1. © 2006 IBM Corporation Emerging Business Opportunities Discussion with RPI Mike Giersch Vice President, Strategic Planning IBM Corporate Strategy

2. © 2006 IBM Corporation 2 IBM Experience - Three Attempts  Circa 92. A Process Centered Approach –Organization was going through some major process re-engineering. –New business opportunity process added. –Groups were to implement process, corporate sponsors, facilitates best practice sharing, etc, –Corporate white space focus rejected by senior leadership –Process aborted – company faced very serious financial challenges, CEO change.  Circa 95. A Funding Centered Approach –Post major expense cutbacks, concern that some new things were cut, needed a life-line. –Created new business fund – groups nominate projects, corporate team evaluate and recommends funding. Funding provided, no on-going oversight or support –Funded mostly things that we would want groups to decide to fund … gaming the system to get extra funding … ‘bowling for dollars’… serving up ‘hearts and lungs’. Reinforced WRONG behavior. –Projects turned over to groups to manage. Funding process ended. –Ongoing, low profile, staff focus in corporate strategy on new business opportunities.  Circa 99. A Change Management Approach – The EBO System

3. © 2006 IBM Corporation 3 Call to Action 9/12/99 Self Assessment 4Q99 Start-up 1Q2000 Management System 2001 First Graduation Summer 2003 Next Phase 2006 Benchmarks Cisco Intel Microsoft Consultant / VC Input Academic Literature Case Studies Akamai ISP Market Life Sciences PvC Caselets Business Intelligence RFID RS/6000 SP SSD Microdrive Recommendations for CEC, Staff, Line EBO Work Sessions P&G Sun 1-on-1 CEC Interviews Major Root Causes HORIZON 1 Core business Extend, defend, increase productivity and profit contribution HORIZON 2 Growth business Scale proven business models, increase market share, & grow to opportunity HORIZON 3 Emerging Opportunities Test business models, prove viability, capabilities and value Seed growth opportunities Time and Level of Uncertainty  Profit  ROIC  Costs  Productivity or efficiency  High revenue growth  Market share gains  New customer acquisitions  Profit  Project-based milestones  Creating the Business Design  In market pilots Measures EBO Idea Sources Enterprise-Wide EBO Selection Criteria  Strategic alignment  Cross IBM leverage  New source of customer value New Markets New Business Models New/Disruptive Technologies EBO Categories Research External S o u r c e s (Customer, VC) Business Units Sales & Distribution  $1B+ revenue potential  Market leadership  Sustained profit potential Selection SELECTION CRITERIA GRADUATION CRITERIA US $1 Billion CultivationGraduation Strategic alignment Cross IBM leverage New source of customer value $1B+ revenue potential Market leadership Sustained profit Strong leadership team in place Clearly articulated strategy for profit contribution Early market success Proven customer value proposition Phase 3 Iterative/Starburst Clusters of opportunities Working on a portfolio $3- 5B Market Potential Phase 1 Identification “Looking for Churn” Within an Industry or Across Industries Phase 2 Nurture an Opportunity $1B Market Potential Extrapolate Commonality for use in other Industries / Domains -Common Business needs - Emerging or Disruptive Business models -Technology Disruption Phase 4 Scale and transition all or part of the nurtured businesses The Portfolio 2006 2000  Autonomic Computing  Business Trans. Outsourcing  Engineering & Tech. Services  Learning Solutions  Grid Computing  WebFountain  Retail on Demand  Sensors & Actuators  Info-based Medicine  Blade Servers  Bus Process Integration  Dynamic Workplace  Flexible Hosting Services  Storage Software  STI Cell Processor  Product Lifecycle Mgmt  Life Sciences  Linux  Pervasive Computing  Digital Media  Network Processor  e-Markets

4. © 2006 IBM Corporation 4 A Few Words of Context … EMEA Asia/ Pacific Americas Hardware Software Services  IBM Today –Revenue $103B, Profit $12B, R&D $6B –4 Product/Service Groups plus Sales/Distribution Unit  IBM in 1999

5. © 2006 IBM Corporation 5 A Snapshot of the Past 19851993199920002001 -$20 B $20 B $60 B $100 B $140 B $180 B $220 B 0 100 200 300 400 K Employees Profit Revenue Employees Market Value

6. © 2006 IBM Corporation 6 19841992 A Few Fortune Views of IBM

7. © 2006 IBM Corporation 7 And another ….

