IBM in the 21st Century: The Coming of theGlobally Integrated Enterprise“Global integration is the new game. Innovation is the way to win. We must be out thereconnecting across the world.†–Sam Palmisano, Chairman and CEOIn April 2008, members of IBM’s fifth Integration and Values Team (IVT5), were close to finishingtheir deliberations. This high-powered group of high-level executives included country generalmanagers from India and Brazil as well as vice presidents from businesses and functions, chosenfrom a group of about 300 leaders convened by Chairman and CEO Sam Palmisano to view IBMholistically. Senior VP of Corporate Communications and Marketing, Jon Iwata, and the new head ofResearch, John E. Kelly III, were the executive sponsors. IVT5’s focus was on “the global IBMerâ€defining and developing leaders for the global economy; making the “globally-integrated enterprise”relevant to all employees through global citizenship and the IBM values and culture; and ensuringmarket access in the form of a level playing field for IBM to compete globally. The scope was all 170countries in which IBM operated.iTeam members felt excitement and urgency. Palmisano expected recommendations in late May, asthe next major part of IBM’s transformation to a globally-integrated enterprise. Over its nearly 100year history, IBM had moved from international (exporting from the U.S.) to multi-national (withsubsidiaries in many countries) to global. Starting with the first IV team in 2002, convened toglobally-integrate the supply chain (e.g., one global instrument for requisitions), teams had identifiedways to integrate manufacturing (e.g., test engineering from anywhere in the world, to analyze andfix any line in any plant), create an integrated human capital supply chain (e.g., data bases with acommon definition of skills and experience, global recruitment and on-boarding process), and createinterconnected global solutions centers serving the world (e.g., centers for ERP (enterprise resourceplanning systems in Bangalore, the oil industry in Norway, banking in the U.S. and elsewhere).Other projects were underway. IBM realized considerable efficiencies from all of them.IVT5’s mandate was slightly different and more general, yet critical to making the rest of thetransformation work in practice: the people and the culture that would produce many more globalleaders and global citizens. The team faced the usual challenges of change – identifying the mostimportant needs and barriers, thinking creatively about approaches that would take advantage ofIBM’s strengths while finding new opportunities, setting an inspiring theme that would attractsupport. In addition, there was the uneasy fact that globalization was misunderstood in many places,by the public if not government officials. Outside the U.S., IBM was still a “foreign†company even ifstaffed completely with local citizens, although IBM was able to operate as a trusted partner in________________________________________________________________________________________________________________Professor Rosabeth Moss Kanter prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended toserve as endorsements, sources of primary data, or illustrations of effective or ineffective management.Copyright © 2008, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-5457685.homeworkminutes.com/answer/view/11535#”>.homeworkminutes.com/answer/view/11535#”>, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,photocopying, recording, or otherwise—without the permission of Harvard Business School.This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.For the exclusive use of I. Grant308-105stIBM in the 21 Century: The Coming of the Globally Integrated Enterprisevarious geographies. Internally, some IBMers in mature markets who saw IBM shifting attention tothe rapidly-growing BRIC nations (Brazil, Russia, India and China) understood the rationale butfeared the consequences. At the same time, some IBMers outside the U.S. felt that IBM was still toomuch of an American company making too many decisions in New York. So IVT5’s mandate wasnot as simple as leadership development for a globalizing world; team members also had to focus onlocalizing IBM to connect its people not only with each other and with customers and industries butalso with communities and nations.IVT5 members had seen abundant facts and figures, such as IBM’s existing efforts on leadershipdevelopment and international assignments, its array of global corporate citizenship initiatives, andits extensive training and professional development. But to think creatively about the future, theywould have to wrap their minds around the whole system (and ecosystem): IBM’s business model,the implications of global integration, the IBM values, corporate citizenship as an approach and a setof partnerships, how people came to be IBMers and relate to such a diverse global