Like Continental Air, IBM seemed to be on a roller-coaster, with the major difference that it was so much bigger and had so many years of industry domination. The common notion is that the bigger the firm, the more difficult to turn it around, just as a giant ocean liner needs far more room to maneuver to avoid catastrophe than a smaller vessel.
On January 19, 1993, International Business Machines Corporation reported a record $5.46 billion loss for the fourth quarter of 1992, and a deficit for the entire year of $4.97 billion, the biggest annual loss in American corporate history. (General Motors recorded a 1991 loss of $4.45 billion, after huge charges for cutbacks and plant closings. And Ford Motor Company reported a net loss of more than $6 billion for 1992, but that was a non-cash charge to account for the future costs of retiree benefits.) The human cost, as far as employment was concerned, was also consequential; some 42,900 had been laid off in 1992, with an additional 25,000 planned to go in 1993. In its fifth restructuring since 1985, seemingly endless rounds of job cuts and firings had eliminated 100,000 jobs in less than a decade. Not surprisingly, IBM's share price, which was above $100 in the summer of 1992, closed at an 11-year low of $48.375. Yet IBM had long been the ultimate blue-chip company, reigning supreme in the computer industry. How could its problems have surfaced so suddenly and so violently?
"They hired my father to make a go of this company in 1914, the year I was born," said Thomas J. Watson Jr. "To some degree I've been a part of IBM ever since."[67] Watson took over his father's medium-sized company in 1956 and built it into a technological giant. Retired for almost 19 years by 1992, he now was witnessing the company in the throes of its greatest adversity.
IBM had become the largest computer maker in the world. With its revenues steadily growing since 1946, it had become the bluest of blue-chip companies. It had 350,000 employees worldwide and was one of the largest U.S.-based employers. Its 1991 revenues had approached $67 billion, and while profits had dropped some from the peak of $6.5 billion in 1984, its common stock still commanded a price-earnings ratio of over 100, making it a darling of investors. In 1989, it ranked first among all U.S. firms in market value (the total capitalization of common stock, based on the stock price and the number of shares outstanding), fourth in total sales, and fourth in net profits.[68]
In Watson's day, IBM was known for its centralized decision making. Decisions affecting product lines were made at the highest levels of management. Even IBM's culture was centralized and standardized, with strict behavioral and dress codes. For example, a blue suit, white shirt, and dark tie were the public uniform, and IBM became widely known as "Big Blue."
One of IBM's greatest assets was its research labs, by far the largest and costliest of their kind in the world, with staffs that included three Nobel Prize winners. IBM treated its research and development function with tender, loving care, regularly budgeting 10 percent of sales for this forward-looking activity. In 1991, for example, the R & D budget was $6.6 billion.
The past success of IBM and future expectations based on its seeming stranglehold over the technology of the future made it a darling of consultants, analysts, and market researchers. Management theorists, all the way from Peter Drucker to Tom Peters (of In Search of Excellence fame), lined up to analyze what made IBM so good. And the business press regularly produced articles of praise and awe of IBM.
Alas, the adulation was to change abruptly by 1992. Somehow, insidiously, IBM had gotten fat and complacent over the years. IBM's problems, however, went deeper, as we will explore in the next section.
The great IBM debacle of 1992 began in the early 1980s with a questionable management decision. Perhaps the problems were more deep-rooted than any single decision; perhaps they were more a consequence of the bureaucracy that often typifies behemoth organizations (Sears and General Motors faced somewhat similar worsening problems), growing layers of policies, and entrenched interests.
In the early 1980s, two little firms, Intel and Microsoft, were upstarts, just emerging in the industry dominated by IBM. Their success by the 1990s can be largely attributed to their nurturing by IBM. Each got a major break when it was "anointed" as a key supplier for IBM's new personal computer (PC). Intel was signed on to make the chips, and Microsoft, the software. The aggressive youngsters proceeded to set standards for successive PC generations, and in the process wrested control over the PC's future from IBM. And the PC was to become the product of the future, shouldering aside the giant mainframe that was IBM's strength.
