netrashetty
Netra Shetty
International Business Machines (IBM) (NYSE: IBM) is an American multinational technology and consulting firm headquartered in Armonk, New York. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas ranging from mainframe computers to nanotechnology.[4]
The company was founded in 1911 as the Computing Tabulating Recording Corporation, following a merger of the Computer Scale Company of America and the International Time Recording Company with the Tabulating Machine Company. CTR adopted the name International Business Machines in 1924, using a name previously designated to CTR's subsidiary in Canada and later South America. Its distinctive culture and product branding has given it the nickname Big Blue.
In 2010, IBM was ranked the 20th largest firm in the U.S. by Fortune and the 33rd largest globally by Forbes.[5][6] Other rankings that year include #1 green company (Newsweek), #1 company for leaders (Fortune), #2 best global brand (Interbrand), #15 most admired company (Fortune), and #18 most innovative company (Fast Company).[7] IBM employs almost 400,000 employees (called "IBMers" by IBM) in over 200 countries, with occupations including scientists, engineers, consultants, and sales professionals.[8]
IBM holds more patents than any other U.S.-based technology company and has nine research laboratories worldwide.[9] Its employees have garnered five Nobel Prizes, four Turing Awards, nine National Medals of Technology, and five National Medals of Science.[10] The company has undergone several organizational changes since its inception, acquiring companies like SPSS (2009) and PwC consulting (2002) and spinning off companies like SAP (1972) and Lexmark (1991).
International Business Machines (NYSE: IBM) is a leading global technology firm that offers a variety of products and services in the information technology industry. Their current businesses consist of 5 major divisions: Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment. In 2006 IBM lost its position as the number one IT company to Hewlett-Packard in terms of annual revenue (difference of $235 million between revenues of HPQ and IBM). In 2009, that lead widened as HP generated $118.3 billion in revenue while IBM's revenue came in at $95.76 billion.[1] [2]
Although IBM lost its first place rank to Hewlett-Packard in terms of revenue, IBM is a far more profitable business (boasting a gross profit of $43.8 billion for FY09) than Hewlett-Packard (gross profit of $28.4 for FY08).[1][3] There are several underlying factors that contribute to IBM's high profitability which has increased every year since 2005. One of the reasons for the increase has been upper management's active effort towards divesting from cyclical and commoditizing businesses, while concentrating on the higher value services and software sectors.[2]
In 2009, revenue declined 7.6% to $95.8 billion due to declines in sales from growing markets.[1]
Business Overview
Contents
1 Business Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Global Services
1.2.2 Systems and Technology
1.2.3 Software
1.2.4 Global Financing
1.3 Acquiring Growth
1.4 Integration of Supply Chain
2 Trends and Forces
2.1 Contributions to Open Source
2.1.1 Going beyond Linux
2.2 Military contracts
2.2.1 GALE
2.2.2 MASTOR
2.3 Dependence on emerging markets
2.4 PC line divesture
2.4.1 Investing in innovation
2.5 Effect of the Global Recession
3 Competition
4 References
IBM was founded in 1911 when the company produced commercial scales and tabulators. Today, the company produces software, servers and other storage devices, and provides IT services. IBM employs over 350,000 people in 170 countries across the globe, and about 60% of total revenue comes from outside of the U.S. IBM serves clients in a variety of industries, with the largest revenue generating industries being financial markets and small- and medium-sized businesses.
