Strategic Analysis of IBM in 2000-2005 - Essay Example

Zooming in on Blue: Evaluating IBM's Strategies International Business Machines (IBM) is a world leader in information technology. The company is engaged in providing business and technology services. It is also the world's largest consulting services organization. The company operates in over 160 countries worldwide spanning North America, Latin America, Europe, Middle East, Africa and Asia Pacific (IBM Website). IBM's clients include more than 90% of the communications, retail and electronic companies in the Fortune 500, and 675 Fortune 1000 companies. IBM also manages the majority of the world's banking customer data for the 100 top retail and corporate banks in the world (Schlender 2003, p. 133). The company has recently adopted an integrated supply, manufacturing and distribution operation into one operating unit. In addition to its own manufacturing operations, the company uses a number of contract manufacturing (CM) companies to manufacture IBM-designed products. In their website, IBM stated that it spends nearly $2 billion a year with diverse suppliers, for example, greater than any other technology company. Yet more than managing their expenditures, IBM had emphasized a responsibility to hold themselves and their suppliers to high standards of behavior. This means complying with all applicable laws and regulations. They seem to support a strong commitment to work with suppliers to encourage sound practices and develop sound global markets. Despite their company's strong performance in the recent years, IBM is aware that it competes with several large players in the various industries it operates in. In the consulting and outsourcing industry, it faces stiff competition from Accenture and Capgemini. In the application infrastructure software business, IBM faces competition from BEA Systems, Oracle, Sun Microsystems and Microsoft. In software, IBM is second to Microsoft, the world's largest software company. In the market for servers, IBM's position of leadership is challenged by Unix, Hewlett Packard, Sun Microsystems and Dell. All these players are large multinational companies, with the finances and development expertise to pose a considerable threat to IBM's market share and revenues (Datamonitor International, 1 July 2006). In this regard, we will use Porter's 5 Forces as a tool to understand where power lies in IBM's business situation. This is useful, because it could assist people in understanding both the strength of an industry's current competitive position and the strength of a position the industry is looking to move into. In analyzing the IBM's competitive environment, Porter's Five Forces will delineate that there are five important forces that determine competitive power in a situation: Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution and Threat of New Entry. Supplier Power In their website, IBM mentioned that it developed an IBM Global Procurement, which is part of the Integrated Supply Chain organization. This arm of the IBM acquires goods and services for IBM and its clients. This is done with flexibility to sense and react to changing market dynamics. With few exceptions, this organization is the only group authorized to commit IBM funds to external suppliers. Furthermore, IBM explained that their Procurement fulfills its mission by using Global Commodity Councils to strategically source goods and services through a network of international, regional and emerging suppliers for IBM's varied businesses. Procurement is conducted in an environment of pervasive e-procurement across all steps of the acquisition process - from initial market segment intelligence and strategic sourcing, to tactical order placement, invoicing and electronic payment. With enhanced supplier interaction, Procurement takes responsibility to maintain IBM's competitiveness by engaging suppliers to provide competitive advantage in cost, technology, innovation, speed to market, quality, and supply assurance. This responsibility includes activities such as supplier selection, negotiation of price, terms and conditions, contract implementation and ongoing supplier management. Buyer Power IBM is a multinational corporation with fully owned subsidiaries. Of the 315,000 IBM employees, half live outside the United States. IBM does business in 160 countries. "Big Blue" no longer sells consumer products, except for laptops marketed through its Web site. Its focus now is providing hardware, software, integration technology (IT), and consulting to businesses of all sizes. The company's competitive strategy is to become a world leader in IT services, a $450 billion market, through its biggest division, IBM Global Services (IGS) (Zarley 2002, p. 14). IGS develops partnerships with hundreds of companies, intermediaries known as solution providers. IBM looks for partners that offer geographic access and presence, industry expertise, and delivery capability. IBM's CEO Samuel Palmisano emphasized that their customers are going to want more integration services and the key to IBM's being successful in that market is a partnering strategy. In Palmisano's 2005 Annual report, he mentioned that IBM's Global Services in 2005 totaled $47.4 billion, an increase of 2 percent. Although they have a backlog estimated at $111 billion, they had realized a transition in services over the past few years, a shift to smaller deals of shorter duration. These are good opportunities if they can recalibrate their sales model to capture them in addition to the traditional "mega-deals". And the profitability of these kinds of deals is very attractive; if IBM's global cost structure is competitive. This is why Palmisano is currently urging IBM to address both their sales model and services cost structure last year. They also took other actions to strengthen IBM's services business by shifting thousands of employees into global delivery centers; rebalancing IBM's Integrated Technology Services portfolio; and doubling the resources dedicated to integrated solutions, which they expect will account for 70 percent of the total IT opportunity by 2008. Competitive Rivalry IBM is facing a stiff competition with several large players in the various industries it operates in. This is quite a gargantuan challenge for IBM since all their competitors are large multinational companies, with the finances and development expertise to pose a considerable threat to IBM's market share and revenues. In the desktop computer sector, IBM belongs to the top five players in the market. Hewlett-Packard was the top advertiser in 2004, spending US$1.9 billion and increasing ad spend by 2% compared to 2003. IBM's expenditures were also huge, at US$1.3 billion. The company reduced its advertising expenditures by 5% in 2004. Furthermore, IBM completed the sale of its PC operations - a segment that has yielded