8. © 2006 IBM Corporation 8 A Problem in September 1999 “One issue looms larger and larger in our company: Why do we consistently miss the emergence of new industries?” What should IBM do to improve its ability to successfully identify, select and pursue emerging business opportunities in a timely fashion ?  Understand root causes  Recommend actions to address these issues

9. © 2006 IBM Corporation 9 EBO Start-up Approach The Project Team did significant outside research, wrote 4 in-depth case studies, and developed over 25 mini-case studies focused on IBM’s EBO efforts. Benchmarks Leading companies Academic literature VC Input Case StudiesCaselets Recommendations for CEC, Staff, Line EBO Work Sessions 1-on-1 CEC Interviews Major Root Causes Akamai ISP Market Life Sciences PvC Business Intelligence RFID RS/6000 SP SSD Microdrive

10. © 2006 IBM Corporation 10 The Underlying Root Causes 1.Our management system rewarded execution directed at short-term results and did not place enough value on strategic business building. 2.We were preoccupied with our current served markets and existing offerings. 3.Our business model emphasized sustained profit and EPS improvement rather than actions to drive higher P/E's. 4.Our approach to gathering and using market insights was inadequate for embryonic markets. 5.We lacked established disciplines for selecting, experimenting, funding, and terminating new growth businesses. 6.Once selected, many ventures failed in execution. 7.Senior management didn’t spend time on new growth opportunities

11. © 2006 IBM Corporation 11 Recommended Actions  Corporate Level Adopt 3 Horizon model as overall IBM business construct Define Horizon 3 cross-business domains Appoint Senior Executive Leadership Appoint Silicon Valley ambassador Build IBM EBO management and measurement system  Group Level Define group and business unit specific domains Build appropriate EBO management system for each group Lead selected Emerging Business Opportunities Decide appropriate investment balance by Horizon

12. © 2006 IBM Corporation 12 Emerging Business Opportunity HORIZON 1 Core business Extend, defend, increase productivity and profit contribution HORIZON 2 Growth business Scale proven business models, increase market share, & grow to opportunity HORIZON 3 Emerging Opportunities Test business models, prove viability, capabilities and value Seed growth opportunities Time and Level of Uncertainty  Profit  ROIC  Costs  Productivity or efficiency  High revenue growth  Market share gains  New customer acquisitions  Profit  Project-based milestones  Creating the Business Design  In market pilots Measures Source: Alchemy of Growth Adopted from The Alchemy of Growth, Baghai, Coley, White

13. © 2006 IBM Corporation 13 The EBO Approach, at a Glance, the Essentials  Declare/communicate strategic intent to pursue new growth opportunities  Identify highly visible short list of emerging business initiatives  House them in the appropriate group/business unit, but give them special treatment... gold badges –Dedicated A-team leadership for each opportunity –Active sponsorship for each by a SVP –Special support structure –Protected funding –Disciplined mechanisms for cross company alignment –Measured differently, strategic milestones –Regular review and oversight  Nurture and graduate or kill this short list, and continuously identify new candidates

14. © 2006 IBM Corporation 14 Global Services EBO Research Sales & Distribution Software Systems & Technology Business Unit Ownership Oversight, Collaboration and Issue Resolution Unique, Hybrid Organizational Model

15. © 2006 IBM Corporation 15 EBO Results “In 2000, IBM established its Emerging Business Opportunities program to identify and nurture new lines of business. An EBO focuses on ‘white space’ opportunities that can become profitable, billion dollar businesses within five to seven years. EBOs are typically assigned an experienced IBM executive ‘champion’ to manage the venture during its startup phase... Once an EBO has grown to sufficient size, it becomes part of an existing business unit...” 2004 Annual Report  25 EBO’s launched since 2000  5 EBO’s achieved $1B+ rev in 2003 and 2003  4 additional EBO’s doubled revenue in 2004  2 new emerging businesses launched in 2004 2006 Analyst Briefing New Markets  Retail on Demand  Sensors & Actuators  Info Based Medicine FY05 ~$1B >100% YTY Business Performance Transformation  Business Transformation  Strategy & Change  Engineering & Technology  Bus Performance Mgmt Software FY05 $4B +28% YTY Emerging Countries  China  India  Russia  Brazil FY05 $4B +14% YTY

