Stand Back, Big Blue -- and Wish me Luck

Information Processing

IBM is setting its PC business loose to give it a better shot at fending off clones and reversing its slide

Catherine Arnst in New York, with Mark Lewyn in Washington and bureau reports
Business Week

August 17, 1992

James A. Cannavino knows what it takes to succeed in the personal-computer business. A PC maker needs to be lean, flexible, aggressive, and lightning-fast -- all the things that companies such as Dell Computer and Compaq Computer are and that Big Blue isn't. So Cannavino, general manager of the $ 11 billion Personal Systems Div., is spending his summer negotiating a divorce that he hopes will finally pull the IBM PC business out of its slide.

Come September, Cannavino says IBM will slice off a new unit to focus exclusively on developing and manufacturing PC hardware. By cutting PCs loose from the rest of Personal Systems, which also handles workstations and software, including IBM's OS/2 operating system (box), Cannavino hopes to create an entity that can finally compete with the Compaqs of the world. IBM is still not sure whether it will be a new operating unit or a separate company. ''We will have more independence than we have today,'' Cannavino told BUSINESS WEEK. ''And over time, we will have more and more independence.'' Within a few years, he hints, his Baby Blue may even issue its own stock.

The idea is to create a streamlined organization that can cut prices often, roll out new products several times a year, sell through any kind of store, and provide customers with the software they want -- even if it doesn't happen to be IBM's. In other words, Cannavino intends to operate like the scrappy PC makers that have done so well at his expense. Those companies never have to worry about anything except PC hardware. And they don't have to deal with the IBM bureaucracy, which has often kept Personal Systems from responding quickly to its competitors.

SCREECHING HALT

The new group will pick up the pace immediately in September, announcing a new line of low-priced PCs. All year, IBM has been on the losing end of an industry price war. Even after it countered Compaq's price cuts in June, its prices still remain as much as one-third higher (table). Worse, by telegraphing the new fall lineup, the company has curbed sales of current models. Matt Fitzsimmons, president of ComputerLand in White Plains, N. Y., says his Compaq sales are up about 30% this quarter, while IBM's have come to a screeching halt.

Cannavino says autonomy will allow the PC division to react much faster. But the process of gaining independence has been painfully slow. IBM executives continue to hash out how exactly the new unit will work. It is still not known, for example, what the organizational structure will be, who will run it, how products will be distributed, and what will be left in Personal Systems. Chairman John F. Akers is close-lipped about the overhaul. ''Cannavino will be prepared to talk publicly about all that come September,'' says Akers. Cannavino jokes: ''Did he say what year?''

Indeed, the lengthy process of revamping the PC business is an indication of how far IBM has to go to free its operating divisions from headquarters bureaucracy. That was the goal of Akers' reorganization last December. But insiders say the old ways persist. ''It's possible that they can pull it off, but they are probably spending more time arguing over what day to make the announcement,'' says one former IBMer. Cannavino acknowledges that decision-making remains cumbersome. ''If you . . . cover six to seven organizations, just to get a consensus on something can take a month by the time you make all the appointments,'' he says.

How far will the independence movement go? Rumors have been swirling in the computer industry for weeks that IBM would spin off the entire Personal System division into a publicly traded company. Instead, the parts are being sliced much finer and investors may be offered shares in a far smaller PC company. ''There isn't anything we are doing that prohibits that from happening,'' says Cannavino. ''In fact, it probably enables that.'' He quickly notes that Securities & Exchange Commission rules prevent IBM from issuing stock in any spin-off until it has three years of audited results. In other words, don't expect a Baby Blue stock offering before 1995.

For now, the critical question is how the overhaul will help IBM once more get PCs to market quickly and at the right price. Dealers, customers, and IBM watchers are virtually united in the view that PC distribution should be taken away from the National Distribution Div. (NDD) and given to the group that makes the machines. NDD, which is responsible for selling PCs and software to dealers, is part of the massive North American marketing-and-services division and does not report to Cannavino. The structure is costly and cumbersome, making it difficult to coordinate pricing and product rollouts.

''I think they desperately need to get the sales-and-marketing group under one umbrella,'' says Bill Fairfield, president of Omaha-based InaComp, which runs two computer-store chains. His company's dealings with IBM's salespeople, he says, ''have certainly not been as smooth as certain other competitors'.'' Again, Akers' response is short on specifics. ''There's a lot of work being done to make the distribution system more efficient,'' he says.

GLARING HOLES

Cannavino insists that dramatic changes are afoot. But he, too, is circumspect about what they will be. ''Everyone is so sensitive,'' he explains. Cannavino hints that NDD will not be broken up but will work more closely with PC developers. ''The team we know as NDD will pick up more and more functions,'' he says.

Analysts welcome anything that fixes IBM's immediate problem: the wrong products at the wrong prices. Take notebook PCs. IBM didn't introduce one until March, 2 1/2 years after Compaq. The delay left IBM with only a 3.6% share of the fast-growing market, according to International Data Corp. Compaq has 10.1%.

And IBM still has some glaring holes in its portfolio. Pete Reilly, head of U. S. marketing for Personal Systems, says he'll plug ''the obvious gaps'' this fall. A series of machines for consumers and small business will be called the Value Line and will be priced at or below comparable Compaq offerings, says analyst William Milton of Brown Brothers Harriman & Co. In all, IBM is expected to introduce 11 new machines.

Lower prices and new models might just allow IBM to hold on to its share of the IBM-compatible PC market, says Sanford C. Bernstein analyst Richard Schutte (chart). It's now 16.4%, down from 20.4% in 1989. He notes that IBM wouldn't even be doing this well without the bounce it got when it finally entered the hot notebook market. Nevertheless, he predicts a drop to 15% next year.

Cannavino isn't trying to downplay IBM's problems. ''I'm not saying it isn't going to be a difficult year or two: Competition is fierce. Price wars are intense. The world's economies are flat to mediocre. The industry is not growing very rapidly. Let me tell you, it's a very difficult time.'' Still, Cannavino insists that IBM has a ''very bright future'' in personal computers. After all, it's still the world's largest supplier. And now, it's getting in shape to compete.

GRAPHIC: Photograph, ''Let me tell you, it's a very difficult time'' JAMES A. CANNAVINO

General Manager, Personal Systems Div. PHOTOGRAPH BY SUSAN GREENWOOD/GAMMA-LIAISON; Chart, LOSING GROUND TO THE CLONES Data: International Data Corp., Sanford Bernstein Estimates; EVEN AFTER PRICE CUTS, IBM COSTS MORE (This table is not available electronically. Please see the August 17, 1992 issue.)