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IBM Strategic Analysis

IBM Strategic Analysis

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Strategic Analysis IBM Corporation 1986-2006

consulting). has difficulties penetrating the Small and Medium Business segment. disk drives to Hitachi. together with a significant culture change. and moved away from commoditization sectors through divestments of e. Palmisano (2002 and onwards. It has moved away from commoditization businesses to stay as much as possible out of grip of e. posted big losses and laid off almost half of its workforce. IBM lost customer and shareholder confidence. Under John F. Informix. (1993-2002). many challenges remain: the company has had trouble showing organic growth. Page 2 . and more). IBM made a remarkable turnaround under Louis V. Gerstner Jr. Dell. three CEOs played a significant role in leading the company. IBM exited non-core businesses in network equipment and application software. ebusiness). Akers (1986-1993). Its global presence. Microsoft. strong sales force. on demand business. This paper analyzes the three periods in detail. PC division to Lenovo. and corresponding moves into high-profit software/middleware and high-growth services. Tivoli. and looks primarily at IBM´s software and services businesses. and is threatened by Open Source substitutes in its software portfolio and imitation by the big application vendors. IBM definitely and successfully competes on value again. complacency and arrogance. mostly due to lack of competitive spirit. a strong and solid vision for the future (integration. HP.Executive Summary This paper analyzes the strategic environment and moves of the IBM Corporation over a period of 20 years (1986 to 2006). IBM´s only outside CEO to date. By differentiating IBMs portfolio. strong brand. 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. loyal partner channel and complete suite of IT products and services make it a mighty competitor. IBM has consistently built high-value businesses though software and services acquisitions (Lotus.g. With this renewed focus on differentiation and added value for its clients. This revival was further emphasized in the following years by the strategy under Samuel J. PriceWaterhouseCoopers-Consulting. lack of customer focus. IBM became again a company “that matters” by the turn of the century. Rational.g. EDS and CSC. However. Oracle. its global network to AT&T. Several frameworks for analyzing its strategic moves have been applied.

............ MACRO E NVIRONMENT ANALYSIS (PEST) ....... 16 EXHIBIT 4.........................................1 2.................... 23 EXHIBIT 11....................................... 2 TABLE OF CONTENTS.............. 7 2006 AND BEYOND .................................................................................... 26 EXHIBIT 12.......................................... IBM HISTORICAL STOCK PRICES ......................................................................................... 18 EXHIBIT 6.................................................................................................................................................Table of Contents EXECUTIVE SUMMARY .............................. 11 REFERENCES ................................................................................................................ 4 IBM BEFORE 1986 . 20 EXHIBIT 8........................................ 9 SUMMARY AND CONCLUSIONS............................................. IBM STRATEGY AS OF 2006 ......................................... 8 IBM SOFTWARE GROUP .....................................2 2............................3 2..........................................................................................................5 3 4 5 INTRODUCTION...... 4 IBM'S STRATEGY ...................... 14 EXHIBIT 3..................... 5 1993-2002: R EBUILDING A COMPANY THAT MATTERS............ EMPLOYEES AND STOCKHOLDERS ......... 12 APPENDIX .................................................................................................................................................................................................................................................................................................................................................................................................... 22 EXHIBIT 10.............................. 13 EXHIBIT 1.. TIMELINE OF IMPORTANT EVENTS FOR IBM (1980-2006).................. IBM HISTORICAL REVENUES........................................................ NEAR DEATH EXPERIENCE ................................................... MESO E NVIRONMENT A NALYSIS (F IVE FORCES/V ALUE NET ).............................. 27 Page 3 ......................................................................4 2.. 5 2002-2006: SUSTAINING GROWTH AND SHARPENING FOCUS ........ VALUE CHAIN A NALYSIS OF IBM BUSINESS U NITS ............................................ SUSTAINABILITY A NALYSIS – TETRA THREAT MODEL ................................................................................................. 17 EXHIBIT 5......................... IBM HISTORICAL REVENUES AND PROFITS (1986-2005).... IBM SOFTWARE PORTFOLIO...................................................................... 13 EXHIBIT 2.......................... A BRIEF HISTORY OF IBM..................................................................................... 21 EXHIBIT 9.......................... 4 1986-1993: D ECLINE OF A MONOPOLIST..... DIVERSIFICATION ............ PROFIT.................. MICRO E NVIRONMENT ANALYSIS OF IBM ............................................................................ 3 1 2 2........................................................... 8 IBM GLOBAL SERVICES ....................... 19 EXHIBIT 7................................................................................................................................................................................................................................................

