IBM Learned Hard Lesson in Complacency
Can IBM come back? The answer from investors and analysts--even as IBM stock shot up more than $4 a share to $127.125 on Thursday--is surprisingly qualified. Oh sure, International Business Machines Corp., the world’s biggest computer maker, will recover from the current distress that led it this week to report declining earnings for the second straight year.
No one doubts the long-term abilities of the company that even in a bad year earned $4.8 billion on $51 billion in sales.
But the institutional investors that make the stock market hum don’t ask what IBM will do in the long-term, but whether the stock will outperform the market in the next six months.
On that score, Steven Cohen of the Gartner Group research firm just changed his IBM recommendation from a sell to a hold--a designation he calls “not yet a buy.” And Barry Tarasoff of the brokerage firm Wertheim, Schroder, says “Yes, the value is there, but no momentum.”
The best that can be said about IBM stock is that investment manager David Dreman, who says that the way to make money in the stock market is to go contrary to the crowd, thinks it’s a good investment.
But the fact that IBM is now the contrarian’s choice, while Digital Equipment Corp. hits new highs of more than $146 a share, speaks volumes about how the computer business has changed.
Cost of Overconfidence
What happened? Overconfidence. Five years ago, when its business was growing 17% a year and the Justice Department dropped the antitrust suit against it, IBM bet on continued rapid growth. It built plants, hired staff, and set its sales force’s quotas on a pace that would have taken it to $60 billion of sales in the year just ended, and more than $100 billion in 1990.
Things aren’t going according to plan. The computer industry is in a slump, the company explained in 1986 as its sales grew scarcely at all. But the slump wasn’t general. Digital Equipment, which makes computers mainly for the engineering and scientific market, enjoyed 20% growth in sales--some of it coming from the kind of corporate customers normally considered IBM’s clients.
How could IBM let DEC, a company one-sixth its size, steal the spotlight? Hubris, the ancient Greeks called it, the overweening pride that preceded the hero’s downfall.
For a couple of years now U.S. business has been asking how much productivity it was getting, and how much money it was saving from all the computers it has purchased. Those are serious questions for big companies spending $200 million a year on data processing, says Joseph Izzo, the head of his own computer consulting firm in Santa Monica.
Not Listening
But IBM wasn’t listening. It was goading its sales force to meet the company’s growth targets by pushing more machines on the customers--ironically violating the credo with which the late Thomas Watson Sr. built IBM from a manufacturer of butcher’s scales into one of the world’s great companies.
“Don’t talk machines, talk the prospect’s business,” was Watson’s rule--tell the customer how your product will help make money. When IBM stopped doing that, customers stopped buying and started questioning.
And some of the answers company managements got were from the engineers, who showed them DEC equipment and said: “Here, take a look at how a computer should work.”
The DEC systems answered several needs: They could transfer information from one computer size to another, and they were small enough to be used within a single department or at remote locations, such as branch banks where they could record transactions and instantly update accounts. DEC exposed a weakness in IBM’s flank.
The computer giant is already reacting, pushing a new mid-sized computer of its own and planning important product announcements within the next couple of weeks. With a little help from the economy, it’s a good bet that investors and analysts this time next year will be singing about “IBM’s remarkable comeback.”
Meanwhile, the lesson is a reassuring one: that even IBM gets its comeuppance when it takes the customers for granted.
