Industry analysis for IBM server market

Industry analysis for IBM server market Free Online Research Papers IBM, as one of the most important multinational information technology corporations in the world, plays a role of indicator in their industry. And their strategies implies the situation and direction of IT industry. In this report, the strategic analysis for the server product and relevant services in the UK market will be mentioned. In addition, this report contains three main parts: stakeholder analysis, external internal analysis and the strategic options. Stakeholder Analysis The IBM’s main stakeholders in the UK and their expectations and interests are as follows (More in Appendix 1) : Table 1 Stakeholder Expectations and interests Owners private/shareholders Profit, Performance, Direction Government Taxation, VAT, Legislation, Employment Rate Senior Management staff Performance, Targets Non-Managerial staff Rates of pay, Job security, Working environment and hours Trade Unions Working conditions, Minimum wage Customers (Distributor/Government) Quality, Customer Care, Price Creditors Credit score, new contracts, Liquidity Suppliers Long-term Contract, Stable Payment Local Community Jobs, Involvement, Environmental issues, Shares To achieve their expectations and interests, these stakeholders affect IBM’s strategy making from different perspectives. However, the power and the effect of these stakeholders are different based on their status. The stakeholder power/interest matrix below demonstrates the power differences of these stakeholders. (more in Appendix 1) Power/Interest Matrix Figure 1 Hence, the strategy making of IBM should consider whether the new strategy can satisfy these key stakeholders who have high power. For example, the government element in the â€Å"keep satisfied†, they have high power (legislation power) but low interest. Another example is the shareholders in â€Å"key players†, who have high interest in IBM and high power on affecting the strategic decision. To sum up, if the strategic decisions threaten the benefits of the key stakeholders, this strategy might be difficult to be achieved. External Analysis PEST Analysis Political factors Taxation. The heavy taxes in the UK make the IBM server products increase the weakness on the price factor, especially on the premium price IBM products. (More in Appendix 2) Economic factors GDP factor. The healthy economic environment with strong and stable GDP in the UK provides a good market for the product and service business of IBM. Although the GDP increase rate is not fast, the stability could balance this disadvantage element. GDP composition by sector: The service industry in the UK contributed nearly 73.4% to the GDP in 2006. That indicated that the high value added service market in the UK is matured, and the customer experience on the service would be higher or more difficult to be satisfied. Chart 1 (CIA, 2007), Disposable income. The average disposable income in the UK was  £11,811 per head in 2004, and it indicated the current and potential opportunity for the products and services of IBM. (More in Appendix 2) Socio cultural factors Population and the internet users. In 2006, the population in the UK was nearly 60,609,153, and according to CIA,(2007), more than half of these people (37.6 million in 2005) were internet users. The well known about the internet indicated the opportunities of relevant products and services. Technological factors Internet. A survey from CIA,(2007) shows that there were 6,064,860 Internet hosts in 2006, and more than 400 Internet Service Providers in 2000. In this sophisticated market, the opportunity and competition will exist together. 5 Forces Analysis The threat of entry The threat of entrants for the server market was low because of the enormous costs on the RD, relevant support products and services, manufacturing and the distribution. For example, IBM spent nearly $171 million in system and technology for server product in 2005, (Annual Report,2006) and IBM spent over $1 billion in the Linux operating system in 2001.(Shankland, 2002) This was only the barrier on the cost, there were other barriers like technique, distribution channels etc. Power of Suppliers Intel and AMD, as the two biggest processor providers (monopolies) in the world, have very strong power on the chip supplying. Although the power of suppliers might be decreased resulting from the competition between these two companies, the wide range of customers and high costs on switching cause the buyers lack of power to bargain with these two giants. However, the power of suppliers for other low technical required material and parts was much lower than the core hardware providers. Power of buyers The power of buyers for the server products in the UK was high because the buyer did not concentrate to the firm and the switching costs for the buyers were low. There were many product choices for the buyers, e.g. IBM, HP, Dell etc. Competitive Rivalry By 2003, The UK server market continues to show promising signs, according to IDC,(2003), the competitive