Individually, I’d like you to submit an analysis after reading the case which includes the following:  See page 529 and go through as much of the analysis(Strategic Case Analysis: points  1-4) as you feel is necessary to understand the case. Select only two ratios to perform.   A.Make a concluding  diagnosis.   B. Make a Formulation statement  C. Make an implementation statement/s.

This last step with the IBM case will assure you of a good grade if you put in the effort. Remember this is the class that demonstrates your understanding of many of the things you were to learn in the undergraduate program. I will submit the 3 best analyses to the department head.

the other work: if publicly traded provide financials, as many as you feel are appropriate to understand the status of the company. if not publicly traded make an estimated guess. cite your rational.

I will upload the financial pictures.

January 1, 2015. It is New Year’s Day and Virginia Rometty, IBM’s chief executive officer (CEO),

looks at IBM’s performance and knows the company faces challenges. In October 2014, IBM announced
a tenth consecutive quarter of flat or declining sales, and she broke with prior CEO commitments to
earn more than $20 a share every year.1 IBM has a history of reacting to change slowly, but eventu-
ally reinventing itself. Under her predecessor, Sam Palmisano (2002–2011), IBM underwent significant
changes. Palmisano redefined IBM by deemphasizing hardware to increase the impact of consulting
and software. In 2002, IBM acquired PricewaterhouseCoopers Consulting for $3.5 billion and Rationa

l

Software for $2.1 billion to remake IBM around three complementary areas of Systems and Financing,
Software, and Services (see Exhibit 1). Rometty was part of those changes and, since becoming CEO,
she has divested unprofitable businesses, such as selling its server unit to Lenovo for $2.1 billion in
2014, and paying Global Foundries $1.5 billion to take IBM’s money-losing chip business in 2014.2 Still,
a clear move by IBM into new profitable areas has remained elusive. Further, increased competition in
cloud computing services from Amazon and Google put pressure on software and services sales and
revenues (see Exhibit 2).

As she celebrates her third-year anniversary as CEO, Rometty becomes increasingly aware that time
is the one thing she is running out of to change IBM. Once again in its over-100-year history, IBM is at
the crossroads. It is time for further changes at IBM so it can adapt to disruptive cloud computing and
data analytics technologies. Alternatively, will the current strategy of offering customers integrated
technology solutions enable growing revenues from cloud computing and data analytics? As Virginia
Rometty is getting ready for the new year, she ponders: What needs to be done to avoid her becoming
known as the CEO that oversaw IBM’s decline or being dismissed early in her tenure?

Brief History of IBM

IBM’s (“Big Blue’s”) history dates back to long before electronic computers, reflecting several tech-
nological discontinuities (see Exhibit 3). It originated as the Tabulating Machine Company in 1896,
and it specialized in the development of punch-card data-processing equipment. Thomas J. Watson,
Sr. became general manager of the company in 1914 and in 1924 changed its name to International
Business Machines Corporation, or IBM. During the next 20 years, IBM grew rapidly. Despite the Great
Depression of the 1930s, IBM continued to manufacture new products, and after passage of the Social

FRANK T. ROTHAERMEL

KONSTANTINOS GRIGORIOU

GERMAN RETANA

DAVID R. KING

IBM at the Crossroad

s

Professors Frank T. Rothaermel, Konstantinos Grigoriou, German Retana, and David R. King prepared this case from public sources. This case is
developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient
or inefficient management. All opinions expressed, and all errors and omissions, are entirely the authors. © by Rothaermel, et al., 2015

.

MHE-FTR-03

4

125992762

8

REV: APRIL 8, 2015

2

IBM at the Crossroads

Security Act of 1935, IBM secured a major government contract to maintain employment data for 26
million people. This was described as “the biggest accounting operation of all time,”3 and it opened
the door for a variety of other government contracts. After the United States entered World War II, all
IBM facilities were placed at the disposal of the federal government and IBM’s product line expanded
to include bombsights, rifles, and engine parts.4

In the 1950s, IBM became a chief contractor for developing computers for the U.S. Air Force’s auto-
mated defense systems, a product that generated tremendous profits. More importantly, the company
gained access to cutting-edge research on digital computers being done under military auspices.
However, IBM failed to dominate the emerging industry by letting RAND Corporation take over the
job of programming the new computers. According to one project participant, Robert P. Crago, “We
couldn’t imagine where we could absorb two thousand programmers at IBM when this job would be
over some day, which shows how well we were understanding the future at that time.”

5

IBM was the largest of the eight major computer companies through most of the 1960s. (Others
were UNIVAC, Burroughs, NCR, Control Data Corporation, General Electric, RCA, and Honeywell.)
People in the industry talked about “IBM and the seven dwarfs,” as IBM dominated its competitors
with a 70 percent market share. In the 1970s, a number of mergers and acquisitions resulted in an
increasingly concentrated market, with IBM still firmly in the lead. Many companies chose to focus
on niche areas in order to avoid competing directly with IBM. The IBM mainframe, IBM System/360,
that earned the company its dominant position was still part of IBM’s product line through 1978,
though IBM continued to produce mainframe

s.

