The Man Who's Rebooting Ibm's Pc BusinessIra Sager
It's 8:30 Saturday morning, and G. Richard Thoman, head of IBM's struggling personal-computer business, is home conducting his weekly conference call. On the line are nearly a dozen top managers worldwide--from Raleigh, N.C., to Paris, where it is almost dinnertime. He goes over the daily production and sales statistics--44 pages' worth--in excruciating detail, quizzing each manager in turn. How many computers were built? By product line? By factory? How many were shipped? What's in finished-goods inventory? Did we meet development and manufacturing deadlines?
This weekly ritual--it usually runs until 11 a.m., East Coast time--is just part of Professor Thoman's course in Management 101 for executives in the IBM Personal Computer Co. Thoman, along with Chief Financial Officer Jerome B. York, is carrying out one of the most critical missions in Chairman Louis V. Gerstner Jr.'s turnaround of IBM: revamping the seriously messed-up PC division. It has been losing market share for years. And last year, its perennially anemic profits suddenly turned into an estimated $1 billion operating loss.
GEARING UP FOR FALL. Gerstner knows that until he can fix that, the future of the entire enterprise will be in question. To begin with, the $9.5 billion-a-year PC operation is IBM's biggest hardware unit, accounting for nearly one-sixth of corporate revenues. More important, PCs are the dominant form of computer hardware. Already, 60 cents of every hardware dollar goes to PCs, and that figure will only grow, because PC technology is the building block for a wide array of products--from network servers that whisk data onto the Information Superhighway to massively parallel machines composed of hundreds of microprocessors that "mine" corporate data in a flash. PCs and related software "are very important to our future success," says Gerstner.
Gerstner may have already assured IBM's future in PC software with his $3.5 billion buy of Lotus Development Corp. The bold takeover, which was concluded on July 5, gives IBM the top products in electronic mail and groupware that IBM's own programmers couldn't produce. Gerstner figures that as the computer industry shifts from desktop PCs to networks, his new packages--more than operating systems such as Microsoft's Windows or IBM's own OS/2--may be the key strategic technology.
Meanwhile, Thoman is working overtime on a PC turnaround. Now, the first signs of success--some head-turning new products and an uptick in sales--are apparent. In the first quarter, IBM cranked out a record 1.1 million machines. Shipments rose 22% worldwide and jumped 37% in the U.S., according to market researcher International Data Corp.
Analysts expect the second quarter to be more of a mixed bag: Sales in Asia were strong, and Europe has been rebounding after a pitiful first quarter, thanks to improving corporate sales. But in the U.S., sales were flat with last year's second quarter because of soft home-PC sales. In all, analysts expect IBM's second-quarter PC revenue to rise 15%, still trailing an industry that's racing ahead 20% a year. Overall, though, Wall Street is encouraged. On July 7, IBM's stock hit $100 a share--the first time in three years. And on July 18, analysts expect the company to report earnings of $1.3 billion on a 15% revenue gain to $17.5 billion.
The test of the PC company's comeback will come in the crucial fall selling season, when 40% of all PCs are sold. Gerstner has just given the go-ahead for the creation of a new consumer division aimed at giving IBM a sharp focus on the home-PC business. The division's first job will be to launch a new Aptiva home-computer line. Fall is also a big season for corporate buyers, and IBM has goodies for them, too. The ThinkPad portable line will be totally revamped and will share the innovative keyboard of the highly regarded "Butterfly" PC. New, lower-priced machines will be aimed at boosting IBM's 9% share of the portable business.
If these products click, IBM will be in a position not only to retake lost market share but also to start generating profits, which Thoman says is now the higher priority. Merrill Lynch & Co. analyst Daniel Mandresh figures the PC operation is now in the black. He estimates that sales for the year will jump 15%, to $10.7 billion, and PC profits could add as much as $500 million to IBM's $5.9 billion bottom line in 1995.
That's because--under a crash program launched last winter by Thoman and York--the division has tightened up its internal operations: Finished-goods inventory dropped 65%, procurement and distribution costs have come down 50%, and the unit was able to shut 13 warehouses in Europe because it is managing supplies better. Analysts figure the division's gross margin is back to around 19%, from a money-losing 13% a year ago. And now IBM management vows to match Compaq Computer Corp.'s 25% gross margins. "I think we've made enough progress to start to feel good that we're going to fix this," Gerstner says.
