DEC Essay, Research Paper

Digital Equipment Corporation (DEC)

Overview

Digital Equipment Corporation (DEC) is

one of the most successful computer manufacturers in the world. Throughout

its nearly 40-year history, it has struggled through the ups and downs that

have plagued virtually every company in the computer industry. Unlike many

others, however, DEC has managed to reemerge time and again as a top player

in the industry.

The Early Years

The first 35 years of DEC’s history

can be tied directly to the history of its founder, Ken

Olsen, who was once hailed by Fortune

magazine as "America’s Most Successful Entrepreneur." In an

industry that regularly chewed up and spit out most of its founders and

entrepreneurs, it’s amazing that he managed to stay at the helm of his

company for 35 years. Equally amazing is that DEC has managed to stay

intact, as well as successful, for four decades.

In 1957, Ken Olsen and Harlan Anderson were engineers at the Massachusetts

Institute of Technology (MIT) Lincoln

Laboratory. Both had spent several years working with and on big mainframe

computers. As part of his duties, Olsen had served as liaison between

MIT and IBM at the IBM plant. Two things

were clear to Olsen when he finished this assignment – he wanted to build

computers and he believed he could do it better than IBM. In addition,

Olsen believed computers should be brought out from behind the protective

glass walls built by IBM and into the main offices where multiple individuals

could interact with them.

Olsen and Anderson knew engineering, but not much about running a business.

Since they needed $70,000 to start up their business, they sought help

from American Research & Development (ARD), a venture capital firm.

ARD agreed to the loan with the provision that it retain a 70 percent

interest in the company and the head of ARD, General Georges Doriot, would

be an advisor in all business matters. For the next 30 years, Doriot became

Ken Olsen’s mentor, counselor, and guide and a key part of DEC’s success.

One of Doriot’s first pieces of advice was for the small company not

to draw the attention of companies like IBM until they had established

themselves. To this point, Doriot suggested that the company start out

making just printed circuit modules, not full blown computers, and change

the company’s name from ‘Digital Computer Corporation’ to ‘Digital Equipment

Corporation’. When the company opened in August 1957 in the tiny mill

town of Maynard, Massachusetts, it was as an electronics company.

Conservative by nature, Olsen insisted on one extravagance for the new

company’s products. His modules would be built using the newly developed

and expensive transistors. In early 1958,

DEC shipped its first products – Digital Laboratory Modules and Digital

Systems Modules. After one year in business, the company had sold $94,000

worth of logic modules for memory testing. Once Olsen had proven himself

and his company, he again approached Doriot and ARD about building computers.

This time they gave their blessing.

The Origin of the Minicomputer

Olsen realized that many of the tasks being performed by the huge mainframe

computers could easily be performed by smaller "fundamentalist"

computers, and that’s what he wanted DEC to produce. To seem less threatening

to the computer giants, DEC’s first computer came out in 1959 under the

innocuous name Programmed Data Processor or PDP-1.

Although it appeared to be just another advanced logic module, it really

was a solid-state, general-purpose computer, complete with its own keyboard

and a cathode ray tube (CRT) that allowed the users to see what was being

entered into and received back from the central processing unit. It was

the first commercial machine to use transistors instead of vacuum

tubes, which allowed it to fit into a space the size of a refrigerator.

Designed for individual interaction, it provided more power than most

users expected or needed, and at a price they could afford.

Initially, sales of the PDP-1 were slow, primarily because each unit

had to be customized for the specialized function it would perform. The

professors and scientists who used it were sufficiently computer literate

to develop some of their own software and had enough company support or

grant money to afford the modest $125,000 to $150,000 price tag. Then

in late 1962, DEC received an order from International Telephone and Telegraph

(ITT) for 15 PDP-1 units to control its message switching systems. This

large order, and several that followed from ITT, firmly set DEC in the

marketplace as a computer company. Meanwhile, Olsen donated a PDP-1 to

MIT with the sole purpose of getting engineering students to interact

with a computer as soon as possible. The students were ecstatic and eventually

DEC computers became common in universities and schools around the world.

After five years in business, DEC reported sales of $6.5 million and

net profits of $807,000. But as the company grew, the management style

that worked in 1957 was beginning to flounder in 1963. Mismanagement led

to a drop in sales and the steady growth of the first five years came

to a standstill. The two founders, Olsen and Anderson, were at odds on

how to solve the company’s problems, which eventually led to Anderson

leaving the company.

Matrix Management

As Olsen agonized over the problems in manufacturing and the divisions

in management, he hit upon a concept of organizational structure that

would soon become DEC’s trademark. The structure, known as matrix management,

although not entirely unique to DEC, became Olsen’s baby and the solution

that would move his company from chaotic infighting to explosive growth.