population, andhow people did their work in IBM. That was a great deal to review, the length of at least three,perhaps four, Harvard Business School cases.As leaders who had risen to their positions because they were globally-oriented systems thinkerswho reflected IBM’s emphasis on innovation, they knew that it was necessary to stand back to look atthe big picture – to see how IBM worked now, to view IBM at its best, but also to understand thegaps, dilemmas and opportunities.Company Profile: The International Business of IBMBy 2008, IBM was a self-described “globally-integrated enterprise focused on innovation,†with386,000 employees working in 170 countries generating $99 billion in annual revenues (See Exhibit 1for five-year income statement). Headquarters was in a sleek low building on a verdant park-likesetting in Armonk, New York.International Business Machines Corporation, founded in 1911 in New York State by ThomasWatson, was familiarly known as the Blue Giant or Big Blue after the color on its unchanging logo.That was all that remained unchanged during the information revolution of the second half of thetwentieth century. Most of the machines IBM had produced through the years had disappeared, asIBM shifted its business mix to reflect changes in technology and to push the innovations thatproduced those changes. For example, IBM was credited with introducing the field of computerscience, and the name, as a distinct academic endeavor. Though some considered it a lumberinggiant, IBM was one of the few computer manufacturers to survive more than 25 years, and as IBMheaded for its 100th anniversary, it had transformed into a technology solutions company rather thana maker of boxes.“Big Blue†hit upon rough times in the late 1980s and early 1990s when profits from its mainframeand PC businesses started to tumble. Its resurgence began in 1993 under Chairman and CEO Louis V.Gerstner, Jr., who was a rare external hire. By the end of his nine-year tenure in 2002, IBM wastransformed from primarily a manufacturer of hardware into a provider of software, services, andsystems (See Exhibit 2), and it had embraced the Internet. In 1995, IBM acquired Lotus, a premiersoftware development company based in Cambridge, Massachusetts, for $3.5 billion.ii In 2002, IBMpurchased PricewaterhouseCoopers to round out its consulting offerings, having already boughtmuch smaller Internet-services companies. From 1993 to 2001, the last full fiscal year before Gerstnerstepped down, IBM grew from $63 billion in revenues with a loss of $8 billion to $82 billion withearnings of $8 billion.2This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.For the exclusive use of I. GrantstIBM in the 21 Century: The Coming of the Globally Integrated Enterprise308-105In 2002, IBM-lifer Samuel J. Palmisano was appointed Chairman and CEO (See Exhibit 3 for a listof senior executives). Between 2003 and 2007 IBM spent $16 billion to acquire over 50 smallercompanies, mostly in software development.iii In 2005, the company sold its PC business to Lenovo, aChinese manufacturer and long-term IBM business partner. At the same time, the services business,particularly IT systems integration, faced strong competition from the explosive growth of the“outsourcing†industry in emerging countries, especially India.IBM grouped its businesses into four main areas. Global Services included two segments – GlobalTechnology Services (GTS), which focused on client IT infrastructure needs, and Global BusinessServices (GBS), which offered business consulting, systems integration, and application managementexpertise. Together, they accounted for $54 billion in revenues – $36 billion from GTS and $18 billionfrom GBS. GTS grew by nearly $4 billion in 2007, while GBS expanded by over $2 billion. Systemsand Technology, which offered more robust computing and data storage assistance for large clients,accounted for $21 billion in sales, 45% of which was delivered directly to clients, while the remaining55% passed indirectly through business partners. Sales in the latter area had fallen by $600 million in2007. The Software business provided middleware and operating systems to help customersintegrate disparate IT applications within their organization. Industry-specific applications includedinformation management and product lifecycle management programs. The area generated nearly$20 billion in revenues and had grown nearly $2 billion in 2007. Global Financing brought in $2.5billion by offering client and commercial financing. It also remarketed used products through sale orlease. A relatively small fraction of the total business, the unit grew by $137 million in 2007.Global Scope“International†continued to be IBM’s first name and a reason for its success. About 60% of IBM’srevenues stemmed from its non-U.S. operations and 65% of its employees worked outside the U.S. In2007, the company divided its global operations