Certainly.00% -5. detailed analysis of strategy (macro.00% 15. and the IBM share price. important reorganizations. these periods match with three different CEO´s. and still is known for late but very successful entering of the PC business in the early eighties. More specifically. the IBM Software Group and its strategic importance to the corporation as a whole. being John F. the past twenty years have been a turbulent ride for the company.5. Hereafter.00% 5. Gerstner Jr. 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. it focuses in the last 10 years on one of the IBM business units. 2 IBM's Strategy IBM started almost a century ago.1 IBM before 1986 IBM's history dates back decades before the development of electronic computers – before that it developed punched card data processing equipment. Akers. It originated as the Computing Tabulating 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Page 4 . has evolved to a dominant player in mainframes in the midst of the 20th century. I have chosen IBM for two reasons: 1. which plots the IBM Return on Assets and Invested Capital. Louis V. meso. diversification 2002-2006 : Sustaining growth and sharpening focus Coincidentally or not.00% -15. the three mentioned phases and an up-to-date reflection on its strategy will be discussed separately. turnarounds and strategic repositioning. 2. which provide some very interesting insights.00% ROA ROIC Figure 1. This may on one hand give me an advantage in knowing the company and parts of its history. with punched card data processing equipment. and Sam Palmisano. Results are shown in Exhibits 4.6 and 7 in the Appendix. 2. this period can be subdivided in three different discernable phases: 1986-1993 : Decline of a monopolist. to give its dominance away later to other PC players. Another significant move is briefly touched upon. and based on Figure 1 below. an overview and highlights of the strategy are given per period. near death experience 1993-2002 : Rebuilding a company that matters. namely IBM´s commitment to IT services (and the corresponding IBM Global Services organization). Below. micro and dynamics) has been done in this paper.00% -10. The twenty year period has been quite a turbulent ride for IBM. a brief early history. respectively.00% 0. 20. I have worked for several years for IBM in the Netherlands.00% 10. with ups and huge downs.1 Introduction This paper analyzes the strategy of the IBM Corporation over a period of 20 years (1986-2006). but on the other hand it allows me a moment to reflect on the “big picture” of the company´s strategy.

