IBM searches for a better way to do business

VIEW FROM WALL STREET

July 07, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- Only nine years after surviving one of the most extensive antitrust investigations ever launched, a series of setbacks has convinced International Business Machines that monopolizing the computer industry is the least of its concerns.

Last week alone, IBM announced important agreements with Apple, a major force in personal computers, and Siemans, the largest European manufacturer of computer memory chips. These embryonic deals follow others recently disclosed with Novell, Borland, Lotus, NeXT, Silicon Graphics and Wang.

That's a dramatic shift in strategy for IBM. The computer giant spent a half-century thriving through internal growth alone and dismissed many attractive deals, including the acquisition of Universal Automatic Computer, the original computer company, and the patents that became the basis for Xerox.

IBM's about-face comes only a few years after many in the industry were convinced that the company's most vigorous expansion was still to come. "A low-cost producer that pushes relentlessly to build sales volume," is how Fortune described the company in a 1984 cover story. That article criticized IBM for, as then-Chief Executive Officer John Opel noted in a staff memo, "crushing our rivals, stifling innovation and exploiting our size to ensure success."

Mr. Opel's successor, John Akers, must look back on that criticism with a certain longing, for the article appeared just as IBM began a seven-year slide.

Since the article's publication, IBM's profits, market share and stock price have all declined. And last Monday, Fortune weighed in with a revisionist characterization, calling the circa-1984 IBM a "fat, overconfident company" fraught with poor marketing and inadequate products that has been "a disaster" ever since.

Similarly, acerbic comments have come from analysts, investors, other media -- and from Mr. Akers himself.

"Some of our people do not understand that they have a deeply personal stake in declining market share, revenue and profits," Mr. Akers wrote in the current issue of Think, IBM's in-house publication. "The development team must . . . be more innovative. The manufacturing team must improve its cost competitiveness and its quality.

"The marketing team must understand customers' needs. . . . We must measure ourselves against tougher standards because the tougher expectations the marketplace is setting for us."

Can a company once perceived to be almost dangerously competent suddenly turn out to be inept?

Lost in the current furor is how remarkable a company IBM continues to be. It has either the top position or a strong presence in almost every segment of the industry, from (beginning at the beginning) chips to personal computers to workstations to mainframes, notes Roger McNamee, a portfolio manager at T. Rowe Price.

And IBM's performance in recent years, as poor as it has been, remains vastly better than those of many of its competitors. Digital, Unisys and Groupe Bull are all contracting. Wang is laying off a quarter of its work force and handing its computer-manufacturing business off to IBM. Even newer stars,

such as Apple and Compaq, have found that their prospects have soured.

Still, IBM faces dramatic changes within the computer industry. And rather than "crushing rivals," "stifling innovation" and "exploiting size," IBM is grappling with the notion that its size may be as stifling to itself as it is intimidating to outsiders.

For decades, the computer industry enjoyed remarkable growth by making an evolving product applicable to an expanding array uses. Volatile production costs and demand killed some companies but the winners, most notably IBM, experienced frenetic growth.

That has changed, if only because the industry isn't growing. Even successful companies face formidable challenges. "We anticipate that half of the companies now considered to be leaders in the industry will not exist in their present form in the next five to 10 years," McKinsey & Co. consultants Ron Bohlin and Joanne Guiniven wrote in a report published last year.

IBM, contends Rick Smith, an analyst with the Gartner Group, a Connecticut research firm that shares McKinsey's conclusion, will be one of the survivors, but surviving won't be painless.

Although its market share will begin to rebound after a five-year decline, Mr. Smith said, the company's revenues and profits will still contract as dying companies offer price inducements they can't afford to customers in exchange for new business.

For IBM to thrive, he contends, it must concoct a whole new model of how to do business.

One example of such a successful formula is the consulting arms of major accounting firms. Instead of getting involved in research or manufacturing, traditional operations for a computer company, they tie together massive computerized information systems made by others. That requires little capital investment.

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