The Decline of Mainframe Computing

Up through the 1970s, IBM relied on a vertically integrated strategy, building most key components
of its systems itself, including processors, operating systems, peripherals, and databases. IBM preferred
to do things in-house, and the prevailing attitude was that no one could do it better. The company was
able to capture high margins capitalizing on its reputation for technical prowess, reliability, and out-
standing service, even when the technology was not cutting-edge. IBM’s strategy was virtually flawless,
routinely out-competing its rivals. In 1976, however, IBM faced a life-threatening discontinuity that
was not the result of a traditional competitor’s action. It started in a California garage far from IBM’s
New York headquarters, where college dropouts Steve Jobs and Steve Wozniak put together the Apple
personal computer kit. On April Fools’ Day of the same year, they founded what was then known as
Apple Computer, Inc.

Once among its greatest assets, IBM’s size and industry dominance caused it to underestimate the
power and speed of the computer revolution that was taking place. Instead, IBM’s disdain toward Apple
and other emerging competitors gave the new companies five unchallenged years during which to
perfect their new technology. IBM did not introduce its own version of the PC until 1981, and though
it set the (open) standard for the industry, IBM’s delayed response meant that it had already forfeited
the opportunity to dominate this new market. To add insult to injury, IBM then chose to outsource
the operating system and microprocessors for its new machines from Microsoft and Intel, respectively,
creating the Wintel standard in the PC industry. IBM bought the operating system from Microsoft’s
Bill Gates in a deal where he retained the rights, making him one of the wealthiest people on the
planet. In another misjudgement, IBM sold its 20 percent equity stake in Intel in the mid-1980s.

IBM at the Crossroads

3

Meanwhile, IBM held on tight to other activities in the computing value chain, only to find that
its vertically integrated business model had no advantage in the evolving computer industry. PCs
could be sold in a variety of retail outlets, eliminating the need for a highly trained sales force. Data-
processing centers were no longer essential as PCs had their own memory and processing systems
inside. There was also no need for IBM to maintain these machines because businesses increasingly
internalized the service function and hired their own computer technicians.

As the computer value chain disintegrated, different companies took the lead in specific segments.
Intel was the leader in microprocessors, Microsoft in operational systems, Novell in networking, HP
in printers, Seagate in disk drives, and Oracle in databases. Even in personal computers, cost-efficient
competitors like Compaq and Dell easily outpaced IBM. Many dedicated software developers and ven-
dors also popped up. Thus, in 1992, IBM’s CEO John Akers began to split IBM into business units (e.g.,
for processors, storage, software, services, printers, and so on) in order to compete more effectively
with these focused niche players.

The growth of local area networking capabilities and the subsequent decline of mainframe sales
led to the inevitable outcome: On January 19, 1993, IBM announced the largest single-year corporate
loss in U.S. history ($8.1 billion). The “big iron” business divisions had not recognized the need for
the company to adapt. As a result, 250,000 workers departed, and a decade of radical transformation
followed. Louis Gerstner was the first non-IBMer to take over as CEO and he inherited the daunting
task of saving Big Blue.

The Louis Gerstner Era (1993–2002) or “When the Elephant Learned to
Dance”

When Louis V. Gerstner, Jr., became chairman and chief executive in 1993, it was not clear whether
IBM would survive. Gerstner was not a lifetime IBMer. Even worse, he had no particular understand-
ing of the computer-technology industry. He came with a background in consumer products, financial
services, and consulting. The IBM board had decided that IBM needed a leader, a strategist, and a
manager—and Gerstner fit the bill.

Louis Gerstner received a bachelor’s degree in engineering from Dartmouth College in 1963 and an
MBA from Harvard Business School in 1965. He worked as a McKinsey consultant and later became
president of American Express and then CEO of NJR Nabisco. He was not the obvious choice for the
fallen icon of American technology. Nevertheless, he brought to the table a strong vision and a passion
for change. As soon as he took the reins at IBM, he began traveling to meet customers to get a sense
of the market. His verdict was bold: “We were going to build this company from the customer back,
not from the company out.”

6

One major decision Gerstner made was to reverse Akers’ plan to split IBM into 13 “Baby Blues.”
In theory, dividing the company into multiple strategic business units addressed IBM’s fundamental
trouble—that as an integrated company, IBM was not flexible. Gerstner, however, liked the concept of
“integrated solutions,” recalling his days as an IBM customer. IBM could provide one-stop shopping
and service to tackle tough business problems without forcing its customers to deal with different
vendors. He heard similar sentiments from customers. Within three months, Gerstner decided to keep
the company together, saying: “I knew it was a big risk, but I never doubted that it was the right thing
to do at IBM.”7

4
IBM at the Crossroads

Under Gerstner, IBM’s new strategy evolved quite rapidly. In late 1995, the firm formed a new divi-
sion to make sure the entire company was focused on the emerging business opportunities the rapid
adoption of the Internet would bring. Then, beginning in 1997, IBM started a massive advertising
and marketing campaign to push “e-business,” a term coined by IBM. Many observed that the notion
of e-business served as a wake-up call to Wall Street about the upcoming shift in business models.8
While experts and competitors were slow to comprehend the full value of e-business, IBM’s corporate
customers loved the new focus. The dot-com boom in 1999 was an opportunity for Gerstner to say
that he regarded the Internet start-ups as “fireflies before the storm,” suggesting that there was much
more to come which was uncommon at the time. Gerstner’s success as CEO demonstrated the dyna-
mism of the IT industry, and the fact that even if one misses a turn of the innovation cycle, there is
still hope to survive and get back in the game. Gerstner’s turnaround was a huge success; under his
tenure, IBM’s market cap grew from $29 billion in 1993 to $133 billion in 2002. Louis Gerstner sum-
marized the successful transformation of IBM in his business memoir: “Who Says Elephants Can’t
Dance?: Inside IBM’s Historic Turnaround.”

