University of Jordan

Faculty of Business
Strategic Management

“International Business Machines”

Strategic Ananlysist

Prepared by Fathi Salem Mohammed Abdullah

2009
 Table of Contents
Topics Page
Introduction and brief history of IBM 3

Vision, Mission, Value 4

Porter’s Five Forces Framework 5

PESTEL Framework 6
External Audit 7

CPM-Competitive Profile Matrix 7

External Factor Evaluation (EFE) Matrix 8

Financial Ratio Analysis 9

Internal Audit 11
Internal Factor Evaluation (IFE) Matrix 12

SWOT Matrix 13

SPACE Matrix 15

Grand Strategy Matrix 16

The Boston Consulting Group (BCG) Matrix 17

The Internal-External (IE) Matrix 17

The Quantitative Strategic Planning Matrix (QSPM) 18

Recommendations 21

References 22

Introduction:
Brief History of IBM:

2
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.

3
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 consulting. Over one billion

4
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:

1. The Threat of Entrants:

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 The threat of entry is low because the costs of R&D, support
products and services, manufacturing, and distribution are very high.
2. 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.

3. 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.
4. Threat of Substitutes
The web hosting business of other companies and some
advanced devices and computers could cause threat of substitutes.
5. 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.
6
 - 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.

7
 External Audit
Opportunities Threats
1. Video game console market 1. Competitors are strong.
revenue is projected to reach
2. Economic fluctuation could
$12 billion in 2008 and $66
crimp consumers’ spending.
billion in 2012.
3. Small & Medium business
2. The IT market in Russia,
demand fails to accelerate.
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.

CPM-Competitive Profile Matrix

IBM MSFT HPQ EDS

Critical Weight Ratin Weighted Ratin Weighted Ratin Weighted Ratin Weighted
Success g Score g Score g Score g Score
Factors

Price 0.12 3 0.36 3 0.36 4 0.48 3 0.36

Financial 0.15 3 0.45 3 0.45 2 0.30 2 0.30

Position

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

8
Market 0. 22 3 0.66 4 0.88 2 0.44 2 0.44
Share

Manageme 0.10 4 0.40 4 0.40 3 0.30 3 0.30

nt

Global 0.10 3 0.30 3 0.30 3 0.30 3 0.30

Expansion

Total 1.00 3.25 3.35 2.88 2.34

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted
Score

Opportunities

1. Video game console 0.20 3 0.60

market revenue is
projected to reach $12
billion in 2008 and $66
billion in 2012
2. The IT market in 0.10 4 0.40
Russia, India, Brazil,
and China are
expected to grow
twice as fast as in the
rest of the world
3. Mobile phone markets 0.15 3 0.45
are expected to grow
by 9% in 2008
4. Handheld computers 0.15 3 0.45
markets are expected
to grow by 32% in
2008

9
 Threats

1. Competitors are strong 0.20 2 0.40

2.Economic fluctuation 0.10 2 0.20

could crimp
consumers’ spending
3. Small & Medium 0.10 3 0.30
business demand fails
to accelerate
Total 1.00 2.80

Financial Ratio Analysis 12/2006

Growth Rates % IBM Industry SP-500
Sales (Qtr vs year ago qtr) 9.90 11.70 9.00
Net Income (YTD vs YTD) 10.50 29.90 15.40
Net Income (Qtr vs year ago
14.00 22.40 0.90
qtr)
Sales (5-Year Annual Avg.) 4.00 7.63 13.05
Net Income (5-Year Annual
14.33 7.68 19.88
Avg.)
Dividends (5-Year Annual
20.52 10.99 10.03
Avg.)
Price Ratios
Current P/E Ratio 15.1 16.1 22.9
P/E Ratio 5-Year High 26.6 22.3 22.7
P/E Ratio 5-Year Low 13.6 8.1 6.7
Price/Sales Ratio 1.52 1.32 2.49
Price/Book Value 5.30 4.19 3.53
Price/Cash Flow Ratio NA 5.20 10.40
Profit Margins

