Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
IBM Business Leadership Forum
St. Petersburg, Russia
June 6, 2007
Good morning, and welcome to St. Petersburg and the Business Leadership Forum. I have to begin by saying thank you, to each of you, for joining us for what promises to be a provocative and productive couple of days.
We began these sessions four years ago, when many industries, and many countries, were just beginning to confront a number of daunting—and historic—developments. We wanted to bring together leaders from business, government, academia and policy to discuss these issues and, most of all, to share what we can do about them—how to use them to our best advantage, to change the game, to grow our businesses and nations.
We have gotten enormous value from these meetings:
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This year's IBM Business Leadership Forum is our largest ever—we even had a waiting list of CEOs! More than 550 business, government and academic leaders from every sector of the economy, and every corner of the world, have joined us for these next two days.
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As you saw in the video, we have hosted these forums in San Francisco, the nexus of the United States' famed Silicon Valley; in Paris and Rome, two historic capitals that are transforming for new roles in the global economy; and in Shanghai, the rising powerhouse of the East.
This year, we have chosen St. Petersburg, a city perhaps better known for culture than for commerce.
Why St. Petersburg—and why Russia?
When this city was founded 300 years ago, it was called Russia's "window to Europe." Today, it is a window to the world. A century ago, St. Petersburg was one of the financial and industrial capitals of Europe. Today, it is re-emerging as a center of industry, transportation and commerce.
As we heard from the governor of St. Petersburg last evening, Mrs. Matvienko, and from the director of the Hermitage, Dr. Piotrovsky, the city has both a rich cultural history and a promising economic future.
Last year, when the Russian Federation held the presidency of the G8, the world's largest industrialized economies, its leaders came here for their annual economic summit. At the same time, the finance ministers of China, Brazil and India also met in St. Petersburg to discuss ways to enhance dialogue between developing countries and the G8.
That's telling, because Russia is a pivot point between those two worlds. It has long been a global power, both economically and politically. Yet, as the country emerged from nearly a century of Communist rule, its economy was very much that of a developing nation. There was considerable work to do to bring Russia fully into the global, capitalist economy.
Russia's economic development in recent years has been extraordinary:
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What's happening here is the product of economic forces that led us to create the IBM Business Leadership Forum five years ago.
These forces will be the focus of much of our discussion over the next two days.
What are the revolutionary changes that led us to create this forum—and that continue to challenge businesses and nations around the world?
You could name dozens, but I believe there are three of overarching importance:
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Emerging markets already own three-quarters of the world's foreign exchange reserves.
And those markets will make up more than half of the global economy 25 years from now (up from 21 percent today).
One billion new consumers and investors will turn many emerging markets into middle-class economies. These are the fruits of globalization, and they have enormous implications for every one in this room.
Altogether, these three forces have caused value, opportunity and profit to shift across every industry and every region of the world.
Let me spend a moment on each.
We have seen the emergence of a new computing model, built on a new global infrastructure based on open standards and technologies.
Where has this new model come from?
Obviously, the Internet is interconnecting everything—people, businesses and institutions. After just one decade, there are a billion people, millions of businesses and perhaps a trillion devices connected to the World Wide Web. Here in Russia, almost 20 percent of Russians currently use the Internet, a population that is growing at double-digit rates each year. The Russian government predicts that by 2010 more than 70 million Russians will be online.
At the same time, computing power has been growing by leaps and bounds. By 2010, supercomputers will be capable of 10 quadrillion calculations per second.
And finally, there has been a proliferation of connected technology in devices, in transportation systems, retail … in the very infrastructure that underpins how we all live and work.
Did you realize that last year, the world produced more transistors than grains of rice—and at a lower cost? In actual numbers, we are on track to producing 1 billion transistors for every human being on Earth by the year 2010. About half of those are built into consumer electronics. But a growing number are things like RFID tags, which are helping to monitor everything from auto parts moving around on the production floor to cartons of tomatoes en route to market.
Together, embedded technology and pervasive networking have displaced the PC-based model of computing of the 1980s.
I promise not to bog you down with technical jargon. But if you've ever heard terms like:
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… then you are hearing about aspects of the new computing model.