The Sam Palmisano Era (2003–2011)

On January 1, 2003, Samuel “Sam” J. Palmisano took the helm at IBM and he pushed the e-business
strategy begun under Gerstner even farther. However, Palmisano had a very different leadership style
that ranged from body language to conversation style. He was tall, beefy, and relaxed, looking every
inch the former college football lineman he was, and he spoke to people with trademark informal-
ity.9 Palmisano was also a life-long IBMer, having joined the company as a 22-year-old salesman in
1973. Since then, he had held a series of leadership positions, including senior vice president for the
Enterprise Systems and Personal Systems groups. He had played an instrumental role in creating and
leading IBM’s Global Services (rising to senior vice president) and building the largest IT services orga-
nization in the industry. He also served as senior managing director of operations for IBM Japan, and
he became IBM’s president and chief operating officer in 2000.

Upon becoming CEO in 2002, Sam Palmisano organized IBM around three complementary areas
of hardware, software, and services. Essentially, IBM consultants could visit a company and outline an
integrated solution to meet a customer’s IT needs that would also sell IBM hardware and software. As
part of this strategy, IBM only kept high margin hardware. For example, in 2004, IBM divested its PC
business to Lenovo.10 When revenue flattened in 2005 (see Exhibit 4), Palmisano pushed the shift to
services even faster. “Software had to play a bigger role,” Palmisano explained. In software, IBM built
expertise mainly with acquisitions of small companies in fields like security, data management, and
web commerce. From 2003 until 2007, IBM spent $11.8 billion on 54 acquisitions—36 software and 18
services companies—in order to facilitate the transformation process.11 Additionally, IBM encouraged
universities and other technology companies to promote education for an emerging field that within
IBM was called “service science.”

12

Palmisano’s strategy represented an aggressive effort to increase profit margins in response to
intense price competition in hardware and software. Under his leadership, IBM transformed itself
from a multinational company with worldwide operations to a more seamless global enterprise
with centers of expertise, each of which was a hub in a global service network. The corresponding
change in IBM’s corporate mindset was illustrated by employees’ responses to a 2003 survey regarding
the company’s future values. Three strategic thrusts emerged: “Dedication to every client’s success,”
“Innovation that matters—for our company and for the world,” and “Trust and personal responsibility

IBM at the Crossroads
5

in all relationships.” Under Palmisano, IBM was consistently profitable and its stock market valuation
passed Microsoft in 2011.13 It was another example of IBM responding to rapid technological change
and the challenges of globalization.

The Virginia Rometty Era (since 2012)

Virginia “Ginni” Rometty followed Sam Palmisano as CEO of IBM on January 1, 2012 and as Chair
of the Board of Directors on October 1, 2012.14 Rometty began her career at IBM in 1981 as a systems
engineer and she progressed through multiple leadership positions, including Senior Vice President of
IBM Global Business Services where she oversaw the successful integration of PricewaterhouseCoopers
Consulting. Rometty is IBM’s first female CEO, and in 2014 was ranked number 10 on Forbes list of
powerful women.15 Upon her appointment, Palmisano downplayed the selection of a woman by stating,
“Ginni got it because she deserved it.”16

Having played a part in creating IBM’s strategy under Palmisano, Rometty initially avoided chang-
ing IBM’s strategy, stating: “What you’ll see is an unfolding of the strategy we have in place.”17 However,
simply continuing what had worked in the past was what led to previous problems at IBM. When
leadership shifted a struggle for a new direction began. Since Rometty has taken over the position, IBM
has focused on what it calls “strategic imperatives”: cloud computing, data analytics, mobile, social, and
security efforts. These imperatives have led to double-digit revenue growth for the company.18

Yet, high growth alone has not been enough. For example, in 2014, IBM’s cloud computing revenues
grew roughly 60 percent to $7 billion, but this only represented 7.5 percent of IBM’s total revenues.19
IBM has also pushed into data analytics with predictions that this area of investment will bring in $10
billion in revenues—granted, it may take 10 years.20

Rometty increasingly sees IBM’s future as tied to three disruptive technologies.21 IBM believes that
the following three environmental forces will have a more radical impact on the business environ-
ment than any other technology revolution has had before:

1. Cloud Computing: A model for enabling convenient, on-demand network access to shared
computing resources such as networks, servers, storage, applications, and services. If you use
Google Drive, Dropbox, or Microsoft 365, for example, you are taking advantage of cloud
computing. In the future, most businesses will rent computer services rather than owning
hardware and software as well as running their own networks.

2. Big Data and Analytics: How to acquire, process, store, manage, analyze, and visualize data
arriving at high volume, velocity, and variety. Prime applications are in finance, medicine,
law, and many other professional fields relying on deep domain expertise within fast-moving
environments.

Systems of Engagement: Provide decentralized technologies which encourage peer-to-peer interac-
tions, often on cloud-based platforms. One application, for example, is leveraging social media such as
Facebook or Twitter on a secure and mobile platform to engage one-to-one with each customer, rather
than using a one-size-fits-all approach.

