A New IBM Shows It Too Can Be Nimble : Computers: The new PC operation has cut prices, quickened product roll-outs, regained market share, won praise and even made money.
The library at IBM’s labyrinthine complex here features the latest books on management trends and corporate restructuring. Someone must be reading them.
Facing an unprecedented loss of market share, IBM in the last eight months has overhauled its slumping personal computer business, which revolutionized the industry from this tony Atlantic coast resort town more than a decade ago.
International Business Machines Corp. in September reorganized its PC operation--which analysts estimate had been losing up to $1 billion a year--as a separate entity with virtual independence.
The new IBM Personal Computer Co. has cut prices, quickened product roll-outs, regained market share, won praise for new models and even made money in one of American industry’s most cutthroat businesses. Analysts say the change has been just short of remarkable for lumbering IBM.
The transformation also demonstrates how IBM, which has suffered big declines in core businesses such as PCs and mainframe computers, is addressing mistakes that began spiraling in the late 1980s. Change is accelerating under new Chairman Louis V. Gerstner Jr.
“Certainly no other company has made the (personal computer) turnaround IBM has. They had a lot to learn in a short time,” said Richard Zwetchkenbaum, a PC analyst with market researcher International Data Corp. in Framingham, Mass. “But they have a long way to go.”
In practice, IBM so far merely has recaptured some customers who defected to makers of IBM “clones,” or lower-cost copies, such as Compaq Computer Corp. and Dell Computer Corp.
By lowering reliance on high-priced, sophisticated PCs, IBM has sacrificed profit. Analysts and IBM executives say there is room to reduce costs, long a problem companywide. PC employees remain concerned about their jobs as IBM continues slashing its payroll.
Perhaps most important, some industry executives believe that IBM has been overzealous in its PC drive. They say the company’s new brand lines could cannibalize one another; the fear already has aroused internal concern.
Also, IBM is venturing into what for it are new sales channels such as an 800 number and a catalogue, frustrating dealers who can’t meet existing demand.
“There’s a great deal of customer dissatisfaction now because they can’t get the machine,” said Katie Pushor, product marketing vice president for MicroAge Inc., a nationwide PC reseller. “We have customers that want to buy IBM again--for the first time in years, really--but we can’t deliver it.”
Too much demand is a welcome problem for IBM. Too little was strangling its PC operation. IBM’s share of the U.S. PC market fell to 12% last year from 27% in 1985, says International Data Corp. Worldwide market share bottomed out around 9% last September.
To reverse that trend, IBM shattered its existing PC structure. In its place, the company has tried to resurrect the creative spirit and freedom of the “Acorn” project that developed IBM’s first personal computer in 1981. As IBM’s PC business grew, it began to resemble the rest of the company: thick with bureaucracy and resistant to change.
The conversion was typified by IBM’s shifting top PC management in the mid 1980s to Somers, N.Y., near IBM headquarters in Armonk. Even today, that relic of the PC unit’s structure remains.
“Our natural tendencies of conservatism sucked it back into the motherhood,” said James G. Turner, an Acorn team member who now heads the high-end PS-2 line in Boca Raton.
IBM’s PC restructuring began by combining manufacturing and distribution. In the old model, PC marketing was left to the parent, placing it at the mercy of the huge, companywide operation. As a result, IBM PC makers didn’t necessarily have a clear idea of what customers wanted.
Now, Robert Corrigan, president of IBM PC Co., controls manufacturing, marketing, distribution, development and public relations. Executives crow that the “flatter” organizational structure--a trend at many big companies--has eliminated layers of sclerotic bureaucracy.
Corrigan said of PC executives: “They don’t need to check with anybody else. They don’t need anybody’s approval. They do it on their own.”
The laboratory for change has been IBM’s expansive, Pentagon-like research and development facility in Boca Raton with a confusing coding system of colors and numbers only an engineer could appreciate.
