Cover Story

IBM

As Markets and Technology Change, Can Big Blue Remake its Culture?

John A. Byrne, Deidre A. Depke, and John W. Verity in New York, with Robert Neff in Tokyo, Jonathan B. Levine in Paris, Stephanie Anderson Forest in Dallas, and bureau reports
Business Week

June 17, 1991

In all their frustration and even desperation, their sarcasm and raw anger, the words alone command attention: ''The fact that we're losing share makes me goddamn mad. . . . Everyone is too comfortable at a time when the business is in crisis.'' What makes the message positively riveting is that it comes from no less than John F. Akers, chairman of IBM and chief of the enterprise the world has viewed as the brightest paragon of American business.

These words and plenty more like them, which a company spokesman confirms fairly represent what Akers told an internal IBM management class, were spread via electronic mail within IBM by a manager who attended the meeting. Intentionally or not, in the days since Akers' remarks appeared publicly, a freshly sharpened focus is centering on Big Blue. After six years of struggling to fix itself, IBM still faces the toughest technological and management job in business today.

HARDWARE STORE

Once again, Wall Street is slashing its estimates of the company's future earnings. IBM long ago lost its panache as an investment, but now there's a certain derision in the view from Wall and Broad. As veteran money manager Robert Stovall puts it, IBM ''is the Sears Roebuck of the computer hardware business.''

So, too, are business leaders revising their views of IBM (page 31 33 ). Even Thomas J. Watson Jr., the son of IBM's founder and the man who led IBM into its greatest era, is talking. ''The best thing for me to do is to say no comment, but I won't,'' Watson told BUSINESS WEEK. ''There are things at IBM that apparently need improving, and Mr. Akers was trying his best to communicate that. I've done precisely the same thing in my day.''

Not that Watson thinks the headaches he suffered in his 14 years atop IBM compare to the intractable problems Akers faces now. Some in the end may prove unsolvable. Asked what Akers should do, the chairman of one of IBM's most tenacious rivals is reduced to something close to platitudes. ''He's got to break the rules,'' he says. ''He's got to figure out how to compete again.'' Which points to the fundamental question for IBM: After enjoying the fruits of wild, near-monopolistic success, how can an enterprise keep from going to fat? Can a huge business that has lost its wind rejuvenate itself (page 28 30 )?

Thomas J. Peters, the management guru who with co-author Robert H. Waterman Jr. extolled IBM in the 1982 best-seller In Search of Excellence, blames a system of incentives that doesn't reward a spirit of autonomy and independence. ''The place is still too damn stuffy,'' he says. Although a hidebound bureaucracy is far from IBM's only problem, the company is looking to shed an additional 14,000 names from its payroll of 373,000 this year. Since 1986, the company has slashed 47,000 workers. Some rivals think IBM over the next few years must cut an additional 40,000 or so.

That brutal prospect has set IBMers, so long accustomed to the company's no-layoff tradition and the comfortable tug of its golden handcuffs, abuzz. A veteran IBM manager in Westchester County, site of the company's Armonk (N. Y.) headquarters, reports: ''Some people are saying, 'What a breath of fresh air! How positive! Let's get going.' But there's another group who are very angry.''

IBMers worldwide are debating whether the fault lies in them, or their bosses (page 27 29 ). Especially Akers: His pay and bonus last year leapt 185%, to more than $ 2.2 million. ''It's not that people here aren't working their butts off,'' says one woman who works in the personal-systems marketing group. Instead, she points to ''the cult of the executive. If John Akers said, 'I think we could sell more mainframes if I ran down the street naked every day,' it's a sure bet that everyone else in the meeting would say, 'You've really got something there, John.' '' Akers would not comment for this story.

LONG VIEW

What may be most dismaying about what's wrong at Big Blue is that in the past two decades, when Japan made its biggest inroads into U. S. markets, IBM excelled. It was the huge U. S. corporation that somehow got things right. Superbly managed, it satisfied the needs of its customers. It took the long view, plowing piles of cash -- $ 6.55 billion last year -- into research and development. ''Respect for the individual'' was a central tenet of the corporate credo. And none of Big Blue's lavish attention to employees or social concerns seemed to subtract from profit: In a bare three years, which included a severe recession, IBM nearly doubled its operating income, to $ 11.2 billion in 1984.

Yet something has gone terribly awry. Seven years later, IBM operations still have not topped that record profit. And IBM shares, so long the market bellwether, today trade near $ 105, a 1983 level that's 40% below the 1987 peak. Just how did IBM and its blue-suited legions plunge into, as Akers puts it, ''crisis''?

