Moffat ready to play fix-it man for IBM's PC division

The new head of IBM's PC division, or personal systems group, is rolling up his sleeves, pulling out the wrenches, and getting his hands dirty to fix the division's problems.

After losing nearly $1 billion in 1998 and racking up about half a billion in losses last year, IBM's PC division is looking for its first quarter of profitability in about two years.

Along the way, the group cut $1 billion in cost, launched a stylish new line of PCs, revamped ThinkPad notebooks, and largely exited the retail market in the Americas and Europe.

But a recent product shortage that cost IBM $250 million in lost sales during the second quarter and has continued well into the third quarter indicates the company still has work to do on its supply chain. Still, some analysts contend the third quarter could be break-even for the division, which makes PCs, portables and servers. Much depends on Moffat's execution. After working for 39 days during a transition period, he replaced predecessor David Thomas last Friday.

Moffat's background in finance, manufacturing and operations may be just what IBM's recovering PC division needs, Technology Business Research analyst Bob Sutherland said.

CNET News.com: Your division is emerging from the darkness after a long period of unprofitability. Can you project where you might be in a quarter or even six months?
Moffat: You know I can't forecast. The easiest way to say this is there's a reason why I'm here. You can read my background. The reason that I'm here is that I play to win. I have a history of that here at IBM, and I have a history of winning. There's a lot of people who can play to win, but there's not many that win?I focus on three constituencies: the customers, the shareholders and the employees. I've got to win with the first two, customers and shareholders. And when I do that, the third wins.

I've been kidding around with some of the guys that (Compaq Computer CEO) Michael Capellas was an all-state football player. I was an all-American track runner. So I know what competition is. I ran the quarter mile and 600 indoors. So I understand full-contact sports.

How crucial will your operations background be in continuing the PC group's turnaround?
Lou (Gerstner) picked me because I'm a plumber. I use the words to say I understand how everything works end to end in business--all functions. I worked in Europe, so I understand the geographies. I'm not an American who has never been outside the United States. I think in order to run a business you have to do that.

I get my hands dirty. I can tell you I have been through 50 percent of direct revenues from customer walk-throughs to exactly understand all their problems. You can't do that unless you have the levels of operations background that I have?It's a dirty business. You can't stay clean and stay above it all. You've got to get into it.

What are some of your goals as you come on board?
It's not new to me. I am coming back to (the personal systems group). I worked with (IBM president) Sam Palmisano for about nine months in the enterprise systems group, but this is home for me. It's great to be home.

As I come in, the thing that really struck me is our strategy is absolutely correct. I was part of the team that put that strategy together. But the thing we were lacking is we weren't executing. So all of my attention is very focused on execution--day to day getting people to understand critical elements of our strategy, making sure they have an execution game plan for that and executing it. That's what it's all about.

OK, so what are the key elements of your strategy?
We focused on customer choice. We are a hybrid distribution model (direct and indirect). I think we reported 24 percent direct (sales) in the second quarter. We will be at 35 percent by the end of the year, and that is critical for me turning this business around from a profitability standpoint. (Direct) gets us closer to the customer, helps us better understand their requirements and moves us forward.

That brings us to the second key element of our strategy. We've been doing extensive supply-chain management with the (distribution) channel. And that is an element of what David Thomas has talked about taking $1 billion in cost out of our system.

Could you break down this $1 billion in cost-cutting initiatives?
That is supply-chain work, end to end, (that) has taken roughly half a billion dollars worth of cost out. We're going through and are making many procurement initiatives that have taken roughly another $250 million out of our business. And other elements of an end-to-end business look have taken roughly another $250 million out. So we're well on our way to having commitments above that $1 billion and are seated to come through in our results. They improved our results for the second quarter, and I think that trend is continuing.

What else will you be doing?
The third (goal) is making sure we penetrate markets we haven't played in in the past in a large enough way. If you look at the demographics, we've played well in large business but not as well in very small accounts or small business on a worldwide basis.

I would like to expand on this. Are there any other geographic regions or market segments in which you are looking to expand your presence?
What I'm focused on--and I just started these reviews with my brand teams--is trying to take some places where we have been successful and take the lessons learned to where we've been less successful. An example of that is that in Europe our ThinkPad brand was not as successful as it was in the United States and Asia. I'd like the ThinkPad brand to be No. 1 every place in the world. I would like to take the desktop experience in Asia-Pacific, understand it and get myself out of the situation I'm in in the United States, where we're No. 3.

A little bit of it is to leverage the knowledge base I have in the countries where we have (success). Some of my competitors are trying to get into countries. IBM's there. So it's leveraging the IBM strength and also the knowledge base from other parts of the world.

Back to your goals, that's three along logistics. Do you have any plans regarding marketing or customer relations?
Yes. The final thing that I am personally focused on is making it easier to do business with IBM. We talked to 100 customers my first 39 days. It is evident to me after looking at things through their eyes, what things we can do. But I won't talk about them because I don't want to give my competitors any advantage there. There are simple things that can be done to give people easy access to IBM. You will see some of those things coming out the next couple of months. Like I said, they're not complex.

So far you've spoken in broad terms. Please explain in more detail about some of the manufacturing and supply-chain changes.
Let me start with manufacturing?It hits you when you read it, (where) David Thomas talks about how supply shortages hurt our second quarter. Our supply chain was not executing the way that it can, the way it was designed to execute. It was hurting our results and hurting our customers, which is probably the most important piece of that.

You saw the very first management change that I made. I brought Adalio Sanchez into that business. Adalio is a proven general manager, and he's a proven manufacturing person. And I have already seen the effects of making that change.

How are you addressing those second-quarter supply shortages?
I also have spent an extensive amount of time with my suppliers. I knew them from my past, and I have kind of explained to them that we are going to execute together. I have already started to see the performance happening. We still have supply shortages. I would like them to be better balanced than they are. But one of the things when you have supply shortages is that it signals robust demand.

Your direct strategy is multi-pronged, with increased emphasis on direct Web sales and, like Dell, building customized extranets for large customers.
Second quarter we had about 24 percent of our total revenue through direct, and I won't break that down (between) the ShopIBM site and large accounts. You're absolutely correct that we have a two-pronged strategy on this and our understanding of what our customers want. Internally, the ShopIBM one is known as Project Odyssey. It's a project that I know very well because it's a project I personally started up. It is doing very well--robust demand--selling across our product line, and it is giving us pretty good demand in the small-business space.

Along the way you exited retail and lost some PC and portable market share. Can you explain why?
We did exit selling our products through the retail market. That was very simply an economic decision. The supply chain could not be optimized to allow us to make the levels of profitability that are required in that marketplace. Therefore, we've targeted a piece of Odyssey, the ShopIBM.com, at the individual market to take care of that as a segment.

What about the extranets?
Large accounts direct, the customers really do need something that's customized to them with extranets. I'm also going for the customer experience?Part of this is getting the customer experience correct. We want people to understand what they're buying. If you go onto our (Web) site, we have an adviser on there. We're not trying to get them to understand all the technology. We're trying to get them to get the technology based on what they're going to do with it.

Is there some message you would like to convey to your customers and competitors?
We're playing to win, and we're going to. That's why I'm here.