Akers: The Last Emperor (June 1991)

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IBM CORPORATE AFFAIRS (1991)

A Retrospective: John Akers' Six+ Years At the IBM Helm

Akers: The Last Emperor?

Corporate Boards Getting Tougher With CEOs; Will IBM's?

PHOENIX, June 12, 1991...

John Akers' "public flogging" of his senior management certainly brought about a myriad of reactions -- both within, and outside IBM. Some were quite favorable; others chastised IBM's chairman for trying to shift the blame on others for the problems which happened on his watch. Such contrasting views usually call for a longer-term context of the events which led to Akers' outburst.

When we first set out to do this type of analysis, we were determined to provide a balanced view of his years at the IBM helm. For that reason, we offered to meet with Mr. Akers. Through a spokesperson, however, he declined the offer. Consequently, IBM's chairman chose to leave his record to speak for itself. Which, as you are about to see, almost guaranteed a depressing story, albeit a balanced one.

In this report, we start the clock in 1983, when Akers became IBM's president. Our stopwatch ends today, albeit only figuratively. For time is running out on this IBM chairman, despite his frantic efforts to stop the IBM game clock. As you can see on page 6, overall, we rate his six-year performance as a "D." From the purely financial standpoint, however, it is a clear "F!" Even a complacent Board as IBM's has been, therefore, will find it increasingly uncomfortable to keep ignoring their chairman's disappointing track record.

A Blank Check?

In late April of this year, a well-known New York financier asked me an unusual question: "Suppose, Bob, the IBM Board were to hire you as a special consultant, to advise them on strategy, or something like that... Suppose they called you in, gave you a check and asked you to fill in the blanks. Would you do it?" 'What a far-fetched question!', I thought to myself. "That would never happen under Akers," I replied out loud. "I know, I know... But, let's just suppose it did," our client persisted. "Would you do it?"

Our answer to the above question isn't important. What's important is that the question was being asked in the first place; that it was being asked by a person of considerable clout and stature; that this conversation took place well before the now famous Akers outburst became publicly known (in fact, it may well have been even the very day Akers was admonishing his team).

In other words, the question implied that if, in this person's opinion, the IBM Board could use an outsider's advice, something must be wrong with the insiders' strategies. And not just a little bit wrong -- a blank check's-worth of a wrong!

The Complacent Board?

Yet, one would never get that impression if one listened to the public statements by some of IBM's board members. Irving Shapiro, for example, a former IBM board member, was quoted in a recent interview with Business Week as saying, "I applaud what IBM is doing. The only issue is: How productive is it?" Richard Lyman, an old-timer on the IBM board (since 1978) and a former president of Stanford University, said that Akers has "the full confidence of the board."

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It would not be perhaps surprising to hear the above votes of confidence by IBM's former and current board members in light of Akers' remarks at the IBM Annual Meeting in late April. Speaking in Kansas City, IBM's chairman once again told his shareholders that the company "...is continuing to invest for growth," that he and his team "are managing the business with prudence to generate increasingly attractive financial returns."

Sounds good. Except that this is not the first time Akers has promised the shareholders growth while delivering declines. As a matter of fact, he's been doing that, on and off, for most of his six years as IBM's head (see APPENDIX A -- an historical perspective of Akers' years). For example, at the 1985 Atlanta Annual Meeting (his first as chairman), Akers promised the shareholders a year of "solid growth." Yet, in just over six weeks, as a matter of fact, on this very day six years ago, he recanted his earlier prediction and told a group of financial analysts gathered at IBM's Yorktown Heights facility in New York that such "solid growth" isn't going to happen (in 1985 -- see APPENDIX A). Considering that this happened when Akers was only a "rookie" chairman, one might have been tempted to give him some leeway. Now, after more than six years in the job, glossing over IBM's problems is less acceptable. As is his apparent "double talk."

We now know, for example, that Akers' outburst to a class of IBM's middle managers occurred only days before the IBM Annual Meeting. So what? "There's no fun in having the stock at 25% discount. There's no fun in being a no growth business..." was what Akers told the IBMers. "Shareholders are unhappy and I don't blame them." One would think, therefore, that he and the directors, who get paid to represent the shareholders, would feel the same way publicly? After all, isn't there only one IBM?!

Consider this: within days of yelling at his management team "WHERE"S MY RETURN FOR THE EXTRA 5,000 PEOPLE? WHERE'S THE BEEF? WHAT THE HELL ARE YOU DOING FOR 'ME?'," Akers told the IBM shareholders that "the difficulties we're dealing with reveal that the IBM company is strong...;" that "our people, the quality of our resources; we have never been in a better shape." Wow! Will the real IBM please stand up!

The two votes of confidence, therefore, by the IBM directors quoted in the BW story are even more amazing considering that they were made after Akers' outburst became public; after IBM turned in a terrible first quarter score card; and after a decade of the worst results in the 78-year history of the IBM company (see the charts and tables 1-5). The fact that the IBM Board members are evidently putting a coat of paint over Akers' own glossy statements, despite his track record of unfulfilled promises, makes one wonder if the whole Board isn't being complacent? And if the public company officials should get charged if they (intentionally?) misled the shareholders?

