AI as the Future of Technology and a Big Asset for IBM

Executive Summary

In this memo, we provide analysis and recommendations that will transform I.B.M. from a slow-moving tech giant with a shrinking revenue to an innovative, fast-growing, and multifaceted leader making aggressive revenues in the A.I. era while complying with corporate value and further building the brand.

Our macro environmental analysis indicates that A.I. is the future of technology, and it will bring huge economic benefits. In order to catch the new tech wave, I.B.M. must develop to be a market leader in the A.I. industry. Although Watson AI technology is a big asset for I.B.M., the difficult transformation within the organization and the fierce external competition puts your company at a disadvantage, resulting in a 22-Quarter streak of falling revenues on financials.

After weighing between several legitimate strategies, we strongly recommend I.B.M. aggressively expand and commercialize Watson Health. In doing so, I.B.M. will emphasize innovation initiatives, form partnerships and leverage acquisitions to develop Watson Health, thus offering various cutting-edge tech services to clients. I.B.M. will enter and penetrate multiple medical areas and obtain the biggest market shares and revenue. Your company will crush competitors in the enormous healthcare industry and achieve the goal of an 8% growth in total revenue by the end of 2023.

Contextual Analysis

In the macro environment, artificial intelligence (A.I.) can bring huge economic growth into the world and benefits companies that adopt A.I. in their businesses. The digitalization of business industries creates a huge amount of data. These unsearchable and unstructured data are great untapped sources for A.I. development. The potential economic benefits from A.I. technology are huge: “By 2035, A.I. technologies could increase labor productivity 40% or more, doubling economic growth in 12 developed nations.” (Columbus, 2017). In addition to the macroeconomic benefits, businesses can achieve more financial gains with the adoption of artificial intelligence (See Exhibit 8).

According to the research, brands that integrate A.I. can increase revenue by six to ten percent (Gerbert, n.d.). A.I. has already proved its worthiness in business. Seeing this trend and opportunity, more and more new technology companies invest heavily in developing their A.I. technology to better serve others. They hope to grab the chance in the new tech era and take away market shares in this industry. According to The Economist, “A.I. is already starting to generate big financial gains for companies, which helps explain firms’ growing investment in developing A.I. capabilities” (A.E.S.,2016). As more and more big companies adopt A.I. into their business in order to make their business become faster and smarter, I.B.M. has great potential to benefit from this technology wave (See Exhibit 2).

There is no doubt that fierce competition comes along with opportunity. The highly innovative and entrepreneurial new tech startups are strong competitors (See Exhibit 9). They use their speed and agility to cope with the rapid changes in this new technology era. While I.B.M. is taking its time changing in culture and restructuring the workforce, these new startups already have new talents, expertise, and innovation-centered culture. In this perspective, tech startups overshadow I.B.M. on the innovation initiatives of cutting-edge technology for new business. I.B.M. also competes with big tech companies such as Microsoft, Amazon, and Google in the cloud business. The competition is intense because all of these big tech companies have sufficient capabilities to invest and grow more in the new business (See Exhibit 1). People’s perception of I.B.M. being older, less innovative, and entrepreneurial compared to its younger competitors is a disadvantage and challenge that needs to be addressed.

Despite the formidable competitors, I.B.M. has one of the strongest brand names in the business world. The brand itself represents trust and loyalty to customers and clients, enabling I.B.M. to gain more demands from retained and new customers and clients (See Exhibit 4). By completing acquisitions and forming partnerships, I.B.M. increases access to a huge amount of data from all different sources, allowing Watson to learn, become smarter, and better serve its clients.

In terms of organization, I.B.M. reorganizes its business portfolio from the legacy hardware industry to the cognitive computing and cloud computing industry. As imagined, the transformation of a giant enterprise like I.B.M. is nothing close to easy. Because of the strategic imperatives, new talents and skills are needed. The retraining of internal employees and the hiring of new external talents need to be completed as soon as possible. The old organizational structure makes I.B.M. slower to implement new initiatives. To make I.B.M. faster, I.B.M. is integrating businesses from 175 countries around the world, facing risk factors in politics and legal areas. In order to develop the new technology and catch up with the wave, your company is doing aggressive acquisitions and partnerships. The integration of new acquisitions and how these external companies fit into I.B.M. is also a challenge that cannot be overlooked (See Exhibit 3).

In the corporate cultural aspect, I.B.M. repositions itself to be more innovative, fast, and entrepreneurial by calling on “Don’t try to protect the past” (I.B.M., p9). The new artificial intelligence technology ‘Watson’ is considered to be the future of I.B.M. Your company’s attractiveness to new and young talents and external experts is not so strong compared to newer tech companies like Google or Facebook. The organization is relatively conservative compared to other competitors (See Exhibit 5).

The financials are unsatisfactory. The revenue generated from the new business is not making up for the loss of revenue from the digested legacy business. The artificial intelligence service is new and in its late introduction stage in the life cycle. We can expect an accelerating growth rate when it enters the growth stage of the life cycle.

Goals and Objectives

Our intention is to lead I.B.M. to successfully transform and keep its position as the market leader with a sustainable competitive advantage. Our recommendation below will achieve the goal that, in 5 years, I.B.M. will have an 8% growth in revenue, about four percentage points higher than the Nasdaq analyst’s projected rate of 4.97% (See exhibit 10, 11). By achieving this goal, investors will regain confidence in I.B.M.’s future success. In the process, I.B.M. will stick to its value of

1. Dedication to every client’s success,
2. Innovation that matters for our company and for the world, and
3. Trust and personal responsibility in all relationships (IBM.com).

