The Big Winners In Big Blue's Breakup: CustomersJohn Verity
The news of radical surgery at IBM, a restructuring of the company into independent business units, has been welcomed on Wall Street with about as much warmth as a flu outbreak. After an immediate but momentary upswing from 95 to 98, IBM's stock skidded as details of the wrenching plans became clear. Investors worry, analysts say, that the turmoil of the wide-ranging reorganization will hurt IBM's sales before it helps. Indeed, when Chairman and CEO John F. Akers told securities analysts on Dec. 9 that IBM's revenues will likely grow more slowly than the rest of the industry's next year, the stock touched a price not seen since 1982: 83 1/2. Now, it's hovering around 86.
But is the situation all bad? Granted, this pillar of American business and U. S. technological pride has been in the doldrums for six years. It also plans to put 20,000 people out of work next year, in addition to the 50,000 already let go. And despite its vigorous efforts to cut costs, decentralize decision-making, and speed new products to market, stockholders are more frustrated than ever: They long for the time when IBM seemed invincible -- and when its return on equity, at 17%, towered over that of other large U. S. industrial companies. In those good ol' days, Big Blue was the bluest of blue chips. Yet Wall Street, waiting impatiently for IBM to regain its former strength, isn't seeing the whole story.
TRIMMING DOWN. In fact, IBM's struggle, as painful as it may be to watch, is a positive sign. Competition and technological innovation from upstarts such as Sun Microsystems Inc. and Microsoft Corp. are forcing an inefficient supplier -- and an enormous one at that -- to trim down, be more competitive, and serve its customers better. IBM contains the bulk of the U. S.'s computer design and manufacturing resources. Its streamlining should make the U. S. industry stronger and better able to battle its main opponent, Japan.
If all goes well, the "commonwealth" of independent IBM companies that Akers envisions will unleash the company's immense resources. Its historically strong storage products division, for instance, is being set loose to sell disk and tape drives to other computer companies -- something IBM was generally loath to do in years past. The result should be increased competition and therefore better products, both for IBM and its rivals. IBM execs hint at moves into the consumer electronics market, too, and they say they're even considering aggressively selling microchips on the open market. That could give the rest of the U. S. electronics market the benefits of IBM's tremendous technological prowess while also making its chipmaking more efficient.
Better yet for computer buyers, IBM is finally having to play by the same rules as its smaller competitors. For instance, Big Blue is getting serious about industry standards, creating so-called open systems, which cost less and put more power into the hands of customers. "We will continue to open up the AS/400" minicomputer to industry standards, says Jack D. Kuehler, IBM's president.
Until recently, critics contend, IBM had so much clout it seemed almost oblivious to such pressures. From the moment that it sewed up 60% of the nascent computer market with its System/360 25 years ago, IBM has established almost every important technical standard, from the shape of disk drive plugs to the format of network message systems. That control, critics contend, allowed IBM to slow the pace at which new technologies entered the marketplace, to keep prices high relative to underlying costs, and to earnits famous profits.
SITTING DUCK. To be sure, the new tack is perilous for Big Blue. "Talk about a battleship sitting in Pearl Harbor," says George Lindamood, a researcher at Gartner Group Inc., a Stamford (Conn.) consulting company. Divisions going their own ways, for instance, could spell trouble for Systems Application Architecture (SAA), IBM's plan to tie together different computers and software in one compatible bundle. But, again, computer users should eventually benefit. If SAA fails, the market will impose a better way of interlocking incompatible machines -- one that will probably make it easier for people to connect the best machines available, whether from IBM or one of its competitors.
A decade ago in January, the Reagan Administration dropped a Justice Dept. antitrust suit against IBM that sought to break up Big Blue into four broad-based companies. The idea was to foster fierce competition among the new units and make the whole computer industry more competitive. How ironic that the market forced the change anyway. Whether the giant is up to the challenge or not, buyers and users will benefit.