rivalry in the server market was becoming intense in the UK. These competitors included HP, IBM, Sun Microsystems, Dell and Fujitsu Siemens Computers were becoming the fifth leading server vendor in the U.K. Chart 2 Top five server vendors in the UK Source: IDC,(2003) The threat of substitutes The web hosting business might be the biggest threat of substitute for the server products in the UK. The advantages of web hosting include low cost, tech-support, easy to manage and low switching costs. In addition, the advanced personal computer might be another biggest threat to the server product. However, currently, the PC can not instead of professional server for the business uses. Internal Analysis Value Chain Analysis Figure 2 Value Chain Firm infrastructure: Supply-Chain Management in IBM.. Supply chains of IBM are becoming more complex, harder to manage and more costly to run. In fact, nearly $3.4 trillion was spent on supply chains in 2005. To address this, IBM is creating a supply-chain management business transformation outsourcing practice. The Supply chain management (SCM) solutions can help IBM to improve costs and customer service, while decreasing overall supply chain inventory. (IBM, 2006) Business Performance Management (BPM). According to 10-k,(2006), IBM enables companies to visualize end-to-end processes across business and IT systems, analyze execution in real time against goals, and make adjustments as needed. For instance, IBM offers consulting, services and middleware to simulate and monitor business processes, and provides clients with real-time analysis of the underlying IT systems carrying out those processes. HRM: To eliminating redundancies and overhead structures to drive productivity, this integration improves IBMs capacity to innovate by providing greater clarity of key priorities around shared goals and objectives and leads to a sharper focus for the company on learning, development and knowledge sharing. (10-k,2006) Otherwise, IBM acquired numbers of companies to enhance their capability. However the integration issues could appear during the acquisition process that would be the challenge of the HRM, e.g. the culture conflict. (10-k, 2006) Technology development: IBMs research and development (RD) operations differentiate IBM from its competitors. IBM annually spends approximately $5–$6 billion for RD, including capitalized software costs, focusing its investments in high-growth opportunities.(10-k,2006) Procurement: SCM outsourcing. IBM has developed Business Partner relationships with established, best-of-breed Supply Chain Management solution providers. Their solutions, coupled with IBM products and services, deliver the cost-competitive, scalable and secure infrastructure the customers need. (IBM, 2006) Acquisitions and mergers. In order to improve their businesses on the high value products and services, IBM acquired service-related companies into the global services segment, (e.g. Network Solutions). And the software-related companies that were integrated into the software segment. (Annual Report, 2006 ) Inbound Out bound Logistics and Operations: IBMs supply, manufacturing and logistics and customer fulfillment operations are integrated in one operating unit that has reduced inventories, improved response to marketplace opportunities and external risks and converted fixed to variable costs. (10-k,2006) Marketing and sales: In 2005, the company realigned its operations and organizational structure in Europe to give sales and delivery teams greater authority, accountability and flexibility to make decisions and to execute more effectively on behalf of our clients. (10-k,2006) Services: IBM Provides technology and transformation services to clients businesses, and invests to improve the ability to help their clients innovate. (10-k,2006) And this is the high value added and profitable process. (More in Appendix 3) Value System Analysis The value system of IBM is as follows: Figure 3 In this value network of server products, the processor and the software providers have higher profit pool than other suppliers. Furthermore for the distributors, the retailers have the high profit pool. Therefore, the profit space of server products for IBM is not wide enough. Value drivers: Channels Value Drivers Wholesalers: Price, choice, quality, logistics Retailers: Price, service, guarantee Business orders: Price, service, guarantee Table 3 The table above shows the main distributors of IBM and their value drivers. Because of high buyer power, satisfying their distributors is required for IBM. SWOT The SWOT model can be summarized from the external and internal analysis. Strengths: ? Advanced business performance management ? Good organization culture ? Strategic outsourcing, mergers and acquisitions ? High efficient fulfillment center ? Flexible marketing management ? Creative services Weaknesses: ? High costs in the value chain ? Possible acquisition issues Opportunities: ? Strong and stable economic market context. ? Sophisticated service market ? High individual consumption power ? Matured internet market ? High level of entry barrier to the server market Threats: ? Customers have high experience on the service ? Customers have low switching costs ? IBM has high switching costs on the core hardware ? Intense competition ? High threat of substitutes Strategies According to 10-K, (2006), the main strategy in the UK is that IBM delivers their high value added services (or software) to customers through their server product. And it can be divided into 4 pieces as follows: 1) Reallocating resources to enhance their server product business and reduce operation costs and optimize the efficiency. 