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International Business Machines Corporation, abbreviated IBM and nicknamed "Big Blue" (for its official corporate color), is a global technology and innovation company headquartered in Armonk, New York. IBM is the largest technology and consulting employer in the world, with more than 400,000 employees serving clients in over 170 countries (Linkedin 2010).
IBM was founded in 1911 when the company produced commercial scales and tabulators. At present, IBM is a leading global technology firm that offers a variety of products and services in the information technology industry. Their current businesses consist of 5 major divisions: Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment. IBM serves clients in a variety of industries, with the largest revenue generating industries being financial markets and small- and medium-sized businesses
Translating the technologies into value for the customers- through its professional solution, services and consulting business worldwide.
To meet and respond its customer needs, IBM creates, develops, and manufactures many of the world's most advanced technologies, ranging from computer system and software to networking systems, storage devices and microelectronics.
Strategies of IBM
At present, IBM is working with its clients to develop new business designs and technical architectures that allow their businesses the flexibility required to compete in this new landscape. The business is also adjusting its footprint towards emerging geographies, tapping their double-digit growth, providing the technology infrastructure they need, and taking advantage of the talent pools they provide to better service the company's clients (Wikinvest 2008).
IBM's strategy addresses this new era and delivers value to its clients through three strategic priorities (refer to appendix 1.1):
Focus on Open Technologies and High-Value Solutions
Deliver Integration and Innovation to Clients
Become the Premier Globally Integrated Enterprise
During this all time the financial position of company was under variety of risks.
The movement in interest rate and currency movements on outstanding debt and non-U.S. dollar denominated assets and liabilities.
Besides this, there was also a risk of collectability of accounts receivable and recoverability of residual values on leased assets.
Therefore, to avoid these risks company performs a sensitivity analysis. The purpose of this was to determine the effects that market risk exposures may have on the company's debt and other financial instruments.
New Growth initiatives of IBM
Porter's Five Forces Analysis
The competition in the IT market is so high and IBM has to compete with many powerful competitors in every fields of its operation. Then the level of rivalry within IBM's environment can be considered as high. Some competitors of IBM are as follow: HP, Dell, Acer, Apple, etc. (refer to appendix1.2)
Power of buyers
When a buyer has a lot of choices to choose from it brings down the price of product, and therefore bargaining power of buyer is high. The more options for buyers in the market means that, customers can choose from more brands like Compaq, Dell, Sony, etc. On the other hand bargaining power of customers is low when the buyers have only few choices.
Therefore, IBM must try to reduce the barraging power of the buyer (Qurratulainun 2008). This can be done by increasing its product demand through means like; amount of production needed and its products price. On the other hand, customers have lots of substitute (Refer to appendix 1.2).
3. Powers of Suppliers
Supplier power is high in this industry especially in providing microchips and microprocessors. Intel is the market leader of the industry with almost 75% of the market and there is no substitute for it. The next company is AMD with 15% market share is so far from Intel. Intel is the leader company in determining the price and it doesn`t left any opportunities for IBM or other manufacturers to have a direct effect on the supplier policies as 80% of them provided by Intel.
On the other hand Microsoft has the same situation with Intel as all the companies except apple provide its software from Microsoft and Microsoft software and operating system are used in more than 90% of PCs and laptops.
So bargaining power of suppliers is high following the reasons below:
Large number of famous suppliers for IBM components like hardware, keyboards, etc while for certain ACER and Compaq the supplier use a fake components.
Microsoft standard for all PC's and Intel standard for most PC's. IBM can choose either
High switching costs
4. Threat of entry of new competitors
Entering to this market is not easy for new companies (Oppapers 2010). It needs high model to have your own computer company. The threat of entry into IBM is moderate because the IBM industry has few major entry barriers.
IBM Threat of entry of new competitors is moderate because:
Less investment is needed for independent stores
Low product differentiation
IBM's brand name is well known and therefore could be barrier for new comers.
Low economies of scale
No legal or governmental barriers
5. Threats of substitute products or services
Threats of substitute products for IBM are moderate because IBM believes in innovation and therefore eliminate barriers by regularly updating itself. But at present IBM do face a constant threat of substitutes or services from other computer hardware products; such as, HP and Apple which are among its top competitors.
However, among these competitors, Apple is not a very important competitor due to price there is huge gap between HP and IBM and Apple. Moreover, Apple target market is different from IBM and HP. So, the competition is between IBM and HP and customer. On the other hand, there is not an important substitute for current product in the market. There are just in initial stage and cannot be important competitors for the current market.
