IBM and the Structure of the IT Industry
Thursday, February 05, 2004
Appendix: IBM Case Study
Copyright 2004, Adam J. Robinson. All Rights Reserved. Do not reproduce without consent from the author. He can be reached at Adam.Robinson@yale.edu. Also, Check out the main Website at www.ajrobinson.blogspot.com
WHAT IS IBM?
All information and Statistics in this presentation come from either http://www.IBM.com, http://www.nytimes.com, or http://www.wsj.com:
IBM's character has been formed over nearly 100 years of doing business in the field of information-handling. Nearly all of the company's products were designed and developed to record, process, communicate, store and retrieve information -- from its first scales, tabulators and clocks to today's powerful computers and vast global networks. IBM helped pioneer information technology over the years and it stands today at the forefront of a worldwide industry that is revolutionizing the way in which enterprises, organizations and people operate and thrive.
Currently, from an investment outlook, IBM believes investors, particularly those who invest in the technology sector, reward companies that adapt, that continually create and lead the high-value spaces—“because that’s the only way to deliver consistent, long-term earnings growth in an industry that is constantly evolving.” It believes investors reward companies that “manage for the long haul, run highly efficient operations and are managed by experienced and disciplined leaders. And, at a time when industry growth projections are highly unreliable, the firm is catering to investors rewarding companies that outperform their competitors—no matter the rate at which the industry is growing or contracting.” They say, “This is why we have made marketshare a top priority.”
FROM IBM’s 2002 ANNUAL REPORT:
o IBM is the world's largest information technology company, as well as the world's largest business and technology services provider ($36 billion); and the world's largest IT financier ($35 billion in assets).
o All of IBM's core businesses - from servers to storage systems, to middleware, to services - gained marketshare in 2002.
o In terms of IT finance, IBM signed $35 billion in new financial agreements in 2002, $14 billion for customer and government financing and $22 billion for commercial financing.
o IBM Global Services signed $53 billion in new contracts in 2002, of which 42 contracts were each worth in excess of $100 million, and five which exceeded $1 billion.
o In October 2002 IBM acquired PricewaterhouseCoopers Consulting. With some 30,000 employees and offices in 52 countries, PwC Consulting brought additional depth and leadership capabilities to IBM's services-led business.
o IBM paid an effective tax rate of 30.0% in 2002, up from 29.7% in 2001.
SOME 2003 STATISTICS:
o IBM took in 89 billion dollars in revenue last year and 62% of its sales are overseas from one of its locations in 90 countries. 57% of its 316,000 person workforce is deployed outside of the US. The company plans to expand to 330,000 in 2004.
o IBM common stock is currently at a 52-week-high of $100.00. Market Capitalization is $170.7 billion. P-E ratio is 22.87.
o The current Chairman and CEO of IBM is Samuel J. Palmisano.
HISTORY:
Charles R. Flint arranged the merger of the International Time Recording Company, Computing Scale Company, and the Tabulating Machine Company to form the Computing-Tabulating-Recording Company (C-T-R) in 1911. The new company was based in New York City and had 1,300 employees. C-T-R was renamed International Business Machines Corporation on Feb 14, 1924, because the scope of the business was widening into electronic keypunching.
When the diversified businesses of C-T-R proved difficult to manage, Flint turned for help to the former number two executive at the National Cash Register Company, Thomas J. Watson, Sr. Within 11 months of joining C-T-R, Watson became its president. The company focused on providing large-scale, custom-built tabulating solutions for businesses, leaving the market for small office products to others. During Watson's first four years, revenues more than doubled to $9 million. He also expanded the company's operations to Europe, South America, Asia and Australia.
During the Great Depression of the 1930s, IBM managed to grow while the rest of the U.S. economy floundered. Because Watson continued the firm’s capital investments, IBM was ready when the Social Security Act of 1935 brought the company a landmark government contract to maintain employment records for 26 million people. It was called "the biggest accounting operation of all time," and it went so well that orders from other U.S. government departments quickly followed.
After inventing several primitive electronic calculators in the 40s (most of the production facilities were used then to manufacture war materials) IBM in the 1950s took computing first to vacuum tubes and then transistorized machines. By 1959, IBM had an automatic production line for transistors and had created the three most powerful mainframes in the world.
