IBM and the Power of Focus

Businessweek reports on IBM's decision to focus on one chip line, and the success that followed.

For a proud tech industry leader, the situation couldn't have gotten much worse than what IBM (IBM ) faced in the summer of 2003. The company's semiconductor unit, which had bet on a strategy of manufacturing all kinds of chips for all comers, had lost $1.2 billion over the previous 18 months. Big Blue was also spending billions to upgrade its chip plants — and getting thrashed by Asian rivals that were manufacturing at much higher volumes and offering bargain-basement prices. It was a full-blown crisis. "We were in danger of being marginalized," recalls William M. Zeitler, senior vice-president in charge of the systems and technology group.

That called for a meeting of some of IBM's best minds. So on July 15, 2003, starting at 7 a.m., Chief Executive Samuel J. Palmisano, Zeitler, and about 70 others from the company's then-separate chip and computer divisions gathered in a conference room at Harvard University to come to grips with the situation. By the end of a long day, they had charted a new course. The chip and computer units would be combined. Rather than manufacturing all kinds of chips for 400 customers, IBM would focus primarily on one family of chips, its well-regarded Power microprocessors. It would make some of the chips for its own use and others for key partners' products, including Nintendo (NTDOY ) game consoles, Apple (AAPL ) G5 computers, and Cisco Systems (CSCO ) networking gear. It would also recruit co-investors to help fund advances in chip manufacturing technology.

That high-stakes strategy shift is starting to pay off. Advances in Power chips have not only helped IBM gain share in high-end servers, they also have landed Big Blue the coveted role as processor supplier for next-generation game consoles to Sony (SNE ), Microsoft (MSFT ), and Nintendo. That's 100% market share. IBM has especially high hopes for the Cell chip, the brains of Sony Corp.'s PlayStation 3 console, which is based in part on IBM's Power technology and is being co-developed by Sony, IBM, and Toshiba (TOSBF ). The partners are poised to reveal details at a chip industry conference on Feb. 7. One hint of what's to come: Cell will include a cluster of Power processors, making it 10 times more powerful than today's contenders. If the momentum continues, IBM could emerge as a much more potent force in the processor realm.

You can't be all things to all people. That is a difficult strategy to execute.

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