History, Development and Growth
In early 1970s, IBM was the largest manufacturer of computers in the world. It was able to achieve rapid growth in revenue and market share due to the sale of its 360-mainframe computer model. The 360 model was later improved through the development of the 370-mainframe model.
By mid 1970s, IBM began to face high competition from small companies that were able to produce cheap computers whose qualities were either equal to or superior to its models. Following the technological advancements that led to the reduction of the lifespan of mainframe computers, IBM changed its strategy from leasing to selling computers. Additionally, it developed new computer models such as the AS400 to compete with low cost minicomputers.
By 1991, high competition led to significant reduction in computer prices. Moreover, IBM was not able to develop new products in time. Consequently, its market share reduced drastically. The management’s attempt to restructure the firm was not successful since it continued to make losses.
Nonetheless, the company returned to profitability in 2000. In the last three years, the company has been making at least 10 billion in net profits (IBM). However, it generates over 60% of its revenues from services and software rather than the sale of computer hardware.
Strengths
First, IBM was able to develop high quality computers in 1970s and 1980s, thereby gaining the largest market share in the industry. Second, the company had a dedicated and high performing sales force. This enabled it to increase its sales and to earn high profits from its mainframe computers.
Third, IBM was able to offer excellent services to its clients, thereby enhancing customer loyalty. Fourth, the company had adequate capital, which enabled it to develop new products and to offer high quality services.
For example, it invested $32 billion in the construction of new manufacturing plants in order to produce low cost computers. Finally, IBM has a strong brand image that is known for quality and reliability. This strength has enabled it to increase its earnings from software and services since 2000 (IBM).
Weaknesses
First, the company did not focus on market research in order to identify customer needs. Consequently, it was not able to develop new products in time to satisfy emerging market needs. Second, IBM’s research and development initiatives focused on improving its existing products rather than developing new ones. Thus, it always developed new products to compete with those of its rivals rather than to satisfy customer needs.
Consequently, the company lost its competitiveness in the hardware segment of the market. Third, IBM lost its competitiveness due to its inability to reduce its operating costs. Finally, the company had an undesirable organizational culture, which discouraged innovation and cooperation among its technical team members.
PEST Analysis
Political Factors
The pursuit of protectionist policies by major computer producing countries is the main political factor that affects the global computer industry. From 1960 to 1980, most Asian countries such as Japan, Singapore, and Korea focused on supporting their computer industries through research and development.
Consequently, the “Asia-Pacific region emerged as the leading producer of computer hardware and associated products such as semiconductors”. Additionally, countries such as China and Japan charged 82% and 25% import duty respectively in order to discourage importation of computers from the USA.
Since 2000, major trading blocs such as the European Union and ASEAN use preferential tariffs to benefit their member countries at the expense of other computer producers such as the USA. In this regard, protectionist policies will continue to limit IBM’s ability to increase its share of the global computer market.
Economic Factors
Business cycle and the level of economic activity have great impact in the computer industry. In 1970s and 1980s, large companies were the main customers in the industry. Consequently, computer producers had to reduce the prices of their products in order to enable their customers (businesses) to lower their operating costs.
Nonetheless, it also led to the emergence of new segments such as outsourcing of data services. During the 2008/2009 global economic crisis, the sales of computers declined because most companies focused on cost cutting measures rather than new investments. This implies that demand for IBM’s hardware and software products is likely to decline during recessions and vice versa.
Social Factors
The use of computers in educational institutions provided high demand for hardware and software from 1970s to 1980s. In 1990s, new market segments such as users of personal computers at home emerged. In the last decade, the use of computers among the youth for learning, communication, and entertainment purposes increased significantly .
Additionally, most governmental organizations have focused on the use of computers to provide services such as health care and education. The continuation of these social trends is likely to boost demand for computers in future.
Technology
Technology is the backbone of the computer industry because it determines new product development, product distribution, and provision of customer support services. Since 1980s, technological advancements have significantly reduced the lifecycle of computers and peripheral devices, thereby forcing manufacturers to develop new products within a short time.
In the last ten years, investments in research and development have led to the production of a variety of computer models and peripheral devices in response to emerging market needs. Thus, technological advancements enable computer manufacturers to serve new market segments. Nonetheless, technological transfers have led to the increase in the number of computer producers and independent software developers, thereby increasing competition.
Porter’s Five Forces Analysis
Threat of New Entrants
Major players in the industry such as IBM, HP, and Toshiba have established several efficient manufacturing centers in various parts of the world. This enables them to achieve economies of scale in production. Moreover, the amount of capital required to join the industry has significantly reduced because most new entrants hire existing producers to manufacture hardware on their behalf.
Similarly, the number of independent software developers has increased substantially because knowledge is the main resource that they need to join the industry. Overall, the threat of new entrants is high in the software segment and moderate in the hardware segment of the industry. This means that IBM is likely to lose its market share as more firms join the software segment of the industry.