At IBM, we recognized that this new computing model would change the way businesses applied information technology. We knew that businesses and industries were going to need to respond rapidly and effectively to a volatile marketplace—so companies would need to take all this advanced technology far deeper into their organizations.
Their aim? Not merely to reduce costs, but to use technology to be more innovative—in their products and services, of course, but also in their business processes and business models.
As leaders, you recognize that there are two options—either create the differentiating value that brings greater profitability, growth or societal value … or be a commodity player, focusing on high-volume, mass-market products and services at the lowest possible cost. As Jeff Immelt from GE said at the opening of the video we just saw, "If you can't differentiate yourself, you are going to be commoditized immediately." And the only way to achieve differentiation is through innovation.
The good news is there has never been a better time to be an innovator. In a world where everything is connected ... where massive computing power is available to everyone ... where you can reach out to any marketplace on earth and get skills and ideas in return ... in that kind of world, you have the makings of an unprecedented explosion in creativity.
The possibilities of innovation have generated enormous demand for two major resources—technology and talent.
We talk about how technology has become pervasive. Imagine what you can do with intelligence built into all your products and your processes. Or consider the power of supercomputing. You don't need to be a Fortune 500 company or a member of the G8 to access that power today. It's now available to governments and companies of every size, in every industry, in every community. In fact, supercomputing can now be accessed on demand by just about anyone—the average cost of CPU time is about 50 cents per hour.
As for talent … imagine what you could do with a workforce of 800 million. That's the size of the labor pool in China. Or could you get by with 500 million? That's the size of the labor pool in India—double the size of the workforce in the entire European Community. Those two countries alone are graduating nearly 1 million new engineers every year.
In fact, exceptional talent is everywhere. And the good news is you can tap into it whenever you need to. Thanks to integrated software architectures and new business models, enterprises today are knitting together teams of highly specialized experts and integrating their capabilities into their overall operations.
It is this combination of technology and talent … invention and insight … that sparks innovation. But even with an abundance of technology and talent, innovation doesn't happen on its own.
Last year, we surveyed 750 CEOs and government leaders around the world to get their perspectives on innovation. There are two important findings from that survey that I want to share with you.
First: The best innovators don't do it all themselves. They collaborate. When we asked CEOs about the best sources of innovative ideas, their top answer—not surprisingly—was their own employees.
What's fascinating were the next five: business partners, customers, consultants, competitors and industry associations. All of them external sources. Internal R&D came in a distant seventh place.
The fact is, in a flat world, no enterprise, no university, and no national economy stands alone. Every one of our organizations is part of an ecosystem of business partners, government agencies, universities and research labs, customers and competitors.
Global connectivity gives us the unprecedented ability to collaborate and learn from one another. That's why vertically integrated, internally focused R&D is giving way to joint ventures, licensing, outsourcing and other forms of collaborative partnerships.
Second: CEOs and government leaders told us that we need to approach innovation from a broader perspective than we might be accustomed to. Most of what you traditionally hear in terms of innovation focuses on cool new inventions—the next iPod, hybrid automobile or search engine. That view of innovation isn't entirely wrong, but it's incomplete.
The biggest opportunities in innovation do not reside exclusively in our product and service lines. They are locked inside our business processes ... our management systems ... our policies and governance ... our operations ... even our corporate cultures.
Product and service innovation will always be important. But I believe each of us has the potential to unleash innovation in virtually every part of our enterprise.
Consider the opportunities to apply innovation in your business processes, for example.
From the supply chain, to human-capital management, to manufacturing, to R&D, every system that makes up your enterprise's operations can be transformed through the application of technology, and through partnerships that can give you access to global talent, global scale and greater expertise than you have internally.
Perhaps the biggest opportunity lies in applying innovation to the fundamental business model that defines your enterprise. CEOs told us they are pursing business model innovation for two reasons—one, because their competitors are doing it, and two, because it pays off. When you compare business performance, those companies that have grown their operating margins faster than their competitors are putting twice as much emphasis on business model innovation.
And if business model innovation is the most alluring opportunity, arguably the most difficult challenge is how you create a culture of innovation—not just coming up with new ideas, but building a capability that is a sustainable part of your operations.
