assignments
zpx141
AD715_Assignment1_IBM-Spring2013.pdf
Spring 2013
IBM in the 21st Century The coming of the Globally Integrated Enterprise
Nick Day
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Contents
Executive Summary ....................................................................................................................................... 2
Global forces driving IBM to become a global integrated enterprise .......................................................... 2
IBM’s adaption .............................................................................................................................................. 3
Necessary skills of global leadership ............................................................................................................. 4
Lessons Learned ............................................................................................................................................ 5
Works Cited ................................................................................................................................................... 6
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Executive Summary In 2008, IBM has convened a team of executive leaders as part of the fifth Integration and Values Team (IVT5). The
purpose of the committee was to chart a course for IBM to become a globally integrated enterprise. This analysis
is both a review of IBM’s history and recommendation for the future. It is separated into the following four
sections:
1. There are a handful of specific forces that will shape the global marketplace that IBM must address. IBM
is facing shifts in both demographics and economic growths. IBM must to address the global need for
technological and cultural innovation. Finally, IBM must solve the counter-play between economic
growth and increased government regulations.
2. IBM has displayed the ability to adapt in its past; global expansion into a multinational corporation and
the move from hardware sales to sales of software and consultancy services. This ability will be need
again in the increasing complex global marketplace
3. IBM will require leaders with a systematic viewpoint and a deep understanding of the local marketplace
and global solutions become increasingly irrelevant. Additionally, IBM requires leaders capable of
developing localized decision makers who possess both expertise of the country/region in which they
operate and the dual benefits their country/region’s operations and IBM as a globally integrated
enterprise offer each other.
4. Recommendations: IBM must a) localize decision makers to ensure solutions not only fit within a globally
integrated IBM but also satisfy the local needs of the customer, b) innovate for local markets while
leveraging the expertise of IBM’s global experience, and c) further develop revenue streams outside the
US market.
Global forces driving IBM to become a global integrated enterprise There are varying views on what is driving globalization. Ernst & Young identified three factors driving
globalization as, demographic shifts, reshaped global power structure, and disruptive innovation (Ernst & Young
Company Website). In her article titled “The international forces that shape your business strategy,” Professor
Lilach Nachum identifies the increasing mobility of thinkers and the move toward buy versus make as important
global forces shaping business strategy (Nachum). In the paper titled, “Global forces shaping the future of business
and society”, the McKinsey Institute (Barton) identified five factors driving global business. This section will outline
the five factors and present an opinion how these factors have impacted IBM in the past and in the coming future.
First, for the first time emerging markets will grow faster than developed nations resulting in the creation of a new
pool of consumers and innovation in product design (impact from new cultures) and supply chain (meeting
demand in new geographies). IBM is positioned well to handle this dynamic as it is, at the time of this case, a truly
global entity. In 2008, IBM generated $99B in revenue through operations in 170 different countries and of IBM’s
386,000 employees, 67% were located outside the US. Per annual report, of its $106.9B 2011 revenue, 34.6% was
earned outside the US. Per the case, “more than 90,000 employees were added to [IBM’s] emerging market
workforce since 2003” (p. 3) and by 2008 India was home to 75,000 IBM’ers which is the largest one country
workforce outside the US. IBM is well established in the emerging world and appears positioned to realize
significant business growth in these regions.
Second, bigger productivity gains are needed in the developed world to drive economic growth. The cost of labor
in the developed world has reached a level where one-to-one ratio of input-to-output will reduce profit growths.
Looking at profit as a measure of productivity, IBM is increasing productivity through growth of profitable
businesses and moving out of declining businesses. First, IBM is focusing growth on its services and software
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business. Per IBM’s 2011 annual report, these combined
businesses combined to represent 79.6% of revenue and
83.6% of gross margin (see fig. 1). Additionally, these
businesses were grew faster than the other parts of IBM;
7.9% vs. 4.0%. Second, IBM has adapted to the every
changing technology landscape. The increase in revenue
from services and software has come from the decline in
hardware sales. In 1995 hardware sales accounted for
49% of IBM’s revenue. This percentage declined to 18%
in 2011 (IBM, p. 27). This decline can be attributed to
IBM’s sale of the ThinkPad line of notebook computers to Lenovo in 2005. IBM had lost almost a billion dollars
selling personal computers in the 3 ½ years leading up to the sale (Rojas). Accurately indentifying the
commoditization of personal computers, IBM has jettisoned this business to focus resources services and software
sales.
Third, the global flow of people, information and goods will result in a global network that will drive innovation and
new business models. However, this increased complexity will increase economic volatility around the globe.
