Very few organizations, especially huge ones, can sucessfully transition from one business model to another. IBM created the ubiquious PC and transformed itself from a hardware company to a services firm. Now, according to a 5/13/10 article on wsj.com “IBM Turns to Software” by Spencer E. Ante, IBM seeks to morph into a software firm which would be a third radical change for the firm.
IBM had to set up a division separated from corporate both organizationally and physically to develop and launch the PC. The existing divisions were too vested in the existing product lines to nuture a newcomer which would eat into their businesses. Later the successful PC operation was folded into the organization, and later sold to Leveno in 2004 when the business became too cut-throat
The move to a services business model occurred differently; it gradually happened within the existing corporate culture and structure. IBM became the poster child for outsourcing jobs to the least cost/most effective geographies in the world. But now other companies have adopted this business model and IBM’s service margins are being squezzed.
From the article, “International Business Machines Corp. is trying to transform itself again, as Chief Executive Samuel J. Palmisano races to stay ahead of the technology industry's fast-changing profit curve.
“The top priority this time for Big Blue—which famously dumped its personal computer business in 2004 to focus on consulting and services—is software. Mr. Palmisano wants that high-margin business to account for about half of the company's pretax profit by 2015, up from just over a third in 2003.
“In particular, Mr. Palmisano wants to sell programs that help clients sort through the mountains of data being generated by the growing number of transactions and record keeping that have moved to electronic form. Those programs, called analytics, help retailers dig through real-time sales figures to spot unexpected trends or governments plow through piles of records to more quickly catch welfare fraud or find fire risks.” IBM is a very hierarchical company which, ironically, allows its management to turn the battleship in new directions. A decentralized firm would take more time to transform itself because of the need to educate and build consensus. IBM has the resources to win, but does it have the ability to transform its business model and culture?
The competition is determined to protect its high-margin business from aggressive rivals, “The company also faces tough competition in the market for advanced business software from companies like SAP AG and Oracle Corp. SAP agreed Wednesday to acquire Sybase Inc. for about $5.8 billion, a deal that beefs up the German company's position in software that helps clients mine data in real time and on the road.
“IBM is counting on acquisitions to drive more of its growth. Mr. Palmisano said IBM would be a more aggressive buyer, spending $20 billion on deals between 2011 and 2015. Recently, IBM had been spending about $3 billion a year on acquisitions. ‘In five years we will spend more on acquisitions than the previous ten years,’ the chief executive said.”
So if you work for a software firm, be prepared to really fight or start calculating your best price for the IBM acquisition.