As IBM began losing ground in one market after another, Intel and Microsoft were gaining dominance. Ten years before, in 1982, the market value of the stock of Intel and Microsoft combined amounted to about a tenth of IBM's. By October 1992, their combined stock value surpassed IBM's; by the end of the year, they topped IBM's market value by almost 50 percent. See Table 6.1 for comparative operating statistics of IBM, Intel, and Microsoft. Table 6.2 shows the market valuations of IBM, Intel, and Microsoft from 1989 to 1992, the years before and during the collapse of investor esteem.
As the problems of IBM became more visible to the entire investment community, Chairman John Akers sought to institute reforms to turn the behemoth around. His problem—and need—was to uproot a corporate structure and culture that had developed when IBM had no serious competition.
Table 6.1. Growth of IBM and the Upstarts, Microsoft and Intel, 1983–1992 ($ million)
Table 6.2. Market Value and Rank among All U.S. Companies of IBM and the Upstarts, Microsoft and Intel, 1989 and 1992
Rank | Market Value ($ mil) | |||
|---|---|---|---|---|
1989 | 1992 | 1989 | 1992 | |
Source: Forbes Annual Directory Issue, "The Forbes Market Value 500," April 13, 1990, pp. 258–259, and April 26, 1993, p. 242. The market value is the per share price multiplied by the number of shares outstanding for all classes of common stock. | ||||
Commentary: The market valuation reflects the stature of the firms in the eyes of investors. Obviously, IBM has lost badly during this period, while Microsoft and Intel have more than tripled their market valuation, almost approaching that of IBM. Yet IBM's sales were $65.5 billion in 1992, against sales of Microsoft of $3.3 and Intel of $5.8. | ||||
IBM | 1 | 13 | $60,345 | $30,715 |
Microsoft | 92 | 25 | 6,018 | 23,608 |
Intel | 65 | 22 | 7,842 | 24,735 |
A cumbersome bureaucracy stymied the company from being innovative in a fast-moving industry. Major commitments still went to high-margin mainframes, but these were no longer necessary in many situations, given the computing power of desktop PCs. IBM had problems getting to market quickly with the technological innovations that were revolutionizing the industry. In 1991, Akers warned an unbelieving group of IBM managers of the coming difficulties. "The business is in crisis."[69]
He attempted to push power downward, to decentralize some of the decisionmaking that for decades had resided at the top. His more radical proposal was to break up IBM, dividing it into 13 divisions and giving each more autonomy. He sought to expand the services business and make the company more responsive to customer needs. Perhaps most important, he saw a crucial need to pare costs by cutting the fat from the organization.
The need for cost-cutting was evident to all but the entrenched bureaucracy. IBM's total costs grew 12 percent a year in the mid-1980s, while revenues were not keeping up with this growth.[70] Part of the plan for reducing costs involved cutting employees, which violated a cherished tradition dating back to Thomas Watson's father and the beginning of IBM: a promise never to lay off IBM workers for economic reasons.[71] Most of the downsizing was indeed accomplished by voluntary retirements and attractive severance packages, but eventually outright layoffs became necessary.
The changes decreed by Akers would leave the unified sales division untouched, but each of the new product group divisions would act as a separate operating unit, with financial reports broken down accordingly. Particularly troubling to Akers was the recent performance of the personal computer business. At a time when demand, as well as competition, was burgeoning for PCs, this division was languishing. Early in 1992 Akers tapped James Cannavino to head the $11 billion Personal Systems Division, which also included workstations and software.