IBM’s Smarter Planet focus is designed to help clients operate in new environment. “Smarter Planet is IBM’s vision
of a technology-enabled world that is more instrumented, interconnected, and intelligent than ever before,
enabling people and organizations to tackle significant business and societal challenges. At the heart of this vision
is the opportunity for meaningful innovation—exploring and extending the boundaries of businesses, industries
and communities. It’s about helping the company’s clients become better at what they do for their clients. IBM’s
strategy is to accelerate progress towards a “smarter planet” by equipping its clients with the advanced, integrated
capabilities that they will need to thrive in this exciting new world that is unfolding before us—capabilities such as
business analytics, business process management, social business and cloud computing.” (IBM 2011, p. 21)
Fourth, increased demand for raw materials will result in a focus on productivity improvements related to the use
of said materials, innovation in clean technology and an increase in environmental regulations. IBM is positioning
its services offerings as the solution to this increased demand. IBM worked with the San Francisco Public Utilities
Commission to create a smarter water and sewer system. IBM’s solution combined asset management and
geographic information software to help San Francisco predict and prevent system breakdowns. The result was a
“70% increase in ability to track critical assets” and “11% improvement in the ratio of predictive to corrective
maintenance” (IBM 2011, p. 14).
Fifth, governments face a significant challenge in the balance between economic growth and maintaining social
safety nets. IBM worked with the government of Bolzano, Italy to “extend healthcare services without increasing
costs” (IBM 2011, p. 15) by providing the elderly “access to advice and medical attention from their homes” (IBM
2011, p. 15). IBM’s services will assist governments in meeting the needs of the populous with economical
solutions.
IBM’s adaption IBM has proven to be incredibly agile in adapting to changes in the business. International Business Machines, or
IBM as it is commonly know, started company operations building some of the worst first tabulating machines.
Computer ware remains a portion of IBM business with servers and storage accounting for 15% of 2011 revenue.
However, services are now the focus for IBM. IBM service offerings come in two forms; Global Technology
Services (GTS), which supports a client’s IT infrastructure, and Global Business Services (GBS), which is comprised
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of consulting, system integration and application management. Per the Harvard Business School case “IBM in the
21st Century: The Coming of the Globally Integrated Enterprise,” service revenue accounted for $54mm or 55% of
IBM’s 2007 revenue (p. 3). In reviewing IBM’s 2011 annual report, service revenues account for approximately
56.7% of 2011 (IBM, p. 27). However, IBM’s growth of its software category is a stronger example of adaption.
IBM’s software line produced 23.5% of 2011 revenue and 43.5% of pre-tax profit. Services accounted for 41% of
pre-tax profit (IBM, p. 27).
Software includes middleware and software products. Per IBM’s 2011 annual report, “Approximately two-thirds of
external software segment revenue is annuity based, coming from requiring license charges and on-going
subscription and support. The remaining one-third relates to one-time charge (OTC) arrangements in which clients
pay one, up-front payment for a perpetual license” (IBM, p. 23). The requiring license model is a lucrative business
for IBM to be growing at such a rapid pace; as outlined above, software is 23.5% of revenue but 43.5% of pre-tax
profit (IBM, p. 27). For comparison, software accounted for only 27% of pre-tax profit in 2000 (IBM, p. 27). IBM
has been able to grow its software business by embracing Web 2.0 and open platform standards.
Additionally, as addressed in the previous section, IBM has adapted its operations geographically. As the BRICs
(Brazil, Russia, India, and China) have become larger global economies, IBM has also grown operations in these
countries. From the HBR case, “The BRIC countries had expanded at twice the global rate, averaging 21% in 2006:
19% in Brazil, 21% in Russia, 38% in India, and 16% in China. To support this growth, IBM tripled the number of
employees in these locations… By 2008, Russia employed an estimated 2,000 people, China and Brazil 13,000
each, and India 75,000” (Kanter, p. 3)
Necessary skills of global leadership From the case and other readings, IBM has developed a style of management that I believe is valuable for any
organization and any level of the organization. First, Palmisano challenges his team to grow. “I want to use the
entire team –get more participation and more development. To go to the level below as part of their preparation”
(Kanter, p. 8). I feel this type of leadership is important for a few reasons; it provides the employee the examples
and experience of what is needed at the next level and clear understanding of what growth is need to progress. It
also provides clear evidence to the employee that management is conscious of and actively working to further
develop the employee. Such behavior is likely to create goodwill in the employee which can often lead to
increased effort and productivity. Finally, it provides management with clear evidence of who is ready for the next
level and who needs more working.
Coaching and collaboration is a focus of IBM leadership development. “Many IBM leaders stressed the continuing
value of face-to-face interactions…coaching and mentoring was more effective face-to-face…” Coaching is
important to help employees understand not only how to act or the appropriate way to handle a situation, but also
what is expected of them. That IBM believe coaching is better handled face-to-face is an additionally benefit
because it also serves to develop a personal connection between manager and employee. From the article
Measuring and maximizing the business impact of executive coaching, results show that “coaching had a further
positive impact on productivity in the managers’ units, following the initial positive impact of the training”
(Levenson, p. 106). Additionally, “managers stressed the need to make a habit of collaboration and to have
sufficient flexibility to play a variety of roles depending on circumstances.” Flexibility and working with others
provides managers the resources necessary to make decisions in unfamiliar countries or to solve problems they’ve
not previously experienced.
