The world turned upside down? IBM in the 1990s

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

A comparison of working capital assets for three firms in the information technology industry illustrates an ongoing problem. At year-end 1988, $27.6 billion, equal to 169 days' sales, sit in IBM's plants and warehouses as inventory or remained uncollected as outstanding accounts receivable. The figure is 133 days for Digital and just 111 days for Hitachi. IBM required only 97 days investment in inventory and accounts receivable back in 1983. The difference between 1983 and 1988 is 72 days worth of sales. Accounts receivable is the major problem. Even after subtracting approximately 18 days' receivables owned by IBM's finance subsidiaries, the net difference in receivables between 1983 and 1988 is still 54 days. This adds $8.9 billion in current assets to the balance sheet.

Products

IBM is frequently criticized for its pace of product introduction-too little and too late, especially in small systems. This means that despite enhancements and mid-life kickers to existing products, IBM has trouble keeping technologically abreast of more fleet-footed rivals.

Historically, IBM hardware generations follow a five- to six-year cycle. In large systems, where IBM sets software standards, this presents few problems. But look what happened when IBM moved at this same conservative pace in the world of personal computers. IBM introduced its original PC in mid-1981. The new generation PS/2 did not ship until mid-1987. While IBM stood pat, the clones" appeared, quickly followed by systems based on newer technology. As an example, Compaq Computer began shipping IBM-compatible PCs in 1983 and introduced its next-generation machine in 1986. Result: Industry watchers estimate IBM's share in the PC market for business systems fell from 60 percent in 1984 to 25-28 percent in 1989. People Management It seems that every article chronicling IBM's woes begins and ends with recommendations for getting rid of people. Does IBM have too many people on the payroll? The data suggests that perhaps IBM is a little thick around the middle. Personal productivity measured in sales per employee stands at $164,000 for IBM, compared to $173,000 for Sun Microsystems, $177,000 for Hitachi, and $259,000 for Amdahl. The trend over time for IBM's U.S operations definitely looks bad. Sales per employee measured in constant 1982 dollars dropped 15 percent, from $110 million in 1984 to $94 million in 1989. We shall return to this issue when we look at IBM's strategy.

So far we've been looking at nothing but the challenges and problems confronting IBM. Now it's time for a look at Big Blue's strengths.

ENDURING STRENGTHS

IBM enjoys important advantages resulting from long-standing relationships, economies of scale and scope, and massive investments in R&D and plant automation. These advantages translate into four strengths that will endure at least through the 1990s. Let's examine each in turn.

Worldwide Presence and Prestige

IBM does business in 132 countries, supplying 5 million customers with 10,000 hardware, software, and service offerings. In 1989 non-U.S. operations accounted for 59 percent of revenues and 100 percent of corporate profits. Moreover, IBM is number one in every large national market in which it participates, with the sole exception of Japan. And participation does not mean just marketing. it also includes manufacturing, research and development, service, and education. This position gives IBM both breadth and depth that no other company can match.