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IBM Strategic Analysis
IBM Strategic Analysis
Executive Summary
This paper analyzes the strategic environment and moves of the IBM Corporation over a period of 20 years (1986 to 2006). The IBM Corporation experienced quite a turbulent ride during this period: From most admired company in 1984 to almost dead in 1993 From regaining customer and shareholder confidence in 1993 to a company that matters again in 2001 From mattering again in 2001 to building a new model for growth in the 21st century During this 20 year timeframe, three CEOs played a significant role in leading the company. Under John F. Akers (1986-1993), IBM lost customer and shareholder confidence, posted big losses and laid off almost half of its workforce, mostly due to lack of competitive spirit, lack of customer focus, complacency and arrogance. IBM made a remarkable turnaround under Louis V. Gerstner Jr. (1993-2002), IBMs only outside CEO to date. By differentiating IBMs portfolio, a strong and solid vision for the future (integration, ebusiness), and corresponding moves into high-profit software/middleware and high-growth services, together with a significant culture change, IBM became again a company that matters by the turn of the century. IBM definitely and successfully competes on value again. This revival was further emphasized in the following years by the strategy under Samuel J. Palmisano (2002 and onwards, on demand business, consulting). IBM has consistently built high-value businesses though software and services acquisitions (Lotus, Tivoli, Informix, Rational, PriceWaterhouseCoopers-Consulting, and more), IBM exited non-core businesses in network equipment and application software, and moved away from commoditization sectors through divestments of e.g. its global network to AT&T, disk drives to Hitachi, PC division to Lenovo. This paper analyzes the three periods in detail, and looks primarily at IBMs software and services businesses. Several frameworks for analyzing its strategic moves have been applied. With this renewed focus on differentiation and added value for its clients. It has moved away from commoditization businesses to stay as much as possible out of grip of e.g. Dell, HP, Microsoft, Oracle, EDS and CSC. Its global presence, strong brand, strong sales force, loyal partner channel and complete suite of IT products and services make it a mighty competitor. However, many challenges remain: the company has had trouble showing organic growth, has difficulties penetrating the Small and Medium Business segment, and is threatened by Open Source substitutes in its software portfolio and imitation by the big application vendors.
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Table of Contents
EXECUTIVE SUMMARY ............................................................................................................................. 2 TABLE OF CONTENTS................................................................................................................................ 3 1 2 2.1 2.2 2.3 2.4 2.5 3 4 5 INTRODUCTION............................................................................................................................ 4 IBM'S STRATEGY ......................................................................................................................... 4 IBM BEFORE 1986 .............................................................................................................................. 4 1986-1993: D ECLINE OF A MONOPOLIST, NEAR DEATH EXPERIENCE ...................................................... 5 1993-2002: R EBUILDING A COMPANY THAT MATTERS, DIVERSIFICATION .............................................. 5 2002-2006: SUSTAINING GROWTH AND SHARPENING FOCUS ................................................................. 7 2006 AND BEYOND .............................................................................................................................. 8 IBM SOFTWARE GROUP ............................................................................................................. 8 IBM GLOBAL SERVICES ............................................................................................................. 9 SUMMARY AND CONCLUSIONS.............................................................................................. 11
