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Stratagem
 
IBM: CEO TRANSITION
Can rometty live up to a hundred year old secret?
By successfully reorienting IBM into lucrative high margin businesses, Sam managed a phenomenal growth in bottomlines. B&E analyses the task ahead for his successor Virgina Rometty as she endeavours to take IBM to its next strategic leap.
Issue Date - 24/11/2011
 
What does it take for a company to survive 100 years? Chances are that even if an answer to this very open-ended question is available, CEOs of most companies we know today wouldn’t be ready with one. And that would be more because they have never thought of things that way!

Sam Palmisano, current Chairman, President & CEO of IBM, who is relinquishing his CEO position next year, claims that the secret for the same has been with IBM (the company completed 100 years recently) for years. During a speech at the Computer History Museum, Sam referred to IBM’s former chief Thomas Watson Jr. who said that there were three rules that can ensure a firm exists forever: Have a set of laws (core ideologies that a company stands by), don’t break them and be willing to change everything else. For IBM, the ‘law’ was always about being a trusted partner to corporates. Where it showed resistance to change in accordance with this ‘rule’, it faltered and nearly fizzled out. Where it adapted to its strengths and market opportunities, it won.

But even if the intent is right, making strategic shifts doesn’t work if you are unable to have a pulse on the market. Sam, even though his stepping down would never have made as much of the news as a Steve Jobs, was one CEO who did. A graduate in history from John Hopkins University, Sam showed the courage to lead IBM away from hardware into software, services and consulting. One of the headlines then said, “Big Blue gets the blues.” To be sure, the PC division was bleeding. But doing it then meant a sudden decline in confidence for the company.

From the time Sam joined the company as CEO in March 2002, the IBM stock has appreciated by around 81.75% and closed at $187.25 on November 8. When you look at financials from 2002 to 2010, the company saw its revenues grow to $99.87 billion in 2010, a CAGR of just 2.32%. But look at the story on the net income front, which was $14.83 billion in 2010, a far more impressive CAGR of 17.11%. More interestingly, while revenue dipped drastically in 2009 by 7.6% in the aftermath of the recession, net profit continued to rise even in that year, growing by 8.8% to $13.42 billion. To further nail the point, consider that HP’s revenues for 2010 were far greater than IBM at $126.03 billion. However, its net profit still lags Big Blue at $8.76 billion, and the company saw drops in both revenues (by 3.2% yoy) and net profits (by 8.03% yoy) in 2009. By reorienting IBM to high margin businesses, IBM simply appears to be generating more from less. Hardware was 24% of their pre-tax income in 2000, and it came down to just 8% in 2010. Software has gained immensely from 25% in 2000 to 44% in 2010. The innovation engine has also remained remarkably impressive for a company of its size. Fred Giron - VP, Principal Analyst, Forrester Research, says that this has been possible “thanks to a right balance in between IBM’s internal innovation capabilities as well as an aggressive acquisition strategy.” Since 2000, the company has utilised $70 billion in cash in capital expenditures and acquisitions and $107 billion in share repurchases and dividends. It also retains its dominance in terms of IP, and obtained 5866 patents in 2010.

 
For Virginia Rometty, who succeeds Palmisano, the most obvious agenda will be to carry on with her predecessor’s last great strategic leap, continue to reorient the business towards high margin segments (maybe IBM has already added that to its core laws!) and keep IBM’s execution ability intact. By 2015, the company expects $7 billion from cloud opportunities, $15 billion from business analytics and $10 billion from smarter planet. The company has earmarked $20 billion for more acquisitions from 2010-2015 and also hopes that growth markets will be around 30% in revenues by that year. Rometty’s credentials are strengthened by the fact that she has been with the company since 30 years, has had several successes and is already in charge of global sales, marketing and strategy. But the smart planet offering isn’t as straightforward as anything that IBM has done so far. Building smart cities involves engagement with a wide variety of stakeholders, and only a few of them would be in the technology domain. She admits that Sam has told her to never hesitate from reinventing the company, but a vision like smart planet requires tremendous persistence even if things move slowly in the initial period.

However, the problem area that may really trouble Rometty is the emergence of cloud, which will affect the company’s mainframe business. Sunit Gogia, Senior Stock Analyst, Morningstar, cautions in his latest report, “The advent of cloud computing is making large amounts of computing capacity available for rent on-demand and will reduce customers’ purchases of IBM’s high-end systems.” The previous quarter saw a 7% yoy decline in mainframe sales. The services segment also grew rather unimpressively by just 3% yoy, which the company attributes to tight public sector spending and weak performance in Japan.

Start ups have had more headway in the cloud ecosystem, with Amazon leading the way. IBM plans to target much greater penetration into enterprises & SMBs with a single ecosystem of partners that provides private, public and hybrid clouds. Success of its initiatives will be critical as IT moves from a capex to an opex model. For Rometty, the coming years will continue to demand visionary leadership and tough decision making as IBM continues to reinvent itself. The biggest positive is that being with IBM for over 30 years, she would know that only too well. Now it needs to be seen whether she can read the market signals and respond as aptly as Sam did. Let us also not forget, that she is the first woman at the helm of IBM :-)

Virat Bahri           

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