BUSINESS

AGAINST THE WALL

JOHN DALY December 28 1992
BUSINESS

AGAINST THE WALL

JOHN DALY December 28 1992

AGAINST THE WALL

BUSINESS

JOHN DALY

Like many career employees of International Business Machines Corp., the world’s largest computer maker, William Etherington acknowledges that no one at the company ever promised him lifetime job security—it was something that the workers used to take for granted. Indeed, when Etherington, now the president of IBM Canada Ltd., boarded a train in London, Ont., in May, 1964, to join the Toronto-based company as a marketing trainee, there were many other things about the company that he could take for granted: IBM’s dominance of worldwide computer markets, the chance of regular promotions through its complex management hierar-

IBM’S EMBATTLED CHAIRMAN WIELDS THE AXE IN A BID TO REVERSE THE COMPUTER GIANT’S SAGGING FORTUNES

chy—and the need to buy his first conservative dark suit. But last week, IBM’s chairman, John Akers, announced that the Armonk, N.Y-based giant is m the midst of the worst crisis in its 81year history and that it may have to lay off large numbers of employees for the first time ever. In Toronto, Etherington, 51, said that IBM Canada and its 10,000 employees will have to bear part of that burden. Declared Etherington: “The objective is to get through this hard time and simply survive.”

In separate sessions last week, both Akers and Etherington openly acknowledged that many of IBM’s traditional business strategies are outdated and that more difficult days lie

ahead. They predicted that sales of IBM’s large mainframe computers, once highly profitable, will continue to decline dramatically. At the same time, the company will face more intense competition from low-cost rivals in markets for personal computers and other smaller systems. As a result, Akers announced that IBM will reduce its worldwide workforce by

25.000 employees in 1993 to slash costs. Announcements about the impact in Canada are pending.

Since Akers succeeded John Opel as company chairman in 1986, he has already reduced IBM’s workforce by

100.000 to 300,000 employees, including the elimination of 2,800 jobs in Canada, by offering lucrative buy-outs and early-retirement packages. But now, both Akers and Etherington say that it may be necessary to violate the company’s tradition of no layoffs to achieve further reductions. As well, Akers announced plans to cut development spending by $1.3 billion next year and to close and sell off unused

g factory and office space.

I Even after those cuts, how5 ever, Akers said that IBM’s J earnings prospects for 1992 " and 1993 are grim. To pay for the staff reductions, Akers announced that the company will take a $7.7-billion pretax charge on its earnings in the fourth quarter of 1992. IBM lost $3.6 billion in 1991—its first loss ever. Based on Akers’s projections, analysts predicted that the company will likely lose $6 billion this year, the largest loss ever by any North American corporation. That announcement provoked a massive sell-off of IBM stock—a clear vote of nonconfidence from investors. IBM’s shares, which traded as high as $117.50 on the Toronto and New York Stock Exchanges as recently as July, plummetted by $15.50 to $65 in the two days following Akers’s news conference, before closing the week at $66.63. While Akers’s plans for further reductions were unclear last week, Etherington offered some insight into what lies ahead in Canada. He said that IBM Canada’s software development laboratory in Toronto, which employs 1,500 people, and its components plant in Bromont, Que., likely would not be affected. But he added that a power system and memory components plant in Toronto, which employs 1,000 workers, “will have to work very hard to stay competitive.” Still, IBM Canada is much healthier than its giant U.S.-based parent. The company lost $19 million last year on $6.2 billion in revenues, and last week Etherington forecast a modest profit for this year.

But in Canada, as in other countries, IBM is

under siege on many fronts. Until the early 1980s, the company dominated the market for large central mainframe computers, which were the only systems used by most businesses. The company introduced new models at its own pace, its profit margins were fat and it could count on lucrative repeat orders and servicing contracts. But over the past decade, many businesses have started to replace the mainframes—usually housed in special climate-controlled rooms—with networks of computers, powered less expensively on the user’s floor, and the market for home personal computers has also greatly expanded. Although IBM is a major competitor in those markets too, it is battling rival personal computer manufacturers including Apple Computer Inc. and Compaq Computer Corp., while it has ceded leadership in the personal computer software market to giant Microsoft Corp. of Redmond, Wash. That intense competition is continually driving down prices and accelerating the pace of technological change.

For years, however, industry analysts have said that IBM’s hierarchical and bureaucratic corporate structure—and especially its fully integrated operations—have impaired its performance in new markets. Critics say that companies that try to do everything are now obsolete and that the current worldwide economic slump is accelerating the decline of companies that adhere to that model.

Last week, Akers and Etherington conceded that many of IBM’s practices are old-fashioned. But they added that IBM has revamped its operations dramatically over the past two years and will continue to do so. Etherington said that IBM representatives are focused on providing solutions to customers even if that means selling some hardware and software made by other companies. Indeed, last June, the company introduced a brand of low-priced personal computers, the Ambra, assembled in Asia from mostly non-IBM components.

In Canada, Etherington said that IBM has already reduced its manufacturing floor space by 40 per cent over the past three years. As well, almost 1,000 of IBM Canada’s 6,000 marketing and services representatives now work from home or their client’s offices, linked to company computers by telephone lines. That has allowed the company to reduce its office space. IBM is also switching to a Japanese-style team organization in many of its operations, eliminating many of the layers of managers. He said that overall, there is now one manager for every 12 IBM Canada employees, compared with one for every six in 1989.

So far, however, those and other reforms have failed to appease increasingly disgruntled investors. The pressing question for IBM now is whether its restive shareholders, inspired by the recent ouster of General Motors Corp. chairman Robert Stempel, will allow the old management team enough time to reorganize its company.

JOHN DALY in Toronto