consultant. Somewhere in the middle came the low margin business of PCs. Sometimes it seems as though the only constant throughout this journey has been the IBM brand.
In a sense, IBM is a hard brand in a soft world: known for desktop boxes full of microchips, but offering distinctly softer services like consultancy, implementation, systems analysis and software. And with the recent sale of its PC manufacturing unit to Chinese manufacturer Lenovo, the company is softer still.
As the structure of the IT value chain has shifted from manufacture and assembly to service and consultancy; so has IBM. The decision to ditch the PC operation is really just the latest symptom of this transition: with two earlier milestones being the sale of IBM's printer arm and the acquisition of PwC Consulting.
Of IBM's five divisions, only one is directly in the business of hardware manufacture. In its 2004 fourth-quarter results, revenues within the services unit (the largest division) increased 10 percent, software revenues rose 18 percent, but hardware revenues only rose 1 percent. With the PC business sold, the remaining part of the hardware business will comprise servers, mainframes and large-scale storage systems.
IBM's operational focus may be changing: but the needs that its brand addresses are not. When early computers were manufactured, they were not the mass-produced desktops or laptops of today. Early manufacture was bespoke and depended upon highly-skilled labor for installation, operation and maintenance. The decision to deploy a computer was a strategic one on the part of a client, requiring complex systems analysis to interface with other previously manually-operated parts of the business.
In its early days, the client need to which IBM responded was not a manufacturing one, nor was it about the provision of hardware. Instead, IBM's core product-in the most abstract sense-was about using technology and clever thinking to enhance business processes and operations. Sure, IBM answered these problems with computers, but it also answered the problems with people: as it still does today.
IBM's enormous R&D investment, its software development, and its patent library have ensured that it has stayed ahead in the intellectual property and skilled labor end of the IT industry. The PC manufacturing business had begun to look like an increasingly anachronistic accident of history. And without its PC division, IBM is returning to the roots of its brand. From a corporate perspective, the narrowing focus of the IBM business is a sign of the company's commitment to concentrating on key areas where valuable returns can be achieved. It also makes for a simpler brand message. CEO Sam Palmisano explained in news reports in January 2005: "IBM is well positioned to continue our mission of bringing together the best insight, expertise and technologies to help our clients transform their businesses."
Despite the problems with PC manufacture today, there's no doubt that the PC is what made IBM famous among the general public. For many, the first PC we saw bore the IBM name, and if it didn't, we certainly talked about "IBM compatibles" before "PC" became the generic descriptor. In July 2004, IBM sold its 100 millionth PC.
Unlike IBM's printer business (now known as Lexmark), the PC operation will retain the IBM brand under license. For many people, the IBM brand will always be associated with hardware. But so long as the company doesn't let this cloud its vision and is clear about where it wants to go, it can leverage its heritage as an important differentiator for its brand. A further advantage of this deal is that it enables the company to keep its brand name in front of consumers while making its own revenue from invisible services: analysis, support, project management and implementation.
So what about Lenovo? The company (which recently changed its name from Legend) is already one of the world's largest PC manufacturers. As a large operation based in China with access to large economies of scale and low-cost labor, Lenovo is well placed to take a cost-leadership positioning at home and abroad.
But the addition of the IBM brand provides Lenovo with the luxury of being able to differentiate by other means. With the IBM brand, Lenovo can introduce elements of service and industry leadership, but without incurring the costs of establishing IBM's high-value skilled-labor operation.
As the PC market becomes increasingly commoditized (with desktops becoming more indistinguishable and more interchangeable), manufacturers are faced with three choices: do battle in a global price war or differentiate, either by augmenting base products with other services or bundling the base product within a broader package of services.
The halo effect of the IBM brand allows Lenovo a broader range of options while its existing operations in China allow it to keep costs down. Thanks to IBM, Lenovo can have its cake and eat it.
Lenovo paid US$ 650 million cash and $ 600 million in shares in the IBM transaction. Much of this value clearly stems from the IBM brand (both removing it as a competitor and acquiring it), rather than its tangible assets (that is, the equipment and existing operations).
The IBM brand brings kudos to Lenovo. It removes a barrier to Lenovo's products-particularly outside of China. Lenovo now seems more reliable, more trustworthy. Even to customers who are fully aware that the product is no longer "made" by IBM, a stamp of approval from such a highly respected company means a lot in any market.
But the structure of the deal with IBM respects the fact that a brand is about much more than the badge on the front of the box. It is significant that both companies have announced a commitment to ongoing operational cooperation: not merely in terms of IBM distributing Lenovo products, but each company acting as preferred partner to the other. As part of the agreement both companies have committed to supporting each other. Lenovo with low-cost products to complement IBM's high-end servers and mainframes; IBM with customer relationships, service and support. An ongoing association between the two companies will bring fresh markets and new customer relationships to be leveraged.
In last week's article, I wrote that the compelling logic of Google's move into hardware seems to indicate that the distinction between hardware and software is of diminishing significance. And it seems almost paradoxical that IBM is moving back from the hardware space while another giant of the IT sector, Google, is taking steps toward it. But a closer look reveals that what we are witnessing is the IT industry growing up: and precisely because the hardware/software dichotomy is less significant, other brand characteristics relating to customer segment, customer value and market positioning have become more important.
In the case of IBM, a high-value brand-and a highly skilled business-has been the continuing theme throughout the years of transition regardless of whether hardware or software is involved. For Lenovo, on the other hand, a successful mass-market operator has been able to achieve economies of scale in a commoditized market. Where both companies overlap, each lends credence to the other: seemingly a real (and rare) case of complementary cooperation both as businesses and brands.