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Technology / AI and automation

THERE IS ONLY ONE CUT LEFT THAT NOW HAS ANY CHANCE OF SAVING IBM

Back in the 1960s, the Rex cinema in Haslemere was the only cinema for miles around. In the early 1970s, before the multiscreen revolution really took hold, cinema appeared to be in terminal decline and not many people travelled on the 10.20pm bus to make the three-and-a-half mile journey from Haslemere to Liphook, so the Alder Valley bus company decided to discontinue it – and was chagrined to find that traffic on the 7.00pm bus from Liphook to Haslemere quickly started to dwindle. Liphook people couldn’t get the bus back from the cinema, so they stopped going at all. Today the Rex cinema is long gone, replaced by an ugly housing development, and the Alder Valley bus service is in even worse shape, although new bus operators running vehicles much smaller and cheaper to run, are starting to spring up.

The wrong cuts

The latest round of cuts at IBM Corp attracted the usual shock horror headlines and for the first time played big on radio and television news programmes – even Joe Public is now being made aware that the giant is in trouble, and about the only consensus among analysts is that the latest cuts won’t be the last, and that the company will have to take yet more charges against its figures in 1993. Crucially, while IBM trumpets its perception that the latest round of cuts will reduce its costs by $4,000m a year starting next year, it acknowledges that margins are still under pressure, despite a fall in gross margins to 48% today from 58% last year. Stephen Smith of PaineWebber Inc points out that every 1.5 percentage point fall in margins trims $1,000m off IBM’s savings – which is why all the savings the company has claimed for the cuts it has made over the past five years have left it no better off that it was when it started downsizing. There is no question that cuts were urgently needed at IBM, and the fact that they have still achieved so little leads to only one conclusion: the company has been making the wrong cuts. Instead of carefully targeting its voluntary redundancy offers solely on people it knew it could afford to lose, it has allowed its brightest and its best to flee the coop with its money, so that customers that were committed to remaining in the IBM mainframe camp because the IBMers they dealt with really were exceptionally good, are now confronted with retrained clerks that cause their commitment to evaporate. One of the more disconcerting aspects of last week’s announcement was that as well as patting itself on the back over the number of employees it has persuaded to leave, it is boasting that it has cut manufacturing space by 40% since 1985. And this is the company that was always touted as the low-cost manufacturer. If that reputation ever had any validity to it, why has the company not blasted all the personal computer clonemakers that have stopped simply snapping at its heels but beat it to its lunch and occupy its bed every day, to the Chapter 11 dog house to which it consigned the likes of Columbia Data Products Inc and Eagle Computer Inc in 1984 and 1985? As the low-cost manufacturer, and with its vast economies of scale, why are its PS/2s not so cheap that the likes of Dell Computer Corp and Compaq Computer Corp can’t possibly make any money? One reason is that the company never did see the first generation of clonemakers – apart from Compaq – off by lower pricing and superior products, it did it by having more expensive lawyers, who were able to trip them up over patent infringements in their BIOSes. The second generation was much too canny to infringe anything, and IBM’s empty reputation was exposed.

Tentative toe Nevertheless there must have been some historical justification for the reputation IBM had as the industry’s low-cost manufacturer and with its skills and experience, the company must have been able to increase its volumes still further and got its unit costs much lower. Instead it takes capacity out of production. The same argument applies in spades to IBM’s semiconductor manufacturing. Again the company has always enjoyed the reputation of making chips of superb q

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uality, yet instead of having given the Japanese a really hard time on the merchant market with an unstemmable flood of cheap and unmatchably reliable chips, the company is only now dipping a tentative toe into the merchant market with its memory chips and that only in Japan – and at the same time taking a big hit against its figures to take chip capacity out of production because the biggest part of the manufacturing consolidation just announced is in semiconductor fabrication. IBM’s ability to make the life of competitors in the disk drive industry a misery may have become a bit tarnished of late with every other new generation of mainframe drives embarrassingly turning up problems in the field, but the company’s own requirement for all sizes of disk drive is so enormous that if it were making the same number for the rest of the industry as it makes for itself, even IBM would find it extraordinarily difficult not either to undercut the opposition to the point where it keeled over, or garner much grosser margins than any other disk vendor.

No strategy

And the striking thing is that while such strategies would require significant investment – something not beyond the bounds of IBM’s borrowing capacity given its shaky but still standing triple-A credit rating, they are all essentially simple, involving only things that IBM already does reasonably well and could do better with diligent commitment. In contrast to all the things where IBM is investing heavily – OS/2, which even if it does survice cannot hope to be more than an also-ran in the operating system stakes unless the Feds do a number on Microsoft Corp; Systems Application Architecture, which has now collapsed and never meant much to many users anyway; AD/Cycle and Repository Manager, which nobody believes will ever work. What is becoming increasingly clear is that IBM’s management now has no strategy to manage the decline of the mainframe and the relentless rise of open systems based on the elaboration of the personal computer, whether it run MS-DOS, Windows, Windows NT, NetWare or Unix: instead it is taking more and more desperate short-term measures simply to shore up the bottom line for the next quarter, the next set of annual figures. Having crippled some of its most potentially successful computers in the past lest they impact its dinosaur mainframe business, it has now given up and is allowing each part of its computer operations offer whatever it can, regardless of the impact on other parts of the business. At each step over the past seven years there have been measures that could have taken that would have alleviated IBM’s problems, and at every step it has failed to take them. What is now blindlingly clear is that top management has betrayed the trust of customers, employees and shareholders alike, and that the next cut has to be made right at the top, with a complete sweep of the entire executive board.