When does a BMW become a Hyundai? Sam Palmisano has been turning these words over in his mind at the IBM PC Company’s headquarters in Raleigh, North Carolina, ever since he became the latest IBM general to take on the challenge of halting IBM’s faltering progress in the PC sector, the fourth high-level IBMer to be given that challenge in the space of just three years. With the motor industry reference, Palmisano, formerly head of IBM’s illustrious US services unit, illustrates the ‘brand equity’ problem IBM faces: although it claims a 50% share of the high-end notebook PC market, the IBM PC Company cannot seem to replicate that success in the broader market for mainstream notebooks. But Palmisano’s analogy could just as easily be extended beyond the notebook market to portray the dilemma which IBM faces as a whole as it struggles once again to come to terms with the industry it spawned back in 1981. Since the first IBM PC rolled out of Boca Raton, Florida 15 years ago, IBM has sought to leverage much – but not all – of its expertise and might in order to dominate the PC market. Until the early 1990s and the rise of serious competition, it ran with the ball. Just three years after the IBM PC was launched, IBM was posting annual PC revenues of $4 billion. But with the rise of Compaq, Packard-Bell, Dell and more recently Hewlett-Packard, IBM has been fumbling badly. While the PC Company may have never been out of the top three of the world’s PC makers, it is gradually losing its grip. Last year, according to market analysts Dataquest, the worldwide PC industry grew 25% to 60 million units. IBM, however, managed to grow its unit shipment by just 21% to 4.8 million leaving it with an 8% share, down from its 90’s highpoint of 15% in 1993. The picture in the US is even worse. In the first quarter of this year, the company dropped out of the top three PC vendor hierarchy for the first time, registering a lowly fifth position.
Whereas rivals such as Compaq and Dell have used the PC business as a springboard to corporate might and handsome profits, IBM seems never to have got the hang of the post-infancy PC business. Its PC unit has consistently made losses and, unlike Compaq and Dell, it has had to watch and suffer as PCs and related technologies have contributed to the collapse of margins in its mainframe, minicomputer and server businesses. According to IBM analyst Bob Djurdjevic, while total PC Company revenues were up by 3% to $8.7 billion in 1995, the division still made a loss of $286 million.
It is no exaggeration to say that when IBM launched the first PC it created a monster, which it is struggling to contain. Such has been the company’s difficulty dealing with the PC that today there are two entrenched schools of thought about how it should move forward.
One view is that IBM should admit that it cannot make PCs profitably and get out of the market. IBM should not be in PCs. Do telephone companies make telephones?, says Djurdjevic. The second, probably more realistic but no less dramatic in its implications, is that if IBM wants to stay in business it had better re-engineer its whole PC philosophy.
The cut-your-losses view owes a lot to the Palmisano BMW or Hyundai analysis of the market. IBM is good at making BMWs: sophisticated, highly engineered, high-performance, no compromise products which sell at premium prices to a sophisticated and demanding, if elite, customer base. Compare that with Compaq. It would not blanche at being likened to Hyundai, a company which also makes well engineered products, but tailors its specifications to the demands of a broader audience which places greater emphasis on value for money and ease of purchase.
In its own way, the Compaq approach to making and selling computers is every bit as no compromise as IBM’s; it is simply geared to the requirements of a market with a very different set of values than the one which IBM has traditionally served. For those very reasons, the crash and burn view believes that IBM cannot compete with Compaq, and yet still be IBM – anymore than BMW could compete directly with Hyundai and still retain the brand cach which is so important to its success.
If this analysis is correct, it suggests that IBM would be better off if it gave up pouring money into a fight it cannot hope to win. But that is a view IBM will not accept.
In Raleigh, Tony Santelli, the IBM PC company’s general manager of product and brand management, spells out why IBM is determined to stay in the PC business: Put simply, it cannot afford to sidestep that huge revenue base, he says.
Today, says Santelli, the worldwide PC hardware market is worth $137 billion. And, unlike virtually any other major part of the computer industry even in a recession, the PC business still grows at around 12% per year. That PC hardware sector is on target to hit $250 billion by 2000, he adds, and a company of IBM’s size – and one which wishes to stay at more than twice the size of its nearest competitor – cannot afford to shun such a huge revenue opportunity. Neither, he believes, can it expect to fully exploit it by restricting itself to the premium-end of the market.
Internal war cry
The impetus to act now is there. The erosion of IBM’s worldwide PC market share from 10% in 1994 to 8% last year has allowed Compaq to stretch its lead. But Compaq is not the only threat – Hewlett-Packard, IBM’s arch rival in servers, has also now risen above the PC Company in the US market share league.
