TECHNOLOGY

Fighting the blues

A shakeup at IBM leads to lower prices

BRENDA DALGLISH April 13 1992
TECHNOLOGY

Fighting the blues

A shakeup at IBM leads to lower prices

BRENDA DALGLISH April 13 1992

Fighting the blues

TECHNOLOGY

A shakeup at IBM leads to lower prices

John Akers and William Gates have a shared history—some of it strained. As chairman of Armonk, N.Y.-based computer giant International Business Machines Corp. (IBM), Akers hired Gates’s Microsoft Corp., in Redmond, Wash., to develop what quickly became the most successful new software of the 1980s: the operating system that manages the vast majority of all personal computers. But the companies diverged over the best way to develop the next generation of software. Now, the two executives most often encounter each other on the neutral ground of the United Way campaign: both men sit on the charity’s American board of directors.

Gates says that their relationship is a civil one. But his opinion of his rival’s latest product is markedly uncharitable. When IBM unveiled its newest generation of personal-computer software last week, the blunt-spoken Gates declared: “IBM still can’t do it right. So far, they are really humiliating themselves.”

That view is plainly partisan: Microsoft’s own Windows program is the main competition to IBM’s new software product. Still, there is little doubt that the company whose initials were once synonymous with computers has fared badly in recent years.

After setting the standard for personal computers in the early 1980s, IBM watched as its sales gave way to socalled clones—similar products manufactured more cheaply by smaller, nimbler competitors. Worldwide last year, IBM, which currently employs 344,000 people, lost $3.3 billion on revenues of $77 billion, its worst result since 1946. But the company, which has won four Nobel Prizes for Clerks its research accomplishments over the years, is fighting back—with results that should benefit Canadian consumers. In addition to last week’s release of the latest version of its OS/2 program, designed to make computers more versatile and easier to use, IBM is also working to shed its image as a stodgy, overstaffed corporation by, among other things, slashing prices on many of its existing computer models, moving to deliver new products more quickly to market and opening its first discount sales outlet in North America next month, in Toronto.

IBM has lost ground to more aggressive competitors in several key market areas. Although

the company introduced its first personal computer several years after other makers introduced their own models, IBM’s design quickly became the dominant one. Buyers wanted the reliability that they associated with IBM’s reputation. Within three years, however, IBM’s share of the personal-computer market began falling, as competitors introduced a growing number of clones. Modelled on IBM’s design and able to run software made for IBMs, the clones sold for 30 to 40 per cent less than IBM’s machines. Acknowledged William Etherington,

president of Markham, Ont.-based IBM Canada Ltd.: “In the personal-computer industry, you can make the product cheaper, faster, relentlessly, year after year after year. And the barriers to entry are low—anyone can start in a garage putting together bits and pieces and make a personal computer.” As a result, according to Etherington, “We have 50,000 competitors in the computer industry today.” Those competitors, moreover, are biting off an ever larger chunk of IBM’s market, leaving the U.S.-based giant with 17 per cent of personalcomputer sales by revenue in 1990, the last year for which statistics are available—down

dramatically from 90 per cent in the early 1980s.

Meanwhile, the evolution of increasingly powerful small computers, either standing alone or connected in networks, has eroded the demand for large mainframe computers—long an IBM strength. In 1991, IBM sold $18 billion in large computer processors, holding about 40 per cent of the world market. That was barely half of the 70-per-cent market share the company claimed 10 years ago. The decline in demand for such massive mainframe computers was one factor that contributed to IBM’s $4.8-billion overall drop in sales last year compared with 1990, when the company earned a $7-billion profit on revenues of $82 billion.

IBM’s performance in Canada reflected its worldwide decline. Evans Research Corp., a Toronto computer marketing research company, estimated that in 1989 IBM had the largest share of the Canadian market for personal computers, selling 139,000 units, or almost 18 per cent of all those sold. Its leading competitor, Cupertino, Calif.-based Apple Computer Inc., sold 75,900 personal computers—or al-

most 10 per cent of the market. By last year, according to Evans, IBM’s sales had declined to 105,400 units, while Apple, which had cut prices and introduced more low-end products, had increased its sales to nearly the same volume. Although both companies remain market powers with 10.6 per cent of total sales each, Apple’s market share has increased significantly, while IBM’s has tumbled—trends that Evans forecasts will continue this year.

