to Make Cuts in PC Business Real Change, or Just Buying Time?
- October 13th, 1999
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.
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.
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.
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.
watch IBM to see if the PC division turns around, and modify their selection