Fumbling For Fortunes

Do a spot poll on CEOs of Fortune 500 companies and they
will unanimously rate 1997-98 as the year that called for all their wit and skills to turn
it into a good one. As, all of them found, to their dismay, the old ways of increasing
revenues and profits by raising prices completely ineffective. Such was the intensity of
the competition that they couldn’t offset inflation either. The ones who succeeded in such
an environment were those who managed to push sales by introducing new products and
finding ways and means to reduce manufacturing costs. Case in point is Merck, the
pharmaceutical giant, which saw both revenues and profits jump by 19.2 percent and 18.9
percent respectively.

 Unfortunately, though, this trend is not an
across-the-board experience. Several companies faced tough times, watching revenues drop
dramatically even as volumes increased. Analysts saw this as ripple effect of the Asian
crisis. This is expected to worsen further in 1998, with the margins getting affected even
more severely. This was more than adequately demonstrated in the semiconductor business.
For example, world DRAM chip makers saw volumes jump 21 percent last year even as revenues
fell by an equal amount, according to In-Stat, an industry research group. The US
memory-chip maker Micron Technology saw prices for its memory chips drop 75 percent in
1997 while unit sales rose, thereby pushing Micron’s profits down 44 percent.

Even Intel the world’s dominant microprocessor maker,
experienced the pinch of falling prices. To begin with, its revenue and profit growth of
20.3 percent and 34.7 percent over last year was well below its 1996 growth rates. In
fact, according to a Merrill Lynch analyst, the average selling price of an Intel chip,
for the first time, fell 16 percent. For Intel, which is used to annual growth last year
has been an eye opener. Its fourth-quarter revenues were flat, despite a 20 percent
increase in shipments. Worse, its shares rose by a meager 7.4 percent when all other tech
stocks rose by an average 17 percent.

As mentioned earlier, companies have had to become creative
in their ways to grow and yet be consistently profitable. Amidst the chaos, we have seen
IT companies post modest to good growth, ranging from a low of 3 percent (IBM) to a high
of 57 percent (Dell Computer). The joker in the pack turned out to be Compaq ($ 24,584 m)
with a growth of 36 percent over the previous year. Thanks mainly to its acquisition of
Tandem. The acquisition of DEC last year will only further boost its turnover.

Compaq chose the merger route to grow in size. What
is debatable is whether it will lead to better bottomline. In fact, its profit has taken a
knocking-though when compared to others’, it still is very healthy at 41 percent. Its
profit in 1996 was a good 66.4 percent over the previous year. But it is not surprising,
nor is it a freak case. As, all companies without exception have shown profits which are
below last year’s, again reflecting the fact that last year has taken a toll on many
companies’ bottomlines.

All the same, the profits are much higher than the revenue
growth itself. IBM is a good example. Its revenues rose only by 3 percent, but its profits
went up by 12 percent over the previous year. The same applies to Intel (3:35), Microsoft
(31:57), and Dell Computer (59:82). Oracle is the only exception here. Its profit and
revenue kept apace at 36 and 35 respectively. But what is interesting is that Oracle
managed to keep the 36 percent growth in profits as in 1996 even though it grew by only 35
percent last year. In 1996, the 36 percent growth in profit came after doubling its
growth-92.4 percent.

Once again, last year there was no presence of IT
companies from the Top 50 in the category of those who made the biggest increase in
profits. In 1996, Gateway 2000 (now Gateway) and Sun Microsystems led the pack with
respect to increase in profits with 91.9 percent each. However, last year, both were
pipped to the post by Dell Computer with 82 percent profit increase (which is slightly
lower than its 90 percent the previous year).

This also proves the unpredictability of the industry.
Ironically, the information technology industry is one industry where the sun is a long
way from setting. Yet, the industry is driven by new technologies-a double-edged sword.
All it takes is a good technology to come along for its predecessor to become history. We
have instances like Netscape and Hotmail-companies which came out of nowhere and became
successes in a short span of time-scattered on the landscape of this industry.

Of course, what we don’t see are the innumerable
companies with bright ideas either being swallowed by the biggies or getting killed. We
have seen this happening all too often in this industry. Projections and estimates have
been known to be junked soon after they are made. Part of the problem is competition.
There are no level playing fields. There is nothing to stop a Microsoft or any other large
company from entering a new segment that was pioneered by another start-up company. So,
what we are seeing is a competitive economy where the strong get stronger and the weak get
weaker by the day and perishing subsequently.

Of course, we have seen the likes of IBM and General Motors
go through a trough, and there are many who predict the same will happen to Microsoft and
Intel, and now, Compaq-what with its buying spree covering the entire gamut of solution
offering, from consumer end to the enterprise end. After a free run, Intel is facing
problems, both in sustaining the growth and seeking out newer markets.

Be that as it may, companies in information
technology are leading the others with respect to return on revenue, return on assets,
highest profits, and so on. For instance, Microsoft leads the pack, followed by Intel, of
companies with the highest return on revenues at 30.4 and 27.7 percent respectively. The
good news is that in the new world paradigm of Internet, companies will be forced more and
more into adopting IT. In such a scenario, IT companies can only gain. And, without doubt,
those companies which work smart instead of working hard are likely to be the winners.