I want to start by apologising for the fact that we postponed this meeting twice. We were originally scheduled to do it in March, and then right in the middle of the Lotus deal. I must confess, the thought did occur to me that we’re on a roll here: since we started postponing these meetings, the stock is up 30 points and maybe we had found the secret. But Jerry [York, chief financial officer] wouldn’t let me do that. I do want you to know that, coming from a consumer background, I did ask Hervey Parke to do a survey of what you wanted to hear me talk about – or hear us talk about. We did this about a month or so ago, and we got back a real dog’s breakfast in terms of responses. It was all over the place. Some of you wanted to hear from seven or eight of us; some of you wanted to hear from only one of us. Some of you wanted to hear about sales; some of you want to hear about technology. So, I’ve decided to talk about something that’s of interest to me.
Customer
I’m not going to talk about financials. Jerry reviewed our second quarter with you two weeks ago. I want to talk a little bit about our strategic perspective as I did with you last year. You can talk about strategies in lots of ways – we can talk about our financial strategy, but I think Jerry’s covered it with you very well in the past: our expense reduction, our strategy for cash, our priorities for cash, our views of our development spending. I could talk to you about our strategy from a technological point of view. We’re very excited about the bipolar to CMOS transition. We are very excited about the AS/400 going to PowerPC. We’re very excited about our leadership in parallel processing and disk. And, of course, we’re very excited about our networking strategy, and Lotus being a very important part of that. But I’m not going to talk about strategy from a technical point of view, although obviously we can take questions on our technology later. Instead, I want to talk to you about strategy from a perspective that I think is very important in any company, but is particularly important in this industry, and that is strategy from the point of view of the customer. Because this is an industry that is remarkably insolent in the way it deals with customers. It is very customer-insensitive. We have decided to organise IBM around five customer groups. We have done this. And this will be the prism through which you will see our view of growth. And it also is the fundamental driving force behind our resource deployment and our development spending. Why customers? Well, we’ve redefined the mission of IBM to encompass two objectives: the first is that we will continue to be the leading foundry of the intellectual capital that drives this industry. But secondly, and equal ly important, we are going to become the leader translating the technology into value for customers. Because as I talk to customers all over the world, of all sizes and shapes, perhaps the thing they tell me the most is that the translation of this technology into value is difficult, sometimes bewildering, and a subject that IBM and the industry at large simply does not spend ample time in both its development budgets and its marketing activities. So, let’s talk about our five customers. I’ll do that very briefly and we can take some questions on these subjects or any other subjects you want to ask about. The first customer group which we’ll focus on shouldn’t be a surprise. It’s large businesses and institutions.
Louis Gerstner address
On July 31 in New York City, IBM Corp made its annual presentation to analysts, with chairman Louis Gerstner topping the bill. Here, and in two future issues, we present his address. This is obviously the most logical, high-priority customer group for IBM. This is our turf. This is our stronghold. We have relationships with nearly all of the world’s largest institutions, relationships that our competitors wish dearly they had. But for sure we’re not taking these customers for granted because they are changing in their view of informati
on technology in very significant ways. There is the relentless pressure throughout the world on large enterprises to reduce costs, increase cycle time, go global, improve customer satisfaction, flatten organisations – and in every other way to develop competitive advantage. And this technology is the technology of re-engineering. Information technology is the technology that allows radical restructuring of enterprises. Let me tell you what these customers are telling us about their IT requirements. First of all, they are seeking – more than ever before – solutions. They want integrated technologies from the industry once again. They don’t want piece parts. And as a result, their needs are driving a partial reintegration of the industry. The industry, as you know, disaggregated about 15 years ago and broke up into what had been originally eight or 10 competitors into 60,000. And the customer basically assembled the technology on his or her premises, driven by that wonderful promise the industry made of interconnectivity and openness. Now, because customers are demanding solutions and not piece parts, you see 760 transactions last year in the merger and acquisition area in this industry totalling $68,000m – up from 530 and $21,000m the year before. You can’t pick up the paper today without seeing another alliance. Very recently: Compaq-Cisco, Intel-Oracle, Novell-FileNet, Sprint-MCI and America Online. What goes round comes round. When I stood here two years ago, when we first got started here, I remember that the strategy driven by the investment bankers at the time was to break IBM up into a bunch of little pieces and follow the model of the piece-part approach to the industry. And it would have been exactly the wrong thing to do at that time because the industry’s coming back our way. All of these competitors I just mentioned are trying to do what IBM does every day. And that is to integrate all the parts of this industry into solutions. The second thing that the customers – the la rge customers – are telling us is that they are evolving very quickly toward a very new model of computing. It’s neither the host-based system that IBM created, nor the desktop model that Microsoft and Intel are credited with creating. It is a much more sophisticated model that includes the best of both previous models combined with a very significant new dimension called networking. High-speed, high-bandwidth technologies such as Asynchronous Transfer Mode are transforming today’s client-server networks into truly interactive global networks.
The Internet
It’s what we call network-centric computing – making possible massive interconnection between enterprises, institutions, customers and individuals. It affects private networks, as well as public switched networks, and even the most public of all networks – the Internet. New applications on these networks will be fast enough to support true interactivity – nearly limitless bandwidth for video, audio, X-rays, photos, designs – whatever you wish. It will change the way information technology is used. People will communicate and interact as teams, collaborating across companies and national borders. Large customers will be directly connected with suppliers, distributors, retailers and customers. The nature of the commercial transaction as we know it in the world today will change – as well as the definition of value and competition. So while I’m going to talk to you briefly about five distinct customer segments – each of them does have a different demand for what they need from IBM – I also want you to know that this new model of computing that is driven from the corporate sector is also driving very powerful interconnectivities among these five customer sets – and again, playing to IBM’s unique strength as an integrator.
