To give you a perspective about the competitive advantage of IBM, try to imagine that every time people or businesses use Visa or Mastercard, it is IBM Mainframe that handles that transaction.
Cloud-based services like Dropbox or Ofice 365 give businesses and customers flexibility and convenience. No budget is needed for the IT department, no need for maintenance, the cloud is really a no-brainer solution. What you need are the device and the internet only – and the rest just happens online. In these days when The Cloud reign and rules, do our old friend IBM still relevant? Does IBM have sufficient competitive advantage to keep survive?
Competitive Advantage of IBM. In This Issue
Reliability is the first thing we should address
Down to Earth Stability
Kylie Jenner and her follower will never care if the Instagram server experiences some trouble and get a delay when the 23 years old celeb uploads her smoking hot body in a sexy bikini. The case is far different when an institutional trader buys a massive amount of stocks in the spot market. Even a few seconds of delay could cost millions of dollars.
This is why financial services, banking, credit card provider keep using mainframe technology as executors. It is also one of the reasons why IBM – apart from its disastrous mismanagement – still stands today, even in frayed condition.
So this is not only about speed.
It is reliability, massive volume, that be executed with speed.
To get more perspective, try to think about a person in ATM, every money transfer, flash sale on Black Friday, credit card transaction, the barcode that read the price. All the capabilities of the mainframe will dwarf most server computers like toys. The mainframe is like a ship for your delivery, it is stable, cost-effective, can handle in volume, and much stronger than a cool yacht. They sail and never fail.
Mainframe technology is old-fashioned, never cool, never gives euphoria. But their reliability is unmatched. This is the strongest competitive advantage that IBM has.
International Business Mainframe
Apple is well known for its vertical and closed-loop integration. They make their own chips – Bionic chips, A11 – they make their own OS – iOS, macOS – they have the devices – iPhone, iPad, Macbook – and accessories – Airpod. Moreover, they have their own retail store The result is a seamless experience for the user, No wonder Tesla desire to replicate that business model.
Our big blue friend has a similar approach but in a very old-school style. IBM has its own hardware, OS, source code (programming languages), and compilers. A competitor that dares to challenge IBM has to overcome this complexity first.
This is also why IBM has ultimate security – for being very different. A cybercriminal may spend years of his/her career hijacking x86 servers when he meets the mainframe, he is forced to learn new tricks. It is like entering a new maze that you never trained before.
Even when this mission is impossible to accomplish, another problem awaits.
IBM has a massive installment base, thus, the network effect and switching cost play their card. Building financial infrastructure isn’t like plug-and-play. You need to build it almost from scratch if you migrate from one vendor to another. Would the big boys be willing to shut down their service even for a day just to give chance another vendor to replace IBM? Imagine the transaction worth almost 3 Trillion dollars a day.
And as the economy grows, the number of related parties will increase. The result is an exponential growth of transactions. Handle it over to another name other than IBM is very risky.
The Competitive Disadvantage.
It is fair when we talk about the competitive advantage of IBM, we also talk about the disadvantages. As you may guess, this is big, secure, slow, reliable, everything with this characteristic always has drawbacks in agility and flexibility.
Mainframe relies heavily on a single Behemoth computer – it is expensive. If you have a small company and at the beginning of your early phase of business, the phase that you haven’t meet your “break-even” scale, using this kind of server will break your bank. So this isn’t a platform used by Steve Job or Bezos in his garage to build Apple and Amazon. This is a platform titan to titan scale.
So, due to this size, IBM could not catch the smaller opportunity. In this circumstance, the cloud meets that demand. Instead of really on one monstrous machine, the cloud company spread its services into similar and identical “small”. In the mainframe, the services are dedicated, one machine to one firm, in the cloud, a network of machines could serve a network of the different clients1. Hence, the cloud has flexibility. The customer only pays what they use, not the idle one.
Key Takeaway of Competitive Advantage of IBM
We are at the end of the topics, to sum up
- The ultimate point of IBM’s competitive advantage is its mainframe. It has very integrated, sophisticated services which guarantee reliability and security. Another notable fact is that IBM enjoys a first-mover advantage. They are the first mainframe company with the scale, this helps them to build a large installment basis. We encourage the reader to access here in order to get more perspective about large installments which create switching costs.
- IBM has a size issue, it could not catch the promising opportunity. The debate on this topic could be started by mention that IBM has acquired Red Hat, transforming them into a hybrid solution. It like emulate Microsoft come story, from windows to cloud. But we still not seeing the evidence. Its “all right” financial report for this segment is the result of cost-cutting, little engineering in accounting. We aren’t saying that there is no moat or competitive advantage in Red Hat, we just don’t see it yet.
Creating a narrative about IBM without mention its failure is unfair. We want to emphasize that right now we focus on its competitive advantage, another issue will be covered in the other section of this website. The lesson we like you to know is the more you understand the competitive advantage of a certain company, you are used to recognizing the potential stock or business to invest in.
But, as Warren Buffett and other gurus said, great business is one thing, management is another thing. So this is not the end of IBM analysis. It just telling you the power and the weakness of their brand.
- This illustration may little bit deviate from the technical standpoint but you get the idea