IBM's Winning Strategy

Question: Wondering about the business impact of high-tech giant IBM Corp.'s system integration/services strategy? Some clues were revealed in January when the company disclosed its full year financial results for 2008:

• record revenue of $103.6 billion;
• record pre-tax profit of $16.7 billion;
• record earnings per share of $8.93;
• record free cash flow of $14.3 billion, up $1.9 billion, excluding global financing receivables.

And full year performance for 2009 is expected to be even better. IBM says it anticipates earnings per share of at least $9.20 for 2009.

What's the explanation?

"IBM is fundamentally a different company compared to several years ago," explains Eugene Zakharov, senior analyst, professional services, Technology Business Research Inc. It has transitioned, he explains, from its traditional role as a hardware builder into a provider of systems integration/services and software.

"It was at the end of the 1990s that IBM realized that remaining competitive would require a shift to a different range of activities and services that would provide additional value to the clients," Zakharov says. "And the leadership at IBM thought being just a provider of products did not present adequate differentiation in the marketplace."

IBM was also sensitive to the diminishing unit price trends for products, such as desk or laptop computers and hard drives. "Fear of that product commoditization helped trigger a reinvention strategy that shifted and refocused business activities away from a hardware focus," he says.