16. © 2006 IBM Corporation 16  Active senior level sponsorship  Dedicated A-team leadership for each opportunity  Disciplined mechanisms for cross company alignment  Actions linked to critical milestones  Resources fenced – and watched – to avoid premature cuts  Quick starts, quick stops  Continued evolution  Communications and connection to the business  Need a burning bridge … top level support  Thorough internal assessment of root causes  Broad senior level buy-in  Start small Call to Action, Start-up Operating, Sustaining EBO Lessons

17. © 2006 IBM Corporation 17 Call to Action 9/12/99 Self Assessment 4Q99 Start-up 1Q2000 Management System 2001 First Graduation Summer 2003 Next Phase 2006 Benchmarks Cisco Intel Microsoft Consultant / VC Input Academic Literature Case Studies Akamai ISP Market Life Sciences PvC Caselets Business Intelligence RFID RS/6000 SP SSD Microdrive Recommendations for CEC, Staff, Line EBO Work Sessions P&G Sun 1-on-1 CEC Interviews Major Root Causes HORIZON 1 Core business Extend, defend, increase productivity and profit contribution HORIZON 2 Growth business Scale proven business models, increase market share, & grow to opportunity HORIZON 3 Emerging Opportunities Test business models, prove viability, capabilities and value Seed growth opportunities Time and Level of Uncertainty  Profit  ROIC  Costs  Productivity or efficiency  High revenue growth  Market share gains  New customer acquisitions  Profit  Project-based milestones  Creating the Business Design  In market pilots Measures EBO Idea Sources Enterprise-Wide EBO Selection Criteria  Strategic alignment  Cross IBM leverage  New source of customer value New Markets New Business Models New/Disruptive Technologies EBO Categories Research External S o u r c e s (Customer, VC) Business Units Sales & Distribution  $1B+ revenue potential  Market leadership  Sustained profit potential Selection SELECTION CRITERIA GRADUATION CRITERIA US $1 Billion CultivationGraduation Strategic alignment Cross IBM leverage New source of customer value $1B+ revenue potential Market leadership Sustained profit Strong leadership team in place Clearly articulated strategy for profit contribution Early market success Proven customer value proposition Phase 3 Iterative/Starburst Clusters of opportunities Working on a portfolio $3- 5B Market Potential Phase 1 Identification “Looking for Churn” Within an Industry or Across Industries Phase 2 Nurture an Opportunity $1B Market Potential Extrapolate Commonality for use in other Industries / Domains -Common Business needs - Emerging or Disruptive Business models -Technology Disruption Phase 4 Scale and transition all or part of the nurtured businesses The Portfolio 2006 2000  Autonomic Computing  Business Trans. Outsourcing  Engineering & Tech. Services  Learning Solutions  Grid Computing  WebFountain  Retail on Demand  Sensors & Actuators  Info-based Medicine  Blade Servers  Bus Process Integration  Dynamic Workplace  Flexible Hosting Services  Storage Software  STI Cell Processor  Product Lifecycle Mgmt  Life Sciences  Linux  Pervasive Computing  Digital Media  Network Processor  e-Markets

18. © 2006 IBM Corporation 18 Some external examples …

19. © 2006 IBM Corporation 19 Mike Giersch Vice President, Strategic Planning IBM Corporate Strategy giersch@us.ibm.com Thank You

20. © 2006 IBM Corporation 20 EBO Idea Sources Enterprise-Wide EBO Selection Criteria  Strategic alignment  Cross IBM leverage  New source of customer value New Markets New Business Models New/Disruptive Technologies EBO Categories Research External Sources (Customer, VC) Business Units Sales & Distribution  $1B+ revenue potential  Market leadership  Sustained profit potential Criteria and Selection of EBO’s