IBM Growth Markets - Market Expansion Strategy, Branches in Secondary Cities

IBM is focusing on emerging markets and other countries in Africa, Asia, Latin America and Europe for future growth and it’s Growth Markets Unit which focuses on these 152 countries is driving growth (Revenue & Profit) in the recent quarters, is expected to continue to grow and contribute US$ 17 billion in incremental revenues, 30% of IBM revenues, outpace major markets growth by 8 points and drive margin expansion by 2015 (IBM 2015 Roadmap Objectives). In order to successfully achieve these 2015 objectives, IBM needs to expand its market presence in the Growth Markets which means opening new branch offices not only in the metropolitan cities, capital cities and big cities but also opening branches in the secondary cities or tier 2 cities in emerging market countries. IBM expects mature markets that consist of countries like US, UK, France, Germany, Japan, Canada, etc are not going faster enough as IT spending has reached maturity levels when compared to emerging markets and other countries where IT spending by both governments and industries is on the rise in recent years. IBM has been aggressively opening branches in the Growth markets and in 2011 alone 92 branches (31 face to face and 61 Virtual branches) in 13 countries were opened by the company and most of them in the secondary and tier 2 cities in emerging and BRIC countries (Brazil, Russia, India & China). IBM had been present in most of the countries for many decades but the company is expanding into new cities and towns in these countries as there has been increase in IT spending by the governments to automate systems and use IT to provide good governance and service to the citizens and Small Medium Businesses and Large Industries increased IT adoption.

IBM Branch set up involves setting up a physical office with office staff who will be the sales team, client support staff and the Branch staff also collaborate with IBM’s business partners, who are responsible for educating the public to use IBM products.  IBM branch opening strategy is more targeted to open branches in secondary and tier 2 cities where there is significant educated population with IT skills, Universities and Other higher centers of Learning, Growing Cities where Governments are investing in terms of infrastructure like roads, power, Special Economic Zones, etc, internet and telecommunications networks, presence of industries that are large, medium and small, and favorable government policies. Another major reason for IBM targeting the secondary and tier 2 cities is IBM strategy to support the small and medium-sized enterprises/businesses (SMB), considered one of the fastest growing segments and where IBM is seeing strong demand and potential growth in future. IBM SMB strategy is to offer innovative and advanced that were once exclusive for larger companies with larger budgets to small and medium businesses at affordable prices and easy to use. IBM is looking to offer various IT services in the secondary cities that are focused towards telecom, banking, public utilities, etc which will help the citizens, industry and governments in these regions to take advantage of the IT Infrastructure and services for their benefits. IBM is closely working with governments and public sector undertakings and is developing innovative products and service offerings that help them in providing good governance and citizen services easily. IBM Smarter Cities is one such initiative which is seeing increased adoption by many governments across the globe. Smarter Cities projects are running both in mature markets (1900 Projects) and growth markets (500 projects).

IBM is continuing its aggressive branch expansion strategy in 2012 and in first quarter of 2012 opened 76 new branches (33 face to face & 43 virtual branches). The branches opened highlight the fact that IBM is focused on improving its geographical foot print in secondary and tier 2 cities in India (15 branches), China (11 branches), Brazil ( 8 branches), Mexico (4 branches) Russia (3), Korea (6), and ASEAN countries like Indonesia, Malaysia (4), Thailand, Philippines in 2011 and 2012. IBM also opened branches in Middle East and Africa in countries like Angola, Senegal, Tanzania, Mauritius and Qatar. Growth markets being critical component of future growth for IBM, the company is hoping to expand its geographical footprint beyond the large and metropolitan cities will help in strengthening relationships with existing clients and partners, acquire new clients and provide innovative and affordable solutions and services in areas such as information management, IT security, cloud computing and business analytics. The branches also closely work with IBM business and training partners that educate consumers about various IBM offerings and also train local talent in terms of technical skills and certifications who can play critical role in further pushing the IBM products and service offerings to the customers. Geographic Market expansion is not only branch opening in secondary cities but also involves IBM commitment in the local city or town development by investing in people and infrastructure and working closely with governments, businesses and educational institutions.