Simply put, matrix management divided the company and individual responsibilities

between product lines. A senior executive took ownership of each product

line and was responsible for developing the product, marketing it, and

turning a profit. Resources from central functions, such as sales, manufacturing,

and marketing, were shared by line managers, thereby opening up communications

between all groups. This matrix structure encouraged such concepts as

corporate democracy, consensus decision-making, and creativity at all

levels. Under the new management scheme, profits again began to climb.

The PDP-8

In 1966, the first product to be released under the new management, the

PDP-8, was

very successful and became a mainstay of the company for years to come.

As with all DEC equipment, the PDP-8 included a high-quality video display

terminal (VDT), but it was also small enough to sit on a table top. And

it was cheap, only $18,000, which was far below any comparable machines

being sold in the industry. Thousands of PDP-8s were installed in small

businesses, universities, high schools, newspapers, and book publishers.

Many baby boomers got their first taste of computing on one of these machines.

When one of DEC’s salesmen took the new, small computers to London to

try to establish a presence there, he drew a connection between the current

craze of miniskirts seen all over that town and the new "mini"

computers he was hawking. The phrase caught on and industry publications

began referring to the new computers as minicomputers.

The PDP-8 was also responsible for opening up a whole new market and

new style of selling in the industry. Original equipment manufacturers

(OEMs), such as scientific instrumentation makers or typesetting companies,

bought PDP-8 units, attached their own hardware to it, wrote software

to support their particular application, and sold the resulting package

as their own product. Soon, OEM business accounted for 50 percent of all

DEC sales.

As DEC recorded more sales and achieved higher profits, other computer

manufacturers quickly jumped into the minicomputer business. By 1970,

nearly 70 companies were manufacturing minicomputers, but none with as

much success as DEC.

8-Bit Words

Just as things were starting to look up for the company, the next challenge

came. DEC was creating computers that used 12- and 18-bit words. The industry,

though, was moving toward the 8-bit word with its various multiples as

an industry standard. In 1967, a group of DEC engineers led by Ed de Castro

was assigned the task of designing a 16-bit computer. Their final plan

contained a basic 16-bit system that could be grown to 32-bits as well

as the development of a series of compatible products that would allow

users to upgrade their existing machines rather than replace them. But,

what de Castro’s group was suggesting amounted to scrapping the entire

DEC product line and replacing it with the new 16-bit machines.

DEC’s management soundly rejected de Castro’s computer and his long-range

plan. So, in April 1968, de Castro and two other engineers found their

own venture capital, left DEC, and started their own company, Data

General Corporation, to produce 32-bit computers. In 1969, Data General

was one of the hottest new companies in minicomputer manufacturing, tapping

a market that could have been DEC’s.

The PDP-11

When de Castro’s group left, DEC still didn’t have a 16-bit computer

product and no longer had an engineering team that could develop it. A

new engineering team was hired and development began again. It was a slow

process for the new engineers, but the result was the PDP-11, which would

prove to be the precursor of a new era in DEC computers. The final PDP-11

plan actually encompassed a whole family of minicomputers with larger

memories and more processing power than any small machine previously built

by DEC. In addition, the PDP-11 was simple to use, while covering a wide

range of computing performances.

Although it was late arriving on the market, the PDP-11 was a major success.

By 1971, DEC was selling 100 machines per month. DEC quickly brought out

two more models and by 1972, DEC was back on top of the minicomputer market.

Bad Decisions

But all of DEC’s decisions weren’t good ones. In the spring of 1972,

the PDP-11 group at DEC proposed a new concept they called the DEC Datacenter.

The Datacenter combined a PDP-11/20 with a VT05 terminal and a printer

on a desk. The intent was to bring a computer to all people, from scientists

and technicians to secretaries and bookkeepers. This "individual"

computer never made it to the product line and was eventually scrapped.

In a similar story, David Ahl, a DEC employee in the new products division

of the company, proposed a small computer that could be sold to individuals

such as doctors or engineers and to small businesses as well as to schools.

Although they were probably too expensive for most homes, Ahl proposed

that the Heath company create a kit version that would make them more

affordable. Olsen and the DEC management didn’t think there would be a

market for either product. For DEC, these were missed opportunities, but

they were also being missed by most of the major computer manufacturers

at the time.

The VAX Strategy

In the spring of 1977, IBM finally came out with its version of the minicomputer,

the Series 1. Although IBM was a major competitor, DEC felt secure in

its established customer base. In addition, DEC had a new weapon in its

arsenal, VAX,

short for Virtual Address Extension. Since 1975, DEC had been developing

a 32- bit minicomputer designed to provide virtually unlimited address

space (memory). The name VAX-11 was chosen to ensure customers that the

VAX was compatible to their PDP-11 units. On October 25, 1977, the first

VAX prototype came off the production line. Along with the VAX architecture

came a proposal from the designers called the VAX Strategy. Basically,

the VAX Strategy revolved around compatible machines being tied together

to form a huge network. For years, DEC had been developing its own networking

setup, called DECnet. Networking was something IBM’s machines could not

do.