2) To pursue an innovation agenda with its clients, partners and in other relationships, and to continue refining its portfolio to achieve higher value. 3) Acquiring businesses that contribute strategically to its portfolio 4) To maintain its leadership of this rapidly changing business by focusing on high-value innovation-based solutions and services while consistently generating high returns on invested capital for its shareholders. (10-K, 2006) (More in Appendix 4) Evaluations Acceptability :Stakeholder Analysis According to the expectations of the stakeholders and the power/interest map analysis mentioned above, the strategy can be accepted and supported by key players because their expectations can be satisfied by the current strategies, e.g. profit. Although that is difficult to be supported or accepted by the non-managerial employees who have high influence power but low interest on the strategy resulting from the culture conflict and management issues could appear after the acquisition, they are not the mainstream. To sum up, the new strategies are acceptable but IBM should consider carefully about their strategy for acquisition, because that threaten the interests of a small group of stakeholders who have high influence power. Suitability analysis: Lifecycle Analysis The server product is in the growing period in the UK market. (See the figure below). According to the environment analysis above, there are many opportunities on the server product or relevant services in the UK. IBM is one of the main server providers, furthermore the current strategy of IBM is focusing on server products and relevant high value added services (and software).. Therefore, these strategies are suitable to IBM. Figure 4 Lifecycle of server products in the UK Suitability: value chain analysis IBM attempts to use the strategic acquisition and reallocation to add more value in their value chain and optimize their internal system. These two strategic decisions can help IBM obtain competitive advantages on the profit and system synergy. Therefore, the strategies are suitable. . (More in Appendix 5) Feasibility: Resource deployment IBM can utilize their strengths on the finance and brand to acquire the organizations or outsource if it is required. Hence, there is no gap between IBM’s strategies and the requirement of resource coupled with competences. The current strategies are feasible for IBM. To sum up, according to the evaluation above, the current strategies of IBM are acceptable, suitable and feasible. Conclusion References Book: Johnson, G. (2005), Exploring corporate strategy, 7th ed., Harlow: Financial Times Prentice Hall. 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(1979) How competitive forces shape strategy, [online] Available from: http://en.wikipedia.org/wiki/Porter_5_forces_analysis [Accessed 18 Feb 2007] Shankland, S.,(2002), IBM: Linux investment nearly recouped,[online] Available from: http://news.com.com/2100-1001-825723.html [Accessed 12 Mar 2007] Statistics, (2006), Regional household income, [online]Available from: statistics.gov.uk/articles/economic_trends/ET633RegionalHouseholdIncome.pdf [Accessed 6 Mar 2007] Source ESB, (2007), IBM Distributors, [online], Available from: sourceesb.com/Distributors/IBM.asp, [Accessed on: 01/03/2007] Sourcewire,(2004),Press Release: Tatung to challenge UK server market?[online] Available from: e-consultancy.com/news-blog/284667/tatung-to-challenge-uk-server-market.html?keywords=dell+server [Accessed 18 Feb 2007] Wikipedia,(2007), Corporation tax,[online] Available from: http://en.wikipedia.org/wiki/Taxation_in_the_United_Kingdom#_note-intro [Accessed 18 Feb 2007] XKO, (2006), IBM Business Partner, [online], Available from: xko.co.uk/partners/ibm, [Accessed on: 01/03/2007] 10-K,(2006),IBM,[online] Available from: ftp://ftp.software.ibm.com/annualreport/2005/2005_ibm_sec10k.pdf [Accessed 18 Feb 2007] Appendix 1 Stakeholder Analysis According to Johnson, G. (2005), stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals and on whom, in turn, the organisation depends. The key stakeholders of IBM are as shown in Figure 1. Key shareholders of IBM Figure 1. Stakeholders of IBM From ‘Market’ Environment Suppliers: IBM perceives diverse suppliers are good for business, spent nearly $ 2 billion with them. It is committed to increasing diversity in its supply chain (IBM Relationships, 2007). Many suppliers from Span, Taiwan, Portage, Russia, Roman and so on. The main suppliers are