Ibm - the New Blue

About IBM: The Big Blue

IBM's history dates back decades before the development of electronic computers - Big Blue was officially born in 1911 as the Computing-Tabulating-Recording Company, a conglomeration of other companies that started in the 1880s. Since then, the company has been instrumental in the development of mainframes, calculators, personal computers, networking, software, and several scientific breakthroughs. Four IBM researchers have won Nobel prizes. In 1990, IBM had its most profitable year ever. By 1993, the computer industry had changed so rapidly the company was on its way to losing $16 billion and IBM was on a watch list for extinction - victimized by its own lumbering size, an insular corporate culture, and the PC era IBM had itself helped invent.

Since that time, IBM has made major changes in its business activities, shifting its focus significantly away from components and hardware and towards software and services. In 1993, Lou Gerstner was brought in to run IBM. He moved the company's focus to services, and re-established IBM as the biggest computer consulting and services company in the world. However, nearly after a decade, Big Blue was still losing money on PCs, a market it helped launch. Gerstner was succeeded by Samuel J. Palmisano in 2002.

The New Blue under the Leadership of Palmisano

The style of Sam Palmisano may be understated compared to his predecessor, Louis Gerstner. But the strategy moves the 52 year old has made since he became the chairman and chief executive of IBM less than two years ago have been bold, even risky.

If successful, his strategy promises to redefine not only IBM, but also what it means to be a computer company. IBM is no longer content to be merely a supplier of hardware and software, and seeks to become more a side-by-side partner with businesses - helping them improve their marketing, planning, procurement and customer service.

The aim is to create a very deep connection between IBM and its customers, and at that level it is a very powerful strategy. But it's making IBM more like a service business with technology thrown in than a technology business.

To pursue this strategy, Palmisano needed to add expertise in business consulting and software. In 2002 the largest purchases came when he acquired PricewaterhouseCoopers Consulting for $3.5 billion and Rational Software for $2.1 billion.

More fundamental changes have come in 2003, and some are just now falling into place. In particular, IBM has shaken up its software, services, and research divisions. With the addition of PwC Consulting, the big IBM services unit is more focused on executive-level business consulting instead of traditional technology services.

If Palmisano's overhaul of IBM proves successful, the company could gain a long-term competitive advantage, as it did from big bets of the past - such as its pioneering mainframe computers in the 1960's. For IBM, the strategy also moves the centre of gravity in its relationships with corporate customers further from its traditional mainstay, the mainframe, and closer to business consulting services.

Some large customers who have watched the new game plan unfold are impressed both by its scope and its early impact. "Sam Palmisano took a real gamble with a strategy that changes how IBM does business," said Raymond E. Gogel, chief information officer of Xcel Energy, America's fourth-largest oil and gas utility.

Palmisano likes to say that his plan is bold but not really risky because IBM is just following customer demand. Companies are less enamoured of technology itself than in what technology can do for them - the practical benefits, or solutions, he says.

In the summer of 2003, Palmisano asked IBM employees to share their thoughts online about what the company's future values should be. The results were distilled to three: customer relationships,