Although DECnet worked well enough internally, Ethernet,

a system developed by Bob Metcalfe at Xerox’s

Palo Alto Research Center (PARC),

was more encompassing. The designers of the VAX Strategy chose Intel

Corporation, a leading Silicon Valley chip maker, to manufacture the

semiconductor chip on which to base Ethernet. In May 1980, DEC, Xerox,

and Intel announced their Ethernet plans to the world.

The Personal Computer Problem

Also in 1980, virtually every product-line manager at DEC was pitching

some type of personal computer for DEC to begin manufacturing. DEC had

the beginnings of a personal computer in the Components Group’s PDT (Programmable

Data Terminal), which included a computer terminal with built-in intelligence,

a CRT screen, and a keyboard. Olsen finally agreed to develop a small,

individual computer. However, the new product was called an "applications

terminal and small system" – the label "personal computer"

was not allowed at DEC.

Unfortunately, Olsen and DEC still didn’t quite understand the PC concept.

Instead of constructing an affordable, quickly-produced machine that would

appeal to a large market of new users, DEC spent 18 months coming up with

an elegant computer terminal that would not only stand alone but could

also be networked with other DEC systems. To complicate things further,

DEC continued its corporate policy of manufacturing all the component

parts itself. In contrast, IBM was purchasing MS-DOS

from Microsoft and drives, monitors

and circuit boards from the Far East.

Then, DEC made another tactical error. Instead of throwing all of its

support behind one product, it hit the market with three products. In

May 1982, DEC unveiled the Professional (its original PC concept), the

Rainbow (a low-end backup product that used MS-DOS), and DECmate II (the

latest version of its dedicated word processor). Although the Pro was

a high quality product, its high price took it out of most users’ range

and it sold poorly. The Rainbow, though more reasonably priced, didn’t

offer anything not already available from IBM. Although the Rainbow had

decent sales, most were to DEC’s already established customer base.

Reorganization

By 1983, DEC was struggling. It was now a very large company with several

products and was having trouble managing itself. In response to all of

the internal problems, Olsen reorganized the company. Many upper and middle

managers left the company, and employees floundered as they tried to fit

into new jobs with new bosses and new procedures. Schedules weren’t met,

orders were incorrect, and billing wasn’t accurate. Earnings were dropping

significantly. But even DEC was taken by surprise when it realized that

its third quarter earnings for 1984 were down 72 percent from the year

before. The next day, October 18, DEC’s stock plunged 21 points. This

day became known as "Black Tuesday" in DEC’s history.

Although things were bleak, most of DEC’s customers had so much invested

in their computer systems that they couldn’t do much but stay with the

company. But new customers were leery and DEC’s already limited success

in the PC market quickly dissipated. DEC quietly pulled out of the competition

as IBM and Apple fought for domination

of that area.

However, there was one positive result. By moving away from PCs, DEC

again refocused its time, energy, and money on the VAX product line. In

May 1983, DEC had unveiled the VAX-cluster, a means of hooking several

VAX minicomputers together in a proprietary local-area network, in essence

allowing them to become the equivalent of a mainframe. In October 1984,

DEC finally released its flagship VAX product, the VAX8600. The 8600 marked

the beginning of the second generation of VAX machines, with four times

as much power as DEC’s top-of-the-line machines.

As DEC brought out more and more components for its VAX system, it kept

preaching the benefits of the Ethernet and quietly built links to other

vendors’ equipment, including IBM, which landed them important new big

accounts. By 1985, DEC’s star was on the rise again, but this time it

wasn’t with a single product like the minicomputer in the 1960s, but rather

a concept – networking. Corporations were beginning to see that computers

could do much more for them than just crunch numbers or write letters,

and networking allowed several individuals to share the same information

and computing capabilities.

DEC immediately shipped every 8600 made. While sales at DEC climbed,

other manufacturers like IBM, Wang,

Data General, and Hewlett-Packard were

recording slumps. Over the next 18 months, DEC released ten additional

VAX system components, with each one able to communicate with its brothers

and sisters as soon as it was installed.

Again, the Personal Computer Problem

One problem still plagued DEC. It still didn’t have a competitive low-end

PC product. Based on its success with the VAX machines, DEC decided to

create its own low-end desktop model, called the VAXmate, that would incorporate

the best of DEC’s networking capabilities, including a connection to Ethernet.

But by the time VAXmate hit the market, most of the potential users had

already bought IBM PCs, and those that hadn’t were turned off by the $5000

price tag. Although many individuals at DEC understood the PC market,

they could never convince the company and Olsen what should be done. Many

ended up leaving after years of fighting the system.