Business and Financial Metrics
In the first quarter of 2010, IBM's revenue increased 5.3% to $22.86 billion. Its net income was $2.6 billion, 13% up from $2.3 billion in 4Q09. This growth was primarily due to an increase in software, hardware, and technology-services revenue. However, IBM's consulting contracts fell by 2%. They had 13 contracts greater than $100 million in 1Q10, down from 22 such contracts in 4Q09.[4]
In the second quarter of 2010, IBM's revenue increased 2% from 2Q09 to $23.7 billion. Currency losses on the weak Euro reduced IBM's revenue by $500 million. In addition, there was a 12% drop in new servicing contracts to $12.3 billion. Outsourcing contracts also fell by 19%. Service and outsourcing contracts are important to IBM because they locki n revenue for several following years. However, short-term consultancy contract increased by 20% and its net income increased 9% to $3.4 billion.[5]
In the third quarter of 2010, IBM's revenue increased 3% to $24.3 billion. Revenue from emerging markets such as China and India grew by 29%. However, service signings, which account for 60% of annual sales, fell 7% to $11 billion. This didn't take into account that right after the end of the third quarter IBM signed a $1.8 billion contract with ABN Amro Group NV on Oct 8. IBM announced seven acquisitions, including a $1.7 billion purchase of Netezza Corporation. IBM's net income increased 12% from $3.2 billion to $3.6 billion. [5]
Business Segments
IBM's business is divided into four major segments: Global Services, Software, Systems and Technology, and Global Financing.
Annual Report 2009[1]
Global Services
IBM’s Global Services, which provides IT infrastructure solutions, is divided into two segments: Global Technology Services (GTS) and Global Business Services (GBS). Through GTS, IBM offers strategic outsourcing services to reduce costs and improve productivity, maintenance and support for IT infrastructure, and systems integration. Through GBS, IBM offers consulting services for financial management, human-capital management, supply-chain management, and software development, management, and maintenance.
In 2009, the Global Services segments' combined revenue decreased 6.6% to $55 billion due to a decreased demand for consulting. Global Technology Services revenue declined 3.9% to $37 billion. GBS's revenue declined 10.1% to $17.7 billion. Although Application Outsourcing signings increased by 21.7%, Consulting and Systems Integration signings fell by 10.2%.
Systems and Technology
IBM's Systems and Technology business segment produces servers, data storage products, microelectronics, retail store solutions, and printing systems through a partnership with Ricoh and infoPrint Solutions Company. Approximately 55% of the server and storage sales are through the company's business partners and the other 45% are directly to end-users.
This segment's revenue decreased 16.1% in 2009. The major products of this business, System z, Converged System p, System Storage, Retail Store Solutions, and Microelectronics, all posted double digit declines in revenue.
Software
The Software business segment at IBM is responsible for the development and sale of various types of software. The majority of software that IBM offers is middleware and operating systems software. Middleware is software that allows IBM's clients to consolidate systems and applications across a single platform. Operating systems are the actual software that allows computers to run and operate. In addition to middleware and operating systems, IBM offers Product Lifecycle Management software that allows clients to optimize the processes through which they develop new products.
Software revenue decreased 3.1% to $21 billion in 2009. While Key Branded Middleware increased by 1.1%, Lotus posted a 10% decrease in revenue. Demand for Lotus dropped due to many customer's consolidations and downsizing in 2009. Product Lifecycle Management revenue also fell 23%. In October 2009, IBM signed an agreement with Dassault Systemes in which IBM will acquire the companies sales, client support operations, customer contracts, and assets related to Product Lifecycle Management. The transaction will be completed in the first quarter of 2010.
Global Financing
Global Financing offers financing services for IBM customers when they purchase IBM systems, software, and services. Global Financing also provides commercial financing to dealers of IT products. This group also sells and leases used equipment.
Global Financing's total revenue decreased from $4.5 billion to $4.1 billion in 2009. External revenue fell by 10% due to decreases in financing revenue and used equipment sales. Internal revenue declined 6.3% because of a 22% decline in financing revenue. Profit for this segment decreased 1.7% due to the drop in revenue.
Acquiring Growth
On July 15, 2010, IBM announced that it would buy Coremetrics, a privately-held provider of Web analytics software. San Mateo, California-based Coremetrics provides cloud analytics services that helps companies market their brands. Since 2003, IBM has acquired over 50 software-companies.[6]
In 2006, IBM acquired over 10 companies in order to enhance its Software and Services segments. These companies ranged from software developers to service-oriented companies that offer business and technology solutions to clients. Specifically, IBM acquired several companies that specialize in developing information and systems management.
IBM also acquired six companies in Q1 2008 alone. These companies included the data duplication software developer, Diligent Technologies, as well as, the storage software company, FilesX.