PCs had been the rising star of the company, despite the fact that mainframes still accounted for about $20 billion in revenues. But in 1990, market share dropped drastically as new competitors offered PCs at much lower prices than IBM; many experts claimed that these clones were at least equal to IBM's PCs in quality. Throughout 1992, IBM had been losing market share in an industry price war. Even after it attempted to counter Compaq's price cuts in June, IBM's prices still remained as much as one-third higher than its competitors' prices. Even worse, IBM had announced new fall models, and this development curbed sales of current models. At the upper end of the PC market, Sun Microsystems and Hewlett-Packard were bringing out more powerful workstations that tied PCs together with mini-and mainframe computers. James Cannavino faced a major challenge in reviving the PC.
Cannavino planned to streamline operations by slicing off a new unit to focus exclusively on developing and manufacturing PC hardware. By so doing, he would cut PCs loose from the rest of Personal Systems and the workstations and software. This, he believed, would create a streamlined organization that could cut prices often, roll out new products several times a year, sell through any kind of store, and provide customers with whatever software they wanted, even if it was not IBM's.[72] Autonomy in these areas was deemed necessary in order to respond quickly to competitors and opportunities, without having to deal with the IBM bureaucracy.
On January 25, 1993, John Akers announced that he was stepping down as IBM's chairman and chief executive. He had lost the confidence of the board of directors. Until mid-January, Akers had been determined to see IBM through its crisis, at least until he reached IBM's customary retirement age of 60, which would be December 1994. But the horrendous $4.97 billion loss in 1992 changed that, and investor and public pressure mounted for a top management change. The fourth quarter of 1992 was especially shocking, brought on by weak European sales and a steep decline in sales of minicomputers and mainframes. Now IBM's stock sank to a 17-year low, below 46.
Other aspects of the operation also accentuated IBM's fall from grace: most notably, the jewel of its operation, its mainframe processors and storage systems.
For 25 years IBM had dominated the $50 billion worldwide mainframe industry. In 1992, overall sales of such equipment grew at only 2 percent, but IBM experienced a 10 to 15 percent drop in revenue. At the same time, its major mainframe rivals, Amdahl Corp. and Unisys Corp., had respective sales gains of 48 percent and 10 percent.[73]
IBM was clearly lagging in developing new computers that could out-perform the old ones, such as IBM's System/390. Competitors' models exceeded IBM's old computers not only in absolute power but in prices, selling at prices of a tenth or less of IBM's price per unit of computing. For example, with IBM's mainframe computers, customers paid approximately $100,000 for each MIPS, or the capacity to execute 1 million instructions per second, this being the rough gauge of computing power. Hewlett-Packard offered similar capability at a cost of only $12,000 per MIPS, and AT&T's NCR unit could sell a machine for $12.5 million that outperformed IBM's $20 million ES/9000 processor complex.[74]
In a series of full-page advertisements appearing in the Wall Street Journal and other business publications, IBM defended the mainframe and attacked the focus on MIPS:
One issue surrounding mainframes is their cost. It's often compared using dollars per MIPS with the cost of microprocessor systems, and on that basis mainframes lose. But . . . dollars per MIPS alone is a superficial measurement. The real issue is function. Today's appetite for information demands serious network and systems management, around-the-clock availability, efficient mass storage and genuine data security. MIPS alone provides none of these, but IBM mainframes have them built in, and more fully developed than anything available on microprocessors.[75]
On March 24, 1993, 51-year-old Louis V. Gerstner Jr. was named the new chief executive of IBM. The two-month search for a replacement for Akers had captivated the media, with speculation ranging widely. The choice of an outsider caught many by surprise. Gerstner was chairman and CEO of RJR Nabisco, a food and tobacco giant, but Nabisco was a far cry from a computer company. And IBM had always prided itself on promoting from within—most IBM executives, including John Akers, were life-long IBM employees. Not all analysts supported the selection of Gerstner. While most did not criticize the board for going outside IBM to find a replacement for Akers, some questioned going outside the computer industry or other high-tech industries. Geoff Lewis, senior editor of Business Week, fully supported the choice. He had suggested the desirability of bringing in some outside managers to Akers in 1988:
Akers seemed shocked—maybe even offended—by my question. After a moment, he answered "IBM has the best recruitment system anywhere and spends more than anybody on training. Sometimes it might help to seek outsiders with unusual skills, but the company already had the best people in the world."[76]
See the Issue Box: Should We Promote from Within? for a discussion of this. (See Chapter 3 for another discussion.)
