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Volume 5, Number 5______________________________________________ July 1986

 

State Of The Company Issue

 

On June 5, 1986, over 500 senior managers attended Digital's semiannual State of the Company Meeting in Merrimack, N.H. The theme of the day, Digital's "Window of Opportunity," was explored by the day's presenters. Following are summaries of the speeches.

 

State Of The Company by Ken Olsen, president

 

Digital’s Financial Position by Jim Osterhoff, Vice President, Finance

 

Our International Window Of Opportunity by Jack Shields, vice president, Sales & Services

 

Digital's Workstations Opportunity by Steve Teicher, group engineering manager, Worksystems

 

Taking Advantage Of Digital’s Window Of Opportunity In Europe by Pier Carlo Falotti, president, Europe

 

Today's Window Of Opportunity In GIA by Dick Poulsen, vice president, GIA

 

Taking Advantage Of Opportunities In The U.S. by Chick Shue, vice president, U.S. Sales

 

Contributions Being Made By Field Service by Dave Grainger, vice president, Field Service

 

Strategic Contributions Of The Other Services by Don Busiek, vice president, Software Services, Educational Services and Computer Special Systems

 

Industry Marketing's Strategies For This Competitive Window by Jerry Witmore, vice president, Industry Marketing

 

Competitive Advantage Through Manufacturing by Bill Hanson, vice president, Manufacturing Operations

 

State Of The Company by Ken Olsen, president

 

We have a window of opportunity to strongly capture the number two position. With the computers, the people, the manufacturing capacity, the money and the networking we have, we can capture the world.

 

Almost no big company has created the products and the organization to exploit them. None has an equivalent rate of technological and skill de­velopment that we have set out to accomplish. We have to stop and ask, "Why e do we think we can do it?"

 

What makes us so presumptuous to think that we will do something that all the big companies in this country and in Europe have failed at? We are not without a history of failure. In the early '80s, we went for a long period without a significant new product. We were on top of the world as far as orders, deliveries, profit and growth. But we couldn't get out a new prod­uct. We deteriorated in our marketing. The cooperation within the organi­zation fell apart. After six or eight years of great success, we fizzled.

 

Now the question for each one of us, particularly those of us who are managers, is, "What right do we have to think we can do it and what do we have to do in order to do it?" You heard through the years some simple explanations that I presented. One of them was having the company broken down among entrepreneurs. We had the motivation, the control, the measure­ments to accomplish this. But to my dismay, that fell apart. We discovered in time that the entrepreneur, by nature, is the last one to delegate. The entrepreneur is the last one to cooperate with someone else. And when suc­cess comes, the entrepreneur is the first to become conservative and to rule out ideas. The successful entrepreneur is the last one to learn something. It was a very humbling experience for me when our management system failed.

 

Now, humility, in itself, is not enough. People who are overly introspective are a bore. To win in business, we have to have enthusiasm and confidence and the selfish yearning to go out and win. Yet we also need that intro­spection — that humility — to learn from each other, to study, to go to school, to learn from our customers.

 

There is good tradition for this. In science, we are taught that the sci­entist is humble. He never knows the answer, and is always searching, ex­perimenting; frustrated that he could have been so stupid two years ago, and ill at ease with what he has today. It's that humility that builds science. In many religions, the pilgrim humbly searching is the model of life.

 

We don't know everything about computers, and we have a lot of reasons to be humble about our marketing. If our marketing message were simple and were understood, we could own the world.

 

Now, if I asked what advantage we have, I hope you would say, "We have an environment which is conducive to creativity and encourages people to do good work and to work hard." In fact, when we started the company, there were a number of ideas we took from MIT. One was the atmosphere. It produced people who were creative, enthusiastic, interesting, exciting and worked awfully hard and enjoyed it. At MIT, there was, and I believe still is, enormous generosity on the part of the management. They didn’t pay well, but enormous generosity in terms of trusting people, not checking on them all the time. In the group that I was in, there were also very clear goals so that everyone understood where they sat relative to the project they were working on. Secondly, their peers knew and that brought the pressure for • driving hard. And thirdly, the boss was considered to be relatively unim­portant. At MIT, they had this enormous intellectual challenge. That combin­ation of generosity, trust and intellectual challenge was exceedingly pro­ductive. It was this that challenged me to go into business to try to gen­erate that atmosphere. This is still the challenge. If we generate that atmosphere and if we keep it, we can do better than anyone else.

 

Our goal and the secret to our success is to create and keep this atmosphere which generates creativity, makes people work hard and enjoy working hatrd, and 'Challenges them to learn, to do new things, and to take chances yet be careful in their approach, so that we never gamble the whole company.

 

I am often asked by the press, "Who is your replacement, Ken?" I have two answers. First, I am young and healthy and it will be a long time before I make that decision. The other answer is that you don't pick the leader by crowning one. In our kind of business, you work people as hard as you can. That’s how you find out who can do it and who can’t. You owe that to the individual. Part of that is giving financial responsibility, and this is something that we sometimes do very well, and we sometimes do very poorly. If we are going to pick the corporate leaders out of hundreds, thousands of managers, we owe each one of them the right, the obligation to take finan­cial responsibility for what they do. Each of us should lay out our plans and make our budgets. If things don’t work out during the year, it is our responsibility to adjust the budget. If we did things wrong, the company owes it to us to be sure that we live with what we did wrong. If we do well, we should enjoy and learn from things we did well.

 

Last year, New England's football team had an interesting year. New England had previously had a losing team; they were losers in spirit and losers in actuality. They got a new coach who is quiet and humble and introspective. He went to work on the team. They hired new assistant coaches who en­couraged the players, told them that they were winners and taught them the techniques, and developed an atmosphere to learn and, above all, to cooper­ate. The results were amazing. They were born losers yet, in one year, they won the championship of the conference. That set them up for a game which was the league championship. But they had no more emotion left; they were drained. Their vision was limited to the conference championship. They couldn't stir up one more ounce of enthusiasm for that final game and, as you know, it just fizzled.

 

There are a number of lessons to learn from this team. One lesson is that we owe the people who are doing the work the enthusiasm, the confidence and the goals. We owe them knowledge about techniques and technology and methods and everything that makes a good team or a good company. We also ought to learn that, in spite of the skill and in spite of what they did, largely with humility, the football team lost that final game. We don't want to do that.

 

If we are enthusiastic and have fun, but continue to learn, to work hard, to be humble — humble technically, enthusiastic technically — if we worry about our marketing and about doing a better job; if we do this in every part of the company, and in all of our responsibilities, we can take on the world.

 

Digital’s Financial Position by Jim Osterhoff, Vice President, Finance

 

Today, thanks to all you have accomplished in the last year, I have the pleasure of reporting financial progress in profitability, productivity of assets and the value of Digital to our shareholders.

 

Operating profit margins have been our primary trouble spot in the past*few years. We had fallen from a historical range of 15 to 17% down to 6 to 8%. And, a year ago, we were still headed down. Our absolute operating profits in FY85 were $450 million, substantially below what we had earned in 1981-82 on less than half the 1985 volume. We hit a quarterly low at the end of FY85 with a margin of 5.2%. But at that point we made a significant turnaround.

 

As we reported, QI was still our lowest normal first-quarter margin in recent history, but by Q3 we had improved to 11.6% — our first double-digit operating profit margin in 14 quarters. For the first three quarters of FY86, our operating profits have totaled $502 million, already surpassing each of the last three full years.

 

A year ago we stressed the significance of break-even, which shows the trend of total cost that must be recovered by revenue before earning a profit. Through nine months of FY86 we have reduced the break-even to 83% of actual revenue from 87% a year ago. The best way to return to the pre-1983 levels of profitability is to stay on a flattened trend line in total cost growth.

 

Another way of viewing our performance is by comparing the trends of growth rates in revenues and costs. Despite high revenue growth for most of the last five years, our margins declined because costs were growing even faster than revenues. This was not the way we planned it, but each year our revenue budget proved to be too optimistic.

 

This year we took a different approach. We budgeted resources to achieve an 18% volume increase, but we made the assumption that 6 points of that would go into backlog and 12 points would flow through to revenue. Costs were budgeted at a 10% increase to produce an improvement in margin even with just a 12% revenue gain.

