Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/122892/1228200.000

Text File | 1993-04-08 | 11KB | 209 lines

                                                                                BUSINESS, Page 26

How IBM Was Left Behind


Mainframe computers were its cash cow. Then the industry changed,
and Big Blue was just the leader of an obsolete market. Can
it ever recover?

By THOMAS MCCARROLL


    When it comes to dominating an industry, few companies
have done so with the overpowering force of International
Business Machines. From gigantic mainframes and tiny laptops to
semiconductors and software, IBM ruthlessly called the shots for
the entire industry after the computer became a commercial item
about 40 years ago. So tight was IBM's market grip that it was
practically impossible for any computer company to do business
without being tied in some way to the Big Blue colossus.

    How the mighty have fallen. While most of the industry is
enjoying a renaissance, the world's largest computer company is
being overwhelmed by an array of problems in one market after
another. Its mainframe business, the core of the company, is
being undermined by microchip miracles that make today's
low-cost desktops as powerful as yesterday's closetfuls. Its
lead in personal computers has evaporated. Its supremacy in
computer chips is a mere memory. In software, upstart companies
that didn't exist a little more than a decade ago are running
rings around the 78-year-old behemoth. And even worse, IBM has
been bogged down by endless rounds of painful restructurings and
cutbacks. "IBM is no longer the monolithic monster that strikes
fear in the hearts of competitors," says Ulric Weil, a leading
computer consultant. "It has proved to be quite mortal after
all."

    At a time when other computer companies, including Sun
Microsystems and Compaq, have been reporting hefty profit
increases and rolling out innovative products, IBM last week was
announcing its most traumatic cutbacks to date. In the fifth
major restructuring in the past seven years, it plans to shed
more unprofitable and ill-fitting assets and slash its work
force next year more than 8%, or an additional 25,000 employees.
Only a year ago, IBM reorganized its operations into 13
semiautonomous units, called "Baby Blues." The latest round of
cuts will include the first layoffs in the company's history and
will lead to a $6 billion write-off for the fourth quarter. IBM
is expected to post a net loss of about $4.8 billion for the
year -- the second largest in American corporate history.

    IBM also announced that it would pare its spending on
research and development $1 billion, or 17%, a move that
prompted President-elect Bill Clinton to comment while leading
a two-day economic conference in Little Rock. Though he conceded
that IBM's cuts reflect the irresistible pressures facing U.S.
manufacturers, he expressed concern about IBM's decision to
slash investment in research and development. That kind of
expenditure, said Clinton, is "the exact thing we don't want
them to be cutting."

    The bad news echoed loudest on Wall Street, where IBM
stock has been transformed from a darling into an ugly duckling
in recent years. IBM shares went into a free fall after chief
executive John Akers warned that the company may have to cut its
rich yearly dividend of $4.84 a share as a result of the
restructuring. "The reality of the environment we find ourselves
in makes us less sure we'll be able to maintain that dividend,"
he said. "We must be frank with ourselves and honest with our
constituents, including our shareholders." The company's stock
plummeted 11 points last week to hit its lowest level in 11
years, wiping out $6.3 billion in shareholders' equity.

    Although the company, based in Armonk, New York, has
already taken several drastic steps to snap out of its prolonged
slump, many industry analysts remain unconvinced of IBM's
ability to re-emerge as a major force in the industry. The moves
so far, they say, are little more than Band-Aid solutions that
cover up deep financial and technological wounds. IBM's
challenge is not just to shrink in size but also to remake
itself completely into a nimbler and more market-oriented
player, in much the same way that American Telephone & Telegraph
reshaped itself after the breakup of the Bell System eight years
ago. And even that would hardly be enough to restore IBM's
dominance in an increasingly fast-moving and decentralized
industry that is becoming less and less dependent on a single
pacesetter.

    IBM's corporate culture has been drastically altered by
the radical changes under way. After years of enjoying the
comfort of lifetime employment, IBM workers now labor under the
threat of dismissal and the pressure of pay-for-performance. For
many IBMers, the company's announcement last week that it may
abandon its no-layoffs policy merely formalized what Big Blue
has already been doing. Although IBM largely relied on attrition
and early-retirement programs to reduce its labor force by
100,000 from a peak of 406,300 workers in 1985, the company
began de facto layoffs last year through a new
employee-evaluation process that grades workers according to
internal goals. Those who haven't measured up have been fired.