Case Study: IBM Growth Markets Strategy 2015 – Emerging Markets Strategic focus

IBM changed its corporate structure in 2008 by dividing its markets into Growth and Mature Markets moving away from the earlier geography based segmentation and this change is necessitated by the fact that emerging market countries have different Information Technology (IT) needs and usually IT spending grows more than twice as quickly as those countries’ gross domestic product. IBM Growth Markets Unit headquartered in Shanghai, China includes 152 emerging countries spread across Asia-Pacific, central and eastern Europe, Latin America, Middle East and Africa. China, Brazil, India, Russia (BRIC Countries) are the major countries that contribute significant revenues (40% of Unit Revenues) in this unit. IBM Growth markets make up 22% of IBM's revenue in 2011, and the company expects to increase that to 30% by 2015 as per its roadmap. In 2011, Growth Markets Unit revenue increased 19%, contributed 11% incremental revenues at constant currency compared to 2010, around 40 countries grew at double digits at constant currency and nearly 60% of growth markets revenues came from outside the BRIC countries. IBM's success in growth markets is essential part of the company's five-year strategy to add $20 billion in new revenue by 2015. IBM is also investing more than US$1 billion in growth markets for developing the business partners and also spending heavily on the marketing initiatives which are mostly co-marketing efforts with business partners to increase revenues.

IBM is making significant investments in more than 100 emerging countries in terms of building critical infrastructure; developing strategic industries and responding to massive demographic shifts, such as rapid urbanization and these emerging countries are expected to drive more than 60% of global GDP growth by 2015. Virginia Rometty as soon as she took over as IBM CEO in January 2012 appointed James Bramante as senior vice president in charge of Growth Markets Unit which highlights the importance of this unit in its 2015 strategy. According to IBM First Quarter FY 2012 results, Revenues from the growth markets increased 9% (up 9%, adjusting for currency) and 40 countries had double digit revenue growth at constant currency. Revenues in the BRIC countries - Brazil, Russia, India and China - increased 10% (up 11%, adjusting for currency). The Growth Markets are driving growth for IBM as mature markets are facing economic slowdown and the European Sovereign debt crisis is also having significant impact. To further enhance the growth markets revenues IBM is aggressively opening branch offices beyond the large cities and BRIC countries particularly in African countries.

IBM had been investing in BRIC countries for past many years and its investments in these countries and other emerging nations even during the Global Financial Crisis 2008 has been delivering consistent revenues and is fueling growth for the company.  IBM had set up R&D facilities in India, Brazil and China and these facilities are capable of innovation in the fields of natural resources technology, transportation and logistics, infrastructure and clean technology and also have significant number of employees working in these geographies. IBM is also working closely with Governments in BRIC and other emerging markets in range of projects covering infrastructure, energy, utilities, etc. The BRIC revenues are significantly contributing to the company’s overall profitability. IBM is investing heavily in Africa and it aims to increase its presence from 24 countries to 35 countries by 2015. In Africa, IBM is investing in areas like financial services and is working with five leading Kenyan banks on infrastructure projects and helping Safaricom, through a partnership with Vodafone; provide its M-PESA mobile money service to more than 15 million customers. Bharti Airtel is working with IBM to deliver next-generation mobile phone service across 16 African countries, from Ghana to Tanzania offering voice, data and digital services.

Growth Markets are essential part of 2015 road map and with mature markets slowing down, these markets have been driving both revenue and profitability growth since past few years and are expected to continue to fuel revenues in future too. But the current macro economic volatility due to European Sovereign Debt crisis is a major concern that is having significant affect on BRIC countries and other emerging countries along with US, Japan, UK and other developed countries. There has been cutting down of growth estimates for countries, reduce in spending increase in austerity and there has been rise in inflation, interest rates and fall in incomes for people. But IBM is well invested and prepared for facing adverse macro economic volatility and is expecting to keep up its growth particularly with boost from emerging countries IT Spending. IBM will maintain its 2015 financial roadmap with focus on four growth markets of analytics, cloud computing, emerging markets and "smarter planet" and will constantly shift to higher value operations, as well as drive new markets around new customers. 

IBM 2015 Road Map continues the drive to higher value—with the expectation of at least $20 operating (non-GAAP) EPS* in 2015.Key objectives for 2015:

Þ      Software becomes about half of segment profit Þ      Growth markets approach 30 percent of geographic revenue Þ      Generate $8 billion in productivity through enterprise transformation Þ      $70 billion of capital returned to shareholders Þ      $20 billion in spending on acquisitions * Excludes acquisition related and non operating retirement related charges

Source: IBM Annual Report 2011

Discussion Points:

1. What will be the affect of European Sovereign Debt Crisis on IBM revenues?
2. Will IBM be able to keep up its Growth Markets revenues and profits?
3. With BRIC countries slowing down what will be the affect on IBM growth?

