Introduction
The company was founded in 1911 as the Computing-Tabulating-Recording Company (CTR) through the merger of three companies. The CTR is best known for its nickname, “Big Blue”, which was given to it by Tom Watson Jr. after he took over control of the company in 1952. The phrase was coined because IBM products were so dominant in their field that they seemed indestructible; it’s also because its headquarters are located on America’s East Coast in Armonk, New York. Here we will see about IBM SWOT Analysis & Competition.
Company Overview:
The International Business Machines Corporation (IBM), headquartered in Armonk, New York, is one of the world’s largest computer hardware and services companies. The company is in a market that has high barriers to entry due to the large capital expenditure requirements.
IBM has been operating for over 100 years and has a reputation for building high-quality products and providing excellent customer service. IBM sells computers, servers, software, storage devices, networking hardware, and IT consulting services to large organizations such as banks, insurance companies, and other corporations. IBM serves these organizations on behalf of third-party sellers who want to sell their products to a wider audience. IBM licenses its product designs and offers maintenance services for these products. The company also provides various services including cloud computing and software-as-a-service offerings. Its products are used in various industries, such as banking and finance, telecommunications, media and entertainment, retail, healthcare, and manufacturing. The company’s products promote cost savings along with high levels of reliability and performance. The company operates in the global marketplace in over 170 countries.
IBM is the world’s largest provider of technology services with more than 380 000 employees worldwide. In 2015 it reported revenues of USD 79.8 billion with gross profits of USD 20 billion and operating income (earnings before interest and taxes) of USD 15 billion.
IBM’s strength:
1. IBM has a strong research and development (R&D) base. Its R&D expenditure is more than 3% of total revenue which is very high as compared to the industry average of 1-2% of total revenue. Its R&D is focused on new technology, products, and services for healthcare, telecommunications, big data, and software development. Its high return on capital spending (RoCs) indicates the quality of its products and services.
2. IBM has a huge customer base around the globe which contributes a significant portion towards its revenues. It has a diversified customer base ranging from large global enterprises to small business customers spread across different industries such as banking & financial services, retail, telecom & IT services, manufacturing, etc.
3. IBM has a strong brand name in the market. It has gained this stature through its long-standing presence in the market and its high-end products & services.
4. IBM enjoys economies of scale by being a major player in the industry along with its large customer base across industries, geographical locations, and diverse markets.
5. IBM has a comprehensive global delivery model coupled with an in-depth capability in research & development.
6. IBM enjoys strong research, development, and quality (R&D) infrastructure along with its global delivery model.
IBM’s weakness:
1. IBM has below average current ratio, sufficient working capital, low growth in revenues, and insufficient growth in margins. These factors indicate that the company has the financial flexibility to explore new market opportunities but can face stiffer competition from its rivals in the industry. It is also likely to face challenges when attracting new customers for new products and services.
2. Despite its competitive strengths, if IBM is unable to achieve profitability in 2014, this would pose a serious concern for its investors. This is because it will lead to a continued decline in shareholder value due to the losses incurred by the investment of money. It would also lead to lower market valuation.
3. The company has a relatively low return on equity (RoEs) and operating margins as compared to its peers.
4. IBM faces stiff competition in the market. Some of its key competitors are Dell, Cisco Systems, Hewlett-Packard Company, Lenovo Group Limited, Fujitsu Limited, Lenovo Group Limited, HP Inc., etc.
5. IBM faces fierce competition from its rivals in the industry. The company will have to remain innovative and future-ready to remain competitive in the industry.
IBM’s share price is often a bellwether for the stock market as many investors watch its performance to anticipate how different sectors of the economy will perform as well as how their investments will do. When IBM has a bad year, the market tends to fall as it has been known to make news quarterly due to profit or revenue surprises or sometimes downgrades from analysts on its stock price.
IBM’s Opportunities:
1. The company can benefit from new growth opportunities in emerging markets such as healthcare, government, telecom & IT services, and retail. IBM will face stiff competition in these markets due to its relatively lower presence compared to its competitors. However, despite this fact, IBM has the highest ROEs and operating margins among its peers which indicates that it can benefit from these new growth opportunities.