Rometty believes that both current and future IBM customers all face these major challenges. Thus,
her strategic intent is to transform IBM in order to help transform its customers—she views these dis-
ruptions as the biggest ones ever experienced in the technology and services industry. She also views

6
IBM at the Crossroads

them as major business opportunities that IBM hopes to leverage via heavy investment. To ensure that
customers are prepared for their own transformations, IBM has trained each of its more than 100,000
consultants in all three areas of potential growth.

IBM’s Cloud Computing Initiative

The introduction of personal computers shifted computing power from mainframes to local
machines, and now applications running on the cloud are shifting processing power back to servers.
Cloud computing is a web-based form of information technology (IT), defined as “a model for enabling
convenient, on-demand network access to a shared pool of configurable computing resources (e.g.,
networks, servers, storage, applications, and services) that [could] be rapidly provisioned and released
with minimal management effort or service provider interaction.”22 (See Exhibit 5 for a full definition
and further explanation of cloud computing.) It was made possible by cheap and powerful processors
combined with high-bandwidth availability across networks. The cloud has changed the distribution
of value across the entire IT industry. Traditional “big fish” in the IT industry sold hardware (e.g., Intel,
Dell, IBM), operating systems (e.g., Microsoft), database engines (e.g., Oracle, IBM), office applications
(e.g., Microsoft), or business applications such as enterprise resource planning (e.g., SAP, Oracle) or
customer relationship management tools (e.g., SAP, Oracle, Microsoft). Now the cloud allows users to
access all of these functions as an online service that blurs traditional distinctions among industry
participants,23 placing giant companies that used to be partners in hardware and software on a direct
collision course. For example, Dell bought Perot Systems to move upstream into value-added IT ser-
vices. Winners and losers will be determined by their capabilities, understanding of where value was
created, and approach for capturing it.

The two primary approaches to capturing value involved either public or private clouds. The public
cloud can be accessed by anyone, and this approach is largely dominated by Amazon. Companies that
offered complementary technologies also emerged. Early examples included RightScale, CloudKick,
and enStratus, which offered tools to manage public cloud infrastructures. However, Google, Microsoft,
and other firms could also enter the market to leverage their infrastructures, brand names, and scale
and cost capabilities. For example, telecom companies like AT&T controlled bandwidth, which was a
key cost driver in cloud technologies. The private cloud segment required firms to make significant
investments in and reconfigure their own data centers. Any firm with a preinstalled base would there-
fore be cautious in implementing changes, and private cloud providers faced resistance to adopting
proprietary systems.

IBM made its first foray into the cloud in 2007. The “Blue Cloud” was a combination of software
and hardware components through which IBM sought to provide customized, cloud-based services for
each of its client organizations, a so-called “private cloud.” Some analysts viewed IBM’s efforts criti-
cally, claiming that Blue Cloud was just “Web computing by another name.”24 IBM responded that Blue
Cloud was never intended as a full-fledged cloud service; rather, it was an initiative crafted by IBM to
experiment with the emerging technology.

In 2008, IBM started offering integrated Cloud Computing Centers. Their purpose was to enable
IBM’s clients to transition to virtualized data centers and to provide them the freedom to innovate in
a controlled and secure computing environment. According to IBM, the Cloud Centers could deliver
standardized services through IT automation, resulting in reduced system and application manage-
ment costs. They were targeted at clients in emerging markets, to facilitate growth as well as to

IBM at the Crossroads

7

acquaint them with the benefits of the new delivery model. The first Cloud Center opened in February
2008 in Wuxi, China. After that, IBM built centers in Vietnam, Japan, Brazil, India, Korea, Ireland,
Poland, and South Africa, and has since continued to expand the program.25

In 2008, IBM started to extend its consulting and technology services to the cloud, building on
knowledge gained from its earlier Blue Cloud project. IBM envisioned helping its customers in three
main ways. First, IBM would communicate the message of the cloud to help its customers understand
its full potential. Second, it would help them assess the cost of their own cloud initiative and plan
accordingly. Third, IBM would be in a position to provide expertise in the installation, configuration,
and usage of a “private” cloud in its customers’ data centers. In 2008, IBM also formed an alliance with
Google to capitalize on each other’s strengths, such as IBM’s reputation helping to drive sales of Google
Apps, Google’s cloud offering, while IBM offered an integrated solution to provide infrastructure for
customers around the globe.

At the same time, IBM moved even further into the cloud revolution by developing a certification
program covering the resiliency of cloud-based applications or services delivered by its partners.
Companies hoping to gain IBM’s seal of approval had to work with IBM’s cloud consulting practice,
making IBM a “reference point” in the cloud market.26 The idea behind the certification program was
to help create some standards around security and interoperability in the rapidly emerging world of
cloud computing. Generally, the program seemed to have attained its goal, as smaller companies were
utilizing it as a signal of expertise in the cloud arena.

Since 2013, IBM has pursued both private and public cloud efforts. IBM continued to offer highly
successful private clouds for its clients to run behind their firewalls.27 At the same time, IBM uses
application vendors to address specific business processes that would align with IBM’s offerings. The
intent was to form an ecosystem of partners where different vendors address specific business needs
to provide integrated business solutions that IBM could offer to clients. IBM also had its sights on the
public sphere, creating a public cloud facility in Raleigh, North Carolina where clients could integrate
their private clouds with public infrastructure.

