IBM Is on Rebound With Streamlined Operations, New Product Lines : Computers: Dispelling its reputation as an arrogant giant helped the nation’s fourth-largest industrial firm pull out of a slump, analysts say.
A few years ago, some industrial experts feared that IBM, one of the nation’s most important companies, had slipped into a dangerous slump.
Its products were outdated and overpriced and its payroll and cost structure too bloated to deal with a slowdown in computer industry sales, the critics said.
Instead of its sales growing 15% or better a year, as IBM had predicted, annual growth averaged less than half that from 1984 to 1989.
In addition, IBM’s profit fell from $6.6 billion in 1985 to $3.8 billion in 1989, and its stock price slipped from as high as $173 a share in 1987 to as low as $93 a share in December, 1989.
The downturn was troubling not just because International Business Machines Corp. is the nation’s fourth-largest industrial company, but because IBM’s health is a benchmark for the U.S. economy and its technical prowess.
Some said IBM--which employs more people than live in Minneapolis--was too big and bureaucratic to change.
But in the past year or so, the world’s largest computer company appears to have executed a neat turnaround.
Its profit and stock price are on the rebound, its product lineup has been revitalized and thousands of unneeded employees are gone. IBM also has become more customer-oriented, helping dispel its reputation as an arrogant giant, industry analysts say.
“In the mid-80s, other (computer) companies started to do well. IBM was marking time,” said Barry Bosak, an analyst at Smith Barney, Harris Upham & Co. “Now, in 1990, IBM seems to be doing better in general than the computer industry.
“I’m impressed by the ability of IBM to make a good number of cutbacks and at the same time roll out what is a fairly extensive line of new computers,” he added.
IBM had been losing ground in the product area to nimbler, younger competitors. Compaq Computer Corp. lured away corporate customers for personal computers, while Sun Microsystems Inc. outshined IBM in the fast-growing computer workstation market.
In 1990, IBM replaced its slow-selling workstations with machines that won critical praise and strong orders. It made a promising return to the home computer market, while selling off its low-tech typewriter business. Most important, it announced the biggest overhaul of its mainframe computers since the 1960s.
Mainframes, the room-sized computers that store huge amounts of data for companies such as airlines, are IBM’s most important business. The machines and associated equipment and services account for more than half IBM’s revenue and profit.
Analysts say they generally are pleased with IBM’s revamped products. Rick Martin of Prudential-Bache Securities Inc. calls it the company’s most competitive lineup since the early 1980s.
Analysts also applaud the way IBM handled the transition to its new mainframe line, announced in September. Transitions to a new generation of technology often disrupt orders while customers await the announcement. While IBM felt that lag, it was not as severe as some analysts expected.
IBM is now “shipping all we can build” of the new mainframes, said Bill Grabe, a marketing vice president.
The company needed the new machines to meet increased competition for its once-exclusive mainframe customers. Two U.S. companies that are partially Japanese-owned, Hitachi Data Systems Corp. and Amdahl Corp., offer competitive machines compatible with IBM models.
IBM’s mainframes also face competition from the No. 2 computer maker, Digital Equipment Corp., which began shipping its first mainframes in 1990.
In the past few years, IBM also has increased its presence in software--an area of growing importance--by buying minority stakes in dozens of small software houses. These companies have developed programs that tailor IBM computers for specific industries.
Under Chairman John Akers, who took charge in 1986, IBM reduced its worldwide payroll from a high of 407,000 that year to 383,000 at the end of 1989 through voluntary severance offers. The figure is a few thousand lower now, though the company hasn’t disclosed the exact total.
Under the most recent cutback, announced in December, 1989, IBM said it would eliminate 10,000 U.S. workers. The company took a $2.4-billion charge against its 1989 profit to pay for the severance deals, resulting in a steep earnings drop that year.
IBM also has reassigned workers from factory floors and headquarters to sales offices, where they are helping improve customer service and beef up orders.
IBM’s transformation began after the company reported a 27% drop in earnings in 1986, which it blamed in part on a downturn in the economy and the computer industry.
“We also did some real introspection and concluded that part of the problem was ours,” said Frank A. Metz Jr., IBM’s chief financial officer.
That self-examination led to the recognition that IBM’s overhead was too costly. Its payroll and plants were at a level that required annual revenue growth of 13% to 15% to turn a profit, while revenue was growing at only half that rate.
IBM also decided that it must “re-emphasize our commitment to our customer,” Metz said in a recent interview at the company’s hilltop headquarters, about 25 miles north of New York City.
“We concluded that, although our products were good, it was taking us far too long to get our products to the marketplace, and too often they weren’t as responsive as they needed to be to our customer requirements,” he said.
That led IBM to loosen the centralized decision-making that had long been its hallmark.
“There are a lot of decisions made in this company today--important decisions, operational decisions--that we’re not involved in here,” Metz said.
An association that represents IBM customers says it has noticed the company’s new attitude.
“The openness has changed tremendously,” said Merrikay Lee, secretary of Common, which represents users of IBM mid-range computers. “They used to listen but never really incorporated their customers into the fold. Now they’re much more willing to talk and listen.”
Metz said the process of downsizing IBM will continue, though he doesn’t expect another major restructuring.
IBM’s moves already have boosted its profit. For the first nine months of 1990, it earned $3.56 billion, compared to $3.17 billion in the same period a year earlier.
Analyst Cliff Friedman of Bear, Stearns & Co. predicts that IBM will earn $10.20 a share for 1990, up from the $9.05 it would have earned in 1989 had it not been for the restructuring charge that slashed profit to $6.47 per share.
IBM’s improving fortunes have been reflected in its stock price, which has risen to about $113 a share.
Although rejuvenated, IBM isn’t out of the woods. One looming threat is the recession. Another is the increasing competition in the computer industry as its growth rate slows.
In addition, IBM’s profit could be squeezed by computer users’ increasing interest in “open” systems, those that allow machines from different makers to work together. Open-system computers have a lower profit margin than proprietary models such as IBM’s mainframes and minicomputers.
Despite its recent resurgence, “over the long term, IBM’s going to wind up losing market share,” predicted analyst Stephen Cohen of SoundView Financial Group Inc. “Industry (profit) margins are going to be declining because it’s a maturing industry. I think IBM is going to face some very stiff competition.”
