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Case study on rise and fall of IBM business
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University of Jordan
Faculty of Business
Strategic Management
“International Business Machines”
Strategic Ananlysist
Prepared by Fathi Salem Mohammed Abdullah
2009
Table of Contents
PageTopics
3Introduction and brief history of IBM
4Vision, Mission, Value
5Porter’s Five Forces Framework
6PESTEL Framework
7External Audit
7CPM-Competitive Profile Matrix
8External Factor Evaluation (EFE) Matrix
9Financial Ratio Analysis
11Internal Audit
12Internal Factor Evaluation (IFE) Matrix
13SWOT Matrix
15SPACE Matrix
16Grand Strategy Matrix
17The Boston Consulting Group (BCG) Matrix
17The Internal-External (IE) Matrix
18The Quantitative Strategic Planning Matrix (QSPM)
21Recommendations
22References
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.com4
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.
Legal:
- Cyber protection and the chemical the use in making hardware; like carbon, germanium, and silicon
- Currency exchange- Legal registration for their business outsourcing facilities.
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 Weighted Score
Rating Weighted Score
Rating Weighted Score
Rating Weighted 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
Management
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 2.34
External Factor Evaluation (EFE) Matrix
Key External Factors Weight Rating Weighted
7
Score
Opportunities
1. Video game console market revenue is projected to reach $12 billion in 2008 and $66 billion in 2012
0.20 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
Threats
1. Competitors are strong 0.20 2 0.40
2. Economic fluctuation could crimp consumers’ spending
0.10 2 0.20
3. Small & Medium business demand fails to accelerate
0.10 3 0.30
Total 1.00 2.80
Financial Ratio Analysis 12/2006
8
Growth Rates % IBM Industry SP-500Sales (Qtr vs year ago qtr) 9.90 11.70 9.00Net Income (YTD vs YTD) 10.50 29.90 15.40Net Income (Qtr vs year ago qtr) 14.00 22.40 0.90Sales (5-Year Annual Avg.) 4.00 7.63 13.05Net Income (5-Year Annual Avg.) 14.33 7.68 19.88Dividends (5-Year Annual Avg.) 20.52 10.99 10.03Price RatiosCurrent P/E Ratio 15.1 16.1 22.9P/E Ratio 5-Year High 26.6 22.3 22.7P/E Ratio 5-Year Low 13.6 8.1 6.7Price/Sales Ratio 1.52 1.32 2.49Price/Book Value 5.30 4.19 3.53Price/Cash Flow Ratio NA 5.20 10.40Profit MarginsGross Margin 42.2 35.2 33.7Pre-Tax Margin 14.7 11.8 17.5Net Profit Margin 10.6 8.8 12.45Yr Gross Margin (5-Year Avg.) 39.6 33.6 33.45Yr PreTax Margin (5-Year Avg.) 12.9 9.3 16.65Yr Net Profit Margin (5-Year Avg.)
9.0 6.6 11.5
Financial ConditionDebt/Equity Ratio 1.24 0.77 1.24Current Ratio 1.1 1.2 0.9Quick Ratio 1.1 1.1 0.7Interest Coverage 21.6 11.6 42.3Leverage Ratio 4.2 3.3 4.2Book Value/Share 20.57 17.49 16.50Investment Returns %Return On Equity 36.6 27.8 21.3Return On Assets 9.3 8.7 5.8Return On Capital 15.3 14.7 7.8Return On Equity (5-Year Avg.) 28.6 19.5 15.4Return On Assets (5-Year Avg.) 7.9 6.2 5.0Return On Capital (5-Year Avg.)
12.4 10.0 6.7
Management EfficiencyIncome/Employee NA 18,387 52,240
9
Revenue/Employee NA 268,252 424,626Receivable Turnover 3.1 4.9 12.8Inventory Turnover NA 4.7 5.5Asset Turnover 0.9 1.0 0.6
Date Avg. P/E Price/Sales Price/Book
Net Profit Margin (%)
12/07 14.70 1.59 5.26 10.512/06 13.70 1.65 5.13 10.312/05 17.00 1.47 3.91 8.812/04 20.70 1.75 5.12 7.812/03 22.70 1.83 5.64 7.4
Date Book Value/ Share
Debt/Equity ROE (%)
ROA (%)
Interest Coverage
12/07 $20.57 1.24 36.6 8.7 22.112/06 $18.92 0.80 33.0 9.1 42.912/05 $21.03 0.68 24.1 7.6 41.612/04 $19.26 0.72 23.7 6.8 69.212/03 $16.44 0.85 23.6 6.3 59.5
Net Worth Analysis 12/2006 (in millions)
1. Stockholders' Equity + Goodwill= 28,506+12,854 $41,3602. Net income x 5 = 9,492 x 5 $47,4603. Share price = 110/EPS 6.262=$17.57 x 9,492 $166774.44. Number of Shares Outstanding x Share price =
1,506.48x110$165712.8
Method Average $105,326.8
Internal Audit
10
Strength Weakness
1. IBM revenues increased 7 percent to
69.92$.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
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.
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.