There is much more to say about each of these dimensions of innovation—more than anyone can cover in one speech. So what we've done this year is to build our entire agenda around innovation.
Starting this morning, every session over these next two days will focus on a different aspect of innovation that our survey of CEOs and public-sector leaders highlighted as crucial—and we'll talk about how these apply to our organizations.
By the way, I am sure you saw in your welcome kits, we have kiosks set up around the Philharmonic. You will have the opportunity to do an instant innovation survey … and answer on a range of key issues we are facing today as leaders. I encourage you to share your point of view … and in my closing comments tomorrow, I will share with you some interesting insights and possible trends!
Let me now talk about the globalization opportunity.
Simply put, what does the reality of globalization mean for our organizations, our industries and our countries?
A lot of people think this is all about lower cost and labor arbitrage. But what's happening goes far deeper than that.
Today, small companies can be global, and established corporations can be more agile. Developed nations can market their unique skills, and developing regions can compete and dramatically improve their standard of living. The Internet, free trade and more open societies have allowed work to flow from anywhere, to anywhere.
That, in turn, has led to new institutional forms. With the emergence of this entirely new business environment, we are seeing the sunsetting of the multinational corporation. When I started at IBM in 1973, we were a classic multinational. We had "mini-IBMs" in dozens of countries around the world. Each country operation had its own sales force, its own supply chain, procurement, finance, HR and other so-called 'back-office' functions. In many cases, the countries had their own manufacturing, development, even research capabilities.
For a time, this was the most efficient way to grow in local markets. But what once looked like efficiency has now become redundancy. In an increasingly interconnected economy and society, the multinational model is expensive, and increasingly it gets in the way of speed, responsiveness and innovation.
Replacing it is something we call the globally integrated enterprise. If you look at the globally integrated model architecturally, you see it's very different from the centralized hub-and-spoke model of the 19th century, or the linked nodes of the 20th century multinational. The globally integrated enterprise is inherently distributed, componentized and pervasively interlinked.
In fact, we define it this way …
A globally integrated enterprise locates operations and functions anywhere in the world based on the right cost, the right skills, and the right business environment. It focuses on what it does best, and it partners with other specialized companies and organizations as part of a diverse ecosystem. And it integrates all of this horizontally and globally.
IBM is on its way to becoming a globally integrated company. We have been flattening hierarchies all over the company. We've restructured regional headquarters and directed more resources out into the field. We are capitalizing on skill and expertise everywhere in the world, increasing capability in emerging markets in India, China, Brazil and Central Europe, even as we continue to hire in advanced skill groups in the U.S., Western Europe and Japan.
Our clients have expressed a great deal of interest in learning about how to become globally integrated. Certainly the established multinationals see the potential. But I would say that smaller and mid-sized companies, and emerging economies in countries like Russia, are even more advantaged in this flat world.
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But whether you are a multinational or a startup, a mature economy or an emerging market, all of us today have to confront a new reality: When everything is connected, work moves. And the key question for all of us is: What will cause work to move to me? In other words, the way we have to compete in today's global economy is to understand the principles of global integration.
As we see it, the flow of work today is driven by three principles.
First, Economics. You can't fight the laws of economics. A key determiner of where and how work will move is cost and profit potential.
There's no question that low cost has been the initial reason why so much work has moved to places like India, China and Latin America. Indian and Chinese labor costs, for instance, are one-tenth those in America and much of Western Europe. By one estimate, between 2000 and 2003 alone, foreign firms built 60,000 manufacturing plants in China.
But costs aren't the only factor. If they were, we'd see everything commoditizing and all work flowing in one direction. And that's not what's happening. Why are European biotech and pharmaceutical companies like Roche and Eppendorf building manufacturing and R&D centers in the U.S.? Why did IBM's annual survey of foreign direct investment trends in manufacturing, services and R&D in 2005 indicate that Europe regained its position as number one—attracting 39 percent of all projects, vs. Asia's 31 percent?
