IBM shift from hardware to solutions paying off big

Big Blue rules.

IBM, a source of mainframes, servers, software and computer services, has the largest market capitalization among publicly traded companies not just in the Hudson Valley but on the entire East Coast.

In fact, as of Sept. 27, the Armonk-based company ranked No. 6 in the world in market capitalization, behind only consumer technology juggernaut Apple, oil giant Exxon-Mobil, Microsoft, Wal-Mart Stores and PetroChina.

Market capitalization -- the value of a company's outstanding shares -- reflects what owners of the company's stock believe the company to be worth in light of its future prospects.

Although rivals like Hewlett-Packard and Dell have languished, IBM's profits have climbed. That's due in no small part to IBM's strategic decision to move away from its former focus on hardware to become a "solutions" company, said James Kelleher, a technology analyst at Argus Research.

"They've been wildly successful since moving away from the hardware-only model," Kelleher said.

Rather than try to sell customers hardware components or packaged software, IBM analyzes the customer's problems and opportunities and comes up with a solution that combines hardware, software and technical services. As a result, hardware accounts for only about 15 percent of sales, and higher-margin software and services make up the rest, Kelleher said.

Playing to IBM's strength is the trend toward harvesting "big data" -- massive data stores drawn from user interactions with the Internet -- and using patterns in the data to understand everything from consumer tastes to traffic patterns in congested intersections.

For instance, officials in Rio de Janeiro, which will host the World Cup soccer tournament in 2014 and the Summer Olympics two years later, wanted to use data to get a coherent picture of the life of the city as a whole.

"Cities collect data on water usage, utility usage, traffic patterns," said IBM spokesman Michael Rowinski. "We helped them build an intelligent operations center that helps them understand the pulse of the city."

The company emphasizes it is not standing still. IBM invested about $6 billion in research and development in 2011.

"That's a big investment for any company," Rowinski said.

In 2011, IBM was issued 6,180 U.S. patents, more than any other company in the United States. Almost 2,500 of those patents were issued for work at sites in New York, according to the company.

Researchers at the Thomas J. Watson Research Center in Yorktown Heights developed a "cognitive system" called Watson that competed against two former champions at television's "Jeopardy" quiz game in 2011, beating both. The machine heard the questions posed as natural, spoken language and came up with the right answers faster than the humans in many instances.

Now researchers are hoping to harness the same technology to help doctors who are coping with a flood of new research.

Women have played key roles in building the businesses in the valley in recent years. In September, IBM's Virginia Rometty added the title of chairwoman to her role as chief executive. At the helm of PepsiCo, the No. 2 company in the Hudson Valley, is chairwoman and CEO Indra Nooyi.

Purchase-based Pepsi, with a market cap of $113.1 billion as of Aug. 15, is locked in a global battle for supremacy with Coca-Cola and is seeking growth in emerging markets by appealing to local tastes. The maker of 7-Up, Mountain Dew, Doritos, Quaker Oats and Gatorade has seen emerging-market revenue climb from $8 billion to $22 billion since 2006, said company spokeswoman Heather Gleason.

Food scientists in PepsiCo's Westchester County food science facility are helping to propel that growth by devising flavors that appeal to local taste buds. Fueling growth in Russia, for instance, are Lay's caviar-flavored potato chips. In India, it's magic masala chips, and in Thailand it's hot chili squid.

The company also hopes to stimulate growth by adding $500 million to $600 million to its marketing budget in 2012. One initiative: using the silhouette of pop icon Michael Jackson on Pepsi cans. Hudson Valley companies following IBM and PepsiCo in market cap are: MasterCard, Regeneron Pharmaceuticals, Bunge, Xylem, Jarden, Ascena Retail Group and MBIA.

In another measure of size, IBM's annual revenue also easily outstrips PepsiCo, the second-largest company in the Hudson Valley, $106.9 billion to $66.5 billion. Among the New York City-based companies, only Verizon Communications and JPMorgan Chase topped IBM's revenue numbers.