The world turned upside down? IBM in the 1990s

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

IBM is focusing on reducing fixed assets. Since 1986 management closed three manufacturing facilities and cut capital spending to a 1989 rate equal to about 10 percent of sales revenue versus 13 percent in the early and mid-1980s. Also, outsourcing components and software from allies and business partners will reduce the need for future in-house investments in production facilities.

A LOOK AT THE FUTURE

If we accept the first three parts of our discussion as a reasonable summary of industry trends, enduring strengths, and IBM business strategies, we can begin searching for answers to the big question. Will IBM work its way out of a long slump, or is "The World Turned Upside Down"?

The answer to our question lies in the future, so let's try visualizing what IBM might look like going into the twenty-first century. Three possible scenarios suggest themselves. Running each scenario through a simple pro forma model forecasts IBM's financial performance. Table 2 summarizes results for the period 2000-2001; Figure 5 shows the more important results in charts. Let's examine each scenario, how it might come about, the implications for IBM's future, and the odds of its occurrence. Return of the Old Big Blue Under this scenario, IBM achieves growth rates equal to the information technology industry average by successfully moving up the value chain to the point where 50 percent of sales revenue derives from software and services. Revenue growth in these segments offsets a slowdown in hardware, driving IBM's total sales at a brisk 12 percent annual growth. Thanks to economies of scale and scope, return on sales stands at 11 percent. A trim asset structure (sales/ assets ratio equals 1.3) reflects increased participation in these non-capital intensive businesses. Return on shareholder equity reaches 25 percent. IBM easily retains its AAA credit rating. The result, in terms of financial performance: The Old Big Blue is back. IBM enters the twenty-first century as a $220-240 billion company.

Is such a scenario probable? In the author's opinion, no. True, the growth figures and profit margins reflect actual 1987-89 performance in IBM's non-U.S. operations. However, sustaining and managing this kind of growth for a decade in a company that starts from a base of $62 billion is another matter. No corporation of IBM's size ever sustained such growth for an extended period. No paradigm exists for such a management tourde-force. Also, the challenges confronting IBM-holding Japanese and domestic competitors at bay while simultaneously building strong positions in software and system integration services businesses-are simply too formidable to permit such an outcome.

Summary: very unlikely to happen. Probability assigned: one chance in ten.

Steady as She Goes

In this scenario, IBM enjoys modest success in the transition to software and services (they eventually total about 20 percent of sales) and experiences an average overall annual growth rate of 9-10 percent. Return on sales equals 9 percent, about the same as IBM's corporate average for 1986-88. Current assets are back in line with 1983's profile, producing a sales/assets ratio of 1.1. Return on equity is a solid 17 percent. Retaining the AAA credit rating is open to question, but the company may just do it. IBM enters the next century as a $160-180 billion company.