IBM Global Business Services Executive Report

Strategy and Change

IBM Institute for Business Value

After the crisis: What now?

IBM Institute for Business Value

IBM Global Business Services, through the IBM Institute for Business Value, develops fact-based strategic insights for senior executives around critical public and private sector issues. This executive report is based on an in-depth study by the Institute’s research team. It is part of an ongoing commitment by IBM Global Business Services to provide analysis and viewpoints that help companies realize business value. You may contact the authors or send an e-mail to iibv@us.ibm.com for more information.

By Saul J. Berman, Richard Christner and Ragna Bell

In the wake of the recent economic crisis, companies worldwide are

scrambling to prepare for growth in an increasingly complex atmosphere. As they seek a trajectory for success in the post-crisis environment, what can organizations do to help them successfully manage uncertainty and complexity and, ultimately, foster growth? We believe the answer involves decisive actions designed to preempt scarcity, drive cost efficiency through productivity and agility, and seek targeted and innovative approaches to revenue growth.

Action amid uncertainty
The financial industry meltdown and subsequent global economic crisis were perhaps the biggest economic disruptors in recent history. While the financial system seems to have stabilized and a number of economies are positioned for growth, the overall economic environment remains highly volatile. Economists continue to speculate whether the economy is indeed on a road to recovery or whether it will experience a stall, a further downturn or “fits and starts.” Regardless of which scenario is accurate, one thing is clear: today’s business environment is increasingly complex and uncertain, with organizations facing increased global interconnectedness, accelerated industry transformation, growing volumes of data and rapidly evolving customer preferences (see Figure 1).
Data overload

Business environment Black swans
“We don’t know what we don’t know.”
- Nicholas Taleb

Networked economy Complex interdependencies

Complexity

Protectionism

Government hand in business Credit constraints Industry restructuring Demographic shifts
- Exchange rates - Commodity prices - Inflation

Price instability

End to stimulus Sovereign defaults

Pre-crisis

Debt overload

Uncertainty
Sources: IBM Institute for Business Value analysis; Taleb, Nissam Nicholas. The Black Swan, The Impact of the Highly Improbable. New York: Random House, 2007.

Figure 1: Increasing uncertainty and complexity in today’s business environment.

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After the crisis: What now?

Global interconnectedness – and its integration of economies, societies and cultures – has made the world smaller and, at the same time, more complicated. As globalization opened up new avenues of trade and fostered growth, it also created a more interconnected economic environment. Globalization and the interconnectedness it represents create an “interlocking fragility,” as described by Nicholas Taleb in his book Black 1 Swans. The crisis has spurred a significant increase in industry restructuring and has driven many companies toward business model changes. Some industries, such as finance, have relied on government involvement to help ensure their very survival. Others continue to evolve, facing redefinition or even disintegration. The long-term effects of these shifts – and of government’s involvement in industry – remain unknown. Furthermore, organizations continue to struggle as they learn to operate in an increasingly data-intense world. Being able to turn vast amounts of data into information and insight can obviously benefit a company as it charts strategy. However, it can also lead to data overload, making it difficult to sort through all the noise for relevant facts. Consumer preferences are also changing more rapidly, as consumers have more data at their fingertips than ever before. This influences not only what and when they buy, but also how and from where they make purchases. This access to information has led to a more informed, more empowered customer. Today’s educated consumers continue to influence change across all industries – forcing many organizations to reevaluate their business models. Despite these growing complexities and lingering uncertainty, companies must be prepared to act decisively and to remain flexible enough to adjust course as necessary. To succeed in this post-crisis economic environment, we recommend organizations concentrate their actions around three main goals (see Figure 2):

Get ahead of scarcity
• Assure access to key supplies • Secure the best global talent • Move quickly on the M&A agenda • Embrace the financial case for green

Focus on productivity and agility
• Improve collaboration • Tap the power of information through predictive analytics • Build a management system conducive to rapid decision making and execution • Become globally integrated

Find targeted approaches to grow revenue
• Promote valueconscious offerings • Improve marketing, sales and service productivity • Engage customers through digital channels • Establish government partnerships

Source: IBM analysis.