Diagnosis

We identify that the biggest problems are 1) the decreased revenue growth rate in the past five and a half years (See exhibit 6, 7), and 2) the challenge of facing aggressive competition on innovation from the tech startups while transforming in culture and organization. Although the 4% growth rate in January broke the streak of falling revenue for the first time, analysts argue that this is the result of the change in currency rate and doubt that a true turnaround was achieved.

As we can see, the revenue generated from the strategic imperatives has not made up for the shrinking of revenue from the digested legacy business. The implied reason lying behind the unsatisfactory financials is the lack of commercialization of the new A.I. business. The following recommendations are going to make I.B.M. more profitable by capitalizing on its strengths in A.I. technology and capturing more value from its retained and potential customers and clients.

Options and Alternatives

In light of the diagnosis, we come up with three potential strategies for I.B.M. to overcome the challenge, solve the problem and achieve the goal and objectives. All strategies target the goal of increasing revenues by 8% in five years.

1. Aggressively commercializing and adding Watson Health services to the healthcare industry

As mentioned above, the shrinking revenue stems from the insufficient revenue generated by the strategic imperatives, which consist of 46% of revenue. To solve this problem and make an official turnaround, I.B.M. need to commercialize Watson Health service aggressively and gain profits. The healthcare industry is an enormous market that posed big problems as costs surged and the population aged (I.B.M., p7). Watson Health also aligns with I.B.M.’s value of ‘innovation that matters for the world” (I.B.M., p7). We suggest Watson Health expand to more medical areas besides cancer, such as obesity and chronic diseases. Although the cancer market benefits I.B.M. in the long term, it is hard to bring in short-term gains. “I.B.M. first applied the Watson technology to the daunting realm of cancer research, a lengthy struggle with little short-term financial reward” (Lohr, 2018).

By expanding the medical realms for Watson Health, your company will meet the needs of a larger demography and gain multiple channels of sales. At the same time, we also recommend I.B.M. sell services to employers who can provide Watson Health services to their employees and cooperate with insurance companies who provide Watson health services to their policyholders. In this way, the amount of people using Watson Health services spikes up and boosts sales too. On the contrary, Watson is new to offering different A.I. medical services to customers and has the risk of inaccuracy. If a service is inaccurate due to internal control, the reputation can be negatively influenced. The inaccuracy decreases as time goes by.

2. Offering Watson services to more industries

The Watson AI technology can be applied to a lot of different industries besides healthcare, such as financial services and information and communication. According to Forbes, “Information and Communication, Manufacturing, and Financial Services will be the top three industries that gain economic growth in 2035 from A.I.’s benefits. A.I. will have the most positive effect on Education, Accommodation, and Food Services and Construction industry profitability in 2035” (Columbus, 2017).

Watson can enter into new industries to generate revenue from multiple channels. While this strategy can definitely meet the goal of pumping up the revenue once implemented successfully, the cons could be the requirement of new talents and expertise in these industries. I.B.M. is still transforming, and entering these new industries will add more time for I.B.M. to complete the transformation. In addition, I.B.M. faces steep competition from both startups and big tech companies such as Google and Microsoft. Despite the first mover advantage, as more competitors enter the market, the margins will be driven down once they start to compete on price.

3. Selling more existing Watson services using high-profile marketing campaigns

The high-profile marketing on “Jeopardy” proved to be a huge success for the public to notice the power of Watson’s A.I. technology. According to The New York Times, “the company scored a research and public relations triumph in 2011 when its Watson system defeated human champions in the question-and-answer game, “Jeopardy!” (Lohr, 2018). We recommend I.B.M. hold more high-profile marketing campaigns and educate and bring attention to Watson in order to boost sales. The campaign can include events like “Jeopardy” and advertisements for the Super Bowl.

Moreover, the marketing campaigns should expand around the world, focusing on growing economies in countries such as China and India because 60% of the revenue is generated outside the U.S. “While the U.S. and E.U. countries were cutting healthcare budgets and attempting to lower costs, India and China were investing heavily in expanding care to their populations through massive hospital building projects” (I.B.M., p8). The expenditure on marketing will be recovered from an enormous increase in sales revenue in 5 years. The downside of the strategy is that other competitors in the A.I. business can also benefit from the education that I.B.M. gives about A.I. In this case, I.B.M. should especially emphasize the name ‘Watson’ to differentiate itself from other A.I. technologies to prevent a windfall for competitors.

Strategic Recommendation

Considering the three legitimate strategies, we decided to recommend the first strategy because it can achieve the goal with the best risk mitigation. The aggressively expanding and commercializing of Watson Health services at a fast pace will increase the revenue by offering multiple medical services targeting larger demographics and selling to businesses instead of individuals. The strategy will allow your company to differentiate itself from competitors using the first mover advantage. The Watson Health offerings will disrupt the healthcare industry that is valued at 6.5 trillion dollars, eventually leading to establishing a long-term competitive advantage in the ‘blue ocean.’ Additionally, the strategy aligns with the objectives that “best serve the clients” and “innovation that matters to the world” (IBM.com).

Implementation

Starting in 2019, you will enter the medical areas of cancer, obesity, and chronic diseases. You will form partnerships with healthcare companies and medical schools that have expertise in these medical areas. We anticipate that it will take a year to grow the partnerships. In the meantime, you will continue to acquire companies that specialize in obesity and chronic diseases to access more data and train Watson to be smarter. We expect a 1% increase in revenue in 2019, 2% in 2020, and 4% in 2021. By 2023, based on conservative estimates, you will achieve the goal of an 8% increase in revenue.

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