Ibm: A Work In Progress

Louis V. Gerstner Jr. certainly isn't catering to his public. For more than three months now, since he took over as chairman and CEO of IBM, everyone from computer pundits to big investors has been seeking a grand strategy from Gerstner, seizing on his every word and leaked memo as a sign of where he is taking the world's largest computer company. Finally, on July 27, Gerstner gave them the news--and in spades: He announced a monster $8.9 billion restructuring charge against second-quarter earnings. And he wouldn't even promise that this would be the final blow--further restructuring will be needed if business worsens, he warned.

Then, Gerstner addressed the big question of strategy. "There's been a lot of speculation on when I will deliver a vision," Gerstner said. Next, the letdown: "The last thing IBM needs right now is a vision," he continued coolly. "What IBM needs right now is a series of very tough-minded, market-driven, highly effective strategies in each of its businesses."

PRIORITIES. Gerstner made it clear that his priority now is execution--not visions issued from "40,000 feet in the air," as he puts it. His main goal: to make Big Blue profitable again. Toward that end, $6 billion of IBM's $8.9 billion second-quarter charge will be used to cover staff reductions. Some 50,000 employees--25,000 more than expected--took a buyout offer in the first six months of the year. Now, an additional 35,000 will be cut during the next 12 to 18 months. The remaining $2.9 billion of the charge will cover plant and office closings. Gerstner is giving almost no specifics on where, but he has put every division of IBM on notice that it must prove its value or face cuts. And IBM emphasized its new focus by choosing Emerson Electric Co. Chairman Charles F. Knight, who is known as a bear on costs, to serve on its board.

Wall Street already sees profits returning: In the wake of Gerstner's announcements, analysts were predicting $1.3 billion in profits for Big Blue in 1994. IBM's share price shot up 3 points, to 45 5/8, though it fell back to 44 the day after Gerstner's announcement. Key outsiders also are convinced that Gerstner can make progess. IBM has "had a rocky road, and I don't think it's over," says Bill L. Fairfield, president of Omaha-based InaCom Corp., the largest reseller of IBM personal computers. "If Gerstner pulls the right strings, he could come out with flying colors."

Simply seeking profits, however, may not be enough. Some customers fault Gerstner for refusing to state clearly how he thinks IBM's technology and products are likely to evolve. IBM "has not articulated a vision that customers can buy into," says Peter J. Daboul, senior vice-president for information systems at Massachusetts Mutual Life Insurance Co. in Springfield, Mass. Daboul says that the failure is "absolutely" hurting IBM. "They've just done a shotgun approach. They need to bring together a vision that maps where the technology is going."

Gerstner's biggest problem may be that he is taking the helm just as standardized computer technology--which allows customers to move from one supplier to another--is taking hold. The replacement of CEO John F. Akers with Gerstner, and the prospect of a strategic shift at Big Blue, has many customers rattled. Now, Gerstner has a lot of bridge-building to do with customers. "The big thing that is missing there is trust," says Robert J. Randall, microcomputer coordinator for Universal Foods Corp. in Milwaukee.

Rivals, meanwhile, are moving in for the kill. When Akers said late last year that the company would deemphasize mainframe investment, says Willem P. Roelandts, head of Hewlett-Packard Co.'s computer systems division, IBM customers began switching to HP minicomputers for the first time. One example: Bard White, chief information officer at Spalding Sports Worldwide in Chicopee, Mass., who bought a Hewlett-Packard machine early this year. "Cost-wise, IBM was way off base for the performance they offered," White says.

Some worry that further customer defections will follow if Gerstner doesn't articulate his strategy more clearly. IBM "has to decide what the company's about," and build the products to hit that target, says Steven A. Ballmer, a Microsoft Corp. senior vice-president. "It sounds like Gerstner's trying to do some good things to batten down the hatches. But I don't see the strategy, at least in software."

To be sure, Gerstner has his hands full dealing with the here and now. After General Motors Corp.'s $21 billion charge in 1992's first quarter, IBM reported the second-largest quarterly net loss in corporate history--$8 billion, or $14.10 a share. That was coupled with a 4.3% decline in quarterly revenues, to $15.5 billion, and a cut in the annual dividend to a mere $1 a share, from $2.16. In just about every IBM business, the trend during the quarter was down: Overall sales of computers and other hardware fell 12.9%. Demand, Gerstner says, is soft all over the world. Given the breadth of the troubles, Standard & Poor's Corp. downgraded IBM's debt.

UNSWERVING COURSE. Gerstner has defined some areas of technological emphasis for IBM, though he's just getting started. He singles out IBM's computer-chip manufacturing division as one area that can be counted on for more revenues. IBM is the world's biggest chipmaker, even though virtually all of its production is for its own consumption. In the 1970s, in a decision that still astounds many, IBM decided not to sell chips to outsiders. That decision may be reversed. "We want to find ways to leverage" the chip technology, Gerstner says. He says he also hopes to foster more projects such as the PowerPC, a personal-computer microprocessor co-developed with Apple Computer Inc. and Motorola Inc. that is poised to fight a pitched battle with Intel Corp.

Gerstner says he is also excited about the opportunities offered by the shift to servers, computers that act as a hub for networks of PCs. There, he undoubtedly sees opportunities to sell more high-margin mainframes and minicomputers, which IBM is pushing as the servers of choice. But he can't count on that part of the business to bail out the company. In the second quarter, revenues from AS/400s, 60% of which are sold as servers, declined vs. last year. The silver lining: The rate of decline was less than in the first quarter.

Some IBM watchers worry that Gerstner may be counting too much on mainframe sales, a longtime IBM failing. Gerstner says predictions of the mainframe's death are exaggerated--a controversial conclusion. A recent survey by consultants Forrester Research Inc. found that 34% of the 1,000 largest U.S. companies are against using the mainframe as a server for PCs, citing the expense. Worse yet for IBM, 20% see "no future" for their mainframes. "IBM's current attempt to reposition the mainframe as an `enterprise-wide server' is falling on deaf ears," says the survey.

Gerstner, of course, may still come up with more ideas. He says he is at the beginning of his learning curve and that the $64 billion IBM is far more complex than RJR Nabisco Inc., the $16 billion company he ran before. "It's geometrically more difficult," he says. Even so, Gerstner doesn't plan to share the job. He says he will not name a president, as had been speculated. Instead, he will depend for advice on a circle of executives that has yet to be completely formed.

The upshot: For now, IBM is a work in progress. The vision will have to wait until the hard work of restructuring is done.

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