Put most plainly, IBM remains stuck in the past. With a corporate culture that cherishes former glories and a dependence on slow-growing sales of mainframe computers (table), costs remain too high. And key new products -- laptop computers are but one example -- find their way to market far too slowly.

None of that is startling news. But why can't Akers, six disappointing years after he took the helm, turn IBM's ship around? The technological current just may be too swift. Every advance in microprocessors -- the silicon chips that are any computer's brain -- rewrites the economics of the computer biz. So as the price of computing power has plummeted, computer hardware has become a commodity item, like so many cast-iron skillets. That has allowed scads of new, nimbler rivals -- Compaq Computer, Sun Microsystems, MIPS Computer Systems, and Dell Computer among them -- to nibble away at IBM's market share. So IBM's sales may grow, as they did in 1990, to $ 69 billion. But as all this competition keeps putting the squeeze on margins, profits are bound to suffer (charts, page 26 28 ). This year, Wall Street doesn't even see higher revenues, let alone profits.

MEETING MILL

No wonder Akers is angry. Despite his efforts to push decision-making down to lower levels, IBM remains a largely centralized corporation, an organization in which many can nix an idea or project but few have the authority to approve. One software planner, a recent defector to Microsoft Corp., recalls how IBM operates: ''All day long, it's a constant round of meetings where nothing gets done.'' One reason may be that few other companies have enjoyed IBM's long history of outsize success. Since 1924, when Thomas J. Watson Sr. changed the name of Computing-Tabulating-Recording Co. to International Business Machines Corp., IBM has dominated its markets. By the 1950s, IBM held nearly 95% of the punch-card machine business. That gave it tremendous advantages in computers, a market it entered in 1952. Remington Rand was first out with its Univac, but Watson launched an all-out drive to build a better electronic computer. IBM soon left Remington in the dust, and from then on exploited a strategy of ''price leadership.'' Translation: Facing minimal competition, IBM was free to establish and control the dollar value of data processing.

Nice work if you can get it. IBM clinched its lead by designing, building, marketing, and servicing a market-beating mainframe, the System/360, which it introduced in April, 1964. The 360 rapidly swept up 70% of the computer market, eventually knocking out the likes of all, with the usual effect on profits. The imponderable is whether IBM adopted its PC strategy because it was the only way to win -- or if a dysfunctional corporate culture demanded the wrong long-term approach. ''The fact that its PC development had to be done totally outside the IBM system tells you something about the system,'' observes one prominent management expert. It ''was the worst of what Jack Welch has tried to get rid of at General Electric.''

A hindsight case can be made that holding sway over the computer biz for 20 years fostered a dangerous mix of complacency and arrogance. ''They were always telling us we were the best people in the world,'' recalls one recently retired IBM Europe manufacturing manager. ''That didn't exactly encourage you to work harder. As long as you shined your shoes and said good morning to your boss, you had a job for life.''

Jeff R. Smith, a microsystems specialist at Cincinnati's Good Samaritan Hospital, tells of the time he had a software problem. ''I called our IBM sales rep to ask for help. He returned the call to my boss, the data processing manager, and complained. He didn't think I should be bothering him with stuff like that. His call got me in trouble.''

The IBM attitude is part of why the company is now hurting in a key market, Japan. While its Japanese rivals long deployed thousands of so-called systems engineers to help clients at the low-margin business of developing software, IBM held back. ''IBM used to laugh at its Japanese competitors for bothering so much with system engineering,'' notes Shozo Shigeoka, a Tokyo-based industry observer. But now, IBM is paying the price as the Japanese exploit their knowledge of customers' needs to win new mainframe sales. IBM Japan, long a star performer, posted a 1.1% sales gain last year, while pretax profit sank nearly 21%. Meantime, Fujitsu and NEC saw sales surge more than 12%, while archrival Hitachi's rose 10%.

LAPTOP LAGGARD

IBM also is performing poorly at the computer market's low end. Take the laptop: By 1990, the market had already reached $ 5.67 billion, but IBM didn't produce its model until this past March. IBM now must try to face down Toshiba, the market leader, Zenith, NEC, Compaq, and Tandy. So far, the machine has sold well to big accounts. IBM says it has already sold 80% of what it expected to move in 1991. But it's not moving in the fast-growth part of the market: small businesses and students. They're buying machines for as much as 50% less than IBM's $ 5,995 tag.

