Slogging Up PC Hill at I.B.M.

By John Markoff
The New York Times

May 10, 1992

It's crunch time for I.B.M., time to go head-to-head and toe-to-toe with the competition, and James Cannavino, for one, is pumped up for action.

Consider the broken-glass caper. A few months ago, Steven Ballmer, a cocky top executive of I.B.M.'s archrival in software, the Microsoft Corporation, paraded before thousands of employees in the Seattle Kingdome in a red Corvette. On the car's doors, in bold letters, was the word "Windows," the name of Microsoft's hugely successful software program, a product that has helped undermine the International Business Machines Corporation's supremacy in personal computers.

Mr. Cannavino, head of I.B.M.'s personal computer business, saw red indeed, viewing the Kingdome hoopla as an overdose of hype that demanded a response. Known at industry gatherings for his decidedly non-I.B.M.-style flair, Mr. Cannavino resolved that he would get his own red Corvette, take it on stage at a trade show in Chicago in March and break its windows with a sledgehammer.

In the end, cooler heads prevailed. A video was played starring Mr. Cannavino as a skier who smashes through windows during a downhill run. When the video ended, the I.B.M. executive, still dressed in ski gear, walked on stage to the sound of crunching glass.

Freedom to Be

More than any other manager at I.B.M., Mr. Cannavino embodies the company's scrappy -- if somewhat uncertain -- new stance. A 47-year-old self-taught engineer who describes himself as "a nerd turned loose in the field," Mr. Cannavino arrived at I.B.M. in 1964 from a grocery clerk's job to repair keypunch machines. Now the street-smart Chicago native has become the lightning rod for the sweeping changes that are reshaping the world's largest computer maker.

In the past, the company was a fearsome giant that dominated mainframes but was too muscle-bound to respond quickly in personal computers, where it was outsmarted by Microsoft and undersold by a host of small hardware producers. Facing the company's first decline in revenues in 45 years, John F. Akers, I.B.M.'s chairman, announced a reorganization last December that split the giant into 14 parts, giving each a large measure of autonomy and a mandate to pick up the pace.

Perhaps the most important of the parts -- the desktop computing operation, comprising personal computers and the fast-selling RS/6000 work stations -- went to Mr. Cannavino, who had been in charge of the PC business since December 1988. This week, Mr. Cannavino is scheduled to formally unveil the structure and agenda of his operation, officially known as the Personal Systems division.

How Mr. Cannavino will fare is already being widely viewed as the most crucial gauge of whether a decentralized I.B.M. can survive the computer wars of the 90's. Despite fostering the image of a sleek downhill racer, Mr. Cannavino is slogging uphill all the way. Many in the industry believe that his twin goals -- unseating Microsoft in software and restoring growth in the PC hardware business -- will be nearly impossible to achieve without even more dramatic changes at Big Blue. And they have given Mr. Cannavino mixed reviews for the three years that he has headed the company's PC sector, although some concede that he was hobbled by I.B.M.'s old ways. Even Mr. Cannavino says that time is running very short.

"If you look at us and say, 'I don't feel that I.B.M.'s in it' by the time we end this year, I've probably got the model wrong," he said in a recent interview. "And I probably won't be here very long."

No Time to Wait

So Mr. Cannavino has not been waiting for this week's formal announcements to get things started. Since the December decentralization, he has done the following:

Signed a rapid-fire series of agreements with Intel, Bull and others designed to broaden I.B.M.'s channels of distribution and take it into new markets. He has also begun talks to acquire Northgate Computer, a maker of inexpensive clones.
Moved to catch up with such fast-growing direct-mail competitors as Dell Computer and Zeos by selling I.B.M.'s low-end PS/2 personal computers directly by phone.
Exercised his new-found freedom to price the company's personal computers. I.B.M. had been thinking about pricing its first notebook model, the N51SX, at more than $4,000. That figure, picked by an executive used to setting prices for AS/400 midsize models and mainframes, was wildly out of line with the competition. So when the N51SX went on the market in March, it sold for $2,250.

But skeptics remain. Despite all the new freedoms, Mr. Cannavino is constrained by some old realities. The staff remains steeped in the company's traditional culture, for example. And the division is still fed its components by other divisions.

Critics also say that while the N51SX appears to be correctly priced, it can't match some of the competition in terms of lightness and battery life. And that, they say, is a shortcoming that can be laid at Mr. Cannavino's door.

There are other shortcomings that some pin on him. Last year, I.B.M.'s decline in the personal computer business turned into a rout. Caught unawares by a lightning shift to a no-frills, commodity-market approach in PC's and to direct-mail sales, revenue from Personal Systems hardware declined by more than $1 billion, to about $9 billion.

There are some industry executives who suggest that last year's troubles may have put Mr. Cannavino on thin ice. A recent decision by the company's European business to sell an Asia-made PC clone is a warning signal that his division has failed to deliver either hit products or competitive machines, they say.