Later in this chapter we will describe and comment on the great comeback engineered by Gerstner. But for now, let us examine the factors leading to the decline in IBM's fortunes.
In examining the major contributors to IBM's fall from grace, we will analyze the predisposing or underlying factors, resultants, and controversies.
As IBM grew with its success, it became more and more bureaucratic. One author described it as big and bloated. Another said it had an "inward-looking culture that kept them from waking up on time."[77] Regardless of phraseology, by the late 1980s IBM could not bring new machines quickly into the market, nor was it able to make the fast pricing and other strategic decisions of its smaller competitors. Too many layers of management, too many vested interests, a tradition-ridden mentality, and a gradually emerging contentment with the status quo shackled it—this in an industry that some thought to be mature, but which in reality was gripped by burgeoning change. The cumbersome IBM found itself at a competitive disadvantage compared with smaller, hungrier, more aggressive, and above all, more nimble firms. Impeding every effort to make major changes effective was the typical burden facing all large and mature organizations: resistance to change. The Information Box: Resistance to Change discusses this phenomenon.
Overly Centralized Management Structure
Often related to a cumbersome bureaucratic organization is rigid centralization of authority and decision making. Certain negative consequences may result when all major decisions have to be made at corporate headquarters rather than down the line. Decision making is necessarily slowed, because executives feel they must fully investigate all aspects, and, not being personally involved with the recommendation, they may be not only skeptical but critical of new projects and initiatives. More than this, the enthusiasm and creativity of lower-level executives may be curbed by the typical conservatism of a higher-management team divorced from the intimacy of the problem or the opportunity. The motivation and morale needed for a climate of innovation and creativity is stifled under the twin bureaucratic attitudes "Don't take a chance" and "Don't rock the boat."
The Three Cs Mindset of Vulnerability
Firms that are well entrenched in their industry and have dominated it for years tend to fall into a mindset that leaves them vulnerable to aggressive and innovative competitors. (We will encounter this syndrome again in Chapter 10 with Boeing. But it bears repeating.)
The "three Cs" that are detrimental to a front-runner's continued success are:
Complacency
Conservatism
Conceit
Complacency is smugness—a complacent firm is self-satisfied, content with the status quo, no longer hungry and eager for growth. Conservatism, when excessive, characterizes a management that is wedded to the past, to the traditional, to the way things have always been done. Conservative managers see no need to change because they believe nothing is different today (e.g., "Mainframe computers are the models of the industry and always will be"). Finally, conceit reinforces the myopia of the mindset: conceit for present and potential competitors. The beliefs that "we are the best" and "no one else can touch us" can easily permeate an organization that has enjoyed success for years.
The three Cs mindset leave no incentive to undertake aggressive and innovative actions, and contributes to growing disinterest in such important facets of the business as customer relations, service, and even quality control. Furthermore, it inhibits interest in developing innovative new products that may cannibalize—that is, take business away from—existing products or disrupt entrenched interests. (We will discuss cannibalization again in more detail shortly.)
Over-Dependence on High-Margin Mainframes
The mainframe computers had long been the greatest source of market power and profits for IBM. But its conservative and tradition-minded bureaucracy could not accept the reality that computer power was becoming a desktop commodity. Although a market still existed for the massive mainframes, it was limited and had little growth potential; the future belonged to desktop computers and workstations. And here IBM, in a lapse of monumental proportions, relinquished its dominance. First there were the minicomputers, and these opened up a whole new industry, one with scores of hungry competitors. But the cycle of industry creation and decline started anew by the early 1980s as personal computers began to replace minicomputers in defining new markets and fostering new competitors. While the mainframe was not replaced, its markets became more limited, and cannibalization became the fear. See the Information Box: Cannibalization.