into three super regions: Europe, Middle-East andAfrica (EMEA); Asia Pacific; and the Americas. EMEA employed 25% of IBM’s workforce whileaccounting for 36% of revenues. It had manufacturing plants located in Ireland, Hungary, and France.Asia Pacific had 30% of total employees and contributed 21% of sales. Production facilities operatedin China and Singapore. The Americas accounted for 45% of the workforce and 43% of globalrevenues, with manufacturing sites in New York, Minnesota, California, and Mexico.iv For 2007,IBM’s profits were derived largely from Europe and emerging countries like India, China and Brazil.In 2006, the company moved its global procurement function from Westchester, New York, toShenzhen, China, and integrated supply chain management into one global system.A growing proportion of IBM’s workforce and revenues had shifted outside the U.S. The BRIC(Brazil, Russia, India, and China) countries had expanded at twice the global rate, averaging 21% in2006: 19% in Brazil, 21% in Russia, 38% in India, and 16% in China. To support this growth, IBMtripled the number of employees in these locations. Overall more than 90,000 employees were addedto its emerging market workforce since 2003. By 2008, Russia employed an estimated 2,000 people,China and Brazil 13,000 each, and India 75,000, making it home to the largest number of IBMemployees outside the U.S (See Exhibit 4 depicting the extent of IBM’s global workforce).vHistorically, activities in the BRIC countries were hindered by unfavorable state regulations.vi In1918, an arm of IBM opened offices in Brazil. In 1971, it inaugurated a major manufacturing facility asprotectionist law forbade the company from importing many products. But IBM stayed, partnering inBrazil’s first information technology joint-venture in 1991, which gave it an important presence forthe coming economic liberalization. IBM operated in India from 1951 to 1977, pulled out due todisputes with the government over equity participation and intellectual property, then returned in1992 via a joint venture and, in 1999 as a wholly owned subsidiary. Although IBM had offices in3This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.For the exclusive use of I. Grant308-105stIBM in the 21 Century: The Coming of the Globally Integrated EnterpriseChina before the Communist takeover it did not return until 1979, as the Cultural Revolution ended,when it installed a computer for the Shenyang Blower Works, the first of its kind since the foundingof the PRC. With the deepening of economic reform in the mid and late 1980’s, IBM set up offices inBeijing and Shanghai. In 1992, IBM officially announced the establishment of IBM China CompanyLimited, its first solely funded enterprise in China. In 1993, IBM China established offices inGuangzhou and Shanghai and by 2007 had 26 offices covering 320 cities in China. A Russian presencebegan in 1993, following the Cold War. By 2005, the company had taken advantage of statesponsored efforts to promote a technology park in Akademgorodok, which rapidly became a “SiliconSiberia.†Because it was an area of focus, Russia at 800 people had the full set of functions that amature market possessed, as contained in the IBM Corporate Blueprint.Investment expanded in other emerging markets. In December 2007, IBM announced plans toinvest $1.6 billion in developing countries in Asia, the Middle East, and Latin America.vii In 2007,over 50 countries in the IBM family, including Poland, South Africa, and Mexico, grew more than10% (See Exhibit 5 for geographical scope of growth).viii Egypt, where IBM had operatedcontinuously since 1954, was another growth target. “Egypt’s growing like crazy,†Sam Palmisanosaid, referring to the country’s double-digit growth.ix Services, such as call and data centers, hadmoved there. Egypt was also home to a large software laboratory and an expanding commercialexport business, given its ideal positioning between Europe and the Middle East.The Extended Family and Ecosystem NeighborsIBM served every industry, with financial services, telecommunications, distribution (wholesaleand retail), and government leading the list nearly everywhere, with other industries important tosome regions, such as oil and gas in Russia. A similar set of competitors popped up everywhere: HP,Microsoft, Oracle, and Accenture. Sometimes competitors were also collaborators – for example,competing in software with Oracle but partnering with Oracle in business consulting; or competingwith Microsoft in software but partnering with Microsoft in some regions to sell Intel servers. CiscoSystems was a long-time partner more recently entering domains where it competed with IBM. “Thisis the beauty of IT marketing,†an IBM sales executive in an emerging market said. He also said,“IBM is very recognized as an IT company, but still not as a business consulting company. This is stilla surprise for many customers.