little profit for the company in recent years - to Chinese firm Lenovo for approximately US$1.75 billion in 2005. IBM retained a 19% stake in the expanded Lenovo, and it will serve as the preferred service and financing provider for the company. In its hardware business, IBM reorganized this sector with an emphasis on its leading enterprise server and storage products. Other streamlining efforts included a move toward outsourced manufacturing and refurbishing, and a focus on services, which led IBM to acquire PricewaterhouseCoopers' consulting and IT services unit in 2002, PwC Consulting, for an estimated $3.5 billion in cash and stock (Euromonitor International, 1 October 2005). To keep up with the competitive environment, IBM acquired the Argus semiconductor software and related intellectual property from Infocon, an industry leading software for lithography advanced process control for semiconductor manufacturing in January 2006. In the same month, it acquired CIMS Lab, a leading provider of software that enables tracking the usage of computing resources across virtualized technology environments. The company completed the acquisition of Micromuse, a software company for approximately $865 million in February 2006 (McElligott, 21 December 2005). In March 2006, the company opened a new global delivery center in Shanghai, China to address the growing global demand for the delivery of application services. Threat of Substitution To alleviate the threat of being substituted, IBM diversified its product and services portfolio. Its products include servers, storage devices and software and its service portfolio includes business consulting services, infrastructure services, on demand services and financing, among others. Most of these products and services are leaders in the markets in which they operate. The company's diverse portfolio enables it to provide end-to-end solutions. With a strong presence in consulting, the company differentiates its offerings and gains a competitive edge over regional players. Also, none of the company's business segments dominate its revenues. During fiscal 2005, the global services division accounted for 51.2% of the company's total revenues, systems and technology group 27.5%, software 18.1%, global financing 4%, enterprise investments 1.2% and personal computing 3%. A diversified revenue stream enables the company to take advantage of market specific opportunities as well as does not expose it unduly to market specific risks. Threat of New Entry The entrance of new competitors in the industry is not a threat at all to IBM this is because IBM has a global reach, which operates in the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. The company has fairly diverse geographical revenues, with the US accounting for 38.4% of the total revenues, other countries 49.8% and Japan 11.8%. IBM is also integrating its businesses into a single global system, thereby increasing flexibility, creating a more complete view of operations and identifying new sources of talent and skills. This system features global delivery centers, globally integrated manufacturing and corporate functions and a global skills marketplace. Integrated operations give the company the advantage of having a single flexible network capable of sharing workloads across clients, products and geographies. This system can result in savings and therefore, higher profitability for the company's global operations. Proposed Strategies Increasing IT outsourcing Throughout the world, information technology (IT) outsourcing spending is forecast to rise from $193 billion in 2004 to $260 billion by 2009. An increasing number of corporations worldwide are outsourcing IT services to on and offshore service providers to reduce costs and improve efficiency. Presently, IBM is focused on developed markets in North America and Europe as well as developing markets in India and China. Given this position, IBM is well placed to benefit from increasing IT outsourcing spending worldwide. IBM could leverage its marketing network and relationships with existing clients to improve its business process outsourcing business. One disadvantage of IT outsourcing would be the increase of their market might become too diverse to handle effectively. This is why it is suggested that IBM should strengthen its management and they should continually improve new management systems to make their organizational structure effective and to cater more client-facing leaders out into local markets. Continue to Strengthen Research and Development In Palmisano's 2005 annual report, he indicated that IBM had maintained their technology strength as a result of long-term investments they had made over many years. Last year, IBM's Systems and Technology business extended its industry leadership, enhancing its competitive standing and staking out advantageous positions in growth markets of the future. Since 2000, IBM's total share of the server market has grown 9.5 points in annual revenue. IBM's competitive strategy was also quite consistent over the years. Given that the firm was never the lowest cost producer in the industry, it did not try to compete with low prices. Instead, the firm pursued a quality differentiation strategy by offering superior products backed up by excellent technical service and selling them at premium prices. The downside of this strategy is that it could gain a large chunk in their costs. However, in seeing it in the long run, they will reap the fruits of their investments later in this sector of their business. Bibliography Clients. 2006. About IBM. Retrieved 13 October 2006 at IBM Website: http://www.ibm.com/ibm/responsibility/company/relationships/clients.shtml Datamonitor International. 2006, July 1. International Business Machines Corporation. NY: Marketline Business Information Center. Euromonitor International. 2005, October 1. Desktop Personal Computers in the USA. UK: Global Market Information Database. Introduction. 2006. About IBM. Retrieved 13 October 2006 at IBM Website: http://www.ibm.com/ibm/responsibility/company/relationships/index.shtml McElligott, Tim. 2005, December 21. IBM to Acquire Micromuse for $865 Million. Retrieved 13 October 2006 at Telephony Online: http://telephonyonline.com/finance/news/ibm_aquires_micromuse_122105/ Palmisano, Samuel. 2006. Chairman's Letter. 2005 IBM Annual Report. Retrieved 13 October 2006 at IBM Website: http://www.ibm.com/annualreport/2005/ch_1.shtml Sager, Ira. 1999, December 13. Inside IBM: Internet Business Machines, Business Week, E-BIZ Section, pp. EB20-38. Schlender, Brent. 2003, June 19.How Big Blue Is Turning Geeks into Gold, Fortune, p. 133. Suppliers. 2006. About IBM. Retrieved 13 October 2006 at IBM Website: http://www.ibm.com/ibm/responsibility/company/relationships/suppliers.shtml Zarley, Craig. 2002, February 25. Taking the Lead for IBM, CRN, no. 984, p. 14. Read More