IBM’s Big Data and Analytics Initiative

Another effect of cloud computing was that firms had more information than ever before. For
example, it is estimated that Walmart collects more than 2.5 petabytes of data every hour.28 As a
result, IBM, SAS, and other firms are lining up to help customers use the data they amass. Data ana-
lytics, also called Big Data, examines the growing amount of data firms collect to identify patterns
or other relevant information so managers can make better decisions. The questions presented to
clients are: 1) Why collect and store terabytes of data if you do not analyze it, and 2) What is the
use of traditional analysis if you have to wait days for the results? The advantage of data analytics is
that answering these questions often requires expensive new hardware and software for data mining,
predictive analytics, forecasting, optimization, and other uses. These functions relate to business intel-
ligence to help understand what is happening, or more forward looking analysis to identify trends
and their implications. The business implications of data analytics can be compelling. For example,
Netflix analysed its subscriber data to develop its hit show “House of Cards”.29 With appropriate data
analytics platforms, firms can boost sales by making relevant recommendations to customers, increas-
ing efficiency of operations, and reducing fraud.

8
IBM at the Crossroads

In 2009, IBM initiated a massive advertising campaign to promote the idea of building a “smarter”
planet to follow its cloud strategy. According to IBM, the world was already “instrumented” (transistors,
mobile phones, RFID tags, and sensors were the dominant building blocks of the digital age) and inter-
connected (2 billion people on the Internet, immense information exchanges, and smart interacting
devices). The next step was to make our planet “intelligent.” What IBM meant with the slogan “smarter
planet” was that we could use integrated technology to tackle most of today’s pressing environmental
and social issues—in other words, make the world smart enough to be sustainable. For example, in
working with Carnegie Mellon University, IBM anticipated it could save it 20 percent annually on
utilities or nearly $2 million.30 IBM cites a number of examples that illustrate the urgent need for a
smarter planet: inefficiencies in firm operations; the need to acquire, retain, and grow customers; man-
age risk; and other areas with information on the improvements IBM could make.31 To spread aware-
ness, IBM embraced social media, including pages on YouTube32, Facebook33 and Twitter.34 However,
since 2009, IBM’s sales have become less international and more focused on North and South America
(see Exhibit 6). This is problematic, as there is more economic activity outside North America and
IBM has lost roughly 25 percent of its market share in Europe, while simply maintaining it in Asia.

Perhaps IBM’s most visible effort in data analytics involved its artificial intelligent computer system
called Watson. In 2011, Watson competed on the Jeopardy! game show against former champions Brad
Rutter and Ken Jennings. Watson won with Jennings commenting: “I, for one, welcome our new com-
puter overlords.”35 Watson was not connected to the Internet during the game and stored information
including the full text of Wikipedia to answer questions using automated reasoning.36 Discussion of
the week-long Jeopardy! competition exploded giving IBM free advertising and after one year contrib-
uted to increased collaboration (see Exhibit 7).

IBM’s Watson reflects a new era of cognitive computing where computers are able to understand
natural language and learn to be able to engage with humans, make decisions, and discover new con-
nections.37 However, not everyone is convinced of the usefulness of artificial intelligence (AI) and Elon
Musk has warned that AI represents a threat to humanity.38 The ethics of having a machine make
decisions for people and the potential unpredictability of the connections and logic such machines
used to make decisions raises ethical questions. However, progress on answering these questions is
falling behind advances in computing power and capabilities.

IBM’s Systems of Engagement Initiative

The systems of engagement initiative seeks to redirect the way people access and use information.
Rather than access information in isolated chunks, a system of engagement strives toward a more col-
laborative and efficient interaction versus transaction. Improved communications that allow people to
connect inexpensively in real time via mobile devices has made this transformation possible. While
these capabilities raise concerns about information security, they also open opportunities. Within
businesses, employing systems of engagement can enable coordinated efforts across time zones, so
because the work never stops, product lead times never shorten. Such manner of engagement also
enables faster decision making and provides the context for collaborative social systems. A system of
engagement can use social media to attract and retain customers by improving customer service and
developing deeper brand relationships. The challenge for organizations is redefining how they manage
associated technology and data.

IBM at the Crossroads

9

At IBM, systems of engagement leverage the cloud and data analytics to make information available
at the right time and place to make a difference. The focus of IBM’s jStart’s consultants is on under-
standing the IT landscape and listening to clients in order to match business needs with IBM technolo-
gies.39 Experts at IBM can help organizations make sense of IT infrastructure needs to integrate cloud,
data analytics, and mobile together into a system that redefines internal and external relationships.40
Most large companies have systems of record focused on past information and processes, and more
effectively using and accessing that information requires linking existing systems with new systems of
engagement. This challenge requires a robust IT infrastructure that IBM can provide to help organiza-
tions rapidly create value from IT investments. Finally, this approach is more consistent with firms
having a hybrid or private cloud that provides increased security for organizational data.

Doubt Lingers

Since Sam Palmisano, IBM’s strategy has been to leverage a portfolio to deliver integrated solutions
to clients. Virginia Rometty helped to build and implement that strategy, but in the darkness even
she begins to doubt it. Initial optimism of her leadership has fallen as improvements in IBM’s perfor-
mance at the start of her tenure in 2012 have begun to decline (see Exhibit 8). While profits have
improved by moving into more profitable segments (see Exhibit 9) growth in those segments have
not compensated for revenue declines in other areas, as competition and technology has continued to
shift. The combined results have contributed to a falling stock price (see Exhibit 10) associated with
executive turnover.