Intel and AMD. Competitors: Hewlett Pachard, Freecom, Fujitsu Siemens, ASUS, Supermicro, Avocent Cyclades Many competitors are HP, Dell and Sun Microsystems (Gartner, 2006). Customers: Business (Distributors as shown in distributors) Government: The IBM Center for the Business of Government was created in 1998 and is dedicated to stimulating research and facilitating discussion of new approaches to improving the effectiveness of government at all levels in the United States and across the world. Since its creation, the Center has awarded nearly 200 research stipends to leading public management researchers in the academic and nonprofit communities. (IBM Governments Relationship, 2007). Universities: IBM today is involved with many aspects of higher education, seeking to better the education of students and the work of faculty (IBM University Relationship, 2007). Individual: They will be the growing market of server in following year. Therefore, they are the potential customers of IBM. Employees The employees are separate into two types as follows: Senior Managers Non-managerial staff As a flagship for the Information Age, IBM has long understood that it is the skill, knowledge and experience of IBMers - their expertise, in other words - that differentiates this company most from others. Employees understand that, too, and their passion for the company and its future is one of the distinguishing traits of being an IBMer (IBM Employees Relationship, 2007). IBM has many ways to encourage employees, for example: Online Jams Internal Appeals Global Pulse Survey Workforce Research Distributors: According to Source ESB, (2007), they are: American Design Components Atlantic Semiconductor Computer Supplies Unlimited Jan-Tronics Div. of Janco Technology Midcom Data Technologies Synnex Aztec Components Carlin Systems IBN Electronics U.S. Microtech Inc. Partners: IBM has number of strategic alliances and partners, with the growing sense of competition the company keeps the strategy to compete and cooperate at the same time. IBM sold its PC division to Lenovo, which is the third largest PC supplier in the world. (IBM,2007) IBM Business partners are able to deliver the hardware and middleware that you need to create a secure and reliable IT infrastructure for your organisation. XKO is a member of the IBM worldwide network of skilled resellers and authorised integrators. It offers pre-sales services that ensure you choose the right IBM technology for your requirements before buying, deploying and maintaining your IT infrastructure (XKO, 2006). Sapien International is a premier IBM partner for software and developers programme. (IBM, 2007) Besides those IBM possess strategic alliance programme with Novell and Red Hat, Oracle, SAP and Siebel systems (IBM, 2007). Investors Shareholders: According to the IBM Annual Report (2006), there are more than thousands of shareholders. A share of IBM stock is among the worlds most widely held equities. Stock has traded on the New York Stock Exchange for nearly a century. Furthermore, shareholders been provided quarterly financial result and they have a say on cumulative voting, pension, retirement, medical, offsharing and other voting issues. Furthermore, the annual meeting of stockholders is usually held the last Tuesday in April. IBM regularly holds its meetings in a different city each year so that investors from different parts of the country may have an opportunity to attend. (IBM Investors Relationship, 2007) From ‘Social/Political’ Environment Trade Union: Alliance@IBM, which has the important say in the company issues like pension legislation, loss of jobs to off-shoring, promises to retirees, health care affordability and labour law reform (Alliance@IBM, 2007). Government: To UK server market, government will be separate into two parts- local and foreign governments. Local government- UK, Foreign governments can influence suppliers more and the inbound logistics of IBM. In ‘Technological’ Environment: Owner of Competitive Technologies: Intel Microsoft These key stakeholders have different roles, expectation and interest in IBM. These different expectations will increase the conflicts. For example: there are so many shareholders and they have huge power of voting. Therefore, they have a big power in IBM. However, the main expectations of them are profit. If IBM wants to keep the shareholders happy, it needs to reduce cost. However, this will conflict with the expectation of employees- working environment, good payment and so on. These expectations means IBM should increase the cost. Therefore, in some degree, the expectations of different stakeholders will increase the conflicts. Furthermore, different power of the stakeholders will also influence the strategy of IBM. According the shareholder mapping, the issues are as follows: Almost of the key players are acceptable and supportable. As customers, government is positive to the strategy. When government as a whole, it has high power, low interest and neutral attitude. However, when unions and non-managerial employees make lobbing, government may become more interested in it. The attitude of the government also may be changed by lobby. The lobbing may be about reducing work force. Appendix 2 Political factors The value added tax (VAT), charged at the standard rate of 17.5% on supplies of goods and services.