Figure 2: Three immediate priorities to act decisively despite uncertainty.

1. Get ahead of scarcity: As prices recover, the trend toward scarcity will return with even greater impact. Business should act now to gain a long-term advantage. 2. Drive cost efficiency through productivity and agility: While continuing to do more with less, organizations must build processes capable of flexibility and scaling and foster a management system that can sense and execute quickly. 3. Find targeted approaches to grow revenue: Altered customer priorities and buying patterns, along with constraints on macroeconomic growth, mean that companies must selectively find innovative approaches to generate growth.

Amid a more complex and uncertain environment, organizations must take decisive action and be able to course correct as needed.

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Get ahead of scarcity
The economic crisis created a pronounced but temporary interruption in the escalating trend toward scarcity – a trend that has driven increasing competition for limited global supplies of raw materials, environmental resources, market access, talent and other items. During the height of the crisis, prices for many resources and assets dropped – and many fell far below fair value. However, prices are beginning to recover from artificial lows, and the trend toward scarcity will return as economic activity recovers. For example, crude oil prices nearly doubled between February 2009 and February 2 2010. Enterprises should move quickly to lock in long-term advantages by gaining preferential access to resources that are critical to their strategies. We believe companies can try to preempt scarcity by taking action in four areas:

terms. A study of employee productivity shows a dramatic difference in productivity between top performers and other employees, and this productivity difference increases as job 4 complexity increases (see Figure 3). Before the market tightens once more – and while distressed firms continue to cut staff – astute leaders will seize the chance to attract and build key talent pools. This was the case with Deutsche Bank, which acquired top talent by hiring teams from rivals such as Merrill Lynch during the financial crisis to 5 build its global financial institutions business. Today’s environment also provides new opportunities to rebuild talent by enhancing the skills of existing employees, as well as redeploying underutilized employees. Mori Seiki, a Japanese machine tools manufacturing company, took advantage of a reduced production schedule to cross train 600 single-skill employees on multiple positions. In so doing, the company increased its ability to adapt to uncertain demand and 6 improved its employee skill base.
Top 1 percent employee productivity versus average employee productivity

Assure access to key supplies
The severity of the crisis left many enterprises with weakened networks of suppliers and partners. This situation presents both risk and opportunity. With recovering demand, firms must try to avoid the risk that inadequate supplies might constrain their flexibility to respond. Some firms have taken advantage of opportunities presented by the downturn to “lock in” future supplies. For example, during the height of the financial crisis, Chinese companies purchased key assets worth tens of billions of U.S. dollars at depressed prices, locking up supplies of oil, minerals, metals and other strategic natural 3 resources critical to economic growth.

2.27x

1.52x

1.85x

Secure the best global talent
Successfully managing talent is vital in a challenging business environment. Greater complexity in the business environment further raises the value of talent. In addition, globalization of competition now means thinking about top talent in global
Low Moderate High

Job complexity
Sources: IBM Institute for Business Value analysis; Hunter, J. E., F. L. Schmidt and M. K. Judiesch. “Individual Differences in Output Variability as a Function of Job Complexity.” Journal of Applied Psychology 75. 1990.

Figure 3: The importance of top talent increases with job complexity.

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After the crisis: What now?