With 214.Recording (CTR) Corporation. Gerstner restructures the company significantly. who had founded the company in 1896.5. but gained ground quickly due to the pact with Intel and Microsoft. Control Data Corporation. HP. the founder of IBM. In 1993. having served for McKinsey & Company and American Express. as the first outside IBM CEO. Scientific Data Systems. which was incorporated on June 15. HP). comes on board. However. This company was a merger of the Tabulating Machine Corporation. 1924. In the meantime “mainframe substitute” players in the so-called “open systems” arena (Unix. Soon after his entry. the contract with these parties paved the way for dominance of the Microsoft/Intel duo in the PC market. On February 14. akers. Dell. DEC. CTR changed its name to International Business Machines Corporation. 1 In the years 1991-1993 IBM posts big losses (see Exhibit 1). New York. still today). and many other smaller players14. the IBM workforce is in 1994 almost half of what it was in 1986.3 1993-2002: Rebuilding a company that matters. Limited. and many employees are sent home with large “golden handshakes” (which constitute the majority of the financial losses of 1993).5. he realized that IBM had most to offer its customers by its total solutions. Watson Sr. These years can effectively be described as the “after days of monopoly”. Gerstner Jr. IBM or “Big Blue” could have been effectively described as a near monopolist in the computer market. 2. Burroughs. General Electric.1 billion in 1993 the biggest corporate loss in history (at that time). The president of the Tabulating Machine Corporation at that time was Herman Hollerith. opening the doors for new entrants like Compaq. He was said to be hired to split up the company in healthy parts. Digital. Gerstner sees great strategic opportunity for Page 5 . Thomas J. Under CEO John F. …) also started to erode IBM´s mainframe business (Sun Microsystems. In 1917. IBM entered late in the PC market in the early eighties. diversification Please refer to Exhibits 4. But to the hardware offerings also new “open systems” are added. Gerstner realizes the need for diversification in the new IT industry and redefines the IBM portfolio. RCA and Honeywell). IBM still had a significant stronghold in mainframes.2 1986-1993: Decline of a monopolist. although it competed in some areas with around eight other computer companies (UNIVAC. became General Manager of CTR in 1914 and President in 1915. The core of IBM´s business remains servers (and the cash cow the mainframe. and IBM shares plummet in the beginning of the nineties (from US$40 to US$25. the Computing-Tabulating-Recording Company entered the Canadian market under the name of International Business Machines Co. slow to market € Complacency. Wintel..6 and 7 for detailed strategic analysis of the period.. 2. See Exhibit 10 for a more detailed history of IBM. arrogance and complexity within the organization (slack) € Lack of customer orientation € Lock-in of customers € Unsatisfied customers € Antitrust lawsuits Results on performance IBM Return on Assets sharply declines (from +10% to -8%. near death experience Please refer to Exhibits 4. with the $8. see Exhibit 3).6 and 7 for detailed strategic analysis of the period. the Computing Scale Corporation and the International Time Recording Company. Louis V. and there are many different factors that have contributed to this1: € The near monopoly in mainframes had strong influence on the company strategy and culture € High R&D expenditure. and practically non of them exists today. see Exhibit 2).000 people. Clearly. IBM had run into a crisis. 1911 in Binghamton. Most of these competitors have vanished over time.

IBM sold a lot of software and services as part of the (outrageously priced) mainframes for years. which was and still is not always completely believed by its clients. Services were bundled normally with the hardware. This signified a dramatic change in working for IBM and its employees. to sell infrastructure. Gerstner sees future need for companies to integrate diverse IT systems and application. IBM boosted revenues from its (global) enterprise customers through large scale consolidation. 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. PeopleSoft. there will be huge demand for integration.the future in services. The company’s culture was one of the strongest known in US organizations.5 The Internet (and IBM´s corresponding “e-business” view. At first sight. At the same time. products and services. Gerstner decides to focus. IBM guaranteed a certain independence. See Exhibit 9 for a complete list of acquisitions and divestitures. if it had had a separate software entity. so that it could operate with and on other systems and software. these moves into software and services may seem quite bold. the second largest software company in the world. with its diversified portfolio. and the existing strength of IBM in middleware applications and database in the mainframe space. By eating its own cooking. which specializes in socalled “middleware”. Gerstner also decides to form an separate Software Group division. all or not with IBM products. IBM would have been the largest software supplier in the world in terms of revenue1. Then. applications. implementation and consulting services. but now the newly formed IBM Global Services organization and its professionals. Siebel. Gerstner formed new governance models and new and fresh management teams that helped him implement this desperately needed change. internal rivalry and arrogance needed to make place for customer dedication. because this is not a core competence of IBM. However. IBM´s own transition and cost cutting in its own decentralized IT automation and its consolidation and standardization experiences in its internal global IT operations. companies integrated end-to-end over the Internet) was the major driver for both the Software and the Services businesses. after Microsoft). outsourcing activities (operations. IBM will partner with these companies. Complacency. JD Edwards. and still today.7 The new IBM. laid the foundation of a global outsourcing and transformation practice for its clients. Similar to the services view. Instead. and this field is dominated by SAP. According to Gerstner in 1990. and even business process outsourcing and business transformation outsourcing contracts). The newly formed IBM Global Services division is the growth engine of the IBM Corporation for the next decade or more. However. The strategic acquisitions of the Lotus Corporation in 1995 and Tivoli in 1996. middleware and services together with these application vendors (complementors). and exits the application software business. Page 6 . and IBM´s software had to “opened up” to the rest of the IT world. the culture was severely in need of a makeover. as there is a fear of being run over by a train of IBM representatives. The challenge lay in the fact that the software unit would have to be run as a software business. and IBM´s capabilities. Baan. competitive spirit and trust and responsibility in all relationships. was now quickly #1 (services and hardware) or #2 (software) in all its major practices (the GE way). … . integrated competitor´s products. define a significant IBM Software Group (effectively then. Because of the new modular way of customer buying behaviour of IT systems and software. The figure to the right gives a schematic interpretation of the attractiveness around 1995 of the three businesses/sectors. the layer between applications and the operating system.