Neglect of Software and Service
At a time when software and service had become ever more important, IBM still had a fixation on hardware. In 1992, services made up only 9 percent of IBM's revenue. Criticism flowed:
Technology is becoming a commodity, and the difference between winning and losing comes in how you deliver that technology. Service will be the differentiator. As a customer, I want a supplier who's going to make all my stuff work together. The job is to understand the customer's needs in detail.[78]
In the process of losing touch with customers, the sales force had become reluctant to sell low-margin open systems if it could push proprietary mainframes or minicomputers.
Bloated Costs
As indications of the fat that had insidiously grown in the organization, some 42,900 jobs were cut in 1992, thankfully all through early-retirement programs. An additional 25,000 people were expected to be laid off in 1993, some without the benefit of early-retirement packages. Health benefits for employees were also scaled down. Manufacturing capacity was reduced 25 percent, and two of three mainframe-development labs were closed. But perhaps the greatest bloat was R & D.
Diminishing Payoff of Massive R & D Expenditures
As noted earlier, IBM spent heavily on research and development, often as much as 10 percent of sales (see Table 6.3). Its research labs were by far the largest and costliest of their kind in the world.
IBM labs were capable of inventing amazing things. For example, they developed the world's smallest transistor, 1 / 75,000th the width of a human hair. Somehow, with all these R & D resources and expenditures, IBM lagged in transferring its innovation to the marketplace. The organization lacked the ability to quickly translate laboratory prototypes into commercial triumphs. Commercial R & D is wasted without this.
No executive has a perfect batting average of good decisions. Indeed, most executives are doing well if they bat more than 500—in other words, make more good decisions than bad decisions. But, alas, decisions are all relative. Much depends on the importance, the consequences, of these decisions.
IBM made a decision of monumental long-term consequences in the early 1980s. At that time, IBM designated two upstart West Coast companies to be the key suppliers for its new personal computer. In doing so, it gave away its chances to control the personal computer industry. Over the next ten years, each of these two firms would develop a near-monopoly—Intel in microprocessors, and Microsoft in operating-systems software. Instead of keeping such developments proprietary (i.e., within its own organization), IBM, in an urge to save developmental time, gave these two small firms a golden opportunity, which both grasped to the fullest. By 1992, Intel and Microsoft had emerged as the computer industry's dominant firms.
Table 6.3. IBM Research and Development Expenditures as a Percent of Revenues, 1987–1991
1987 | 1988 | 1989 | 1990 | 1991 | |
|---|---|---|---|---|---|
Source: Company annual reports. | |||||
Commentary: Where is the significant contribution from about 10 percent of sales budgeted for R&D? | |||||
Revenues ($ million) | $54,217 | $59,681 | $62,710 | $64,792 | $67,045 |
Research, development, and engineering costs | 5,434 | 5,925 | 6,827 | 6,554 | 6,644 |
Percent of revenues | 10.0% | 9.9% | 10.9% | 10.1% | 9.9% |
The decision still is controversial. It saved IBM badly needed time in bringing its PC to market, and as computer technology became ever more complex, not even IBM could be expected to have the ability and resources to go it alone. Linking up with competitors offers better products and services and a faster flow of technology today, and seems the wave of the future.
Former IBM CEO Thomas Watson Jr. has criticized his successors Frank Cary and John Opel for phasing out rentals and selling the massive mainframe computer outright. Originally, purchasers could only lease the machines, thus giving IBM a dependable cushion of cash each year ("my golden goose," Watson called it.)[79] Doing away with renting left IBM a newly volatile business just as the industry position began worsening. John Akers, newly installed as CEO, was thus left with a hostile environment without the cushion or support of steady revenues coming from rentals, according to Watson's argument. But the counter-position holds that selling brought needed cash quickly into company coffers. Furthermore, it was unlikely, given the more competitive climate that was emerging in the 1980s, that big customers would continue to tolerate the leasing arrangement when they could buy their machines, if not from IBM, then from another supplier whose machines were just as good or better.
