Compaq's diversification strategy, under way for months, will continue this month when the company introduces products for remote and wireless computers. Last week, Compaq introduced a range of peripheral devices for building wireless LANs. The strategy is being backed by a $60 million print, broadcast, and Internet advertising campaign.

Compaq wants to establish itself as a leading supplier of communications devices for on-the-go professionals who require remote access to intranets and databases. That kind of product differentiation is essential for Compaq to overcome the bleeding in its corporate PC unit, which has been stung by low-margin competitors. "Dell is just too good at managing the supply chain for Compaq to be able to compete with them on price, so they have to be able to add value and charge more," says Lindy Lesperance, an analyst at Technology Business Research.

During an earnings call last week, Compaq president and CEO Michael Capellas said the company will no longer go toe-to-toe with competitors on price alone. "We may sacrifice some market share in order to reestablish profitable growth," Capellas said.

Corporate PC sales still provide about 30% of Compaq's total revenue, but those sales fell 12% from a year ago to $2.7 billion in the third quarter. More alarming: The corporate PC unit posted an operating loss of $169 million, compared with a profit of $116 million in the same quarter a year ago. "We know we have to address our commercial PC business in light of industry changes--changes brought on by the Internet, changes in distribution models, but, most important, changes in the core product itself," Capellas said.

Compaq is not alone in recognizing the trend. "We have to migrate our core PC business to suit the needs of the new economy, so we will definitely be there, too," says Joel Kocher, CEO of Micron Electronics Inc.

Compaq will have to walk a fine line if it's serious about emphasizing margins over PC sales. New York Life Insurance Co. last year awarded a major contract for desktops to Compaq "largely because they gave us the best deal," says VP Tom Shea. Had Compaq been less price-aggressive, a stance it plans to adopt, Shea says he might have gone with a different supplier.

Attempts to hold the line on price could also hurt Compaq in the Windows NT server market, which it leads. Dell, for example, could use desktop accounts as a beachhead to pursue server contracts. Says Lesperance, "It could be a risky strategy for Compaq."