McKinsey's 7S Analysis
Following I have done McKinsey's 7S Analysis and in Figure 1.2 illustrates the effectiveness of each of the elements of the McKinsey's 7S model (refer to appendix1.3). The biggest weakness in this diagram is the Structure, putting IBM in a critical risk with competitors. Employees deployed in consulting positions often are working alone, with their learning self-directed. While materials are available for learning on any conceivable subject that IBM has interest in, there is little direction in which materials to study or the relevance of subjects not in the immediate scope of the employee's current position or project. In turn, Structure weakens the Strategy and Shared Vision portions of the 7S diagram. IBM's strategy pertaining to its consulting base is strongly linked to employees sharing the same corporate vision.
PESTLE Analysis of IBM
Following I have done the PESTLE analysis of IBM which shows the overall affect of PESTEL on IBM and how it is helping or hindering its growth at present (Ivythesis 2009).
Favorable government policies
The healthy economic environment with strong and stable GDP provides a good market for the product and service business of IBM.
Disposable income can play a huge role
Economic recessions can impact clients who may cut back on spending on IT and business operations.
IBM may find that it needs to rely less on US operations for profit as emerging countries come on line, for example, Chinese companies looking for premium IT service.
Economic trends, such as inflationary factors that may hinder the economy or consumer purchasing power, can have a strong influence in the Internet industry.
The global market would be another lucrative market for the innovation company because there may be cheap technologies provided by some foreign markets.
Higher tariffs or a devaluation of the dollar may reduce the consumer purchasing power, causing a shift in consumer buying habit that, in turn, causes revenue loss for IBM.
Technology allows employees to collaborate and work far away from each other
Workers are gradually graying, becoming older as boomers move toward retirement.
Employee needs and desires change as workforce becomes more diverse.
People become more dependent on technology now.
IBM is the trendsetter and market maker for new technology for IT automation and business.
IBM continuously innovates as anything can be copied or adopted by rivals.
Advancements in technology can affect an organization's products, services, markets, and competitive position.
It is likely that old standards can be disrupted overnight with introduction of a new technology.
Advancements in products can also create new markets which can change the relative competitive cost positions in an industry and render existing products and services obsolete.
Supportive export policies and control.
What may be legal in one country may not be in another.
Financial practices may differ.
Work will go smoothly, as there would be less environmental issues and threats.
Natural disasters can disrupt IBM operations.
Focus on 'green' technology an important issue as clients and governments try to address global warming.
Analysis of Suitability, Feasibility, and Acceptability
Following I have done the SFA analysis of IBM:
The chosen strategy (to deliver value to enterprise clients through integrated busiÂness and IT innovation) fits in with the aims of creating sustainable and hard to duplicate competitive advantage for IBM, while avoiding problems with recruitment or inefficient training mechanisms (Finance 2010).
IBM has spent much energy solving the 'hard' factors of virtualization, the balance remains on focusing on the 'soft' factors. The transformation is based on behavioral and people management issues, and not reliant on technology that needs to be invented or software that may not be used or accepted.
There will be certain employees who will not accept any changes, no matter how beneficial these changes are thought to be. For this reason, this transformation must be targeted to employees who are receptive to changes that will be beneficial for themselves, their career, and for IBM.
My views on SFA Analysis
According to me from the SFA analysis, the Transformation will target IBM's highly motivated employees, with a suitable reward mechanism, to ease the isolation from the virtual work environment. The end result will be a migration into learning teams that cannot easily transferred to competitors if an employee leaves IBM.
Value Chain Analysis
IBM can be split into its components using Porter's Value Chain, as shown in
Figure1.3. In this figure, arrows in red indicates weak linkages, while an arrow in green show strong links.
Playing to IBM's strengths is the strong link between Technology Development, Procurement and Inbound Logistics, as IBM has aggressively acquired or developed a wide array of technology platforms that meet the challenges of clients' needs, as well as a willingness to support non-IBM products (Freeonlinesearchpapers 2009).
As it is been clear that IBM's profits have increased as a direct result of widening margins despite low revenues. This is a result of cutting overhead and improving efficiency, but there is a natural limit to how long this trend can continue. To increase profits, revenues must increase. The weak link between Human Resource Management, Organization's Infrastructure, and Operations is the lack of differentiation between IBM's pool of consultants and the same pool at IBM's closest competitors. Areas that need stronger contributions to margins are indicated in yellow. Therefore a new organizational infrastructure and HR management is need for IBM so that it can keep on generating revenues and high profits.
According to me gap analysis is very important for company to set itself for future target and see what it can achieve. Therefore, I have done gap analysis between IBM's present state and the desired state in next year as follows;
Loyalty and belonging to immediate surroundings, such as client worksite.
Loyalty, connections, and fulfillment within IBM.
Create networking structures to overcome drawbacks of 'virtualized' workplaces.