On July 28th 2009, IBM acquired all stocks of the French company ILOC for approximately $340 million. This acquisition was a straight stock buyout of all outstanding shares of the company that specializes in software for 'business rules and optimization. The ILOG Business Rule Management System (BRMS), Optimization, Visualization, and Supply Chain Management (SCM) portfolios will build upon IBM software and business process management (BPM) leadership across a broad range of applications and environments.[7]
Integration of Supply Chain
Through the Global Services segment IBM help its clients increase the efficiency and flexibility of their supply chains through integration. In the same fashion, IBM has been working to integrate and optimize its own supply chain. Every year IBM spends approximately $36 billion through its supply chain to purchase products, materials and services across the globe. In recent years IBM has transformed its own supply chain to incorporate the company's supply, manufacturing, logistics, and customer fulfillment operations into one operating system in order to reduce inventories, convert fixed costs to variable costs, and improve the company's ability to respond to changes in the market.
Much of the savings IBM realizes as it integrates and optimizes its own supply chain turn into lower prices for clients, but some of the savings from lower costs lead to higher profitability for IBM. As IBM continues to develop new ways to help its client's optimize their own operations and supply chains, IBM will be able to apply these methods to its own operations and not only see higher demand for their innovative services but also realize lower costs.
Trends and Forces
Contributions to Open Source
IBM is the largest contributor to open-source software (including Linux) projects, serving these projects with funds and resources through the IBM Linux Technology Center. This center employs over 600 engineers across the globe which work towards enhancing Linux and other types of open-source software. Currently IBM is working towards improving Linux's core functionality in order to serve a wider range of customers with varying demands more efficiently. All IBM servers have the capability of running on Linux systems making them attractive for a variety of clients.
Going beyond Linux
In 2006 IBM created 8 open-source software initiatives that go beyond Linux's current capabilities. IBM hopes these initiatives will allow IBM to provide better products for its current customers and to create new products to attract new customers. These new initiatives are based on open-source projects other than Linux such as the Eclipse Rich Client Platform project and Apache's Geronimo and Derby projects. The initiatives include ventures into middleware, web application servers, data servers, systems management, open hardware architectures, and grid computing.
Military contracts
IBM is currently working with the United States military on two separate, but similar, projects. One is the Global Autonomous Language Exploitation (GALE) project and the other is the Multilingual Automatic Speech-To-Speech Translator (MASTOR) software project.
GALE
GALE is a project funded by the Defense Department's new technology-centered sector, the Defense Advanced Research Projects Agency (DARPA). IBM is working on GALE with two other companies: SRI International and BBN Technologies. The goal of GALE is to develop technology to monitor, translate, and summarize various media presentations across the globe from Arabic and Chinese into English. The technology would be used to monitor television broadcasts, phone conversations, Websites and other types of communications.
MASTOR
The second military contract IBM is working on is the MASTOR project. The MASTOR project is designed to use technology to make up for the lack of translators in Iraq. The project's vision is to create technology that would allow an American medic or soldier to have a conversation with an Iraqi using MASTOR technology that would instantly translate each side of the conversation. For example, a US soldier trying to assist an Iraqi civilian could speak English into a microphone plugged into a computer or handheld that contained MASTOR technology which would replay the words of the soldier in Arabic. Then the Iraqi civilian could respond into the microphone and his words would be translated and played in English. The MASTOR project's technology is currently being tested in Iraq by the military.
Dependence on emerging markets
Annual Report 2008[8]
Emerging markets are important to IBM, as more than 60% of IBM's revenue comes from outside of the U.S. The markets that IBM is specifically targeting are India, China, Russia, and Brazil. IBM employed around 113,000 people in these countries. [9]
PC line divesture
In 2005 IBM sold its PC business to Lenovo, China's top PC supplier, in a $1.7 billion deal. Prices and margins on PCs had been falling as the PC market continues to become commoditized, so IBM divested itself of this business halfway through 2005. Since 2004 (the last full year of IBM PC production) IBM's gross profit rate has increased 5 percentage points and its operating margin has increased approximately 3.5 percentage points. IBM's hardware segment, which formerly included PCs, saw an increase of 3.5 points in its gross profit margin due to the sale of IBM's PC business. Also, if one excludes sales of PCs from IBM's 2005 revenue, total revenue increased 3.8% while revenue from the Hardware segment increased 4.8%.
