IBM's center of gravity

IBM's announcement this week that it would be laying off 10,000 to 13,000 workers seems reflective of the downside of "dynamic specialization" (a concept discussed in the previous post). But there is no stopping it.

"In a sense, I.B.M.'s strategy in moving toward services mirrors the course of the American economy. The company depends less on manufacturing than it did in the heyday of mainframe computers as it moves up the economic ladder to helping corporate customers use information technology," explains the New York Times. "Increasingly, I.B.M. researchers and software programmers are put to work for customers redesigning and automating business tasks like procurement, accounting and customer service."

Big Blue is clearly feeling the heat of competition and price pressure in services from "low-cost rivals like Dell, which is rapidly expanding in services, as well as Indian outsourcing companies like Wipro, Tata Consulting and Infosys. Those competitors operate mostly in the mundane but big part of the services industry, which helps companies run their computer data centers."

To compete, IBM is embracing the global -- as opposed to the old "multi-national" -- model. Work gets done where it can get done most productively. By eliminating administrative layers, the company "lowers the center of gravity," as CEO Sam Palmisano puts it. This enables the company to take some cost out of the equation, mostly in slow-growth European countries in this lastest case, to enhance the bottom line. The question is: Can IBM identify new value-adding services and grow the top line?

"The issue is what if the old-style services decline more rapidly than the new business-transformation services picks up the slack," said Mark D. Stahlman, an analyst at Caris & Company, an investment firm.