â€IBM leaders counted its extended family as well as IBM employees and wholly ownedsubsidiaries when describing IBM’s size. Corporate communications head Jon Iwata described IBMas also consisting of “33,000 companies in the global supply chain, 100,000 companies in the businesspartner network, and at least one million clients – we say the one million because it is difficult toassess,†he explained.Business partners included resellers, systems integrators, specialist software developers, trainers,even competitors with whom IBM could connect to offer an integrated solution to customers. Fundsfor training business partners came from channels enablement initiatives; there were screens,guidelines, and certification.IBM relied on business partners everywhere, but in emerging markets even more strongly than inmature ones. Sheer geographic size and infrastructure development stage necessitated this, even ifthe company could have added employees fast enough. In Russia, with its 11 time zones and hugegeographic extent, business partners were an important part of the go-to-market strategy. Businesspartners could also use lower-paid employees on smaller projects, making IBM’s technology moreaffordable to more customers, while preserving IBM’s position as a high-end services provider. InChina, planned growth from operations in 22 major cities (such as Beijing, Shanghai, and4This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.For the exclusive use of I. GrantstIBM in the 21 Century: The Coming of the Globally Integrated Enterprise308-105Guangzhou) at the beginning of 2007, to reach 300 second, third, and fourth tier cities in remoteregions, would involve business partnerships with companies that already had a foothold in thosecities and could provide local knowledge and local service. Large strategic partners were also criticalin China, especially with the central and local governments; the executive for strategic partnerships,Liu Bo, came to IBM after having founded and headed Red Flag Linux and later served as VP ofMicrosoft China, thus bringing a wealth of connections.Relationships with channel partners could be complex, not only because projects had differingrequirements but also because of local political issues. Managers stressed the need to make a habit ofcollaboration and to have sufficient flexibility to play a variety of roles depending on circumstance.In Russia, there were instances in which a major government entity would want a Russian companyas the prime contractor, even though the domestic company lacked relevant experience; IBM couldbring its global experience to bear as a subcontractor. In other instances, IBM would include businesspartners as subcontractors instead of increasing the size of its delivery organization, solidifying thepartner relationship by giving them the business.IBM had long focused on technology education, e.g., at colleges and universities, which wouldhelp ensure technical competence for both future employee and in partner organizations. In emergingmarkets, IBM’s role in educating business partners and raising standards was more especiallyimportant, and not just in technology but also in business practices, and particularly for small andmid-sized business partners. In Egypt, the country general manager dedicated a staff member towork with small resellers, to make sure that they had the right structure, skills, tactics to deliver toIBM standards; he put personal time into this as well. IBM Egypt offered role-playing courses thatincluded how to speak to customers. Partners were also given customer leads.Small and mid-sized businesses (SMB) were increasingly viewed by IBM as an important target.Not only were they business partners in strategic regions and even potential customers, but theywere a focus of government economic development efforts. By training SMBs and improving theirbusiness practices, IBM could show, as a country general manager put it, “This is the way for me tosay that I’m not just coming and taking money as some Western, some American company, and that’sit. We develop the skills of the market. I am part of this project to contribute to the country’s agenda– to develop the high-tech element of the national agenda.