Power of Buyers
Computer manufacturers have a low bargaining power because they are very many, whereas suppliers of high quality inputs such as operating systems and chipboards are very few. For example, nearly all producers depend on Microsoft’s operating systems and Intel’s processors.
Moreover, suppliers’ products such as processors are high differentiated in terms of their speed and reliability. These products are very import to computer manufacturers because they determine the quality of the final product. The threat of backward integration is also low because most manufacturers find it expensive to produce all computer parts on their own.
Buyers of computers, on the other hand, have a high bargaining power because their switching costs are very low. Additionally, most computers are not differentiated since they are compatible with nearly all models in the market. Thus, buyers can easily switch from one model to another.
The low bargaining power of producers means that companies such as IBM cannot easily negotiate for low prices for key supplies such as operating systems. Additionally, the high bargaining power of buyers means that IBM and its competitors cannot pass high production cost to their customers.
Power of Suppliers
Suppliers are very influential in the industry because most of their products are highly differentiated. Furthermore, the threat of forward integration is high because some software developers usually sell directly to end users. Nonetheless, the increase in the number of producers of computer parts has reduced the influence of suppliers in the industry.
Additionally, some computer manufacturers produce their own inputs, thereby reducing the demand for suppliers’ products. In this regard, suppliers have a moderate bargaining power. This means that they can exploit computer manufacturers through high prices of products, which have few substitutes such as Microsoft’s operating systems.
Threat of Substitutes
The threat of substitutes is very low because there are no machines that can rival computers in data processing and management. Thus, demand for computers is likely to continue rising as the world economy grows. Nonetheless, brand or model substitution is very high. For example, mainframes have lost their competitiveness to laptops and personal computers. This means that companies that are not able to engage in rapid product development will lose their market shares or run out of business in future.
Competitive Rivalry
Competitive rivalry is very high in the industry due to the following reasons. First, the number of computer producers and software developers is very high. Second, firms have high fixed costs because the industry is capital intensive. For example, IBM had over 300,000 employees in 1980s.
Third, product differentiation is very low in the industry. This is because manufacturers produce computers with standard or similar features such as speed and storage capacity. Finally, exit barriers are high because producers with large manufacturing plants find it difficult to sell their facilities in order to quit the industry. The high competition means that no company will be able to maintain a dominant position in the market. Additionally, product prices are likely to decline significantly, thereby reducing IBM’s profit margins.
Industry Life-cycle Analysis
Introduction Stage
The industry was at its introduction stage in the 1950s when commercial production of computers became popular. During this period, most producers focused on research in order to develop high quality computers. There were very few producers and computers were very expensive due to high production costs. Though competition was low, profits did not rise rapidly due to low demand.
Growth Stage
The industry recorded high growth from late 1960s to mid 1980s. During this period, companies focused on product standardization in order to achieve economies of scale. This led to the emergence of IBM’s mainframe computers as the dominant model in the industry. Additionally, demand was very high as most businesses focused on acquiring computers in order to improve their operations.
The high demand led to high profits in the industry. For example, IBM earned over 50% profit margin on most of its products. The attractiveness of the industry led to the increase of new entrants, thereby intensifying competition. Consequently, most firms focused on product differentiation in order to serve new segments. Additionally, most companies joined international markets in order to increase their sales.
Maturity Stage
The maturity stage of the industry began in mid 1980s and lasted until early 2000s. This period was characterized with high competition and significant price reductions. For instance, the prices of IBM’s personal computers were nearly three times cheaper in 1993 than they were in 1991.
In order to improve their sales, firms competed on the basis of price and product quality. Additionally, they focused on process innovation in order to lower their costs. Companies that were not able to survive the competition ran out of business. For example, Hewlett-Packard acquired Compaq in 2002.
Decline
The decline stage began in mid 2000s following increased competition and the 2008/2009 global economic downturn. Profits have been declining steadily, especially, in the hardware segment. Furthermore, mergers and acquisitions have increased in the industry since 2004. For example, Lenovo bought IBM’s PC segment in 2005, Acer acquired Gateway Inc. in 2007, and Alcatel acquired Lucent Technologies in 2007.
Since 2004, services and software have replaced hardware as the main source of revenue. Due to declining growth, companies have focused on defending their market shares and maintaining their profitability. Currently, Hewlett-Packard, Dell, and Apple dominate the hardware segment. On the other hand, IBM and Microsoft lead in the service and software segment.
SWOT Analysis
The threats facing IBM include high competition, buyers with high bargaining power, and high threat of new entrants in the software segment. The opportunities in the industry include technological advancements that aid product development, potential increase in demand as global economy grows, and the emergence of new segments.
In the software segment, IBM is likely to overcome competition due to its strong sales force, brand image, and excellent customer services. These strengths will enable the company to retain its existing customers and to attract new ones.
Nonetheless, IBM is not likely to survive the competition in the hardware segment. This is because its organizational culture discourages innovation by sabotaging the development of computer models that compete with mainframes. Thus, it will not be able to develop new computer models in response to changing market needs.