REFERENCES ............................................................................................................................................. 12 APPENDIX ................................................................................................................................................... 13 EXHIBIT 1. IBM HISTORICAL REVENUES, PROFIT, EMPLOYEES AND STOCKHOLDERS ........................................ 13 EXHIBIT 2. IBM HISTORICAL REVENUES AND PROFITS (1986-2005)................................................................ 14 EXHIBIT 3. IBM HISTORICAL STOCK PRICES .................................................................................................. 16 EXHIBIT 4. MACRO E NVIRONMENT ANALYSIS (PEST) .................................................................................. 17 EXHIBIT 5. MESO E NVIRONMENT A NALYSIS (F IVE FORCES/V ALUE NET )........................................................ 18 EXHIBIT 6. MICRO E NVIRONMENT ANALYSIS OF IBM ................................................................................... 19 EXHIBIT 7. SUSTAINABILITY A NALYSIS TETRA THREAT MODEL .................................................................. 20 EXHIBIT 8. VALUE CHAIN A NALYSIS OF IBM BUSINESS U NITS ...................................................................... 21 EXHIBIT 9. TIMELINE OF IMPORTANT EVENTS FOR IBM (1980-2006).............................................................. 22 EXHIBIT 10. A BRIEF HISTORY OF IBM.......................................................................................................... 23 EXHIBIT 11. IBM STRATEGY AS OF 2006 ...................................................................................................... 26 EXHIBIT 12. IBM SOFTWARE PORTFOLIO...................................................................................................... 27
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1 Introduction
This paper analyzes the strategy of the IBM Corporation over a period of 20 years (1986-2006). More specifically, it focuses in the last 10 years on one of the IBM business units, the IBM Software Group and its strategic importance to the corporation as a whole. Another significant move is briefly touched upon, namely IBMs commitment to IT services (and the corresponding IBM Global Services organization). I have chosen IBM for two reasons: 1. I have worked for several years for IBM in the Netherlands. This may on one hand give me an advantage in knowing the company and parts of its history, but on the other hand it allows me a moment to reflect on the big picture of the companys strategy. 2. The twenty year period has been quite a turbulent ride for IBM, with ups and huge downs, important reorganizations, turnarounds and strategic repositioning, which provide some very interesting insights.
2 IBM's Strategy
IBM started almost a century ago, with punched card data processing equipment, has evolved to a dominant player in mainframes in the midst of the 20th century, and still is known for late but very successful entering of the PC business in the early eighties, to give its dominance away later to other PC players. Certainly, the past twenty years have been a turbulent ride for the company, and based on Figure 1 below, which plots the IBM Return on Assets and Invested Capital, and the IBM share price, this period can be subdivided in three different discernable phases: 1986-1993 : Decline of a monopolist, near death experience 1993-2002 : Rebuilding a company that matters, diversification 2002-2006 : Sustaining growth and sharpening focus Coincidentally or not, these periods match with three different CEOs, being John F. Akers, Louis V. Gerstner Jr. and Sam Palmisano, respectively. Below, a brief early history, the three mentioned phases and an up-to-date reflection on its strategy will be discussed separately.
20,00% 15,00% 10,00% 5,00% 0,00% -5,00% -10,00% -15,00%
ROA ROIC
Figure 1. IBM Return on Assets (ROA) and Return on Invested Capital (ROIC) and share price (US$) for the period 1985-2005 For each of the above mentioned periods, detailed analysis of strategy (macro, meso, micro and dynamics) has been done in this paper. Results are shown in Exhibits 4,5,6 and 7 in the Appendix. Hereafter, an overview and highlights of the strategy are given per period.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
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Recording (CTR) Corporation, which was incorporated on June 15, 1911 in Binghamton, New York. This company was a merger of the Tabulating Machine Corporation, the Computing Scale Corporation and the International Time Recording Company. The president of the Tabulating Machine Corporation at that time was Herman Hollerith, who had founded the company in 1896. Thomas J. Watson Sr., the founder of IBM, became General Manager of CTR in 1914 and President in 1915. In 1917, the Computing-Tabulating-Recording Company entered the Canadian market under the name of International Business Machines Co., Limited. On February 14, 1924, CTR changed its name to International Business Machines Corporation. IBM or Big Blue could have been effectively described as a near monopolist in the computer market, although it competed in some areas with around eight other computer companies (UNIVAC, Burroughs, Scientific Data Systems, Control Data Corporation, General Electric, RCA and Honeywell). Most of these competitors have vanished over time, and practically non of them exists today. See Exhibit 10 for a more detailed history of IBM.