†In 2006, IBM decided to help the SMBcommunity in a philanthropic partnership with the International Finance Corporation of the WorldBank to develop of a Web portal with a range of business tools and resources. It was launched inIndia and South Africa in 2007 with content provided by local partners like ICICI Bank in India.Often, NGOs would serve as intermediaries to introduce the SMB toolkit to the market.Technology and InnovationIBM’s classic emphasis on innovation captured in the famous injunction “Think†and theThinkPad name on IBM’s (now Lenovo’s) laptop computers, was ratcheted up in recent years, wellbeyond research and development labs, which remained significant and a competitive advantage,especially if lab developments could be transferred quickly to customers for IBM services. IBMoperated 61 technology research and development laboratories in 15 countries, including majorresearch centers in the U.S., China, Israel, Switzerland, Japan, and India, with development orapplication centers elsewhere. Since 1993, IBM had registered more U.S. patents than any othercompany in the world.Still, with the emergence of the Internet in the late 1990s and the opening of the World Wide Webin 1993, IBM was perceived by some as losing the innovation edge, the way some saw it had missedthe move to client-server computing in the 1980s. But IBM was agile and adaptive. IBM embraced5This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.For the exclusive use of I. Grant308-105stIBM in the 21 Century: The Coming of the Globally Integrated EnterpriseLinux (photos of Linus Torvald could be found in offices in Brazil and elsewhere) and open sourcecomputing; in 2005, 500 IBM software patents were made available, free, to anyone working on opensource projects. IBM moved functions to the Web. It built SOA – service-oriented architecture — thatcan integrate IBM hardware & software platforms to give customer an integrated system. (“Wejumped all over that in a New York minute,†executive vice president of technology and innovationNick Donofrio said). And IBM became a leader in machine-independent “on demand†computing.IBM also made plans to introduce a new academic discipline, akin to its work in establishingcomputer science, called service science management and engineering (SSME). In 2005 IBM began towork with the Ministry of Education in China, responsible for over 1000 universities to deploy theSSME curriculum first in China, together with 40-50 Chinese universities; the director of the IBMChina Research Lab and several senior researchers taught SSME courses at Peking University andTsinghua University.IBM wanted innovation to come from everywhere, inside and outside the company. IBM started aGlobal Innovation Outlook (GIO) research effort involving a hundred internal and external experts.“The whole purpose is to torture ourselves on each of our lines of business. What’s happening to it?Is it changing? What are the fundamental underlying technologies? Where are they going?†Donofriosaid. Donofrio credited senior vice president for strategy, Bruce Herald, with forging strongrelationship with venture capitalist, saying “Ten years ago, we were void of VCs. Now, they all loveus, we know them all, we work with them to buy their companies, we help their companies, we selloff inventions we can’t commercialize within IBM. Because we don’t know everything.â€IBM defined innovation to include processes as well as products, and anyone could play.Employees could submit ideas and engage in dialogue about them through ThinkPlace, a site on theIBM intranet. The discussion eventually extended much further. In July 2006, IBM convened anInnovation Jam, billed as the “largest on-line brainstorming session ever.†Participants included IBMemployees and their family, educational institutions and business partners, as well as clients fromnearly 70 companies. The jam took place over two 72-hour sessions, involved 150,000 people in 104countries, and resulted in 46,000 innovation ideas. In November 2006, Palmisano announced that thecompany would invest $100 billion in initiatives resulting from the jam, ranging from healthcare andenvironment to traffic and social utility projects, and it would emphasize virtual worlds, socialnetworking, and other recent developments.Palmisano said: “We must be ahead of strategic shifts. We can’t miss a cycle and catch up. Weannounced a new platform, the on demand network, at the Museum of Natural History, in October2002. People thought IBM was crazy when we announced it. Now IBM and Google are workingtogether. They picked IBM as the only one with the right technology to be their partner.†In October2007, IBM announced a partnership with Google for a cloud computing initiative (cloud computingwas an offshoot of grid computing that could harness the power of multiple unrelated computersthrough the internet); the initiative would eventually donate 4000 computers to universities, fromwhich students and researchers would have the resources needed to not only develop knowledge ofparallel computing, an emerging industry, but create new and open software applications, rangingfrom data mining and social networking to climate modeling and gene sequencing.To decrease lag time between technology innovation and customer orders, IBM sought way todemonstrate the potential for innovation to drive new solutions. Innovation Centers werestrategically-located places that showcased new possibilities, running futuristic prototypes forvarious industries, such as the Innovation Center on the first floor of the China Technology Lab insuburban Beijing. An