You gotta love the revenue growth in companies like Apple and Google.  From 2000 to 2010 Apple revenues jumped from $8B to $65B.  Google grew from nothing to $29B.  But for some organizations, amidst market shifts, simply maintaining revenues is an enormous challenge. 

In a dynamic world, many companies are losing revenues to new competitors who seem on a suicide mission to destroy industry profitability!  In this situation, the ability to grow takes on an entirely different flavor.  As “core” markets retract (in revenues or profits,) can the company find a way to enter new markets in order to maintain revenues – and possibly grow profits? For many organizations, facing radical market shifts, moving from no-growth, declining profit markets into higher growth, better profit markets is a huge challenge.

Recall that IBM once completely dominated the computer industry.  An IBM skunk works program in Florida is credited for creating the modern day personal computer – and because of the team’s decision to  use external componentry (an IBM heresy at the time) creating Microsoft.  As the market shifted toward these smaller computers, IBM focused on defending its traditional mainframe base, eschewing PC sales entirely. By the 1990s IBM was almost bankrupt! In trying to preserve its old, “core,” mainframe business IBM completely missed the market shift and waited until its customers started disappearing before taking action.  But by then new competitors had claimed the new market!

In came an outsider, Louis Gerstner, who saw the trend toward far greater user of external services by people in information technology.  He pushed IBM from being a “hardware” company to an “IT services” provider (overly simplified explanation, to be sure) and IBM roared back as a tremendous turnaround success story.

But, what would be next?  As Mr. Gerstner left IBM the company’s “core” market was in for another huge upheaval.  Vast armies of IT consultants had been created in other companies, such as Electronic Data Systems (EDS), Computer Sciences Corporation (CSC) and audit firms such as Anderson (now named Accenture) Coopers & Lybrand and Deloitte & Touche.  This created rampant competition and margin pressures from so much capacity. 

Simultaneously, the emergence of similar armies, often even more highly trained, of consultants in India at companies such as Tata Consultancy Services (TCS) and Infosys – at dramatically lower cost and using development standards such as the Capability Maturity Model – was further transforming the landscape of service providers. More and more services contracts were going to these new competitors in foreign countries at prices a fraction of historical rates.  Domestic margins were tanking!

As IT integration and services lost its margin several big competitors began paying enormous premiums to buy customer computer shops, completely taking them over customer via a new approach called “outsourcing” – a solution offering that nearly bankrupted EDS due to the razor thin margins.  The market IBM entered to save itself, and make Mr. Gerstner famous, was no longer capable of keeping IBM a profitably growing concern.

In 2002 it was by no means clear whether IBM would remain successful, or end up again in dire straights.  But, as detailed in Fortune’s CNNMoney web site, “IBM’s Sam Palmisano: A Super Second Act” things haven’t gone too badly for IBM this decade as profits have grown 4 fold.

Rather than simply trying to do more of what Mr. Gerstner did, Mr. Palmisano lead IBM into developing a new scenario of the future, leading to the birth of the Smarter Planet program.  Not dissimilar from how Steve Jobs used Apple’s scenario planning to push the company from Macs into new growth product markets, the scenario planning such as Smarter Planet opened many doors for new business opportunities at IBM.  The result has been a dramatic increase (well more than doubling) its more profitable software sales, as well as development of new solutions for everything from global banking to transportation management, government systems and a whole lot more.  New solutions driven by the desire to fulfill the future scenario  – and solutions that are considerably more profitable than the gladiator war that had become IT services.

Ibm_pretax_income_chart

Using scenario planning to create White Space where employees can develop new solutions is a hallmark of successful companies.  By redirecting resources away from defensive activities, new solutions can be created before the proverbial roof collapses in the declining margin business. By spending money on new product development, and new market development, new revenues are generated where there is more growth – and less competition.  And that allows the company to shift with the marketplace, rather than be stuck in a bad business when it’s way too late to shift — because new competitors have already captured the new markets. 

(For a White Space primer, check out the InnovationManagement.com article “White Space Mapping – Seeing the Future Beyond the Core.”)

When markets shift the first sign is intense competition, driving down margins.  Too many leaders decide to “hunker down” and put all resources into defending the old business.  Costs are slashed and all spending is put into competitive warfare.  This, inevitably, leads to ugly results, because such behavior ignores the market shift.  Being Smarter means recognizing the market shift, and changing investments – putting more money into new projects directed at finding new revenues, and most often higher rates of return.

Not all companies are growing like Apple, Google, Facebook or Groupon.  But that doesn’t mean they aren’t on the road to growth by shifting their revenues into new markets – like IBM.  What ties these companies together is their use of scenario planning to focus on the future, rather than relying on traditional planning systems firmly tied to the past. And investing in White Space so the company can find new markets, and new solutions, before competition eliminates the margin altogether.

If Mr. Palmisano is soon to leave IBM, as the article indicates is likely, we can surely hope the Board will seek out a replacement who is equally willing to make the right investments.  Keeping the company pushing forward by developing future scenarios, and creating solutions that fulfill them. 

 

 

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