In recent years the IT hardware industry has started to become commoditized, leading to falling prices and profits on most IT hardware products. PCs have been most affected by this commoditization, but other products that may soon face widely falling prices and profits include servers and other IT storage and networking devices. IBM has dealt with the commoditization trend by divesting its PC line and focusing its business on high-margin sectors like services and software. Also, IBM is still experiencing high margins in its servers and storage segment, boasting a gross profit margin close to 40% for its Systems and Technology Group in 2007. The company is protecting itself from possible server and storage commoditization however by putting an increased emphasis on developing new products and services as well as focusing on currently offered high margin products.
Investing in innovation
Through its Global Innovation Outlook (GIO), IBM has dedicated itself to being at the forefront of innovation in the technology industry. In 2007 IBM spent over $6 billion on research, development and engineering.[10] One of the most unique and potentially lucrative methods IBM is using to develop new products and services is the InnovationJam that IBM hosted in 2008. During two sessions totaling 90-hours over 90,000 people from across the world came together to discuss over 32,000 ideas for IBM to explore to address current-day problems and upcoming business opportunities.[11] After the discussions ended, IBM's engineers and employees selected the top 10 ideas and IBM assigned a top management officials to each idea and set aside $100 million to start researching and developing the ideas. Some of the selected ideas include real time translation services, integrated mass transit information systems, and healthcare payment smart cards. As many of the ideas are researched and potentially developed they could lead to significant industry breakthroughs and major sources of revenue for IBM.
Effect of the Global Recession
The global recession has affected all major industries across the globe. With budget pressures on customers, all IBM business segments have been affected. For the second quarter of 2009, the company has seen its revenues drop with a 13% decrease from $26.82 billion in Q2-2008 to $23.25 billion. However IBM has managed to increase its profit (by 12%) even in such an economy. This increase has been mainly attributed to the change in IBM's focus from hardware to software and services. With its divestment from the PC market, it has increased profit margins and with strong cost cutting initiatives managed to keep profits up even when revenues decrease.
The company is confident, and has increased its earnings outlook for 2009 to $9.70 per share from $9.20. It attributes this increase on the signing of new long term outsourcing contracts with customers (38% increase in number from previous year).[12]
Competition
Although IBM's main competitors are Hewlett-Packard Company (HPQ) and Dell (DELL), each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while Hewlett-Packard is more diversified as the leader in PCs and Imaging & Printing as well as offering IT services. Since IBM relies heavily on its Software and Services segment, it mainly competes with Hewlett-Packard in the servers and IT services markets and with Dell in the servers and software markets.
Despite falling behind HP in 2009 in terms of revenue, IBM is the leader in servers, IT services, and software. Also IBM leads HP and Dell in all measures of profitability, largely because IBM is focused on high-margin sectors such as services and software and has gotten out of the thin-margin PC business, in which HP and Dell are still heavily involved. With the global recession this divestment has proved to be beneficial for IBM with its profitability still growing even with a reduction in revenue.[12]
In addition to HP and Dell, IBM also competes with smaller IT consulting firms such as Accenture (ACN). However, IBM leads these companies by a large margin in terms of revenue, profitability, and scale. For example, in 2009 Accenture generated $18.2 billion in revenue and $1.8 billion in operating income, whereas IBM generated $58 billion in revenue for its Global Services business unit.
