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IBM's Turnaround and its New Business Model

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Case Details:

Case Code : BSTR107
Case Length : 22 Pages
Period : 1993 - 2004
Organization : IBM Inc.
Pub Date : 2004
Teaching Note :Not Available
Countries : USA
Industry : Information Industry

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Today, the agenda for IBM is dominated by this once-in-a-lifetime opportunity to separate from the pack, to stand apart, and to lead. That's about more than our marketplace performance. We think leaders are expected to lead on multiple dimensions. That means leadership in technology, leadership in imagining how business and society can be changed, and certainly leadership in crafting the public policy frameworks required for a networked world."1

- Gerstner Summing up his Vision for IBM in April 2001.


In 1993, International Business Machines (IBM), a global leader in the IT industry was in deep financial trouble. The company had reported a net loss of $8.1 billion (bn), the largest ever in the history of IT industry.

Many analysts wrote off IBM as dead. The authors of the book Computer Wars wrote that IBM's prospects for survival were very bleak. Larry Ellison, the CEO of IBM's competitor - Oracle Corporation said, "IBM? We don't even think about those guys anymore. They're not dead, but they're irrelevant." 2

In what was termed as the most remarkable turnaround of any company ever, ten years down the line in the fiscal 2003, IBM reported a net income of $7.58 bn on revenues of $89.13 bn.

(Refer Exhibit I and II). During the period 1994-2003, the share price of IBM shot up by nearly 700% (Refer Exhibit III).

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Under the leadership of IBM's former CEO - Louis V. Gerstner Jr. (Gerstner), IBM not only turned around but, was able to significantly boost its financial performance.

IBM was transformed from a company that primarily manufactured mainframes to a company that offered complete IT solutions. The company changed its focus from being product centric to being customer-centric. In March 2002, Sam Palmisano (Palmisano) became the new CEO of IBM.

He faced several challenges, the primary one being boosting the revenues and profitability of the company.

Amidst fierce competition in the industry, reduced corporate spending on IT products & services and economic slowdown in the US, analysts raised doubts about the long-term sustainability of IBM's new 'services heavy' business model.

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1] Press Release "L.V. Gerstner, Jr. 2001 Annual Meeting,", April 24, 2001.

2] "Lou Gerstner's Turnaround Tales at IBM,", December 18, 2002.


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