Be It a Whale or a Dinosaur, Can I.B.M. Really Evolve?

The Executive Computer

By Peter H. Lewis
The New York Times

September 6, 1992

Everyone knows what happened to the dinosaurs that once ruled the earth, and no one more so than the International Business Machines Corporation, which last week pressed ahead with its attempt to evolve into a sprightlier, swifter life form.

I.B.M., the biggest dinosaur in the computer industry, split off its personal computer operations into a separate operating unit, called the I.B.M. Personal Computer Company.

"It's like a whale trying to crawl up on the beach, shed some weight, and walk like a man," said William M. Bluestein, senior analyst for the Forrester Group, a research company in Cambridge, Mass.

The beach is in Somers, N.Y., down the road from Armonk, where I.B.M. has its headquarters in the suburbs north of New York City.

Not exactly a startup, the new company comes to life with 10,000 veteran employees, a well-established brand name and current revenues of an estimated $7 billion a year. It also comes with a senior management team trained in the "Iron Age" of I.B.M., when mainframes dominated the corporate computing landscape.

If all goes according to plan, the new company will eventually become a wholly owned subsidiary of the parent, free to prosper or fail on its own strengths and weaknesses. The goal of the current quasi-independent company is "to increase efficiencies and focus and improve our responsiveness in a fast-changing PC marketplace," said James A. Cannavino, an I.B.M. vice president who oversees all personal computer systems operations, including the new company.

Just how independent will the I.B.M. Personal Computer Company be? Will it be able to buy disk drives, microprocessors, memory chips and circuit boards from sources other than the International Business Machines Corporation? Will it pre-install the Microsoft Corporation's Windows and Windows NT on its systems, perhaps in place of I.B.M.'s own OS/2? Will it be free to develop powerful desktop PC's and boast that they will, dollar for dollar, outperform I.B.M. mid-range systems?

Should it take these bold moves, it would be doing nothing more remarkable than the competition.

Another point to ponder is whether the I.B.M. Personal Computer Company will be bound by the same "no layoffs" employment rules of the parent corporation, or whether Mr. Cannavino will be free to act quickly to trim his large work force, should he find the need.

In the past, several I.B.M. executives have acknowledged privately, the personal computer division had to wage long, bureaucratic battles with other I.B.M. business units to make even minor changes in technology, pricing or marketing. These executives say it was a cultural hallmark of I.B.M. to require managers and engineers to defend new ideas in something akin to a technological and bureaucratic gantlet.

The theory was that only the strongest and best ideas would survive the review process. But it often took months before innovations were approved or rejected.

The result was that I.B.M. has been slow to reach the market with new technologies, and slower still to respond to challenges from its rivals. Some competitors boasted that they could give I.B.M. a six-month head start with a new computer chip and still beat it to market -- at lower prices and with more features. The difference was not in technical or manufacturing skills -- I.B.M.'s resources in those areas are believed to be second to none -- but in I.B.M.'s management structure, which, for all its strengths, is hardly nimble.

In the brave new world of the I.B.M. Personal Computer Company, Mr. Cannavino says, decisions on product development, technology, sales and marketing will be largely insulated from the other I.B.M. divisions. By 1994, I.B.M. itself says, the personal computer company's balance sheets will be reported independently.

"The structure is now more reasonable, but what counts is not the structure but the products," said Will Zachman, president of Canopus Research of Duxbury, Mass. "Reorganizations in themselves don't do anything; it's what you do after the reorganization. The keys are good products, aggressive pricing, and a well-known name backed by service and support.

Customers will not have to wait long to see the results. On Tuesday, the I.B.M. Personal Computer Company will make the first of a series of product introductions, bringing forward several PS/1 home computers that will use either an Intel Corporation 486 microprocessor or an I.B.M. variation of it. Originally offered as a simplified version of the PS/2 line, lacking the power and features of interest to business customers, the new PS/1's are said to be quite powerful.

