Betting on a Xerox Transformation

One of the great tech success stories of the last decade is IBM's (IBM) transformation from a hardware provider to a company that sells software and services. It had to leave behind decades of tradition, dump product lines (including personal computers) and change its culture to be successful. It was not an easy journey, but it was a rewarding one, including for shareholders as the stock price has more than doubled over the last decade and the company now gets less than 20% of overall revenues from hardware. Had it not undertaken changing its business model, it would have found itself in the same existential struggle as Hewlett-Packard (HPQ) and Dell (DELL) currently face. Both of these companies are trying to achieve a similar strategy now, but it might be too little, too late.

Moving from hardware to software and services provides several significant advantages to companies. These services are less cyclical, are more recurring, tend to have higher profit margins and require less capital investment than producing tangible products like mainframes or laptops. As IBM moved more to a software and services model, it was able to increase earnings even as overall revenues have remained flat for more than five years. In addition, it has been able to use the increased cash flow to reward shareholders by raising its dividend payouts and buying back more stock....230 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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