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IBM to Make Cuts in PC Business Real Change, or Just Buying Time?

Written By: R. Krause
Published On: October 13 1999

IBM to Make Cuts in PC Business Real Change, or Just Buying Time?
R.A. Krause - October 13th, 1999

Event Summary

10/8/99 - International Business Machines Corp. (IBM) plans to cut as much as 10% of the workforce at its personal computer division, or as much as 1,000 jobs, in a cost-cutting effort to turn around the division that lost nearly $1 billion last year. Most of the cuts will be in the marketing groups, as marketing for the different brands will be consolidated into one area. IBM products affected will include Netfinity servers, Aptiva PCs, and ThinkPad notebooks/laptops.

IBM's PC business has had difficulties for several years, resulting in the consumer PC division head being replaced last summer. With the consumer PC division now being folded into the business PC division, the waters are muddied further.

Market Impact

In the extremely competitive PC marketplace, "circling the wagons" is not a good sign. IBM cannot indefinitely sustain $1 Billion losses, and cutting 1,000 people will make only a modest dent. Most of the turnaround will have to come from other places, such as overhauling (or revamping) the cost structure and supply chain. This means a dramatic restructuring (in either cost or business model) is necessary. This move will lead to market consolidation, with IBM losing market share to the other four large vendors (Dell, Compaq, Gateway, HP). IBM will not be able to "turn the Titanic on a dime", and so will show continued weakness in its PC business for another 6-12 months. Even if they are able to reverse their fortunes, they will have lost valuable ground and time.

Some months ago, Michael Dell, Dell Computer's CEO, predicted that one of the "Big Five" would exit the PC business within a few years. IBM's problems may end up validating his comments, if the PC group cannot turn around the business.

User Recommendations

Users should be concerned with IBM's current state. If the losses continue, IBM faces three possibilities: (1) continue to accept the losses; (2) get their PCs from somewhere else, i.e. another vendor; or (3) exit the PC business. (1) is not viable, (3) is not likely in the next 12-24 months, and (2) is merely a survival tactic, not a strategy. But, given that IBM is willing to re-badge its Netfinity 4000R from OEM Network Engines, we believe that (2) will be IBM's fall-back plan (70% probability) if restructuring/re-energizing fails (50% probability). However, these are primarily long-term (one-two years) issues. In the short term, the user's acquisition process should have minimal effect, especially considering IBM's strong service and support division.

Users should watch IBM to see if the PC division turns around, and modify their selection process accordingly.

 
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