IBM Company Analysis - Case Study Example

Introduction

Information technology is among the most fiercely competitive, fast changing, and dynamic industries globally. The industry is largely characterized by ever increasing commoditization and innovation cycles. There are several companies in the United States that have become predominant in this industry. Apple and IBM are examples of U.S based transnational companies that have dominated the information technology industry in the last few years. Recently IBM has focused much on pursuing high-value innovation model as opposed to products, services, and commodity technology. The commitment of this idea by the company has foreseen its continuous reinvention of businesses every year. Organically, the company has been able to grow its new businesses through acquisitions. Recently, IBM has reported significant increase in its revenues. In 2014, its operations foresaw approximately 17 billion dollars revenues from operating earnings and operating pre-tax income of 22 billion dollars (Rometty, 2014). The total revenues in the same year amounted to 93 billion dollars. This paper seeks to research on the business performance of IBM since it was founded. The thesis will narrow down into examining a brief history of the company, evaluation of the management and organizational structure, description of its operations as well as an overview of its competitive and marketing strategy. A financial analysis of the company will also form part of this article.

Brief Company History

The emergence of new technologies in the 1880s formed the core basis of developing International Business Machines. Four companies headed by Willard Bundy, Herman Hollerith, Alexander Dey, and Julius Pitrat who invented a time clock, electric tabulating machine, dial recorder, and computing scale respectively were consolidated to form Computing-Tabulating-Recording Company (CTR) in 1911. Thomas Watson joined the company in 1914 as a manager but later became its president. CTR advanced its operations overseas in regions, such as Australia, Asia, South America, and Europe. Watson changed the title of the company from CTR to “International Business Machines” in 1917. With its tabulating equipment, IBM made it easy for huge organizations including the United States government to process bulky amounts of data. After being in the company for almost 40 years, Thomas Watson stepped down in 1952. His son Thomas Watson Jr. became the board’s chairman and Albert William’s became the president. In 1957, IBM developed a selectric typewriter in the market and introduced a reservation system known as SABRE for American Airlines. These were remarkable achievements in the field of technology for the company. In 1964, the company introduced IBM System/360, the family of the computer system (Bashe, 2001). In the 1970s, IBM made a series of innovations that expanded an emerging industry of personal computers. However, in 1993, the organization experienced a 8 billion dollars loss, the biggest corporate loss in America to be recorded at that time. The company though did not shout down, but continued to make other innovations like the Blue Gene in 2009 that foresaw the company awarded the National Medal of Technology and Innovation. In 2011, statistical data revealed that IBM had surpassed Microsoft in value. IBM was valued at 214 billion dollars whereas Microsoft was valued at 213 billion dollars (Gandy, 2013).

Description of IBM’s Operations

IBM engages in dynamic technological services that are extensively spread across the world. The scope of the company’s operations ranges from Microsoft services, mid-market, application management services, SAP application services, maintenance as well as optimization and business analytics. Recently, IBM has included insight cloud services in its category of operations. These services are based on data science whereby internal data is combined with external data of businesses, geo-spatial factors, and events from sources like The Weather Company and Twitter. The data scientists from the company have worked on statistical validation, refinement, and enrichment of all external datasets. The signals from the data multiple sources have been extensively applied on applications and business processes hence enhancing business decisions among business developers and professionals. Due to the nature and scope of IBM’s operations, the company has committed its efforts in ensuring that its management and organization structure remains strong and focused into achieving organizational goals (IBM, n.d).

Management and Organization Structure of IBM

According to the company’s website, the directors’ board is made up of approximately 14 members. The number of members vary because of availability of candidates suitable for membership as well as other business circumstances. As from 2014, the board of the company has 13 members. The directors’ board play a significant role in the company by evaluating the performance of the CEO and annual evaluation of the company. IBM management incorporates several committees including the executive committee, management resources and executive compensation committee, the corporate governance and directors committee, as well as the audit committee. The executive and board of directors committees are chaired by Virginia Rometty, who also happens to be CEO of the company. The other executive officers are in charge of several divisions including global technology services, marketing and communications, systems and software, sales and distribution, research, and strategic partnerships (Galbraith, 2009).