Move quickly on the M&A agenda
The crisis has created yet another avenue to preempt scarcity in the area of mergers and acquisitions (M&A). Equity values recover ahead of the general economy, so organizations must move quickly to benefit from low asset prices. M&A success requires both speed and diligence, so companies must carefully select M&A targets that support their growth strategies. For example, in September 2009, Xerox announced its intent to acquire Affiliated Computer Services Inc. to help accelerate its growth in an expanding market. By combining Xerox’s strengths in document technology with ACS’s expertise in managing and automating work processes, Xerox hopes to create new market opportunities in business process outsourcing, as well as help fulfill its vision of “owning” all 7 aspects of document management. In another example, German automaker Volkswagen announced in December 2009 its intention to buy a one-fifth stake in the Japanese car manufacturer Suzuki. As the automotive industry landscape continues to transform, this deal will enable Volkswagen to take advantage of Suzuki’s expertise in smaller, low-cost cars, as well as its strong position in the fast-growing Asian markets, especially India. In addition, the partnership will optimize investments in developing hybrid and 8 electric vehicles under both brands.

benefit of operating sustainably. We recommend corporations embrace green for financial benefits and look for ways to reduce their resource usage today – before energy and environmental pressures return in full. There are numerous opportunities for resource reduction across all areas of a company. For instance, human resources managers are looking at areas such as office space, travel expenses and talent retention, while IT managers examine electricity usage, hardware disposition and data center concerns. Within the supply chain, organizations are looking at how to reduce their use of fuel, electricity, water and various other materials. Such initiatives are win-win situations, as increasing efficiency to reduce environmental impact typically has the added benefit of decreased cost and waste. As an example, Chinese shipping giant China Ocean Shipping Company (COSCO) cut carbon emissions 15 percent and fuel costs 25 percent by making changes to its supply chain. A detailed analysis of COSCO’s operations revealed that consolidating its distribution centers from 100 to 40 could cut logistics costs by 23 percent, saving 100,000 tons of greenhouse gas emissions annually – without any additional costs.9

Embrace the financial case for green
Businesses and governments have sharpened their focus on sustainability, primarily in response to consumer and stakeholder expectations. While the economy might temporarily have shifted some focus off environmental concerns, the economics of scarcity will increase the financial

Sustainability will be increasingly important in the post-crisis environment.

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Focus on productivity and agility
In their initial response to the crisis, many organizations cut costs by decreasing capacity to match lower demand, reducing staff, pruning investments and restricting expenses on discretional activities like travel. Now, businesses and governments must take their cost-efficiency approaches to the next level by fundamentally redesigning operations and key processes to become more productive while increasing agility to support growth strategies. In the post-crisis environment, cost efficiency and effectiveness are more important than ever. Organizations are caught between constrained customer budgets on one hand and vigorous global competition on the other. Similarly, governments face lower revenue generation combined with higher demand for services. The need to do more with less will continue to grow. The continued uncertainty in the post-crisis environment also dictates a very high premium on agility. Organizations must have the flexibility to scale up or down with more uncertain demand, to adapt to rapidly changing customer requirements and market opportunities, and to minimize unused capacity. Firms also need increased agility to respond to unanticipated problems and bottlenecks in their interconnected value chains – from suppliers to partners to customers. The new environment provides enterprises with four important enablers that can dramatically increase productivity and agility:

IBM is a prime example of an organization that has embraced collaboration. The company’s commitment to collaborative innovation extends to its employees, business partners, customers and even the public at large. To enable enterprisewide collaboration, IBM pioneered the use of “jams,” which are online realtime discussions for IBM employees. The jams now include customers, business partners and IBM employee family members partnering to discuss growth strategies, innovation, product solutions and more. In addition, IBM has numerous initiatives that foster internal collaboration, including wikis, blogs and social networking and media sharing sites. IBM also created an online innovation marketplace called ThinkPlace, which offers employees an open collaborative global forum to submit ideas on efficiency and process improvements, revenue opportunities, time-saving techniques and more.

Tap the power of information through predictive analytics
While it’s not possible to consistently predict the future, there are ways to improve an organization’s capability to sense and anticipate change. With so much data available literally at our fingertips, the challenge becomes turning that data into useful information and insights to enable action. Predictive analytics can assist companies in using data to enhance customer relationships, process efficiency and asset productivity. StatoilHydro, the Norwegian oil giant, was able to reduce costs and increase production through harnessing the power of predictive analytics. The company implemented a new process framework, which links advanced realtime sensing capabilities in the field to powerful collaborative and analytical resources accessible across the enterprise. The new solution enables StatoilHydro to monitor offshore oil and gas fields to improve

Improve collaboration
To effectively drive efficiency, organizations must embrace collaboration – both internally and externally. By improving collaborative efforts, an enterprise can realize process improvements, as well as expose itself to broader sources of innovation.