I.B.M. has been coy about what it will announce, but in subsequent weeks, according to the reports in the trade press, the company is expected to overhaul its PS/2 series of business computers, introduce new notebook and pen-based portable systems, and create a new brand name -- PS/ Valuepoint -- for a line of computers that will compete directly against the clones that have battered I.B.M. for years.

The PS/Valuepoint machines are said to be based on I.B.M.'s original PC-AT design, which the company largely abandoned in 1987 when it created the PS/2 series. That AT design, marketed as I.B.M.-compatible even after Big Blue had walked away from it, has generated billions of dollars in sales for I.B.M.'s competitors, and I.B.M.'s share of the market has plummeted.

"The company has the opportunity to regain market share, not the commanding role it had, but a strong role," Mr. Zachman said.

Obviously, these products were in development under the old system, and probably under the same leadership. Mr. Cannavino joined I.B.M. as an engineer in 1963. The president of the I.B.M. Personal Computer Company is Robert J. Corrigan, who joined I.B.M. as an engineer in 1962. (He will have day-to-day responsibility for running the company and will report to Mr. Cannavino.) And the head of the new company's North American operations is Sam M. Inman 3d, a 20-year I.B.M. veteran.

"If you have a $7 billion company, it's a real company right off the bat," said David B. Jemison, professor of management at the Graduate School of Business at the University of Texas and a specialist in business strategy. "You can't populate it with new people, so they all come from the same gene pool.

"The question is," he continued, "how do we change old habits, and can you really change old habits with the same people? It can happen, if indeed in the old situation there were constraints that were keeping them from doing the things they wanted."

Philip C. Rueppel, a research analyst at Sanford C. Bernstein & Company, a brokerage in New York, commented: "They have removed many of the organizational roadblocks and fully understand their costs. What's left is an organization that has the potential of truly being much more responsive."

Mr. Bluestein, who imagines the whale walking ashore, focuses on the word potential. "Basically, it doesn't mean anything until I.B.M. addresses certain fundamental questions in the PC market," he said. "If they don't shed the ingrained culture, they're just transferring all the same people, with all the same problems and headaches, into a new procedure. Whether this reorganization unclogs their arteries for decision-making and product development is really the question."

Some of I.B.M.'s competitors have tried, in similar fashion, to unclog their corporate arteries.

Eckhardt Pfeiffer, shortly before he was named chief executive of the Compaq Computer Corporation of Houston, was chatting with two mid-level employees at a trade show last year when they said they were sure Compaq could build high-quality computers at less cost. The two wandered the show and were quoted prices for components that were less than what Compaq, a $3 billion company, was paying.

Mr. Pfeiffer asked the employees to form a secret "swat team," free from executive review and unrestrained by typical Compaq procedures, with a mandate to design a line of computers to battle the lower-cost clones, which had done to Compaq what Compaq had done to I.B.M. Other senior Compaq officials now confirm that they did not know of the group until months later, when the team presented Mr. Pfeiffer with the design for Compaq's Prolinea series. The Prolineas have proven so popular that Compaq cannot meet demand.

The Digital Equipment Corporation of Maynard, Mass., perhaps the biggest dinosaur other than I.B.M., was being nibbled to death, and in a bold move earlier this year, it formed a new company, Digital Direct, patterned after direct marketers like the Dell Computer Corporation of Austin, Tex.

By breaking from its corporate mold, Digital Direct has been able to sustain hardware sales of $10 million a week, according to industry analysts who have attended Digital briefings. In other words, personal computers went from a negligible part of Digital's business to bringing in revenues at an annual rate of $500 million, in less than a year. That may not be enough to insure that Digital escapes the tar pits, but it is a promising sign.

The irony is that even if this latest step in I.B.M.'s grand experiment succeeds, the company will only be learning from itself.

More than a decade ago, because of suspicion that the personal computer market would never amount to much -- maybe 50,000 machines for hobbyists, one projection held -- I.B.M. allowed Don Estridge to form a small team to work independently in Boca Raton, Fla. The result, introduced in 1981, was the phenomenally successful I.B.M. PC. Later, when the success of the PC was apparent, I.B.M. reined the division back into the corporate fold, and it has paid ever since for that decision.