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Chairman’s letter

A New World

At the opening of this letter, I said that we intend to capitalize on our strengths in order to seize the growth, profit and leadership opportunities presented by today’s global marketplace. Let me close with some thoughts on what will be required of any company seeking to do that.

On the prospects for continued global growth: When people look out at the global economy today, some are concerned about ripple effects. They fear the impact on overall growth—even in the developing world—of a possible downturn in parts of the developed world. Now, I’m not an economist, but let me offer a perspective based on my experiences as I visit IBM’s clients and our own operations around the world.

You only have to get outside of the United States to see that something very new is happening today. The world’s growth markets are no longer as dependent on import-export, on the exchange of raw materials for industrial goods. Instead, they are innovating. They are differentiating. Most importantly, their people are becoming consumers; they’re joining the middle class. Hundreds of millions of people are opening their first bank accounts, getting their first cell phones, using their first credit cards. Tens of millions are buying their first automobiles. These are historic developments, and are pretty far removed from economic fluctuations in the United States, Europe and Japan.

And consider what has to happen to give all of those people cell phones, financial services and cars. Infrastructure has to be built and developed, and not only the IT infrastructure I discussed earlier, but business infrastructure—for banking, manufacturing, telecommunications, transportation and government services.

Your company knows a thing or two about how to build both kinds of infrastructure to support the way the world works. We’ve been doing that for nearly 100 years. However, our ability to focus on markets that are small today but with great upside potential was inhibited in the past by our own organizational structure. When you group such smaller markets with big ones, they tend to be overshadowed and to lack proper management attention, investment, skills and support.

That is the reason we are creating a new Growth Markets organization, to be headquartered in Shanghai. Its goal is to accelerate IBM’s global growth significantly. I believe this is the best way to ensure that these markets get the talent, investment and attention they deserve and need in order to keep growing.

On local engagement: To be truly global today, a company has to do a lot more than set up sales offices or research facilities in multiple markets, or send its people on international assignments. Doing business in the developing world is about relationships, not just transactions. You have to engage at the level of culture, as well as process. You have to build trust. You have to be integrated on the ground, working shoulder-to-shoulder with local suppliers, governments and communities, and understanding their point of view on business and innovation. You have to help them advance their agendas, not just your own. And you have to train your leaders everywhere to be global leaders.

This takes time. You can’t “leapfrog” into being a global company. You’ve got to be committed for the long term, and you have to invest, on multiple levels. IBM has some unique historical, organizational and skill advantages here—but they will only remain advantages to the extent that we continue to make them real every day, in IBMers’ actions, behavior and relationships as global professionals and global citizens.

On developing global professionals and citizens: Of all the issues facing business and society with regard to global integration, perhaps the most challenging is this: How does the individual compete and win in a global economy? This is, on the one hand, what makes globalization such an emotional and polarizing issue to many people. But it also opens up some of the most promising opportunities for organizational innovation in business today—driven by the need to help our people succeed in this new environment.

Last year we introduced the IBM Global Citizen’s Portfolio. It aims to provide our employees with the tools they need to enhance their expertise in a global context. Those tools include a matching fund to support the IBMer’s own learning and exploration—even if not related to his or her current job. We are helping retiring IBMers to transition to second careers in teaching, government service and nongovernmental organizations. And we’ve established a program called the Corporate Service Corps, in which teams of high-potential IBMers from around the world—our leaders of the future—will come together for one-month projects on economic development, environmental and other problems in developing countries.

The underlying idea here is that individuals are in the best position to make decisions about their own work, learning and careers. This shift of control and decision-making to the IBMer represents a very new relationship between enterprises and individuals—and that involves a certain degree of risk. Sharing power always does. But if you trust your strategy, your capabilities and your people—and if you are confident that all are grounded in a set of shared values—then this is the kind of innovation you pursue. It’s one more example of playing offense in a very new game.

I’m deeply gratified that our employees’ reaction to the Global Citizen’s Portfolio has been so enthusiastic. We are, for instance, oversubscribed by thousands of applicants for the Corporate Service Corps. IBMers have a very mature understanding of today’s new environment. They know the world is changing. They don’t expect—or in many cases, even want—what business used to provide. What they do want is an opportunity and some help to learn and grow, so they can effectively compete on a world stage. This is probably the single strongest reason for my confidence in IBM’s future.

. . .

As we enter a new era of technology, business and global society, I am proud of the worldwide IBM team for bringing us to this point, and I am grateful to you, our shareholders, for your support in our journey. I hope and trust that you are pleased with how your company is growing and evolving. My colleagues and I are excited by the possibilities for how we, together with our clients, our partners and you, can bring this remarkable enterprise into its next era of leadership and discovery.

Samuel J. Palmisano signature
Samuel J. Palmisano
Chairman, President and Chief Executive Officer

The selected references in this letter to the company’s financial results excluding the Global Financing business are non-GAAP financial measures, and these references are made to facilitate a comparative view of the company’s ongoing operational performance. Additional information on the use of these non-GAAP financial measures is provided in the company’s Form 8-K submitted to the SEC on January 17, 2008 (Attachment II — Non-GAAP Supplementary Materials).

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