IBM's PC division celebrates return to profit
By Bloomberg News
November 6, 2000, 10:15 a.m. PT
ARMONK, N.Y.--Harry Nicol shaved off most of his hair, and Bob Moffat is getting fitted for a kilt.
Both men, top executives of IBM's Personal Systems Group, promised the antics as a reward for employees if the group, which sells PCs, could turn a profit after two dismal years in the red.
Amid an IBM third quarter that produced unexpectedly anemic overall sales, analysts were surprised the company's PC unit, maker of NetVista desktops and ThinkPad laptops, had edged into the black. The division achieved profitability by cutting costs, streamlining manufacturing and distribution and carrying out plans swiftly and surely, said Moffat, who heads the unit.
"They were doing so many things badly," said Roger Kay, a PC analyst with market researcher IDC. "They knew that they had to execute better."
Personal Systems, which Moffat has run since August, lost $992 million on sales of $12.8 billion in 1998 and lost $557 million on sales of $15.3 billion in 1999. Some analysts say the unit could break even for 2000 if fourth-quarter growth follows the recent trend.
Moffat's predecessor, David Thomas, vowed earlier this year to trim $1 billion in costs in the unit, and Moffat says that goal will be met by the end of the year.
"One thing I didn't do is blow up the strategy," Moffat said. "What we needed to do was get a laser focus on execution" in order to be "faster to market with lower-cost products."
The pieces have come together, at least temporarily, even as IBM struggles to hold market share. To fulfill his promise, Nicol, a senior executive for the NetVista line, showed up for work Oct. 30 with a military-style buzz cut. And Moffat says his next speech at IBM's Greenock, Scotland, factory will be delivered in a kilt.
"They've taken significant costs out of their PC operations," said Gartner analyst Kevin Knox. He cited IBM's retreat from the thin margins of retail outlets in Europe and North America, and its efforts to trim manufacturing costs and cut inventory. Moffat says the inventory pipeline has been cut in half in the past year.
Improved labor productivity
A pivotal change was made in the way IBM manufactures its PCs, almost all of which are sold to businesses. It shifted from a classic assembly line to manufacturing based on teams of four or five workers. Instead of lengthy retooling to produce a minimum of 1,000 specially configured PCs at a time, the factory uses parts kits and teams to build one at a time, with sharply reduced retooling. This has improved labor productivity by 25 percent, the company says.
The move began at IBM's North Carolina factory and moved in the past six months to sites in Scotland, Mexico and China. IBM also sold factories in Australia and Brazil. Subcontractors now handle 40 percent of the company's desktop manufacturing.
IBM's worldwide market share in PCs for the third quarter was 7.2 percent, placing it fourth behind Compaq Computer, Dell Computer and Hewlett-Packard, according to Gartner's Dataquest unit. In the year-ago period, IBM held 7.7 percent of the market.
To keep market share from slipping further, even as profit improves, IBM will have to take greater advantage of its 140,000-employee Global Services division, which sells technology services, said Gartner's Knox.
Textron, for example, last month chose IBM PCs, laptops and small servers to replace thousands of Compaq and Dell computers. At the same time, the industrial products maker purchased help-desk, maintenance and other PC support from IBM's services unit.
"A customer doesn't just buy a PC," Moffat said. "Customers buy solutions. IBM was the only company that could give the total solution to Textron."
One key to the climb into the black was a move to sell directly to customers rather than using dealers and distributors. This cuts overhead and inventory costs. The direct approach includes sales via the company's Web site and on "extranets," computer networks that are open to authorized outsiders, such as IBM business partners.
At midyear, the company was selling about a quarter of its PCs directly to customers. That has improved to almost a third today, and the company is aiming for 35 percent by year-end.
The group's bottom line was also given a substantial boost by improved sales of small PC-sized server computers. Sales of the xSeries server line, formerly called Netfinity, were 40 percent above year-earlier levels, Moffat said. IBM also generated savings by using more common parts in different PC models. In the past nine months, IBM completed an overhaul of its desktops and laptops to emphasize simplicity.
IBM also trimmed the PC unit's work force by 10 percent in the past year, Moffat said, by moving some workers elsewhere in the company and through attrition.
One trend working in IBM's favor, said Knox, is the move by big companies to replace outdated desktops with new laptops--a niche where the ThinkPad brand may stand out. Today, about one in five U.S. PC sales to corporations is a notebook, and the trend points to a one-in-four ratio within a year or two, said Knox.
Still, Moffat is cautious about becoming too confident. ''One quarter does not a turnaround make.''
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