Just outside of St. Petersburg, Toyota is building a plant in Shushary that will employ 600 workers who will produce a total of 16,000 cars in 2008. The plant eventually will produce up to 200,000 vehicles per year. Toyota also plans to localize the production of components, potentially lowering production costs by 10 to 15 percent. In a few moments, you will hear directly from Toyota's chairman, Fujio Cho, about his company's ability to capitalize on global economics to drive an innovation agenda.
In all of these cases, companies are not moving solely or primarily to low-cost environments. What they're doing is obeying the second law of global integration—Expertise. In a world where the means of production and distribution are increasingly available to anyone, the only way to differentiate yourself is to have better skills, to have a better idea, to come up with a more innovative solution, to know more than the next guy, and to apply it more effectively.
The talent in emerging economies around the world is enriching the world's marketplace of expertise. India has been able to produce world-class schools and turn out huge numbers of graduates in disciplines such as engineering. By the end of this decade, India will have more than 21 million college graduates and the second-largest pool of scientists and technology professionals of any country in the world. The numbers count. That's why there are so many high-tech companies that are successful in India and stepping out onto the world stage. Education makes a huge difference.
I believe that expertise is also Russia's key differentiator in the globalized and networked world. This country has a 50-year legacy of IT education, as well as strengths in aviation, space, manufacturing, metallurgy, biology, physics and engineering. In Russia, 50 percent of university students study science and technology, and more than 1.3 million have graduated with IT-related degrees over the past seven years. The average Russian dedicates more than 10 years of his or her life to schooling after the age of 25. This is among the highest rates in the world, ahead of Brazil, India and China, as well as Germany, Japan and the United Kingdom.
And it's showing up in the marketplace. According to the Russian government, exports of Russian programming products and services increased by 80 percent to $1.8 billion in 2006 compared to $1 billion in 2005. The government expects this to rise 10 times by 2010.
Russian companies are competitive in the global IT services market not simply because they have lower costs, but because of their ability to tackle non-standard tasks essential for product development, and to manage high-end, complex projects. That's why IBM has collaborated for years with Russian companies like Luxoft and Axmor on important areas of our own global product development. Russia's large pool of highly skilled professionals with mathematics and science backgrounds is also what led IBM to open a product development lab in Moscow in 2006.
The last of the three drivers of global integration is Openness—in trade, technology and commerce. You can't defeat open systems and open approaches. You may be able to interrupt the spread of openness or temporarily delay it, but I don't think there's much doubt that open approaches will win out in the end.
They provide a level playing field, which stimulates competition, innovation and the free flow of goods and ideas. Importantly, systems that are open nurture collaboration—the co-creation of value, such as the Linux operating system, which is developed by countless programmers collaborating on the Internet.
Since the economic problems of the mid 1990s, the Russian government has come a long way toward establishing a more open, market-based economy. Foreign trade has grown significantly, and there has been strong foreign investment from many global companies that regard Russia as an exceptionally good place to do business.
We have much to learn from countries like Russia and other emerging markets about what government can do to capitalize on open technologies to foster open trade and commerce.
And we all have a lot to think about in terms of the broader, long-term implications of this new world that is emerging around us. The most important of those implications, frankly, go far beyond commerce. They go to the basic relationship between enterprises and communities… between governments and citizens… and between institutions and the people who make them up.
I hope we'll get into some of those subjects, too. In fact, given the people who have come together here, I know we will.
As I mentioned earlier, we have structured our agenda over these next two days to look deeper at the dimensions of innovation and how they relate to the forces of change that I've discussed with you today.
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Over these next two days, some of the great minds that have analyzed the revolutionary changes going on around us—in society and the economy, as well as in technology—will share their thinking with us.
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Globalization … innovation … integration … all of these are enormous challenges. But the opportunities they represent are equally grand. I believe we can all look forward to an engaging and productive exchange as we tackle these big issues over these next two days.
I am tremendously excited about the ideas and questions that are about to be unleashed in this auditorium and in these hallways. If you are new to these forums, I promise you, it is an experience unlike any business conference you have ever attended. What begins here as a conversation evolves into innovative strategies and competitive dynamics that will change the world.
The first question is: Are you ready? I'm guessing that you wouldn't have come to St. Petersburg if the answer was not a resounding YES. So let's get started. Again, a warm welcome to you all, and thank you for joining us.
