Overview: Is IBM recovering or stuck in transition mode?

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Jul. 11 2014, Updated 9:01 a.m. ET

Is IBM recovering?

In 2010, IBM Corp. (IBM) announced, under the leadership of then CEO Sam Palmisano, the “2015 Roadmap.” The plan focused on growth initiatives, increased contribution of software services to the total revenue, strong free cash flow generation, and the target of $20 earnings per share (or EPS). In 2012, CEO Ginni Rometty took the helm. Under her guidance, IBM took various steps to alter its business model to achieve the “2015 Roadmap.”

The previous chart shows IBM’s 2015 Roadmap. The company plans to achieve the Roadmap by following strategic acquisitions, implementing cost cutting measures, and transforming its business model.

Initiatives to drive growth

IBM has taken the following steps to combat declining revenues and falling market shares. It seems to be in the right direction.

• Shift in focus from “hardware” to business analytics and cloud with the investment of $1.2 billion.
• Investment of $1 billion in “Watson,” commercial cognitive computing platform
• Sale of low end server business

Increased adoption of cloud services

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According to the 2013 IBM annual report, 85% of new software is being built while keeping in mind cloud compatibility and 25% of the world’s applications are expected to be available in the “cloud” by 2016. According to the report, 67% of the IBM research work is focused on data, analytics, and cognitive computing. Until fiscal year 2013, IBM has already invested $24 billion to build big data and analytics. There are 500 analytics patents generated every year. The cloud computing space is dominated by Amazon Web services (AMZN), Google (GOOG), and Microsoft’s Azure (MSFT).

Sale of server business

Adhering to its strategy, in January, 2014, IBM announced the sale of its commodity server business to Lenovo for $2.3 billion. Other sales are expected. Layoffs also form a strong part of its strategy to cut costs. It has spent an estimated $1 billion alone in 2013 on employee severance costs.

The declining hardware business, fall in global services revenues, sluggish IT spending, and intense competition contributed to its falling financial performance. IBM lost its market leader position in the server market to HP (HPQ). For the successful transformation of IBM, from the hardware business to a service business, and to gain foothold in the cloud space, the company has adopted the route of acquisitions, investments, and partnerships.

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