After 23 years of working with Gerstner, Thoman knows better than to set expectations too high. His assessment: The job isn't nearly done. Overall, he rates the current performance of IBM PC Co. a C+. Still, that's up from the F he gave it last spring--when the PC operation seemed to be in free fall. Once the overwhelming revenue leader in the market, IBM PC Co. was skidding toward No.4 in the U.S. and No.2, behind Compaq, around the world. Products trickled out of development, and forecasting was inept. Big Blue had an oversupply of outdated dogs and a shortage of potentially hot-selling new models. Bottom line: While the industry was racking up double-digit revenue growth last year, IBM PC was writing off $700 million in obsolete inventory, watching sales shrink 6%, and sticking Armonk with a $1 billion loss.
A MARKET FORCE, AGAIN. Thoman is determined never to repeat that sorry performance. The 51-year-old executive, who planned on a career in diplomacy and earned a doctorate in economics before joining Gerstner at McKinsey & Co., has helped his boss hawk credit cards at American Express Co. and cookies at RJR Nabisco Inc. Since Gerstner brought him to IBM, he has been studying techniques that rivals such as Compaq and Dell Computer Corp. long ago mastered: How to bring products to market quickly, build them in sufficient volumes, cut their prices at the optimum moment, and replace them before they're unsalable. Says Thoman: "We had a business which had never functioned correctly."
Now, new products are created by teams from research, design, procurement, logistics, and manufacturing--all working side by side in Raleigh instead of sprinkled across the country in nine different locations. The most promising outcome from that process so far: the Butterfly subnotebook. It moved from a lab project to a finished product in 18 months--a record for IBM. In an industry with nine-month product cycles, that's not overly impressive, but it was a big step forward.
IBM is once again a force to be reckoned with in the market, too. Discount broker Charles Schwab & Co. picked IBM to supply 6,000 PCs after considering other PC makers. "We did not pay any premium to go with IBM, trust me," says Dawn Lapore, Schwab's chief information officer. "That's a new IBM, as far as I'm concerned."
If people are skeptical of an IBM PC turnaround, they have good reason. Almost since its inception in 1980, the IBM PC business has been on a roller coaster--reversing periodic slides and winning back market share only to suffer even steeper drops.
Thoman came in on an uptick in January, 1994. Then, PC Co. was pursuing the type of multibrand marketing strategy long used by consumer-goods companies and then being adopted by such rivals as Compaq. With new lines such as the ValuePoint, IBM quickly became far more competitive on price and features. But signs of the next downturn were already showing: Too many nameplates were confusing to customers, and each brand behaved like an independent company, sending costs skyrocketing.
MOST VISIBLE FLUB. By then, the system--such as it was--was about to grind to a halt. The PC Co. simply could not get new products out the door. It missed every internal deadline, then missed revised schedules 41% of the time. New products lagged behind competitors' by an average of three months. And in the fast-moving PC market, that was fatal. Analysts figure that 50% of the profits for any new model is generated in the first three months, when prices are highest. After that, it's a game of diminishing returns.
Thoman quickly determined that an overhaul was needed--from the ground up. He says he was shocked to find a high-tech company that had absolutely no timely data on its operations. Here was a nearly $10 billion operation in a rapidly changing business, and it could gather results only on a monthly basis at best. Even then, the information was incomplete. "At first, I don't think I understood how severe our wrongs were," Thoman says. "It took me really into the fall to understand them."
That winter, Thoman called in York, a former Chrysler Corp. executive, to teach the PC crowd Manufacturing 101. York says planning and manufacturing systems were alarmingly inadequate. That was headache enough. But IBM engineers--who got bonuses for favorable reviews in technical magazines--also were adding last-minute bells and whistles that drove costs through the roof and made deadlines impossible to meet. That's ene reason the PC 700 desktop line, announced last October, wasn't built in volume until the first quarter.
IBM's most visible flub was the Aptiva home PC. Although technically solid, the Aptiva hit the stores absurdly late--10 days before Christmas. Even then, dealers couldn't get enough. Thoman admits now that the shortage was intentional. The Aptiva, it turned out, could not be built profitably. So he cut production. "If you're losing money, volume is not the solution, in my experience," he says dryly. The new fall lineup, Thoman says, will be plentiful and profitable.
Around IBM PC Co. headquarters in Somers, N.Y., Thoman is known for his mild-mannered ways. The son of a college professor, he dresses more like an academic than a high-powered executive. But don't stand in the way of his turnaround. Thoman has fired one product manager, and of 24 senior managers in place when he came, only 9 remain. "We have clear accountability," he says. His job, too, is on the line. Thoman points out: "If I can't turn this business around, then Lou should move on me, and I shouldn't be here."