    Still, analysts insist that IBM must get even leaner --
perhaps paring at least 50,000 more jobs within the next two
years -- if it is to meet the challenge from smaller and nimbler
competitors. Says Bruce Lupatkin, an industry analyst: "There's
still a lot of fat left." CEO Akers agrees that layoffs are
necessary for the company's long-term survival. "Although it's
a difficult step to take," he says, "it's one that, given the
realities, if we must do it, we must do it."

    Job reductions alone, however, will not be enough to
restore IBM's competitive edge. Distracted by endless rounds of
cutbacks, the company lost sight of the ball. IBM fumbled in
market after market: it fell behind in computer-chip technology,
and it engaged in a self-destructive battle with software
powerhouse Microsoft over the direction of desktop-computer
programs. Even worse, IBM began losing money and market share
in two of its vital markets: mainframes and personal computers.
Here IBM is faced with a double quandary: it remains the world
leader in the market for mainframes, but the large systems are
fading fast in importance. Meanwhile, personal-computer systems
have been growing in strategic value just as IBM has lost its
technological virility.

    For four decades, the mainframe was the queen bee of
office computing. The gigantic machines often served as host for
an army of white-collar workers, who were linked together in a
single network of as many as 10,000 "dumb" desktop terminals.
The market for these behemoths regularly grew 15% a year, but
sales have slowed to 4% since 1990 as customers have turned to
less expensive but powerful personal computers and linked
workstations. Many manufacturers of large systems have already
fallen victim to this irreversible change. In August, Wang
Laboratories was forced to file for bankruptcy. Unisys, the
by-product of the merger of Burroughs and Sperry, nearly went
under after it suffered $2.5 billion in losses in 1989 through
1991. Huge losses also nearly claimed Digital Equipment, whose
board ousted founder and president Kenneth Olsen earlier this
year.

    For years, IBM stubbornly attempted to ignore the trend
away from big mainframes. Instead of adapting, it tried to
protect its base: the computing dinosaurs account for 42% of
IBM's revenues and about 60% of its profits. Margins on large
systems were as high as 70%, although recent price competition
has reduced margins to about 50%. But with sales slowing and
price pressure mounting, IBM has finally faced up to the trend.
Last week Akers signaled IBM's intention to shift away from its
mainframe business, which is down 10% this year. Most of the $1
billion reduction in R. and D. will occur in mainframe
development. IBM, he said, will rely more on workstations to
serve as the central host for PC networks. "The computer
industry is in a time of funda mental transition," said Akers.
"Customers more and more prefer smaller computers."

    IBM, however, is seeking to gain strength in a market
where it is at its weakest. Personal computers accounted for 20%
of IBM sales of $63 billion last year and are expected to make
up 40% by the year 2000. But IBM's growth in PCs lags far
behind that of the rest of the industry. IBM is the only one of
the top 10 PC vendors whose market share has declined this
year. In fact, IBM's PC business is in the red.

    By contrast, Apple Computer -- which has surpassed IBM as
the leading PC maker for the first time ever -- is having a
spectacular year, largely on the success of its laptop
PowerBook. Apple and Compaq are reaping the benefits of huge
demand sparked by aggressive price cutting. Workstation
manufacturers, such as Sun Microsystems and Hewlett-Packard, are
also enjoying strong demand for their machines. IBM is still
catching up in workstations. Although it developed superb
technology years ago, the company sat on it out of fear that it
would cannibalize IBM's bread-and-butter mainframe business.

    To prevent being passed by the PC parade, IBM has rolled
out several new products as well as a new marketing strategy.
In October the company launched a line of computers called
PS/ValuePoint, with prices starting at $1,300 for the
entry-level model. The PS/VP, which is compatible with IBM's
original PC line, is the company's answer to Dell and Compaq,
which both sell machines by mail order as well as through retail
channels. The strategy is starting to pay off. IBM expects to
ship 1.5 million PCs this quarter, 50% more units than it has
ever shipped in any quarter in its history. The shipments
include the company's five-year-old PS/2 models as well as its
brand-new line of laptops. While its new assertiveness has been
praised by analysts, IBM can at best hope only to stem its
losses rather than to reclaim its lost glory in PCs.

    The days of Pax IBM are over. Rather than dictate to the
industry as it did in the past, a humbled IBM must now accept
its role as just another player. To its credit, IBM appears to
be doing exactly that. Although it is coming off what can best
be described as an annus horribilis, rivals would be mistaken
to underestimate this company in the future. If it can overcome
the enormous challenge of becoming leaner and more responsive
to shifting demands, and if it can anticipate the next
technological wave rather than resist it, Big Blue still has the
potential to be a market monster once again.