After my last article, The Day Everything Changed at Compaq, someone mentioned a skunk works project at Compaq in the late 90’s to compete with low priced competition. The main new competitor in this space was eMachines, who came onto the scene, almost out of nowhere, and became a huge player. With great pricing and a strong feature set, they quickly obtained prime assortment space with all major retailers. So, where did they come from? Well, in many ways, business is like the game of chess—you always need to anticipate the next several moves, and if possible, put your competitor into an “either/or” choice of which piece they will lose. I actually played an indirect role in a series of decisions which led to the rise of eMachines as one of our biggest competitors of the era. To paraphrase the famous line from “Cool Hand Luke,” it was “failure to anticipate!”

In 1997, I was a Vice President at Compaq and stationed in Singapore. I led the Consumer business across Asia, and had responsibility for the region’s product development center (which I created). In 1997 there was a tremendous financial crisis that engulfed the entire region. Without getting too bogged down in the financial details, the result was that Korea had to get aid from the IMF, which prioritized funding to those companies that had strong exports to help service debt.

In an effort to open the market to Compaq products, I was in Korea for a partnership meeting with Hyundai to acquire their retail store network in the country. During this particular visit I had a meeting with TriGem, a well-established but smaller Chaebol (Korean style conglomerate). I met with TriGem’s CEO, Paul Lee, who suggested a partnership: they would become an ODM supplier to Compaq, while Compaq would have increased access to TriGem’s retail footprint. This proposed partnership had the potential to be an alternative to the original Hyundai project, but also could have added to it for an even bigger impact in the market. TriGem had the ability to take advantage of the country’s financial crisis and source components and labor for extremely low costs, and had even begun piloting the new models in the Japan market under the brand name Sotec. We had many meetings identifying specific products and configurations. We even had detailed operational plans to roll out the TriGem provided products throughout the region.

I traveled to Houston to present the overall business model, and get Headquarters’ approval to move forward and make TriGem an official ODM partner (as well as a market partner). Unfortunately, the meeting didn’t quite go according to plan. The Houston consumer team staunchly opposed this outsourcing deal. Up to that point, Compaq had an engineering group that played a definition and validation role for the electrical and mechanical designs (while the ODM’s effectively did just the execution work). Partnering with TriGem for essentially turnkey products would have marginalized the Houston team to some degree by removing this engineering component from their responsibility. Ultimately, the Compaq HQ team made the argument that if we went with this outsourcing approach we would ultimately lose the competency for good. Instead of the proposed partnership, they asserted that Compaq needed to challenge their internal team to meet the cost goals that TriGem was able to achieve. The deal was turned down and I personally informed TriGem of the decision – even though I didn’t agree with it.

At that point, TriGem executed a perfect “either/or” pivot. With Compaq backing out, they set into motion their Sotec model for the U.S.—rather than sending their PC’s to Compaq, they would send them to the U.S. to be branded under the eMachines name. They headquartered the company in Southern California, and when they hit the U.S. market, they almost immediately took the #3 position in market share with their low-cost machines (which were cheaper than Compaq’s at the time). If we had known this was going to happen, it probably would have affected Compaq’s decision not to use them as an ODM partner—it might very well have been worth it to keep them out of the market. Hindsight’s 20/20 though, and a significant competitor was born.

Though we were eventually able to get our costs on par with eMachines, it had effectively become a slugfest with Compaq losing a lot of potential revenue over several years. eMachines continued to be a strong force in the industry for some time. The coda of their story is that after facing increased competition from both Compaq and HP, they were eventually acquired by Gateway in 2004. Acer, in turn acquired Gateway in 2007, and the eMachines brand was slowly retired.

The lesson in all this is that in times of market upheaval and turmoil—like 1997, and not unlike today—big companies should think long and hard before dismissing potential partners with viable assets. Sometimes, you need to step back and ask yourself if there is more to the game than what you see on the board. As big and powerful as Compaq was, we didn’t anticipate a small TriGem making a really big impact on us, and the rest of the market. We didn’t see that we were in an either/or situation. Compaq’s flirtation with (and rejection of) TriGem focused them to go full throttle into the formation of eMachines and become a major player in the industry. While companies have the prerogative to play it safe and say “no,” they need to be cognizant that a good opportunity could easily go elsewhere and come back to bite them in the future.

Sean Burke is a 25 year Executive in the high-tech and consumer products industries and has held leadership positions at world class companies like Compaq, Dell, Hewlett Packard, Flextronics, and currently AMD.