Supporting the Management Process (IBM)

International Business Machines Corporation (IBM) has faced challenges this last decade due to increased competition in the home-consumer segment of the personal computer

(PC) market. When IBM introduced the PC in the early 1980s, it was a huge success.

Over time, however, the PC market grew immensely, and competition began to rise.

Although the PC was initially marketed toward businesses, a home-consumer market emerged as well. In 1995, IBM, under the direction of then-CEO Louis Gerstner, set up a home-consumer PC division to augment its business PC division. IBM hoped that with the two divisions, each employing its own design, manufacturing, and marketing personnel, it could better focus on the needs of its various customers and increase total sales.

IBM’s consumer division quickly developed PCs that had high customer appeal. In early 1996, the division released its “Aptiva” PC in a sleek, dark gray color. The model was equipped with many high-tech features. Also, IBM’s reputation for quality allowed the consumer division to charge a higher price for the PCs. (In December 1996, IBM PCs sold for an average of $1,880, whereas other companies charged as little as $1,300 to $1,400.)

Initially, the manufacturing department in IBM’s consumer division could not keep up with consumer demand. Soon, however, IBM began losing market share to companies such as Dell, Compaq, and Gateway. These companies discovered that consumers prefer low price to the extra “frills” that IBM offers in its computers. Furthermore, IBM found that many consumers were no longer willing to pay higher prices for IBM’s reputation. IBM, the company that originally created and dominated the PC market, began losing market share in the PC business very fast. IBM’s PC division lost almost $1 billion in 1998. In 1999, IBM reduced its PC workforce from 10,000 to approximately 9,000 employees and cut its losses down to $360 million. In early 2000, IBM unveiled a new line of sleek, stylish machines that it branded as the NetVista line of products. With these and a number of other changes in place, business finally began growing in the second half of 2000. By the fourth quarter of 2000, IBM regained enough market share to be listed as No. 5 for PC shipments in the United States.

1. Did IBM make a good decision in setting up its consumer division? How so?

2. Analyze IBM’s decisions and actions involving the consumer division. Try to categorize these decisions and actions following the threefold management process of planning, controlling, and evaluating.

3. Based on the threefold management process of planning, controlling, and evaluating, where do you think IBM was weakest in its decision-making practice with respect to the consumer division? Where do you think it was strongest?
4. If you were Sam Palmisano (IBM’s current CEO), what information would you want from your accountants in order to effectively plan, control, and evaluate the decision to either shut down or continue to operate the division? Note: In 2005, IBM sold its personal computer division to Lenovo, a Chinese company.
Source: Raju Narisetti, “IBM to Revamp Struggling Home-PC Business,” The Wall Street Journal, October 14, 1997; Lisa Smith, “IBM’s Personal Computer Unit Makes Turnaround,” The Herald-Sun, March 22, 2001.