IBM employees must decide their own learning strategy on own perception of industry trends.
Directed training programs to keep ahead of client demands and industry trends.
Create training programs based on informed decision on technology and demand trends.
IBM employees an move to competitor easily.
IBM employees reluctant to move to competitors because of loss of peer networks.
Enhance and encourage employees to work together, even with geographical gaps and across projects
Clients get the knowledge that comes with the IBM employee.
Clients get the same knowledge plus everyone else on the employee's network.
Encourage networking and track metrics and effectiveness of teamwork.
Revenue was down.
Revenues increase markedly; goal is 10-15% over three years.
Implement strategic planning with ultimate goal of revenue enhancement.
Benchmarking Financial Analysis of IBM with its competitors HP and Dell
At present time, we all know that before investing in any company, an investor looks at its balance sheet so that he or she can get the full knowledge of company, its performance and how safe it is to invest in that company. Therefore, following I have done the Financial analysis of IBM, HP, and Dell in which I have taken four major analysis from which we can see how company is doing in terms of Growth, Profitability, Liquidity and Credit risk. Besides this I have also done a two year (2008-2009) financial/ratio analysis of all three companies (refer to appendix 1.4) which helped me to look at the overall situation of companies and with the help of which I have done four analyses which are as follows.
For growth analysis I have looked over company's sales, net income and dividend. Overall it shows that though sales were down, but IBM's net income was increased by 8.5%. IBM's dividend was also by 6% to $2.9 per share.
This shows that company is growing, but at a medium pace. To maximize its growth IBM should try to increase its sales in BRIC countries where they are still lacking in making customers.
For this I have seen company's gross margin which was increased from 2008 (49.3%) to 2009 (50.9%), due to manufacturing and logistics cost savings projects.
Increase in profitability margin is a good indicator which shows that company is operating very efficiently in term of generating profits. To keep its profits generating, IBM should decrease its manufacturing and distribution cost.
To see how liquid (fast it can turn its assets into cash) is IBM I have taken current and quick ratio of the company. After doing the ratio analysis I have seen that both current (1.36) and quick ratio (1.24) increased.
After looking at the current and quick ratio I can say that company is liquid enough to meet its near term operating needs and has enough cash on hand to pay bills and keep going because the ratio is more than 1. As a recommendation I would like to say that company should take less liability (Loans) because of fluctuating interest prices which could create tension among shareholders.
Credit Risk Analysis
To explain how risky company is, I have taken debt/equity ratio. In 2009 debt/equity ratio decreased from 7.13 to 3.82.
It seems like company is doing great in 2009 in terms of proportion of debt to shareholder's equity it is using to finance a company assets. My recommendation is that though debt/equity ratio decreased to 3.82, it is still high and company should try to get it sum where around 2 to be on the safe side.
Strategy during Recession
As we all know that past 3 years have been really tough on IT industry. But despite so much volatility in the market, IBM managed to deliver outstanding performance. In addition to this company also purchased over 100 companies in the past few years, which helped IBM to maintain its portfolio of products and offerings to its clients.
The key belief of IBM strategy is, as follows:
â€¢ To shift its business mix of higher-value service and software to the next level.
â€¢ Turn into the leader in globally integrated enterprise
â€¢ Respond to its client needs by delivering them with integrated busiÂness and IT innovation
14.2 HP's comparison
As compared to IBM, HP sales were also down by $3 billion in 2009. Its net income decreased by 7.2% and dividend also fell to $1.85 per share in 2009.
HP's gross margin increased from 26% to 26.7% in 2009 which shows company is maintaining its profits.
Both current (0.98 to 1.22) and quick ratio (0.83 to 1.08) increased. Both ratios were over 1 which shows that HP is performing well and is liquid enough.
Credit Risk Analysis
HP's debt/equity ratio decreased from 2008(1.91) to 2009 (1.83). As compared to IBM, HP has a better and is avoiding risk. It is because its ratio is less than 2, which shows that HP is using less liability (loans).
HP's strategy to survive recession as compared to IBM
By trying to make long-term investments and by looking into important resources before knowing whether their predictions will accurately reflect customer demand for their products and services.
After developing a product, they should be able to manufacture appropriate volumes quickly and at low costs (Wolverine 2009).
Therefore, to accomplish this HP is trying to accurately forecast volumes, mixes of products and configurations that meet their changing customer requirements.
14.3 Dell's comparison
As compared to IBM, Dell sales remained same to $61.1 Billion; however its net income and dividend were down from its previous year which shows that company is not doing well at all. Net income was down by 3.2% to $2.45 billion and dividend was down to $1.25 from $1.31 per share in 2008.
Gross margin of Dell was also down from 2008(20.1%) to 2009's (19.2%).
