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.
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.
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.
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