 

Year-to-date we have added all the sales resources that were expected to produce an 18% volume growth. But the industry has not cooperated. So, while we are substantially out-performing the competition in the marketplace, our volume growth is a third less than we had planned. Nevertheless, despite being over budget in some areas of expense, our total cost increase year- to-date has been held to 8% compared with the full-year budget of 10%.

 

Now let's look at asset performance and what the improvements achieved in asset productivity have done for us. A year ago we were seeing the beginning of some favorable trends in inventories. Actual inventories have continued to decline, aided in part by lower labor and material content in our new products, but mostly by a continuing improvement in turn rate.

 

In 1984 our inventory turn rate was 2.1 turns, and this year to date it is 2.7. This improvement has reduced our investment in inventories by $675 million. Most of it has come from a closer coupling of sales forecasts and production plans -- simply, improved coordination and teamwork between Manufacturing and Sales.

 

There's continuing progress in receivables as well, with the U.S. leading the way. A year ago we were feeling pretty good about an improvement in D.S.O. (Days Sales Outstanding) in the U.S. down to 76 days. But today in the U.S. we're at 62 days — our lowest ever. Recently, excellent improve­ments have been achieved in Europe as well. By a year from now, we expect to see the same kinds of trends in GIA.

 

As with inventories, the improvement in receivables can be measured in terms of cash. In Q3 of FY8.4, we were at 88 days, adjusted for some currency ef­fects. Improvements in D.S.O. since then have saved the company $170 million.

 

Receivables can be viewed as a measure of customer satisfaction, because most of the reasons customers don’t pay within the standard terms are related to quality problems --quality of product, delivery, paperwork, installation, coordination with other suppliers, etc. You could say that receivables measure how long it takes us to satisfy the customer after shipment of the product. The improvement that we’ve achieved in D.S.O. tracks with recent improvements we've made in customer satisfaction. And while the D.S.O. and customer satisfaction trends are good, there’s still plenty of room for improvement.

 

The other asset account that's been in the spotlight is cash. At the end of FY84, our cash balance was $476 million.- A year ago we were closing in on $1 billion. And since then, we've added another $1 billion.

 

Where did this cash come from? Ongoing operations have contributed only $66 million. Cash earned from net income of $882 million has slightly more than funded our growth, which has consumed $450 million and paid for new capital investments of $366 million net of depreciation. Nearly all of our cash improvement has come from one-time events — new issues of debt, including $400 million borrowed in the last half of 1984, and the $675 million of dis­investment in inventories and $170 million disinvestment in receivables.

 

These numbers provide an obvious answer to the question that we often get on dividends. A policy that would commit the company to an ongoing use of cash should not be made on the basis of cash generated from one-time events.

 

As a result of the improvements in inventories and receivables and excluding the excess cash that has built up (we define excess cash as all the cash over 15% of revenue, which is our historical average), the total asset turn rate has made a significant improvement to 1.2 turns. Continued progress requires further reductions in inventories and receivables and a concerted effort to hold down the costs of new facilities.

 

Our financial improvements have shown up in the price of our stock. Today the value of our stock is 75% higher than it was a year ago.

 

What’s different now from a year ago? The stock market in general is much higher, but we have grown from 30% below IBM to 20% above IBM (on a pre­split basis). A negative factor has been the unexpected weakness of the computer industry, and lower anticipated future growth rates. Our new products were anticipated so they should not have had a major impact on the investment community. I think it's safe to say that most of the rise in our stock price is the result of improvements in profit margins and asset management.

 

Overall our financial progress report for the past year looks pretty good. In a very difficult industry environment, we have managed to grow by 12%. But most importantly, we are gaining market share; asset turns have hit an all-time high; and cost performance has been brought into line with revenue growth for the first time since 1981. This success has raised investor ex­pectations and caused the price of our stock to increase by more than 75%.

 

We see bright prospects for the company, highlighted by a clear product leadership position. So let me spend a few minutes on financial considera­tions affecting growth.

 

Shareholders obviously like growth because it offers the opportunity for higher return on their investments. Employees like to work in a growth environment because of job satisfaction and personal reward benefits. Suppliers like to do business with growth companies because growth trans­lates into the same benefits for their own operations. And to customers, growth represents product and service superiority, and they like to do business with a winner. There's one other benefit to growth that we can all identify with — survival. In an expanding industry, growth is defined as higher market share.

 

The management of growth is not a simple task, and while the benefits are obvious, there are also risks.

 

One risk is underestimating the competition. Although we truly believe we are the best, we are still a small piece of the industry. IBM has rarely pioneered new products in this industry, but even where they haven't pio­neered, they have dominated. For the past several years IBM's growth, on average, has been $4.8 billion annually, equivalent to our total sales.

 

IBM used to be nine times our size. They are still seven times our size. So you might say that every order for which we are in competition with IBM is seven times more important to us than it is to them.

 

Another risk related to growth is what I call the "revenue cost race." It's based on the hypothesis that the higher the growth rate in business, the greater the risk of damage from a sudden interruption in that growth rate. The best analogy I can think of is the rule of maintaining one car length between yourself and the car ahead of you for each 10-mile-per-hour incre­ment of your speed. The faster your speed, the more distance you should allow. Think of the car ahead of you as revenue and yourself as cost. The distance between is profit. When the car ahead of you changes speed, it takes time to react. It's the same in business. There is a time delay be­tween the action of revenue and the reaction of cost. There’s also more in­ertia in cost than there is with revenue. Much of the cost growth we will incur in FY87, for example, will be set in place by actions we are taking this year. It’s even more risky to speed up cost growth in anticipation of a speed-up in revenue, especially when the distance between the two is short to begin with. Imagine driving down the highway at 55 miles an hour, with only three car lengths between yourself and the car in front of you, and increasing your speed in anticipation of the car in front doing the same. If the revenue car, in this case, doesn't accelerate, or if it slows down, the profit interval can disappear in a hurry. Comparing ourselves with IBM in this way, we are traveling at a much faster speed, with much less relative distance between revenue and cost.

 

You might say we're paid to take these risks related to growth. I’d rather say we're paid to manage them.

 

Growth represents both the beginning and the end of the financial cycle. It impacts both profits and assets, which in turn determine the availability of internal and also external funds required to keep the cycle going. All else being equal, growth causes both assets and profits to increase. But all else isn't equal. For example, the model indicates that growth should cause prof­its to rise. But it doesn't always happen that way, as we learned in FY83 and FY84.

 

Growth also causes assets to rise. Our total assets have been in locked step with revenue as we have grown to a $7 billion corporation. Our asset turn­over rate has been relatively constant, at least through FY85. But our recent asset performance has caused this relationship to improve. That's a result of managing inventories and receivables. This has enabled us to halt the growth of total assets (excluding cash), despite a continuing increase in revenues.

 

Right now we have the opportunity to take advantage of competitively super­ior products. But along with this growth opportunity, we need to consider our financial capacity for growth.

 

Our "self-financing growth rate" indicates how much growth we can finance from internally generated funds without using our cash reserve or going to outside markets for additional financing. The key factors in this equation for seif-financed growth are profit margins and asset turns.

 

Our present self-financing growth rate is about 12%. In other words, we can support from internal operations an annual growth rate of 12% over the prior year. Continuing to issue new shares for employee stock programs and addi­tional debt as our equity base grows will support an additional three points of growth, increasing our total annual financial growth capacity to 15%. The cash generated from operations can be improved by improving the profit margin. The cash consumed by growth can be reduced by improving the asset turn rate. Either of these actions or the two in combination will increase the self-financing growth rate.

 

Also, we have and we can use our roughly $1 billion dollars of excess cash. This cash provides us- with an additional growth capacity of 20%, but for one time only, not on an annual basis. It is clear that we must have significant further improvements in our financial performance —- profit margins and asset performance -- in order to finance the kinds of growth rates we have the opportunity to achieve in the years ahead.

 

So the benefits of growth are obvious and compelling. The risks are less obvious, and they can be dangerous if we don't pay attention to them. But, clearly, the benefits outweigh the risks.

 

Growth itself is not a formula for success, it's the management of growth that adds the value and makes the difference. Financing is not a practical constraint to growth in the near term with our present cash position, and it should not be a practical constraint in the future, providing we manage that growth effectively and improve our our financial performance. The opportun­ity for growth is here. I say, let's go for it . . . carefully.