Company (2009) Total Revenue ($M) Gross Profit ($M) Gross Profit Rate (%) Net Income ($M) Revenue Growth from 2008 (%)
IBM 95,758[13] 43,785[13] 45.7[13] 13,425[13] (4.9)[13]
Hewlett-Packard 114,552[14] 27,028[14] 23.6[14] 7660[14] (3.2)[14]
Dell 61,101[15] 10,975[15] 17.9%[15][16] 2,478[15] (0.5)[15][17]
The company was founded in 1911 as the Computing Tabulating Recording Corporation, following a merger of the Computer Scale Company of America and the International Time Recording Company with the Tabulating Machine Company. CTR adopted the name International Business Machines in 1924, using a name previously designated to CTR's subsidiary in Canada and later South America. Its distinctive culture and product branding has given it the nickname Big Blue.
In 2010, IBM was ranked the 20th largest firm in the U.S. by Fortune and the 33rd largest globally by Forbes.[5][6] Other rankings that year include #1 green company (Newsweek), #1 company for leaders (Fortune), #2 best global brand (Interbrand), #15 most admired company (Fortune), and #18 most innovative company (Fast Company).[7] IBM employs almost 400,000 employees (called "IBMers" by IBM) in over 200 countries, with occupations including scientists, engineers, consultants, and sales professionals.[8]
IBM holds more patents than any other U.S.-based technology company and has nine research laboratories worldwide.[9] Its employees have garnered five Nobel Prizes, four Turing Awards, nine National Medals of Technology, and five National Medals of Science.[10] The company has undergone several organizational changes since its inception, acquiring companies like SPSS (2009) and PwC consulting (2002) and spinning off companies like SAP (1972) and Lexmark (1991).
International Business Machines (NYSE: IBM) is a leading global technology firm that offers a variety of products and services in the information technology industry. Their current businesses consist of 5 major divisions: Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment. In 2006 IBM lost its position as the number one IT company to Hewlett-Packard in terms of annual revenue (difference of $235 million between revenues of HPQ and IBM). In 2009, that lead widened as HP generated $118.3 billion in revenue while IBM's revenue came in at $95.76 billion.[1] [2]
Although IBM lost its first place rank to Hewlett-Packard in terms of revenue, IBM is a far more profitable business (boasting a gross profit of $43.8 billion for FY09) than Hewlett-Packard (gross profit of $28.4 for FY08).[1][3] There are several underlying factors that contribute to IBM's high profitability which has increased every year since 2005. One of the reasons for the increase has been upper management's active effort towards divesting from cyclical and commoditizing businesses, while concentrating on the higher value services and software sectors.[2]
In 2009, revenue declined 7.6% to $95.8 billion due to declines in sales from growing markets.[1]
Business Overview
Contents
1 Business Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Global Services
1.2.2 Systems and Technology
1.2.3 Software
1.2.4 Global Financing
1.3 Acquiring Growth
1.4 Integration of Supply Chain
2 Trends and Forces
2.1 Contributions to Open Source
2.1.1 Going beyond Linux
2.2 Military contracts
2.2.1 GALE
2.2.2 MASTOR
2.3 Dependence on emerging markets
2.4 PC line divesture
2.4.1 Investing in innovation
2.5 Effect of the Global Recession
3 Competition
4 References
IBM was founded in 1911 when the company produced commercial scales and tabulators. Today, the company produces software, servers and other storage devices, and provides IT services. IBM employs over 350,000 people in 170 countries across the globe, and about 60% of total revenue comes from outside of the U.S. IBM serves clients in a variety of industries, with the largest revenue generating industries being financial markets and small- and medium-sized businesses.
Business and Financial Metrics
In the first quarter of 2010, IBM's revenue increased 5.3% to $22.86 billion. Its net income was $2.6 billion, 13% up from $2.3 billion in 4Q09. This growth was primarily due to an increase in software, hardware, and technology-services revenue. However, IBM's consulting contracts fell by 2%. They had 13 contracts greater than $100 million in 1Q10, down from 22 such contracts in 4Q09.[4]
In the second quarter of 2010, IBM's revenue increased 2% from 2Q09 to $23.7 billion. Currency losses on the weak Euro reduced IBM's revenue by $500 million. In addition, there was a 12% drop in new servicing contracts to $12.3 billion. Outsourcing contracts also fell by 19%. Service and outsourcing contracts are important to IBM because they locki n revenue for several following years. However, short-term consultancy contract increased by 20% and its net income increased 9% to $3.4 billion.[5]
In the third quarter of 2010, IBM's revenue increased 3% to $24.3 billion. Revenue from emerging markets such as China and India grew by 29%. However, service signings, which account for 60% of annual sales, fell 7% to $11 billion. This didn't take into account that right after the end of the third quarter IBM signed a $1.8 billion contract with ABN Amro Group NV on Oct 8. IBM announced seven acquisitions, including a $1.7 billion purchase of Netezza Corporation. IBM's net income increased 12% from $3.2 billion to $3.6 billion. [5]
Business Segments
IBM's business is divided into four major segments: Global Services, Software, Systems and Technology, and Global Financing.
