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?