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After the crisis: What now?

the regularity of each platform and optimize long-term production as part of its integrated operation programs. The result is increased production and improved operational 10 efficiency at reduced cost.

Build a management system conducive to rapid decision making and execution
In addition to collaboration and predictive analytics, effective leadership is also an essential ingredient in the quest for increased productivity and agility. An enterprise cannot be nimble if its management system does not enable quick decisions and decisive action. In fact, when asked to identify the critical traits of an agile business, 61 percent of executives 11 surveyed cited rapid decision making and execution.

To prepare for the future, today’s organizations need to reinvest in their management systems to ensure they enable quick decisions and fast execution. We have identified eight steps that can help build an effective management system (see Figure 4). In this framework, decision events are based on clearly defined authority at the appropriate level, a set of criteria directly linked to the organization’s strategy, improved business intelligence and the availability of new technologyenabled collaboration. Triggered by specific events, decisions can thus be made with increased speed and quickly translated into actions that include feedback loops and organizational learning. Impact and results of actions are tracked in real time to provide the relevant information needed for rapid course correction.

Management system framework

1.

Authority
Empower the line: Lower the center of gravity.

2.

Criteria
Align more tightly to strategy.

3.

Information
Improve availability and relevance of information.

4.

Method
Virtualize the venues for decision making.

5.

Event
Reduce cycle times.

6.

Decisions
Make field executors part of decision making.

7.

Actions
Build capabilities and systems for testing and learning.

8.
Source: IBM analysis.

Results
Enable realtime performance tracking with the ability to link actions with results.

Figure 4. Eight steps to a more effective management system.

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While many firms have highly structured approaches for long-term decision making, such as annual planning and performance reviews, their realtime decision making tends to be ad hoc and reactive. Establishing regular cadence-driven processes that tie together these eight steps speeds up the cycle of assessment-to-decision-to-action.

Swiss-based Nestle is reaping benefits associated with its pioneering GLOBE (Global Business Excellence) program, which standardized processes worldwide to gain efficiencies in the global supply chain and back-office processes and accelerated decision making and local market innovation 13 through enterprise-wide transparency. In another example of global optimization, GE Healthcare was able to source innovation from an emerging economy. Rather than the traditional approach of developing high-end products in mature markets and adapting them for other countries, GE developed a low-cost, portable ultrasound machine in China to meet the specific needs of local customers. In doing so, the company found a new niche market in the developed world for the innovative product, which is now being used in ambulances, at accident sites, in family doctor offices and other places where use of a conventional more expensive machine is 14 less than ideal.

Become globally integrated
To successfully compete – and win – in the new, post-crisis economic environment, organizations must cut costs and optimize resources and capital productivity on a global basis. The accelerating shift of growth to emerging markets has further underscored the need to globally integrate operations. And, increasingly, the emerging markets will also be sources of innovation and talent. In a full-fledged globally integrated enterprise, work flows 12 to places where it can be done most effectively. Free flow of work ensures that things are done at optimal locations and times in terms of cost and quality. Standardized global processes and adoption of best practices can improve customer satisfaction by enabling consistent global customer experiences and can reduce operating costs by achieving economies of scale and less duplication. Global integration provides the operational efficiency and flexibility to compete effectively in both mature and emerging markets.

Find targeted approaches to grow revenue
The crisis has dramatically altered customer buying patterns. Tightened credit and constrained budgets mean that customers are fundamentally more value conscious in both what and how they buy. Demand growth has shifted from debt-driven mature market geographies to the emerging market economies, where buyers bring new and different priorities than customers in the mature economies.

Global integration provides competitive benefits to companies in both mature and rapidly emerging markets.

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After the crisis: What now?