Innovation Center in Barcelona, Spain, focused on banks of the future. Becausethe realities of banking were different in Latin America (e.g., large population with no access totechnology), an Innovation Center for financial services was established in Brazil, featuring solutions6This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.For the exclusive use of I. GrantstIBM in the 21 Century: The Coming of the Globally Integrated Enterprise308-105such as payment through cell phones, or a system based on images from bank’s digital cameras formanaging large queues so that a bank could attend to a customer in 15 minutes, as required by a newBrazilian banking law. In addition, IBM also demonstrated new technology through public-facingprojects contributing solutions to societal problems, such as scientific research on disease or K-12public education, which also reflected IBM values.In IBM’s strategic planning process, the lines of business examined technology trends andresponded. To think across the businesses, there were three global councils consisting of a crosssection of top leaders, for technology, strategy, and operations to help ensure that there was a flow, astechnology became part of strategy, and strategy was implemented. Integration was among IBM’sbiggest challenges.Management by Flying AroundWhen Sam Palmisano became CEO, he saw the company’s fortunes tied to the reality ofglobalization and historic changes in technology. Web 2.0 moved more applications directly to theWeb, and open standards-based computing was more prevalent, making it harder for companies tolock in customers to their standard. The Internet was making the world smaller and more connected,and freer trade meant that IBM customers crossed borders in numerous ways. Emerging nationswere not only sources of market growth but also had a skilled population and were major producersof IT talent. These changes stimulated Palmisano to define a new concept of the corporation: that itmust become a globally-integrated enterprise (GIE).Trade liberalization, open source software, and a freer movement of people across nations werethe main themes on the IBM public policy agenda in every country, coordinated by governmentrelations staffs worldwide, and echoed in Palmisano’s speeches as well presentation by IBM leaderseverywhere. Palmisano told the world that IBM would make location decisions based not only oncosts and the availability of talent but also on the openness of the environment.Palmisano spent about half his time externally focused. He was attuned to the external world,having started at IBM in sales and service, a market-facing job where the laboratory was thecustomer’s office. His leadership was seasoned by postings in Japan, eventually assuming a top postin the Asia-Pacific region, which, he said, changed his perspective: If you live and work in alanguage that’s not your native tongue, you learn a lot. I built relationships throughout Asia. Thatmakes a difference. Our big strategic deals in Asia are all a result of personal relationships, some ofwhich I established when I was there. You can’t be transactional, Asia is relational. They want toknow your company is sustainable, will be there in a hundred years, is committed to the society – notjust selling PCs in stores.†Thus, Palmisano spent a great deal of time talking with governmentofficials about public policy and societal issues, especially in the developing world, combined withtown hall meetings with IBMers in selected areas, judiciously-chosen speeches and occasional mealswith major customers, such as a lunch in São Paolo with a few leading bank CEOs and Latin Americageneral manager Rogerio Oliveira before addressing a major conference on innovation. Jon Iwataobserved, “He is invited to talk with political leaders in a different way than in the past. It used to beabout IBM investing in their country or as an employer. The discussion now is about nationalcompetitiveness – what will create jobs – policies on education, infrastructure, the environment.â€In a typical week in the fall of 2007, he met with the Chancellor of Germany in Berlin and returnedto New York to announce the initiative with Google to train future computer scientists. A yearearlier, in November 2006, Palmisano stood with high-ranking officials in Beijing, China: to makethree important announcements that signaled IBM’s future directions; first, with the Chinese7This document is authorized for use only by Irene Grant in GB600 Leadership Strategies for a Changing Worldtaught by Kaplan University from June 2012 to June 2017.1. A brief summary of the case.2. What global forces drove IBM to become a globally-integrated enterprise?3. How has IBM adapted thus far? Have they been successful?4.?What skills should global leaders have?5. If you were Jon Iwata and John Kelly, what recommendations would you make to Sam Palmisano? How would youimplement them?