IBM’s Successful Transformation – Going the Softway

IBM logoContinuous evolution and adapting to one’s environment is key to survival. This was first stated by Darwin in the context of life form on Earth. However, the essence of its meaning can very well be applied to businesses and corporations. Great many American corporations that failed to adapt with changing business environment have perished. IBM is one company that seems to understand Darwinism. I believe IBM is a one of success stories of business transformation.

IBM was the company that invented and helped develop many of the electronics and semiconductor industry’s significant technologies. It had been one of the early adopter of the concept of using electronics in actual products for ease of computing. Examples are personal computers, DRAM memories, hard disk drives, and numerous other component hardware technologies. It flourished with those electronic products. However, today’s IBM gets less than 20% of its revenue (which is continuously decreasing) from hardware products.

In early nineties, IBM was confronting a challenge. The challenge was how to transform a global computer behemoth that was a leader in every market it served, but continued to lose market share to its competitors. It did not happen until Louis Gerstner Jr. became the chief executive. Gerstner, in his book “Who Says Elephants Can’t Dance?” mentions that very few people understood how close the firm was in running out of cash.

IBM was facing onslaughts from Intel (with its chips) and Microsoft (with its operating system). In early nineties, IBM recognized its failure to compete and abandoned its OS/2 software product. By late nineties, IBM also slowed its development of personal computers. The company that was at the forefront of developing those products was not longer making money out of it.

Gerstner set new direction and newer priorities by starting IBM Global Services. It shifted its focus towards selling “solutions” rather than just products alone. The new thrust was for on-demand solutions. It concentrated on the higher end of the solutions consulting rather than the lower end outsourcing business. In its “solutions”, it hitched its hardware product like PCs, services, software, and technical services. Along the way, it sold its PC division which had become a commodity. To me it was a very good example of exit strategy for an existing business. Instead of rapid abrupt selling, it slowly transformed and abandoned its star performer of the past.

The on-demand concept (or solution offering) was initiated by Gerstner, while the present chief executive, Sam Palmisano, has taken it to the next level. He has hit the final nail in transforming IBM from hardware company to one led by software and services. IBM focused on the idea that customers want bundled “solutions” of software, hardware and services tailored to specific company and industries rather than a catalog of standard products.

If Louis Gerstner made IBM dance, then Sam Palmisano is making it prance.

Today, many such American companies are at cross roads. At least on the technology sector, HP is making moves to become less dependent on hardware, Cisco is attempting to combine hardware/software/consulting, Google is trying something other than search, Amazon wants to do more than selling books, etc., Time will tell which one will succeed and thrive.

As a dividend investor, this is what I am looking for; a corporation that is willing to adapt, a corporation that does not want to live in its past, but wants to grow continuously by evolving. That’s how a company can sustain growing dividends for longer time. Few other aspects that I like about IBM is that it can be used as proxy investment for international developed markets, emerging markets and technology exposure.

One Response to “IBM’s Successful Transformation – Going the Softway”

  1. “IBM means Service” That’s the tradition that both CEOs reached into to effect the change.

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