This started an effective era of “coöpetition”. …5 Palmisano effectively strengthens IBM´s focus on high-value solutions (like consulting. whereas IBM was able to make extra money of its R&D activities. Palmisano takes over the CEO responsibility in 1992. Capgemini. employees and IBM shareholders. see Exhibit 2). even Nobel prizes. an IBM salesman with more than 35 years of duty. Furthermore. and building an 11 consecutive year record of the largest number of filed US patents. In 2003. creativity and high value for customers. IBM had already moved out of most consumer businesses.000 processors.). mostly in the enterprise space. that builds on the Gerstner strategy in terms of value based competition. Palmisano also decides to divest the harddisk drive business to Hitachi. creating new semiconductor technologies. cementing its lead over competitors as HP (which bidded for PWC-C. but with the 2004 divestiture of IBM´s PC business to the Chinese company Lenovo. Results on performance IBM Return on Assets sharply increased (from -8% to +10%. .A value based player needs to do R&D and be innovative. IBM announces that it will acquire PriceWaterhouseCooper-Consulting (PWC-C) for $3. IBM opened op much of its technology (hardware and software) to its partners and competitors. Historical figures of all IBM divisions can be found in Figure 4 and Table 1 of Exhibit 2. Palmisano also re-establishes IBM Corporate Values (in a new form). outpacing the Dow Jones Industrials and other indices (from US$25 to US$130.5. and being monopolist in today´s gaming consoles. in order to stay competitive in the future. which successfully grew the pie for all parties. Samuel J. and was outperformed by Dell and HP for years already.6 and 7 for detailed strategic analysis of the period. which focus on innovation. But “plain disk capacity” is commoditizing rapidly and margins are low. Page 7 . IBM continued to invest a significant portion of its revenues (about $5 billion. EDS.. but far from as hard as many of its competitors. and IBM shares surge again. building supercomputers of more than 100. leading edge processor technology in its servers. The latter move again signifies IBM´s strategy to move away from commoditizing businesses: its PC business of about $10 billion a year made approximately only 1% profit. quantum computing breakthroughs. but true success remains unachieved in this area. Nintendo´s GameCube and Sony’s PlayStation 3.4 2002-2006: Sustaining growth and sharpening focus Please refer to Exhibits 4. accelerating innovation and time-to-market. dedication to client success and trust and responsibility. see Exhibit 3). or 7%) in R&D. IBM continues to make (enterprise) storage systems and software. Again this emphasizes focus on differentiation. This is a very interesting move. designing and manufacturing the processors in the Microsoft´s Xbox 360. IBM is hit by the collapse of the dot com bubble. outsourcing. Shortly after his official appointment. with whom it already had a joint venture. Dell and services companies as Atos Origin. which it will integrate in its Global Services “Business Consulting Services” department. CSC. beating the best human chess player Kaparov with an IBM parallel computer in 1997. IBM´s stronghold. the only (partial) remaining consumer activity is history as well. There is a push towards the so-called Small and Medium Business segment (SMB). total solutions. IBM´s R&D efforts have led to significant breakthroughs. too a year before for $17 billion!).5 billion. 2.

