BM remains an American-based, not an Indian- based company, as a recent New York Times article gave the impression to some readers when it claimed that IBM employs more people in India than in America.
IBM may have outsourced a great deal of its operations around the world as many other large companies have done, but its center of gravity remains in America. IBM was founded in the U.S. 106 years ago, and its headquarters and major research facilities remain to the U.S.
But IBM is an American company in decline, as evidenced by the long string of drops in its sales.
IBM’s Key Financial Metrics 10/6/2017
IBM’s Key Financial Metrics 1/17/2017
The root cause of IBM’s long decline is the failure to make a timely transition from the traditional mature declining business segments to emerging fast growing segments.
To be fair, IBM’s revenues from “strategic imperatives” (cloud, Watson and analytics, security, social and mobile technologies) have been rising in recent years. But IBM is late in this space, which is already crowded with heavyweights like Amazon, Microsoft and Google.
Apparently, IBM’s leadership has been spending too much time to revive its traditional business rather than to renew its pioneering drive that made it a great technology leader back in the old days.
That raises a simple question: why keeping the old business around, anyway? Because these businesses are outsourced at a lower cost to India and other locations.
But that has been a trap. Outsourcing hasn’t helped IBM improve its operating margins, which continue to slide — see tables.
Besides, outsourcing leaves management with fewer resources to plow into new business initiatives. Hence, the slow speed of transition from traditional business segments to new business segments.
Wall Street has taken notice, sending IBM’s shares south as the rest of the technology shares have been soaring. Over the last five years, IBM’s shares have lost close to 30% of their value, as the Powershares QQQ have gained 121.26% — see table.
IBM versus S&P 500
*It doesn’t include dividends
Source: Finance.yahoo.com 10/18/16
Outsourcing provides certain competitive advantages to early-movers – that is, to companies that adopt it first — but it isn’t proprietary. Others can adopt it, and therefore, isn’t a source of sustainable competitive advantage.
Then there’s corporate complacency whereby leadership of these companies fails to renew the pioneering drive that characterizes market leaders.
That’s what eventually happened in the PC industry, to companies like the old HP.
Outsourcing was supposed to cut costs, limit corporate size, and improve operating margins. But instead it ended up giving HP’s advantage away to Asian PC and printer makers, piece-by-piece, failing to re-ignite sales growth.
Meanwhile, HP failed to revive its old pioneer drive that made it a great technology company in the first place.
The rest is history, which IBM will be destined to repeat. Unless it scales back on its outsourcing activities in India and other locations.