Industry Overview and Competitive Strategy

The information technology industry has observed significant changes since its storied history. Carrier pigeons were used by Reuters in the 19th century to disseminate quotes of stock whereas rowboat reporters were used by the Associated Press to obtain news from ships. With the advent of industrialization, there was introduction of television, radios, and telephones that posed a threat to business information providers (Jewell, 2014).

Industry Analysis

Today, the multibillion dollar information technology industry faces a great challenge in competing with the digital world that continues to have digitally savvy users. Furthermore, the emergence of internet has foreseen a rise in multiple new information sources, such as low-cost sites of research, search engines, expert blogs, and online newspapers. Most of these sources are readily available to the users without or little fees. In 2008, the industry was forecasted to grow by 5%. Large players like IBM and Apple were projected to continue fighting for the market share while struggling under new competitive dynamics. However, according to the recent reports, the industry is said to be promising in the future following the emerging and fast-growing markets, such as Eastern Europe, Latin America, India, and China (Rometty, 2014).

Figure 1: Shows IBM’s market share by value in New York

(http://www.indiabix.com/data-interpretation/pie-charts/013001)

Figure 2: Shows IBM’s market Share by volume in the U.S

(http://www.indiabix.com/data-interpretation/pie-charts/013001)

IBM has laid several business strategies to ensure that it continues to be competitive in the industry. Perhaps the effectiveness of its strategies has resulted to its ranking as the number one application vendor for thirteen consecutive years. In other segments like Message Oriented Middleware, IBM has also been ranked as number one. In the services of cloud infrastructure, IBM possess 7 percent of the 55 percent market share. In the middleware and application infrastructure markets, IBM is leads in 9 out the 12 markets (Rometty, 2013).

Main Competitors in the Industry

The information technology industry is has several global players who have increasingly competed for the market share in the recent decade. Some of these players, include the Microsoft Corporation, Hewlett-Packard Company, Accenture Public Limited Company, and Apple. Microsoft claims 42% of the total 88% mobile phone market share. The company also introduced its laptops computers in the market recently. It is among the leading software producers across the world. On the other hand, Hewlett-Packard has for a long time dominated the personal computer industry. Approximately 60 percent of its total revenues are from personal systems. Accenture also claims the leading position in offering services associated with business process outsourcing and technology. Most clients in the United States prefer Accenture’s services in terms of improving operational performance of their businesses and delivery of new services or products in the market (Storz & Moerke, 2007).

Environmental Factors Affecting IBM

IBM has faced several political factors that have hindered its operations overseas. The company reports that it has been exposed to high taxes especially in the UK making its products costly. Import laws have also crippled most of its overseas operations. The low purchasing power from the clients due to economic recessions have derailed the company’s business. One of the socio-cultural factors that has influenced IBM’s business ambitions is the increasing usage of internet by the global population. The internet has enhanced the market for information technology hence IBM, being an innovative company, see this situation as a favorable environment for achieving its goals (Rometty, 2014).

IBM’s Marketing Strategies

As observed earlier, IBM deals in five major segments: global financing, technology and systems, software, global business services, and global technology services. The company primarily targets markets on a global scale. Its global presence is felt in over 170 countries, most of them found in the Caribbean and Latin American regions. Some of the countries where the organization has facilities include Canada, China, Brazil, Australia, Japan, and Kenya. Initially, IBM used the traditional strategy of marketing mix to promote and sell its home PCs. However, today, with the expanding dynamics of information technology business, the company has adopted effective measures to enhance the four marketing mix elements including price, production, product, and promotion. IBM has fought to remain outstanding in the market by effectively promoting its newly innovated brands. Apparently, the company is working on a computer product that will have same traits as a human brain. IBM’s target market obtain much information about the company’s products through extensive channels like online and media advertisements. The aim of IBM in product promotion is to sell more than a million units per year. The prices of the products are reviewed according to the trends in the market although IBM makes them affordable for its customers. The major divisions of IBM’s business include software, services, and hardware. The product lines in software division are middleware, database, enterprise management, and groupware. In services, the company majorly deal in strategy and business consulting as well as IT consulting. “Be a great company, therefore a great brand” (Storz & Moerke, 2007). This is a statement that captures IBM’s branding strategy for the past several years. The Smarter Planet campaign has cemented the company’s branding strategy by providing a number of lessons to IBM’s marketers in advertising, social behavior, and positioning fields. The automation, private cloud, and public cloud software strategies have significantly put IBM in a better position in the market (Storz & Moerke, 2007).