10
Gross Margin 42.2 35.2 33.7
Pre-Tax Margin 14.7 11.8 17.5
Net Profit Margin 10.6 8.8 12.4
5Yr Gross Margin (5-Year
39.6 33.6 33.4
Avg.)
5Yr PreTax Margin (5-Year
12.9 9.3 16.6
Avg.)
5Yr Net Profit Margin (5-
9.0 6.6 11.5
Year Avg.)
Financial Condition
Debt/Equity Ratio 1.24 0.77 1.24
Current Ratio 1.1 1.2 0.9
Quick Ratio 1.1 1.1 0.7
Interest Coverage 21.6 11.6 42.3
Leverage Ratio 4.2 3.3 4.2
Book Value/Share 20.57 17.49 16.50
Investment Returns %
Return On Equity 36.6 27.8 21.3
Return On Assets 9.3 8.7 5.8
Return On Capital 15.3 14.7 7.8
Return On Equity (5-Year
28.6 19.5 15.4
Avg.)
Return On Assets (5-Year
7.9 6.2 5.0
Avg.)
Return On Capital (5-Year
Avg.) 12.4 10.0 6.7

Management Efficiency
Income/Employee NA 18,387 52,240
Revenue/Employee NA 268,252 424,626
Receivable Turnover 3.1 4.9 12.8
Inventory Turnover NA 4.7 5.5
Asset Turnover 0.9 1.0 0.6

11
 Date Avg. P/E Price/Sales Price/Book Net Profit
Margin (%)
12/07 14.70 1.59 5.26 10.5
12/06 13.70 1.65 5.13 10.3
12/05 17.00 1.47 3.91 8.8
12/04 20.70 1.75 5.12 7.8
12/03 22.70 1.83 5.64 7.4

Date Book Debt/Equity ROE ROA Interest

Value/ (%) (%) Coverage
Share
12/07 $20.57 1.24 36.6 8.7 22.1
12/06 $18.92 0.80 33.0 9.1 42.9
12/05 $21.03 0.68 24.1 7.6 41.6
12/04 $19.26 0.72 23.7 6.8 69.2
12/03 $16.44 0.85 23.6 6.3 59.5

Net Worth Analysis 12/2006 (in millions)

1. Stockholders' Equity + Goodwill= $41,360
28,506+12,854
2. Net income x 5 = 9,492 x 5 $47,460
3. Share price = 110/EPS 6.262=$17.57 x 9,492 $166774.4
4. Number of Shares Outstanding x Share price = $165712.8
1,506.48x110
Method Average $105,326.8

12
 Internal Audit

Strength
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.
Weakness
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.

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
13
 leader as provider of 35 of
the world's 100 most
powerful supercomputers.

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted
Score
Strengths
1. IBM revenues increased 7 0.10 4 0.40
percent to 69.92$.billion
2. A unique approach to engage 0.06 3 0.18
their employees in an online
intranet using its Jam
technology
3. Strong strategic planning to 0.06 3 0.18
be an innovation-centric
globally integrated
corporation
4. IBM operates in 170 0.10 4 0.40
countries with about 60
percent of its revenues being

14
 generated outside the US
5. IBM concentrated on 0.10 4 0.40
becoming stronger in high
value added businesses
6. IBM ranked number 1 0.10 4 0.40
hosted service provider in
Western Europe
7. IBM is supercomputing 0.12 4 0.48
leader as provider of 35 of
the world's 100 most
powerful supercomputers

Weaknesses
1. Declining in revenues 0.08 2 0.16
of services and
systems segments in
2006
2. Decline in revenue of 0.08 2 0.16
public, industrial, small
and medium business
industries in 2006 by
9.6%
3. Decline in revenues in 0.10 2 0.20
Asia Pacific area by
5.7%
4. Total assets are 0.10 2 0.20
gradually decreasing
from 109M to 103M in
2006
Total 1.00 3.16

SWOT Matrix

15
 Strengths Weaknesses

1. IBM revenues increased 7 1. Declining in revenues of

percent to 69.92$.billion in
SPACE Matrix 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.
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.

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.

Opportunities S-O Strategies W-O Strategies

1. Video game console 1. Entering the video game 1. Increasing marketing

console market by produce efforts into Asia
market revenue is Pacific, (W3, O3).
video game console, (S5,
projected to reach $12
O1).
billion in 2008 and $66
2. Entering the mobile phone
billion in 2012. market, (S5, O3).
2. The IT market in
3. Entering the Handheld
Russia, India, Brazil, computers market, (S5,
16
and China are O4).

expected to grow
Directional vector point is :( 3.167, 1.163)
FS
Conservativ
Aggressive
e

C
A
IS

Competitiv
Defensive
e
ES

Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Weak
Strong
Competitiv
Competitiv
e
e
Position
Position
Quadrant III Quadrant IV