A recent Wall Street Journal article entitled "More Chief Executives Are Being Forced Out By Tougher Boards" cited several cases where the boards had eventually acted in the shareholders' best interests. But only after they had received "intense heat from the regulators, stockholders or the media." The report concluded that, "even the tough-minded directors usually lack the time, the information or expertise to confront management." Well, after this CMS BULLETIN, the IBM Board members won't be lacking at least one of the three missing ingredients.

Analysis of Akers' "Report Card:" The Three "A's"...

Management Skills. As can be seen from A Text Box: kers' "Report Card" table on page 6, IBM's chairman scored well in terms of his management skills (a "B" overall). We see his ability to focus on a simple goal and to communicate it clearly to IBM's casts of thousands as one of his personal strengths. This ability earned him one of the three "A's" on his performance chart.

In 1987, for example, he did just that with his "year of the customer" theme. Notwithstanding some competitors' jabs at it (DEC, for example, said that "at DEC, every year is the year of the customer), Akers showed that he was able to communicate clearly and succinctly to IBM employees the need to focus once again on the outside world. This, by the way, is consistent with his views at the time he became IBM's chairman. In an interview with the New York Times in January 1985, he said that he expected to spend a lot of time on "external affairs" (see APPENDIX A).

In 1988, Akers repeated this management feat as he urged IBM's people to orient their thinking away from IBM products, and toward the customer "solutions." Therefore, one could rightfully dub 1988 as "the year of the solution" -- as we did contemporaneously in one of our CMS BULLETINS (see APPENDIX A).

1988 was also the year in which Akers earned the second of his three "A's" -- the one for organizational effectiveness. In January of that year, he busted up the IBM highly-centralized management hierarchy by creating the "lines of business" (LOB), and giving their heads more authority. He also told his senior executives that they can expect to stay in their jobs much longer than before, thus ensuring more continuity. And he encouraged IBM people to think globally, which facilitated a greater influence on decision-making of its international segments.

Akers earned the third of his three "A's" for his commitment to excellence. The results of the changes which Akers had brought about -- the customer orientation, global solutions and commitment to excellence -- became clearly visible in late 1990. IBM's "market-driven" product lines looked to be in the best shape they have even been! And IBM's Rochester AS/400 plant and lab received the Malcolm Baldridge award for excellence.

By the way, Akers' three "A's" have one thing in common -- they are trademarks of a good salesman. Which is how Akers got the job in the first place. But, as can be seen from the rest of his scorecard, being a good salesman is only one of the qualifications required for a top-notch CEO.

For the most part, we thought that Akers' management decisions passed the test of "common sense," which is why we rated his performance as a "B" in this category.

The rest of Akers' "report card" goes all downhill. Downhill from the "A's," that is. Even within the management skills category in which he scored the best, he had demonstrated a lack of vision with respect to grasping the industry trends, or IBM's product strategies. Think of the "rent-to-purchase" conversion fiasco, for example. IBM's mid-range product line mess in the mid- to late-1980s, IBM's lateness in coming up with the PS/2, having to be dragged kicking and screaming by the market demand into the UNIX world -- are some of the examples why he only earned a "D" in these categories.

Analysis of Akers' "Report Card:" The Rest...

Personal Leadership. In the personal leadership category, Akers scored a resounding "F." Take his stubborn adherence to IBM's "no layoff" policy, for example (also see APPENDIX A for additional examples). With the IBM ship listing under the weight of its huge Selling, General and Administrative (SG&A) expense bulk ($20.7 billion in 1990), Akers was boasting to his shareholders about the 14,000 fewer jobs which would reduce the IBM expenses by "$400 million next year, rising to $600 million in 1993 and beyond!?" Yet, $400 million is only 1.9% of the (1990) SG&A expenses. And the IBM shareholders will have to wait till 1992 to feel the effect of it!

Underscoring Akers' inflexibility of positions -- "shooting the messengers of bad news" -- is how one of IBM's employees described his style (see APPENDIX A and CMS BULLETIN 91-30, 5/28/91). His continued unwillingness to consider (contrary) outside viewpoints underscores the very arrogance which he claims he would like to see eliminated within IBM (see our 1986 correspondence with him on page 8 and APPENDIX A).

As for his ability to motivate people, accountability (i.e., being a "team player"), or external relations success, the latest outburst has only revealed to the outside world what the insiders have been seeing and feeling for some time: that Akers isn't cutting the mustard in any of these categories.

Financial Record. In terms of his financial record, IBM's chairman rates an "F" in nearly all categories. The fact that the IBM stock price is down 23% since the time he took over as chairman, while the Dow Jones industrials' index is up 194% during the same period, requires no further comment. IBM's other financial measurements, such as the net earnings change, the return on equity, or market share gains/losses -- are all similarly disappointing.

COPY OF DJURDJEVIC/AKERS' 1986 CORRESPONDENCE (chart)

Not "A Natural" (Leader)

A true leader must always be ahead of his team. When times are tough, he must be supportive of his players. When the team enjoys success, that's the time to "kick ass," so as not to become complacent. It is fairly obvious to everyone that, at this moment, times are tough at IBM, that the people are feeling down in the dumps. Yet, Akers chose to kick some of them while they were down. The timing of his recent harsh comments, therefore, proves that he lacks a "feel" to be a leader, that he is not "A Natural" -- to borrow a term from a successful baseball movie.

