Big Blue pays price for slow reactions: IBM is struggling to keep up with events, writes Richard Thomson

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The Independent Online
SHARES in IBM, the world's biggest computer company, have slumped to a 10-year low, following the announcement of a new round of job cuts and restructuring.

The share price dropped to dollars 65 last week, as investors reacted with scepticism to the company's latest attempt to revive its flagging fortunes. IBM had said that it would shed 12,000 jobs in Europe and 12,000 in the US.

It is the second big restructuring plan within 13 months, and shareholders believe the new scheme may still not be enough to turn profits around.

Among other things, the new plans are designed to remove about dollars 1bn ( pounds 636m) of administrative expenses from IBM's operations. But investors are wondering why this excess was not cut out more than a year ago?

In the last round of cuts, IBM shed 40,000 jobs out of a total workforce of 300,000. The total cost of restructuring came to around dollars 6bn, but even after this, the company now finds that drastic new measures are necessary.

IBM's problem is that net income has slumped from about dollars 6bn in 1990 to a small loss last year, and a relatively insignificant profit is expected for 1992. Big Blue's share of the world computer market has slumped, and this year's dividend will probably have to be cut.

As well as the job cuts, IBM is trying to push its structural reorganisation further than before. Last year, it granted a degree of autonomy to its business units. Now it has revealed that it is considering allowing some of them to sell their own stock and become, in effect, joint ventures with the parent company. They could also be given more independence to make their own business decisions, develop their own sales forces and control their manufacturing operations.

The aim is to break up the monolithic structure of the company and make it more responsive to market changes. So far, however, the loosening of ties between the centre and the business units has not boosted profitability.

Slowness to react is one of the main reasons for IBM's loss of profit over the last two years. The company's success in the 1970s and 1980s was built on almost complete dominance of the mainframe computer market. This enabled it, among other things, to set its own prices. In recent years, however, improvements in microchip technology boosted the power of desktop computers significantly. Mainframes have ceased to be the big market, and IBM's cash cow has withered.

The company moved somewhat belatedly into personal computers in the 1980s, but although it is now the world's biggest PC supplier, IBM is not completely dominant. Moreover, the competition in this market is intense and profit margins are thin.

The most promising area at the moment is mid-range computers, but this is not the largest part of IBM's business. It is also highly improbable that it will ever emulate the financial returns once produced by mainframe machines.

The computer markets have changed in a way that is inimical to IBM, and it is unlikely the company can recapture the kind of position that enabled it to make an astonishing 25 per cent return on equity in 1984. The changes under way at IBM are an attempt to restore as much profitability as possible in worsening circumstances, but in the process they are altering the ethos of the company.

In the past, IBM employees could be confident that they had a job for life if they wanted it. No longer.

The sweeping cuts in staff levels over the last two years have been achieved largely by natural wastage, but last week John Akers, the chairman, warned: 'It is likely that some business units will be unable to maintain full employment in 1993.'

Evidently, the new philosophy is that no job is sacrosanct in IBM's attempt to reorganise itself.

(Photograph omitted)

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