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:

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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

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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.

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- 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

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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

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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

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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

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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

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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

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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

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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

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