(Kessler, 2005) Otherwise, corporation tax (main rate is 30%) will reduce the profit of IBM, this tax charged on the profits and chargeable gains of companies. The main rate is 30%, which is levied on taxable income above  £1.5m. (Wikipedia, 2007) (Statistics, 2006) GDP (official exchange rate): $2.341 trillion (2006 est.) CIA,(2007), GDP real growth rate: 2.7% (2006 est.) CIA,(2007), Economic factors Labor force by occupation. The labor force occupied about 79.5% in the service industry in 2004, Labor force: 30.4 million (2006 est.) : agriculture: 1.5% industry: 19.1% services: 79.5% (2004) CIA,(2007), Table 2 Year GDP at current market prices (millions of pounds) 2000 953,227 2001 996,987 2002 1,048,767 2003 1,110,296 2004 1,176,527 2005 1,224,715 (EHS, 2006) Appendix 3 Revenues from Global Services in 2005 totaled $47.4 billion, an increase of 2 percent. Our backlog is estimated at $111 billion, the same as a year ago. (Palmisano, 2006), Supply Chain: Company supply chains – sequences of business activities that join together the production of goods and services, from procurement to manufacturing and distribution are becoming more complex, harder to manage and more costly to run. In fact, some $3.4 trillion will be spent on supply chains this year(2005). To address this, IBM is creating a supply-chain management business transformation outsourcing practice. This new practice draws on the success of IBMs own internal supply-chain transformation, as well as the expertise of the worlds largest supply-chain consulting practice. (IBM, 2005) The following three company-wide organizations play key roles in IBMs delivery of value to its clients: Sales Distribution Organization and related sales channels Research, Development and Intellectual Property Integrated Supply Chain (10-k,2006) Just as IBM works to transform its clients supply chains for greater efficiency and responsiveness to market conditions, the company continues to see business value as it establishes its globally integrated supply chain as an on demand business, transforming this function into a strategic advantage for the company (10-k,2006) IBM spends approximately $38 billion annually through its supply chain, procuring materials and services around the world. (10-k,2006) Firm infrastructure: With a comprehensive knowledge of IBMs business and infrastructure solutions, as well as the products, technologies and services IBM and its Business Partners offer, the companys global client teams gain a deep understanding of each clients organizational, infrastructure and industry-specific needs to determine the best approach for addressing their critical business and IT challenges. These professionals work in integrated teams with IBM consultants and technology representatives, combining their deep skills and expertise to deliver high-value solutions that address clients pain points and innovational aspirations. (10-k,2006) The broad adoption of open standards is essential to the computing model for on demand business and is a significant driver of collaborative innovation across all industries. (10-k,2006) Technology development: Some of IBMs technological breakthroughs are used exclusively in IBM products, while others are used by the companys licensees for their products when that new technology is not strategic to IBMs business goals. (10-k,2006) Procurement: Leveraging this experience, in June 2005, IBM launched its supply-chain business transformation outsourcing service to optimize and help run clients end-to-end supply chain processes, from procurement to logistics. (10-k,2006) Operations: The companys supply, manufacturing and logistics and customer fulfillment operations are integrated in one operating unit that has reduced inventories, improved response to marketplace opportunities and external risks and converted fixed to variable costs. (10-k,2006) Simplifying and streamlining internal processes has improved operations and sales force productivity and processes and thereby the experiences of the companys clients when working with IBM. (10-k,2006) to its own manufacturing operations, the company uses a number of contract manufacturing (CM) companies around the world to manufacture IBM-designed products. The use of CM companies is intended to generate cost efficiencies and reduce time-to-market for certain IBM products. (10-k,2006) IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products. (10-k,2006) Outbound Logistics: Improved delivery and outcomes for its clients. (10-k,2006) Leveraging this experience, in June 2005, IBM launched its supply-chain business transformation outsourcing service to optimize and help run clients end-to-end supply chain processes, from procurement to logistics. (10-k,2006) The company offers its products directly and through a variety of third party