The Economy and the Effect of the Economy on IBM Essay

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IBM has faced a decline of 6.7 percent in revenue earnings since 2011 through 2014. Quarterly report indicates that there has been a 4 percent dip in revenue of third quarter quarter (Lohr par. 14). The decline in the operating profit in third quarter and the reduction of sales has been attributed to the underperforming economy. This essay evaluates the reasons behind the declining financial performance of IBM and tries to understand how far the economic slowdown has affected the company’s performance.

What happened to the strong performing company, which has often been called recession proof? Until 2010, the company saw an increase in revenue earning, however, performance dwindled post-2011. Recent economic conditions have definitely affected IBM. For instance, an increasing strength of dollar has affected the performance of many companies, including IBM, who have a strong overseas operation (Townsend and Wong par. 1).

Some critics believe that the initial increase in revenue of IBM was mostly imbibed from company’s auditing policy of customers, quick selling to unlicensed customers, and heavy layoffs of employees (Cringley par. 3). The company is loosing a lot of its revenue due to its poor management of the global customer services division. The company is so understaffed that it aims to incorporate an automated project to help service its customers. The bad performance of the company has been because of the economic recession of the global economy.

IBM’s business soared and stock prices rose initially in 2007, when the recession had just hit the economy, because investors believed it was safe to invest with such a strong name. However, with recession worsening, and buyer sentiment remaining dampened, the overall market remained bad, and business essentially poor. This resulted in reducing consumer and stockholder confidence on the company that resulted in the fall in the stock prices of the company.

The business model that IBM pursued was to retain its strong business ground, holding on to its core business, and expand into new business opportunities (Lohr par. 16). The company is entering into new business avenues with data analytics and microchip divisions. However, the poor performance of the core business of hardware and software was stagnating these growth plans.

The recession that began in 2008 and continued until 2013 showed a few specific characters such as a fall in credit availability, fall in consumer confidence, decline in export, bust of the housing bubble, fall in GDP due to austerity measures followed by countries, and problems with exchange rate (Hetzel 120). The economic downturn has affected many businesses. The economic recession has dampened consumer demand, thus reducing demand for goods and services. This has affected most businesses especially the automobile industry. IBM has seen a decline in demand from its customers, thus, reducing sales and revenue. Austerity measures resulted in tightening of fiscal policy of the economy, thereby reducing spending. This too adversely affected business. Exchange rate fluctuation has affected businesses. The most recent rise in the exchange rate of US dollar has affected many businesses that have operations spread globally. Large deficits in balance of payment of countries resulted in shrinking of the economy, thereby affecting the businesses.

When businesses face recession, usually they take one of the following strategies to steer their business: prevention, promotion, pragmatism, and/or promotion (Gulati, Nohria and Wohlgezogen par. 7). IBM primarily went on a defensive mode to protect its core businesses and then followed a progressive strategy and adopted defensive and offensive strategy for its business. Hence, their initial strategy was saving their core business, but as the recession deepened, they started saving their core business as well as venture into diversified business interests.

Works Cited

Cringley, Robert X. “How Big Blue Blew It: Inside IBM’s Catastrophic Earnings Miss.” 2014. Forbes. Web.

Gulati, Ranjay, Nitin Nohria and Franz Wohlgezogen. “Roaring Out of Recession.” March 2010. Harvard Business Review. Web.

Hetzel, Robert L. The Great Recession: Market Failure Or Policy Failure? New York: Cambridge University Press, 2012. Print.

Lohr, Steve. “Weak Results at IBM as Its Strategy Shifts.” 2014. The New York Times. Web.

Townsend, Matt and Andrea Wong. “Dollar Rally Into October Upends Earnings From 3M to IBM.” 2014. Bloomsberg. Web.

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