software. For the software and services businesses a closer look is taken in the next two chapters. but most of it was closed and proprietary. Because of the high margin on software products. It sells its middleware directly to enterprises. Rational in 2002 for US$2. The major software acquisitions by IBM in the past have been : Lotus in 1995 for US$3. organic growth seems unachievable. market opportunity or external threat. not just technology features and functions. Organic growth is the major challenge for the company. Intel servers cannibalize the midrange Unix systems and even mainframes. The new CEO does not go without worries though. This gives IBM clients flexibility and choice. including computer systems. 2. see Exhibit 2).” . Hardware revenues and growth are solid (according to Gartner 2005. and the complexity of its partners/alliances and “coöpetition” strategy make significant growth difficult. The low-end space is dangerous because of commoditization by players a Dell and Sun. an effective era of coöpetition has started for IBM. 3 IBM Software Group Lou Gerstner installed the IBM Software Group as a separate entity in 1995. and makes it easy for them to integrate their infrastructure and business operations. suppliers and customers — can respond with flexibility and speed to any customer demand. differentiation and innovation. through resellers and Independent Software Vendors (ISVs). which helps companies integrate and manage their operations. and IBM shares stay flat around US$80 (see Exhibit 3). the IBM Software Group contributes a significant portion to the overall profitability of the company (about 30%.5 billion. although Return on Assets and profitability (Exhibit 2) increase. services and consulting businesses worldwide.7 billion.1 billion. Page 8 . whereas the revenue portion is only about 17%). Informix in 2001 for US$1 billion. An important differentiator for IBM´s software business today is that it is entirely built on open standards.1 billion and Ascential 2005 for US$1. Historical figures of all IBM divisions can be found in Figure 4 and Table 1 of Exhibit 2. towards clients. Results on performance IBM Return on Assets stays relatively constant (around +10%. IBM is still leader in terms of revenue with 32% market share). Despite moves to penetrate the Small and Medium Business segment effectively.5 2006 and beyond IBM describes its vision as follows : “IBM strives to lead in the invention. Tivoli in 1996 for US$0. See Exhibit 12 for an overview of IBM´s software portfolio. IBM translates these advanced technologies into value for our customers through its professional solutions. supporting a wide variety of hardware platforms and applications. IBM had offered a lot of software with its mainframes.” More details on IBM´s strategy for 2006 and beyond (from Annual Report 2005) is described in Exhibit 11.The new vision. Through steady internal development and select acquisitions over the past several years. More specifically. Again this vision signifies focus on value. storage systems and microelectronics. With the new Software Strategy. employees and shareholders. development and manufacture of the industry's most advanced information technologies. IBM has become the leader in enterprise-class middleware. revenue stagnation seems to be a major issue. 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. building on Gerstner´s “e-business”. See also Exhibit 8 for Value Chain analysis of the different IBM businesses. the company does not really succeed. 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. and has it integrated by its own Global Services organization or other IT Services companies.

this division has been the growth engine of IBM (see Exhibit 2). 4 IBM Global Services The IT services sector is huge (about US$560 billion in 2002 according to Gartner. or at least very low priced software and support with freely accessible. creating significant shareholder value. BMC. IBM´s 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. (Microsoft. other important players in the middleware/applications market challenge the IBM products like databases. application servers. The company believes that its combination of technology. Since the inception of IBM Global Services under Gerstner in 1996. Potential price erosion may take place. Oracle. …). However. the software market is highly competitive. MySQL.The portfolio today is vastly different from its inception in 1995. …. and certainly is one of the big drivers of profitability in the near/medium future. IBM Software According to IBM itself. Oracle and SAP. performance. Computer Associates. quality. JBoss. community developed Open Source alternatives (like Sendmail. rapidly growing and highly specialized organizations. BEA. Symantec). ranging from Fortune 50 companies to an increasing number of relatively small. the “substitute” Open Source movement offers free. the Software portfolio has very strategic implications. Page 9 . € Secondly. 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. These forces will likely make it difficult for IBM to sustain growth of its software revenue and capture its added value in the future. reliability. approaching US$1 trillion by 2010). large application builders such Microsoft. The above figure graphically depicts how IBM Software is “squeezed” between three forces: € First of all. price and the breadth of products and service offerings are important competitive factors. and revenue has grown van $11 billion to almost $16 billion.

