Momentum is a funny thing in the personal-computer business. Just ask IBM. Last year, it was full steam ahead: Big Blue's PC unit was cranking out new models, slashing prices, adding distributors, and on its way to taking the No.1 spot in the U.S. market from Apple Computer Inc. But that was last year. Now, the IBM Personal Computer Co. has badly misjudged demand, leaving customers clamoring for some models, such as the popular ThinkPad laptop, and IBM stuck with large inventories--$100 million by some estimates--of other models.
Help is on the way--in the form of new models, an untangling of product lines, and an overhaul of internal operations. But none of these moves will do much good before the fourth quarter. That makes 1994 a possible washout in PCs for IBM, and it bodes ill for the company's overall recovery. Last year, PC sales surpassed the $6 billion that IBM's mainframe hardware brought in. And as more companies move to networks of powerful PCs, IBM must have the right products in its lineup--or risk losing out to rivals such as Compaq Computer Corp. and Hewlett-Packard Co.
Pesky Compaq's sales, meanwhile, are exploding. According to market researcher International Data Corp., the Houston company sold 970,000 PCs worldwide in the first quarter, vs. 840,000 for IBM. IDC thinks new products will hoist IBM back into the lead for this year--but Compaq has been coming on strong. "All last year, IBM couldn't deliver, so many of our dealers started to write Compaq into their contracts," says Gregory A. Pratt, chief operating officer of Intelligent Electronics Inc., a wholesaler that supplies PC dealers. One result: Big Blue's share of sales through computer dealers tumbled to 18% in the first quarter, from a peak of 24% in the second quarter of 1993, figures Computer Intelligence InfoCorp.
BAD REACTIONS. At the same time, technical problems delayed new PS/2 models until mid-June, leaving IBM without a new product to pitch to its core corporate customers since early 1993. Even IBM concedes that its new products are taking too long to hit the market, its costs are too high, and its customers are confused by overlapping product lines. "We haven't been doing as well as we wanted to," says IBM Senior Vice-President G. Richard Thoman, who now says the second quarter will be "O.K., but not great."
IBM Chief Executive Officer Louis V. Gerstner Jr. is counting on Thoman to turn things around. Gerstner brought in his RJR Nabisco Inc. protege last January to oversee the PC unit as well as IBM's on-line service, Prodigy Services Co., and printer business. Thoman took over the top PC job in May, when Robert J. Corrigan, the previous chief, abruptly resigned.
How did Big Blue get in such a pickle? Insiders say the troubles stem from its inability to keep up with quick changes in the market. The reasons: lousy forecasting, manufacturing logistics, and control systems. For example, until nine months ago, the PC unit didn't have the authority to centralize its purchasing to get Wal-Mart-like clout. Among other things, that prevented management from shifting away from pricey Japanese components as the yen has risen. At a meeting with analysts in April, IBM Chief Financial Officer Jerome B. York cited heavy buying of Japanese parts as one reason the PC Co.'s profits are too low.
Thoman took charge of the operation himself because he wants to be sure costs drop--and products get out the door faster. "We are not the low-cost provider in the industry, and we're not fast enough to market," he says. Boosting profits is another goal. The PC unit's revenues were up about 29%, to just over $8 billion, last year, but it had net profits of only about $200 million, estimates PaineWebber Inc. analyst Michael K. Kwatinetz. By contrast, Compaq's profits last year hit $462 million on sales of $7.2 billion. Gerstner "just can't see why IBM can't do as good a job as Compaq," says Merrill Lynch & Co. analyst Daniel Mandresh.
At least one reason, however, seems clear: IBM still doesn't use common parts across its product families. For instance, many of the components in Big Blue's high-end PS/2 family are unique to that product line. That means parts must be ordered from suppliers as much as five months in advance, making it tough to react quickly to market changes.
Those slow-footed ways have cost IBM dearly with customers. Consider Harris Methodist Hospital in Fort Worth. Larry F. Blevins, the hospital's chief information officer, says he got fed up after waiting two months for IBM to deliver high-end PS/2 servers to run his network. So Blevins turned elsewhere. Within 10 days, he had two Compaq servers powering 400 PCs. He says he saved time and money: The Compaq servers and software cost half the $100,000 IBM was proposing and could handle five times the data traffic.
BEFUDDLED. To speed its reaction time, Thoman says, IBM is redesigning its PC line to include "commodity" components that are in plentiful supply. That will give management more flexibility to build machines as orders come in, rather than according to forecasts. IBM is already doing that in Europe, and Thoman says 80% of the U.S. operation's machines will be built that way by yearend.
Another key Thoman objective: to whittle down overlapping product lines. "I think we have succeeded in confusing our marketplace," he admits. It's easy to get befuddled. The PS/1 is a consumer-oriented line, but the PS/2 is a more powerful line aimed at corporate customers. Meanwhile, the ValuePoint line--IBM's answer to low-cost PC clones--has high-end models that clash with the PS/2. Then there is the mail-order Ambra line--and other new PCs coming out in the fall based on IBM's fast PowerPC chip--which will compete against models in IBM's lineup that run on Intel chips.
Thoman's simplification campaign will kick off with yet another PC line due out this fall. Those PCs will meld features of IBM's PS/2 line with cheaper, readily available parts. Already one big customer likes what it sees: Giant insurer CIGNA Corp.--one of the largest corporate PC buyers in the nation--will shift from AST Research to IBM. Using IBM, CIGNA figures its annual PC tab will drop 20%, to $12.6 million.
Such deals are encouraging. But a lot is riding on the fourth quarter--when IBM does 40% of its PC business. Thoman knows IBM has to keep building momentum if it wants to be ready.