Annual Report 2009[1]
Global Services
IBM’s Global Services, which provides IT infrastructure solutions, is divided into two segments: Global Technology Services (GTS) and Global Business Services (GBS). Through GTS, IBM offers strategic outsourcing services to reduce costs and improve productivity, maintenance and support for IT infrastructure, and systems integration. Through GBS, IBM offers consulting services for financial management, human-capital management, supply-chain management, and software development, management, and maintenance.
In 2009, the Global Services segments' combined revenue decreased 6.6% to $55 billion due to a decreased demand for consulting. Global Technology Services revenue declined 3.9% to $37 billion. GBS's revenue declined 10.1% to $17.7 billion. Although Application Outsourcing signings increased by 21.7%, Consulting and Systems Integration signings fell by 10.2%.
Systems and Technology
IBM's Systems and Technology business segment produces servers, data storage products, microelectronics, retail store solutions, and printing systems through a partnership with Ricoh and infoPrint Solutions Company. Approximately 55% of the server and storage sales are through the company's business partners and the other 45% are directly to end-users.
This segment's revenue decreased 16.1% in 2009. The major products of this business, System z, Converged System p, System Storage, Retail Store Solutions, and Microelectronics, all posted double digit declines in revenue.
Software
The Software business segment at IBM is responsible for the development and sale of various types of software. The majority of software that IBM offers is middleware and operating systems software. Middleware is software that allows IBM's clients to consolidate systems and applications across a single platform. Operating systems are the actual software that allows computers to run and operate. In addition to middleware and operating systems, IBM offers Product Lifecycle Management software that allows clients to optimize the processes through which they develop new products.
Software revenue decreased 3.1% to $21 billion in 2009. While Key Branded Middleware increased by 1.1%, Lotus posted a 10% decrease in revenue. Demand for Lotus dropped due to many customer's consolidations and downsizing in 2009. Product Lifecycle Management revenue also fell 23%. In October 2009, IBM signed an agreement with Dassault Systemes in which IBM will acquire the companies sales, client support operations, customer contracts, and assets related to Product Lifecycle Management. The transaction will be completed in the first quarter of 2010.
Global Financing
Global Financing offers financing services for IBM customers when they purchase IBM systems, software, and services. Global Financing also provides commercial financing to dealers of IT products. This group also sells and leases used equipment.
Global Financing's total revenue decreased from $4.5 billion to $4.1 billion in 2009. External revenue fell by 10% due to decreases in financing revenue and used equipment sales. Internal revenue declined 6.3% because of a 22% decline in financing revenue. Profit for this segment decreased 1.7% due to the drop in revenue.
Acquiring Growth
On July 15, 2010, IBM announced that it would buy Coremetrics, a privately-held provider of Web analytics software. San Mateo, California-based Coremetrics provides cloud analytics services that helps companies market their brands. Since 2003, IBM has acquired over 50 software-companies.[6]
In 2006, IBM acquired over 10 companies in order to enhance its Software and Services segments. These companies ranged from software developers to service-oriented companies that offer business and technology solutions to clients. Specifically, IBM acquired several companies that specialize in developing information and systems management.
IBM also acquired six companies in Q1 2008 alone. These companies included the data duplication software developer, Diligent Technologies, as well as, the storage software company, FilesX.
