Olivetti's emphasis on PCs, services, and telecommunications provide short-term relief and may drive a turnaround: long-term challenges remain

Computer Industry Report, March 25, 1994

The recent award of Italy's second cellular license to an Olivetti-led consortium of international suppliers demonstrates the Italian company's long-term diversification strategy. Olivetti is looking for increasing revenue from a variety of nontraditional IT services. The win will provide that and more, including a visible reminder that Olivetti can indeed compete and succeed in new markets.

However, Olivetti still faces several significant challenges. It is making the best of a bad situation. The European economy is stagnant; Italy's politics are in a state of turmoil. The company is hampered by government policy dictating employment levels that limit the speed at which Olivetti can rightsize. The slide in the value of the Italian lira meant that overall worldwide sales showed an increase, but in real terms were again off, in 1993. Further, Olivetti still faces the long-term problems that have troubled it for years: a muddled product set and overall strategy that is rooted in the past.

Thanks to reorganization administered by new management and more effective cost containment, however, Olivetti will operate in 1994 at near breakeven. Olivetti is beginning to address the longer-term strategic problems. Its 1993 revenues increased 7.3%, from $5.1 billion to $5.5 billion. Losses in 1993 were narrowed to L300 billion (or $176 million). The company's debt has been decreased to one-third of equity, down from one-half at the end of 1992. PC sales are climbing and are now a far greater contributor to Olivetti's bottom line than are system sales. Margins in 1994 will expand, thanks to increasing services sales. Despite the persistence of the company's long-term challenges, we note the following positive changes at Olivetti:

* Fewer products. Olivetti no longer sells MIPS systems. Pyramid, NetFrame and Stratus are sold only to selected customers. The company's system strategy focuses on Unix-based intel and Digital's Alpha-based products. Whereas this choice is certainly not beyond reproach, Olivetti can no longer be faulted for selling too many platforms and supporting them all poorly.

* Services transition. Olivetti is moving from a breaks/fix-services focus to systems-integration and professional-services focus in its services business. Remedial services remain a harvestable business line that is funding expansion into higher value-chain activities.

* Lower head count. Olivetti's total worldwide labor force has been reduced by 25% in the last 30 months. This bodes well for the company's ability to offer products and services at competitive rates. In fact, management would like to proceed with the staff reductions slightly faster. In an age when Olivetti's most significant competition comes from companies that do not feel the paternalistic need to retain full employment, the alternative is continued huge losses.

* PC focus. Olivetti is doing what it does best, and that is PCs. It is the dominant PC supplier in Italy, where unit sales grew by 30% in 1993. PC unit growth is even faster outside Italy 45% in 1993.

* Slimmer organizational structure. Most notable among the many organizational changes at Olivetti over the past three years has been the increasing freedom granted to front-line services assets. Olivetti's third-party maintenance operation is profitable, and its systems integration unit has been growing.

* Vertical market economies of scale. Olivetti is focusing its software and systems integration problem-solving expertise in three vertical markets (banking, public administration and retail/distribution) that share one key attribute. As a result, Olivetti can focus its significant development resources on a relatively small spectrum of IT products (middleware and applications in distributed, end-user environments).

The good news is that Olivetti management expects the company to break even in 1994. The return might have come more quickly had either the Italian government or the Italian economy cooperated. They have not. Flat forecasts for the next 12 months do nothing to brighten the outlook.

However, Olivetti's new management does deserve credit for addressing the company's existing fundamental weaknesses, even though it has made only limited progress to date. Management has moved to restore competitiveness in Olivetti's traditional businesses and to expand into new markets. Both will be important components to Olivetti's ultimate turnaround. Unlike past management, the current group appears to have a solid understanding of the dilemma, even if it also understands that there is little it can do to remedy the situation.

What will the company need? Restoring Olivetti to profitability and growth will be an uphill battle. The moribund European economic situation has done nothing to simplify Olivetti's turn-around. Approximately 35% of the company's revenue is generated inside Italy. And Italy's economic picture of late has not been particularly encouraging. What's worse, Olivetti cannot expect much growth from the rest of Europe, either. The lack of economic growth in European countries outside Italy (which represent another 44% of Olivetti's revenue) has been a primary contributor to its lackluster performance.