Dell's current ratio was up from 1.07 to 1.36 in 2009. Besides this it's quick ratio also increased to 1.3 in 2009 from 2008's (1.01). Both ratios were up and more than 1 which shows company is liquid enough and can generate cash quickly.
Credit Risk Analysis
Debt/equity ratio also decreased in 2009 from 6.38 to 5.2, which shows that even though debt/equity ratio decreased it is still very high and company is very risky to invest in at current phase.
Dell's strategies to survive recession as compared to IBM
To maintain its position, the company is focusing on product customization and superior relationships with suppliers.
Dell's executives are aware that quality customer service is a key element of the company's success and are reportedly working towards improvements.
Dell brings few products to market and leverages technology created by other companies effectively and efficiently.
14.4 Conclusion of Competitor/Financial Analysis of IBM as compared to HP and Dell
Although IBM's main competitors are HP and Dell, each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while HP is more diversified as the leader in PCs and Imaging & Printing as well as offering IT services. Since IBM relies heavily on its Software and Services segment, it mainly competes with HP in the servers and IT services markets and with Dell in the servers and software markets.
Despite falling behind HP in 2009 in terms of revenue, IBM is the leader in servers, IT services, software, and has still more net income than HP or Dell. Also IBM leads HP and Dell in all measures of profitability, largely because IBM is focused on high-margin sectors such as services and software and has gotten out of the thin-margin PC business, in which HP and Dell are still heavily involved. With the global recession this divestment has proved to be beneficial for IBM with its profitability still growing even with a reduction in revenue. Further in terms of Liquidity and Credit risk analysis company is improving from its previous years but is still behind HP. This is because company is more dependent on its liabilities (loans), which proves to be expensive due to changing interest rates (Thewallstreetjournal 2009).
Total Revenue ($M)
Gross Profit ($M)
Gross Profit Rate (%)
Net Income ($M)
Revenue Growth from 2008 (%)
Finally, how IBM is doing at present and is it a good company to invest in for investors?
According to me all companies has its ups and downs, but it doesn't mean that it's not doing good. Even during the economic downturn IBM kept coming up with new strategies to keep its customers and shareholders happy. Therefore, yes I do think that one should invest in IBM and I can say this because of the following reasons (refer to appendix 1.5);
Wide international footprint
IBM's revenue is widely distributed across the globe protecting it from economic downturns in single countries.
Existing PC business has helped keep margins high
Diverse Business and Global presence
Venturing into South Africa (WSJ 2009)
New business in Britain
Leadership is key Obama Initiatives
Though IBM did well during tough times, but it should never forget that tough times like these demand new alternatives. In today's time IBM needs to develop effective business analysis and should focus its actions to accommodate the changing needs of customers in this economic downturn. Therefore, it's management duty to review and increase viable options and alternatives during these bad times (IBM Global 2009).
Therefore, to stay ahead in today's competition and stiff market conditions IBM should keep on innovating and improving. Some of the recommendations that I would like to suggest to IBM for its future growth are as follows:
IBM should pay more attention to its maintenance service. By this I mean that a complete line of support should be provided from product maintenance through solution support to maintain and improve its clients' IT infrastructure and needs.
With the changing time company should shift to higher value areas, and invest where management sees the best long-term opportunities and gains. This will improve the efficiency of the business.
Should have retirement related cost depends on factors like; financial market performance, the interest rate, environment and actuarial assumptions. This will save company a lot of money because everything will not be pre-decided and will change according to the economic conditions.
IBM should concentrate on having better advertising and promotional channel so that customer knows about its latest features. For example; In India there is not much advertising done by IBM as compared to HP. Due to which HP is ruling the market share at current scenario.
IBM should move its domestic employees overseas rather than fire them and hire new people overseas. Because those layoffs and new hires will come with hefty cost, which everybody wants to avoid in today's economic conditions.
The company has to make better processers although companies like DELL make processers the dealers has no credibility in them, because they suggest the intel processers are good.
The company may grow if the company merge or acquit the companies like HCL and Infosys as there turnover is huge.
Overall, IBM gained a good deal from its virtual workforce, being the pioneer in many cases. But now IBM must address the downside- the loss of companionship and knowledge sharing within a traditional office setting. The end result of transformation is to restore the social setting of the IBM employee, building loyalty to the company, promoting teamwork and reliance among peers, giving joy to the work experience, and satisfying clients with excellent service that cannot be obtained anywhere else in the market. At last, if IBM gets successful in achieving these values no doubt it would be in its best shape, and would end up in generating more profits and revenue, which every company wants in today's competitive market place. Finally, I would like to say that tough times demand new alternatives, and this is what IBM has to do.