This risk is exacerbated by the fact that IBM focuses on selling existing products rather than analyzing market needs in order to develop relevant products. Finally, IBM will not be able to overcome competition from low cost producers due to its inability to reduce its operating costs.
The company can continue to pursue its corporate strategy profitably because it is capable of providing high quality products and enhancing customer loyalty. Concisely, it has a strong competitive position in the software segment. IBM can overcome high competition in the hardware segment by investing in low-cost production plants, as well as, technological and market research.
Nonetheless, the company might not afford these investments because it is not very stable financially. In particular, its net profits grew by only 1.2% in the last three years. Additionally, its return on invested capital (ROIC) increased from 0.13 in 2010 to 0.14 in 2012. IBM’s liquidity is also not high because its current ratio (CA) in 2012 was only 1.13.
Most importantly, the company has a high debt-to-equity ratio of 5.28. This means that IBM depends on borrowed capital to fund its investments. Thus, the cost of additional borrowing (interest on loans) will lower the company’s profits.
Corporate Strategy
IBM’s mission is to offer effective, high-quality products, and services to its clients. Thus, its initial corporate strategy was to manufacture and to lease computers to businesses. After losing its competitiveness in the hardware segment, the company changed its corporate strategy to provision of services such as cloud computing and software development.
This strategy has three advantages. First, it enables the company to increase its revenue by selling improved versions of its software products to existing customers. Second, IBM has a dominant position in the software segment. Thus, it is likely to generate high revenue by serving this segment.
Finally, the strategy enables the company to maintain strong relationships with its customers through provision of regular support services. Nonetheless, IBM faces high competition in the software segment from low-cost companies that are also able to offer high quality products. In this regard, the company can lose its competiveness in the software segment if it is not able to lower its costs.
Business level Strategy
IBM has three main divisions namely hardware, software and services. In the hardware division, the company pursues a differentiation strategy by developing computers with superior capabilities. This enables it to charge a premium price in order to make high profits. The company also follows the differentiation strategy in its software division.
This involves developing application software products that satisfy the needs of individual clients. The company pursues a focus strategy in its service division. In this case, it concentrates on serving businesses that need outsourcing services such as cloud computing, management of data centers, and computer maintenance (IBM). IBM provides differentiated services in this segment in order to enhance customer satisfaction.
In order to succeed in pursuing the differentiation strategy, IBM invests heavily in research and development (IBM). This enables it to understand customer needs and to develop appropriate products for each client. Additionally, it focuses on human resource development through training and adequate remuneration in order to retain its talented workforce. The company owes its success to its employees who maintain positive business relationships with its clients.
Structure and Control Systems
IBM uses a functional organizational structure in order to control its operations. This structure involves organizing the business into units that specialize in specific activities such as sales and marketing or research and development. The functional structure was adopted so that the company can achieve efficiency in production. On the contrary, the structure has partly contributed to the challenges facing the company.
For example, the research and development team usually takes a long time to make decisions concerning new product development. Additionally, managers have to seek approvals from top management before making decisions such as price changes. This slows down the decision-making process, thereby reducing the efficiency of the firm. In this regard, IBM should use a product structure in order to enhance efficiency in product development.
IBM’s remuneration system succeeded in enhancing employees’ motivation and productivity. For example, the sales executives were able to meet their targets because they were paid high commissions. Nonetheless, the remuneration system did not encourage cooperation between divisions. For example, mainframe managers were not reward in order to encourage them to cooperate with employees in the minicomputers division.
Recommendations
IBM can improve its competiveness by changing its corporate strategy. In particular, it should focus on increasing the production of hardware and development of software. This will involve introducing new low cost computer models rather than depending on the sale of mainframes.
Moreover, the company can diversify its hardware division by producing related products such as smart phones and modems. Revitalizing the hardware division will enable the company to reduce its dependence on revenues from software and service divisions. This can be achieved by adopting a product organizational structure that enables managers to make quick decisions regarding sales and product development.
In this regard, each product division will be allocated enough resources to conduct activities such as research and marketing in order to identify customer needs. Finally, IBM needs to change its organizational culture by promoting cooperation among managers and focusing on market needs rather than the success of existing products. These recommendations can be implemented within five years as shown in table 1 in the appendix.
Works Cited
Amason, Allen. Strategic Mangement. New York: McGraw-Hill, 2010. Print.
Bridwell, Larry and Chun Kuo. “An Analysis of the Computer Industry in China and Taiwan Using Michael Porter’s Determinants of National Competitive Advantage.” International Business Journal 3.1 (2005): 116-120. Print.
IBM. About IBM. International Business Machines Corporation, 31 Dec. 2012.Web. Print.
Katsioloudes, Marios. Strategic Management. New York: McGraw-Hill, 2012. Print.
Kraemer, Kenneth and Jason Dedrick. Enter the Dragon: China’s Computer Industry. Irvine: University of California, 2012. Print.
Riain, Sean. “Dominance and Change in the Global Computer Industry: Military, Bureaucratic, and Network State Developmentalisms.” Studies in Comparative International Development 4.1 (2006): 76-98. Print.