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IBM has created the General Management Leadership Development Program (GM LDP) to create its leaders of
tomorrow. From IBM’s website, “participants in the GM LDP participants in the GM LDP rotate through
assignments designed to accelerate advancement to key leadership positions around the globe.” The program
intended to build capabilities such as leading teams, create strategies and bring about change in a globally
integrated enterprise, and to excel and adapt to doing business in a complex global marketplace. IBM has created
a program train employees how to be leaders in global integrated enterprise. IBM has taken the responsibility of
creating its next generation of leaders. Business Week included IBM on its list of “Twenty Best Companies for
Leadership” (O'Connell).
Lessons Learned Despite IBM’s strong performance in shifting its business model from hardware to services and software, the same
progress has not been made in diversifying
geographically. Between 1995 and 2011, IBM’s share of
revenue earned outside the US market increased by only
2.6% (see Fig. 2). Over this 16 year period, IBM’s
compound annual growth rate (CAGR) was 2.5%; US grew
at a rate of 2.0%, the rest of world was 2.8%. While being
able to sustain an annual growth rate of at least 2% for 16
years is impressive, there is not a great difference
between the growth rates of the US and the rest of the
world. Despite tripling the workforce in the BRIC
countries and the incredible growth rate of these countries, IBM is not realizing the same in terms of revenue
growth. IBM’s shift from mature markets to emerging markets has not yet matched return with its investment. A
part of this problem is likely that management is still centralized at the top of the pyramid.
While the HBR case presents IBM’s focus on localization, decision making and problem solving are not undertaken
at the country level. Per the case, “trouble-shooting still involved management by flying around,” (Kanter, p.8).
IBM needs to empower country leadership decision making: business development, social investments as done
with education in China (Kanter, p. 13). Truly local operations should provide the necessary understanding of
customer needs and local market factors that are otherwise difficult to gauge from afar. Additionally, localizing
leadership and instilling a local development program will create the next generation of local leadership. While
global leadership is necessary, its function should be to support local leadership, not replace it.
Finally, IBM’s transition of its business model from hardware to service and software should provide a notice of
caution. The life cycle of technology is brisk and IBM must be prepared to adapt as the business landscape
changes. While currently increasing in its importance to IBM, software could quickly become a commodity and
marginalized as has happened with hardware. Further strengthening the case for true localization of its business,
IBM should leverage the fact that with localization will mean countries at different points in market maturity.
Localizing decision making could mean a heavy focus on software for the Brazil market while innovation beyond
software is the focus for Western Europe.
IBM has been successful in adapting to diminishing economic barriers be actively developing into a globally
integrated enterprise. However, this process is never complete. Being a globally integrated enterprise means
continual evolution to needs of each market it operates in while always being mindful of the global market. IBM
must thinking globally while operating locally.
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Works Cited 1. Barton, Dominic. "Global forces shaping the future of business and society." McKinsey Quarterly.
McKinsey & Company, n.d. Web. 13 Feb 2013. subscription required.
<http://www.mckinseyquarterly.com/Global_forces_shaping_the_future_of_business_and_society_2701
>.
2. Ernst & Young. "Six global trends shaping the business world." Ernst & Young Company Website. N.p., n.d.
Web. 13 Feb 2013. <http://www.ey.com/GL/en/Issues/Business-environment/Six-global-trends-shaping-
the-business-world>.
3. Rojas, Peter. "Why IBM sold its PC business to Lenovo."engadget.com. AOL Inc., 01 Jan 2005. Web. 14 Feb
2013. <http://www.engadget.com/2005/01/01/why-ibm-sold-its-pc-business-to-lenovo/>.
4. IBM. General Manager Leadership Development Program. IBM.com. n.d. Web. <http://www-
03.ibm.com/employment/gmldp/>
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<ftp://public.dhe.ibm.com/annualreport/1997/ibm1997.pdf>
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<http://www.ibm.com/annualreport/2011/bin/assets/2011_ibm_annual.pdf>
7. Kanter, Elizabeth Moss. "IBM in the 21st Century: The Coming of the Globally Integrated Enterprise."
Harvard Business Review. (2008): n. page. Print.
8. Levenson, Alec. "Measuring and maximizing the business impact of executive coaching." Consulting Psychology
Journal: Practice and Research. 61.2 (2009): 103-121. Print.
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page. Web. 18 Feb. 2013. <http://www.forbes.com/sites/85broads/2012/01/27/the-international-forces-
that-shape-your-business-strategy/2/>.
10. O'Connell, Patricia. "Twenty best companies for leadership."Businessweek.com. Bloomberg Businessweek, 16
Feb 2010. Web. 18 Feb 2013.
<http://images.businessweek.com/ss/10/02/0216_best_places_for_leadership/12.htm>.
