A Change in Tune Could Banish the Blues at IBM

“Don’t talk machines, talk the prospect’s business.” That’s the dictum on which Thomas Watson built International Business Machines Corp.--reminding his sales people that the customer isn’t interested in machines or technology but in what they can do for his or her business.

If Louis V. Gerstner Jr., who was named IBM’s chief executive last week, can revive Watson’s focus on the customer, a newly successful company could emerge.

But the situation is perilous; ultimate failure cannot be ruled out. “IBM stock could go to $15 a share in the next three to five years because of repeated write-offs,” says a longtime consultant to the computer industry.

IBM stock sold at about $51 a share last week as company directors brought in Gerstner, the 51-year old head of RJR Nabisco, to clear away an overburden of management and free up the value underneath.

It won’t be easy. IBM is huge--$65 billion in annual sales, more than 300,000 employees. It is the largest producer of big or mainframe computers, of medium-sized computers and of small personal computers too. But IBM is not profitable--it lost $5 billion last year. When you hear that IBM sold $12 billion worth of personal computers last year and failed to make a profit on them, you know something is grievously wrong.

The company is overweight for one thing. “A simple computer is nothing more than a package of the technology of the moment,” said Jack D. Kuehler, the recently resigned president of IBM, a few years ago. He meant that complex microchips now contain so much information and yet cost so little that small companies, such as Dell Computer, can turn out machines faster and cheaper and beat IBM to the customer.

So IBM has been trying to downsize--100,000 employees have left the company in recent years. Another 100,000 will probably go in the Gerstner restructuring to come.

Before he was forced from office in January, outgoing Chairman John Akers split operations into 13 divisions, creating semiautonomous units for the PC business, the mainframe business, software, semiconductors and so forth.

“But it should be 113 divisions,” says Bob Djurdjevic of Annex Research, a Phoenix research firm. “There should be an IBM for the retail industry, an IBM for hospitals, an IBM for automobile manufacturing and for aircraft.” An IBM for every customer.

Djurdjevic is right and so are other computer experts who say that IBM management doesn’t understand what is needed to solve its problems. It’s not a matter of “downsizing”--reducing labor costs to make a profit. It’s understanding that the customers know more than the computer maker about what the computer should do.

“Who uses information most wisely in the world today?” asks a computer expert provocatively. Consumer companies is the answer, Procter & Gamble, Gillette, Wal-Mart. Those companies keep on top of consumer tastes by interpreting information. But they don’t simply buy machines to do that. They mix and match equipment and demand software programs to help them.

For computing, they want a company to supply information services the way law firms supply legal services and accounting firms supply bookkeeping.

But IBM hasn’t wanted to play that game. Rather, it has offered solutions that push sales of IBM hardware. A Chicago customer’s complaint that “IBM salespeople spent a half-hour of my time talking about IBM” is typical.

Ironically, IBM is good at supplying computer services--last year it made money selling $5 billion worth of services, and increased sales to non-IBM computer customers. But for service to become the focus of IBM’s business means a profound shift to a company of small units operating independently--the antithesis of a big company.

Let that thought sink in. This is IBM, nicknamed Big Blue for its size and the color of its mainframe computers, the company that for decades has seen itself controlling the development of the computer industry--and the company that many saw as America’s best hope in global competition. That it has come a cropper holds lessons for all business, says Mark Stahlman, author of a significant study of IBM in “Upside” magazine.

The lesson is that there is no need for Big Blue or Big Brother in world industry today. Even as IBM’s directors were trying to find a new chairman, a new product was coming out--the Pentium microprocessor from Intel--that brings the power of a mainframe onto a fingernail-sized chip of silicon.

IBM has faded and yet America has an enormous and successful computer industry, observes Kenneth Bosomworth of International Resource Development, a consulting firm. It’s an industry in which information users and providers are growing and developing in fluid interaction. Many flowers blooming is the direction for U.S. and world industry, not centrally planned, big companies. Significantly, the Japanese computer industry, which modeled itself on IBM, is in difficulty today.

So what’s ahead for IBM? Tough times but watch for signs of life. IBM will be selling more services, software and equipment, such as semiconductors and disk drives, to non-IBM customers. Divisions will operate more independently.

But IBM won’t split into separate companies because that would undermine the great strength of its global reach. IBM alone can offer customers solutions on a worldwide basis.

Still, it will have write-offs as it closes facilities and cashiers employees. The next few years will be no picnic at IBM.

But the company also was in trouble in 1914, when it was known as the Computing-Tabulating-Recording Co. At that time, it brought in a new chief executive named Thomas Watson, who was more interested in customers than machines. His business insight then took IBM a long way--and could again.