Among the steps toward improving morale and efficiency: axing a dress code that cultivated the image of corporate IBM and eliminating meetings that crippled action on pricing and development. IBM is rolling out new PC models as fast as every six months, compared to an old 36- to 40-month product cycle.
“We’ve seen a great change in motivation,” said Ozzie Osborne, who heads worldwide operations for the ValuePoint line of PC clones. “Decisions are made quickly. We can respond to our competitors quickly.”
When Compaq cut prices a day before IBM unveiled the ValuePoints in October, IBM reacted overnight. Six people made a decision to slash prices, which wasn’t ratified by IBM corporate executives as in the old days.
In designing its new energy-saving “green PC,” IBM needed to pick a color for a stripe encircling the base. Instead of waiting for corporate approval, a small group of PS-2 marketing and manufacturing heads reviewed pictures and decided in a 30-minute conference call on an environmentally correct forest green; customers said a blue strip reminded them of “the old IBM.”
To offer a range of models and prices, IBM has created “brand teams” around products--PS-1, for home and small business users; low-priced ValuePoints, for companies; more sophisticated and expensive PS-2s; mobile computers, led by the acclaimed ThinkPad notebooks, and servers, which give PCs access to bigger information sources.
IBM’s old strategy--centered on the pricey PS-2--neglected corporate customers that have lower performance needs and tight budgets. Now, surging demand for ValuePoints helped push up IBM PC unit sales 40% in the first quarter, when the PC operation made an undisclosed amount of money.
But some analysts say the brand strategy could prove troubling. The Boston Consulting Group, which IBM hired to analyze the PC operation, noted in a report that “the overlap between the brands is confusing and could blur segment ownership responsibility.” In response, Corrigan asked in a memo: “Are our customers confused?”
IBM is expected to add to the mix in June, introducing in the United States a low-priced line known as Ambra manufactured in Singapore and now sold in Europe without the IBM logo.
IBM defends the lineup. “What we are finding . . . is really our customers aren’t confused about it,” said Madeline Mansfield, an IBM spokeswoman. “We tried it with a one-brand approach for too long and look what happened to us.”
Customers are buying, but outside suppliers can’t provide IBM with parts fast enough, causing record backlogs. IBM is telling dealers demand is two to three times higher than it had forecast. For instance, the company has about $1 billion in unfilled ThinkPad orders. One reason: IBM can’t get a 5-cent part for the computer’s innovative cursor tracking device.
More broadly, however, the PC changes reflect IBM’s wider realities. Under Gerstner, IBM is trying to return to profitability after two years of losses and a plunge in its stock price. To do that, IBM is conceding to market forces after years defending the prestige of its own products and people.
Take the PC unit’s decision to sell through a toll-free number and catalogue, a mass-market break with tradition. IBM will soon offer through the catalogue hardware and software made by other companies. It also is building computers to customer specification, another new step.
“They’re not pushing products on the market. They’re letting demand pull,” said Richard Schutte, a research associate at Sanford C. Bernstein & Co.
Pricing is another key area. A year ago, IBM PCs cost up to 90% more on average than cut-rate competitor Gateway 2000, Schutte said; Compaq’s machines, by comparison, were only 65% higher than Gateway’s. Today, IBM prices are about 20% above the cheapest clones and within 5% of Compaq on most models.
“What we see is a competitive market, and IBM has selected to be a dog in the hunt,” said Jack Cooper, chief information officer at Joseph E. Seagram & Sons Inc., an IBM customer.
Corrigan admits that the reorganization is incomplete. He said IBM PC Co. needs to reduce costs--in areas such as procuring parts and processing and shipping orders--to compensate for falling computer prices.
A big concern for IBM and other PC makers is that demand will weaken, creating low sales along with already low margins. For a segment that just regained profitability, that could hurt.
IBM has said the PC unit is a potential candidate to spin off as an independent company, possibly with its own stock. For now, Corrigan’s goal is to make it healthy enough to stand alone. But the more successful he is, the harder it will be for IBM to abandon a field it helped pioneer.