 

Our International Window Of Opportunity by Jack Shields, vice president, Sales & Services

 

We use the image of the "window of opportunity" because a window not only opens, but can close as well. At the moment, Digital faces an incredible window of opportunity. We must exploit this opportunity and continue to keep the window open.

 

That window is open today because of a number of factors. Most of them have been internally driven. In other words, steps we have taken have put us in a position to exploit certain advantages. Other factors are environmental — that is the economy and our competition.

 

So we need to look at these opportunities from the point of view of the steps we have taken to position ourselves and the relative strengths or weaknesses of our competitors.

 

We see a four-to-five-year period of extraordinary opportunity. And over that time we expect to gain market share. This isn't just growth for growth's sake. Rather, we must take advantage of the opportunity while it presents itself and use it to our strategic advantage and enable Digital to accomplish significant market-share improvement. We have prepared by in­vesting in various areas. We have the company together. We have the strategy. We have the teamwork. We have all of the assets that we believe are needed to exploit this window of opportunity.

 

Let me review our situation and the criteria for success.

 

Success in this industry and this environment requires superior products and technology. Next we need to participate in a broad set of markets, because you can’t be a niche supplier and be successful. We need to be a general- purpose supplier and have the size so adequate funds are available to rein­vest in technology and the engineering of products to maintain our leader­ship. All these elements are interrelated, and the process is reiterative.

 

We need a multi-faceted distribution capability and a strong direct sales organization. We need to have that complemented with an indirect or OEM distribution capability. And we need wide geographic dispersion so that we can take advantage of the opportunities that present themselves around the world.

 

Loyal, satisfied customers are essential. Our manufacturing capability is critical to both customer satisfaction and our financial performance. And of course, we must have the financial performance and the investors’ support to sustain our growth.

 

So much for the criteria. Now, let’s review our position.

 

Simply stated, with our VAX line of computers, we have the finest product offering in the industry — from the desktop to the data center — compat­ible products which use the same software. We’re the only company in the industry with that capability. Add to that our networking and software advantages, and you can see the window.

 

We not only have the advantage today, but our technological capabilities are far beyond that of most companies our size. This technology provides more competitive products. And because our products are more competitive, we can price them in a way to support a cost structure to keep the company growing.

 

On the marketing side, we’ve traditionally participated in the scientific and manufacturing markets. We have not been as much of a participant in other areas such as the financial services market. However, we’ve taken steps over the last months to establish our industry marketing capability. So while growing in our traditional markets, we also expect to take market share in new markets. These new markets represent a major part of the opportunity before us.

 

On the distribution side, we’ve changed from a company primarily dependent on indirect distribution channels, such as OEMs, to one which depends pri­marily on direct sales. This year we’ll sell 65% to 70% of our products directly. That's a major change in the way the company does business. It gets us closer to our accounts. It requires that we understand more about the customers' problems and solutions for those problems, and it gives us the additional advantage of account control. While we still see large growth in our indirect distribution channels, we believe the increased direct selling effort will provide more stability during varying economic cycles.

 

We've always had a commitment to customer satisfaction, and that is a critical part of our overall opportunity. It is the number one goal of the Executive Committee. We believe that if we have loyal, satisfied customers, they'll continue to use and purchase our products, and it is almost impos­sible for the competition to extricate us from those accounts. Our services are the best in the industry, and this is a major advantage in customer satisfaction.

 

There have been incredible improvements in the links between our manufac­turing and sales organizations. These, in part, are reflected by lower inventories, as well as shortened customer payment time — a sure sign of high quality and customer satisfaction. We’re working together, communi­cating well together, and reviewing performance together weekly.

 

So during this window of opportunity, we intend to capture an even larger customer base and continue to achieve excellent customer satisfaction. Meanwhile, we have to watch our financial performance and ensure the revenue growth is achieved before we allow expense growth. As we accomplish these objectives, our vulnerability will be minimized, and we'll have the finan­cial size and strength to be a formidable competitor long into the future.

 

We have the goals in place. We have organizational focus. I have no doubt • we’ll continue to improve, and absolutely no doubt that within five years we'll be recognized as number one in the industry in every dimension except perhaps size — which will take a little longer.

 

Digital's Workstations Opportunity by Steve Teicher, group engineering manager, Worksystems

 

Digital's philosophy is that productivity and innovation are a result of people having direct access to computing. When computers were unapproachable and kept in computer rooms with people in white coats, we made them simple, convenient and local. When it was clear that what was needed was access to a common set of programs and a common set of data for an entire team, or an entire company, we introduced timesharing and made it work. With the intro­duction of VAX computing in the 1970s, Digital offered the most powerful t computing environment ever. All VAX languages could make use of the same data files. We enhanced our networking to the point that we could support worldwide electronic mail systems. We can even do programming across the network. We debug programs between California and Maynard. These systems work so reliably that we run our company with them.

 

As we all know, personal computers are not quite enough for many types of serious work. Many businesses are run bv teams of oeonle that have tn work

together. These teams need the advantage of personal computing in terms of the interactivity, but they also need the services, multi-tasking and ease of management that timesharing offers. So they need combinations of things.

 

For a time, our customers had to buy special-purpose workstations, for instance for integrated circuit layout, from several vendors. And we did, also. Inside of Digital, you saw workstations from many of the vendors with whom we compete today.

 

But now things are different. We at Digital now offer VAXstations that combine the power of the VAX computing environment with VMS or ULTRIX operating systems, with graphics and other kinds of workstation software. VAXstations are general-purpose delivery vehicles for VMS and ULTRIX com­puting. They offer many advantages over timesharing terminals as a way for people to use the computer environment.

 

VAXstations actually allow you to do more things simultaneously on the screen. This capability is very important. Because as the price of computing power goes down, to keep our revenue moving up we have to provide people with the tools that let them use computers better.

 

VAXstations can also do the things that competing workstations do. Over 90% of the applications that our customers want to run on workstations run on VAXstations today. In addition, with VAXstations, customers get a better way of using VMS and ULTRIX and an opportunity to do all computing on the same system. No longer do customers have the expense and effort of dealing with several different vendors for different types of jobs. And in fact, most of the workstations from competitors are going to be connected to a VAX com­puter. So with VAXstations, customers can reduce their total cost by having one type of system and one vendor.

 

We will offer VAXstations over a wide range of price and performance. No other vendor anywhere can offer the range of compatible computing that is offered by Digital, and no other vendor anywhere will offer the range of compatible workstations that we will offer. No other vendor has made the investment in technology that we have made to reduce cost and improve performance for entire systems, not just central processors.

 

We're winning with VAXstations. This is a company-wide effort, it is not an effort of my group or some small part of the company. Our goal is to be number one in the workstation business -- not two or three. We are already number one in the technical computing space. And we ought to be able to do even better in workstations.

 

Taking Advantage Of Digital’s Window Of Opportunity In Europe by Pier Carlo Falotti, president, Europe

 

We have a set of enthusiastic people in Europe. They are very stretched, working long hours, but their motivation and drive help them to overcome these difficulties. Half the population in Europe has been in the company less than two years. We have a lot of new managers, and they are all excited. The biggest problem is to make sure they don't run too fast. And that's a good problem to have.

 

We are in a winning and non-complacent mode at this time. But most im­portant, we are working toward this result together as a very strong team.

 

And we always talk about Europe, but Europe is really an assembly of countries. The U.K., the largest subsidiary, is approaching 500 million. We are in a winning and non-complacent mode at this time. But most important, we are working toward this result together as a very strong team.

 

And we always talk about Europe, but Europe is really an assembly of countries. The U.K., the largest subsidiary, is approaching 500 million pounds in annual revenue. In three years, Germany has multiplied its revenue by 2.5 times, and increased its profit by five times.

 

France has grown significantly with a very young population during a period when there was a capital-spending shrink due to government policies. Italy has grown its revenue by 3.5 times in three years. The conservative Swiss have about tripled their revenues, too. Spain quadrupled its revenue in three years, and about 90% of their management is new.

 

Denmark, to give you an example of a small country, in three years has quadrupled its gross revenue. By the way, Denmark won the team award for this year.

