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Slimming Down for Future Growth

By Mark W. Johnson

Few corporations endure for 100 years, so IBM's centennial should make this year an occasion to learn from what has carried the corporation so far for so long. One of the key lessons lies in how Big Blue has moved into new-growth markets while at the same time exiting businesses it no longer saw as key to the future.

Such moves are often unpopular at first. Back in 2004, when IBM revealed that it was divesting its personal computer unit, the business world was skeptical. After all, the PC and ThinkPad had become IBM's signature products. The decision to shed $11 billion in revenue and transfer 10,000 employees to the then-largely unknown Chinese manufacturer Lenovo was seen by some as an iffy maneuver. When the deal was announced, the smart money picked Dell Computer as "the big winner."

Skip ahead seven years: IBM's investors have no more reason to miss PCs than they did punch cards. Big Blue's stock has doubled since the divestment. Meanwhile the price of shares in the formerly winning Dell has been roughly cut in half. (The Standard & Poor's index of 500 stocks has remained roughly flat since then.)

Conventional wisdom has been to divest what is not core to your business. This makes sense—most of the time. Sometimes it is parts of the core that you most want to divest. For IBM, the computer business gave way to a more ambitious definition of its new core in what Chief Executive Officer Samuel Palmisano calls "high-value businesses." By this, he means solving big problems by selling business analytics software and "smarter planet" solutions. Big Blue now derives more revenue from both its software segment and services segment than it does from hardware.

Read the full article on Bloomberg BusinessWeek

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