In an attempt to diagnose what was wrong with the company’s business strategy, IBM Canada’s Etherington last year launched an imaginative inquiry. Code-naming his project

Frankenstein Co., after the fictional 19th-century scientist who was destroyed by the monster that he created, Etherington instructed his executives to analyse what they considered to be the best companies competing against IBM in each of its main markets. Their conclusion: IBM had more employees than its best competitors and had to radically revise its operating style. Indeed, the 78-year-old IBM carries a lot of bulk. Its $ 7-billion annual research budget alone is larger than some countries’ gross domestic product. As well, in the rapidly evolving computer industry, products often move from state-of-the art to obsolete in a matter of a few years. In a climate of quickly changing consumer preference, the size and bureaucracy that, along with its color scheme, earned IBM the nickname of Big Blue have become distinct liabilities. In response, Akers has launched a concerted drive to shake up—and trim down—his company.

The first changes are already evident. Five of the company’s top executives, including Akers, took pay cuts last year amounting to 40 per cent of their compensation. In Akers’s case, his total compensation fell to $1.88 million in 1991 from $3.12 million the year before. Meanwhile, IBM has begun to shed employees: by the end of 1992, Akers plans to have reduced IBM’s workforce to about 330,000 people—80,000 fewer than worked for the company in 1986. And the company has begun paring some non-essential

indulgences, including the private golf and country club that IBM Canada has maintained near Toronto since 1942. The course is now up for sale. Declared Etherington: “It is a humbling experience to go through these difficulties. But I tell our employees that in 75 days we have made more changes than we did in the previous 7 5 years.”

For consumers, the most obvious benefit from IBM’s restructuring is apparent on price tags for the company’s products. Last month, it announced that the popular PS/2 Model 55SX personal computer was reduced in price to $1900 from $3255. In addition, IBM also announced recently that it will soon be selling a clone of its own—probably a machine purchased from an Asian manufacturer that will not carry an IBM logo and will be aimed at the low end of the market. In Toronto, meanwhile, the company plans to open its first warehouse outlet next month, modelled on the successful approach taken by such newcomers as Dell Computer Corp. of Austin, Texas.

The release last week of IBM’s latest software reflects both the company’s longstanding problems and its new resolve. After missing several earlier target dates for the unveiling of the revised 2.0 version of its OS/2 software, IBM cut the product’s price tag by more than half, to $199. Despite that, OS/2 2.0 faces an uphill battle in challenging its main competitor: Microsoft’s Windows 3.1.

Both products serve similar purposes. Employing a so-called graphic user interface, they allow operators to give commands to their machines by selecting options from an onscreen menu with the aid of a hand-held control known as a “mouse,” rather than by memorizing dozens of cryptic letter combinations that must be entered on a keyboard. In addition, both products allow users to run several computer applications, including word processing, graphics and spreadsheet accounting, at the same time on a single machine.

The similarities are no accident: Microsoft worked with IBM to develop the original edition of OS/2. But in 1989, the two companies began to disagree about the approach to the innovative software. Microsoft’s original Windows, meanwhile, has outsold the initial version of IBM’s OS/2 by an overwhelming 9 to 1, making it the most successful—and profitable—software in computer history. Despite that sales record, however, many sophisticated computer users prefer the latest version of OS/2 to the new Windows. Said Colin Shaw, of AMS Management Systems Canada Inc. in Ottawa: “Sure, Windows has sold a lot of copies, but most of them went to hobbyists who use them more as toys than as a business tool.”

That may not be enough to help IBM. In the fast-moving computer industry, the product that gets to the market first with acceptable, if not necessarily superior, quality is often the one that emerges as dominant. While Curt Rohrman, a financial analyst with New York City-based securities dealer First Boston, said that he believes that IBM’s OS/2 is probably the better product, he added: “That is not the important variable right now.” Instead, says Rohrman, “It is user perception: which product has the momentum, which has the marketing hype.” And on that front, despite its venerable history, IBM seems to have more work to do.

BRENDA DALGLISH