IBM Case Study

University of Jordan Faculty of Business Strategic Management

“International Business Machines” Strategic Ananlysist

Prepared by Fathi Salem Mohammed Abdullah

2009

Table of Contents Topics

Page

Introduction and brief history of IBM

3

Vision, Mission, Value

4

Porter’s Five Forces Framework

5

PESTEL Framework

6

External Audit

7

CPM-Competitive Profile Matrix

7

External Factor Evaluation (EFE) Matrix

8

Financial Ratio Analysis

9

Internal Audit

11

Internal Factor Evaluation (IFE) Matrix

12

SWOT Matrix

13

SPACE Matrix

15

Grand Strategy Matrix

16

The Boston Consulting Group (BCG) Matrix

17

The Internal-External (IE) Matrix

17

The Quantitative Strategic Planning Matrix (QSPM)

18

Recommendations

21

References

22

Introduction: Brief History of IBM:

2

In 1886 Herman Hollerith, a statistician for the US Bureau of Census formed the Tabulating Machine Company and Thomas J. Watson became its leader in 1915 and made the company slogan “Think”. It changed its name to International Business Machines (IBM) in 1924. It was taken by the US government at the beginning of World War II in the war effort and given a one percent profit, which it used to fund war victims and orphans. During the period between 1910 and 1960, it developed products from punch-card tabulating machines to room-sized calculators to mainframe computing systems for large enterprises and changed the nature of accounting, calculation and basic back-office business processes. In the 1970s and 80s, IBM product lines expanded from its traditional mainframes to minicomputer and personal computers and applications moved from backend operations to departmental operation. In 1981, the company introduced the IBM Personal Computer or PC, allowing the use of computers in schools, homes and businesses. Components for the computer were sourced from outside the company. The processor chip came from Intel and the operating system, called DOS (Disk Operating System), came from Microsoft. IBM introduced the ThinkPad in 1992, the first in a series of notebook computers to be manufactured by the company. In 1995, IBM acquired Lotus Development Corporation and Tivoli Systems. In 1997, IBM demonstrated computing’s potential with Deep Blue, a 32-node IBM RS/6000 SP computer programmed to play chess on a world class level. During the nineties, with the Internet and open standards, IBM embraced the network computing model and coined “ebusiness” to describe how network computing can transform core businesses and transactions. In October 2002, IBM acquired PwC Consulting, the global management consulting and technology services unit of PriceWaterhouseCoopers. IBM sold most of its hard disk drive operations to Hitachi in December 2002. The sale involved the creation of a joint venture called Hitachi Global Storage Technologies, which was 70%-owned by Hitachi. In 2003, IBM Research launched On Demand Innovation services, which teamed customers with a team of researchers who specialize in business transformation and technology 3

consulting. Over one billion will be spent over the next three years and will be staffed with 200 IBM research consultants. Today, IBM is by far the largest information technology in the world and the eighth largest company in the world. In 2003, it had revenues of US $89.1 billion, a net income of 4.32, more than 366,000 employees in 170 countries with approximately sixty percent of revenues generated outside the United States.

Vision Breakthrough microprocessor architecture that puts broadband communications right on the chip.1 Mission At IBM, we strive to operate in the invention, development and manufacture of the industry's most advanced information technologies, including computer systems, software, storage systems and microelectronics. Values We translate these advanced technologies into value for our customers through our professional solutions, services and consulting businesses worldwide.2

Porter’s Five Forces Framework:

The Threat of Entrants: The threat of entry is low because the costs of R&D, support products and services, manufacturing, and distribution are very high. 1

www-304.ibm.com

2

manonamission.blogspot.com

4

Bargaining Power of Buyers: The power of buyers is high because the switching costs for buyers are low; there are also many product choices for the buyers. Bargaining power of suppliers: There are two biggest processor suppliers in the world who have very strong power on the chip supplying. However, the power of supplier for other low required materials and parts is lower than the main suppliers. Threat of Substitutes The web hosting business of other companies and some advanced devices and computers could cause threat of substitutes. Competitive Rivalry: The strength of competition in this industry is very high; the main rivals are HP, Microsoft, Dell, and Fujitsu Siemens Computers, they compete with international, national, regional, and local

PESTEL Framework: Political: -

In general international operations are highly influenced by the governmental policies and their laws, but in this case there is little effect because most of countries are looking for developments and new technologies. 5

-

Heavy taxes in some countries make IBM increase its products price.

Economic: -

-

National growth rates. Fuel Prices.

Social: -

-

Positive customers' perception toward new technology around the world. Increase in population and internet users.

Technological -

-

Advanced technology development. Internet Increase numbers of companies that need ERP systems

Environmental: -

IBM made the some of the major technologies like to trace weather throughout the world.