 

All of this performance has put us in the number two position in Europe. Major companies that are really important in Europe are now using Digital. We have a very good image and have easier access to large accounts.

 

So we have set very ambitious revenue goals for Europe. To reach those goals, we have to make sure the goals of all the functions converge. We did that in 1983, but it is time to review it, given our new ambitious goals. It is crucial that everybody knows our objectives. So we printed 25,000 copies of a brochure that we will distribute to employees in sessions where managers explain what those words mean and how we're going to meet our goals. We must have everybody's participation behind those goals.

 

We have to continue to improve our productivity. And the first element of productivity is to continue to improve in quality. We strongly believe that quality is synonymous with productivity. Doing a good job the first time is 8 the cheapest way to do it.

 

We created a senior manager group to focus on what we need to get better productivity through quality. And our number one measurement of quality is D.S.O. (days sales outstanding). We've integrated service and software. And we have adopted many quality programs from Manufacturing.

 

We all depend on one another for quality. There must be no break in the cycle from taking an order and processing it, to manufacturing the product and distributing and servicing it. We all have to work together to make sure we save the money that is savable.

 

We have significantly reduced the inventory between Manufacturing and the Field. We also have increased flexibility so that today we can ask Manu­facturing for a system that is not yet in the plan, and they will deliver it quickly — within a month. This was unthinkable only a couple of years ago.

 

We are starting a new project to make a quantum leap in our ability to process orders faster.

 

Also, we have to do away with islands of automation in manufacturing, in distribution and in the office. So we're conducting a study called "infor­mation architecture," to make sure we understand how we want to process our data and operate our business, to optimize our organizations and systems design.

 

On the selling side, one of our objectives is to put our sales people in front of customers more than before. On the average, our sales people are out 26% more time this year than last year. And in the offices where they've been running the Field Sales Operation Model (FSOM) for a full year, they are out about 50% more time than before. Interestingly, those are the offices that are way above budget.

 

Also, we have introduced a quotation system that on the average throughout Europe has decreased the time spent to quote by 27%. And again, in the offices where they had the new system for a full year they have cut that time in half.

 

One big problem was the number of change orders. Basically, 68.5% of orders needed to be recycled at least once; and some orders as many as two or three times. That was a tremendous waste of energy. So we put a lot of effort in that area and reduced the number of change orders by 84% on the average.

 

Meanwhile, we are focusing on expanding our customer base, and we are doing so -- with new customers, not just new applications — at a pace of about 10% a year.

 

In one year, we tripled our sales of software products and doubled the amount of business in projects and consultancy. That is one of the main reasons why our sales in the financial market are up more than 50%. Banks buy systems, not just hardware; and to sell to a bank, you have to consult with them.

 

Another area we’re focusing on is sales to our installed base. In 1984, about 13% of our revenue came from our installed base. This year it is in excess of 23%.

 

Our goal is to dramatically improve our market share in the areas where we feel there is greatest potential, such as manufacturing, financial services, telecommunications, education and research. Our manufacturing and Engineering presence in Europe is fundamental to achieving the volume of

business we want. Customer visits to our plants are an important sales tool. On the engineering side, we could and we must expand more, taking advantage of the engineering talent that exists in Europe. There are also opportunities for joint activity in such areas as product development and marketing partnerships.

 

Everything we do has to be oriented to our customers, because customer loyalty is a tremendous asset.

 

In striving for our goals, our biggest risk is the availability of people and the ability to integrate them into the company. We need to do a lot more training than we're doing today and, of course, continue with external and internal courses for management development. It's a top priority not only to get the right people, but also to help our existing people become even more capable than they are today.

 

I would like to have a new slogan: We are the number one place to work. We want it to be known that Digital is a company where you can have freedom, where your ideas are welcome, where you can grow. Then we can attract the best people in engineering, software and sales. Those people only go where they can add value, where they don’t have to deal with a lot of bureaucracy, within the context of professional discipline. And I think that Digital's values are providing the balance that people want. And if we keep that balance, we will be able to take full advantage of our window of opportunity.

 

Today's Window Of Opportunity In GIA by Dick Poulsen, vice president, GIA

 

Our business in GIA encompasses half the world's area and over 70% of its population. Today we contribute about 12% of the company's total business. We’re making significant strides towards the $1 billion mark. And we are taking the necessary steps to ensure that Digital takes full advantage of the vast windows of opportunity in GIA markets.

 

We operate under widely varying conditions, over a broad geography, with cultural, language and time-zone differences that make communications difficult. Computer literacy, too, varies dramatically from country to country; and we must take that factor into consideration when we develop our plans.

 

The good news is that what's good for the U.S. and Europe is certainly good in our area. The U.S. computer industry is recognized around the world as having technologically superior products, and Digital's are at the top. Our product set and our architecture enjoy worldwide acceptance, and we’ve ^gotten good press coverage and have a very positive image.

 

Multi-nationals are very important in emerging and developing marketplaces and these customers are a key strength for Digital in GIA. They pull a lot of our products into these countries early and help establish a user base that we can build on later.

 

Our management strategy is to install strong teams within each country. The business resides in the countries. Our role from Acton is to help develop and strengthen the local organizations and make them self-sufficient enti­ties. This decentralization enables us to deal with the vast differences between countries, the multiple time zones, and the diversity of business environments.

 

In many respects, the industrialized countries of GIA are very similar to what we would see in the U.S. and Europe. The growth industries are the same — finance, telecommunications, government, engineering and manufacturing.

 

Canada is a mature market. IBM currently has a 44% share of this $5 billion market. They're particularly strong in the banking and finance industries. This is the market we must penetrate if we are to seriously expand in Canada. Our two-year marketing strategy focuses heavily on penetrating this market. A number of factors are helping us meet this goal. For instance, Canadian banks are deregulating, so newer, non-IBM banks and trust companies are emerging in a very competitive banking industry. Also, we’re relocating our Canadian executive offices from Ottawa to Toronto, Canada's finance and corporate office capital. About 45% of Canada's gross national product is generated within 200 miles of Toronto, and over 80% of Canada's Fortune 500 companies have their headquarters there. Our new executive offices will include an Application Center for Technology to demonstrate our commercial and financial application packages to corporate officers and senior managers.

 

Japan is the second-largest computer market in the world — close to $20 billion. We have a very small share of that now, and we see tremendous opportunities for growth. Over the past five years, our growth there has been nearly 35% compounded annually. In fact, we are growing faster than the industry and faster than our major competitors -- Fujitsu, NEC, IBM and Hitachi.

 

A deregulated telecommunications industry in Japan will present us with the same opportunities to compete as we now have in the U.S. Additionally, Japan has an enormous semiconductor industry, with 41% of the global market share. Our Japanese subsidiary has already sold over 200 VAX systems in the CAD-CAM market for simulation work and design. Other important opportunities in Japan include computer-integrated manufacturing, artificial intelligence and financial applications.

 

We must have a strong local presence, and we must invest some of our capital spending in Japan if we are to become known as a local company with high- quality products.

 

The South Pacific Region — Australia and New Zealand — attracts just about every competitor in the world. As a bounded environment and an English-speaking country, Australia makes a good test market.

 

We believe the economic environment in that region will be favorable over the next few years. Our greatest success there has been in the health and education markets. As in Canada and Japan, financial services and government hold a key to our future success. Recently, the Australian Department of

 

Aviation (which is comparable to the Federal Aviation Administration in the U.S.) selected Digital from a field of 39 competitors to build multi­mi 11 ion-dollar computer networking systems. We're extremely proud of that sale .

 

The main challenge in Australia is compliance with the Australian govern­ment's "offset" requirement program. This program has been in place for a number of years, but only recently did the government decided to enforce it. Basically, we have to offset the flow of money out of the country that oc­curs when we import our products, by investing in the in-flow of technology into the country.

 

The emerging countries of GIA include India, the People's Republic of China, Taiwan, and Korea. These locales are rapidly industrializing to serve their great masses of people. Banking, transportation and telecommunications are moving quickly to adopt sophisticated technologies supported by computers. Emerging countries, especially the smaller ones, want technology transfer. To the politicians, that simply means "give us a factory." Our notion of technology transfer is to provide the infrastructure -- the people to engineer, manufacture, market, sell, train and service our products. Devel­oping a pool of knowledgeable users of computer systems and applications is the real technology transfer. Therefore our strategy in these countries is to transfer technology through direct presence in these markets rather than building plants.

