Tuesday, November 29, 2011

IBM – Reinventing the business model

Selling off the part that forms the identity of a company might be hard to comprehend but that is exactly what IBM, the Goliath of the PC industry, did when they sold the PC group to Lenovo. [1]

On the face of it, the move seemed to be a fiscal move in order to sell-off a part of the company that wasn’t producing great results. However, taking a deeper look, the move can be thought of from a strategic perspective. IBM has a brilliant brand name and has been growing its service business and product lines over the years. By strategic acquisitions such as SPSS Inc., Netezza, Algorithmics Inc., etc. IBM has been slowly gaining a foothold in newer high-profit domains. [2]

To recreate a business model that works – selling PCs on a large scale to almost all types of customers – truly requires strategic planning. IBM decided that instead of focusing on the low-hanging fruit of the hardware business can better channel resources and energy in consulting companies in various industries and by selling products that serve the broad needs of companies in various domains. In this case, IBM saw the opportunity to target the high-income corporate organizations whose specialized needs warrant specialized skill-sets that IBM had developed over the years.

By acquiring companies and integrating the software to make an end-to-end system, IBM was able to brand itself as a one-stop-shop for all the needs. This helped them gain clients in various parts who trusted the IBM brand name to deliver quality software and services. In the analysis of the company’s business model, it would have been clear that the customer value proposition, the profit formula and the key resources and processes direct the efforts towards software and services. Once that was identified, creating the new model was almost obvious.

However, for a company of IBM’s size, it becomes really important to identify which direction they see the company moving in. Over here the opportunity analysis with detailed financial projections would be needed in order to predict how a particular move would help the company. The shifting base of competition, the commoditization of the hardware products and the low-prices led to the once lucrative PC business to seem less important. These factors ultimately contributed to the new direction taken by the IBM management.

The conclusion and the caveat that I want to point out to is that each company needs to evaluate from time to time its current business model and see if it make sense from the three aspects – value proposition, profit and resource/process. If it realizes that the model is no longer producing the required output for long-term growth, a serious effort needs to be undertaken to design the new business model - even if the core operation of the organization needs to be changed.

References:

1. Reinventing your business model, Mark W. Johnson, Clayton M. Christensen and Henning Kagerman.

2. IBM sells its PC business to Lenovo,

http://www.msnbc.msn.com/id/6666170/ns/technology_and_science-tech_and_gadgets/t/ibm-sells-pc-business-chinas-lenovo/#.TtXVd2DPUUw

3. IBM List of Acquisitions, http://www.ibm.com/investor/strategy/acquisitions.wss

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