive, but they make a significant differ­ence on our balance sheet.

 

At a constant cash level of 10% of revenue, if our turn rate were still at the historical 1.15, we would require $1.4 billion more capital than we presently employ. If we had raised that capital in the form of debt, our earnings per share would be reduced by $.70 a share. If we had raised all of it in the form of equity, earnings would be reduced by about $1 a share, because of more shares outstanding. So asset improvements have a direct and very significant effect on earnings, and probably an even greater effect on the price of our stock.

 

The star of the show in assets has been inventories. For several years, our actual inventory turn rate was very close to 2.0. We made small improvements in 1983 and 1984 , and over the last three years we have made major breakthroughs in inventory management. These efforts have paid off hand­somely. Our present inventory level is $1.3 billion, and the turn rate is 3.5. If we had stayed on the trend line of two turns per year, our inven­tories today would be $2.2 billion dollars. Inventory improvements over the last three years have reduced our capital requirements by nearly $1 billion, which accounts for two-thirds of our asset improvement.

 

Another element of the asset picture is receivables. The amount of capital we have invested in receivables used to be less than what we had invested in inventories. But today we have $2.2 billion in receivables, compared with $1.3 billion in inventories. Receivables now represent our largest user of capital, even exceeding our net investment in property, plant, and equip­ment. Despite good progress in the U.S., and more recently overseas, our performance in managing receivables, when viewed on a company-wide basis, over a longer period of time, is less impressive.

 

We measure receivables in days sales outstanding (DSO). Our receivables today average about 80 days, which is 48 days over our standard terms. Those 48 days represent $1.3 billion of our $2.2 billion in receivables. In addition to this dollar impact, the customer-satisfaction implications of this are very important. If you accept DSO trends as an indication of how well we service our customers at the time of sale, our performance here over the years should raise a question of whether our progress in improving customer satisfaction is all that it should be. Survey results tell us that customer satisfaction is improving every year, but in the factors reflected in receivables, it would appear that more consistent improvement is needed.

 

I would summarize our internal financial message this way: Our profit margin improvement over the past seven quarters has been spectacular, but our present absolute level of profitability is about on a par with longer-term historical levels. Our cost growth is accelerating and bears careful attention. The shift in our cost structure from variable to fixed makes us more vulnerable to margin declines, in the event that we fall short of achieving our volume plans. Overall asset performance is the best in our history, and among the best in our industry. An outstanding job has been done in reducing inventories, and we need to do more about improving re­ceivables, for both investment and customer-satisfaction reasons.

 

On balance, the financial message doesn't sound quite the same to us in­ternally as it does to the outside world. I believe the explanation for this can be found in our stock price.

 

At the end of fiscal year FY85, our stock was selling at $47 a share, and we had a book value of $36 a share. The $11 difference can be viewed as the premium that investors were willing to pay above our book value for antici­pated future earnings. Investors valued Digital at 1.3 times its book value, based on expectations of future added value of $11. Our present book value is $47 a share, and the market price is about $160. Compared with two years ago, the value of future earnings, as assessed by the marketplace, has grown from $11 to $114. Investors presently value Digital at 3.4 times our book value.

 

Our book value can be thought of as the solid underpinnings of the value of the company, reflective of our cumulative historical accomplishments over the past 30 years. Everything above book value reflects expectations for the future. In large measure, then, most of the rise in the value of our company over the past two years, to one of the 10 most valued companies in America, is not reflected in our financial statements. Over the last two years, our value has risen by $114 a share. Of that, only $11 is in the bank, so to speak. The other $103 represents investors' extrapolation of our recent performance into the future. This large increment of our value is quite volatile; it can increase further, or it can decline, depending on what our performance indicates should be expected of us in the future. There is a difference in our financial message, between the way we say it, and the way the outside world hears it, and the difference is future expectations. The outside world assumes that we will deliver their future expectations.

 

For our customers and our customers-to-be, we have a strong, simple finan­cial message: We are a AAA company, one of only 12 such U.S. industrial corporations. We are in the top 10% of the "Fortune 500," and we are one of the 10 most valuable companies in America. And we can keep our external message strong and simple, as long as we, internally, understand that it's not a reality until we make it happen.

 

 


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