Lessons learned from Big Blue

Did you hear IBM's getting into the water business?

That"s right, the water business. Specifically, IBM managers are looking to change the way water is managed through digital sensors and computer networks. This is coming from a company that grew up in the era of mainframes and transformed the corporate world with the personal computer. Now it wants to get into the infrastructure-improvement business, including the management of automobile traffic, water, and the power grid, according to a recent Associated Press report.

Business analysts have watched IBM for years, and during the past few decades the corporation saved itself from near collapse by ditching the personal computer and focusing instead on software and services. That basically changed the entire business model from being a manufacturer of millions of widgets (that is, PCs, mainframes, typewriters) to a creator of ideas that made networks of those widgets work better (that is, software and services).

The PC business turned into a commodity business (at least at some level), and others were becoming better at producing those commodities. So they rethought the business and identified demand they could meet. The company has evolved from selling products to selling ideas. IBM reportedly made $1 billion in 2003 alone from licensing its intellectual property.

Much has been written about this transformation--how over the years IBM sold its hardware businesses and, by 2004, had sold its iconic PC business to a Chinese company. Some would say this is a shining example of an old-school company adapting to the new, "service-based" economy.

I see it differently. IBM managers just found customer demand that matched in-house expertise, which in 2002 really started to shift as IBM bought the consulting arm of PriceWaterhouseCoopers. Others had become better at making computers; IBM couldn't compete, so they discovered and met new demand for software, services, and business consulting. The manufacturing didn't stop; it just shifted to other companies. Sure, IBM now wants to offer services in the infrastructure-building business. But some manufacturer out there has to make the stuff--be it network computer enclosures or anything else--to improve the infrastructure and bring the ideas to fruition.

(As an aside, IBM also knows the value of offering a complete package of hardware, software, and services, hence its recent--though failed--attempt at acquiring Sun Microsystems, which would have given IBM market dominance in the computer server business.)

Few in the 1980s imagined IBM would be where it is today. Could the same happen to today"s struggling automotive companies? Could they transform themselves entirely? No one knows, though the Detroit Three are in for some seriously painful changes. GM just announced 21,000 layoffs, and more are sure to come.

But one thing's fairly certain: Though many an OEM--in the auto sector and elsewhere--may revamp their business models and go through challenging transformations, the ones that remain efficient and aligned with customer value will emerge stronger from this historic downturn. And no matter what happens, they'll likely need fabricated metal products made by companies that aren't an ocean apart from customers. As many OEMs are finding, when it comes to just-in-time manufacturing, location matters.

As Brent Meyers, chief executive of the Corporation for Manufacturing Excellence, a consultancy, told the San Francisco Chronicle last week, "You can't do just-in-time delivery when you're having it made in China and thrown on a boat."