In this new economic environment, enterprises must find targeted approaches to generate new revenue growth. Past growth strategies that relied on overall market growth to drive revenue expansion will no longer work. We have identified four key efforts to help organizations source new revenue:

Promote value-conscious offerings
One approach to grow revenue involves promoting valueconscious offerings – not necessarily cheap offerings but ones that change the price-value equation. By simplifying its portfolio and focusing on value, an organization can serve both the financially squeezed customers of the mature markets, as well as the price-sensitive consumers of emerging markets. U.S. pharmacy benefits manager Express Scripts provides an example of how serving the agenda of value-conscious customers can actually yield higher margins for the company. Express Scripts created a campaign to encourage patients to save money by switching from brand-name drugs to generic drugs. Generics not only help customers save money, they also deliver higher margins for Express Scripts. This win-win campaign helped Express Scripts increase the number of prescriptions filled with generics and, in turn, increase its gross profit.15

Productivity improvement approaches that have been successful in manufacturing and back-office processes can be adapted to marketing, sales and service as well. Starbucks Coffee Company rolled out an efficiency initiative in which the company took a fresh look at how its stores operate, aiming to accelerate retail transactions, lower service costs and reduce wait times. The initiative incorporates “lean” techniques, which center around creating more value with less work, and has resulted in changes ranging from where coffee beans are stored and when they are ground to how the pastry counters are stocked each day.16

Engage customers through digital channels
Today’s increasingly knowledgeable customers are leveraging the digital information explosion to reinvent how they research, shop, purchase and obtain goods and services. In doing so, they are driving new ways to gain information and communicate. These factors, combined with the post-crisis economic environment, make it imperative for companies to successfully engage customers through new channels and effectively integrate across channels. Engaging with and listening to customers in new ways can help reveal unaddressed needs and unlock new demand. Organizations can also collaborate with customers via digital channels to create new value.

Improve marketing, sales and service productivity
Customers’ increased focus on value and price put real pressure on gross profit margins, which fund sales, marketing and customer service operations. Therefore, enterprises must increase the productivity of these activities to reduce costs as a percentage of revenue, while increasing effectiveness to generate incremental revenue. These are information-rich areas where analytics can drive rapid and significant improvement.

In the post-crisis environment, past growth strategies that relied on overall market growth no longer work.

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For example, a number of organizations have used customer collaboration to help redesign existing or create new products. For example, Kraft Foods in Australia engaged users of its Vegemite product through an online survey. Using customer input, the company developed a smoother and more spreadable 17 version of its Vegemite product. Companies can also engage customers through “provocative” selling techniques, such as viral marketing campaigns. As part of what has become its “Campaign for Real Beauty,” Dove, a personal care brand owned by Unilever, released a video that uses time-lapse photography to show the transformation of a “normal” woman into a glamorous model using stylists and digital enhancements. The clip was released under the slogan “No wonder our perception of real beauty is distorted.” Although the clip only aired on television a few times, at one 18 point it was one of the most watched videos on the Internet.

It’s up to each company to find its niche in partnering with governments – whether it’s helping deliver government services more efficiently and effectively, shape industry rules or improve social well being. Some organizations may even discover that rather than directly partnering with governments themselves, they are better suited to helping their customers in this regard.

Are you ready for action?
As organizations prepare for a future ripe with uncertainty, one thing is certain: the need to move forward. Despite an unpredictable, complicated backdrop, there is urgency for companies to take decisive actions and take advantage of the key opportunities presented in this post-crisis environment. Waiting for clarity and stability is not an option. The actions we have described can help enterprises move aggressively with the flexibility and agility to adapt to rapid changes in the environment. Business leaders should start by developing clear scenarios for their industry and the overall situation that can help identify which strategies and business models will best position their organization to succeed across the range of possible future outcomes. By combining an understanding of their current position with a clear set of future scenarios, they can select decisive moves across the three recommendations identified in this study – to get ahead of scarcity, focus on productivity and agility, and find targeted approaches to grow revenue.