Making things worse, Akers missed the opportunity to do it when he took over as chairman in 1985. At the time, we called his unwillingness to distance himself from his predecessors "a lack of political savvy." We were told that our comment infuriated him (see APPENDIX A).

Quo Vadis? (Where to?)

Where to from here? Despite the fact that, as of April 1991 all 64 IBM U.S. regions were below plan, and the international picture wasn't much better, we expect things to improve in the second half of the year. The shipments of the top-of-the-line ES/9000 mainframes will certainly help. As will the new high-end disks. This will ease the pressure on the IBM Board "to do something about Akers."

On the other hand, this year Akers has lost his main backer on the Board, the person who actually made him the CEO -- Frank Cary. The former IBM chairman reached the age of 70 and retired. John Opel, Akers' predecessor as chairman, still has about four years left on the Board, but is reportedly not very active. The same can be said about the other former insider, Nicholas Katzenbach, who additionally only has one more year left before reaching the age of 70. This leaves Akers with his own two insider appointees to the Board -- Jack Kuehler and Frank Metz -- versus 13 outside directors.

In other words, should the outsiders on the Board decide that it is time for them to take their duties on behalf of the shareholders seriously, Akers won't stand a chance. On the other hand, it would take extreme pressure for the outsiders to act tough -- something that they have never done before. So stand by for more excitement at the world's largest computer vendor.

Happy bargain hunting!

Bob Djurdjevic

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APPENDIX-A: AKERS' RETROSPECTIVE

(as seen through ANNEX's reports, press clips)

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THE FORMATIVE YEARS

PHASE 1: INDOCTRINATION & DELUSION...

Feburary, 1983: John Akers becomes IBM president.

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March, 1983: "IS IBM MORTGAGING ITS FUTURE?"

(Annex Computer Report; Apr/83 issue):

"...As long as there is a steady and increasing demand for its products and services in the future, this IBM strategy (expansion) should continue to work... But, IBM's challenge is going to be that of forecasting such growth accurately. In 1977, the company underestimated the effect which aggressive pricing of its 303X had in generating demand for its products...In the 1980s, IBM must make sure it does not become too optimistic in assuming its lower prices will automatically generate user demand... by shifting the emphasis from rental to purchase revenues, IBM is becoming more vulnerable to the general economic conditions and year-to-year fluctuations."

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April, 1983: Opel on Cary: "Remarkable Display Of Business Courage and Confidence"

(Annex Computer Report; Jun/83 issue):

In a tribute to the outgoing chairman at IBM's 1983 Annual Meeting in Boston, IBM's (now also retired) chairman John Opel praised Cary for his "remarkable display of business courage... and confidence," and for "setting our growth strategy." Opel also lauded Cary for his confidence "that the great opportunities which we saw before us would be translated into actual demand."

"...ACR (Djurdjevic) asked the IBM Chairman (Opel) to explain why IBM achieved this (financial) turnaround, in part, by borrowing from its future? Mr. Opel pointed out the increased significance of IBM's service revenues... and the IBM Credit Corp. (ICC)... In conclusion, Mr. Opel told ACR (Djurdjevic) "we have reasons to be optimistic about out future."

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May, 1983: Krowe: "Purchase Is a Natural Order of Things!"

(Annex Computer Report; Jul/83 issue):

"After the IBM shareholders meeting in Boston... John Opel asked Mr. Allen Krowe, IBM's Senior VP and Chief Financial Officer, to handle our concerns (regarding the lease base sale)... Krowe attributed the reason for a change to customer preference. 'So, you are saying that the shift to purchase was not IBM-driven, but was market-driven?' ACR (Djurdjevic) asked. 'That is correct,' Krowe replied... He did agree though with our assertion that this would lead to 'greater period-to-period fluctuations, and therefore, pose an increased requirement for accurate demand forecasting.' But, he also added that IBM's recent performance suggests
that the company is relatively insulated from the influence of negative worldwide economic factors (such as the current recession)."

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July, 1983: "A Headstart or a Legacy?"

(Annex Computer Report; Aug/83 issue):

"Once notorious for its product shortages, the world's largest computer company may face the reverse problem of having to figure out what to do with excess manufacturing capacity. In recent years IBM has added $10 billion-worth of new plant and lab facilities, or two thirds of its assets. Such a massive investment is evidence of a massive dose of confidence about the future which IBM's chairman, Frank Cary, possessed. The next three years will show whether IBM's new chairman, John Opel, received a headstart or a legacy from his predecessor."

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March, 1984: Akers First Speech to Analysts: "Need to Be More Forthcoming;" Aggressive Capital Investments" (unpublished until now)

At the IBM meeting in Boca Raton, FL, IBM's president, John Akers, started his first public address to financial analysts by saying that IBM understood "our need to be more forthcoming about our business, unlike some of the press reports" (about IBM). Answering one analyst's question, Akers said that "much of the success today has been a result of our capital investments over the last five years. We will continue to be aggressive" (in this respect)... Meanwhile, IBM's Krowe contradicted himself from his above May 1983 remark as he said that the "poor economic conditions worldwide" represent the biggest threat to IBM's otherwise optimistic growth plans.

