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INTRODUCTION ............................................................................................................. 2
GLOBAL IMPACTS OF THE CREDIT CRUNCH ................................................................................... 3 IBM INTERNATIONAL BUSINESS MACHINES ................................................................................. 4
Table 1: IBMs Financial Performance History 2000-2009. Source: IBM Annual Report 2009 ................... 5 Table 2: Earnings per share 2006 to 2010 projection. Source: IBM Annual Report 2009. ......................... 6
Introduction
The Credit Crunch emerged in 2007 with the first effects being felt by the U.S. Mortgage industry. The term credit crunch came was used to describe the collapse of the subprime mortgage industry that resulted in a freeze in lending by financial institutions. With non-payment of loans, huge debt and no capital gains, financial institutions began to go under. Investment banks, financial services and real estate market felt immediate impacts. Trillions of U.S. dollars were lost, huge government bailouts were necessary and a global slowdown of consumer spending and economic activity. markets. In fact, by early 2008, the effects snowballed to global
Prior to 2007 and this global economic crisis, the lending habits of the Mortgage industry had opened the way for this eventual collapse. Mortgages were granted to low income earners at low interest rates. These were called subprime loans loans granted to borrowers who did not meet acceptable lending criteria. Failure to repay and refinance these loans was the outcome that left lending institutions in billions of dollars in debt.
One of the most significant outcomes of the financial crisis would have been the collapse of Lehman Brothers. In just two weeks, Lehman lost ten trillion dollars in market share crippling the global stock market. By this time the U.S. government stepped in with a $700 billion bailout and stimulus plan. $250 billion was used to bailout the banking sectors and went to large
banks, AIG was loaned $85 billion and mortgage companies Fannie Mae and Freddie Mac nationalized and received $200 billion in bailout (Financial Times).
While these large organisations suffered tremendous losses, smaller enterprises were having negative impacts from the credit crunch. With a volatile stock market and a slow economy, customers spending declined. Those unable to procure loans for capital spend or payments of debt became victims of acquisitions or were forced to declare bankruptcy. This period signaled an era of unsurpassed business closure and economic slowdown.
organisations. This also meant that companies with large cash flows, who still maintained buying power, were therefore able to acquire companies that were in trouble and going under.
Some notable impacts globally were: Liquidity Financial Institutions began tightening lending standards. This made it more difficult for businesses to borrow the money needed to fund daily operations or in some cases, much needed capital expenditure. Employment With consumers cutting back on spending, many businesses cut back on payrolls, causing rise in unemployment or flexible working hours. Injection Huge government bailouts were necessary to salvage economies. Particularly with banks and mortgage companies. The U.S. government injected billions of dollars in large lending institutions like AIG, Chinas government invested in an estimated $500 billion Stimulus Plan, Iceland, Latvia & Hungary took large billion dollar loans from the IMF in order to save their economies. Rising inflation rates Consumer spending declined Foreclosures, unpaid mortgages Bankruptcy Business closure, mergers and acquisitions Oil Prices fell under $40 per barrel
Overall Revenue for 2009 amounted to $95.8bn down 5% from the previous year, however; the companys cash flow was $15.1bn, $800m more than 2008. The steady cash flow over a period of three years amidst a global financial crisis afforded IBM a high-value market position (IBM Annual Report 2009). During this period of market and financial turbulence, IBMs strategic Internationalisation, Capital Expenditure, investment in Research and Development, Acquisitions and Diversification has resulted in strong Earnings per Share, increased cash flow and continued revenue growth.
Table 1: IBMs Financial Performance History 2000-2009. Source: IBM Annual Report 2009
Table 2: Earnings per share 2006 to 2010 projection. Source: IBM Annual Report 2009.
Revenue
The companys revenue in 2008 amidst the credit crunch went up by 5% from its $91.3 billion net profit in 2007 to $103.6 billion in 2008 (Annual Report 2008). This was their highest profit in over a decade. The company maintained strong performance while globally, large, medium and small corporations were experiencing great loss and threat of closure or bankruptcy.
Price Instability
Exchange Rate Fluctuation
The fluctuation of exchange rates in operating nations to the U.S. dollar has affected the companys results. This resulted in some denomination of company assets and liabilities. This poses a liquidity risk and has a direct impact on cash flow. This rate fluctuation has also affected the companys pricing and procurement decisions. Supplies may be purchased in a multiple function currency and sold in other currencies. At December 31, 2008, a decrease of $1, 007 million in the fair value of the companys financial instruments was shown.