As 2014 turned into 2015, Rometty decided to invest $4 billion with the majority of the money
focused on cloud computing and data analytics with the goal of her “strategic imperatives” represent-
ing 40 percent of IBM’s revenues by 2018.41 In essence, she doubled down on the current strategy. She
believes new technology is disruptive, but not to the strategy of IBM helping customers with integrated
spoliations. However, even with double-digit growth, her revenue targets are ambitious for businesses
that only brought in 27 percent of revenues in 2014. To be successful, IBM needs to meet its double-
digit growth projections for its strategic initiatives, but two clear obstacles lie in its path:

a focus on high margin products and software, which could backfire and alienate cus-
tomers. Meeting this challenge requires managing IBM’s culture and demonstrating the benefits
to customers. Will IBM consultants compensated by commission and executives worried about
stock options be able to implement her strategy? Further, high profits in these areas will attract
additional competition.

the growing challenge of continued dependence on its home market international sales.
For example, China has made it a priority to build its own IT industry; to do so, it is asking for-
eign companies to turnover source codes and to partner with domestic firms to produce both the
hardware and software that run on machines.42 Further, while IBM needs to expand international
sales, a stronger dollar dilutes profits from overseas revenues. Can IBM navigate this more complex
global environment?

These are the most obvious challenges, but certainly there are more. Will continuing the existing
strategy meet current competitive demands, grow revenues, and enable Rometty to avoid being the
CEO that failed IBM?

10

IBM at the Crossroads

EXHIBIT 1 IBM’s Offerings and Market Segments

Source: IBM 2007 Annual Report.

Services

Software

Strategic Outsourcing
Business Transformation Outsourcing
Integrated Technology Services

Maintenance
Consulting and Systems Integration
Application Management Services

WebSphere
Information Management
Tivol

i

Lotus
Rational
Operating Systems

Servers
Storage
Retail Store Solutions
Microelectronics
Commercial Financing
Client Financing

Systems & Financing

IBM at the Crossroads

11

EXHIBIT 2  Examples of Providers of Different Cloud Service Models

Service Model Intended Users Level of IT Stack Examples of Providers

Infrastructure-as-a-Service (IaaS) System administrators Lowest.
Closest to hardware.

Public Cloud: Amazon,
Rackspace, GoGrid, Joyent
Private Clouds: VMware, Enomaly

Platform-as-a-Service (PaaS) Developers Moderate.
Developers care only
about application code.

Google App Engine, Force.
com, Engine Yard, Heroku

Software-as-a-Service (SaaS) End-users Highest.
Users only access application.

Google Docs & Gmail
(office apps), Microsoft
Software Plus Services
(office apps), Salesforce.
com (CRM), NetSuite (ERP)

12
IBM at the Crossroads

EXHIBIT 3 IBM Navigates Wave after Wave of Technological Change, 1890–20

15

Source: IBM Prospectus (2004), “Understanding our company.” Vertical axis shows total industry revenues. Red lines added to
emphasize IBM’s ongoing competitive standing. Research and depiction of last wave (2015) by author.

18

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IBM at the Crossroads

13

EXHIBIT 4 IBM Financial Data, 2004–2014 (numbers in $ millions except per-share amounts)

Fiscal Year 2010 2011 2012 2013 20

14

Cash and short-term investments 11,651 11,922 11,129 11,066 8,476

Receivables (total) 28,225 29,561 30,578 31,836 31,832

Inventories (total) 2,450 2,595 2,287 2,310 2,103

Property, plant, and equipment (net total) 14,097 13,883 13,996 13,821 10,771

Depreciation, depletion, and amortization (accumulated) 26,193 26,241 26,506 26,654 28,263

Assets (total) 113,452 116,433 119,213 126,223 117,532

Accounts payable (trade) 7,804 8,517 7,952 7,461 6,864

Long-term debt 21,846 22,857 24,088 32,856 35,074

Liabilities (total) 90,280 96,197 100,229 103,294 105,518

Stockholders’ equity (total) 23,046 20,138 18,860 22,792 11,868

Sales (net) 99,871 106,916 104,507 99,751 92,793

Cost of goods sold 48,472 51,320 48,987 45,981 41,353

Selling, general, and administrative expenses 27,822 29,832 29,671 29,703 28,607

Income taxes 4,890 5,148 5,298 3,041 4,234

Income before extraordinary items 14,833 15,855 16,604 16,483 15,751

Net income (loss) 14,833 15,855 16,604 16,483 12,0

22

Earnings per share (basic) excluding extraordinary items 11.69 13.25 14.53 15.06 15.68

Earnings per share (diluted) excluding extraordinary items 11.52 13.06 14.37 14.94 15.59

14
IBM at the Crossroads

EXHIBIT 5  Working Definition of Cloud Computing

Definition of Cloud Computing:

Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources
(e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management
effort or service provider interaction. This cloud model promotes availability and is composed of five essential characteristics, three
service models, and four deployment models.

Essential Characteristics:

On-demand self-service. A consumer can unilaterally provision computing capabilities, such as server time and network storage, as
needed automatically without requiring human interaction with each service’s provider.

Broad network access. Capabilities are available over the network and accessed through standard mechanisms that promote use by
heterogeneous thin or thick client platforms (e.g., mobile phones, laptops, and PDAs).