Even with its ongoing problems in the low-end PC market, DEC was successful,

and in October 1986, Fortune magazine put Ken Olsen on the cover

and declared him to be "America’s Most Successful Entrepreneur."

Record profits were still being received, with no visible end in sight.

1987 proved to be the most successful year ever for DEC. In January 1988,

Apple negotiated an agreement with DEC to integrate its Macintoshes into

VAX networks. This was profitable to both companies – it gave Apple an

opening to corporate environments where it had previously been weak and,

by endorsing the Macintosh, it gave DEC the desktop machine that had eluded

it for so long.

Then in 1988, Sun Microsystems began

inundating the market with powerful workstations running AT&T

Bell Labs’ UNIX

operating system. These desktop systems were priced well below DEC’s minicomputers

and were able to give individual users a lot of computing power. Many

in the industry began to speculate that UNIX could become the industry

standard since it worked across different machines. And in June, IBM released

the Application System/400, a mid-range system that tied together two

key IBM minicomputers.

The Final Decade

In the latter part of 1988, DEC countered some of these moves by releasing

networking products that allowed VAX computers to connect and share files

with computers made by IBM. It also created an updated version of its

Ultrix operating system that was compatible with UNIX and complied with

all the major UNIX standards.

For the next few years, DEC maintained its position as one of the primary

manufacturers of computer equipment. But in the 1990s, things began to

go downhill again. A recession had hit the country and the computer industry

was shifting its emphasis to software and services. Sales were moving

from institutions to individuals and from proprietary mini and mainframe

computers to PCs, networks, and open systems. DEC was on the wrong side

of almost all of those trends and was simply not responding well to the

changes.

By 1992, it was clear that DEC was in trouble. The fiscal year ended

with DEC carrying a $2.8 billion debt following losses of $617 million

in 1991. The company’s operating expenses were eating up 44 percent of

its revenues and company management agreed that DEC had to downsize. But

Ken Olsen could not bring himself to let thousands of workers go and,

eventually, the board of directors asked Olsen to step down. After 35

years, the man who had forever epitomized the heart and soul of DEC was

gone. But he had lasted far longer than most of the entrepreneurs in the

computer industry and had carried his company through many highs and lows.

After Olsen’s departure, the new management under CEO

Robert Palmer began cutting expenses. Factories were shut down and

over 30,000 workers were let go. By mid-1993 the downward spiral was slowed

and, although the company was still in the red, it appeared to be recovering.

Internally the reorganization brought confusion, and even though DEC brought

in new managers who knew the high-volume, low-margin market, they were

simply unable to shift to high commodity products quickly enough. On April

15, 1994, the company and the world were stunned to learn that DEC had

recorded a $183 million dollar third-quarter loss. At DEC, the day became

known as Black Friday.

The job of turning the company around was given to Enrico

Pesatori, a DEC vice-president who had come from Zenith

Data Systems in February 1993. Starting in July of 1994, Pesatori

put the company on a new path that included shifting sales from DEC’s

sales force to hundreds of resellers, scrapping the confusing and time-consuming

matrix management, dropping unprofitable ventures, and reorganizing the

company into a series of product-oriented mini-DECs, each responsible

for its own success. Additional jobs were cut, and the company that once

employed 126,000 soon consisted of about 63,000, a third of whom were

in Europe.

The company refocused on its strengths, primarily networking and video

servers, and moved into the high-volume, low-margin commercial markets

that were necessary to ensure continued revenues. In 1994 DEC came out

with a line of desktop computers called the Celebris, and in 1995 introduced

its new ultra small laptop product called the HiNote. This time, the company

had management in place that understood how to sell to this market, and

in May 1995, DEC posted its first back-to-back profitable quarters in

four years.

In addition, DEC has produced its own super-fast microprocessor called

the Alpha. DEC is using the Intel chip in PCs and large servers being

built for the commercial market, while using its much faster Alpha chip

in DEC products for its existent customers. DEC has also struck a deal

with Microsoft’s Windows NT group to use the Alpha chip in its operating

system for network servers. DEC’s video server computers are also being

used by cable companies

to insert local advertising digitally onto their networks. This switch

to digital ads is expected to open an extremely lucrative market for specialized

servers. In 1996, DEC announced it would discontinue marketing residential

PCs and concentrate on the business PC market.

Digital Equipment Corporation is one of the few original manufacturers

to have survived the early years in the computer industry. The company

has suffered the ups and downs that have plagued this high-growth industry

to become one of the most recognizable names in computer manufacturing.

In 1998, Digital Equipment announced that it was being sold to the Compaq

Computer Corporation for $9.6 billion, thus ending its long, strange

economic journey of ebbs, flows and surges.

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