The Sad but Brutal Truth About IBM

IBM as we know it is dead. The IBM that the giant Japanese conglomerates strove to emulate and that our own Justice Department once tried to dismantle is no more. The company that symbolized America’s technological superiority in the Information Age has been reduced to a stumbling corporate Cyclops: an object of pity and concern now desperately struggling to regain its lost vision.

IBM’s somber disclosure that it will cut 25,000 more jobs, shut some factories and possibly report the largest annual loss in the history of corporate America confirms a sad but brutal reality: For all its restructurings, reorganizations and “early retirements” of the last few years, the world’s largest computer company has consistently chosen to nibble the bullet instead of bite it.

Faced with product-snapping technological discontinuities, nimble competitors, rebellious customers and a global recession, IBM has proven unwilling and unable to redefine itself as a company that offers the best computing value per dollar. Make no mistake: Most of IBM’s most grievous wounds have been self-inflicted. That’s why its top management has lost credibility with both the stock market and the marketplace.

But how can IBM be honest with its customers and investors until it starts being honest with itself? IBM has to have the courage to publicly acknowledge that its business model of the customer and the world is obsolete. Asking “What business is IBM really in?” is exactly the wrong question. The real question for IBM is, “What businesses shouldn’t we be in? Which of our businesses no longer provide a premium value for our customers?”

The answer to those questions will determine whether IBM will be able to right itself or whether it is doomed to be dismantled by Jack Welch’s General Electric or Bill Gates’ Microsoft.

Essentially, IBM is now the last soup-to-nuts computer company in the world: It does hardware, software, silicon, systems integration, personal computers, supercomputers, multimedia, and so on. Many of these technologies are seamlessly compatible with one another; most of them are not. For the last five years, IBM Chairman John Akers has been running a high-tech conglomerate where the whole is worth substantially less than the sum of its parts.

But where this vertical integration once empowered IBM to define and dominate the computer industry, it now imposes an intolerable overhead of financial and conceptual costs. By trying to be all things to all its customers, IBM guaranteed that its internal costs of coordinating these diverse efforts would eventually outstrip any economies of scale.

Yes, Akers promised last year to break IBM into a confederation of quasi-autonomous units. Yes, IBM has successfully “spun out” Lexmark--its electric typewriter/personal computer printer division--as a separate company. But IBM has never once retreated from its stated goal of being a major player in every facet of the information industry. The company has never had the courage to say what it is not prepared to do. The company never explicitly acknowledged--until this week--that the underlying dynamics of its marketplace were changing.

Let’s be fair: Over the last decade, IBM has never ignored a genuine market opportunity. Rather, it has consistently thrown a lot of resources at emerging opportunities. But what were the priorities? How often was IBM first to market? How often were IBM’s products the best-priced? How frequently was IBM prepared to compete against itself to capture customers? Precisely because it wanted to play in every market, IBM lost its sense of self-discipline and direction. Indeed, IBM has more directions than a compass.

IBM’s top management has never had the intestinal fortitude to say, “No, we do not need to invest as much as we do in silicon and semiconductors,” or “Yes, we are prepared to support our mid-range computers and high-end workstations at the expense of our mainframe systems,” or “We are going to spend less on hardware and more on software development.”

Instead, IBM wanted it all. It wanted to preserve its lucrative franchise in high-end mainframes, and it wanted to compete aggressively in personal computer hardware, software and networks. In this era, “wanting it all” is less a sign of strength than a signal of immaturity.

Now, IBM top management can honestly say that all of these Big Blue market segments and technologies are strategic and continue to have enormous potential. They can argue that they don’t want to risk alienating important customers. These are good arguments. In fact, they have proven to be such good arguments that IBM is now facing the worst financial crisis in its history.