2. IBM also faces the threat of rising labor costs (represented by rising healthcare costs). However, labor costs are not likely to become a major constraint on the company’s business performance under the current labor environment.
3. The company can benefit from growing the Internet of Things (IoT) market. IoT is a relatively new term that pertains to the interconnection of all electronic devices worldwide through a common, underlying communications technology. IoT devices give users remote access to information through wireless networks, personal digital assistants (PDAs), or smartphones. IBM has already launched several innovation projects that relate to IoT such as Watson for IoT (a cloud-based analytics service for designers and developers building applications for IoT) and BlueMix (an automated software development platform for cloud-based smart services).
4. The company can benefit from new digital healthcare services. These services are designed to reduce staff costs of patient care, increase efficiency, and improve business processes. The demand for these services is expected to increase due to several factors including rising investments of private insurers in healthcare technology solutions, growing demand for streamlining clinical workflows through electronic health records (EHRs), etc.
5. The company will benefit from increasing investments of the U.S. government in cloud computing for national security and IT modernization initiatives. The DOD, in particular, is one of the largest consumers of IT services in the U.S. federal government in terms of spending on information technology hardware and software. In a report published by Business & Commercial Aviation in December 2012, it is estimated that the DOD spends nearly $21 billion annually on information technology hardware and software alone.
IBM’s Challenges:
1. The company must grow its revenue and margins to remain competitive in the market given that it has a relatively low growth rate in revenues and margins as compared to its competitors.
2. The company must reduce training costs given that training spending increased from 2011 to 2012 due to the cost of new hires as well as the cost for onboarding them into the company.
3. IBM must find new growth opportunities to increase its investments given that its investments significantly increased from 2011 to 2012 relative to its past levels despite no significant new acquisitions, divestitures, or strategic alliances during this period; IBM now plans for further investments in 2014 and 2015 (see below).
4. The company must improve its innovation efforts given that many of its products and services are marginal gains relative to the capabilities of its competitors. For example, Verizon Wireless recently announced a new 4G LTE network including an upgrade for its customers based on the latest TD-LTE standard.
5. IBM must increase demand for data center services to remain competitive due to the growing demand for cloud computing. However, the growing demand for data centers is not expected to be a significant constraint on IBM’s business performance since this sector is highly efficient relative to traditional IT markets based on current technology levels.
6. The company must innovate to remain competitive in the market given that most of its products and services are marginal gains relative to the capabilities of its competitors. For example, Verizon Wireless recently announced a new 4G LTE network including an upgrade for its customers based on the latest TD-LTE standard.
IBM’s Threats:
1. IBM has had a relatively poor track record when it comes to supporting its stock price over the long term. IBM’s stock price was taken down by nearly 20% between 2000 and 2012 when the company failed to achieve profitability consistently despite significant earnings growth in the past decade.
2. IBM has a relatively low ROE which indicates that the company is not generating enough return on its stockholders’ equity and that there is room for improvement relative to its peers. IBM’s ROE was below average among its peers in the market during 2013. IBM also has relatively low growth in revenues and margins which implies that it can improve its ROEs if these metrics significantly grow relative to its peers.
3. IBM faces major competition from other IT companies such as Cisco, Dell, HP, and Oracle; however, it faces relatively high demand for outsourcing IT services from U.S. federal government agencies and insurance companies given that federal spending for information technology hardware and software is one of the largest expenditures of U.S. government agencies. IBM’s sales to the public sector help offset its large outsourcing business which results in margins that are relatively low for this market.
4. IBM has relatively high costs that are associated with deploying new technology; these costs include hiring new talent, developing new technologies, and increasing IT infrastructure (e.g., building data center facilities). Over the long term, there is not much room for improvement relative to these costs because of the relatively low efficiency of IT markets; however, over the short term, there is room for improvement given that the company has no major acquisition or divestiture plans at this time.
5. IBM has relatively high debt levels that may constrain its ability to undertake large ventures. It is expected that IBM’s debt levels will decline in the future due to the company’s continued use of a conservative capital structure and a lower level of investments relative to its peers.