Noting that Mr. Cannavino left mainframes for PC's more than three years ago, Stewart Alsop, publisher of PC Letter, a newsletter, asks, "What's he done for I.B.M.? The wheels he was spinning in his first few years in PC's were training wheels. He really didn't get it when he came over from mainframes."

But others say Mr. Cannavino has not been the problem.

"I don't see anything wrong with what Cannavino has done so far," said Robert Djurdjevic, president of Annex Research, a computer consulting firm based in Phoenix. For example, he said, "the PS/2 has suffered because the company had allowed DOS to remain the standard for almost six years after it was obsolete."

DOS, developed by Microsoft, is the cumbersome computer operating system and industry standard that I.B.M. has been struggling to replace with a new system, OS/2. Microsoft worked for years with I.B.M. on the new system until a bitter and public corporate divorce in 1990. Since then, Microsoft has won widespread acceptance for Windows, a program that makes DOS much easier to use. I.B.M. is now counterpunching with a new version of OS/2.

For his part, Mr. Cannavino blames the I.B.M. culture that he grew up in for much of the company's woes. "This business is moving so fast you can't wait for a coin to land to call it," he said. "In the old days, I.B.M. would have a negotiation and a set of meetings to decide whether it was going to be heads or tails."

All-Out Search

With its restructuring in December, I.B.M. conceded that it could no longer do business as usual. Mr. Akers has turned everything upside down in his search for a key to new growth and nowhere can that be seen more clearly than in the changes taking place in Mr. Cannavino's business. Last month, Mr. Akers said that the company was prepared to go to "any lengths" to become competitive on PC prices.

His words have the ring of irony: Just seven years ago, when I.B.M. was still unassailably dominant in personal computing and Mr. Akers was in his first year as chairman, he said the company would consider withdrawing from PC's if they became a commodity business. But now that that has largely come to pass, they are so central to the business as a whole that withdrawal is no longer an option.

Mr. Akers argues that the freshly unshackled and revitalized Little Blues will quickly become more competitive. And in fact there have been some positive signs recently. In reporting its first-quarter results, I.B.M. told analysts last month that it had succeeded in arresting the slide in its personal computer business by cutting prices on many models. While revenue remained flat, the percentage of growth in unit sales reached into double-digits, an increase that analysts had not expected.

What's more, I.B.M. appears to have won the first technical evaluations in its bitter war with Microsoft. Just weeks after new versions of Windows and OS/2 were introduced in March, a series of articles in trade magazines and newspapers credited I.B.M.'s program with being easier to use and having fewer glitches.

"I think OS/2 is going to do better than even I expected," said Will Zachmann, a computer columnist at PC Week magazine who has been a lonely voice supporting I.B.M.'s strategy in the past year.

In the spring of 1991, I.B.M. "got religion" about writing software in small Silicon Valley-style teams, turning away from its history of using armies of programmers.

Mr. Cannavino said that the company has set an extremely conservative business plan for OS/2 -- selling 1 million copies this year. If he is able to sell the 2 million to 4 million copies that some analysts have begun to predict, the program will be thought of as a success. By contrast, Windows is expected to sell about 10 million copies this year.

Mr. Zachmann argues that I.B.M.'s strategy has been to let Microsoft "shoot its wad" and then take advantage of reports that even after a year-and-a-half of bug fixing, the new Windows 3.1 is still not error-free.

"Microsoft has made a mess for itself," he said. "They had raised the expectations so high and the fact is they have some problems."

But a disturbing list of problems remains for I.B.M. The company is expected to announce tomorrow, for example, that it is buying into Parallan, a Silicon Valley company that makes a high-end server computer, a data librarian for networks of personal computers. The purchase underscores that I.B.M. is not strong enough in a market it should own.

Even worse is Mr. Cannavino's inability so far to become a major player in the notebook computer market. I.B.M.'s lightest and most impressive notebook, introduced just before the trade show in March, received a ho-hum greeting.

"Cannavino's still struggling to get the portable right," said Rick Martin, an ex-I.B.M. executive who is now an analyst at the Chicago Corporation, an investment services company based in Chicago. "He caught up for about one week and then the rest of the industry raced by."

Said Mr. Alsop of PC Letter: "If you're going to be a company that charges a premium, you have to be ahead of the marketplace. The problem for I.B.M. is that they don't get it. They don't understand what makes customers' juices flow."

More ominous yet is the suggestion that all of the recent restructuring hasn't speeded up the decision-making process enough. Consultants who worked with the company on deciding how to price OS/2 say the process took far too long. Mr. Cannavino disputes this, saying that the final decision was reached in two quick meetings that were purposely delayed until OS/2 was ready to be shipped.

Passion for Tinkering

If Mr. Cannavino succeeds in turning things around, say those who know him, it won't be because of his business skills. Instead, they say, it will be because his lifelong passion for computing will result in exciting new products.