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April, 1984: Opel: "Unit Shipments at An All Time High!"

(Annex Computer Report; Jun/84 issue):

"ACR asked IBM's chairman (at the IBM Annual Meeting in Los Angeles, CA) why IBM refuses to disclose to its shareholders the unit shipments by product lines, in light of the fact that rental-to-purchase revenue conversion is distorting the period-to-period comparisons. '... We are not withholding this information from the shareholders... I can assure you (slight pause), I don't believe that this (type of disclosure) would change anything in our results. Our physical shipments of goods are at an all time high."

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November, 1984: IBM's $6 Billion Inventory: Sign Of Weak Demand?

(CMS BULLETIN 84-21, 11/20/84)

"...IBM has overestimated the demand for its products and now has to stockpile about $6 billion-worth of them. What does that mean? More price reductions, as IBM once again attempts to stimulate the demand..." (Re. rent-to-purchase conversions): "...He who plays with fire, sooner or later gets burned by fire. When deciding to give up the protective cushion of its rental income, IBM executives began playing with fire. The negative consequences are already beginning to show up, and will become even more visible by 1986, when most of IBM's rental revenues will be gone."

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PHASE 2: DOUBT...

December, 1984: Puckett: "Never Suspected Anything Till Late 1984"

(CMS BULLETIN 90-30, 7/19/90):

Bernard Puckett, currently an IBM vice president in charge of its Application Solutions line of business, was in charge of plans and controls at IBM reporting to Allen Krowe in early 1984. When told in February 1990 of our analysis regarding IBM's rent-to-purchase and the overexpansion strategies, and the subsequent question we asked John Opel at the April 1984 IBM Annual Meeting, Puckett said "he wouldn't have known it then. We never suspected anything until late 1984. That's when we started wondering if something went wrong."

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January, 1985: Rentals Declining Faster Than the Growth in Service Revenues

(CMS BULLETIN 85-04, 1/21/85)

"... IBM's slower revenue growth rate in the second half of 1984 was also due to a relatively new phenomenon. IBM's service revenues (which include software revenues) were not rising as fast as its rental revenues are declining. During 1984, the company's combined rental and service revenues declined 4.3% as compared to 1983, the second consecutive year in which such a drop took place... 1984 was also the second consecutive year in which IBM's 'business volume,' (the "if sold" value of its hardware revenues) declined. The rate of decline (-0.3%), however, was lower than in 1983 (-1.0%).... In the last quarter of 1984, IBM's overall revenues increased only 12% over the fourth quarter of 1983, the lowest rate of growth since the first quarter of 1982 -- the quarter during which the Justice Department ended its 13-year antitrust suit against IBM... For the first time, IBM warned that 'if the strong dollar continues at the present level, it will impact 1985 non-U.S. revenue growth as reported in dollars, particularly in the first six months.'"

1985: The Last Year Of Rent-to-Purchase Conversions "...Besides the continued threat to IBM's revenues which the strength of the U.S. dollar represents, 1985 will probably be the last year during which IBM will benefit from the one-time sale of its rental inventory. To offset the resulting downward drag on its revenues, IBM will have to continue to grow its service revenues. And that means likely software price hikes, combined with an increased preponderance of one-time charges (as op posed to monthly license fees)."

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PHASE 3: DENIAL...

February, 1985: John Akers becomes IBM chairman and CEO.

(NEW YORK TIMES, 1/29/85)

"... In a broad interview, Akers predicted that within a decade IBM (revenues) would pass $180 billion a year (at the time, IBM revenues were $46 billion [1984]; Akers himself was 50 years of age, looking ahead to probably a decade-long career as the chief executive)... I worked under Frank Cary and John Opel for 15 years,' a relaxed, confident-sounding Mr. Akers said in a recent (NYT) interview... I've had just about every experience in the business -- service, marketing, Federal business, world trade... I feel pretty well prepared.'"

Focused on External Relations. "... Indeed, on first meeting, Mr. Akers appears as a charismatic champion of what he terms a 'new IBM'... Mr. Opel, in contrast, stressed in an interview last month the themes of continuity in the company. Moreover, Mr. Akers indicated that he plans to devote more time to explaining IBM's actions. '...I should be prepared to spend maybe as much as half my time in external affairs as opposed to internal management.'"

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April, 1985: Pulling the Rabbit Out of a Hat Can Be Hard To Do; Akers Feeling the Heat?

(CMS BULLETIN 85-20, 4/11/85)

"... A closer look at IBM's first quarter results shows that, even for the best of magicians, pulling the rabbit out of the hat is a hard thing to do if you had eaten it for supper the previous night. In order to make itself look good in 1984, IBM made many software and some maintenance special offers to its customers giving them a chance to get the software for one-time fees payable in 1984 in lieu of the continuous monthly payments. Now that this source of continuous cash is gone, IBM's service revenues in the first quarter increased only 11.7% since a year before, a far cry from the torrid 25% pace at which they grew in 1984."

