Editor’s note: IBM (NYSE: IBM) missed analysts’ expectations for earnings Thursday – a first since 2005. Kritsa Macomber is an analyst with Technology Business Research. She focuses in this story on hardware performance at IBM while stories circulate that IBM may sell part of its server business to Lenovo.

HAMPTON, N.H. – IBM will spark improved hardware revenue and profit performance during 2H13 by “rolling up its sleeves” to improve sales coverage and execution 

IBM’s Systems and Technology Group (STG) revenue fell a reported 14% year-to-year excluding the divested Retail Store Solutions unit during 1Q13 — with server and storage product lines all posting deteriorating revenue performance as compared to the prior quarter.

IBM executives did not hide disappointment in this performance, indicating a commitment to workforce rebalancing entering 2Q13 as a means to close prolonged mainframe sales engagements and regain share in high-growth countries such as China.

TBR anticipates aggressive sales efforts on the part of IBM through the remainder of 2013, with compelling total cost of ownership and return on investment propositions closely tied to critical segments such as cloud and mobile computing being essential to justifying higher price points as compared to competitors.

The picture is not unlike what competitor Oracle is facing, and particularly following both companies’ UNIX server portfolio updates, we expect the two vendors will be head-to-head in competing for many deals for the remainder of the year.

For its part, IBM has also indicated a renewed commitment to capitalizing on emerging opportunities—namely rising demand for Power-based Linux solutions, and mid-tier and flash storage. However, IBM is not alone in going after these opportunities, and will need to apply its large cash base for targeted R&D and M&A investments, while delivering a business requirements-led marketing approach to successfully monetize on these opportunities.

IBM To Protect Customer Mindshare

In an industry migrating toward software-defined, commodity infrastructure, IBM is encountering challenges in justifying its end-to-end value proposition as it shifts its x86 server business to a solutions-facing approach.

Despite the April 2012 PureSystems launch, System x continued on its trend of year-to-year revenue declines, falling from a reported 2% year-to-year loss in 4Q12 to a 9% year-to-year loss in 1Q13.

Cisco emerged to trail IBM as the fourth-largest x86 server vendor in 4Q12, and will continue gaining share on the back of rising popularity of its UCS platform. IBM reduced prices in 2012 in an effort to stave off some of these revenue declines, which helped drive sales of an additional 1,700 PureSystems from the close of 4Q12, but will continue to face competitive pressures in 2013.

We expect that the rising hyperscale server market, backed by the investment and marketing leverage of the likes of HP and Dell, will have an increasingly disruptive effect on large-scale deployments of traditional x86 servers in the critical areas of cloud, big data and social networking—where IBM is currently strong, and must protect customer engagements from a strategic perspective.

TBR expects continued investment from IBM in areas such as VDI-facing solutions built on two-socket System x servers, differentiated with capabilities such as load balancers, virtualization software and implementation services, will help it to protect its market share and rekindle demand for System x.

IBM’s All-On, End-to-End Flash Strategy

Increasing business requirements for IT infrastructure performance and efficiency will accelerate demand for flash storage in 2013 and beyond.

Although TBR believes the concept of end-to-end flash adoption in the enterprise that IBM presented in its April “Flash Ahead” strategy introduction is a longer-term view, the vendor’s investment leverage, with plans to spend $1 billion in flash-related hardware and software development, as well as its robust services capabilities and expansive enterprise customer base will help drive development of the market and an uptick to adoption of flash in the enterprise during 2013.

Of course, IBM is far from alone, with competitors such as EMC also investing in flash-related R&D and acquisitions. TBR anticipates rapid consolidation and maturity of the market during 2013.

Customers are intrigued by the improved application performance, system utilization and reduced operational expenses promised by flash storage vendors including IBM. However, prices for flash storage technologies will remain high relative to traditional disk-based storage into the foreseeable future, spurring customers to exploit smaller but strategically placed deployments of flash—such as server-side flash cache.

IBM has yet to achieve year-to-year storage revenue gains since 3Q11, so much rides on IBM’s ability to leverage this flash strategy to refine conversations around end-to-end workload optimized solutions that IBM is having with customers as IT efficiency grows ever more critical to business advantage and reignite demand.

IBM will need to justify a highly compelling price/performance value proposition, touting workload efficiency and scalable capacity that customers can add as they need, to help bring its vision of end-to-end flash to fruition. IBM’s Centers of Excellence, its broad technology scope and messaging focused on business impacts such as how IBM customers are engaging with their clients will help IBM drive home the economics of flash and gain customer mindshare.

[IBM ARCHIVE: Check out more than a decade of IBM stories as reported in WRAL Tech Wire.]