IBM Financial Analysis

Figure 3: Shows graphical presentation of IBM’s income statement in the last 5 years.

Income Statement

(http://amigobulls.com/articles/financial-ratio-analysis-for-dummies-part-2)

Within six years, IBM’s aggregate revenue has been derived majorly from insurance, premiums, services rendered, goods sold, trading gains, interest income, and investments. Between 2013 and 2014, there was a decline in revenues. The decline was extended to 2015. The net results for operating income were obtained from the deduction of operating expenses from revenues got through business operations. Rometty (2014) observes that “IBM’s operating income declined from 2013 to 2014 and from 2014 to 2015” (Rometty, 2014). From the 6-year income statement, the operating profit margin remains constant for 6 years. The operating profit margin is defined by income obtained from continuing operations. This income is calculated before introduction of income taxes. It is the sum of non-operating income or expenses and operating profit before the loss or income from income taxes, equity method investments, and extraordinary items. The net income incorporates the moss within the 6 years or the consolidated profit (Rometty, 2014).

IBM’s Balance Sheet

Figure 4: Shows IBM’s balance sheet

Current Ratio, the Equity Ratio, and the Turnover Ration

These ratios evaluate the output generated from the company’s assets as well as revenues. They explain the relationship between the assets required for sustenance of operations and the level of IBM’s operations. The Current Ratio is calculated by dividing current assets to current liabilities. It is important to be considered because it determines the ability of the company to pay current liabilities and short-term debts. Most investors prefer a company with 2:1 current ratio. This means that the current assets for the company is twice current liabilities. Less current ratio that this shows that the company will experience problems in off-setting short-term debts. The chart below shows that IBM is has maintained to more current assets than current liabilities. Compared to the industry, the company is doing well because it is able to sustain shareholders and investors.

Figure 5: Shows a line chart indicating IBM’s current ratio since 2006

(http://amigobulls.com/articles/financial-ratio-analysis-for-dummies-part-1)

The asset turnover ratio for IBM in the last three months to the end of 2015, was 0.2. During the three months, the revenues for the companies totaled to 22 million dollars whereas the total assets amounted to approximately109 million dollars. The asset turnover ratio was calculated by dividing total revenues by average total assets. Since the information technology industry is tremendously growing, IBM reports high profit margins and low asset turnover (Rometty, 2014).

IBM’s Stoke Performance

Figure 6: Shows a line chart indicating IBM’s performance in stoke prices

(http://amigobulls.com/articles/financial-ratio-analysis-for-dummies-part-1)

Unevenness of IBM’s quarterly earnings in the recent years has been due to rapid changes experienced the information technology sector especially in the stoke market. Currency and economic fluctuations in emerging markets have foreseen the fall of IBM’s revenues since 2011. In last year July, IBM recorded weak earnings as its stock dropped by approximately 6 percent (164 million dollars) from 175 million dollars. The attractive dividends from the company seek to combat the challenges experienced in the stock market. IBM also attempts to invest heavily in data analytic technology and cloud computing to make up for dropping sales of personal computers (Vorbeck, Heisig, Martin & Schütt, 2003).

Conclusion

From the historic development of IBM to date, it is evident that the company has a promising future despite the huddles it is currently experiencing in the stoke market. Its effective organizational structure and marketing strategies have been fundamental in the recent past in steering its organizational goals. The branding and positioning strategies are essential for the company considering how the information technology has become competitive in the last few decades. Statistical data from the bar graphs and charts show that although the company experiences several challenges in maintaining its position in the market share, it is guaranteed of its sustainability.