Apple's Lesson for IBM

Ginni Rometty, currently the senior vice president for sales, marketing, and strategy at IBM (NYSE: IBM  ) , was recently anointed the company's next chief executive. The 30-year veteran will succeed Sam Palmisano, the highly regarded corporate captain who has helmed the century-old company for the past decade.

Aside from being Big Blue's first female chief executive, Rometty is also the first CEO who hasn't risen out of the company's traditional hardware divisions. If you think this is a drawback, think again. Rometty is at the leading edge of a growing trend in the technology industry: deliver customers the entire solution, not just the parts.

It's a lesson learned from Apple (Nasdaq: AAPL  ) , one Rometty is already using to make IBM a better company, and investment, than it is now.

A lesson from Steve
Technology companies aren't about just the technology anymore. Steve Jobs and Apple taught us that. Jobs' focus on delivering products that intuitively, beautifully, and holistically do the total job raised the bar for all technology companies to previously unimagined levels.

IBM got on board with this idea under Palmisano's reign, specifically with the acquisition of PricewaterhouseCoopers' consulting business in 2002. Seen as risky at the time, the acquisition ingeniously broadened IBM's total capabilities by adding a strong business-consulting component to go with its unquestioned technology skills.

By that time, Rometty had long been one of Palmisano's top lieutenants and was instrumental in planning the PwC acquisition and integrating it successfully into the technological and corporate vastness of IBM. Speaking about the PwC buy, Annex Research analyst Bob Djurjevic recently told the Financial Times: "He [Palmisano] stuck his neck out, and it was Ginni that made it work."

Growth through solution convergence
In the hopes of making new markets for themselves and spurring growth, more and more of the legacy technology companies -- immediately recognizable names that aren't exactly burning up the market anymore -- are cottoning on to this very same IBM and Apple strategy of solution convergence. While Apple converges hardware and software in the home, IBM has led the push on the enterprise side. A look at the list of imitators shows you just how successful IBM's total solutions pitch has been:

  • With its purchase of Sun Microsystems, Oracle (Nasdaq: ORCL  ) has moved from software alone into the hardware space as well.
  • Dell (Nasdaq: DELL  ) is making its move beyond hardware manufacturing into IT services. Hewlett-Packard (NYSE: HPQ  ) is doing the same.
  • Previously content to sell the routers and switches that make up a network, Cisco Systems (Nasdaq: CSCO  ) has made a big push over the past few years to begin selling the servers that sit along those networks.

Doing all the right things
Rometty's ascension bodes well for company that, by the measure of its most recent third-quarter earnings, is already doing quite well:

  • Net income rose a healthy 7%, to $3.8 billion.
  • The company's EPS of $3.28 handily beat Wall Street's expectation of $3.22.
  • Gross margin ticked up 1.2% to stand strong at 46.5%, trouncing peer Accenture's 30.6% and Hewlett-Packard's 24.2%.

Total revenue did tick down a bit. The company took in $26.2 billion, down 2% from the previous quarter, a minor blip we won't hold against it. And just as importantly, beyond the numbers everyone usually looks at, the company is also doing all the right things:

  • Companies like Microsoft (Nasdaq: MSFT  ) rely on a few big products or areas that carry the rest of the company, but IBM is vibrant through and through and posted strong numbers across the breadth of its business in the third quarter.
  • An emerging-markets story is a vital component to any company pursuing significant growth, and the company increased revenue in these markets by 19%.
  • IBM also grows through acquisitions. But in contrast to other companies that go for broke and buy big, IBM instead buys midsized companies, making integration easier and minimizing the potential damage any single acquisition can inflict.

Thanks for the memories, Steve
IBM's stock has been on a steady climb since the market bottomed out in 2009, and is currently trading for around $187 per share. With a P/E of 14, it's reasonably priced. The company even pays a small dividend and has raised guidance for the full year to $13.35 per share.

At one point, both Apple and IBM teetered on the edge of irrelevance. In both cases, the companies reimagined themselves and became leaders in their respective spaces by thinking beyond their immediate wheelhouse. Look for Rometty to deliver more of the same. Here's another high-tech company that's perfectly adapted to its time. Read all about it in this free Motley Fool special report.

Fool contributor John Grgurich wrote most of his college papers on a beloved IBM Selectric with a quart of Wite-Out close by, but he owns no shares of any of the companies listed in this column. The Motley Fool owns shares of IBM, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Accenture, Apple, and Microsoft and creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has an absolutely scintillating disclosure policy.


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2011, at 12:50 PM, jvgfool wrote:

    I think you have this backwards. IBM has been the leader in focusing on customers’ needs for years. Apple/Steve Jobs talent was anticipating people’s needs. IBM has always been strong on building relationships. Steve Jobs? Not so much. You’re comparing apples (ha, ha) to oranges. What works for IBM or even Microsoft does not work for Apple, and what works for Apple will not work for IBM/Microsoft. Not everything has to be broken down to Apple’s way of business. Steve Jobs would fail in the services business.

  • Report this Comment On November 16, 2011, at 1:48 PM, Doris411 wrote:

    jvqfool, have you looked at any surveys of customer service/support ratings lately? I don't think you can say Apple fails in services.

    They're just looking at different customers: people instead of businesses. I had an IBM PC years ago, and essentially threw it away because their support was so horrendously bad. I'm sure that if I had spent hundreds of thousands a year on IBM products, I would have had a relationship with my account manager.

    Different focus, that's all.

  • Report this Comment On November 16, 2011, at 6:29 PM, ybnvsfool wrote:

    Not to be too picky, but Lou Gerstner came from outside the IBM hardware divisions as well. Actually Mr Gerstner came from outside the company all together. It was also Mr Gerstner that began the march toward services and software.

    In the 1970's IBM was broken up into seperate operating units because the government felt that giving the customer everything they wanted (hardware, services and software in IBM's case) in one bundle gave IBM a competitive advantage that reached the level of anti-trust.

    So, in reality, it was the US government that taught IBM a lesson about the value of delivering an entire solution to the customer.

  • Report this Comment On November 17, 2011, at 11:53 AM, XMFGrgurich wrote:

    Thanks for the comments, all.

    Yes, everything in the world doesn't have to be attributed to Apple. That angle is probably being overplayed a bit right now, but there are similarities between the two companies' approaches, nonetheless.

    And hey, glad to hear that the U.S. government had something to teach the private sector. Smart government goes hand in glove with a smart private sector.

  • Report this Comment On November 17, 2011, at 11:54 AM, XMFGrgurich wrote:

    Have to have a look into Lou Gerstner, too. Cheers.

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