Breaking Up IBM
The general consensus of management experts favored Akers's reforms, which broke up Big Blue into 13 divisions and gave them increasing autonomy—even to the point that shares of some of the new Baby Blues might be distributed to stockholders. The idea was not unlike Japan's keiretsu, in which alliances of substantially independent companies with common objectives seek and develop business individually.
The assumption in favor of such breaking up is that the sum of the parts is greater than the whole, so that autonomy and motivation will bring more total revenues and profits. But these hypothesized benefits are not assured. At issue is whether the good of the whole would be better served by suboptimizing some business units—that is, by reducing the profit maximizing of some units in order to have the highest degree of coordination and cooperation. Asking disparate units of an organization to pursue their own individual profit maximization plants the seeds of intense intramural competition, with cannibalization and infighting likely. Is the whole better served by a less intensely competitive internal environment?
Louis Gerstner took command in March 1993. The company, as we have seen, was reeling. In a reversal of major proportions, he brought IBM back to record profitability. Table 6.4 shows the statistics of what seemed to be a sensational turnaround. In 1994, the company earned $3 billion, its first profitable year since 1990. Perhaps of greater significance, compared with the previous year this represented a profit swing of $11 billion. And revenues grew for the first time since 1990. Annual expenses were reduced by $3.5 billion, some 15 percent. Equally important, 1994 finished with financial strength: IBM had more than $10 billion in cash, and basic debt was reduced by $3.3 billion. Of greater importance to stockholders, IBM stock nearly tripled in price, racing from a 1993 low of 40 to a high of 114 on August 17, 1995.
Table 6.4. IBM's Resurgence under Gerstner, 1993–1995
1993 | 1994 | 1995 | |
|---|---|---|---|
(millions of dollars) | |||
Source: Company annual reports. | |||
Commentary: In virtually all measures of performance, IBM made a significant turnaround from 1993 to 1995. Note in particular the decrease in debt and the great profit turnaround. | |||
Revenue | $62,716 | 64,052 | $71,940 |
Net Earnings (loss) | (8,101) | 3,021 | 4,178 |
Net Earnings (loss) per Share of Common Stock | (14.22) | 5.02 | 7.23 |
Working Capital | 6,052 | 12,112 | 9,043 |
Total Debt | 27,342 | 22,118 | 21,629 |
Number of Employees | 256,207 | 219,839 | 225,347 |
By all such performance statistics, Gerstner had done an outstanding job of turning the behemoth around. At first there had been doubters. For the most part, their skepticism was rooted in the notion that Gerstner was not aggressive enough, that he did not tamper mightily with the organizational structure of IBM. For example, a 1994 Fortune article questioned: "Is He Too Cautious to Save IBM?" The article went on to say, "After running IBM for more than a year and a half, CEO Lou Gerstner has revealed himself to be something other than the revolutionary whom the directors of this battered and demoralized enterprise once seemed to want . . . he seems to be attempting a conventional turnaround: deep-cleaning and redecorating the house rather than gutting and renovating it."[80] The article acknowledged the "surprisingly good" results, but attributed them to luck: "Unexpectedly high demand for mainframe computers has given the company temporary respite from the inevitable shift to less lucrative products."[81]
Before Gerstner took over, IBM was moving toward a breakup into 13 independent units: one for mainframes, one for PCs, one for disk drives, and so on. But he saw IBM's competitive advantage as lying in its ability to offer customers a complete package, a one-stop shopping for everyone seeking help in solving technological problems: a unified IBM—somehow, an IBM with a single, efficient team.
Critics inclined toward revolutionary measures were disappointed. "Transforming IBM is not something we can do in one or two years," Gerstner stated. "The better we are at fixing some of the short-term things, the more time we have to deal with the long-term issues."[82] His efforts were contrasted with those of Albert Dunlap, who was overhauling Scott Paper at about the same time. Dunlap replaced 9 of the 11 top executives in the first few days and laid off one-third of the total workforce. Gerstner brought in only eight top executives from outside IBM to sit on the 37-person Worldwide Management Council.
