Analysis of International Business Machines - Case Study Example

International Business Machines (IBM Introduction It can be claimed that information technology is the common thread that is linking almost all sectors of the industry ranging from healthcare through education to entertainment, banking and automobiles. World over the researchers, practitioners, managers and executives have endorsed that a company’s growth and profitability is directly proportional to the information technology based applications in their operations. Though we cannot specify the birth of information technology but it can be mentioned that computers and communications are the two basic building blocks of the information technology. I personally credit two giant companies for sowing the seeds of this global IT revolution, these are International Business Machines (1880) for its role in automation followed by invention of a personal computer and American Telephone and Telegraph (1885) for the innovations in the domain of telecommunications. There is no doubt about the contributions made by these companies in their respective domains. IBM has been termed as the “Snow White” for it being the largest of the eight major computer companies, peers used to fondly call “IBM and the seven dwarfs”, in 1964 IBM produced around 65% of the computers (Dvorak 2006). 2. Background IBM’s objectives are centered around “helping their clients succeed in delivering business value by becoming more efficient and competitive through the use of business insight and information technology solutions; and providing long-term value to our shareholders” (IBM Annual Report 2008). Hence IBM is assisting its clients to come up with new business designs and architectures that enhance their competitiveness in this new network oriented landscape. IBM operates at global scale; very effectively and efficiently it has been able to maintain a balance between its adapting to the geography it is operating from. IBM’s operations are grouped in six sectors, these include: Financial Services, Public Services, Industrial Services, Distribution chains, Communications and Small & Medium industries. In these sectors, key segments being serviced by IBM are Global Technology Services; a Global Business Services segment; Systems & Technology; and Software. In last eight years IBM has acquired over 100 companies to complement and scale their portfolio of products and services (IBM, Annual Report, 2008). IBM team includes over 386,000 employees (worldwide) and they are enabling provision of services to clients in more than 170 countries (IBM Annual Report 2008). In 2008 IBM’s revenues exceed 100 billion USD, up 5 per cent. Its profit margins hover at around 42 per cent and pre-tax income from continuing operations was up by 15 per cent. It is worth including that in 2008, 66% of IBM’s revenues were generated by its non-US operations and there was over 18% increase in its revenue from the BRIC group (Brazil, Russia, India and China) of countries. In 2005, IBM operations in India grew by 55% (IBM operations in India grew by 55% 2006). Owing to such positive indications, in this essay, I have used the case of IBM in India. 3. IBMs Growth World over the industry is in a tumultuous phase and is experiencing unprecedented disruption. Numerous companies in this unexpected, unwanted and an unfortunate period have collapsed and many more may meet the same fate. IBM is one of the very few global companies which have succeeded to stand tall during this hostile environment as well. In 2008 IBM has succeeded in maintaining a compounded annual growth rate between 6 per cent to 11 per cent. Earnings per share in 2007 were USD 7.18 and in 2008 these have risen to USD 8.93 (a clear 24 per cent increase). IBM is all set to meet its 2010 target of increasing their earnings per share to USD 11. In a nut shell, the company has performed exceedingly well even during highly challenging environment. It has delivered record level revenues, pre-tax profit and cash flows from its operations. Two key attributes responsible for IBM’s exemplary growth are: innovation and acquisitions. Innovation: IBM has reaslised that the coming era will not be kind and generous to the companies who do not revisit and revise their long term objectives, strategies and core models. As per IBM, “In the last two decades, our planet has become smaller and flatter. In the next two, it will get smarter” (IBM Annual Report 2008). IBM’s vision of a smarter world includes a fully digital, networked and intelligent systems. These intelligent systems will not only lead to more effective, efficient, productive and personalized systems but will also save us from energy, time, produce. By increasing their relevance, appropriateness leading to higher utility, all these systems will also address the issue of unsustainability. A case worth citing here would be the case of Nortel & IBM, innovation was the common attribute that enabled collaborative venture of Nortel and IBM. "Nortel is a company with a strong history of innovation. Together, we are working to reduce complexity and cost of service delivery while enabling innovation for a new set of on-demand services. This is at the core of what we do.” – Bill Zeitler, Senior Vice President and Group Executive, IBM