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Big Blue’s Near-Term Sales vs. Long-Term Strategy

{complink 2470|IBM Corp.} has lots of people talking these days. While share prices slid this week on news of its latest quarterly earnings report, industry watchers still appear excited about Big Blue's two trump cards: innovative strategy and strong leadership.

IBM reported this week that third quarter net income rose 7 percent to $3.8 billion, compared with $3.6 billion a year ago. Revenue came in at $26.2 billion, an 8 percent increase (3 percent, when adjusting for currency) from 2010's third quarter of 2010. Despite the gains, the company missed sales estimates for the first time in five quarters, according to Bloomberg.

Although the current quarter has caused typical nail-biting from investors looking at the short-term dashboard, there was a silver lining many latched onto just a few weeks ago: IBM surpassed Microsoft in market capitalization.

IBM's market cap had reached just under $214 billion, jumping up to the number two slot and bumping Microsoft — with $213.2 billion in value — down to third, Forbes and others reported. No surprises, here — Apple holds the crown for most valuable technology company with a market cap of $362.1 billion, according the newsfeed. Based on several post-earnings reports this Tuesday, including this one, IBM's market cap is down to $212.5 billion. That just goes to show how fickle numbers can be, and how they just might not tell the whole story for any significant length of time.

Looking more carefully, though, IBM has been on a steady rise for years, securing its place as a top-tier leader worth watching by actively pursuing its business plans, even if they may be initially perceived as unpopular in any given news cycle. That's why it has been a consistent outperformer among major cap-ex companies and a model of what other high-tech companies can only hope to replicate. The Motley Fool folks were just talking about this the other day and had an interesting take on it. Worth a listen.

As if on cue for this post, Samuel J. Palmisano, IBM's chairman, president and chief executive officer, offered this up in the earnings press release: “In the third quarter, we drove revenue growth, margin expansion and increased earnings as a result of our innovation-based strategy and continued investment in growth initiatives.”

EBN has previously pointed out that Big Blue's boldest moves are what has long given it credibility and market resilience. EBN contributor Diane Trommer noted that the company, which recently celebrated its 100th anniversary, once again proved its innovative stamina by joining a select group of chipmakers leading an effort to make the world's largest wafer a reality. More importantly, IBM, in the face of much criticism, has consistently created new opportunities for itself and willingly walked away from low-margin business that no longer makes sense to the big-picture portfolio. (See: Big Blue Cranks Innovation Engine and Happy 100th Birthday Big Blue – What’s Next?.)

We should also give another hat tip to Palmisano, who may well be America's most underrated CEO, if The Atlantic is correct. IBM has thrived under Palmisano, who led the company's PC business divestiture, boosted software offerings, and improved stock prices.

Quarterly earnings often shake things up temporarily, but what's more compelling to watch is how things change over time. Let's think for a moment about what will happen to players like HP that are trying to get out of the traditional PC hardware business, as Apple has done.

An article in Smarthouse may sum it up best with this lead sentence: “Meet IBM, the company HP want[s] to become.” HP is trying to find its way back to fortune, taking steps in changing leadership, dropping its troubled tablet line, and doing a handful of other things already discussed at length here and elsewhere in cyberspace. Perhaps HP's strategy should be to take a look at IBM's best-practices and replicate them.

What about Apple, which turned drab-gray hardware into fashion runway glitz? Will IBM's uptick give executives and investors pause? Probably not much, at least not right now. Any change in market cap will more likely correlate with how Apple handles Steve Jobs's death and picks up where he left off.

And what about Microsoft? Can it keep IBM at bay and maintain a financial edge?

If nothing else, it goes to show that tech tides always change, and sometimes it takes years to reveal the more complete story behind a few numbers flickering on a screen.

9 comments on “Big Blue’s Near-Term Sales vs. Long-Term Strategy

  1. Eldredge
    October 21, 2011

    IBM has always been a very innovation company, with a pool of talented management and technical professionals. It will be interesting to watch how they and MicroSoft compete.

  2. FLYINGSCOT
    October 22, 2011

    We have been so used to seeing Microsoft at the top of the cap pile that it is taking us a little time to accept Apple in the number one spot.  I am encouraged to hear Big Blue has not gone away and is indeed gaining in strength.  This is a credit to Big Blue management team and strategy. I wonder if MS is a spent force these days?

  3. SunitaT
    October 22, 2011

    Perhaps HP's strategy should be to take a look at IBM's best-practices and replicate them.

    Jennifer, are you suggesting that HP should sell its PC business group? Intel's Q3 result has clearly shown that  PCs will for now continue to co-exist with tablets and other smaller-form computing devices rather than fade away as demand soar for competing products.

  4. SunitaT
    October 22, 2011

     I am encouraged to hear Big Blue has not gone away and is indeed gaining in strength.

    @FLYINGSCOT , I totally agree with you. I wouldn't be surprised if IBM acquires the number one spot in the future as one is not sure about Apple's future performance after the demise of Steve Jobs.

  5. jbond
    October 24, 2011

    I think it is great news that IBM is doing so well. They took a gamble by exiting the PC business, and under great leadership it has paid off. By taking over Microsoft to become the number two company, their next company in sight is Apple. Apple does have a large lead in value, but also relies heavily on consumer driven products and innovation. If they were to falter any, IBM has a chance to step into the number one spot.

  6. Jennifer Baljko
    October 25, 2011

    tirlapur  Not necessarily saying HP should totally exit the PC business. Obviously PC, tablets, smartphones, and similar devices will live side-by-side for quite a while and companies need to position themselves to win where they can with the products they offer. But, undeniably, HP has lost it's edge because it's trying to be everything to all consumers, and changes in leadership direction hasn't steadied their course. Ideally, HP to redefine what its core market is, keep investing its best supply chain practices (which only a few years ago held a high caliber of importance), and step back and examine which markets make the most sense for tehm to play in and excel at . They've already started to do that by stopping their TouchPad production.

  7. Jennifer Baljko
    October 25, 2011

    tirlapur  Not necessarily saying HP should totally exit the PC business. Obviously PC, tablets, smartphones, and similar devices will live side-by-side for quite a while and companies need to position themselves to win where they can with the products they offer. But, undeniably, HP has lost it's edge because it's trying to be everything to all consumers, and changes in leadership direction hasn't steadied their course. Ideally, HP to redefine what its core market is, keep investing its best supply chain practices (which only a few years ago held a high caliber of importance), and step back and examine which markets make the most sense for tehm to play in and excel at . They've already started to do that by stopping their TouchPad production.

  8. Ms. Daisy
    October 25, 2011

    Jennifer:

    The facts stated is truly the direction HP needs to take. The addition to this should read – i-n-n-o-v-a-t-i-o-n!

  9. Himanshugupta
    October 26, 2011

    I agree. I also agree with the article which summarize what HP needs in short: innovation and strong leadership. It might be a good start to follow what IBM did in 90's but HP needs to find its own path and that may not necessarily include getting away with low profit margin businesses. 

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