"While in Opel's case there may have been some room for hope that Cary had given him a headstart rather than a legacy, there is no doubt that Akers, who has taken over from Opel, is already feeling the heat. It is perhaps ironic that IBM's new CEO will end up sleeping in the (hot) bed that his predecessors had made. But then, not only is he handsomely compensated for it (he got a 91.2% raise in 1984), but he was also around to watch them make it before jumping in."

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April, 1985: Akers Predicts "Solid Growth" in 1985, A "Trillion Dollar Industry" by 1990s.

(WALL STREET JOURNAL, 4/30/85)

Speaking to the IBM shareholders at the company's Annual Meeting in Atlanta, Akers said that "the company expects 'solid growth' in 1985 profit and revenue... Akers also said that, 'it is predicted that industry revenues should continue to double every five to six years, which means that by some time in the 1990s, we'll be operating in a trillion dollar industry...'"

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PHASE 4: SLOW AWAKENING, YET CONTINUED DENIAL...

June, 1985: "Big Blue" Now Also Singing Blues

(CMS BULLETIN 85-34, 6/18/85)

"In a change of tune from his previous optimistic remarks, IBM's chief executive, John Akers, told a group of financial analysts assembled at the IBM Yorktown Heights research lab on June 12 that the "solid growth" in 1985 isn't going to happen. Only six weeks earlier, Akers assured IBM shareholders at their annual meeting in Atlanta that, `despite what appears to some as a pause in our industry....I am confident that we will enjoy solid growth in revenue and earnings for the year as a whole.' In less than two hours of trading which remained following Akers' change of tune, IBM stock dropped five and a quarter points on a volume of over 2.5 million shares -- as New York Stock Exchange's most active issue."

"Akers blamed the strong dollar and the weakness of the U.S. economy for the slowdown in IBM's rates of growth.... Upon conclusion of his speech, I asked him if he would explain how a strong U.S. dollar has anything to do with the weakness of demand in the U.S. After a few exchanges and clarifications as to what my question really was, Akers conceded that, 'if you want me to say that the foreign currency translations do not affect our U.S. results, I'll agree with that.'"

"...On balance, therefore, Akers' explanation that the softness in demand for IBM products stems from an alleged "weakness of the U.S. economy" fails the tests of global and historical consistency. From the preceding statistics, one would conclude that there is no correlation whatsoever between the economic rates of growth and the demand for IBM products. Which means that IBM's economic theory may be no more than a face-saving tactic, a red herring intended as a diversion from three real problems. Since all of them are self-made, they are now possible topics of embarrassment for IBM executives. As such, they are better left untouched."

Are Users 'Overmipped?' "...IBM's unprecedented high levels of capital spending are the second most important reason for the company's present woes... (Akers') implication that it is the 'industry's' overestimation of demand that has led to the current overcapacity problem. What IBM's CEO failed to point out, however, was the fact that IBM's own capital spending of $16.5 billion dollars during that period accounted for a lion's share of 'our industry's' capital investments. Given the fact that, in Akers' own words, `there is clearly overcapacity' in the industry, one would think that IBM might start pulling in its horns when it comes to capital spending. Instead, Akers told the analysts that he expected IBM's capital spending this year to exceed that of 1984 by 20%!? 'This should remind you of the confidence which we at the IBM company have in the future,' he added. Actually, what this reminds this writer of is an ostrich which, in the hope of avoiding danger, sticks his head in the sand."

Akers' Lack Of Political Savvy. "The June 12 (1985) meeting with financial analysts was an ideal opportunity for IBM's newly appointed CEO (Akers assumed this position only last February) to clear the slate; to admit to IBM's past mistakes; to distance himself from IBM's former CEOs (i.e., John Opel and Frank Cary who should probably shoulder most of the blame for IBM's current lackluster results); to reassure both IBM's customers and shareholders that he has learned from their mistakes, and that the company would be turning a new, and a more prudent leaf from now on. By failing to seize this opportunity to send such signals, Akers has demonstrated not just that he was equal to his predecessors as a poor judge of demand, but also that he lacked political savvy. For, unless IBM users suddenly rush to IBM's rescue, the lower-than-expected demand in the computer industry may ultimately ruin his own credibility. You see, given the 20% to 25% average annual price/performance improvements in the industry, a 20% growth rate in unit shipments (which he predicted for 1985) will mean flat revenues at best, instead of the 'solid growth,' which Akers promised earlier."

"... As can be seen from the preceding, the universe is unfolding as it should. The GNP and the computer industry are growing, albeit not necessarily as fast as IBM promised its shareholders. It remains to be seen if those who made such promises will ever be held accountable for their mistakes."

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August, 1985: IBM's Inventory Doubles in Two Years

(CMS BULLETIN 85-45, 8/27/85)

"...By the end of June 1985, IBM's bulging inventories reached an all-time high of $7.97 billion, an increase of $1.4 billion in just six months.... In just two years, therefore, IBM's inventory has more than doubled... It is evident that IBM is hoping to be able to outsell the current slowdown in the industry, rather than have to take the knife to its overexpansion problem. The next six months will give us a good indication whether or not this can be done. But, even if IBM does succeed in reducing its inventories, in today's buyers' market it will have to drop the prices to stimulate the demand."