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the future in services. Because of the new modular way of customer buying behaviour of IT systems and software, there will be huge demand for integration, implementation and consulting services. The newly formed IBM Global Services division is the growth engine of the IBM Corporation for the next decade or more. Then, Gerstner also decides to form an separate Software Group division, which specializes in socalled middleware, the layer between applications and the operating system. Similar to the services view, Gerstner sees future need for companies to integrate diverse IT systems and application. The strategic acquisitions of the Lotus Corporation in 1995 and Tivoli in 1996, and the existing strength of IBM in middleware applications and database in the mainframe space, define a significant IBM Software Group (effectively then, and still today, the second largest software company in the world, after Microsoft). The figure to the right gives a schematic interpretation of the attractiveness around 1995 of the three businesses/sectors, and IBMs capabilities. At the same time, Gerstner decides to focus, and exits the application software business, because this is not a core competence of IBM, and this field is dominated by SAP, Siebel, Baan, JD Edwards, PeopleSoft, . Instead, IBM will partner with these companies, to sell infrastructure, middleware and services together with these application vendors (complementors). At first sight, these moves into software and services may seem quite bold. However, IBM sold a lot of software and services as part of the (outrageously priced) mainframes for years. According to Gerstner in 1990, if it had had a separate software entity, IBM would have been the largest software supplier in the world in terms of revenue1. The challenge lay in the fact that the software unit would have to be run as a software business, and IBMs software had to opened up to the rest of the IT world, so that it could operate with and on other systems and software. This signified a dramatic change in working for IBM and its employees. Services were bundled normally with the hardware, but now the newly formed IBM Global Services organization and its professionals, integrated competitors products, all or not with IBM products. IBM guaranteed a certain independence, which was and still is not always completely believed by its clients, as there is a fear of being run over by a train of IBM representatives, products and services.5 The Internet (and IBMs corresponding e-business view, companies integrated end-to-end over the Internet) was the major driver for both the Software and the Services businesses. IBMs own transition and cost cutting in its own decentralized IT automation and its consolidation and standardization experiences in its internal global IT operations, laid the foundation of a global outsourcing and transformation practice for its clients. By eating its own cooking, IBM boosted revenues from its (global) enterprise customers through large scale consolidation, outsourcing activities (operations, applications, and even business process outsourcing and business transformation outsourcing contracts).7 The new IBM, with its diversified portfolio, was now quickly #1 (services and hardware) or #2 (software) in all its major practices (the GE way). IBM competes again on value and moved away from commodity businesses (like networking equipment) and divested its Global network operations to AT&T in 1998. See Exhibit 9 for a complete list of acquisitions and divestitures. The companys culture was one of the strongest known in US organizations. However, the culture was severely in need of a makeover. Complacency, internal rivalry and arrogance needed to make place for customer dedication, competitive spirit and trust and responsibility in all relationships. Gerstner formed new governance models and new and fresh management teams that helped him implement this desperately needed change.
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A value based player needs to do R&D and be innovative, in order to stay competitive in the future. IBM continued to invest a significant portion of its revenues (about $5 billion, or 7%) in R&D, accelerating innovation and time-to-market, and building an 11 consecutive year record of the largest number of filed US patents. Furthermore, IBM opened op much of its technology (hardware and software) to its partners and competitors. This started an effective era of copetition, which successfully grew the pie for all parties, whereas IBM was able to make extra money of its R&D activities. IBMs R&D efforts have led to significant breakthroughs, even Nobel prizes, beating the best human chess player Kaparov with an IBM parallel computer in 1997, creating new semiconductor technologies, quantum computing breakthroughs, building supercomputers of more than 100.000 processors, leading edge processor technology in its servers, and being monopolist in todays gaming consoles, designing and manufacturing the processors in the Microsofts Xbox 360, Nintendos GameCube and Sonys PlayStation 3. Results on performance IBM Return on Assets sharply increased (from -8% to +10%, see Exhibit 2), and IBM shares surge again, outpacing the Dow Jones Industrials and other indices (from US$25 to US$130, see Exhibit 3). IBM is hit by the collapse of the dot com bubble, but far from as hard as many of its competitors. Historical figures of all IBM divisions can be found in Figure 4 and Table 1 of Exhibit 2.