Systems and Technology Group (IBM Annual Report, 2008) Acquisitions IBM’s another strategic move for growth has been acquisition. In last 8 years the company has acquired close around 100 companies. Major acquisitions by IBM include the popular PWC Consulting (Pricewaterhouse Cooper) a business consulting and technology services company that was acquired by IBM for USD 3,500,000,000; Cognos – a company that is into business intelligence software was acquired by IBM in 2008 for USD 5,000,000,000. Besides acquiring American companies, IBM has also acquired companies in upcoming economies i.e. in countries like India, Brazil and Israel. In India, IBM acquired Daksh e-services – a company into Business Process Outsourcing for USD 170,000,000 and in 2006 it has also acquired a Brazilian company called Global Value Consulting for an undisclosed amount. 4. SWOT Analysis PEST (viz-a-viz IBM in India) Strength 1. Trusted and focused branding 2. Large number of inter-related products and services – thus making it a producer of wide offerings. In India IBM operations range from mainframes to personal computers to management consulting to Business Process Outsourcing 3. Clear leader in almost all of its streams (like mainframes, minicomputers, personal computers etc) 4. Huge profit margins and rising trends 5. High rate of conversion of R&D in commercial entities 6. Depth, breadth and geographic spread of IBM adds to the advantage Weaknesses 1. Slow in exploiting some of its own discoveries (e.g. Reduced Instruction Set Computing was not used in its own workstations) 2. Virtually no presence in low-end products, this creates limited options in developing economies like India, for obvious reasons 3. Dependency on megadeals Opportunities 1. Presence in 170 countries (IBM has over 95000 employees in India and in 2006 IBM was second largest BPO employer in India) 2. Easy adaptability in resource limited settings to the extent that IBM India has posed a huge challenge to local Indian companies. Threats 1. Limited efforts to retain employees. 2. Stands out as an overseas company and falls short impressing local nationalists 3. Low cost local products and service providers. In India the low cost companies offer services etc at a cost that is one fourth of IBM’s price (Rai 2006). 4. Mainframe business is gradually dying (Two Pillars of IBM’s Growth Look Shaky 2005) 5. Slowdown in technical services 6. Changes in customer behaviour 5. PEST Analysis (viz-a-viz IBM in India) Political factors 1. Although political environment in the country (between 2004 onwards) had been good but still, owing to the nature of the government (coalition) the stability could always been an issue 2. In India Govt. is instrumental in regulating norms for tax etc 3. Indian Govt. is involved in trading agreements with leading agencies 4. Government has an open and a clear policy for Foreign Direct Investment Economic factors 1. In India the interest rates are not too high 2. Local currency is weak and oscillates significantly 3. Inflation is high 4. GDP is better than many countries Sociocultural factors 1. India is a secular state, but Hinduism is the major religion and few national outfits do interfere in proceedings of business houses 2. Although foreign products are respected but owing to limited purchasing capacity only low cost products are preferred. 3. Country’s middle class section of the society is increasing hence the purchasing power of masses is gradually increasing Technological factors 1. The country being seen as a upcoming IT giant, information technology applications are on the rise but adoption of IT applications is relatively slow 2. PC penetration and Teledensity (mobile and fixed) is on the rise 3. Broadband connectivity and Internet is also gaining grounds 4. Impetus on R&D is high 5. Conclusion There is no doubt that IBM is one of the very few success stories at global level. Its profits and market share are on the rise even in less favourable business environment. Innovation and acquisition are the two cornerstones of IBM. With its operations in around 170 countries the company has time tested and proven strategies. The company is rightly concentrating on emerging economies like BRIC countries. The scene of IBM in India is a promising one. PEST analysis is indicative of the fact that technological factors are supportive of a IT company like IBM, whereas, sociocultural factors reflect that India may not be the best consumer of IBM products but a country like India can very well be a favourable destination as far as BPO operations are concerned. References: 1. Dvorak, J.C., 2006, ‘IBM and the Seven Dwarfs’, Available at: http://openmainframe.org/research-resources/ibm-and-the-seven-dwarfs.html 2. IBM 2008, Annual Report, Available at: http://www.ibm.com/annualreport/2008/md_3capabilities.shtml 3. ‘IBM India Operations ‘grew by 55% in 2005’ 2006, Business line, Available at: http://www.thehindubusinessline.com/2006/02/10/stories/2006021002520400.ht 4. Rai S. 2006, ‘India becomes the focal point for growth as IBM fights to stay on top’, Available at: http://www.iht.com/articles/2006/06/04/business/ibm.php?page=2 5. ‘Two Pillars of IBM’s Growth Look Shaky’ 2005, Available at: http://www.businessweek.com/magazine/content/05_31/b3945040_mz011.htm Read More