Resource pooling. The provider’s computing resources are pooled to serve multiple consumers using a multitenant model, with
different physical and virtual resources dynamically assigned and reassigned according to consumer demand. There is a sense of
location independence in that the customer generally has no control or knowledge over the exact location of the provided resources
but may be able to specify location at a higher level of abstraction (e.g., country, state, or datacenter). Examples of resources include
storage, processing, memory, network bandwidth, and virtual machines.

Rapid elasticity. Capabilities can be rapidly and elastically provisioned, in some cases automatically, to quickly scale out and can be
rapidly released to quickly scale in. To the consumer, the capabilities available for provisioning often appear to be unlimited and can be
purchased in any quantity at any time.

Measured service. Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of
abstraction appropriate to the type of service (e.g., storage, processing, bandwidth, and active user accounts). Resource usage can be
monitored, controlled, and reported, providing transparency for both the provider and consumer of the utilized service.

Service Models:

Cloud Software-as-a-Service (SaaS). The capability provided to the consumer is to use the provider’s applications running on a cloud
infrastructure. The applications are accessible from various client devices through a thin client interface such as a web browser (e.g.,
web-based e-mail). The consumer does not manage or control the underlying cloud infrastructure, including the network, servers,
operating systems, storage, or even individual application capabilities, with the possible exception of limited user-specific application
configuration settings.

Cloud Platform-as-a-Service (PaaS). The capability provided to the consumer is to deploy onto the cloud infrastructure consumer-
created or acquired applications created using programming languages and tools supported by the provider. The consumer does not
manage or control the underlying cloud infrastructure, including the network, servers, operating systems, or storage, but has control
over the deployed applications and possibly application hosting environment configurations.

Cloud Infrastructure-as-a-Service (IaaS). The capability provided to the consumer is to provision processing, storage, networks, and
other fundamental computing resources where the consumer is able to deploy and run arbitrary software, which can include operating
systems and applications. The consumer does not manage or control the underlying cloud infrastructure but has control over operating
systems, storage, and deployed applications, and possibly limited control of select networking components (e.g., host firewalls).

Note 1: Cloud computing is still an evolving paradigm. Its definitions, use cases, underlying technologies, issues, risks, and benefits will be refined in a spirited
debate by the public and private sectors. These definitions, attributes, and characteristics will evolve and change over time.

Note 2: The cloud-computing industry represents a large ecosystem of many models, vendors, and market niches. This definition attempts to encompass all of
the various cloud approaches.

(continued)

IBM at the Crossroads
15

Deployment Models:

Private cloud. The cloud infrastructure is operated solely for an organization. It may be managed by the organization or a third
party and may exist on-premises or off-premises.

Community cloud. The cloud infrastructure is shared by several organizations and supports a specific community that has shared
concerns (e.g., mission, security requirements, policy, and compliance considerations). It may be managed by the organizations or a
third party and may exist on-premises or off-premises.

Public cloud. The cloud infrastructure is made available to the general public or a large industry group and is owned by an organization
selling cloud services

Hybrid cloud. The cloud infrastructure is a composition of two or more clouds (private, community, or public) that remain unique
entities but are bound together by standardized or proprietary technology that enables data and application portability (e.g., cloud
bursting for load-balancing between clouds).

Note: Cloud software takes full advantage of the cloud paradigm by being service-oriented with a
focus on statelessness, low coupling, modularity, and semantic interoperability.

Source: National Institute of Standards and Technology, Information Technology (NIST), Laboratory Authors: Peter Mell and
Tim Grance, Version 15, October 7, 2009, http://csrc.nist.gov/groups/SNS/cloud-computing/.

EXHIBIT 5  (continued)

16

IBM at the Crossroads

EXHIBIT 6  IBM Revenue by Geographic Region, 2009 and

2014

2009

2014

35%

Americas

45%

Americas

22%

Asia Pacific

22%
Asia Pacific

33%

Europe /

Middle East /

Africa

43%

Europe /
Middle East /
Africa

Source: Based on author’s depiction of publicly available data.

IBM at the Crossroads

17

EXHIBIT 7 Watson’s impact one year after Jeopardy!

Source: Based on PowerPoint Presentation located at IBM, http://www-03.ibm.com/press/us/en/presskit/27297.wss

One Year Later Watson by the Numbers

15
million views watched the rerun of
Watson’s triumph on Jeopardy!

5
members of Congress competed against Watson

386
universities are collaborating
with IBM on Watson and analytics

34
million potentially benefiting from Watson
through WellPoint health plans

18
IBM at the Crossroads

6

0%

50%

40%

30%

20%

10%

0%

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

$0

2011 2012 2013 2014

Gross Profit Margin (left axis)
Total Revenue (in millions, right axis)

EXHIBIT 8  IBM Financial Performance, 2011–2014

Source: Based on author’s depiction of publicly available data.

IBM at the Crossroads
19

EXHIBIT 9 IBM Financial Information by Segment 2013–2014 ($ millions)

Segment 2014 2013

Global Technology Services

Revenue

Gross Margin

$37,130
38.3%

$38,551
38.1%

Global Business Services

Revenue
Gross Margin

$17,825
30.8%

$18,396
30.9%

Software
Revenue
Gross Margin

$25,434
88.6%

$25,932
88.8%

Systems and Technology

Revenue
Gross Margin

$9,996
39.5%

$12,988
40.8%

Global Financing

Revenue
Gross Margin

$2,034
49.4%

$2,022
45.6%

Other

Revenue
Gross Margin

$374
(215.0)%

478
(195.6)%

Total

Revenue
Gross Margin

$92,793
50.0%

$98,684
49.5%

Source: IBM 2014 Annual Report.

