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	Loyd Eskildson
    
The Decline and Fall of IBM: End of an American Icon? Kindle Edition
by Robert Cringely 

5.0 out of 5 stars A Sad Tale of A Fallen Icon

Reviewed in the United States on November 17, 2018

Verified Purchase


Ross Perot filled his sales quota for the entire year by the end of January, and knew he wouldn't be allowed to sell any more computers or earn more money for 11 more months. He left.

At its apex in the mid-1980s, IBM had 17 layers of management. It was hard to make any decision, and that became its greatest problem and the source of its ultimate decline. It PC line was a marketing success, but a financial failure - IT departments lost power to those not so awed by mainframe power, then even more when the Internet arrived.

About 1980, John Opel was CEO and the firm began urging customers to switch from leasing mainframes to purchase - raising revenue from them by 10X or more. IBM's stated expectation to analysts was that this sales levelwould be somehow sustainable. However, companies like Compaq and Dell had lower cost structures than IBM and could make the same or better profit on each PC than IBM could, while still undercutting it on price. All ran the same Microsoft software. And theupstarts could develop new generations of PCs faster than IBM. At one point IBM tried to buy all the Intel 80286 processors on the market - instead of starving, Compaq simply moved up to the more powerful 80386 line. IBM PCs were now both more expensive, theywere also less powerful. IBM tried to make up for the problems by spending billions to develop the PS/2 and OS/2 - but none of its competitors followed, partly because this would have required cones to give most of their profits to IBM for Microchannel licensefees. This also ended any special treatment Microsoft had given IBM.

Meanwhile, mainframe lookalikes from Amdahl and Hitachi undercut mainframe sales. The Unix operating system then allowed mid-sized systems to threaten IBM's mainframes, and threatened its software sales as well.

Then came IBM's Token Ring (4 mb/second), competing with Ethernet's 10 mb.

By 1993, IBM was a $40 billion company facing a loss exceeding $8 billion - along with 400,000 employees (100,000 too many) and a lifetime employment policy. Since 1911 it had never laid off anyone. That had been easyin the high-profit 1970s. Enter Lou Gerstner.

IBM was focused internally, huge sums were being spent to defeat Microsoft and Intel - battles already lost in Gerstner's view. Meanwhile the mainframe business was being starved of funds and milked for profits by keepingprices artificially high. Gerstner was able to make changes because he'd been hired with a mandate - and there were no viable alternatives.

Gerstner pushed IBM into the IT services business (today's greatest profit source), laid off 100,000, and stopped battling Microsoft. Other changes included going from 'Do it my way' to 'Do it the customer's way,' frommanage to morale,' to 'manage to success,' from 'decision-making on anecdotes and myths,' to decisions based on facts and data,' from 'attack the people' to 'attack the process,' from 'value-me' (silo) to 'value-us' (the whole), from 'analysis paralysis' to 'make decisions and move forward with urgency,' from 'not invented here' to 'learning organization,' and from 'fund everything' to 'prioritize.'

Through the 1990s, IBM's biggest services accounts were IBM itself, AT&T, Sears, Kodak, etc. IBM wasn't a very demanding customer for its own services - few servers and LAN services, and its e-mail system cost 10X/userthan comparable systems. Even in 2014 it could take over 300 hours to recover one's data after losing a hard drive. The AT&T team worked separately from the Sears, Kodak, etc. teams.

EDS would walk in and ask 'How many desktops and systems do you have?' Then 'Here's your price,' adjusted later if the numbers were wrong. The IBM way was to spend months bidding the contract. It's business plan wasto just throw cheaper bodies at tasks - first the U.S., then Canada, Brazil, and then India (one-eighth the cost of a U.S. worker). When others got into IT outsourcing IBM found it couldn't maintain high prices by virtue of its name/reputation. Prices were cut, supported not by greater efficiencies but by cutting corners (eg. forcing employees to work large amounts of unpaid overtime, then cutting pay after being forced to pay overtime, then laying workers off and rehiring as contractors at less money (75%)and no benefits (net = half cost), and finally sending most of the jobs to Asia. However, most of its improved financial position came from a then weak dollar; meanwhile, communications and skill losses created problems.

By the end of 2013, IBM employed more than 100,000 workers in India alone. Many American workers quit - saving IBM from paying severance. H1-B visa abuse became rampant throughout high tech.

IBM did not want to produce commodities, so they sold the PC business to Lenovo. At the end of 2007 it changed its pension plan from defined benefit to a 401K.

The average rate of return on invested capital for U.S. public companies is a quarter of what it was in 1965.

All IBM CEOs except Gerstner were formerly internal salespeople - absent outside experience, technical expertise.

If a founder's answer to 'Why?' is 'to get rich,' they are in the wrong job - wealth is almost always a byproduct of good work, not its objective.

The average CEO tenure is four years.

IBM's five-year plan ending in 2010 doubled EPS from just less than $5 to about $11, about $15 in 2013. In 2012, IBM planned to grow EPS to $20 by 2015 - primarily by reducing U.S. head count up to 78%. At IBM's 5/14/2014meeting with financial analysts it was noted that IBM had eight straight quarters of declining sales.

China sold its PC division to Lenovo in 2004 for what amounted to about $1.8 billion (including assumption of debt, and an equity position in Lenovo); a side benefit was getting a partner to do business with in China. IBM retained design input and the products continued to carry the IBM brand for five years. IBM's server business improved.

In 2014, IBM also sold off its low-margin (Intel-based) server business to Lenovo for $2.3 billion, planning to concentrate on its higher-margin servers (big iron). Author Cringely, however, sees low-cost servers as the future, and the high-margin products as the past - contending it sold a lower-margin business with customers to invest in a higher-margin business where they weren't buying. Thus, he sees that sale as dooming its future.

In the 2004-2014 decade, IBM spent $101 billion buying back shares, reducing the number outstanding by about a third. (It also distributed another $20 billion in dividends over the 2006-13 period.) Some see this as reasonably approach for a company that bloated outstanding shares with stock option plans, stock purchase plans, and M&A via stock. And management bonuses are often tied to increased share price, ignoring revenue, gross margin, and operating margins. In effect, it's an admission the company can't see how it can natively return more on the money than could the S&P 500 index. They'd had sales declines for eight straight quarters.

For decades the heart of IBM's services business had been billable hours, with monitoring and automation tools seen as extra costs. However, IT has increasingly become a commoditized industry. Intel systems set a benchmark for price and performance.