Does Watson Know How to Save IBM?

Time for another reinvention.

More than anything else, with the possible exception of supercomputers that can win game shows and chess matches, IBM is famous for reinventing itself. International Business Machines Corp. has sustained decades of B-school case studies, academic research and cocktail-party anecdotes about how companies should respond to the dangers of disruption.

Yet Big Blue now finds itself adrift: its stock price plummeting, its core businesses languishing, and its vision for the future vague and unsatisfying. The company's most recent earnings report was so dire that analysts are talking about a breakup.

What went wrong? It's a question that will spawn plenty more case studies. But one clue is that over the past few years, IBM has become better known for financial engineering than for the technological kind.

For 103 years -- as it evolved from making adding machines to mainframes to PCs to software and services -- IBM has shown an unusual aptitude for overcoming inertia and accepting change. It has typically taken the long view of technological advances. Most important, it has been obsessively attentive to the needs and desires of its paying customers, and dedicated to solving their problems. This approach has helped the company survive the Great Depression, antitrust scrutiny, a brush with bankruptcy, and accelerating change and intensifying competition in the marketplace. It also turned IBM into a globally admired brand.

In the past few years, however, IBM's strategy has been marked by cutting costs and firing workers while increasing share repurchases and dividends, even as its sales growth stalled. From 2004 to 2013, the company spent $92 billion on share repurchases -- but only $27 billion on acquisitions.

This focus on share price over innovation coincided with a major shift in how businesses think about information technology. Many companies no longer need the expensive mainframes and servers IBM has specialized in -- or the consultants required to keep them humming -- when they can offload their computing to the cloud on the cheap.

Although IBM was alert to this shift, it failed to invest in it aggressively, and cloud-computing business now makes up only about 3 percent of its revenue. Virginia Rometty, IBM's chief executive, has vowed to make the company a leader in the field. But with stiff competition and dwindling profit margins, cloud computing is an unlikely candidate to rejuvenate the fortunes of a company with 430,000 employees and a market cap of about $162 billion.

All of which isn't to say that IBM is doomed. Its security, mobile and analytics businesses are growing. It has a promising partnership with Apple to provide mobile services for companies. It still has plenty of cash to invest and a highly skilled workforce.

And then there's Watson, the supercomputer named for an IBM visionary, which is thus far best known for defeating humans at "Jeopardy." IBM plans to invest $1 billion in the technology, which it thinks could revolutionize businesses from medicine to insurance -- helping companies find insights in vast streams of data. It's had a rocky start. But at least the plan has echoes of IBM's ambitious, problem-solving ethos.

The window for corporate reinvention is narrow. And it's especially hard to turn around companies that have experienced an extended stall in growth. IBM has beat such odds in the past. Nowadays, the clock of obsolescence ticks faster than ever.

--Editors: Timothy Lavin, Michael Newman

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net