Internal Factor Evaluation (IFE) Matrix
11
Key Internal Factors Weight Rating Weighted Score
Strengths
1. IBM revenues increased 7 percent to 69.92$.billion
0.10 4 0.40
2. A unique approach to engage their
employees in an online intranet
using its Jam technology
0.06 3 0.18
3. Strong strategic planning to be an
innovation-centric globally
integrated corporation
0.06 3 0.18
4. IBM operates in 170 countries with
about 60 percent of its revenues
being generated outside the US
0.10 4 0.40
5. IBM concentrated on becoming
stronger in high value added
businesses
0.10 4 0.40
6. IBM ranked number 1 hosted service provider in Western Europe
0.10 4 0.40
7. IBM is supercomputing leader as provider of 35 of the world's 100 most powerful supercomputers
0.12 4 0.48
Weaknesses
1. Declining in revenues of services and systems segments in 2006
0.08 2 0.16
2. Decline in revenue of public, industrial, small and medium business industries in 2006 by 9.6%
0.08 2 0.16
3. Decline in revenues in Asia Pacific area by 5.7%
0.10 2 0.20
4. Total assets are gradually decreasing from 109M to 103M in 2006
0.10 2 0.20
Total 1.00 3.16
12
SWOT Matrix
13
SPACE Matrix
14
Strengths Weaknesses
1. IBM revenues increased 7
percent to 69.92$.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 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.
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.
Opportunities S-O Strategies W-O Strategies
1. Video game console
market revenue is
projected to reach $12
billion in 2008 and $66
billion in 2012.
2. The IT market in
Russia, India, Brazil,
and China are
expected to grow
twice as fast as in the
1. Entering the video game
console market by produce
video game console, (S5,
O1).
2. Entering the mobile phone
market, (S5, O3).
3. Entering the Handheld
computers market, (S5,
O4).
1. Increasing marketing efforts into Asia Pacific, (W3, O3).
Directional vector point is :( 3.167, 1.163)
Grand Strategy Matrix
15
Conservative
Aggressive
Competitive
Defensive
FS
ISCA
ES
Quadrant II Quadrant I
Quadrant IVQuadrant III
Rapid Market Growth
Strong Competitiv
e
Position
Weak
Competitive
Position
Slow Market Growth
The Boston Consulting Group (BCG) Matrix
The Internal-External (IE) Matrix
Strong 3.0 to 3.99 Medium 2.0 to 2.99 Low 1.0 to 1.99
High
3.0 to 3.99
Medium
2.0 to
2.99
16
IV V VI
IBMThe EFE
Total Weighted
Score
The IFE Total Weighted Score
I II III
Question Marks
DogsCash Caw
IBMIndustry
Sales Growth Rate
Market share position
Stars
Low
1.0 to 1.99
The Quantitative Strategic Planning Matrix (QSPM)
Strategy 1
Enter video game console market
Strategy 2
Increasing marketing efforts into Asia and Europe
Key Internal Factors Weight AS TAS AS TAS
Strengths IBM revenues increased 7 percent to 69.92$.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 innovation-centric 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 - - - -
Weaknesses
Declining in revenues of services and systems segments in 2006
0.08 2 0.16 4 0.32
17
VII VIII IX
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 1.00 2.20 2.42
Strategy 1
Enter video game console market
Strategy 2
Increasing marketing efforts into Asia and Europe
Key Internal Factors Weight AS TAS AS 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 - - - -
Threats
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
SUBTOTAL 1.90 2.40
18
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 Debt FinancingRecession Normal Boom Recession Normal Boom
EBIT 2,000,000,000 4,000,000,000 6,000,000,0002,000,000,00
0 4,000,000,000 6,000,000,000Interest 0 0 0 140000000 280000000 420000000
EBT 2,000,000,000 4,000,000,000 6,000,000,0001,860,000,00
0 3,720,000,000 5,580,000,000Taxes 700000000 1400000000 2100000000 651000000 1302000000 1953000000
EAT 1,300,000,000 2,600,000,000 3,900,000,0001,209,000,00
0 2,418,000,000 3,627,000,000#shares 1517389091 1517389091 1517389091 1506480000 1506480000 1506480000EPS 0.856734774 1.713469548 2.570204322 0.802533057 1.605066114 2.407599172
70 percent Stock- 30 Percent Debt 70 Percent Debt- 30 Percent StockRecession Normal Boom Recession Normal Boom
EBIT 2,000,000,000 4,000,000,000 6,000,000,0002,000,000,00
0 4,000,000,000 6,000,000,000Interest 42000000 84000000 126000000 98000000 196000000 294000000
EBT 1,958,000,000 3,916,000,000 5,874,000,0001,902,000,00
0 3,804,000,000 5,706,000,000Taxes 685300000 1370600000 2055900000 665700000 1331400000 1997100000
EAT 1,272,700,000 2,545,400,000 3,818,100,0001,236,300,00
0 2,472,600,000 3,708,900,000#shares 1514116364 1514116364 1514116364 1509752727 1509752727 1509752727EPS 0.840556268 1.681112536 2.521668804 0.818875818 1.637751637 2.456627455
19
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