On July 28th 2009, IBM acquired all stocks of the French company ILOC for approximately $340 million. This acquisition was a straight stock buyout of all outstanding shares of the company that specializes in software for 'business rules and optimization. The ILOG Business Rule Management System (BRMS), Optimization, Visualization, and Supply Chain Management (SCM) portfolios will build upon IBM software and business process management (BPM) leadership across a broad range of applications and environments.[7]
Integration of Supply Chain
Through the Global Services segment IBM help its clients increase the efficiency and flexibility of their supply chains through integration. In the same fashion, IBM has been working to integrate and optimize its own supply chain. Every year IBM spends approximately $36 billion through its supply chain to purchase products, materials and services across the globe. In recent years IBM has transformed its own supply chain to incorporate the company's supply, manufacturing, logistics, and customer fulfillment operations into one operating system in order to reduce inventories, convert fixed costs to variable costs, and improve the company's ability to respond to changes in the market.
Much of the savings IBM realizes as it integrates and optimizes its own supply chain turn into lower prices for clients, but some of the savings from lower costs lead to higher profitability for IBM. As IBM continues to develop new ways to help its client's optimize their own operations and supply chains, IBM will be able to apply these methods to its own operations and not only see higher demand for their innovative services but also realize lower costs.
Trends and Forces
Contributions to Open Source
IBM is the largest contributor to open-source software (including Linux) projects, serving these projects with funds and resources through the IBM Linux Technology Center. This center employs over 600 engineers across the globe which work towards enhancing Linux and other types of open-source software. Currently IBM is working towards improving Linux's core functionality in order to serve a wider range of customers with varying demands more efficiently. All IBM servers have the capability of running on Linux systems making them attractive for a variety of clients.
Going beyond Linux
In 2006 IBM created 8 open-source software initiatives that go beyond Linux's current capabilities. IBM hopes these initiatives will allow IBM to provide better products for its current customers and to create new products to attract new customers. These new initiatives are based on open-source projects other than Linux such as the Eclipse Rich Client Platform project and Apache's Geronimo and Derby projects. The initiatives include ventures into middleware, web application servers, data servers, systems management, open hardware architectures, and grid computing.
Military contracts
IBM is currently working with the United States military on two separate, but similar, projects. One is the Global Autonomous Language Exploitation (GALE) project and the other is the Multilingual Automatic Speech-To-Speech Translator (MASTOR) software project.
GALE
GALE is a project funded by the Defense Department's new technology-centered sector, the Defense Advanced Research Projects Agency (DARPA). IBM is working on GALE with two other companies: SRI International and BBN Technologies. The goal of GALE is to develop technology to monitor, translate, and summarize various media presentations across the globe from Arabic and Chinese into English. The technology would be used to monitor television broadcasts, phone conversations, Websites and other types of communications.
MASTOR
The second military contract IBM is working on is the MASTOR project. The MASTOR project is designed to use technology to make up for the lack of translators in Iraq. The project's vision is to create technology that would allow an American medic or soldier to have a conversation with an Iraqi using MASTOR technology that would instantly translate each side of the conversation. For example, a US soldier trying to assist an Iraqi civilian could speak English into a microphone plugged into a computer or handheld that contained MASTOR technology which would replay the words of the soldier in Arabic. Then the Iraqi civilian could respond into the microphone and his words would be translated and played in English. The MASTOR project's technology is currently being tested in Iraq by the military.
Dependence on emerging markets
Annual Report 2008[8]
Emerging markets are important to IBM, as more than 60% of IBM's revenue comes from outside of the U.S. The markets that IBM is specifically targeting are India, China, Russia, and Brazil. IBM employed around 113,000 people in these countries. [9]
PC line divesture
In 2005 IBM sold its PC business to Lenovo, China's top PC supplier, in a $1.7 billion deal. Prices and margins on PCs had been falling as the PC market continues to become commoditized, so IBM divested itself of this business halfway through 2005. Since 2004 (the last full year of IBM PC production) IBM's gross profit rate has increased 5 percentage points and its operating margin has increased approximately 3.5 percentage points. IBM's hardware segment, which formerly included PCs, saw an increase of 3.5 points in its gross profit margin due to the sale of IBM's PC business. Also, if one excludes sales of PCs from IBM's 2005 revenue, total revenue increased 3.8% while revenue from the Hardware segment increased 4.8%.