A non-technical man, Gerstner's strengths were in selling: cookies and cigarettes at RJR, travel services during an 11-year career at American Express Company. Weeks after taking over, he talked to IBM's top 100 customers at a retreat in Chantilly, Virginia. He asked them what IBM was doing right and wrong. They were surprised and delighted. This was the first time the chairman of the 72-year-old company had ever polled its customers. The input was revealing:
The customers told him IBM was difficult to work with and unresponsive to customers' needs. For example, customers who needed IBM's famed mainframe computers were being told that the machines were dinosaurs and that the company would have to consider getting out of the business.[83]
Gerstner told these customers that IBM was in mainframes to stay, and would aggressively cut prices and focus on helping them set up, manage, and link the systems.
Perhaps the most obvious change Gerstner instituted was the elimination of a dress code that once kept IBM salespeople in blue suits and white shirts.
By the spring of 1997, Fortune highlighted Gerstner on its cover with the feature article, "The Holy Terror Who's Saving IBM."[84] The growth continued. Revenues in 1997 were over $78 billion and net income over $6 billion. For 1998, IBM shares were one of the leading gainers among the companies that make up the Dow Jones Industrial Average.
Gerstner's turnaround was no fluke.
Louis Gerstner, age 60, stepped down from the chairmanship of IBM at the end of 2002 to become chairman of the Carlyle Group investment firm. He succeeded former U.S. Defense Secretary Frank Carlucci, 72 years old, who had been chairman for a decade. Carlyle was overseeing $13.5 billion in investments for institutions and wealthy clients, and had long been politically connected with such notables as former
President George H.W. Bush, ex-Secretary of State James Baker, and former British Prime Minister John Major. The founding partner of Carlyle said that Gerstner could help Carlyle unify its culture and strategy: "That's exactly what he did at IBM and it's directly applicable here."[85] Thus, managerial skills are often transferable.
Samuel J. Palmisano, having led IBM's Global Services, replaced Gerstner on January 29, 2002. By 2005, IBM's revenues were $91 billion, and services and consulting (Global Service) revenues were larger than those from manufacturing (Hardware). The company had been steadily increasing its workforce in developing countries (notably, in India), and retrenching in the U.S. and Europe. In May 2005, IBM got out of the PC business, selling to Chinese computer maker Lenovo, though it would still have a 19 percent stake in Lenovo.[86]
The recession of 2008–2010 brought major problems to IBM's high-tech rivals. Microsoft reported its first full-year sales decline. Hewlett-Packard posted declines in sales and earnings on its traditional computer services and outsourcing. Intel had its first quarterly loss since the 1980s. Even as revenue fell, IBM's profit rose 7 percent to $4 billion, and this sparked a rally in IBM shares, whose 40 percent gain for 2009 far outpaced broader stock indexes, giving a market valuation of $155 million. As a result, in this period of economic turmoil, IBM climbed to 6th among all U.S companies from 19th in 2007.
What was IBM's secret? It was the result of downplaying hardware, expanding software, and focusing its giant services business on advising companies and governments on their fundamental operations. CEO Palmisano became an informal technology adviser to the White House, and a globetrotter in these recession months in talking to government leaders here and abroad about promoting the use of technology to improve everything from roads and water systems to the environment and health care. This emphasis on service is the result of a key decision by Mr. Palmisano shortly after he became CEO in 2002 to spend $3.5 million to buy PricewaterhouseCoopers-Consulting, thus adding strategic consulting to the computer installation and software writing that IBM's services unit already handled.[87]
Invitation to Make Your Own Analysis and Conclusion
To what do you ascribe the success of Gerstner?
Do you agree with all of his actions?
Do you agree with the sale of the PC business to a Chinese firm? Why or why not?