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November, 1985: IBM Starting to Tighten Its Belt

(CMS BULLETIN 85-51, 11/08/85)

"...At the November 6 meeting of European financial analysts in Greenock, Scotland, the top IBM executives, notably Allen Krowe, its chief financial officer, reportedly stressed the importance of "prudence" in cost control. As a result of attrition and its recent reorganization (see CMS Bulletin 85-47), IBM's overall U.S. employment is expected to decrease during the fourth quarter of 1985, they said."

"...At the Greenock meeting, for the first time in at least the last six years, IBM executives also hinted at starting to cut back on their capital expenditures. Some of the capital projects planned for 1985 will be postponed, according to Krowe. Although IBM's CFO made great efforts to play down the significance of these cutbacks, it is clear that they have been caused by the relative weakness in demand in the U.S."

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PHASE 5: REALITY SLOWLY SETTING IN...

January, 1986: Akers: "Approaching 1986 With Caution"

(CMS BULLETIN 86-05, 1/29/86)

"...Commenting on the 1985 results, Akers said that, "there is an absence of convincing evidence (that) the North American economy is showing sustained improvement, and we are approaching 1986 with caution." IBM CEO's words of caution signal a change from the company's bullish long-term posture a year ago. They are an indication that the reality of IBM's (mis)judgment of demand is setting in at Armonk, if not yet on Wall Street. And that's a positive sign, as the industry moves through a phase of growth correction."

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May, 1986: Capital Spending Slows

(CMS BULLETIN 86-25, 5/29/86)

"...Another piece of good news for IBM is the fact that after years of spending billions (over $20 billion in the last six years) on new plants and equipment, IBM has finally started to curtail its capital spending. Largely due to the projects already under way, this year's capital spending plan is likely to be flat compared with that in 1985."

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June, 1986: Why Is IBM Opening Up?

(CMS BULLETIN 86-29, 7/07/86)

"... After decades of almost air-tight controls of its captive markets, there is a breath of fresh air in IBM's strategies. IBM seems to be opening up to the world in more ways than one. First, the company's senior executives, led by its new chairman, John Akers, exhibited an unusual air of openness at last month's meeting for financial analysts in San Jose. Second, IBM is also opening up its SNA communications strategy."

"... What is the reason that IBM may be opening up to the world? In a word -- it is its growth. Or a lack thereof if the company did not open up. The recent comments by the senior IBM executives suggest that they are finally coming around to correcting the flaws in some of their product strategies from the early 1980s. One of them was the assumption of a continuous 50%+ MIPS demand growth, fueled by the (high) PC shipment volumes... As we know now, that didn't happen... Asked by ANNEX (Djurdjevic) at the San Jose meeting if IBM is opening up its communications strategy because the company thinks that such a move would help the growth of MIPS demand, Terry Lautenbach left no doubt about it. 'Of course,' is all he said. Later, Akers expanded on this by saying that, 'the more devices, ours and theirs (meaning those of IBM competitors) we can have connected to our systems, the better for our business.'"

Systems Integration/Solution Selling: New Role/Old Tactics "...Network management and systems integration are vital components in determining eventual winners and losers (in the computer and communications industry)," said IBM's Lautenbach. "We intend to win." In other words, it is through its new role as "the world's best systems and network integrator" that IBM will try to regain some of the control which the company has lost by opening up the SNA gates to the outsiders. Interestingly, there is not much new to IBM's "new" marketing strategy. IBM is still the same old friendly computer supplier which was selling solutions, while its competition was selling products... The only difference from the past, therefore, is that IBM is now also including its communications products among its solutions. As of July 1, 1986, there were 60 marketing teams selling integrated IBM/Rolm solutions worldwide. By the end of the third quarter, however, that number will increase to 100 teams."

Akers Doesn't Think IBM Has An Inventory Problem?! "... Just as we were ready to give the IBM chairman high marks for putting on the breaks on capital spending, for dropping prices to reduce IBM's bulging inventories, Akers said something which indicates that he still may have some of IBM's old arrogance left in him. Answering a question from the floor, IBM chairman said that he didn't think that IBM had an inventory problem. "We are managing it carefully, but I don't think we have an inventory problem." Well, if Akers really thinks that IBM's $9+ billion inventory at cost, over $30 billion at retail, double the level it was only two years ago, with finished goods leading the rise with a 48% year-over-year jump since March 31, 1985 -- can be wished away by a simple declaration that it is not a problem -- why would IBM then be dropping its prices so aggressively trying to sell it off? "Action speaks louder than words," somebody once said."

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November, 1986: Djurdjevic to Akers: How Open-minded Are You Really?

(correspondence unpublished until now -- see the charts)

Following a series of customer workshops in North America and Europe, Djurdjevic wrote to Akers offering to share with the IBM chairman some of the feedback he'd received from IBM customers. "I thought that having a fresh, new perspective of the IBM company may help your executives understand how they are really perceived by the outsiders," Djurdjevic's October 30, 1986 letter said. "And that, in turn, may help you mold a new image for IBM, one which would have an Akers' personal imprint on it, and one which would last well beyond your tenure as IBM's chairman." In his November 17, 1986 reply, Akers turned down the offer.