The response at the IBM PC Company has been a mix of re-motivation and practical action. The company has introduced changes that it hopes will deliver +10 by 2000 – an internal war-cry for 18% market share by the end of the century (see box). This includes the introduction of a much refined demand tracking and forecasting model that is designed to help overcome what, in the past, have been chronic inventory surplus and shortage problems. Changes in manufacturing techniques should, it says, also cut time to market with new products and make the company more responsive.
Alongside these moves, the PC Company will reduce the number of models it supports and back even further away from home-grown technologies such as the PowerPC processor and the OS/2 operating system. Its weak support of PowerPC, a product strongly backed by the rest of IBM, has already helped its relationship with Intel. This, coupled with an agnostic attitude to operating systems, it says will enable it to embrace Windows and Windows NT more fully, a move that should make large users less suspicious of the PC Company’s motives.
Meanwhile, IBM’s isolation at the high-end of the PC market, and the measures it must take to break out of its premium ghetto, are well illustrated by its predicament in the mobile market. IBM’s flagship product in this area, the ThinkPad 760, has been a tremendous success. The ‘Butterfly’ version, which featured the much admired expanding keyboard, was the company’s biggest ever first day seller – that was until it launched the ThinkPad 360, IBM’s first entry-level notebook. Good news, but it is the high-end machines which remain IBM’s strongest offerings, accounting for 75% of ThinkPad sales and giving it half of the high-end world notebook market.
This dominance of what IBM calls the ‘burner’ segment is valuable, but it only gives IBM a 10% share of the fast growing (41% per annum) $29 billion market for mobile computers. This leaves IBM trailing rivals like Compaq and Toshiba, at a time when an increasing proportion of notebook computers are bought as alternatives to conventional machines. Last year, IBM estimates, 20% of mobile computers were bought as alternatives to desktops. This year it expects the ratio to be 50:50 and as much as 80:20 next year.
Many of these new portables-on-the-desktop are likely to come from the mid-range sector which IBM has so far left to rivals. This balance segment, populated by slightly less sophisticated machines at lower prices is where IBM is targeting its new ThinkPad 560.
The 560, according to Bob Stephenson, IBM senior VP and group executive of the personal systems group, is among the first products to benefit from a change in thinking at IBM. At one time, he confesses, IBM would take independent already-standard technologies into our labs and try to make them better. Frequently we would manage [to improve on the accepted standard], but we were [then] usually 16 months late [with the product]. We will no longer do that, we will no longer be laggards in technology. We will take what technology is available.
In the case of the 560 this has led to the use of newly-available 12.1 inch TFT display technology from Japan several weeks ahead of Compaq or Toshiba. IBM will no longer sacrifice time to market for internal reciprocity, says Stephenson. And, perhaps even more significantly for the BMW of notebooks, IBM is shipping the technology in a product not considered to be top of the range.
The same attitude will be brought to bear on all IBM PC products from now on, says Stephenson. We will ship the first Pentium Pro desktop, and we will ship the first Pentium Pro server, he promises.
This determination to be first to market with either independent or internal technology is one of the core commitments for the IBM PC Company, says Stephenson. It has already turned the unit into a net consumer of technology, with around 60% of PC product components now designed and manufactured outside IBM. It is a figure which may grow, but not much. Another core commitment is to be a leader in innovation, which means taking much better advantage of our sister divisions.
Hanging On
Worldwide PC market share 1995
IBM chairman Lou Gerstner has made it clear that technology hoarding by individual divisions will no longer be allowed So when the PC division sees something elsewhere in the company that it likes, it is entitled to go and get it, says Stephenson. Some of the first evidence of this is likely to arrive later in the year when IBM begins to roll out clustering technology for its PC line which has been developed by the RS/6000 Unix server division. Also this year, the PC Company will ship a 100 MB disk drive the size of the quarter, which is already in prototype in IBM’s labs.
The new IBM willingness to be first to market with other people’s technology, and to ruthlessly farm its own laboratories for technologies, is not altogether unfamiliar. IBM has made commitments to industry standards before, only to be seen to be dragging its feet if it thought it had the opportunity to promote its own products ahead of emerging standards. This time, the ring of authenticity in IBM’s statements may be heard less in what IBM says, and more from what it leaves unsaid. There is barely a mention of PowerPC processors, the OS/2 operating system or the Lotus Notes groupware product.These three products are not part of the IBM PC Company’s portfolio.