5 billion acquisition of PWC-Consulting has only cemented its position at the top of the market7. often results in technology choice of products competing with IBM´s portfolio. …). project management and application development to activities in consulting and outsourcing (operational. the “coöpetition” strategy of IBM gives a significant share to its Global Services arm on implementing both IBM and non-IBM products.000 employees. research and talent from the various other business units of its parent. but there already signs of stagnation because of this complex competitive force field. despite the fact that IBM Global Services employs more third-party equipment than it does IBM's own. The PWC-C takeover came at a time when IBM Global Services is feeling the pinch as clients freeze their discretionary IT services spend. Page 10 . IBM Global Services has many competitors (EDS. software and services from one company. But unlike these competitors. and its US$3. implementation. the fact that other IT services companies compete with Global Services. which are for the most part specialized service providers. 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. IBM Global Services has an unparalleled potential to leverage products. CGEY. CSC. and look to renegotiate the terms of their existing outsourcing deals. Its activities range from product support. Accenture. On the other hand. business process outsourcing. The strategy has turned out to work very successfully over the past 10 years. Again. business transformation outsourcing). Atos Origin. The flipside of this proposition is the wariness of customers over sourcing hardware.IBM Global Services ranks as the largest IT services provider in the world.

€ The hardware business is threatened at the bottom by Dell and Sun. supercomputing. IBM definitely and successfully competes on value again.5 Summary and Conclusions After losing its dominant position in the IT industry in the late 1980´s. IBM is again a company “that matters” at the turn of the century. However. India. Oracle. remains to be seen… END OF REPORT Page 11 . Stagnation in software and hardware sales. Eastern Europe. disk drives to Hitachi. do not make it necessarily suitable for this segment. possibly due to shrinking IT budgets of its clients. Dell and many services companies that have a strong and successful focus on this segment. € Services business seems to be stagnating. with low-cost Intel systems € The software business is threatened from three different angles : traditional competitors. However. or more demanding and savvy buyers. although IBM has successful alliances with these companies and large activities in India itself. IBM´s traditional stronghold in high-end and enterprise solutions. application vendors moving down to middleware. and this is emphasized in the following years by the strategy under Sam Palmisano (on demand business. IBM has consistently built high-value businesses though acquisitions (Lotus. together with a significant culture change. Potential areas for growth: € One of the potential areas for growth is the Small and Medium Business (SMB) segment. € Other areas could be grid computing. a strong and solid vision for the future (integration. Rational. € Offshoring companies. resulting in a near-death experience in 1993. IBM has made a remarkable turnaround under Lou Gerstner. PC division to Lenovo). Brazil. and its corresponding moves into high-profit software/middleware and high-growth services.…) still provide opportunities for growth. especially Indian ones. and even in some of its services business force it to look in new sectors € The sheer size and corresponding complexity of the organization make it hard to define a consistent way for growth and competition. challenges remain for the company in several areas : € It proves to be difficult for the company to sustain “organic growth”. Russia. exited non-core businesses in network equipment and application software. Whether shareholder value can be increased (and the $100 billion revenue threshold exceeded). e-business). In many areas IBM lives in coöpetition with almost all other IT companies. Moreover. Informix. gaming. … IBM´s R&D activities and its strong services arm will need to drive future innovation and growth. it meets strong competitors like Microsoft. and many ongoing activities are already taking place. provide a competitive threat to IBM´s outsourcing and offshoring business. Tivoli. formed alliances with most major IT product and services companies and strategically moved away from commoditization businesses through divestments (Global network to AT&T. PWC-C. € Emerging countries (China. …). where there is huge opportunity. consulting). By differentiating its portfolio. and substitute Open Source products.

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