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The new vision, building on Gerstners e-business, now is on demand business: An On Demand Business is an enterprise whose business processes integrated end-to-end across the company and with key partners, suppliers and customers can respond with flexibility and speed to any customer demand, market opportunity or external threat. Sam Palmisano described it as follows : On Demand Business is our way of describing a fundamental shift in computing architecture and how it is applied to business a shift toward integrated solutions and quantifiable business value, not just technology features and functions. . Again this vision signifies focus on value, differentiation and innovation, towards clients, employees and shareholders. The new CEO does not go without worries though, although Return on Assets and profitability (Exhibit 2) increase, revenue stagnation seems to be a major issue. More specifically, organic growth seems unachievable. Despite moves to penetrate the Small and Medium Business segment effectively, the company does not really succeed, and the complexity of its partners/alliances and copetition strategy make significant growth difficult. Results on performance IBM Return on Assets stays relatively constant (around +10%, see Exhibit 2), and IBM shares stay flat around US$80 (see Exhibit 3). Organic growth is the major challenge for the company. Historical figures of all IBM divisions can be found in Figure 4 and Table 1 of Exhibit 2.
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The portfolio today is vastly different from its inception in 1995, and revenue has grown van $11 billion to almost $16 billion. IBMs view on its competitive conditions The company operates in businesses that are subject to intense competitive pressures. The company's businesses face a significant number of competitors, ranging from Fortune 50 companies to an increasing number of relatively small, rapidly growing and highly specialized organizations. The company believes that its combination of technology, performance, quality, reliability, price and the breadth of products and service offerings are important competitive factors.
IBM Software
According to IBM itself, the software market is highly competitive. The above figure graphically depicts how IBM Software is squeezed between three forces: First of all, other important players in the middleware/applications market challenge the IBM products like databases, application servers, . (Microsoft, Oracle, Computer Associates, BMC, BEA, Symantec). Secondly, large application builders such Microsoft, Oracle and SAP, are pushing their software downward to the middleware market to expand their portfolio and to try to control standards (imitation) And last but not least, the substitute Open Source movement offers free, or at least very low priced software and support with freely accessible, community developed Open Source alternatives (like Sendmail, JBoss, MySQL, ). These forces will likely make it difficult for IBM to sustain growth of its software revenue and capture its added value in the future. Potential price erosion may take place. However, the Software portfolio has very strategic implications, and certainly is one of the big drivers of profitability in the near/medium future.
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IBM Global Services ranks as the largest IT services provider in the world, and its US$3.5 billion acquisition of PWC-Consulting has only cemented its position at the top of the market7. The PWC-C takeover came at a time when IBM Global Services is feeling the pinch as clients freeze their discretionary IT services spend, and look to renegotiate the terms of their existing outsourcing deals. The close to US$40 billion revenues that IBM GS generated accounted for 40% of IBM's total 2001 sales and the services division currently has 180,000 employees. Its activities range from product support, implementation, project management and application development to activities in consulting and outsourcing (operational, business process outsourcing, business transformation outsourcing). IBM Global Services has many competitors (EDS, CSC, Accenture, Atos Origin, CGEY, ). But unlike these competitors, which are for the most part specialized service providers, IBM Global Services has an unparalleled potential to leverage products, research and talent from the various other business units of its parent. The flipside of this proposition is the wariness of customers over sourcing hardware, software and services from one company, despite the fact that IBM Global Services employs more third-party equipment than it does IBM's own. Again, the copetition strategy of IBM gives a significant share to its Global Services arm on implementing both IBM and non-IBM products. On the other hand, the fact that other IT services companies compete with Global Services, often results in technology choice of products competing with IBMs portfolio. The strategy has turned out to work very successfully over the past 10 years, but there already signs of stagnation because of this complex competitive force field.
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END OF REPORT
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