"He likes to tinker and he gets excited about new technologies, that's a strength," said an I.B.M. developer who has worked for Mr. Cannavino. "He also tends to be a micro-manager. That's a weakness."

Ultimately, the heart of I.B.M.'s comeback strategy appears to be to try to do what it couldn't in 1986, when it first introduced OS/2 with Microsoft: separate itself from the pack. It is betting heavily that two joint ventures with Apple Computer will restart growth in the PC business. The hope is to reinvent the personal computer with a design that blends video, sound and data.

Crammed into his new office in Somers, N.Y., the site in Westchester County of almost all of I.B.M.'s divisional headquarters, is the gear that Mr. Cannavino believes will help I.B.M. make that leap. For example, by using a special board made by the Picturetel Company, he can point at an icon on his computer screen and set up a video conference with computer industry chief executives who are I.B.M. partners.

By adding this kind of video capability to today's PC's, as well as other new technologies like pen-input and voice recognition in the future, I.B.M. will make its new mark, he believes.

"The vast majority of the population I'm going to serve grew up on MTV," he said. "If you can't make something more compelling, like MTV, its going to look boring -- like a computer."

Now, Who Would Miss A $6 Million Mainframe?

James Cannavino uses the word "empowerment" a lot. He believes that I.B.M.'s future depends on its ability to give employees enough slack to take the initiative.

As an I.B.M. engineer working on mainframes in the early 1970's, Mr. Cannavino didn't wait for permission to do what he wanted. Indeed, to follow up on one idea, he simply made off with a $6 million mainframe, gambling that he could hot-rod the machine to double its performance in a secret skunkworks project with three other I.B.M.-ers.

To get the machine, he visited the company's manufacturing facility in Poughkeepsie, N.Y., and walked down the final assembly line. He found five computers that were bound for I.B.M. locations, one of which wasn't needed immediately. When no one was looking, he changed the shipping tag so that the machine would be sent to the laboratory in Kingston, N.Y., where he was working.

When it arrived, he and his colleagues tore it apart, souping it up by adding new circuits. Working on the project in the evenings, they proved Mr. Cannavino's idea in about three months. Ultimately his design changes, known as Virtual Machine Assists, became part of the standard system and helped I.B.M. against its competitors -- but not before Mr. Cannavino was called on the carpet when auditors discovered that the computer had been rerouted.

Allen J. Krowe, chief financial officer at the time for the mainframe business, called the young engineer to company headquarters in Armonk, N.Y., for an explanation.

"He told me that in I.B.M. terms, what I had done was equivalent to Murder 1," Mr. Cannavino recalls. But, he said, he was able to convince Mr. Krowe, now the chief financial officer at Texaco Inc., that the gamble would pay off.

"There's no question in my mind that if the idea hadn't worked I would have been fired, and I probably should have been for taking a harebrained scheme and destroying a $6 million asset," Mr. Cannavino said. "But the fact is, I wasn't wrong."

Another fact -- that he had to break the rules to develop his idea -- is one reason for I.B.M.'s troubles, Mr. Cannavino added. "There wasn't a way then to get a machine to work on," he said. "It's one of the examples I use now. If you just let people go, they can do things that make a difference."

Fast Talk, Fancy Footwork

Working as a grocery clerk in 1964, James Cannavino, the new head of I.B.M.'s Personal Systems division, fast-talked his way into his first job at Big Blue. It is a story that is part of company lore.

Looking for a better-paying position, Mr. Cannavino had taken a bus near his home on the west side of Chicago and headed out to the suburbs. The bus line happened to end in Oak Park and the first building he happened to see was an I.B.M. branch office.

He brazenly told the receptionist at the front door that he was there for his interview. A flustered secretary called the branch manager, who came downstairs to apologize to Mr. Cannavino for having overlooked the appointment.

Despite his lack of the required college education -- he did possess a two-year technical school degree that he earned in six months -- Mr. Cannavino seized the opportunity and talked his way into a job repairing keypunch machines. The hook: he offered to work for six months without cashing his paychecks until he had proven he was the best keypunch repairer in the business.

Mr. Cannavino dutifully put each check in a shoebox and supported himself during his first months by working on the side as a cook in a pizza parlor.

The dual life came to an end when the branch office's accounting department tried to close its books for the quarter but couldn't make things balance because of Mr. Cannavino's cache of uncashed checks. The branch manager, who had forgotten the deal he had struck with the young man, then released him from his promise -- and from the need to make more pizzas.

GRAPHIC: Photos: James Cannavino of I.B.M.'s Personal Systems division. (Fred R. Conrad/The New York Times) (pg. 1); In an I.B.M. promotional video poking fun at Microsoft's Windows software, James Cannavino skis through a window. (I.B.M. Corp.) (pg. 6)

Graphs: "Beating the Blues," track revenues for I.B.M. and market share for I.B.M., Compaq, Apple and A.T.&.T., 1987-1991 (Source: Infocorp/Computer Intelligence) (pg. 6)