IBM: It’s Not Easy Being Blue

“Don’t look back. Something might be gaining on you.” That old admonition from Baseball Great Satchel Paige is taking on special meaning these days for IBM. Beset by rivals and mired in an industry-wide slump, Big Blue in 1986 has had a year it would rather forget. Even as the firm proudly announced its new line of System 9370 business computers last week, there was speculation on Wall Street that its net income may be down again this year. Profits had already dipped .4% in 1985, to $6.6 billion. The nervousness pushed IBM stock down from 133½ to 123 7/8 at week’s end.

Big Blue’s problems are as stubborn as they are unfamiliar to the company. From the personal computers at one end of its vast product line to the large mainframes that have been its backbone, the huge Armonk, N.Y.-based firm faces growing competition in the industry it used to call its own. Though IBM has sold more than 3 million personal computers since 1981, its share of that market has slipped substantially during the past year, from an estimated 35% of total sales to less than 29%, as consumers turned to other U.S.-made machines and cheap imports, or “clones,” from Taiwan and South Korea. Not even improved models and price cuts of up to 20% have helped IBM stem the invasion.

Last February IBM was embarrassed by its loss of a $27 million Internal Revenue Service contract for 15,000 lap-top PCs to Zenith, a relative newcomer to the industry. In April IBM abandoned the retail computer business, selling 81 stores to NYNEX, the New York-based regional telephone company. The shops had sluggish sales in part because they offered only IBM machines, while competitors stocked a wide range of models.

More important, sales of large IBM mainframe computers, which account for about 70% of the company’s $50 billion in revenues, are being hurt by archrival Digital Equipment Corp. DEC sells the popular VAX line of so-called superminis–midsize computers that can do the work of low-end mainframe models, often at less cost. Companies that want to link many personal-computer users together into a network can sometimes do so more cheaply with a supermini as the central computer than with a mainframe.

IBM’s System 9370 computers are a line of superminis that at least one company official was privately calling “VAX killers.” The firm expects the price ($31,000 to $210,000) and performance of the 9370s to be more than competitive with DEC’s machines. To help launch the 9370s, IBM is augmenting its sales force with employees transferred from other divisions. One problem, though, is that the company will not be able to ship the 9370 line in large quantities until the second half of 1987. Says Computer Analyst Ulric Weil of the Gartner Group, a Stamford, Conn.-based research firm: “By delaying delivery, IBM is playing into DEC’s hands. A year can be an eternity. Only IBM’s most loyal customers will wait.”

Meanwhile, the profit squeeze is producing some changes at IBM. It is hoping to reduce its U.S. work force 5%, to 230,000, by the end of next year, mainly through attrition and early-retirement incentives. On a more trifling level, Big Blue has pared spending on such items as employee travel and magazine subscriptions. The company that could once make money almost at will now seems to be counting every penny. –By Janice Castro. Reported by Thomas McCarroll/New York