Blue Ocean Strategy – Amazon Kindle Fire creating its own market

Kindle Fire is multi-touch screen tablet version of Amazon’s most famous e-book reader Kindle. Kindle Fire is also a classic example of Blue Ocean Strategy adoption by Amazon and Blue Ocean Strategy is creating uncontested market space and defining own set of boundaries to avoid competing with others. Kindle Fire is a 7-inch multi-touch display with IPS technology, runs on Google's Android operating system, with a price tag of US$199 and have access to the Amazon Appstore and digital content like streaming movies, TV shows, and e-books. Compared to the market leader Apple iPad, Kindle Fire is a sort of low end device as it lacks camera, GPS, storage capability, high end graphical display, powerful chip, etc. Amazon’s Blue Ocean Strategy is that it tries to define its own market by targeting the non-iPad users, users who cannot afford iPad, users looking for other Android based tablets and making the competition irrelevant by making the device as a media consumption device empowered by Amazon’s media platform that has huge content like music, movies, videos, books, etc. Kindle Fire differentiates itself from iPad and other tablet devices by focusing not on high end features but with simple and focused features that offers its users a unique experience and affordability. Also Kindle Fire is light weight, durable, good battery life and easy to use.

Amazon.com offers Kindle Fire at a lower price as it eliminated many costly feature like the camera, 3G, GPS, Bluetooth, etc but it offered its customers other features like its own developed web browser Silk that serves the web pages quickly using the network speed and computing power of the Amazon Elastic Compute Cloud (Amazon EC2) and the datacenters that host Amazon EC2 are run by Amazon. Low storage is compensated as the users can store their data on the Amazon EC2 Cloud, and Amazon has huge content like books, music, movies, videos, TV Shows, etc that users can easily download and play it on the device. Kindle Fire is being sold by Amazon at close to its cost and at a slight loss but it is hoping to make money through selling the content that includes 19 million songs, books, movies, applications, etc. Since Kindle fire is closely tied to the Amazon Ecosystem like Amazon.com store, cloud, content and it will be hugely beneficial to the marketers and content providers to sell their offerings easily, target customers with specific offerings, to interact and understand the consumer behavior through this. Kindle Fire also helps in increasing its core business which is e-retailing as the device provides an easy access to the store where customers can buy and sell anything and everything.

According to IDC, Amazon sold about 4.7 million units of Kindle Fire during the fourth quarter of 2011 and the device was shipped to customers from November 15, 2011.  The device has boosted Amazon revenues in the first quarter of 2012 and also helped the company to double its market share of the Android based tablets market and capture more than half of the US market for Android based tablets. Kindle Fire is equipped with Web surfing, e-reading and video streaming activities that most consumers want and Amazon hopes that the device sales will help to increase digital media sales to eventually contribute a larger percentage of revenues of Amazon total revenues and the device will also helps in connecting and transacting with consumers on various other fronts. According to a study conducted by RBC Capital analyst Ross Sandler of 216 Kindle Owners, Amazon can expect to make $136 per Kindle through the life of the tablet and e-book sales will contribute most of the part. Study also found that 80% of Kindle Fire owners bought an e-book, and 58% bought three or more e-books and Sandler believes that the average Kindle Fire owner will spend $15 per quarter on e-book. Over 60% of Kindle Fire owners bought an app, and almost 50% bought three or more and Sandler believes that Kindle Fire owners will spend $9 per quarter on apps for the life of the device.

Kindle Fire has boosted Amazon revenues in first quarter 2012 and according to the company it remains the best selling, most gifted, and most wished for product on the site. Amazon also announced that in the first quarter 2012, 9 out of 10 of the top sellers on Amazon.com were digital products – Kindle, Kindle books, movies, music and apps and it highlight the importance of Kindle Fire, as it provides Amazon with a device to handle the shift from physical media products, like books, DVDs, video games and CDs, to digital versions of such content. The rise in North America sales of digital content where Kindle Fire is exclusively sold is another testimony of how Kindle Fire is going to drive sales of digital content and ultimately revenues in future. With such positive response Amazon is looking to add more digital content to its inventory and also looking to expand the sale of Kindle Fire in other countries. With more and more tablets being sold in future, Amazon can through its Kindle Fire and huge digital content inventory expects to increase the sales of both the device and content and significantly increase its revenues.

Amazon Kindle Fire - Blue Ocean Strategy – Four Actions Frame Work – ERRC Grid