In recent years the IT hardware industry has started to become commoditized, leading to falling prices and profits on most IT hardware products. PCs have been most affected by this commoditization, but other products that may soon face widely falling prices and profits include servers and other IT storage and networking devices. IBM has dealt with the commoditization trend by divesting its PC line and focusing its business on high-margin sectors like services and software. Also, IBM is still experiencing high margins in its servers and storage segment, boasting a gross profit margin close to 40% for its Systems and Technology Group in 2007. The company is protecting itself from possible server and storage commoditization however by putting an increased emphasis on developing new products and services as well as focusing on currently offered high margin products.
Investing in innovation
Through its Global Innovation Outlook (GIO), IBM has dedicated itself to being at the forefront of innovation in the technology industry. In 2007 IBM spent over $6 billion on research, development and engineering.[10] One of the most unique and potentially lucrative methods IBM is using to develop new products and services is the InnovationJam that IBM hosted in 2008. During two sessions totaling 90-hours over 90,000 people from across the world came together to discuss over 32,000 ideas for IBM to explore to address current-day problems and upcoming business opportunities.[11] After the discussions ended, IBM's engineers and employees selected the top 10 ideas and IBM assigned a top management officials to each idea and set aside $100 million to start researching and developing the ideas. Some of the selected ideas include real time translation services, integrated mass transit information systems, and healthcare payment smart cards. As many of the ideas are researched and potentially developed they could lead to significant industry breakthroughs and major sources of revenue for IBM.
Effect of the Global Recession
The global recession has affected all major industries across the globe. With budget pressures on customers, all IBM business segments have been affected. For the second quarter of 2009, the company has seen its revenues drop with a 13% decrease from $26.82 billion in Q2-2008 to $23.25 billion. However IBM has managed to increase its profit (by 12%) even in such an economy. This increase has been mainly attributed to the change in IBM's focus from hardware to software and services. With its divestment from the PC market, it has increased profit margins and with strong cost cutting initiatives managed to keep profits up even when revenues decrease.
The company is confident, and has increased its earnings outlook for 2009 to $9.70 per share from $9.20. It attributes this increase on the signing of new long term outsourcing contracts with customers (38% increase in number from previous year).[12]
Competition
Although IBM's main competitors are Hewlett-Packard Company (HPQ) and Dell (DELL), each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while Hewlett-Packard is more diversified as the leader in PCs and Imaging & Printing as well as offering IT services. Since IBM relies heavily on its Software and Services segment, it mainly competes with Hewlett-Packard in the servers and IT services markets and with Dell in the servers and software markets.
Despite falling behind HP in 2009 in terms of revenue, IBM is the leader in servers, IT services, and software. Also IBM leads HP and Dell in all measures of profitability, largely because IBM is focused on high-margin sectors such as services and software and has gotten out of the thin-margin PC business, in which HP and Dell are still heavily involved. With the global recession this divestment has proved to be beneficial for IBM with its profitability still growing even with a reduction in revenue.[12]
In addition to HP and Dell, IBM also competes with smaller IT consulting firms such as Accenture (ACN). However, IBM leads these companies by a large margin in terms of revenue, profitability, and scale. For example, in 2009 Accenture generated $18.2 billion in revenue and $1.8 billion in operating income, whereas IBM generated $58 billion in revenue for its Global Services business unit.
Company (2009) Total Revenue ($M) Gross Profit ($M) Gross Profit Rate (%) Net Income ($M) Revenue Growth from 2008 (%)
IBM 95,758[13] 43,785[13] 45.7[13] 13,425[13] (4.9)[13]
Hewlett-Packard 114,552[14] 27,028[14] 23.6[14] 7660[14] (3.2)[14]
Dell 61,101[15] 10,975[15] 17.9%[15][16] 2,478[15] (0.5)[15][17]