-

Cyber protection and the chemical the use in making hardware; like carbon, germanium, and silicon Currency exchange Legal registration for their business outsourcing facilities.

Legal:

-

External Audit Opportunities

Threats

6

1.

Video game console market revenue is projected to reach $12 billion in 2008 and $66 billion in 2012.

2.

The IT market in Russia, India, Brazil, and China are expected to grow twice as fast as in the rest of the world.

3.

Mobile phone markets are expected to grow by 9% in 2008*.

4.

Handheld computers markets are expected to grow by 32% in 2008.

1.

Competitors are strong.

2.

Economic fluctuation could crimp consumers’ spending.

3. Small & Medium business demand fails to accelerate.

CPM-Competitive Profile Matrix IBM

MSFT

HPQ

EDS

Critical Success Factors

Weight

Rating

Weight ed Score

Rating

Weight ed Score

Rating

Weight ed Score

Rating

Weight ed Score

Price

0.12

3

0.36

3

0.36

4

0.48

3

0.36

Financial Position

0.15

3

0.45

3

0.45

2

0.30

2

0.30

Advertising

0.09

2

0.20

3

0.30

4

0.40

2

0.20

Innovation

0.22

4

0.88

3

0.66

3

0.66

2

0.44

Market Share

0. 22

3

0.66

4

0.88

2

0.44

2

0.44

Manageme nt

0.10

4

0.40

4

0.40

3

0.30

3

0.30

Global Expansion

0.10

3

0.30

3

0.30

3

0.30

3

0.30

Total

1.00

3.25

3.35

2.88

External Factor Evaluation (EFE) Matrix Key External Factors

Weight 7

Rating

Weighted

2.34

Score Opportunities 0.20 1. Video game console market revenue is projected to reach $12 billion in 2008 and $66 billion in 2012

3

0.60

2. The IT market in Russia, India, Brazil, and China are expected to grow twice as fast as in the rest of the world

0.10

4

0.40

3. Mobile phone markets are expected to grow by 9% in 2008

0.15

3

0.45

4. Handheld computers markets are expected to grow by 32% in 2008

0.15

3

0.45

1. Competitors are strong

0.20

2

0.40

2. Economic fluctuation could crimp consumers’ spending 3. Small & Medium business demand fails to accelerate

0.10

2

0.20

0.10

3

0.30

Threats

Total

1.00

Financial Ratio Analysis 12/2006 8

2.80

Growth Rates % Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Current P/E Ratio P/E Ratio 5-Year High P/E Ratio 5-Year Low Price/Sales Ratio Price/Book Value Price/Cash Flow Ratio Profit Margins Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) 5Yr PreTax Margin (5-Year Avg.) 5Yr Net Profit Margin (5-Year Avg.) Financial Condition Debt/Equity Ratio Current Ratio Quick Ratio Interest Coverage Leverage Ratio Book Value/Share Investment Returns % Return On Equity Return On Assets Return On Capital Return On Equity (5-Year Avg.) Return On Assets (5-Year Avg.) Return On Capital (5-Year Avg.) Management Efficiency Income/Employee

IBM 9.90 10.50 14.00 4.00 14.33 20.52

Industry 11.70 29.90 22.40 7.63 7.68 10.99

SP-500 9.00 15.40 0.90 13.05 19.88 10.03

15.1 26.6 13.6 1.52 5.30 NA

16.1 22.3 8.1 1.32 4.19 5.20

22.9 22.7 6.7 2.49 3.53 10.40

42.2 14.7 10.6 39.6 12.9

35.2 11.8 8.8 33.6 9.3

33.7 17.5 12.4 33.4 16.6

9.0

6.6

11.5

1.24 1.1 1.1 21.6 4.2 20.57

0.77 1.2 1.1 11.6 3.3 17.49

1.24 0.9 0.7 42.3 4.2 16.50

36.6 9.3 15.3 28.6 7.9

27.8 8.7 14.7 19.5 6.2

21.3 5.8 7.8 15.4 5.0

12.4

10.0

6.7

NA

18,387

52,240

9

Revenue/Employee Receivable Turnover Inventory Turnover Asset Turnover

NA 3.1 NA 0.9

Date

Avg. P/E

Price/Sales

12/07 12/06 12/05 12/04 12/03

14.70 13.70 17.00 20.70 22.70

1.59 1.65 1.47 1.75 1.83

Date 12/07 12/06 12/05 12/04 12/03

Book Value/ Share $20.57 $18.92 $21.03 $19.26 $16.44

Debt/Equity 1.24 0.80 0.68 0.72 0.85

268,252 4.9 4.7 1.0 Price/Boo k 5.26 5.13 3.91 5.12 5.64 ROE (%) 36.6 33.0 24.1 23.7 23.6

424,626 12.8 5.5 0.6

Net Profit Margin (%) 10.5 10.3 8.8 7.8 7.4 ROA (%) 8.7 9.1 7.6 6.8 6.3

Interest Coverage 22.1 42.9 41.6 69.2 59.5

Net Worth Analysis 12/2006 (in millions) Stockholders' Equity + Goodwill= 28,506+12,854 2. Net income x 5 = 9,492 x 5 3. Share price = 110/EPS 6.262=$17.57 x 9,492 4. Number of Shares Outstanding x Share price = 1,506.48x110 Method Average 1.

