Is IBM following the right strategy?
Is IBM a globally integrated enterprise focused on worldwide collaboration or is it an organization which is rotten to the core?
Do you think that Samuel Palmisano (IBM CEO who retired last year) built IBM into the world’s leading information technology company or has he destroyed almost every one of his predecessor’s real accomplishments?
It depends on who you listen to.
(1) Is IBM a globally integrated enterprise focused on worldwide collaboration?
Bill George is professor of management practice at Harvard Business School seems to think so.
“In the 20th century, a select group of leaders — General Motor’s Alfred Sloan, HP’s David Packard and Bill Hewlett, and GE’s Jack Welch — set the standard for the way corporations are run. In the 21st century only IBM’s Sam Palmisano has done so … Palmisano reorganized IBM into a “globally integrated enterprise” focused on worldwide collaboration. He cajoled, pushed, and pulled the company into a client-centric, agile structure able to customize delivery of IBM’s software assets, hardware assets, and intellectual property.” – How IBM’s Sam Palmisano Redefined the Global Corporation
If you look at the numbers then this view is justified as in 5 years IBM’s earning-per-share under US$ 5 to around US$ 13.
(2) Is IBM, rotten to the core?
That is the view is expressed by Robert X. Cringely in his 6 part blog post about what is wrong with IBM.
“My opinion is that IBM’s services business profit will continue to decline as they try to cost cut into prosperity. Unless they find a way to grow revenue and provide a quality product (service), they’re either headed for a sell-off of the entire service business, probably to some Indian partner, or to a complete implosion. In short, it’s a race to the bottom and IBM is winning.” – Watch out IBM!
Why is Mr. Cringely so unhappy with IBM?
Well, he believes that IBM’s strategy of shifting execution team from US and other developed countries to cheaper location, especially India is…
- …bad for the company
- …bad for the clients
- …bad for employees
How does Mr. Cringely justify his case? He contends that “IBM seems to believe it is cheaper to replace a skilled worker with two or three unskilled workers to do the same job”. Additionally, he says that…
- …the language barrier for IBM’s Indian staff is huge. Troubleshooting, which was once performed on conference calls, is now done with instant messaging because the teams speak so poorly.
- …the problems that an experienced person could fix in a few minutes are taking an army of folks an hour to fix. This is infuriating and alarming to IBM’s customers.
- …the offshore teams often lack the skill and experience to do the work, problems mount, customers … get upset and leave.
Are these acquisitions based on hard facts or are they based on one of anecdotal experience?
If unhappy customers are leaving IBM then how come there is no decline in revenue?
Over the last 5 years (except for 2010) IBM revenue has shown a year-on-year growth. Profitability has improved. Earning-per-share has more than doubled.
Is all this possible when customers are leaving IBM?
Also, it would take extraordinary inept management not to notice such customer dissatisfaction for 5 years.
Also, could IBM have competed with the Indian IT service providers (TCS, Infosys, Wipro etc.) without having offshore center in India?
Has IBM employed 150,000 unskilled people in India?
IBM has around 150,000 people in India which is about one third of its total strength. This ramp up has happened in last 10 years. IBM is probably the second largest private sector employer in India.
If you have to believe what Mr. Cringely has to say about replacing skilled people with unskilled people then you also have to believe that either…
- …IBM cannot enough find skilled people in India or
- …Have deliberately employed unskilled people who cannot communicate properly or
- …India does not have skilled people
Do any of these alternatives look plausible?
Which is the growth market for IBM?
The growth market for IBM is India, China, Latin America, West Asia and Africa. According to Business standard, in 2011 this market accounted for 22% of IBM total revenue and grew 16% year-on-year. BRIC countries (Brazil, Russia, India, and China) grew at 19% Y-o-Y.
Same trend continues in first quarter 2012.
- BRIC (Brazil, Russia, India and China) up 10%
- APAC (Asia Pacific) up 4%
- America & Europe is flat or down
- Global Services contract signings up 12%
Could IBM have addressed these growth market without India and other local operations?
Two unrelated stories
(1) Cotton textiles trade between India and Britain, 1700–1850
In 1700, India was the world’s main producer of cotton textiles, with a substantial export trade. Indian textiles were exported to Britain on a large scale from the seventeenth century. By the early nineteenth century, however, Britain had become the world’s most important cotton textile producer, dominating world export markets, and even exporting to India.
“This is called this shifting of competitive advantage.”
Tata Acquisition of Jaguar Land Rover
Tata Motors bought Jaguar-Land Rover for US$2.5 billion in June 2008 from Ford Motor Co. which Ford had acquired separately (Jaguar and Land Rover) for a total of US$5.3 billion. The acquisition coincided with the global financial crisis that plunged Jaguar Land Rover’s sales and put a huge strain on Tata Motors. In the 10 months post-acquisition, sales volumes plunged 32%.
To staunch the hemorrhage at the British unit, Tata’s management focused on reducing costs, improving efficiencies and managing cash flow. When the market turned, the premier car maker was well poised to reap the benefits and turned profitable during the quarter ended Dec. 31, 2009.
(Pass or Fail: Tata Steers Jaguar Land Rover to Profit – The verdict: Pass)
According to Guardian:
“Jaguar Land Rover has made one of British industry’s most remarkable comebacks, reporting record profits of more than £1bn (in 2010) as sales powered ahead in emerging markets such as India and China.”
So, how is IBM doing?
When the market dynamics change, when the industry cost structure change you have to be bold and adjust your strategy to suit the new reality.
“And IBM seems to be doing a great job of reinventing itself.”