While Thoman's job is in no immediate danger, he's leaving nothing to chance. That explains all those meetings, the checking and double-checking. Says York: "We're micromanaging this business right now." But that's precisely how the competition beat IBM in the first place--by concentrating on the nightmarish logistics of building millions of PCs a year, each containing thousands of components from hundreds of suppliers. "If a company can master all the logistics and supply-chain efforts, it is a key competitive advantage," says Richard E. Belluzzo, senior vice-president of Hewlett-Packard Co.'s computer-products organization. Adds IBM PC development chief Bruce L. Claflin: "This business is just attention to a billion details."
"MCDONALD'S NUMBER." Getting a handle on those details has not been easy. Hard to believe, but IBM--which does a big business telling its customers how to run manufacturing operations--didn't have a coordinated information system for its PC Co. In Raleigh alone, there were 223 incompatible computer systems. So in October, Thoman hired a chief information officer to put "headlights" on the business. He was fed up, he says, with trying to run things with "taillights"--using outdated information.
Now, data is collected from all the systems so IBM PC managers get a single report of what was made the day before in each plant--by product line. If production numbers drop from the previous day, the plant manager can expect a call from Thoman. Every day, managers see a fresh "McDonald's number" on their screens, telling them how many PCs have been shipped so far this year. A year ago, Thoman couldn't even tell whether he had laptops or desktops tied up in inventory. Today, every model is broken out so managers can see what's moving and what's not.
The most important part of IBM's battle to regain market share is taking place on the plant floor. Thoman carries around a list of six imperatives for the PC company, which he hands out wherever he goes. Top of the list: Become a reliable supplier--get the products out of the factory and to the dealers and customers when they want them. He says IBM has helped Compaq, HP, and others gain market share "by just not being reliable enough." That's why Thoman just hired David S. Hoyte--a former Frigidaire Co. exec with a lot of experience making high-volume consumer appliances--to run manufacturing.
Thoman and York now have the factories meeting delivery promises 80% of the time, up from a dismal 45% last year. But they want to start building more PC models to order. Under that system, instead of piling up inventories of what the company expects--or hopes--to sell, it will manufacture only what it has orders for. That's how mail-order giant Dell does it--and turns a healthy 8% aftertax profit on 21% gross margins.
POSITIVE PREVIEWS. York also helped Thoman zero in on the product-development group, which was screwing up deadlines and sending costs sky-high. Even when designs did make it to manufacturing, they usually arrived only two-thirds complete--requiring costly engineering changes and cutting time for testing. Now, procurement, logistics, and manufacturing people work together on new product designs. That way, when an engineer selects a part, there's someone in the room who knows how much the part will cost, how long it will take to get that part to a plant, and whether using that component may make it too difficult to build the machine.
The next six months will be critical. If IBM can't convince retailers that it's serious this time, it could have trouble getting them to stock its wares. "At a certain point in time, if they don't start figuring it out, people are going to give the floor space to somebody else," says Debbie Meagher, vice-president at Best Buys, a 210-store chain.
Thoman is focused intently on a smooth launch of his fall lineup. He has already previewed some models for retailers, and the early reaction has been positive. What's more, Thoman says, the redesigned Aptivas can be priced aggressively and still turn a profit. The acid test will be building enough of them. "Availability is the single biggest driver of market share," says Edward R. Anderson, president of Dallas-based CompuCom Systems Inc., a PC distributor. That's why executives of IBM PC Co. are still spending their Saturday mornings in Professor Thoman's class.
The Turnaround: A Status Report
PC CO. HAS DONE A LOT...BUT THERE'S STILL MORE TO DO
Slashed workforce 20% and costs by $400 million
New computer systems pump out daily status reports
Shipments up 22% worldwide in the first quarter; U.S. market share skyrocketed 37%
Inventory turns over every 60 days, up from every 80 days last year
All manufacturing deadlines met--first time in over a year
The number of different components used in PCs cut by an average of 50%
Increase gross profit margins--
today's 19% trails that of Compaq, Dell, and Apple
Tighten system to ship products within days, not weeks, of order
Streamline development to get new models into high-volume manufacturing faster
Expand successful portable PC line with lower-priced models
Field more consumer PCs in the $1,500-to-$2,000 "sweet spot" to
increase share in this key growth
Cut number of retail outlets to work more closely with fewer stores