Viii) Ibm

Until the 1990s IBM was viewed as one of the greatest organisations in the world. Then it crashed and a new CEO (Lou Gerstner) was appointed. During his 9 years he saved IBM from self-destruction (it was going to be split into 13 separate units), changed focus, rebuilt it and expanded business by 40%. One of his most important insights was that services were more important than the mainframe computer sales

"...while hardware accounted for 49% of revenue in 1993, the year Gerstner arrived, ten years later it represented only 32%. Far from shrinking, IBM grew: today it is 40% larger than when Gerstner took over. The services unit alone rakes in $US 43 billion in revenue - making it bigger than any freestanding company in technology except Hewlett Packard..."

David Kirkpatrick, 2004

Furthermore, Gerstner got IBM focused on the client (not customer). The connotation of the term "client" is of a lifelong relationship. It is interesting to note that a mere 100 clients represented 20% of IBM's revenue in 2003

The current CEO, Sam Palmosano, took charge when the dot-com bubble burst and revenues were declining by US $5 billion plus!!! The stock market price of IBM is $US89 in mid 2004; this was around 40% below its 1999 high. Yet in 2003, IBM had started to grow with a 10% revenue jump and 43% profit growth.

The current aims of IBM are to increase its services approach with

- annual sales growth to exceed 5% (this is equivalent to generating one Fortune 500 company every year)

- double digit profit growth

- return on invested capital to exceed the S&P 500 average, ie over 10% earnings per share

- to return to the dominant role that it once played in the tech industry, ie it was untouchable

For IBM to achieve these aims, it will need exceptional performance and to have an unique impact

Some of the obstacles to this are

- the law of large numbers, ie growing one Fortune 500 company every year

- currently IT industry is sluggish, (growing at around 4% annually) yet IBM claims that the IT industry has an untapped growth potential of $US 500 million

- competitors are bigger and tougher since the dot-bubble burst, such as HP (high-tech, low cost), Dell (low-tech, low cost), EMC, Oracle, Microsoft, etc. Furthermore, there is possibility of Microsoft or HP joining forces with an IT-strategy consultant, such as Accenture, Deloitte, etc.

IBM's challenge that all people, such as from hardware/software/service

"...can really cross pollinate all more effectively within IBM than anywhere else in the world, and that the customer clearly benefits..."

David Kirkpatrick, 2004

- the margins on software (86%) are considerably greater than those for supplying services (25%) and hardware (29%)

- the complete services approach makes it harder for clients to go to a competitor, ie locks the client into IBM

- to get the bulk of IBM staff to embrace the solutions approach

IBM is getting into new areas for growth by using different business models around IT, ie outsourcing and "give us your hardest problem to solve" (solution provider or service heavy approach), etc. Some examples of this include

- handling other organisations" non-core functions such as finance and accounting, HR, after sales support functions, call centres, etc. This can involve employing the customer's staff

- increasing R&D funding to service-related activities, such as developing shopping carts that help people shop in large supermarkets by displaying maps of the store, offering specials on those items placed in the cart, etc

- linked with Linux who offer software free

- purchased PricewaterhouseCoopers Consulting to form IBM's Global Services so that IBM's staff would be linked with PWC's consultants, ie

"...Marrying the consultants with the sales guys, eggheads and engineers..."

David Kirkpatrick, 2004

An example of this involves Charles Schwab where IBM set up a team that developed a grid to speed up selecting personalised investment portfolios. The grid is independent of the specialised servers that were previously used and got bogged down when things got busy, upset customers and thwarted sales

- around 150 scientists started focusing on "computational biology", such as biotech and medical-research for health care industry. An example is the Mayo Clinic that has maintained one of the world's largest and complete sets of patients" medical data. IBM helped assemble all the information into a single, user-friendly data base. Furthermore, they are developing ways to cross-reference genetical profiles of patients so that data-driven decisions can be made for more individualized treatments

- increased focus on developing countries, such as China

One way to meet the growth targets is to commodify the customer-designed solutions, ie take a design for one customer and resell to other customers. On the other hand, commoditisation by fast-growing, increasingly sophisticated, low-cost generic competition has shifted the centre of the computer industry away from mainframes and is now threatening IBM's services. Furthermore, IBM's costs are those of a mature First World corporation. To handle this IBM has shut its European head office and is increasing its involvement in "strategic low-cost geographies or locations", such as India, Brazil or China. India accounts for the largest numbers of IBM staff outside USA. Growth in the developing world is part of IBM's strategy called "global delivery model".

Other ways include

- IBM is tightening the 'services supply chain", ie getting the right people to the right place at the right time, which involves developing a database and profile of all IBM's staff (around 250,000 in services, sales and distribution)

- using collaborative innovation to invent new technologies, IBM has multiplied collaborative projects in all major segments with customers and rivals, such as

i) global services (under Service Science concept, IBM provides top US science and engineering universities with money and expertise to create new academic disciplines. Participants include UC Berkley, Brigham Young, UCLA, MIT, Rensselaer Polytechnic, Stanford, University of Texas at Austin, Georgia Tech., etc)

ii) hardware (with Sony & Toshiba - since selling most of the hardware group to Lenovo, the 3 organisations jointly developed the powerful new chip processors, such as Cell, that will go in Sony's upcoming PlayStation 3 and Toshiba's TVs. Also, it will provide a foundation for IBM's entire next generation of computers)

iii) software

- with Apache, IBM contributes code to this free open-source "web server", then incorporates Apache into its commercial software.

- with Linux, IBM pays 600 programmers to work on this open-sourced operating system and recently donated a key patent to the group that helps manage Linux.

Creation of "patent common" in which IBM gave away 500 software patents worth $US 10 million to anyone working on an open-sourced project

IBM gave a retail-industry group rights to patents for internet access to stores

Furthermore, divisions that are not sufficiently profitable are being sold. For example, IBM sold its $10 billion personal-computer unit to China's Lenovo

Recently, it has started to give away its intellectual property (IP) in the form of software, patents and ideas. The rationale is

"...Spread enough of those riches around"and the entire industry will grow faster, opening new frontiers. That, in turn, should create opportunities for IBM to sell high-value products and services that meet the new demand..."

David Kirkpatrick, 2005

 

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