The world turned upside down? IBM in the 1990s

Business Horizons, Nov-Dec, 1990 by Eugene F. Bryan

It sometimes seems that computer industry watchers spent much of the latter half of the 1980s laying odds on the fall of IBM. And IBM's performance in that period, concluding in 1989-its 75th birthday as a public corporation-has not always met the standards people have set for Big Blue. Sales revenues in 1989 reached only $62.7 billion, not the $100 billion forecast by Wall Street five years earlier. Return on equity (ROE) stood it less than half its 1984 high. Figure I shows long-term trends in return on sales (ROS), return on assets (ROA), and return on equity.

IBM dropped to 45th place in Fortune's 1989 ranking of "America's Most Admired Companies." In the early and mid-1980s the company consistently ranked first. Wall Street analysts took IBM off their "buy" lists.

How did it happen? More important, will IBM work its way out of a long slump, or is it in trouble for keeps? The company has long been so successful that even its logo is a near-icon, a symbol of American managerial and technological excellence. If the slump is a chronic condition, then perhaps it really is "The World Turned Upside Down."

What follows is an attempt to answer questions about a possible turnaround. The discussion proceeds in four parts: a look at IBM's challenges and problems; in examination of its enduring strengths; an analysis of its management strategy; and an investigation of three possible outcomes as IBM heads into the twenty-first century.

CHALLENGES AND PROBLEMS

The place to begin looking for answers to questions about IBM's future is the industry from which it derives some 90 percent of current sales revenue-Information Technology, comprising four segments: Computer Equipment, Software, Information Services, and Communication Equipment.

The U.S. Industrial Outlook (1990) identifies three trends that will change this industry's shape forever and present IBM with its greatest challenge since the electronic computer replaced mechanical tabulating equipment in the 1950s.

1. Maturing Demand for Hardware; Growth in Software and Services. The hardware segment of the industry is maturing. Demand is slowing and shifting from high-margin mainframes-IBM's strong suit and the source of a sizable slice of operating profits-to low-margin workstations and personal computers. In the future, software and services will drive industry growth. The U.S. Industrial Outlook forecasts growth rates of 25 percent for software and 24 percent for services through the 1990s. Figure 2 shows both software and service industry segments overtaking hardware in dollar volume by the decade's end. Unfortunately, only 13 percent of IBM's 1989 revenues came from software. Service revenue-excluding equipment maintenance-was negligible. What's more, IBM's annual growth rate for software, at approximately 6 percent, was less than one-third the industry average.

2. Increased Competition. Now anyone can build a computer. Many vendors of microprocessor-based machines (PCs, workstations, multiprocessor minicomputers) use off-the-shelf parts and rely on others for circuit board and component assembly.

Quite simply, this means that anyone willing to risk dependence on suppliers-mainly from the Pacific Rim-can avoid the immense investment associated with vertically integrated manufacturing and enter the industry's high-growth equipment markets.

Also, anyone can buy a computer. The Diebold Group's biannual "Information Technology Budget Survey" (1988) estimates that one-third to one-half of 1989 spending on hardware was not under direct control of the information systems (I/S) executive.

Now that the I/S executive no longer holds exclusive control of the purse strings, there are hundreds of places in every business to strike deals for computers and software. In fact, a proprietary sales force is n() longer an absolute necessity for firms entering the information technology business. Dealers, agents, and computer stores all push products for a commission.

Taken together, the changed dynamics of building and buying computers opened the door wide to a host of firms that prospered mightily in the 1980s. Compaq Computer and Sun Microsystems are o good examples. Ten years ago neither company existed. In the early 1990s, both are multi-billion dollar businesses.

Meanwhile, while IBM has its hands full with domestic U.S. competitors, there's trouble brewing across the Pacific. In 1989, japan's eight largest electronics companies rang up computer sales in excess of $60 billion, approximately equal to IBM's revenue. This impressive achievement, the result of a decade of double-digit growth, makes the japanese electronics companies a team of major league players. And these japanese companies are well positioned in the consumer electronics, communications, and semiconductor industries. Participation in these industries provides cash flow to match IBM's deep pockets, as well as access to complimentary technologies needed for the Total Systems Solution" of the 1990s. Any way you look at it, IBM faces fierce competition from both light-of-foot niche players at home and well-capitalized rivals across the Pacific.