Why International Business Machines Corp. (IBM) Needs To Re-invent Itself?

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International Business Machines Corp. (NYSE:IBM) is no longer the poster child it used to be, a streak of year-over-year revenue decline having dealt its sentiments a big blow on the Street. Sales in five of its key segments have been on a decline, further arousing concerns of what the future holds for the tech giant. Given that the bullish angle on the stock is slowly waning, the company needs to re-invent itself if it is to have any chance of reinvigorating its growth prospects.

Tweaking business Model

Despite topping analyst’s estimates, the company’s revenue fell for the 16th straight quarter, for the first three months of the year. Big Blue now faces a long road to growth even as it continues to tweak its business model to focus more on high-growth business ventures.

International Business Machines Corp.(NYSE:IBM) has always been a system company focused on selling hardware as well as operating systems, middleware, and services. Recently it reclassified its financials underscoring the fact that it is planning to reduce its reliance on its legacy business that seems to have matured in terms of growth.

New Areas of Growth

Faced with the threat of losing its edge in the industry, the tech giant has switched its attention to new areas of growth it dubs ‘Strategic Imperatives’. Cloud Computing, big data analytics mobile, and security are the new businesses the company is planning to use, to accelerate growth.

The Tech giant needs to re-invent itself along these new businesses if it is to have a chance of offsetting weaknesses in other areas. Revenues in the company’s legacy businesses such as middleware and mainframes are increasingly slowing, further affirming why it needs to tweak its core business.

Trimming spending and reducing reliance on traditional hardware business is no longer an option. The company is also aggressively exiting low margin business as part of a new plan that seeks to pay more attention to high-growth businesses.

Offsetting Legacy Business Weakness

While it is true International Business Machines Corp. (NYSE:IBM) has a huge chunk of cash that it can use to keep investors happy through payouts, the company cannot rely on this model if it is to remain relevant in the industry. There is no doubt transformation and turnarounds take time. However, given the position IBM finds itself in after years of disappointments, it has no option other than to follow this rout.

Strategic areas led by big data and Cloud have already shown the potential they have in returning International Business Machines Corp.(NYSE:IBM) to revenue growth. The only concern is that revenues from ‘strategic imperatives’ are not growing as fast as they ought to. Slow growth has made it impossible for tech giant to offset weakness in its legacy business whose prospects continue to wane by the day.

Revenues from cloud computing, big data IoT and mobile are up by 37% to $30 billion accounting for a small chunk of revenues generated from the core business. That does not mean the tech giant should shun these new emerging trends and stick to its legacy business.

IoT, Cloud mobile, and cognitive mobile are the future of IT. International Business Machines Corp. (NYSE:IBM) needs to invest more in these new areas of growth as they are expected to shape its prospects in line with the robust transition to the cloud.

Bottom Line

CEO Ginni Rometty has already confirmed that International Business Machines Corp. (NYSE:IBM) is transforming its business as it looks to pay more attention to cognitive solutions and cloud platform. This should be good news for investors as it indicates the company’s willingness to shun traditional core business and pursue new areas of growth that can guarantee long-term shareholder value.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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