20
IBM at the Crossroads

EXHIBIT 10  IBM Stock Performance vs. S&P 500, January 1, 2012–December 31, 2014

Source: Author’s depiction of publicly available data using YCHARTS, http://ycharts.com/.

IBM Price Dec 31 ‘14

160.44

S&P 500 Level Dec 31 ‘14

2058.90

160.44

Jan ‘12 Jul ’12 Jan ‘13 Jul ’12 Jan ‘14 Jul ’14 Jan ‘14

225.00

215.00

205.00

195.00

185.00

175.00

165.00

155.00

2058.90

2164.28

2035.71

1907.14

1778.57

1650.00

1521.43

1392.86

1264.29

Jan 1, 2012: Virginia Rometty’s
CEO tenure commences

IBM at the Crossroads

21

Endnotes

1 Clark, D. “IBM Woes Point to Fresh Overhaul,” The Wall Street Journal, October 21, 2014, p. A1.

2 http://www.ibtimes.com/chip-divestiture-puts-struggling-ibm-faster-track-cloud-1707762

3 IBM Archives: 1930s.

4 IBM Archives: 1940s.

5 Wikipedia.org, “History of IBM.”

6 lohr, S. “He Loves to Win; At IBM, He Did,” The New York Times, March 10, 2002.

7 Gerstner, L., Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, New York: Collins, 2002.

8 IBM Archives: 1997.

9 Lohr, S. “Big Blue’s Big Bet: Less Tech, More Touch,” The New York Times, January 25, 2004.

10 Cohen, S. “Divestment Lessons from IBM,” Forbes, July 12, 2013.

11 Bulkeley, W. M. “IBM Set to Cut More U.S. Jobs,” The Wall Street Journal, March, 25, 2009.

12 Lohr, S. “New Effort to Tap Technology to Aid the Service Economy,” The New York Times, March 28, 2007.

13 http://www.nytimes.com/2011/10/26/technology/ibm-names-a-new-chief.html?_r=0

14 IBM: https://www-03.ibm.com/press/us/en/biography/10069.wss

15 http://www.forbes.com/profile/ginni-rometty/

16 http://www.nytimes.com/2011/10/26/technology/ibm-names-a-new-chief.html

17 Ibid.

18 Clark, D. “IBM Shifts $4 Billion to Cloud and Mobile,” The Wall Street Journal: February 27, 2015, p. B1.

19 http://www.fool.com/investing/general/2015/03/13/5-things-international-business-machines-corps-man.aspx

20 Ibid

21 IBM Annual Reports (diverse years).

22 Mell, P., and T. Grance, Version 15, October 7, 2009, http://csrc.nist.gov/groups/SnS/cloud-computing/.

23 Worthen, B., and J. Scheck. “As Growth Slows, Ex-allies Square Off in a Tech Turf War,” The Wall Street Journal,
March 16, 2009.

24 Schonfeld, E. “IBM’s Blue Cloud Is Just Web Computing by Another Name,” Techcrunch, November 15, 2007.

25 “IBM Opens Four Cloud Computing Centers to Meet Growing Demand in Emerging Markets,” IBM Press
Center, September 24, 2008, Armonk, NY.

26 Higginbotham S. “IBM Gives Cloud Computing a Seal of Approval,” GigaOM, November 23, 2008.

27 http://www.ibm.com/developerworks/cloud/library/cl-publictoprivatecloud/

28 McAfee, A., Brynjolfsson, E. (2012) “Big Date: The Management Revolution,” Harvard Business Review: https://
hbr.org/2012/10/big-data-the-management-revolution/ar

29 http://www.webopedia.com/TERM/B/big_data_analytics.html

22
IBM at the Crossroads

30 http://asmarterplanet.com/blog/2015/03/ushering-new-era-intelligent-building-energy-management.html
– more-33078

31 http://www.ibm.com/big-data/us/en/big-data-and-analytics/

32 https://www.youtube.com/user/IBM

33 https://www.facebook.com/peopleforasmarterplanet

34 https://twitter.com/SmarterPlanet

35 http://www.techrepublic.com/article/ibm-watson-the-inside-story-of-how-the-jeopardy-winning-supercom-
puter-was-born-and-what-it-wants-to-do-next/

36 http://www.techrepublic.com/article/ibm-watson-the-inside-story-of-how-the-jeopardy-winning-supercom-
puter-was-born-and-what-it-wants-to-do-next/

37 Forbes: http://www.forbes.com/sites/ibm/2015/02/23/whats-the-future-of-cognitive-computing-ibm-watson/

38 http://www.cnbc.com/id/102121127

39 http://www-01.ibm.com/software/ebusiness/jstart/about/

40 http://www.smartercomputingblog.com/smarter-computing/systems-of-engagement/

41 Don Clark. “IBM Shifts $4 billon to Cloud and Mobile,” : 27 February 2015, p. B1.

42 Reuters: http://finance.yahoo.com/news/ibm-share-technology-china-strategy-120007774.html