Internal Audit 10

$41,360 $47,460 $166774.4 $165712.8 $105,326.8

Strength 1. IBM revenues increased 7 percent to 69.92$.billion in 2006. 2. A unique approach to engage their employees in an online intranet using its Jam technology. 3. Strong strategic planning to be an innovation-centric globally integrated corporation. 4. IBM operates in 170 countries with about 60 percent of its revenues being

Weakness 1. Declining in revenues of services and systems segments in 2006. 2. Decline in revenue of public, industrial, small and medium business industries in 2006 by 9.6%. 3. Decline in revenues in Asia Pacific area by 5.7%. 4. Total assets are gradually decreasing from 109M to 103M in 2006.

generated outside the US. 5. IBM concentrated on becoming stronger in high value added businesses. 6. IBM ranked number 1 hosted service provider in Western Europe. 7. IBM is supercomputing leader as provider of 35 of the world's 100 most powerful supercomputers.

Internal Factor Evaluation (IFE) Matrix 11

Key Internal Factors

Weight

Rating

Weighted Score

1. IBM revenues increased 7 percent to 69.92$.billion

0.10

4

0.40

2. A unique approach to engage their

0.06

3

0.18

0.06

3

0.18

0.10

4

0.40

0.10

4

0.40

6. IBM ranked number 1 hosted service provider in Western Europe

0.10

4

0.40

7. IBM is supercomputing leader as provider of 35 of the world's 100 most powerful supercomputers

0.12

4

0.48

0.08

2

0.16

0.08

2

0.16

0.10

2

0.20

0.10

2

0.20

Strengths

employees in an online intranet using its Jam technology 3. Strong strategic planning to be an innovation-centric globally integrated corporation 4. IBM operates in 170 countries with about 60 percent of its revenues being generated outside the US 5. IBM concentrated on becoming stronger in high value added businesses

Weaknesses 1. Declining in revenues of services and systems segments in 2006 2. Decline in revenue of public, industrial, small and medium business industries in 2006 by 9.6% 3. Decline in revenues in Asia Pacific area by 5.7% 4. Total assets are gradually decreasing from 109M to 103M in 2006 Total

1.00

12

3.16

SWOT Matrix

13

Strengths

1. IBM revenues increased 7 percent to 69.92$.billion in

SPACE Matrix

2006. 2. A unique approach to engage their employees in an online intranet using its Jam technology. 3. Strong strategic planning to be an innovation-centric globally integrated corporation.

Weaknesses

1. Declining in revenues of services and systems segments in 2006. 2. Decline in revenue of public, industrial, small and medium business industries in 2006 by 9.6%. 3. Decline in revenues in Asia Pacific area by 5.7%. 4. Total assets are gradually decreasing from 109M to 103M in 2006.

4. IBM operates in 170 countries with about 60 percent of its revenues being generated outside the US. 5. IBM concentrated on becoming stronger in high value added businesses. 6. IBM ranked number 1 hosted service provider in Western Europe. 7. IBM is supercomputing leader as provider of 35 of the world's 100 most powerful supercomputers.

Opportunities

S-O Strategies

1. Video game console

1. Entering the video game

market revenue is projected to reach $12 billion in 2008 and $66 billion in 2012. 2. The IT market in

console market by produce video game console, (S5, O1). 2. Entering the mobile phone market, (S5, O3).

14Handheld 3. Entering the

Russia, India, Brazil,

computers market, (S5,

and China are

O4).

expected to grow

W-O Strategies

1. Increasing marketing efforts into Asia Pacific, (W3, O3).

Directional vector point is :( 3.167, 1.163) FS Conservativ e

Aggressive

C A

IS

Competitiv e

Defensive ES

Grand Strategy Matrix Rapid Market Growth Quadrant II

Quadrant I

Weak

Strong Competitiv e

Competitiv e Position

Position Quadrant III

Quadrant IV

Slow Market Growth 15

The Boston Consulting Group (BCG) Matrix Market share position

Industry Sales Growth Rate

IBM Stars

Question Marks

Dogs

Cash Caw

The Internal-External (IE) Matrix The IFE Total Weighted Score Strong 3.0 to 3.99 High

