IBM: Behind the Monolith

Tomorrow: $200 Billion by 1995? Maybe, but Obstacles Loom

By John Marcom Jr., Staff Reporter
The Wall Street Journal

Apr 7, 1986

Two hundred billion dollars.

That could be IBM's 1995 revenue. A $200 billion IBM, four times it current size, isn't wild fantasy, and President and Chief Executive John F. Akers probably doesn't have to launch an acquisition binge. By many estimates, IBM need only maintain its market share -- in IBM parlance, "grow with the industry."

For years the industry has averaged roughly 20% annual growth, The recent slowdown has prompted some debate about the outlook, but it is widely believed that the pace of expansion will again quicken. Faith in the basic laws of "computer-nomics" prevails: Each year, engineers cram more circuits on the same patch of silicon, enabling a dollar's worth of computer to do more work; meanwhile, customers' hunger for power grows, as they shovel more mountains of information into their machines and use them for a wider range of jobs.

IBM shares the faith, though it shies from embracing specific revenue targets that could be affected by inflation, currency fluctuations and recessions. It expects its business to encompass a range of communications products and services as well as computer and software, and IBM talks of the total industry quadrupling to more than $1 trillion in revenue in the 1990s. Maintaining its sizable share of the pie is one of the company's four oft-stated goals -- along with maintaining technological excellence, cost competitiveness and profitability.

Could IBM blow it?

"We don't have anything made," Mr. Akers says. "It's like downhill skiing. As soon as you say, 'Boy, I've got this sport!' you are flat on your face in a hole. You never have it made. Whether it be the product, the communication of the basic beliefs of the IBM company, the training of our young salespeople, the attracting of the best young scientists for the development labs -- you never have it made."

IBM hasn't always seemed as invincible as it does today. In the mid-1970s, before the smash-hit Personal Computer, it was sometimes regarded as a steady but basically ho-hum mainframe computer company. As shown by its subsequent foray into home computers with PCjr, IBM can make mistakes and will spend a fortune to fix problems rather than admit defeat.

So far, the company has managed to sidestep or defeat in court political threats to its power. But, especially in Europe, it could face renewed challenges in the years ahead.

More immediately, it confronts several obstacles:

Size: Even at a modest growth rate, IBM will be a much larger corporation in the mid-1990s. With 400,000 people working in more than 130 countries, keeping them focused on its basic goals, and keeping them as satisfied as they apparently are today, isn't getting any easier. "You have to work harder and harder at it," Mr. Akers says. "When you hire 20,000 people in a year, that's a lot of people to begin to educate in your way of thinking, in your way of communications and in your way of doing business."

IBM in recent years has turned to independent business units, small groups operating outside the company's main divisions, to develop new products and services. Throughout the company, a major weapon against the ill effects of size is reorganizing -- "almost always for very valid business reasons, but occasionally just to change things," Mr. Akers says. "It is very healthy to take an organization that is by definition a bureaucracy and change it, because whatever habits have been built up, some large percentage of them are bad."

Costs: A corollary of declining costs and expanding markets is that IBM must sell more products at lower prices. So far, it has largely protected margins by cutting expenses, streamlining and automating plants and shifting work to outsiders, such as circuit-board assemblers and PC retailers. Some entire products come from outside, like the IBM System/88, a fault-tolerant computer IBM buys from Stratus Computer Inc. But IBM is limited in how far it can switch the expensive burden of the marketing and service forces that help the company hold the largest, most lucrative accounts.

Compatibility: In the mid-range of its product line, IBM offers an array of incompatible, independently designed products that frustrate attempts to build smoothly functioning computer networks. That concern spurs IBM's growing role in setting technical standards that make it easier to link computers of all types.

The company attracted immediate support from even some die-hard rivals last year when it announced its "token-ring" computer-network specifications. (The name refers to how an electronic signal, or token, carries data along a ring-shaped layout of wire.) Now IBM is trying to help steer an industrywide effort to define a new standard dubbed Open Systems Interconnection.

New Business: IBM is in a broadening range of businesses, becoming a sort of general contractor in information. In software, it seeks tremendous revenue growth from a segment once thought merely an adjunct to its computers. In communications, it bought Rolm Corp. and then took a stake in MCI Communications Corp., allying itself with two of American Telephone & Telegraph Co.'s strongest competitors. IBM is also weaving a web of joint ventures and partnerships with leaders in other industries: with Merrill Lynch & Co., for instance, in financial information and with CBS Inc., and Sears, Roebuck & Co. in two-way consumer information.

These ventures take IBM into strange territory where its manufacturing and marketing strengths don't give it as big an advantage as in computer hardware. All these areas relate to IBM's core business, so they don't actually violate Tom Watson Sr.'s maxim for success, "Shoemaker, stick to your last." "But at the same time, we're taking on people who are strange to us," says Tom Watson Jr., who made but one acquisition, textbook publishers Science Research Associates, while head of IBM.

Japan: IBM's market share in Japan has slipped in recent years. IBM, once No. 1, then No. 2 to Fujitsu Ltd., fell to third place in 1984, behind NEC Corp. Given Japan's strength in technology and manufacturing and nationalistic attitudes, competing in East Asia is "exceedingly difficult," Mr. Akers says. "If we can keep pace we'd be doing a fine job."

Checking the Japanese in their back yard is critical, if only to fend off the Japanese in the West. In product after product -- last year, for instance, in printers and terminals -- IBM is striving to cut manufacturing costs to the bone to fend off Japanese competitors. It is a challenge U.S. companies in some other industries have lost.

[Table]

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    PROJECTED REVENUE

    (In billions of dollars)

                          1980*    1985    1990**    1995**

    Processors/           $17.2    $24.8   $44.0     $76.0

     Peripherals

    Office Systems/         4.1     10.5    18.0      41.0

     Workstations

    Software                  0      4.2    15.0      50.0

    Maintenance             4.2      6.1    12.0      25.0

    Other                   0.7      4.4     6.0      10.0

    Total                  26.2     50.0    95.0     202.0

    *  Software revenue included in maintenance

    ** Estimates

    Source: Gartner Group Inc.