UK: BEATEN BY THE GADFLIES - IBM.

UK: BEATEN BY THE GADFLIES - IBM. - IBM's corporate conceit has blinded it to the changes in the industry.

by Roger Eglin, associate business editor of The Sunday Times.
Last Updated: 31 Aug 2010

IBM's corporate conceit has blinded it to the changes in the industry.

For 30 years the world computer industry was captured by the belief that IBM was unassailable. It was a conviction that IBM's top management came to share as well. Now they and the company, whose value has slipped to a mere quarter of what it was five years ago, are paying for their complacency. A moment's historical reflection should have reminded John Akers and his colleagues that the greatest empires can slip into decline, however invincible they may seem. But it was a lesson that went unheeded. Now Akers is standing down as chief executive.

It had become obvious in recent years that IBM's grip on the computer business was being challenged by upstarts like Apple, Compaq and Dell. But the company's ingrained culture seems to have stopped its managers from recognising that the strategy, good enough to make it number one in computer markets around the world, was no longer nearly 22e enough. They deserve some sympathy.

In the years since the launch of the 360 mainframe range in the 1960s, and the arrival of IBM's first PC in 1981, IBM has seemed, even to outsiders, to be the most managerially correct of companies. Employees were well paid and trained. The company's research spending swamped its competitors. Governments worried that their national computer industries were overshadowed by this giant. To placate them, IBM played multinational politics with diplomatic ease. Those who claimed IBM's dominance meant customers were paying too much for their computing never seriously breached Big Blue's defences. The widespread conviction that IBM always had a safe, working solution to computing problems consolidated its position.

So where did it go wrong? The big mistake was the corporate conceit that led IBM's managers into believing their own propaganda. These policies have made us successful, they argue, therefore they will continue to do so. Yet this sort of thinking is manifestly suicidal in an industry subject to such rapid technical change that a company like Microsoft can come from nowhere in a decade. As the pace of change accelerated, heavyweight IBM was outpunched and outplayed by computing's fast-moving flyweights.

The price of successful entry into the computer business in recent years has become ridiculously low. Compaq, whose market capitalisation is running neck and neck with IBM's, did not even exist when IBM's PC was launched 12 years ago. With elegant offices and manufacturing plants around the world, the corporate fat IBM was carrying into battle against these gadflies was immense. Nor can anyone seriously expect a company that was employing 407,000 people at its peak in 1986 to be as responsive as smaller rivals.

The rise of the PC focused all these weaknesses. IBM's mainframe customers were locked in by the cost of switching to another manufacturer. Not so with the PC. Here IBM's machines were running with much the same components and software as its rivals. Customers could switch overnight without penalty. IBM's hold on the market was broken and price competition became a fact of life. The result: IBM lost $4.97 billion in 1992.

Belatedly management tried to break the monolith into supposedly independent units. But this appears to have done little for flexibility or responsiveness. The board still apparently lacks the financial information that would tell it how well each unit is performing.

Though it is by far the most spectacular example, IBM is by no means the only corporate giant needing to adjust to the fast-moving markets and changing technology that have become such a feature of the world economy in the 1990s.

General Motors is struggling to find a management culture that fits the turbulence of 1990s. Large companies generally seem to be finding the going tougher. The ideal enterprise for the 1990s, if not smaller than the accepted corporate model, is certainly trying to behave as if it were smaller. ICI's demerger is a good example of a company seeking a more responsive structure, one that will bring its top managers closer to the marketplace. Decentralisation and delegation are the vogue. Texaco, the oil giant, aims, for example, to operate with only three or four layers of management.

IBM certainly got it wrong: sheer size and inertia blocked the management's vision. More large companies are aware of these dangers and are trying to do something about it. The real lesson, though, is that a company does not have to be a giant to run into a crisis; it can happen to anyone not organised to cope with change.

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