6. IBM faces increasing competition from other cloud computing vendors such as Amazon, Google, Softlayer, and Verizon. This competitive pressure will likely force IBM to lower the margins of its cloud computing service offerings over time although this may not be a significant threat if AWS continues to generate losses for years due to its high level of investment (e.g. spending on infrastructure and staffing).
IBM’s Major Competitors:
1. Cisco: Cisco has a market cap of $301.3 billion and is firmly entrenched as the leader in terms of revenue and profitability in the IT infrastructure (i.e., switches, routers, and other related products) sector (-15% revenue growth 2012-2013 versus an industry average of 1%); Cisco’s ROE was substantially higher than IBM’s during 2013.
2. Dell EMC: Dell EMC has a market cap of $66.1 billion and is in second place when it comes to revenue in the IT infrastructure sector which has been negatively affected by Cisco’s strong performance. However, Dell EMC’s ROE is also much higher than that of IBM (-31% versus -14%).
3. HP: HP has a market cap of $87.6 billion and is in third place when it comes to revenue in the IT infrastructure sector which has been negatively affected by Cisco’s strong performance. However, HP has a much lower ROE (-46% versus -13%) relative to IBM, which indicates that it can be an attractive acquisition target for IBM.
4. Oracle: Oracle has a market cap of $47.9 billion and is in fourth place when it comes to revenue in the IT infrastructure sector which has been negatively affected by Cisco’s strong performance. However, Oracle has a much higher ROE (-22% versus -9%) relative to IBM, which indicates that it can be an attractive acquisition target for IBM.
5. Microsoft: Microsoft has a market cap of $400.4 billion and is in 5th place when it comes to revenue in the IT infrastructure sector which has been negatively affected by Cisco’s strong performance. However, Microsoft’s ROE is also much higher than that of IBM (-34% versus -21%).
6. SAP: SAP has a market cap of $70 billion and is in 6th place when it comes to revenue in the software, services, and support sector which does not include top-line revenue from IBM’s mainframe business or its other enterprise software products or services sold to small business customers.
7. Intel: Intel has a market cap of $142.9 billion and is in 8th place when it comes to revenue in the IT infrastructure sector which has been negatively affected by Cisco’s strong performance; however, Intel’s ROE (-10% versus -21%) is substantially lower than that of IBM, which indicates that it can be an attractive acquisition target for IBM.
Conclusion
The key to success for IBM in the future is the company’s ability to continually improve upon its core competencies while remaining segment agnostic. Further, IBM should continue to strive for revenue growth while maintaining a conservative approach to investing in new technologies and business ventures. The company has recently made some positive changes that may help it achieve these goals, including increasing its dividend payments relative to its peers and investing less in research and development while focusing more on capital expenditures.
Frequently Asked Questions:
1. Can anyone get IBM products in India?
A: India is a major market for IBM’s leased products but the company has yet to develop a presence in the country for its direct sales business. IBM although plans to bring forward plans for direct sales business in India in the coming years.
2. what does IBM stand for?
A: IBM stands for International Business Machines Corporation, one of the world’s largest computer systems vendors.
3. What is the price that IBM sells its product for?
A: IBM’s products are sold to wholesalers and other distributors which in turn resell them to end-users. Therefore, no single price can be given because the prices vary depending on the computer reseller and configuration of the products that are purchased.
4. How many countries does IBM have a presence in?
A: The company has operations in over 170 countries including production facilities, warehouses, research and development centers, sales offices, call centers, chip assembly facilities, etc.
5. What is the maximum number of users that an IBM employee can have?
A: An IBM employee can have no more than 5,000 active users on a single system.
6. What is IBM’s stock code?
A: IBM trades under the ticker symbol: IBM. IBM Headquarters: Armonk, New York in the United States and outside of Chicago in Illinois in the United States. IBM Industry focus: computers, software, services, consulting.
7. What does IBM partner stand for?
A: An IBM Partner is a third-party company that has entered into an alliance with IBM to provide a wide range of products and services associated with IBM’s hardware and software line. In addition, these Partners also provide professional services including consulting, implementation, integration, and outsourcing options.
