IBM's Winning Strategy

Feb. 9, 2009
Looking for a systems integration/services role model? Consider IBM's strategy, which helped drive record earnings.

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.

Eugene Zakharov

Among the changes Zakharov observed were decisions to refocus and expand higher value-add areas such as servers and mainframes. Important keys to the company's current revenue performance, he says, involve decisions made to add more software, consulting services and system integration activities.

Zakharov says IBM's 2002 acquisition of the consulting arm of PricewaterhouseCoopers marked an important watershed. "That event helped make IBM's 2008 results possible. It enabled the transition of IBM from hardware products emphasis to a services/system integration focus."

IBM in January announced that 2008 marked the strongest revenue growth since 2003 and the strongest profit performance in more than a decade. IBM's gross profit margin rose for the fourth consecutive year -- to 42%, up more than five points since 2003.

The company's major operations now comprise a global technology services segment, a global business services segment, a systems and technology segment, and a global financial segment. For 2007, 43% of IBM's revenue came from the Americas, 21% from Asia Pacific and 36% from Europe, Middle East and Africa.

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