I 3.0 to 3.99

Medium IV The EFE 2.0 to Total Weighted 2.99 Score

Medium 2.0 to 2.99 II

Low 1.0 to 1.99 III

V

VI

IBM

16

VII

VIII

IX

Low 1.0 to 1.99

The Quantitative Strategic Planning Matrix (QSPM)

Key Internal Factors

Weight

Strategy 1

Strategy 2

Enter video game console market

Increasing marketing efforts into Asia and Europe

AS

AS

TAS

TAS

Strengths IBM revenues increased 7 percent to 69.92$.billion in 2006

0.10

4

0.40

2

0.20

A unique approach to engage their employees in an online intranet using its Jam technology

0.06

-

-

-

-

Strong strategic planning to be an innovationcentric globally integrated corporation

0.06

-

-

-

-

IBM operates in 170 countries with about 60 percent of its revenues being generated outside the US

0.10

3

0.30

4

0.40

IBM concentrated on becoming stronger in high value added businesses

0.10

4

0.40

4

0.40

IBM ranked number 1 hosted service provider in Western Europe

0.10

2

0.20

4

0.40

IBM is supercomputing leader as provider of 35 of the world's 100 most powerful supercomputers

0.12

-

-

-

-

0.08

2

0.16

4

0.32

Weaknesses Declining in revenues of services and systems segments in 2006

17

Decline in revenue of public, industrial, small and medium business industries in 2006 by 9.6%

0.08

3

0.24

4

0.32

Decline in revenues in Asia Pacific area by 5.7%

0.10

2

0.20

4

0.40

Total assets are gradually decreasing from 109M to 103M in 2006

0.10

3

0.30

3

0.30

SUBTOTAL

Key Internal Factors

1.00

Weight

2.20

2.42

Strategy 1

Strategy 2

Enter video game console market

Increasing marketing efforts into Asia and Europe

AS

AS

TAS

TAS

Opportunities Video game console market revenue is projected to reach $12 billion in 2008 and $66 billion in 2012

0.20

4

.80

2

0.60

The IT market in Russia, India, Brazil, and China are expected to grow twice as fast as in the rest of the world

0.10

1

0.10

3

0.30

Mobile phone markets are expected to grow by 9% in 2008

0.15

-

-

-

-

Handheld computers markets are expected to grow by 32% in 2008

0.15

-

-

-

-

Competitors are strong

0.20

4

0.80

4

0.80

Economic fluctuation could crimp consumers’ spending

0.10

1

0.10

3

0.30

Small & Medium business demand fails to accelerate

0.10

1

0.10

4

0.40

Threats

SUBTOTAL

1.90

18

2.40

Recommendation Enter video game console market by providing new video game console at a cost of $1 billion and increasing marketing efforts in Asia and Europe at a cost of $200 million.

EPS/EBIT Analysis $ Amount Needed: $1,200 Million Stock Price: $110 Tax Rate: 35% Interest Rate: 7% # of Shares Outstanding: 1,506.48 Million Common Stock Financing Recession Normal Boom EBIT Interest

2,000,000,000 0

4,000,000,000 0

6,000,000,000 0

EBT Taxes

2,000,000,000 700000000

4,000,000,000 1400000000

6,000,000,000 2100000000

EAT #shares EPS

1,300,000,000 1517389091 0.856734774

2,600,000,000 1517389091 1.713469548

3,900,000,000 1517389091 2.570204322

70 percent Stock- 30 Percent Debt Recession Normal Boom EBIT Interest

2,000,000,000 42000000

4,000,000,000 84000000

6,000,000,000 126000000

EBT Taxes

1,958,000,000 685300000

3,916,000,000 1370600000

5,874,000,000 2055900000

EAT #shares EPS

1,272,700,000 1514116364 0.840556268

2,545,400,000 1514116364 1.681112536

3,818,100,000 1514116364 2.521668804

19

Recession 2,000,000,00 0 140000000 1,860,000,00 0 651000000 1,209,000,00 0 1506480000 0.802533057

Debt Financing Normal

Boom

4,000,000,000 280000000

6,000,000,000 420000000

3,720,000,000 1302000000

5,580,000,000 1953000000

2,418,000,000 1506480000 1.605066114

3,627,000,000 1506480000 2.407599172

70 Percent Debt- 30 Percent Stock Recession Normal Boom 2,000,000,00 0 4,000,000,000 6,000,000,000 98000000 196000000 294000000 1,902,000,00 0 3,804,000,000 5,706,000,000 665700000 1331400000 1997100000 1,236,300,00 0 2,472,600,000 3,708,900,000 1509752727 1509752727 1509752727 0.818875818 1.637751637 2.456627455

Reverences

1.

www.IBM.com

2. www.304.ibm.com 3. www.manonamission.blogspot.com 4.

Euromonitor International, site www.euromonitor.com

5.

www.moneycentral.msn.com

20

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