 

It's been our experience that to achieve our market-share goals in these high-growth markets, we must sell directly rather than relying on distributors.

 

One recent success in India points to the magnitude of the opportunities. We installed a passenger reservation system for the Ministry of Railroads. The Indian Railroad moves 10 million passengers daily. That’s the equivalent of half the population of Australia. People typically wait in lines for four and a half hours just to buy a ticket. As part of a pilot program, we installed in New Delhi two VAX-11/750 systems supporting 50 ticket sales windows. We use LA50 printers for cutting the tickets, and VT220 monitors for handling the transactions. Each station handles 300 transactions per shift, or 30,000 train tickets a day. That program was extremely successful. We have received orders and export licenses for two clustered VAX 8600 systems. And if we expand and automate the complete railway system, there's an opportunity here for almost 40,000 terminals and about 700 VAX-11/750- class computers to handle ticketing transactions in India.

 

While India has the most passenger-seat-miles, China has the largest rail­road organization in the world, with 3 million employees. So the same opportunity for serving and supporting masses of people exists in the ^People's Republic of China. In China, Digital is the number one computer supplier. This year we will sell and install more computers in China than IBM. We don't want to lose that lead.

 

In Taiwan, we have an agreement in principle to buy out the local distri­butor which is currently responsible for the marketing of hardware and software products there. We already own our own field service subsidiary. We plan to combine the two operations and sell and service our products directly in Taiwan. Similar discussions are under way in Korea.

 

Latin America is a highly volatile economic and political marketplace. We need a local presence to successfully market our products there, but rela­tively small market size and continuously changing government policies have dampened our desire to invest in a direct presence there. We still cover most countries in this area through distributors. The exceptions are Brazil, Mexico and Puerto Rico.

 

Because government policies restrict foreign participation in the Brazilian computer industry, we are associated with a local company there. We sell our high-end products directly. The mid-range products are sold through the local company since the government has protected this market for local manufacturing and marketing companies. The low end is totally protected for Brazilian-designed, engineered and manufactured products.

 

We recently opened a small manufacturing plant in Mexico to make MicroVAXs for the Latin America marketplace. Having that plant gives us access to the Mexican market for all of our products. Basically, we can import a dollar's worth of product for every dollar we export.

 

We market to the rest of South America and the Caribbean through distri­butors. We're in the process of relocating our management center for dis­tributors near Miami, Florida, to provide better marketing support for these small markets.

 

To maximize our window of opportunity throughout GIA, we are investing in sales, sales support and marketing — specifically, industry solutions marketing. We're hiring seasoned, savvy, mid-career sales reps who under­stand the business of selling solutions from our customers' perspective.

 

With the support of local industry marketing groups, we're getting to know the customers better, understanding their needs, talking in their terms and building relationships for the future. Finally, we're investing in teamwork. This year we implemented team awards for subsidiaries that have achieved all of their team goals.

 

The global benefits of this complete integration and the resulting synergy cannot be emphasized enough. We have created an Asian-based Systems Software Engineering Group responsible for assuring that our base software and our layered products are available in Japanese, Korean and Chinese languages.

 

In conclusion, we just can't afford to forget that it's our customers who keep that window of opportunity open for us or close it. We must focus our attention on them.

 

Aviation (which is comparable to the Federal Aviation Administration in the U.S.) selected Digital from a field of 39 competitors to build multi­mi 11ion-dollar computer networking systems. We're extremely proud of that sale.

 

The main challenge in Australia is compliance with the Australian govern­ment's "offset" requirement program. This program has been in place for a number of years, but only recently did the government decided to enforce it. Basically, we have to offset the flow of money out of the country that oc­curs when we import our products, by investing in the in-flow of technology into the country.

 

The emerging countries of GIA include India, the People's Republic of China, Taiwan, and Korea. These locales are rapidly industrializing to serve their great masses of people. Banking, transportation and telecommunications are moving quickly to adopt sophisticated technologies supported by computers. Emerging countries, especially the smaller ones, want technology transfer. To the politicians, that simply means "give us a factory." Our notion of technology transfer is to provide the infrastructure — the people to engineer, manufacture, market, sell, train and service our products. Devel­oping a pool of knowledgeable users of computer systems and applications is the real technology transfer. Therefore our strategy in these countries is to transfer technology through direct presence in these markets rather than building plants.

 

It’s been our experience that to achieve our market-share goals in these high-growth markets, we must sell directly rather than relying on distributors.

 

One recent success in India points to the magnitude of the opportunities. We installed a passenger reservation system for the Ministry of Railroads. The Indian Railroad moves 10 million passengers daily. That’s the equivalent of half the population of Australia. People typically wait in lines for four and a half hours just to buy a ticket. As part of a pilot program, we installed in New Delhi two VAX-11/750 systems supporting 50 ticket sales windows. We use LA50 printers for cutting the tickets, and VT220 monitors for handling the transactions. Each station handles 300 transactions per shift, or 30,000 train tickets a day. That program was extremely successful. We have received orders and export licenses for two clustered VAX 8600 systems. And if we expand and automate the complete railway system, there’s an opportunity here for almost 40,000 terminals and about 700 VAX-11/750- class computers to handle ticketing transactions in India.

 

While India has the most passenger-seat-miles, China has the largest rail­road organization in the world, with 3 million employees. So the same opportunity for serving and supporting masses of people exists in the People's Republic of China. In China, Digital is the number one computer supplier. This year we will sell and install more computers in China than IBM. We don’t want to lose that lead.

 

In Taiwan, we have an agreement in principle to buy out the local distri­butor which is currently responsible for the marketing of hardware and soft­

ware products there. We already own our own field service subsidiary. We plan to combine the two operations and sell and service our products directly in Taiwan. Similar discussions are under way in Korea.

 

Latin America is a highly volatile economic and political marketplace. We need a local presence to successfully market our products there, but rela­tively small market size and continuously changing government policies have dampened our desire to invest in a direct presence there. We still cover most countries in this area through distributors. The exceptions are Brazil, Mexico and Puerto Rico.

 

Because government policies restrict foreign participation in the Brazilian computer industry, we are associated with a local company there. We sell our high-end products directly. The mid-range products are sold through the local company since the government has protected this market for local manu­facturing and marketing companies. The low end is totally protected for Brazilian-designed, engineered and manufactured products.

 

We recently opened a small manufacturing plant in Mexico to make MicroVAXs for the Latin America marketplace. Having that plant gives us access to the Mexican market for all of our products. Basically, we can import a dollar's worth of product for every dollar we export.

 

We market to the rest of South America and the Caribbean through distri­butors. We're in the process of relocating our management center for dis­tributors near Miami, Florida, to provide better marketing support for these small markets.

 

To maximize our window of opportunity throughout GIA, we are investing in sales, sales support and marketing — specifically, industry solutions marketing. We're hiring seasoned, savvy, mid-career sales reps who under­stand the business of selling solutions from our customers' perspective.

 

With the support of local industry marketing groups, we're getting to know the customers better, understanding their needs, talking in their terms and building relationships for the future. Finally, we're investing in teamwork. This year we implemented team awards for subsidiaries that have achieved all of their team goals.

 

The global benefits of this complete integration and the resulting synergy cannot be emphasized enough. We have created an Asian-based Systems Software Engineering Group responsible for assuring that our base software and our layered products are available in Japanese, Korean and Chinese languages.

 

In conclusion, we just can't afford to forget that it's our customers who keep that window of opportunity open for us or close it. We must focus our attention on them.

 

Taking Advantage Of Opportunities In The U.S. by Chick Shue, vice president, U.S. Sales

 

The opportunities in the U.S. are outstanding. It's my pleasure to share them with you and also tell you how we plan to go after them.

 

As a company, we've been doing better than the market for the past three years. We've been growing at a time when IBM's performance was flat to negative in the U.S. And in cases where we sell directly against IBM, our win rate has been high.

 

Quite simply, our goal is to be the number one sales organization in the industry. And to us that means satisfying customers, winning new business, and returning the highest yields per sales person.