This does not, however, necessarily indicate that IBM as a whole has turned its back on them. Nevertheless, the fact that they go virtually un-mentioned indicates that, as far as the PC Company is concerned, they are of no greater significance to the overall game plan than any other third-party product, such as Intel’s Pentium, Microsoft’s Windows NT, Sun’s Solaris version of Unix or Microsoft Exchange.
Indeed, for Michael Coleman, general manager of PC servers, home grown products like OS/2 are definitely running second to those like Solaris which, in the Internet space, are outrunning the other two [OS/2 and NT] combined on IBM PC servers. For more general purpose application areas, Windows NT is now a strategic priority for IBM. It may have come to the party late – we were always on a delayed beta with Microsoft, says Coleman – but now IBM has decided to become a world-class NT supplier and expects to be a Windows NT ‘self-certifier’ before the end of the year.
For most companies, such simple commitments to market leading products amounts to obvious business sense. But having invented the PC 15 years ago, IBM has consistently treated the term ‘IBM PC’ almost as if it was a real IBM brand and then, equally consistently, it has responded with surprise when the PC market has stubbornly refused to follow in the directions IBM would have preferred it to go.
The penny now seems to have dropped. IBM’s commitment to winning in the commodity PC market has never been greater. And it will bring everything in its arsenal of resources to make the PC work for the good of IBM. It has not completely relinquished its own ambitions to be an innovator and market driver, but it will no longer put its own ambitions ahead of market demands.
As Bill McCracken, IBM’s corporate general manager for sales and support puts it: Do we want to sell OS/2? You bet. Do we want to sell Windows NT? You bet. Do we want to meet customer demand? Absolutely.
The elephant has said it can dance before. Now, its most troublesome offspring must show some pretty nimble steps too.
WILL IBM ACHIEVE ‘+10 BY 2000’?
Last month, executives at IBM’s PC divisions started telling the world that IBM has a +10 by 2000 strategy which would see it add 10% to its global PC market share by the end of the century. Tough talk in tough times.
The bullish ambitions will require a massive turnaround. Last month, market research group IDC revealed the extent of IBM’s deteriorating performance in the all-important US PC market. Here, IBM’s market share has slipped so badly that during the first quarter it dropped from the top five PC vendors list for the first time since the PC debuted in 1981. And the company’s worldwide market share in 1995 slipped to 8% from 10.8% the year before.
Pundits have been quick to suggest how IBM could achieve its grand design. IBM must reduce its inventory; reduce the number of models it supports; ditch dead-wood products like OS/2 and the PowerPC. But even if IBM does all these things, it will still have to contend with the efficiencies of manufacturers such as Compaq, Gateway and Packard-Bell, while dancing carefully around Intel’s toes.
IBM’s critics point out that its ‘+10 by 2000’ ambition smacks of wild optimism, but this time there may be more substance to IBM’s plans. The IBM PC Company has moved on – and some observers have missed the early signs of motion. IBM, for example, recently completed a major revamp of its manufacturing process, and now has a different inventory model, quietly shifting inventory into the channel by having major distributors complete final assembly. IBM does still have too many models, but fewer than before.
And how will products such as PowerPC and OS/2 prevent IBM selling more PCs? Critics should note that they are not part of the IBM PC Company’s portfolio – they are someone else’s problem within the corporation. The PC Company is concentrating on its Windows skills, plus leveraging what advantage it can from IBM software like the NetFinity network management technology.
However, there is no sign that the IBM PC Company expects to win this extra 10% of market share over the next four years on the back of anything other than a commitment to the standard technology that it hopes to buy from Intel in increasing volume.
The real obstacle to IBM’s grandiose ambitions for its PC company is plain old competition. However sincere the company is that it will no longer try to dominate the PC arena by reinventing it, there is still no guarantee that it can overhaul Compaq et al through sheer marketing weight. IBM is already going backwards in the home PC market, the sector which will make or break the major players in the back-end of this decade.
The IBM brand name carries little weight in the home market, and the company may yet make more money in that sector by supporting the products of other vendors than by pumping its own products into every available channel at suicidal prices. However, as the competition hots up, as it surely will, who will really have the financial legs to go against IBM in a market share battle. Maybe Hewlett-Packard and Compaq, but not Gateway or Dell, and certainly not Packard-Bell.
With the PC market set to more than double in the next five years, those competitors who insist on believing that IBM is still an unwieldy giant which has outlived its time risk coming unstuck.
IBM the behemoth still exists, but IBM the PC company is now a more autonomous and very different proposition. It just happens to have a very large, and potentially very innovative partner.
APT Data Group Plc, 1996.