Assess the pro and con arguments for the 1982 decision to delegate toMicrosoft and Intel a foothold in software and operating systems. (Keep yourperspective to that of the early 1980s; don't be biased with the benefit ofhindsight.)
Do you see any way that IBM could have maintained its nimbleness and technological edge as it grew to a $60 billion company? Reflect on this, and be as creative as you can.
"Tradition has no place in corporate thinking today." Discuss this statement.
Can you defend the position that the problems besetting IBM were not itsfault, that they were beyond its control?
Would you say that the major problems confronting IBM were marketingrather than organizational? Why or why not?
Which of the three Cs do you think was most to blame for IBM's problems?Why do you conclude this?
Be a devil's advocate (one who argues a contrary position to test the decision). It is early 1993 and Louis Gerstner, an outsider and not even a computer man, being chief executive of Nabisco, a food and tobacco firm, is on the verge of being selected for chief executive of IBM. You have been asked to argue against this decision. Array all the negative arguments you can for this appointment, and be as persuasive as possible. (You must not be swayed by what actually happened; place yourself in 1993.)
As the new CEO brought in to turn around IBM in 1993, how would you propose to do so? (State any assumptions you find necessary, but keep them reasonable. And don't be influenced by what actually happened. Perhaps better actions could have been taken.) Be as specific as you can, and discuss the constraints likely to face your turnaround program.
You are a management consultant reporting to the CEO in the late 1980s. IBM is still racking up revenue and profit gains. But you detect serious emerging weaknesses. What would you advise management at this time? (Make any assumptions you feel necessary, but state them clearly.) Persuasively explain your rationale.
At issue: Whether to break up the company into 10 to 15 semiautonomous units, or to keep basically the same organization. Debate the opposing views as persuasively as possible.
Research the rationale for IBM selling its PC business to a Chinese firm. Do you see any major flaws in this decision?
[67] Michael W. Miller, "IBM's Watson Offers Personal View of the Company's Recent Difficulties," Wall Street Journal, December 21, 1992, p. A3.
[68] "Ranking the Forbes 500s," Forbes, April 30, 1990, p. 306.
[69] David Kirkpatrick, "Breaking up IBM," Fortune, July 27, 1992, p. 44.
[70] Ibid., p. 53.
[71] Miller, p. A4.
[72] "Stand Back, Big Blue—And Wish Me Luck," Business Week, August 17, 1992, p. 99.
[73] John Verity, "Guess What: IBM Is Losing Out in Mainframes, Too," Business Week, February 8, 1993, p. 106.
[74] Ibid.
[75] Taken from advertisement, Wall Street Journal, March 5, 1993, p. B8.
[76] Geoff Lewis, "One Fresh Face at IBM May Not Be Enough," Business Week, April 12, 1993, p. 33.
[77] Jennifer Reese, "The Big and the Bloated: It's Tough Being No. 1," Fortune, July 27, 1992, p. 49.
[78] Kirkpatrick, pp. 49, 52.
[79] Miller, p. A4.
[80] Allison Rogers, "Is He Too Cautious to Save IBM?" Fortune, October 3, 1994, p. 78.
[81] Ibid.
[82] Ibid., p.78.
[83] "IBM Focuses on Sales," Cleveland Plain Dealer, September 10, 1996, p. 6 C.
[84] Betsy Morris, "He's Saving Big Blue," Fortune, April 14, 1997, pp. 68–81.
[85] Kara Scannell and William M. Bulkeley, "IBM's Gerstner to Join Carlyle as Chairman," Wall StreetJournal, November 22, 2002, p. A5.
[86] Company annual reports.
[87] Compiled from William M. Bulkeley, "IBM's Shift to Strategic Consulting Pays Off as Tech Slowdown Drags On," Wall Street Journal, July 30 2009, pp. B1, and B2; William Bulkeley, "IBM Net Rises on Strength in Software," Wall Street Journal, October 16, 2009, p. B4.