 

To do that, we have had to simplify things. We started at the top. We simplified the country team. In the U.S., there is one sales organization and one sales support organization. We have one industry sales marketing plan with an all-channels strategy.

 

We also need to simplify the roles of our sales and sales support people, sales reps need to know how to sell and must know their customers and the needs of the industry, they must have general product and application knowledge, they have" to know our customers' requirements, the competition and technology trends, and when to bring in the heavies for extra support.

 

We'll focus on geographies, accounts and solutions. We started the year with seven area teams and 32 districts. There are now nine area teams and 48 districts. The South Central Area out of Dallas began in January. And on June 2, the ninth area team, the East Central Area, turned the lights on in Detroit.

 

We will focus on accounts. DNA600 is a U.S. Designated Named Account strat­egy. Out of 600 top accounts, 100 will be designated "corporate accounts." We expect each of those accounts to deliver over $30 million per year. Another 200 will be named "industry accounts." These leadership accounts have been identified by the areas and the Industry Marketing groups. And the remaining 300 accounts will be sponsored and invested in within the areas. Collectively, we antcipate up to 50% of our business will come from these 600 accounts between now and 1995.

 

We also need to focus on solutions. This means that sales support represents an increasing part of our strategy. Our sales support strategy is a field­based model — close to the customer. We've been hiring some outstanding people: high-level experts specialized by application, product or technology.

 

While we have increased the direct sales population by 20%, we have more than doubled our sales support people. We'll end this year with about 1,000.

 

We’ve also added what I refer to as the "district manager on the bench" program. We brought in some top sales managers from the outside, people who perhaps could fill that next district opening. And while they're learning Digital, they're sharing successful ideas from their previous companies.

 

In addition, we have a U.S. manager of Sales Methods and Technology to drive productivity gains. Besides adding new people, we must continue to grow through gains in each individual's productivity.

 

Our program of "Sales Selling Services" has been very successful. The job of selling services is done by every person in the field organization. And Sales Selling Service units are amplifiers -- not just selling products, but also selling the Digital advantage, up front.

 

Our Applied Centers for Technology are growing rapidly from eight to 17, and Digital Network Teams are growing to leverage our tremendous advantage in networks.

 

Our Information Systems Sales Teams give information systems directors an opportunity to join the Digital club. Not long ago, only one out of 100 of them was ready. Today it's closer to two out of 10. The Executive Partner­ship Program continues to drive large account development, as we attach our senior executives to relate in a strategic way with our top 100 accounts.

 

We're kicking off industry training this summer. Eight industry groups are ready. We’re sending them to the Industry Summer Training School at Boston University, and we're ready with eight outstanding industry programs.

 

In closing, I would like to make a prediction and offer a challenge. In the early '70s, Digital was the number one small computer company. In the mid- '70s, we were the number one timesharing company. In the early '80s, we were the number one distributed data processing company. And here we are in the middle-to-late '80s — the number one company in networks. All tremendous milestones, and yet . . .

 

I have a dream that I'd like to share with you. I think secretly many of you have the same dream. I can see a time when we'll be number one overall in revenue and profits. The year . . . 2007 . . . March or April!

 

Contributions Being Made By Field Service by Dave Grainger, vice president, Field Service

 

How well a company satisfies its existing customers, and how well it pre­sents its service message, plays an increasingly important role in the overall selling process.

 

In terms of our financial performance, service accounts for more than 25% of Digital's total operating revenues (nearly $2 billion this year), and sig­nificantly more than that in profits.

 

This year, because of very aggressive management, we've made major contri­butions to the corporation's cash flow. We've actually reduced inventory while raising our level of service and the quality of material that we supply to our offices. Rather than using more cash to finance receivables, we've used less. And we've reduced the amount of capital needed to deploy our technology. The net result is a cash-flow improvement of nearly $150 million over the budget to the corporation this fiscal year.

 

But the service contribution goes far beyond the balance sheet. Service is an integrated part of Digital's total solution strategy. Service is an asset for the sales force to use in improving business performance and achieving team goals. Customers not only want quality products, they want quality support — and they're willing to pay for it.

 

Quality support begins long before a product is installed or even intro­duced. Our products must be designed, packaged and marketed with reliability and maintainability in mind. One of the primary functions of our CSSE (Customer Services Systems Engineering) organization is to work with product and application engineering to establish the base-level service elements that are necessary to successfully launch new products.

 

Product quality is on a fast track at Digital. We're driving that message home by incorporating longer service warranties and increasing our level of service commitment to customers. For example, each of the new members of the VAX family introduced this year includes a one-year warranty. In Europe, virtually all of our products are moving to a one-year service warranty during this calendar year. These warranties eliminate a lot of selling, invoicing, and other administrative costs, so we're able to pass savings along to our customers. They also position us as the most competitive vendor in the industry. Marketplace reaction has been exceptionally positive.

 

In Channels Marketing, we're also providing a range of service offerings that our OEMs and Cooperative Marketing Partners require.

 

Nowhere is our leadership in service more evident than in our Customer Support Centers. With our new Colorado Springs center and 13 others around the world, we offer the most complete, sophisticated support capabilities available anywhere. Over the course of the next five years, Digital will invest over $1 billion in these centers.

 

We are entering our second decade of remote diagnostic centers, having introduced the concept in 1976. Today's centers monitor systems hundreds of miles away, detecting possible failures before they ever actually occur.

 

These detections are then relayed to the local service office, where they can decide what action to take at the customer site, if necessary. The end result is higher system availability for the customer.

 

A year and a half ago we introduced artificial intelligence into the service environment. Expert systems are making the cumulative knowledge of our best service people centrally available to analyze system problems at any hour of the day. Some of the top Al engineers in the corporation are working on designing new and enhanced service capabilities.

 

Like so many of our state-of-the-art methods of service delivery, both remote diagnosis and Al technology help to lower our service costs. That means we're able to use our organization more productively, and therefore provide the best price performance in the industry.

 

The technology also helps Digital maintain leadership by yet another mea­surable standard — speedy response. In most cases we provide service from a remote center within 20 seconds. IBM, in contrast, has support centers which act as message centers. You call them and they call you back, typically within 15 minutes. We use computer-based systems for call handling, literal­ly connecting the call to the first available engineer. It’s so fast, we actually created a new metric called ASA — Average Speed of Answer. The goal was 30 seconds, and we're performing at 20.

 

For on-site service, our average response is now running at about 30 minutes. We guarantee to never exceed two hours. Our guaranteed response time and guaranteed system availability go well beyond anything IBM will commit to. We offer the most price-competitive service maintenance products.

 

Digital's style of service complements Digital's style of computing. In the same way that our compatible product architectures protect customers' in­vestments, we're committed to supporting what we sell as long as our cus­tomers continue to need it and to need us.

 

Under our DECcompatible service program we offer customer support for over 175 products manufactured by other vendors which are part of a Digital system. In doing so, we are not only meeting an expressed need for our customers, we are ensuring account control for over $2 billion of Digital- installed hardware. Multi-vendor service has also helped us leverage signif­icant system sales. In a major prime contract opportunity at Boeing, for example, we leveraged $10 million in VAX 8800 system sales primarily because we support a mixed-vendor environment.

 

The success of the DECcompatible service program has also given us a real edge in developing a program for network service, which is one of the most critical service issues facing the industry today.

 

Phase one of Digital's Netcare service is designed to give customers a single service contact. We'll act as an agent on behalf of the customer for equipment which is part of a DECnet-based system, regardless of the mixture of hardware vendors or technologies involved. Under the Netcare program, we'll identify faults in the customer network and notify the responsible vendor. We'll track their response to the problem. We'll ensure that each repair is successful and that the network availability has been restored.

 

We at Digital know how to connect computers. We’re the best at it. We can put systems together so that they can do electronic mail, share files, or use a common disk for backup capability or storage. We can enable users to share expensive high-speed or multi-color printers. The successful personal computer vendors have exposed a great deal of the marketplace to the kinds of things that we do well — merely by their inability to do those things themselves.

 

This is a major window of opportunity for Digital and our networking prod­ucts. These customers are now well aware of the need for connecting up their personal computers, and I think most of them know that Digital is best at it.

