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The tech giant's global integration strategy appears to be paying off: Every division reported strong second-quarter growth
On Feb. 5, 1924, Thomas Watson Sr. changed the name of the company he ran from Computing-Tabulating-Recording to International Business Machines. The change reflected Watson's ambitions rather than reality. C-T-R operated only in the U.S. and Canada. But since the name change, IBM (IBM) has been at the forefront of each new wave in the globalization of business—from international to multinational, and now to the next new thing. For three years, IBM has been striving to become what it calls a "globally integrated enterprise." Now, the strategy is finally starting to click.
The strongest evidence that IBM's big bet is paying off came a few weeks ago when it announced its second-quarter results. Revenues were up a strong 9%, to $23.8 billion. Every division reported healthy growth, including the long-troubled IT services group, where revenues rose 10%. But confirmation that the strategy is succeeding trickles in almost every day with announcements of major IT services contract wins in India or Russia. No wonder IBM's stock, trading at about $112, has risen by 50% over the past year—even after pulling back some in the market's summer swoon.
For IBM, aggressive globalization works. In fact, over the next few years, its approach could emerge as a model for other companies trying to capitalize on the globalizing trend without being hobbled by it.
Leading by Example
The model is simple. Under the old multinational rubric, IBM created miniature versions of itself in each country or region where it operated. That turned out to be a cumbersome and expensive way of doing business. So IBM now sets up shop wherever it can find the right talent at the right price. It has a global supply chain based in China, a global IT service delivery system based in India, and a global financing back office in Brazil. The company has set up new management systems to coordinate these activities.
These changes haven't come easily. IBM seems to be in a constant state of upheaval: More than 20,000 jobs have been eliminated in the U.S., Western Europe, and Japan even as the work force has grown beyond 50,000 employees in India and 10,000 in China. "This is a huge shift for IBM, but I believe it's necessary if we are to capture the benefits and step up to the challenges of a globally integrated economy," Chief Executive Samuel Palmisano said at an IBM-sponsored Forum on Global Leadership on July 25 in Washington, D.C.
If IBM's strategy continues to pay off, it could become a model for other large corporations to follow. Just as IBM found that it couldn't compete well against super-efficient, low-cost IT outfits in India, other industrial giants are at a disadvantage against upstarts from the U.S. and elsewhere that are tuned for the new global realities. They're being forced to make wrenching changes, as well. "For the past 20 years, people have been talking about what the company of the future should be. IBM is actualizing those ideas," says Rosabeth Moss Kanter, a professor at Harvard Business School.
Shifting Workflow and Revenue
While shifting work overseas to lower-cost locations has helped make IBM's huge tech services business more competitive, there's a lot more to the strategy than labor arbitrage. IBM also has improved its effectiveness by redesigning business processes, automating work with software, and bringing all of its increasingly global capabilities to bear on behalf of clients. The company uses the same processes in India that it does in France. That makes it possible to shift work to wherever employees with the right skills are available. As a result, at any given time, fewer people are sitting on the bench waiting for a job to be assigned to them.
And by hiring tens of thousands of people in developing nations, IBM gains more than the benefit of low-cost labor. It's also helping to build strong economies that are now becoming sizable markets for its goods and services. Revenues from the so-called BRIC countries—Brazil, Russia, India, and China—now represent about 5% of IBM's total sales and are growing at 25% per quarter. Strategic outsourcing contracts from Indian companies grew nearly 150% last quarter. "These are the markets that will hypergrow over the next few years, and IBM will grow even faster there," says Michael Cannon-Brookes, vice-president for strategy in emerging markets.
IBM still faces fierce opposition in IT services from both India and Accenture (ACN). There's plenty of competition in its software and computer hardware businesses as well. But, thanks to its globalization strategy, it's no longer the slow-moving, inefficient, and overpriced giant that it was just a few years ago. Globalization is here to stay, and so, apparently, is IBM.