Slow Market Growth

17
 The Boston Consulting Group (BCG) Matrix
Market share position

Industry
IBM
Sales Growth
Stars Question Marks
Rate

Cash Caw Dogs

The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong 3.0 to 3.99 Medium 2.0 to 2.99 Low 1.0 to 1.99

High
I II III
3.0 to 3.99

Medium IV V VI
The EFE
2.0 to IBM
Total
Weighted
2.99
Score

VII VIII IX

18
Low

1.0 to 1.99

The Quantitative Strategic Planning Matrix (QSPM)

Strategy 1 Strategy 2

Enter video Increasing

game console marketing efforts
market into Asia and
Europe
Key Internal Factors Weight AS TAS AS TAS

Strengths
IBM revenues increased 7 percent to 0.10 4 0.40 2 0.20
69.92$.billion in 2006

A unique approach to engage their employees 0.06 - - - -

in an online intranet using its Jam technology

Strong strategic planning to be an innovation- 0.06 - - - -

centric globally integrated corporation

IBM operates in 170 countries with about 60 0.10 3 0.30 4 0.40

percent of its revenues being generated outside
the US

IBM concentrated on becoming stronger in 0.10 4 0.40 4 0.40

high value added businesses

IBM ranked number 1 hosted service provider 0.10 2 0.20 4 0.40

in Western Europe

IBM is supercomputing leader as provider of 35 0.12 - - - -

of the world's 100 most powerful
supercomputers

Weaknesses
Declining in revenues of services and systems 0.08 2 0.16 4 0.32
segments in 2006

Decline in revenue of public, industrial, small 0.08 3 0.24 4 0.32

and medium business industries in 2006 by
9.6%

Decline in revenues in Asia Pacific area by 0.10 2 0.20 4 0.40

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5.7%

Total assets are gradually decreasing from 0.10 3 0.30 3 0.30

109M to 103M in 2006

SUBTOTAL 1.00 2.20 2.42

Strategy 1 Strategy 2

Enter video Increasing

game console marketing efforts
market into Asia and
Europe
Key Internal Factors Weight AS TAS AS TAS

Opportunities

Video game console market revenue 0.20 4 .80 2 0.60

is projected to reach $12 billion in
2008 and $66 billion in 2012

The IT market in Russia, India, Brazil, 0.10 1 0.10 3 0.30

and China are expected to grow twice
as fast as in the rest of the world

Mobile phone markets are expected 0.15 - - - -

to grow by 9% in 2008

Handheld computers markets are 0.15 - - - -

expected to grow by 32% in 2008

Threats

Competitors are strong 0.20 4 0.80 4 0.80

Economic fluctuation could crimp 0.10 1 0.10 3 0.30

consumers’ spending

Small & Medium business demand fails to 0.10 1 0.10 4 0.40

accelerate

SUBTOTAL 1.90 2.40

Recommendation

20
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 Financing

Recession Normal Boom Recession Normal Boom
2,000,000,00
EBIT 2,000,000,000 4,000,000,000 6,000,000,000 0 4,000,000,000 6,000,000,000
Interest 0 0 0 140000000 280000000 420000000
1,860,000,00
EBT 2,000,000,000 4,000,000,000 6,000,000,000 0 3,720,000,000 5,580,000,000
Taxes 700000000 1400000000 2100000000 651000000 1302000000 1953000000
1,209,000,00
EAT 1,300,000,000 2,600,000,000 3,900,000,000 0 2,418,000,000 3,627,000,000
#shares 1517389091 1517389091 1517389091 1506480000 1506480000 1506480000
EPS 0.856734774 1.713469548 2.570204322 0.802533057 1.605066114 2.407599172

70 percent Stock- 30 Percent Debt 70 Percent Debt- 30 Percent Stock

Recession Normal Boom Recession Normal Boom
2,000,000,00
EBIT 2,000,000,000 4,000,000,000 6,000,000,000 0 4,000,000,000 6,000,000,000
Interest 42000000 84000000 126000000 98000000 196000000 294000000
1,902,000,00
EBT 1,958,000,000 3,916,000,000 5,874,000,000 0 3,804,000,000 5,706,000,000
Taxes 685300000 1370600000 2055900000 665700000 1331400000 1997100000
1,236,300,00
EAT 1,272,700,000 2,545,400,000 3,818,100,000 0 2,472,600,000 3,708,900,000
#shares 1514116364 1514116364 1514116364 1509752727 1509752727 1509752727
EPS 0.840556268 1.681112536 2.521668804 0.818875818 1.637751637 2.456627455

Reverences
21
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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