The author is Peter Farwell, CFA and FCPA, a former partner of Ernst & Young, Canada. For further information, please visit Peter’s bio on the web site.
This strategic review of IBM’s business and management style is intended to provide a basis for answering the question: Can IBM survive?
In the 1990’s IBM was in crisis: its sales and profits were plummeting, its customers’ needs were being ignored, and its morale was in shambles. A book was written entitled: IBM, The Decline and Fall of an American Icon. There were numerous negative press articles.
IBM reached outside for a new CEO and Lou Gerstner accepted. Gerstner rapidly sized up the company’s problems and implemented significant, disruptive changes to turn the company around. While he did not change the company’s vision of what it should be he made major changes to its strategies and its execution, both for the short term rescue, to stem the bleeding, and for the longer term growth of the business. He was successful and IBM went on over the next 20 years to new heights as the IT leader.
Now, IBM is in trouble again. Its sale and profits have been falling for several years, and its stock price has suffered. Robert Cringely, a Silicon Valley journalist for over 30 years, has in 2014 published a book: The Decline and Fall of IBM. It is severely critical of the Culture at IBM in the 2010’s. Again, there are a number of articles that criticize various aspects of the IBM business and management.
This strategic review outlines IBM’s vision, strategy, and ability to execute over three periods;
- The Thomas Watsons era from the beginning to the 1980s, when IBM was the dominant IT leader
- The Lou Gerstner era from 1993 to the 2000s, when the PC, Internet and Smartphone had significantly changed the IT landscape; and
- the current era in the 2010’s, when technology changed again and continues to change rapidly
The purpose of the review is to answer the question: Can IBM survive? Suggestions on further changes that would help it to do so are presented.
IBM has recently released it first quarter 2016 report. The results are not encouraging.
Revenue is down again, from $19.6 billion in Q1 2015 to $18.7 billion, a drop of 5%.Profit is lower, from $2.9 billion to $2.31 billion and EPS is down from $2.91 to $2.31.
To put this in perspective we note the following:
1. The first quarter has always been weak so it is not good analysis to extrapolate it to future quarters;
2. There was a lot going on in Q1 at IBM. While there was a significant tax refund in earnings, there were also large restructuring charges – if most of the latter relates to “early retirements”, this may be a sign that IBM is addressing the surplus staffing levels noted in my study. It would be helpful to know just what these charges were for and whether they will continue.
3. Q1 2016 was a downer for the whole IT industry – witness the declines in revenue at Google and Apple that were greater than IBM’s. There was also a fall off in the leading developing countries attributable to political and economic difficulties
Also In Q1 2016, IBM changed its reporting lines to align more closely with the 5 strategic initiatives in the Big IT marketplace. These weren’t the changes we were looking for. We had hoped to see more information of IBM’s results along industry lines. Why? A change to a management structure and power dominated by industry would indicate clearly that IBM is once more listening and responding to its customers, and would follow a restructuring suggested and implemented by Lou Gerstner in the 1990’s. The present management structure as represented in the Q1 report seems to be inward looking, a characteristic of IBM’s difficulties in the 1990’s.
All in all, we are taking a wait and see attitude.
Update re Amazon’s Q1 2016
Barb Darrow reports in a Fortune e-publication, dated April28, 2016, that Amazon Web Services reported its Cloud revenue hit $2.566 billion in Q1, 2016, a growth rate of 64%. Gross profit on these sales was reported as 23.5%. She reports that Amazon claims to have pioneered the Pubic Cloud market over 10 years ago.
At this level of sales revenue, Amazon still comes behind IBM which reported Cloud revenue of $10.8 billion for the 12 months ending in Q1, 2016. In spite of this, Darrow quotes Gartner analyst, David Smith as noting that Amazon is by far the number one provider of cloud services. We would put IBM in that spot, noting that AWS is growing faster than IBM’s Cloud services. The difference may relate to a difference in what is meant by Cloud Services. Amazon plays mainly in the Public Cloud Services, aimed at small and medium sized businesses, whereas IBM offers a fuller range of Cloud Services to large enterprises.
Nevertheless , if Amazon Web Services is providing cheaper, easier to use and simpler Cloud Services, its offerings have all the earmarks of a Disruptive Technology, as described by Clayton Christensen in his book: The Innovator’s Dilemma. As we suggest in out study, IBM had better watch out. It may only be a matter of time before the AWS offerings are appealing to larger enterprises.
Eric Schmidt, CEO of Google\\\’s parent Alphabet, recently set out 6 target businesses based on new technology that techbusinesses should be pursuing. They are: Shifts in food protein from meat to plants; 3D printing for buildings; Virtual Reality outside gaming to augment observations in the real world, to make cars safer, for example; analysis of medical data through data collected on cell phones; self-driving cars; to improve education by using technology to develop custom programs for each student.
> These are the type of opportunities IBM should be pursuing through a separate Entrepreneurial Division as we have recommended in our study: IBM: Can it survive today. By Peter Farwell.
IBM Blog after 2016 annual report
IBM released its second quarter 2016 earnings report on July17, 2016.
It reported GAAP EPS of $2.61 and total revenue of $20.2 Billion. Both figures were down from the year earlier quarter, but were greeted positively by the market which continued to raise the stock price, albeit just slightly. The raise was attributed to the fact that both figures exceeded analysts’ expectations.
Analysts later polled by “24/7” and reported on Yahoo Finance show mixed results with most either neutral or negative. We Agree. The results are disappointing. The total revenue of $20.2 billion marks the 17th quarterly revenue decline.
IBM touted the growth of is Cloud revenue, reported at $11.6 Billion for the 12 months to the end of Q2,2016. In the same week, Microsoft reported annualized commercial Cloud revenue of $12.1 Billion.
Taking these numbers at face value, this suggests that both Amazon Web Services and Microsoft’s Azure have passed IBM in the Cloud. Not good news considering the Cloud is IBM’s top Strategic Imperative.
It seems to suggest that time may be running out for IBM’s transformation.