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November, 1986: Akers Takes Notes While Customers Speak

(CMS BULLETIN 87-30, 5/31/87)

"...In a special report entitled "IBM Renews Its Commitment To Customer Partnerships," IBM's PR people explained how IBM reawakened to the importance which its customers had.... In November 1986, the pro-customer movement 'gathered momentum at an unprecedented IBM strategic planning conference in Purchase, N.Y.,' according to the IBM report. The conference site selection notwithstanding (you see, "Rent, N.Y." had lost some of its lustre in recent years), what made it unprecedented was that Akers invited top executives from six customers in the U.S., Canada, Switzerland and Japan. He then sat back 'to listen, and (to) learn, as customers took the floor.' Akers reportedly took notes throughout..."

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1 9 8 7

("THE YEAR OF THE CUSTOMER")

PHASE 6: NEW IDEAS TRIED...

January, 1987: IBM Earnings Disappoint Even Worst Pessimists

(CMS BULLETIN 87-05, 1/23/87)

"... IBM's (1986) earnings report disappointed even the worst skeptics.... IBM did say that its inventory dropped 10% during the fourth quarter. IBM also confirmed that there was an inventory write-off within its cost of sales figures. Given its $9 billion inventory as of September 30, 1986, however, a 10% reduction would have amounted to about $900 million, or up to $380 million of possible after-tax costs. Which is an amount big enough to have been a major contributor to IBM's 48% fourth quarter earnings drop."

Will IBM Have To Resort To Layoffs?. "IBM ended 1986 with 5,000 fewer U.S. employees on board than at the start of the year. The company said it planned to reduce its U.S. work force by at least 12,000 people in 1987. Given IBM's declining earnings and its other cost-cutting programs, we are being frequently asked if IBM may eventually abandon its heretofore sacred no-layoff policy. Some analysts went even as far as to predict that that's what IBM might have to do. We don't think so.... The only circumstances under which IBM might abandon it, therefore, would be a severe profit crunch or even losses, with little hope of future recovery. Such is not the case at the present time, as we see it anyway. Despite disappointing 1986 earnings, IBM still had almost $5 billion in profits last year. And after 1987, thanks to the growth in its software and communications business, the future outlook for IBM seems once again rosy. Prospects of IBM layoffs, therefore, seem rather remote indeed."

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February, 1987: Akers Declares 1987 "The Year of the Customer"

(CMS BULLETIN 87-30, 5/31/87)

"... Following the (November 1986 customer) conference, "with 1987 barely a month old," (i.e., at about the time IBM was sticking it to its 3090 customers once again with its E-models), Akers announced internally that 'a major new company goal' (was) to be added -- 'to enhance our customer partnerships'. In February, IBM invited some 200 major customers to Orlando, Florida, to 'a work- intensive executive conference.' 'We need to do a better job of sharing our (future) product direction and strategy with you,' Akers told the conference delegates. (In April 1987, at the IBM shareholders meeting in New Orleans, Akers echoed similar sentiments).

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April, 1987: Akers Likened to Gorbachev

(CMS BULLETIN 87-22, 4/27/87)

"... During a luncheon conversation at our recent London workshop, one of the participants likened IBM's current situation with that at the Kremlin. He should know. Only a few months ago, he was himself an IBM executive. 'Akers is in a similar position to that of Gorbachev,' he said. 'He is trying to change things for the better. But, a number of 'old timers' (at IBM) can't wait to see him fail, so that they would take his place.' Curiously, the following day, a large IBM U.K. user executive offered a similar analogy."

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August, 1987: IBM Downsizing: A New Positive Trend

(CMS BULLETIN 87-44, 8/27/87)

"... Another positive IBM sign is a decline in the company's capital investment during the first six months of the year. Although the drop is only 9%, it is a signal that, after about six years of nearly reckless expansion, IBM has started to put on the brakes. The reduction in capital spending parallels IBM's massive transfer of manufacturing personnel to the field, a process which IBM started late last year. In addition, about 13,000 employees took advantage of an early retirement program which ended June 30, another IBM cost-cutting measure... Despite IBM's cost-cutting measures, its Selling, Administrative and General (SG&A) costs have been increasing as percent of revenues. After the first six months of 1987, they were at 31.4% of revenue, up from 29.8% last year."

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October, 1987: Is Akers "Overmanaging This Whole Thing?"

(CMS BULLETIN 87-55, 10/30/87)

"... 'I wonder if Akers is overmanaging this whole thing,' said Joe Zemke, Amdahl's president and a former IBM marketing veteran of 18 years (when told that annualized shipments of ALL major IBM processor lines were down in the first half of 1987)... You see, over the last two decades, IBM has been, for the most part, masterfully orchestrating transitions from one product line to the next. As a result, its financial performance was steady despite the many peaks and valleys which its various products experienced along the way. Consequently, when ALL IBM major processors end up in a valley at the same time, as has just happened, you know that some people pretty high up at IBM must have dropped the ball."

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November, 1987: Akers Seems to Be Turning Things Around

(CMS BULLETIN 87-56, 11/05/87)

"... At the IBM financial analysts' meeting in Thornwood, NY, Akers felt that, 'given reasonably normal economic conditions,' the industry and IBM could maintain their historical growth rates in the future. 'The IBM company is planning for growth next year.' ... Akers also said that he expected IBM to return to the operating margins 'in the range of 20%.' After peaking at about 24% during the sell-off of the IBM lease base in the early 1980s, IBM's operating margins dropped to below 12% after the first nine months of 1987.