Higher interest rates were placed on lending for this period as financial institutions became extra vigilant and cautionary with lending. Re-financing costs soared.
IBMs Global Financial business delivered strong results for 2008, but was adversely affected by interest rates fluctuation. This can either increase or decrease financial revenue and borrowing costs. The Global Financial business facilitates financing to clients who do not wish to pay cash or borrow from a third party financial institution. It relies on the ability of its clients to keep their payment obligations and for new ones to participate. High interest rates can deter decisions to choose this business option when purchasing IBMs services or software.
Debt
IBM has been in the business of lending to customers in order for them to buy product. This lending put the company at $34 billion in debt at the end of 2008. The challenge in a financial crisis would be whether or not customers would be in a position to repay. This put a strain on the companys earnings as many companies were unable to finance their loans and IBM was forced to use its own resources to facilitate these.
In 2008, during the credit crunch, IBM incurred debt to purchase its own stocks at higher prices.
Notable Impacts
Other impacts during the credit crunch would have been consumer spending. In any company that offers goods and services, this was a period of challenge. IBM had to seek ways of shifting its strategic direction and product offering to offer to consumers more cost effective and timely products. Additionally, as consumer spending declined, Maintenance and Outsourcing
Decrease lending for capital expenditure also meant that the company needed to utilize its cash base for large spending. Acquisitions, Research and Development, Capital Investment and Operational costs had to be facilitated with the companys cash in hand.
HRM Strategy IBMs operations span across the globe in 170 countries. This means that they may adapt international HRM Policies and identify what strategy can be used in its operation that aligns with cultural distance (Hofstede 2001). In some locations, virtualisation is practiced.
Employees can work remotely rather than in an office. This can be a cost effective strategy, with less overhead cost and where employees are interconnected regardless of their location.
During the financial crisis, the company made decisions that had direct and indirect impacts to its over 400,000 employees worldwide. With the parent company being established in the U.S., issues such as headcount, international travel, contract workers, wages, flexible working hours and outsourcing had to be looked at. 10
In the period 2008/2009, the North American operations lost over 4000 of its staff members. At this period, when other units were showing strong performance, North America experienced the direct impacts of the credit crunch. The company sought ways to manage its cash flow, while remaining competitive.
While there had been a significant reduction in headcount at the North American Operations, there was simultaneously a significant rise in hiring in India by over 3000 new hires during the credit crunch. This strategy was used primarily because of:
Low pay wages With technology can be used as remote support with highly skilled labour
The companys Human Resource strategy during the credit crunch was to create Global centres of expertise. Global Purchasing and Procurement was set up in China. Human
Relations tasks like expense processing were done in the Philippines. market, but mainly to tap into Indias massive pool of low-cost labour.
Back-office finance
processing was done in Brazil. IBMs expansion to India was partially to cater to the local
Value Chain Strategy Developing a Business of Values IBMs Value Chain Strategy can be seen as its main competitive advantage over other Technology Service Providers. The IBM brand already lends itself to the reason the companys marginal cost can be competitive and still gain market share from its customers. IBM has its upper end suppliers of products. During the credit crunch, customers sought IBMs global
solutions and services to help businesses that were going under. The brand value and years of leading technological solutions, gave them the advantage with their range of new services that targeted supply chain and logistics strategies as the solution to saving companies. Their price strategy for these services was competitive enough to make them affordable and sought after during the crisis.
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International Strategy IBM operates in locations all over the world, while maintaining control over their products and marketing. Research and development is also kept and managed from the home base. The company is known as a leader in Internationalisation.
Research and Development IBM invests over $5 billion dollars on R & D every year. With eight labs in six countries along with 3000 scientists and engineers working on new innovation, the company invests largely on this aspect of the business. New innovations such as ServiceOriented Architecture (SOA), Business Intelligence and Analytics have been developed.
Global Integrated Enterprise - IBM seeks to always maintain competitiveness in the global market. Global integration has enabled the company to cut expenses by $5 billion. The
strategy has been to replicate small versions of the parent company in locations all over the world. These locations would have the same processes and value chain model as the parent company.