distributors and resellers. Changes in the financial or business condition of these distributors and resellers could subject the company to losses and affect its ability to bring its products to market. (10-k,2006) Marketing and sales: Remarketing. The sale and lease of used equipment (primarily sourced from the conclusion of lease transactions) to new or existing clients. (Revenue reported as Global Financing.) (10-k,2006) Retail Store Solutions. Point-of-sale retail checkout systems, software and solutions. (10-k,2006) In addition, the group provides leading semiconductor technology and products, packaging solutions and engineering technology services to clients and for IBM’s own advanced technology needs. (10-k,2006) Services: IBM invests to improve its ability to help its clients innovate. (10-k,2006) Providing technology and transformation services to clients businesses. (10-k,2006) Client financing. Lease and loan financing to external and internal clients for terms generally between two and seven years. (Revenue reported as Global Financing.) (10-k,2006) BUSINESS TRANSFORMATION OUTSOURCING (BTO). Delivers improved business results to clients through the continual strategic change and the operation and transformation of the client’s business processes, applications and infrastructure. (10-k,2006) ENGINEERING TECHNOLOGY SERVICES (ETS). System and component design services, strategic outsourcing of clients’ design teams, and technology and manufacturing consulting services. (Revenue reported as Hardware segment.) (10-k,2006) BUSINESS CONSULTING SERVICES (BCS). Delivery of value to clients through consulting services for client relationship management, financial management, human capital, business strategy and change, and supply-chain management, as well as application innovation and the transformation of business processes and operations. (10-k,2006) CENTER FOR BUSINESS OPTIMIZATION (CBO). Helps clients continually optimize their business performance by drawing upon massive amounts of real-time data, advanced analytical methods, business expertise and deep computing power. (10-k,2006) Appendix 4 Strategy map: IBM is shifting from low value added hardware leader to the high value added service leader and the premium leader to the cost leader. Appendix 5 Suitability:Profit Impact Market Strategy Revenue: 2006 2005 2004 $ m $ m $ m Global services 48,247 47,407 46,283 Hardware 22,499 24,343 31,193 Software 18,204 16,830 16,141 Global financing 2,379 2,407 2,608 Others 94 147 68 Total Revenue 91,424 91,134 96,293 Cost: 2006 2005 2004 $ m $ m $ m Global services 34,972 35,093 35,078 Hardware 14,175 15,803 22,008 Software 2,693 2,534 2,489 Global financing 1,182 1,091 1,046 Others 107 81 103 Total cost 53,129 54,602 60,724 $ m $ m $ m Gross Profit 38,295 36,532 35,569 IBM core strategy revolves around building a competitive edge which is based on their value added service, apparently they had been out from the PC market but strategically they have added a value in it by selling it to Lenovo and making it key element in IBM’s network of alliances rather than an element in the IBM portfolio. At the same time they having a policy of compete and cooperate with their competitors to address the value drivers to the customers, they understand the business is global, fast moving and unpredictable so they have to be very proactive in their approach. IBM has phenomenal reduced in overall cost of every business sector, which in fact contributing towards increased gross profit. The credit should be given to their effective and efficient way of managing supply and value chain, they have a gross profit rise of more than US $ 3,000 m and US $ 2,000 m in the year 2006 as it was in 2005 and 2004 respectively. There is also a rise in market share of IBM because of their considerable earnings per share of common stock which increased by US $ 2.77 in 2006. IBM’s subtle strategy has positive and profound impact on the overall financial health of the company, which is proved by the statistical data provided from the annual financial report 2006. Positioning analysis: Strategy Clock As shown in the strategy clock, IBM server now is in good price and value and it aims at good price and high value position. IBM also wants to get competitive advantage from this positioning. What is more, using high services to add value can help IBM to increase the brand image- which is hard to be copies. Portfolio Analysis: Portfolio Matrix IBM used to focus on the PC business. However, to conduct its strategy effectively, it sold PC business several years ago. As shown in Portfolio Matrix, server is just a small business to IBM at that time and in the ‘Question Mark’ of the Matrix. And now, it becomes the ‘Star’, where IBM invests a lot of money in. The money needed of the investment is generated from ‘Cash Cow’- the services of IBM. Service sector occupies huge amount of the total revenue of IBM. IBM tries to use this strategy balancing the ‘Cash Cow’ and ‘Star’ and also to be a stronger player in server market. 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