A Blue Chip Case of Blues

By John Greenwald

Will the real IBM please stand up? In recent weeks the struggling computer giant has stunned Wall Street with surprisingly strong first-quarter profits and has watched its stock price soar. Along with those gains, Big Blue has rolled out lines of powerful business computers that the company hopes will help to spearhead its comeback over the long haul; the versatile large and midsize machines can handle anything from banking transactions to running factory floors. "I think the worst is behind IBM," says Richard Zwetchkenbaum, who watches the firm for International Data Corp. John Coyle, a computer analyst for Standard & Poor's, concurs: "This is a better IBM company, one that is focused on increasing shareholder value."

And yet IBM remains tormented, as factions within the world's largest computer maker (revenues: $63 billion) fight for its very soul. Just last week Robert Corrigan, 53, whom IBM watchers credit with turning around the company's vital personal-computer business, abruptly declared he would take early retirement next month. The announcement marked the second high-level departure in as many weeks. Earlier, Gerald Czarnecki resigned as the IBM executive in charge of slashing the company's bloated work force and unbuttoning its culture, amid reports that he had been proceeding too slowly to please his superiors.

Worse yet, critics question whether IBM has truly developed a plan that will enable it to compete in the long run against feisty and fast-moving rivals at home and abroad. While chairman Louis Gerstner, 52, has revamped the company's finances in remarkably short order since he arrived a year ago from RJR Nabisco, observers both inside and outside IBM remain concerned about his lack of computer savvy. (At his first press conference after being named IBM chairman, Gerstner conceded that he did not know the brand of laptop he used.) Charles Ferguson, a consultant based in Cambridge, Massachusetts, and co- author of the book Computer Wars, argues that IBM under Gerstner still clings to outmoded technology out of fear of alienating its vast base of existing customers who have invested heavily in the older systems. "Somewhere between one and four years from now the company is going to enter another period of crisis that will be technological, and not fixable by financial and organizational changes," Ferguson predicts.

Gerstner is candid about the dissension within IBM's ranks as he seeks to rebuild the glory of a once all but invincible firm that has lost nearly $16 billion over the past three years. "There are still some very, very senior people in this company that I don't think have bought into the new IBM," Gerstner told Time in an interview last month. According to a recent survey of IBM executives, "We've got half of our senior management group that is excited and committed, first to the need for change and second to the type of changes that we're beginning to implement here. And then we've got another half that is in what can best be described as a denial phase, or a 'Well, I'm O.K., but everybody else is a problem.' So they haven't bought into the concept that they want to be part of the solution."

The solution has so far been excruciating to many inside the company. In the past year IBM has shuttered plants, sold a division that made military and aerospace equipment, and phased out 45,000 jobs, or 15% of the work force. Such painful reductions have pared $2.8 billion from IBM's expenses, and were the main reason behind its $392 million profit in the recent first quarter. The bloodletting hasn't ended yet: the company plans to cut an additional 35,000 workers over the next two years.

Gerstner has been no kinder to hallowed IBM traditions than to workers who have lost their jobs. Upon his arrival he swiftly dismantled a 10-member top- management committee that often stifled action, and began talking directly to employees through electronic mail. At the same time, Gerstner scrapped former chairman John Akers' plan to chop IBM into thirteen units that would function as nearly autonomous companies and thereby gain some of the responsiveness that comes with smaller size. But Gerstner, who last week reorganized his sales force, estimated at 40,000, along industry lines to try to match up with customers' needs rather than their geographic location, believes that big can work too if everyone pulls together. "We're a team," Gerstner says, "and at the end of the day there's only one scoreboard up there, and our only name on the scoreboard is IBM."

Gerstner's freewheeling style has prompted some lightning-fast decisions that might never have been made under past IBM regimes. In a little-publicized meeting last month with Chinese Vice Premier Zou Jiahua at the company's headquarters in Armonk, New York, Gerstner sensed that a tentative agreement was about to stall out over small but unresolved details. Instead of haggling, Gerstner declared, "There's no need for further study. We want to implement; we want to do things. I want action. Let's sign the agreement." That blunt approach won Zou over. Result: IBM and China last week unveiled a deal calling for the American company to link about 500 Chinese cities in a nationwide data network.

But the fate of IBM will ultimately rest on its ability to outpace smaller and so far nimbler competitors like Compaq and Dell Computer. To return to full health, IBM must breathe new life into its most important business: large mainframe computers, whose sales collapse in the 1980s brought on the company's crisis. IBM must also maintain the vitality of its so-called minicomputers, which can perform some of the same functions as mainframes but are less costly. In its latest lines of computers, however, IBM has displayed not so much a fully formed vision of the future as an extension of past models aimed at bridging the gap between the company's older machines and those still to come.

Take the new generation of mainframes that IBM rolled out last month amid considerable fanfare. After five years of development and $1 billion of capital investment, the latest models replace bulky and outmoded systems with a design based on arrays of microprocessors -- tiny computers on a chip -- that can handle vast numbers of instructions simultaneously. But while these models are cheaper than the previous ones and can serve as hubs for the networks of PCs that many companies now favor, they are based on older microprocessors, rather than the souped-up PowerPC chips that IBM has been developing with Apple and Motorola.

The new chip itself has provoked bitter conflict within IBM. Among other things, IBM hoped the PowerPC would break the stranglehold that Intel has on the production of chips for IBM-compatible personal computers. The partners also sought to end the dominance of Microsoft as far and away the largest provider of the operating system, or master software, that runs the IBM compatibles. But Corrigan had loudly doubted the wisdom of the PowerPC strategy before he stepped down as head of the personal-computer business last week, arguing that Intel and Microsoft were too entrenched to be dislodged by the new chip.

The controversy provides a vivid example of the crosscurrents that roil IBM. It has a motley collection of computers and software that fail to fit ( comfortably together. IBM solved a similar problem in the 1960s when it launched a family of computers called the System/360, which were all compatible with one another. "IBM has to find a way to pull its product lines together into a coherent whole," says Stewart Alsop, editor in chief of the trade journal InfoWorld. "That's the question about Gerstner: Does this guy know enough about computers to know what makes a good product?" Microsoft chairman Bill Gates, who is both a supplier and a rival for IBM, puts it more delicately. "I don't think it's clear where IBM will be in three to five years," Gates says, "but they've made a lot of progress in adjusting their cost structure and getting a new focus."

Critics derided Gerstner last summer for proclaiming that "the last thing IBM needs right now is a vision." These days, at least, no one doubts that Gerstner is in pursuit of one.

With reporting by Bernard Baumohl and Thomas McCarroll/New York and David S. Jackson/San Francisco