Establish government partnerships
Another way to target new revenue growth is through government partnerships. As governments continue to play an increasingly active role in business and the economy, there will be more and more ways for organizations to partner with them. An example of this is the build up of the wind energy industry in China. Several energy technology firms are partnering with the Chinese government in its pursuit to generate 15 percent of energy from renewable sources by 2020. Wind energy is one of the key sectors in which the government is investing, building up wind farms with Chinese-made turbines. Local engineering companies are benefiting directly through the significant investment in the industry. Furthermore, the long-term focus of the investment helps build a globally competitive industry that may, in the future, be able to benefit from global export markets.19

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After the crisis: What now?

Below are some key questions to guide business leaders: Get ahead of scarcity: • What resources are critical to your business? • What impact would a return to higher supply costs have on your business? • How can you preemptively secure preferential access? • Are there acquisition or investment opportunities you should move on quickly – before prices rise and ahead of your competition? • Do you know how much energy you use and where? Drive cost efficiency through productivity and agility: • • • Are you able to flexibly scale your production to quickly meet variable and uncertain demand? Are you getting the most from your existing assets, investments and talent? Do you have global assets and employees operating without generating advantages such as scale and knowledge sharing?

Find new approaches to generate revenue: • • • • • How do you accurately forecast demand and customer requirements and develop new revenue opportunities? Can you hear what the market is saying through the huge volumes of data at your fingertips? How can you utilize digital channels to reach new customers and engage them in new and different ways? How will volume and margin changes impact sales and service requirements to optimize revenue? How will you offset challenges to potential revenues from mature markets?

The post-crisis business environment is ripe with opportunity to get ahead of the curve. In many ways, it’s a “no lose” proposition, with inaction being the only “wrong” path. By proactively charting the appropriate moves, organizations can get ahead of scarcity, drive cost efficiency through productivity and agility, and find new approaches to generate revenue. By taking this course of action, they will be well on their way down the right path to success in the new economic environment.

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The right partner for a changing world
At IBM Global Business Services, we collaborate with our clients, bringing together business insight, advanced research and technology to give them a distinct advantage in today’s rapidly changing environment. Through our integrated approach to business design and execution, we help turn strategies into action. And with expertise in 17 industries and global capabilities that span 170 countries, we can help clients anticipate change and profit from new opportunities.

About the authors
Saul J. Berman is a Partner and Global Executive of IBM Global Business Services and leads the IBM Global Strategy & Change group. He has over 25 years’ experience consulting with senior management, has published extensively and is a frequent keynote speaker at major conferences. He was named one of the 25 most influential consultants of 2005 by Consulting Magazine. Saul can be contacted at saul.berman@us.ibm.com. Richard Christner is a Partner in the Internal Strategy and Transformation practice within IBM Global Business Services. With over 15 years of strategy consulting experience, he has helped firms develop new and innovative business models in a variety of industries, including technology, transportation, consumer goods, retail and industrial products. Rich can be reached at christnr@us.ibm.com. Ragna Bell is the Strategy and Change lead for the IBM Institute for Business Value within IBM Global Business Services. She has over ten years of consulting experience with leading clients focused on mergers and acquisitions, strategy formulation and corporate transformation. She has coauthored articles on business model innovation and enterprise transformation. Ragna can be reached at ragna.bell@us.ibm.com.

Executive Sponsors
Grace Chopard, IBM Global Business Services, Strategy and Transformation Leader for Growth Markets Michel Vlasselaer, IBM Global Business Services, Strategy and Transformation Leader for Southwest Europe

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After the crisis: What now?

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15 Orelli, Brian. “Express Scripts gets more generic.” The Motley Fool Web site. August 1, 2008. http://www.fool.com/ investing/general/2008/08/01/express-scripts-gets-moregeneric.aspx 16 Jargon, Julie. “Latest Starbucks buzzword: Lean Japanese techniques.” The Wall Street Journal. August 4, 2009.

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