 

Among the improvements we've introduced over the past year or so are the Optimum Package and Sales Selling Services. About a year ago, a customer buying a system from us had to deal with a Sales person, a Field Service person, a Software Services person and an Educational Services person. Our customers told us they didn't like that, and we reorganized to have Sales sell service. The Optimum Package is what Sales now uses to sell those services.

 

Today, with one order, customers can buy the right set of educational, field and software services to meet their needs. Sales is now the focal point for managing the customer's requirements rather than forcing the customer to learn and select among many possible service offerings.

 

As we focus our marketing more clearly on industries, technical support knowledge has had to shift from product and systems expertise to under- « standing how to solve customers' problems. We're now hiring high-level sales support experts, with typically 15-20 years in the given industry. They'll have specific application expertise and they'll reside in local offices, close to where the the action is.

 

Another recent project is the opening of Application Centers for Technology. Not long ago, if a customer wanted to see a computer-aided design demonstra­tion, we would take them to one of our many CAD/CAM Centers. If the same customer wanted to see some office automation, we'd tak^ them across town to an Office Solution Center. And if they weren't confused and still wanted to buy from us, we'd take them to a Field Application Center, where software support specialists design real solutions for real customers.

 

Now we are putting those three together in the Application Centers for Technology, where the real power of Digital Equipment Corporation is exem­plified. They can see demos of everything from laboratory applications to office automation to manufacturing solutions. They can discuss alternatives with engineers who have actually designed and implemented solutions to difficult problems.

 

There are 17 of these centers in the U.S. They'll all be up and running within the next 6-8 months. In addition, there exist or will exist six in Europe and three more in GIA.

 

While we have improved in the eyes of our customers, we also have made progress in productivity, for instance in the area of material asset management. Over the last year, while raising our overall level of service to our local offices, we've managed to trim our inventory from 52 weeks to 42 weeks.

 

We're investing in two major facilities. One, in Nijmegen, Holland, handles distribution for Europe. The other, in Andover, Mass., will allow us to integrate, under one roof in 500,000 square feet, all of the activities that are now going on in five buildings. The payback period of that program is under 22 months. These facilities at the central level complement our district logistics operations (four in the U.S. and one in each of our subsidiaries) which, in turn, support the 400 Field Service centers.

 

In 1977, we had $2 billion worth of installed equipment that Digital ser­viced. We had a little over 4,000 engineers. That’s about $550,000 per on-site engineer. We only had about a hundred people in the remote service centers.

 

By 1985, we had over $18 billion worth of hardware we directly serviced, 12,000 engineers and about 2,000 people in our Customer Support Centers. That's about $1.5 million per on-site engineer, a three-fold increase in productivity.

 

But ultimately, service means insuring customer satisfaction. In 1986 we will make over three million service calls. Every one of them is important, because every one represents an opportunity to reinforce that the customer made the right decision with Digital — and to help them make that next one.

 

Strategic Contributions Of The Other Services by Don Busiek, vice president, Software Services, Educational Services and Computer Special Systems

 

We at Digital know how to connect computers. We're the best at it. We can put systems together so that they can do electronic mail, share files, or use a common disk for backup capability or storage. We can enable users to share expensive high-speed or multi-color printers. The successful personal computer vendors have exposed a great deal of the marketplace to the kinds of things that we do well — merely by their inability to do those things themselves.

 

This is a major window of opportunity for Digital and our networking prod­ucts. These customers are now well aware of the need for connecting up their personal computers, and I think most of them know that Digital is best at it.

 

Among the improvements we've introduced over the past year or so are the Optimum Package and Sales Selling Services. About a year ago, a customer buying a system from us had to deal with a Sales person, a Field Service person, a Software Services person and an Educational Services person. Our customers told us they didn't like that, and we reorganized to have Sales sell service. The Optimum Package is what Sales now uses to sell those services.

 

Today, with one order, customers can buy the right set of educational, field and software services to meet their needs. Sales is now the focal point for managing the customer's requirements rather than forcing the customer to learn and select among many possible service offerings.

 

As we focus our marketing more clearly on industries, technical support knowledge has had to shift from product and systems expertise to under­standing how to solve customers' problems. We’re now hiring high-level sales support experts, with typically 15-20 years in the given industry. They'll have specific application expertise and they'll reside in local offices, close to where the the action is.

 

Another recent project is the opening of Application Centers for Technology. Not long ago, if a customer wanted to see a computer-aided design demonstra­tion, we would take them to one of our many CAD/CAM Centers. If the same customer wanted to see some office automation, we'd take them across town to an Office Solution Center. And if they weren't confused and still wanted to buy from us, we'd take them to a Field Application Center, where software support specialists design real solutions for real customers.

 

Now we are putting those three together in the Application Centers for Technology, where the real power of Digital Equipment Corporation is exem­plified. They can see demos of everything from laboratory applications to office automation to manufacturing solutions. They can discuss alternatives with engineers who have actually designed and implemented solutions to difficult problems.

 

There are 17 of these centers in the U.S. They'll all be up and running within the next 6-8 months. In addition, there exist or will exist six in Europe and three more in GIA.

 

One of the trends we've seen developing is that our business opportunities are getting bigger. It's not just a VAX or two VAXs, it’s a system of VAXs. It requires different disciplines to both quote the business and deliver the business. The vehicle for doing that is Project Management.

 

Most of the Project Management that's done in the Field is done in Software Services and CSS, but we need a lot more of it and we need to organize it better. We need to pick our shots more clearly so that we get the best, the biggest and the most strategic business that's available. Then we need to report and manage the results of those projects. We are in the process of formalizing both the requirements for, and the assigning of, project manage­ment resources. This will help increase our capture rate at the time we bid business, and make it a lot easier to schedule internal resources. Project managers need the right resources from Engineering, Marketing, Software Services and Field Service. I expect that this kind of Project Management in the Field will result in a major increase in our ability to land these large project contracts.

 

Another program we're working on is Assets. When Software Service Engineer™ ing writes applications for specific customers, the result is often useful in other applications for other customers. This is how ALL-IN-1 and BASEWAY were born. Reinventing that code is inefficient. So far, we’ve established two facilities where we keep a library of useful routines and applications. One's in Charlotte, N.C., for office applications. The other is in Detroit for manufacturing applications. We still have to iron some things out, but I think we'll see a major breakthrough in terms of consulting capability — the ability to land more business and deliver more solutions in a shorter time frame.

 

We're currently working on a project called Electronic Publishing, with VMS • Engineering, the Software Distribution Center and the Field. The goal is to create, edit and finalize in engineering all the technical documentation that currently ships with the system — and never print it until it reaches the customer's site, and then only as particular pieces are required by the customer. The payback is in the forests not cut, in palette loads of docu­mentation that we now pay shipping charges for, and in more professional in­stallation generally. So much of it is never read; it’s there for reference. Electronic Publishing will make installation easier and simpler, and infor­mation more easily available.

 

We’re also exploring the great potential of the Digital Video Network, which is managed by Educational Services. The way we do training has really evolved, from classrooms to publishing books to computer-aided instruction to IVIS. The latest technique is the Digital Video Network, or "classroom via satellite." We have our own educational television station with a transmitting facility in Bedford, Mass., and the two-way audio you wouldn’t find in a normal television broadcast. Right now, we can broadcast to 21 locations in the U.S. and one in Canada. This capability can be used not only for training employees, but also customers. We foresee the day when customers will have receiver stations, through which we can downline-load information, educational material or even take advantage of our promotional capabilities.

 

Industry Marketing's Strategies For This Competitive Window by Jerry Witmore, vice president, Industry Marketing

 

We see tremendous opportunities, not only because of our approach to com­puting and technology, but also because our customers are changing. Today they are finding that it is too complicated to keep up with the plethora of companies they have been doing business with. So they are looking to develop long-term relationships with a smaller number of vendors. The good news for Digital is that in almost every case they see us as one of those strategic vendors.

 

Also, our customers are moving toward large project purchases as opposed to buying specific point products. They are looking for large incremental increases in their business -- in market share, in competitive advantage, in their return on equity. And as they reposition their companies, they are looking at information technology and the purchase of computers in a more integrated fashion. This is entirely consistent with our approach to comput­ing, and puts us in a position to take on more large projects.

