USA: Computing matters - Challenge of open competition FOR IBM.

USA: Computing matters - Challenge of open competition FOR IBM. - IBM is losing its once loyal customers. They have discovered they can buy the same power for less money from other companies, says Di Palframan.

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Last Updated: 31 Aug 2010

IBM is losing its once loyal customers. They have discovered they can buy the same power for less money from other companies, says Di Palframan.

IBM, the world's biggest computer company, is being cut down to size. Its overheads, its matrix management, its entire corporate culture have finally become too much to bear. The company is restructuring. It says it will cost $3 billion and 20,000 jobs. In reality it will be much more.

IBM was once the unassailable monolith of the industry. Now the glamour has gone. The company's market value declined by $32 billion in the five years between 1985 and 1990 and the latest restructuring has, so far, failed to boost confidence on Wall Street. Job prospects are slim for those attracted by IBM's enviable research facilities and its still-enviable market leadership and in the next round of cuts, it may also axe its policy of no compulsory redundancies.

Overall, its share of world computer sales has dropped from around 30% in 1985 to about 21% in 1990. Customers are discovering that the same power can be purchased for much less money from other companies. Moreover these powerful computers conform to many more standards than proprietary ones. They are open systems.

Although IBM subscribes to open systems, a major problem is in the pricing of open versus proprietary systems. Open systems, especially at the personal computer, workstation and mid-range computer level, are supplied by many vendors. All the suppliers are smaller than IBM, more responsive and with lower overhead costs. Competition is intense.

To convince its customers to continue buying its proprietary machines, IBM has to persuade them that they are getting something extra. The difference between machines of similar power is small. The alternative for IBM is to cut the price of its proprietary machines to ensure that it maintains its very large customer base.

"The pricing umbrella of the industry has shifted," insists Peter Griffiths, Hoskyns' group marketing director. The lacklustre performance of big computer companies like IBM and Digital Equipment is due more to the lower margins they are making on their proprietary computers, he says, than to the recession or the low margins on open systems. Still the industry's central problems are "substantially" due to open systems and the fierce competition that they have introduced, though they have yet to have much impact at the top end of the market, on mainframe computers that still command 80%+ margins. IBM still dominates this market, although according to McKinsey and Co its market share has fallen from 49% in 1985 to just over 40% in 1990. IBM's loss has been the Japanese manufacturers' gain. Fujitsu, NEC and Hitachi have almost doubled their mainframe market share from 17% in 1985 to nearly 33% in 1990.

Mainframe prices are currently relatively stable. When they do start to come under pressure, so will IBM, once again. The biggest question mark hangs over the Japanese. Japanese companies are bent on increasing their share of the world market. Fujitsu bought ICL and Nokia Data to boost its presence in Europe. In the past few years it has also attempted (and failed) to buy US software companies.

All major western computer companies are concerned that the Japanese will make as big a dent in their industry as they have in cars and consumer electronics. But they still have some way to go. Figures produced by McKinsey and Co show that Asian vendors increased their share of the North American computer market from 5% to 11% between 1985 and 1990. Over the same period they increased their share of the European market from 3% to 5% (this does not include ICL or Nokia Data).

McKinsey and Co consultant Joanne Guiniven agrees with other industry-watchers that there will be more mergers and acquisitions and that the Japanese will be among the acquirers. Pinpointing the successful companies is not so easy.

The McKinsey view of such a company is one that concentrates on areas where it can excel and build up partnerships to fill any gaps. They tend to be smaller and younger. But Griffiths believes the key is not to get stuck in the middle ground between the niche market players and the bigger low-cost manufacturers with global distribution channels. "This is a revolution, a process that is out of control," he says. "No one can predict where it will end."

Di Palframan is a freelance journalist.

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