'If IBM grows 8% in 1988, we should be able to do better than that in (terms of) earnings,' said Akers. 'And the same again in 1989.'"

Akers: New Broom Sweeps Clean. "... IBM's chairman has certainly demonstrated his sweeping ability since taking over in early 1985. 'There has been a tremendous change in management and people at IBM in the last two years,' he said. ...That's evident now. There are about 17,000 fewer people on the IBM payroll. As a result, by the end of 1987, the company expects to show NO increase in its SG&A costs (Selling, General and Administrative) after an adjustment for foreign currency translations. That's even though its revenues will grow. Akers' cuts, therefore, will flow right through to the bottom line. IBM used to need a 13% to 14% revenue growth just to keep the net margins flat. 'Now, a 4% to 6% revenue growth will have the same effect,' Metz (IBM CFO) said. ...Thanks to Akers, therefore, IBM is certainly a leaner company today, better positioned to deal with possible downturns -- should they happen."

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1 9 8 8

January, 1988: Akers' First Executive Shuffle

(CMS BULLETIN 88-07, 1/29/88)

"... the greatest significance of IBM's latest reorganization was the fact that Akers has decentralized IBM's decision-making in the U.S. Each of the six group executives reporting to Terry Lautenbach (see the charts) should have a chance of running his/her business unit in an entrepreneurial way (to the extent that such things are possible in any corporate bureaucracy). In the long run, however, this should benefit IBM and its customers. The decisions should be made faster and better by the people who are closer to the trenches. For a highly centralized bureaucracy which IBM has been for decades, such a change is monumental. It is the IBM equivalent of Gorbachev's "glasnost" and "perestroika" changes in Russia. No wonder, therefore, that Akers reportedly said at the Jan. 28/88 news conference in New York that these were the most sweeping IBM changes since 1956! (i.e., the year Tom Watson Sr. died)."

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May, 1988: 1988: "The Year of the Solution?"

(CMS BULLETIN 88-24, 5/06/88)

"... Given a variety of mixed signals which 1987 has left in its wake, one would naturally wonder what this year would hold for IBM... We think that an appropriate 1988 theme would be 'the year of the solution.' (Unlike in 1986) ...now IBM has the structure to help turn its words into action. One of the most underreported stories this year has been the formation of the new 18,000-person strong Application Solutions line of business under Ned Lautenbach."

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June, 1988: Akers' "Fixed Smile and Rather Stiff Manner"

(COMPUTER WEEKLY (U.K.), 6/16/88)

"John Akers is reminiscent of the synchronised swimmers at the last Olympics with his fixed smile and rather stiff manner," wrote the British Computer Weekly, after Akers' first ever U.K. press conference in early June 1988. "In a recent bulletin, respected US analyst Bob Djurdjevic of Annex Research, described Akers as 'charismatic.' That was excessive, but perhaps Djurdjevic has been watching too many US presidential candidates in action." (Actually, we had merely seen some "stiffer" IBM CEOs).

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June, 1988: New Culture Emerging Under Akers

(CMS BULLETIN 88-34, 6/21/88)

"...the AS/400 announcement is a good illustration of how much things have changed inside IBM since Akers took over, or more specifically since his reorganization in January of this year. The highly centralized decision-making process, under which the chairman and the Management Committee (MC) kept full control of such things as pricing, has been pushed down the line to the top IBM line executives (Conti, Conrades, Schwartz, Hancock, for example). With the AS/400s, Schwartz implemented for the first time one worldwide price for all models... Schwartz's plan drew fire from some of the other IBM MC members. That's where John Akers cut off the discussion. 'He is in charge,' IBM's chairman reportedly said. 'It's his (line of) business. It's his decision.' And so it was written...."

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June, 1988: Plant Closings: A Positive Move

(CMS BULLETIN 88-37, 6/30/88)

"...As another 10,000 or so recently dislocated IBM U.S. employees join the 33,000 who experienced a similar fate last year, it might be useful to consider their predicament in the context of IBM's earlier overexpansion. This won't give them their jobs back, but it might help them understand that the cutbacks which Akers and Lautenbach implemented over the last two years were inevitable and long overdue... the company's latest cutbacks have to be viewed as positive from the corporate standpoint."

This report contained a photograph of John Opel and Frank Cary with a caption: "They are to blame." An IBM spokesperson told us afterward that Akers was incensed over that.

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December, 1988: Fujitsu to Pay $833M to IBM

(CMS BULLETIN 88-63, 12/01/88)

"...The price for staying software- compatible with IBM for about a decade is $833 million. At least that's what the two arbitrators in the IBM/Fujitsu dispute think. And, that price is only for Fujitsu. Other shoppers may face a different fee. If there are others, that is. You see, we would be hard pressed to believe that IBM would shoot itself in the same foot twice. By now, we suppose, you can tell how we feel about who won and who lost in this case. Relative to the positions the two companies held before this dispute began, there is not much doubt that Fujitsu ended up on top. Of course, both companies' official statements said that they were 'pleased' with the outcome. Fujitsu's, however, went a bit further. It read that Fujitsu was '