 

Businesses are trying to determine how to get strategic advantage over their competitors. And they see computers and information technology as one of the ways of doing that. So decisions on computer purchases are being made higher in the organization, by senior management. This means that our sales force has to spend more time calling at the senior levels of companies.

 

In addition, our customers are looking for us to provide total solutions. So they can reduce their own internal staffs, they want us to take on more consulting and service-related responsibilities. They also demand that their vendors form strategic partnerships with them and understand how they run their business and how we can help them with information technology. They want us to help them solve their business problems.

 

What are we doing to exploit this window of opportunity? We're conditioning the environment -- making it easier to sell. There will of course be a DECWORLD '87. And in addition, industry and applications and product market­ing people will work together to create executive seminars, to attend trade shows, to put together specific advertising campaigns and to do whatever else it takes to make an industry see Digital as a significant player.

 

Digital is already a leadership vendor with leadership companies in almost every major industry. We want to get significant market share in all the industries we’ve targeted. In the U.S., between 70 and 80% of the total available revenue for electronic dat$ processing comes from 600 companies. By focusing on those 600 accounts in depth and breadth and achieving greater penetration there, rather than spreading our efforts over about five million accounts, we can get a tremendous market-share increase.

 

Over the last six months, industry marketing people have been defining the accounts within their industries and working with our application people to define the opportunities within the accounts. Once we have targeted the accounts, we also have to target the applications and products.

 

We have to be able to determine which ones we should walk away from, versus the ones where we have a tremendous opportunity. That's going to be part of qualifying the application opportunity in those industries.

 

To track how well we're doing, we're building a marketing customer data base. Our goal is to be able to tell weekly how much business we did with a specific customer, what our position is within that account, how profitable we are and whether we're accomplishing our objectives in terms of a strate­gic market plan. We need to create a closed-loop environment between a mar­keting strategy and a sales plan and a set of results.

 

Competitive Advantage Through Manufacturing by Bill Hanson, vice president, Manufacturing Operations

 

We try to judge ourselves the same way we judge our vendors. It starts with meeting our delivery commitments. We've been under 10% slips for the past 15 months and under 5% for the past five months. But even with this perfor­mance, we are not satisfied. Our objective is zero slips and 100% on-time delivery.

 

Being predictable is important, but we must be responsive to customers' needs as well. One test of responsiveness to customers is our lead times. Two years ago, we were quoting lead times of over 60 days for 70% of our products. Today, 10% of our products are off-the-shelf items (including some MicroVAX II systems), and 90% of our products are available in less than 60 days.

 

Historically, we were operating with a huge backlog of orders and high levels of inventory. At the beginning of a typical quarter, we were 70% loaded with only 30% of capacity available for new orders. Today, we enter a quarter only 40% loaded, which means we have 60% of our capacity available to respond to new orders. Contrary to historic thinking, being only 40% loaded at the start of a quarter is not bad. Rather, it's a profile of a responsive company, and assumes we will get the needed orders during the quarter.

 

To remain a quality vendor we will have to make continuous improvements in all dimensions of our operations:                                                                           in costs, people productivity, quality,

predictability, responsiveness and asset management. And I am very confident that we have the programs in place to ensure that we will continue to achieve improved performance.

 

In addition, we need customer contact to leverage the opportunities we've created. This customer contact is key for three reasons: Our customers need e to understand our capabilities; we need to learn from our customers; and our customers want to learn from us.

 

First, we must communicate our capabilities. For example, one major customer I spoke to was concerned about our ability to deliver some 15 VAX 8650 systems over the next 18 months. I asked them if they wanted them that day. They simply didn't understand our capabilities. By setting up visits to a couple of our plants, and by providing an overview of our operations, we are able to remove all doubt as to our ability to be a reliable vendor.

 

We also need to learn from our customers. We operate in a complex and chang­ing environment. There are many areas where our customers have more

experience than we do. For example, companies like RCA manufacture millions of units per year. Someday soon, we'll be manufacturing products that approach that kind of volume. We can benefit significantly from the experi­ence of a company like RCA. Likewise, General Electric's knowledge of laser technology could help us as we make use of lasers in printed circuit manu­facturing. Similarly, we would like to draw on Ford Motors' expertise in automated material handling and robotics.

 

Digital is a hot company. We’ve got the products and the world knows that we've worked a lot of hard problems. In manufacturing we've successfully addressed problems in population, deliveries, inventories and gross margins. The knowledge we've gained in working these problems is something the cus­tomers want from us. And we welcome the opportunity to share it with them.

 

We've had to reduce our manufacturing population by more than 5,000 people. We've worked with our people to develop voluntary programs to accomplish this. We also recognize that new technologies and business strategies will require significant shifts in our skills. Therefore, we have to ensure that we have the human resource plans and the training programs to prepare our people to respond to these future job needs. But people management and re­skilling is a universal problem, faced by our customers as well as by us.

 

We have learned a lot in the last two years. We understand the pain, the frustration, the anxiety that comes with re-sizing and re-skilling the work force. But we also know the kind of results in terms of increased productiv­ity and responsiveness, improved gross margins and, most importantly, a healthier work environment.

 

By standards that we set for ourselves, we still have a long way to go before we are truly an international company. But by the standards of many of our customers, we are a successful multi-national manufacturer with 20 years of experience.

 

Currently one-third of our manufacturing people are internationally based. We have plants in 10 countries, and we buy one-third of our raw material in Europe and the Far East. Our most recent international investment has been in Mexico where, in order to open that market for our products, we had to rapidly establish a manufacturing presence. We leased a facility, hired a work force, set up the process and shipped product within nine months. Forty-five of the first 46 hires, including the plant manager, are from Mexico, and our total start-up investment was less than $3 million.

 

Another area in which customers want to learn from us is computer integrated manufacturing (CIM). We don't see CIM as some all-or-nothing turnkey system; this approach is bound to fail. The opportunity in CIM is to go after pieces of the operation that make sense for a given business. Its strength is in its flexibility. While none of our plants are totally integrated, most all of them can demonstrate effective use of CIM. Several plants see CIM oppor­tunities in flexible manufacturing and process controls, while for others it is resource planning and vendor linkages.

 

Assets, population reduction, international manufacturing and CIM are on everybody's mind. They are the traditional areas that all manufacturing

companies are concerned about, and we are pleased that we have made real progress in these areas. We have also made significant breakthroughs in some unique areas, such as inner-city operations, high-performance work systems and artificial intelligence (Al) systems. Our success in these areas has helped us to improve our operating performance and provide opportunities for our customers.

 

Many companies think building plants in the inner-city is too costly and ineffective. Our experience proves this to be wrong. Our plants in Boston and Springfield are among the most competitive operations we have. Boston is in a leadership position in inventory turns. They are currently turning their inventory 20 times, and they have their sights set on 50 turns per year. An average plant is around 8 to 10 turns. Boston is also meeting aggressive cost and delivery objectives. Springfield is a leader in CIM applications and in the use of flexible manufacturing systems. Springfield has developed a competitive assembly line that has the flexibility of building small disks and small tapes simultaneously.

 

Robotics and automation alone do not provide competitiveness. The real breakthrough comes with the development of work systems that achieve synergy among groups of people and technology. This is what high-performance work systems are all about. Like CIM, there's no one answer. Different plants will apply different elements of the concept. Ayr, Enfield, Albuquerque and Phoenix are the among the plants that are working these concepts.

 

As in the field and service areas, Digital Manufacturing is recognized as a leader in the practical day-to-day applications of expert (Al) systems. These tools are helping us to achieve our business objectives of shorter cycle times, better quality, improved indirect labor productivity and lower costs. Beyond the development of practical applications, another dimension of our work with Al has been the generic learning of how to effectively transfer technology from an R&D environment to practical applications. We've been working closely with Carnegie-Mellon in this effort.

 

All of this adds another dimension to the role of manufacturing plants. Customers want to see what we're doing first-hand. In the past 12 months we’ve had more than 500 customer visits to Digital plants. These visits have been very beneficial to us and we are preparing our operations to handle even more visits.

 

All of these programs that we’ve been talking about will pay dividends. More business will be ours, and our effectiveness will be enhanced. Our perfor­mance in manufacturing will continue to improve because of the programs we now have in place. And it will improve as we increase our collaboration with our vendors and customers.

 

 


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