Institutional Strategy
Laurence Capron (1999) expressed cost-based and revenue-based synergies to justify acquisitions. In 2008, IBM was able to acquire failing businesses that would best fit both
categories. They had cash flow, which in itself was an advantage over many businesses. This strategy brought and achievement of economies of scale, additional intellectual property and having bought some suppliers would enable a competitive price. From a critical perspective, the company may have taken on additional debt and unpredicted risks.
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Apple has used its value chain strategy to lock customers into product exclusivity. This has worked well for their product line and customer base as they have put up high entry and exit barriers while still maintaining value. Customers would pay way above market price for their products. IBM may have become vulnerable in this respect, in their effort to open their product to compatibility. affordable. On the other hand, customers may choose them as the option that is
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Outsourcing was another Human Resource strategy used to negate credit crunch impacts. India was used as the outsourcing hub, gaining substantial staff following massive job cuts in North America. This strategy may benefit the companys profitability, but puts a strain on the employees who expect to be replaced by outsourcing measures. The company may be
perceived as having lost their basic human values as well as may face more litigation from staff who believe that they have been unfairly removed.
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Maintenance of this competitive advantage was crucial in 2007/2008 global financial crisis. Development of these solution post credit crunch is vital to sustain growth. Competition in this industry is strong. Rivalry exists in many forms and technology changes every day. There is a high threat of new entrants into this open market (Porter 1990). The recommendation to this solutions leader is to continue to put large capital investment into their forecasts and budgets for coming years. 2010 and beyond is the time to innovate and lead the competition, hold buyers and enjoy the benefits of a large market share.
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References
Wall, S., Minocha, S. and Rees, B. (2010) International Business, Essex: Pearson
Porter, Michael E (1990) The Competitive Advantage of Nations, New York: The Free Press Hofstede, Geert. (2001) Cultures Consequences: Comparing Values, Behaviours, Institutions and Organizations Across Nations. 2nd ed. Sage Porter, Michael E (1980) Competitive Strategy Techniques for Analyzing Industries and Competitors, New York: The Free Press Capron, L. (1999) Horizontal Acquisitions/; the Benefits and Risk to Long-term Performance, Mastering Strategy, p. 202, Financial Times Prentice Hall
http://www-05.ibm.com/innovation/se/pdf/highlights/integration/ibm_vcs.pdf IBM Value Chain [online] accessed Dec 1, 2010. IBM International Business Machines Annual Report 2006 IBM International Business Machines Annual Report 2007 IBM International Business Machines Annual Report 2008 IBM International Business Machines Annual Report 2010
Beer, M., Spector, B., Lawrence, P.R., Quinn Mills, D. and Walton, R.E. (1984) Managing Human Assets, Free Press.
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Bibliography
Weekes, P., Scott, B. and Gray, L., Managing People, Finance and Marketing, Vol 1, 2nd Ed. England, Pearson Customs Publishing
Gannon, Martin J. (2001). Understanding Global Cultures: Metaphorical Journeys Through 23 Nations. 2nd ed., Sage.
Sanders, Dan J. (2008) Equipped to Lead: Managing People, Process, Partners and Performance New York: Mc Graw Hill.
Hofstede, Geert. (2001) Cultures Consequences: Comparing Values, Behaviours, Institutions and Organizations Across Nations. 2nd ed. Sage
Porter, Michael E (1990) The Competitive Advantage of Nations, New York: The Free Press Porter, Michael E (1980) Competitive Strategy Techniques for Analyzing Industries and Competitors, New York: The Free Press
Ansoff, H.I. (1968) Corporate Strategy, Penguin Capron, L. (1999) Horizontal Acquisitions/; the Benefits and Risk to Long-term Performance, Mastering Strategy, p. 202, Financial Times Prentice Hall IBM International Business Machines Annual Report 2006 IBM International Business Machines Annual Report 2007 IBM International Business Machines Annual Report 2008 IBM International Business Machines Annual Report 2010 18
Beer, M., Spector, B., Lawrence, P.R., Quinn Mills, D. and Walton, R.E. (1984) Managing Human Assets, Free Press.
Wall, S., Minocha, S. and Rees, B. (2010) International Business, Essex: Pearson
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The New York Times (2010) Credit Crisis The Essentials, The New York Times, June 12 [online] accessed Nov 2, 2010
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