Can Akers cope with all of this in the little more than three years he has until scheduled retirement? Former Stanford University President Richard Lyman, an IBM director, says Akers has the ''full confidence of the board.'' To make good on that confidence, Akers and his No. 2, President Jack D. Kuehler, need to manage a tricky transition: At the same time it slashes costs by cutting workers, IBM must develop a stunning array of new, proprietary software that is key to its so-called Systems Application Architecture strategy. The plan is to keep customers hooked on IBM's richly profitable mainframes by enabling them to connect the big computers to any and all sorts of smaller machines made by almost anybody. Akers hopes Earl Wheeler, senior vice-president for programming systems, can make SAA work. SAA still has a long way to go to meet its promise.

While Wheeler's 30,000 software writers hack away, IBM has made real progress in reducing bureaucracy at the low end of the company by speeding up product development. Under James A. Cannavino, the general manager who heads IBM's workstation and PC groups, manufacturing times have been reduced, the PC product line has been almost completely revamped, and his new workstation line is a hit. He has also succeeded in forming key alliances, including a joint project that has Toshiba developing color screens for an upcoming IBM laptop. The PC group has also shed the IBM tradition of waiting for a market to develop before jumping in. Within a year, IBM will introduce a laptop that can recognize handwriting -- a leading-edge technology.

Crucially, Big Blue must work harder to hold off mainframe rivals, especially big Japanese makers who are gaining on the quality front. Shigeoka claims IBM's 3090 mainframes fail every 3 to 4 months, against two years or more for comparable Hitachis. IBM Japan's disk drives go down every 2 to 3 months, he says, vs. over a year for Fujitsu's.

QUALITY TIME

Stephen B. Schwartz is the IBM senior vice-president on whom Akers is counting to boost what IBM calls ''market-driven quality.'' Schwartz made a name for himself when his AS/400 minicomputer plant in Rochester, Minn., won the Malcolm Baldrige National Quality Award. ''We're reenergizing the IBM employee,'' he says. ''That's the secret weapon that's eventually going to turn this thing around.''

That's easier said than done when managers throughout IBM are said to be ranking employees, evidently to identify those who'll be pushed to take early retirement. And while it's unclear where encouraging early retirement ends and layoffs begin, the direction seems plain. ''I don't know how they can live with a no-layoff policy in an industry that is changing this fast,'' says one rival CEO. Allen J. Krowe, a former IBM executive vice-president now at Texaco Inc., disagrees. ''Companies that rely on layoff policies cop out,'' he says. ''IBM's policy forces management to look ahead.''

But already, IBM appears to be shifting a tad. Many managers rejected a former early-retirement offer because it gave them no more than two weeks' pay for every year of service -- the same deal a fired employee would get. ''Some people said, 'I'll just wait around to get fired and I'll get the same deal,' '' one manager confides. So IBM is slashing its severance pay in half for those who get the ax, according to one manager who could take early retirement.

Many IBMers who have left are those that IBM may have least wanted to see go. G. Glenn Henry, a Dell Computer Corp. senior vice-president, was an IBM Fellow, Big Blue's highest recognition for technical achievement. He joined Dell in 1988 after 21 years at IBM. Another Dell executive, Roy H. Sovine, left IBM after 23 years. ''The ones that stayed are the ones with security blankets,'' he says. ''I'm not sure that these are your most productive people.''

LAX STANDARDS

Indeed, the deadwood probably discourages the live wires, Harvard business school Professor D. Quinn Mills found. In interviews of 100 IBMers he did for his 1988 book, The IBM Lesson, ''the one criticism that came up over and over again was that the company was too tolerant of people who didn't perform well,'' Quinn says. ''The people who work hard resent it.''

With the computer market in the doldrums, the turmoil at IBM is coming ''at an extraordinarily unfortunate time,'' says one Paris-based manager. A stateside manager sees things differently: ''People are working very hard and wanting to make a difference.'' Either way, while it's doubtful Akers wanted his comments spread around, the net effect has been to issue a stiff challenge. ''Your expectation level is not high enough of our people,'' Akers told the IBM management students. ''If you are in sales, sell. If you are in manufacturing, build. . . . ''

And manager Akers must manage. His remarks ''reflect Akers' frustration,'' says Noel M. Tichy, a University of Michigan professor who helped Jack Welch change GE's culture. ''If those remarks are not followed up with appropriate action, they can take you a step backward rather than forward.'' To advance, Tichy says, Akers must ''talk and talk and talk at the top, with the top executives out there communicating that 'we're not just kicking ass, we're all in this together.' '' Or, in Akers' words: ''We do not have time to waste.''

Copyright 1991 McGraw-Hill, Inc.