In 1969, under the stewardship of Watson’s son as CEO, IBM changed the way it sold technology. Rather than offer hardware, services and software exclusively in packages, marketers "unbundled" the components and offered them for sale individually. Unbundling gave birth to the multibillion-dollar software and services industries, of which IBM is today a world leader.
In 1973, under Frank T. Carey, IBM introduced the floppy disk, Bank ATM’s, and the electronic laser prism price reading machines used by cashiers in supermarkets. These were the most significant inventions by IBM that affected the mainstream consumer until 1981, when IBM introduced the PC. When designing the PC, IBM for the first time contracted the production of its components to outside companies. The processor chip came from Intel and the operating system, called DOS (Disk Operating System) came from a 32-person company called Microsoft.
During the 1980s and early 1990s, IBM was thrown into turmoil by back-to-back revolutions. The PC revolution placed computers directly in the hands of millions of people. And then, the client/server revolution sought to link all of those PCs (the "clients") with larger computers that labored in the background (the "servers" that served data and applications to client machines). Both revolutions transformed the way customers viewed, used and bought technology. And both fundamentally rocked IBM. Businesses' purchasing decisions were put in the hands of individuals and departments - not the places where IBM had long-standing customer relationships. Piece-part technologies took precedence over integrated solutions. The focus was on the desktop and personal productivity, not on business applications across the enterprise. By 1993, the company's annual net losses reached a record $8 billion. Cost management and streamlining became a chief concern. And IBM considered splitting its divisions into separate independent businesses.
Louis V. Gerstner, Jr. arrived as IBM's chairman and CEO on April 1, 1993. Gerstner brought with him a customer-oriented sensibility and the strategic-thinking expertise that he had honed through years as a management consultant at McKinsey & Co. Soon after he arrived, he had to take dramatic action to stabilize the company. These steps included rebuilding IBM's product line, continuing to shrink the workforce and making significant cost reductions. Despite mounting pressure to split IBM into separate, independent companies, Gerstner decided to keep the company together. He recognized that one of IBM's enduring strengths was its ability to provide integrated solutions for customers - someone to represent more than piece parts or components. Splitting the company would have destroyed this unique IBM advantage. This advantage is exactly what is exploited by IBM’s new Business on Demand Strategy.
BUSINESS ON DEMAND – The New, New Thing?
There is somewhat of a comparison to Jim Clark’s New New Thing Ideas… This is Healtheon not just for health care, but 12 industries ranging from health care to finance. “The promise of on demand is that a company or institution can provide products, services, information, health care, education, government services and so on—all “on demand” for customers, citizens, patients and students. These “sense-and-respond” or “real-time” enterprises enjoy enormous competitive advantages. They are able to convert fixed costs into variable costs. They can greatly reduce inventories. And, most compellingly, they are extremely responsive to the needs of their customers, employees and partners.”
Samuel J. Palmisano, Chairman and CEO of IBM, said in an interview with the NY times, "We now see an opportunity to set the agenda again." He concluded: "I am confident that we are on the verge of the next great opportunity for our company, and for the entire information technology industry." He was talking about IBM’s new E-business On-Demand Strategy. What is it, and how does it work?
Currently, the pace of change in the information technology industry is accelerating, and its scope and impact are widening. The ON-DEMAND STRATEGY is IBM’s response to this new market environment. In their words, the strategy entails evolving IBM into “an enterprise whose business processes – integrated end-to-end across the company and with key partners, suppliers and customers – can respond with speed to any customer demand, market opportunity or external threat.” By making themselves into the first and ultimate On-Demand company, IBM plans to serve as a role model and consultant for other companies who want the same for their own firm operations. IBM is trying to position itself as a company which will either build you a self-sustaining on-demand infrastructure (using its own research facilities, hardware and software) or the company to which you can outsource all of your data processing needs, organizing and distilling the information for you in such a way that enables you to respond to the market in real-time.
The value added to a company by IBM via the on-demand strategy is the remolding of the firm’s business model so that it is flexible enough to thrive in an increasingly turbulent market environment. This means transforming companies into even more focused, streamlined, responsive, variable and resilient enterprises that connect their businesses end-to-end with suppliers at one extreme and customers at the other, seamlessly fusing the best of business and technology. This should accelerate value creation. People want and will invest in a company that is intuitive in sensing and responding to change; flexible in terms of structuring costs and adapting processes; focused on the unique things that set it apart; and resilient in managing change and threats.
How did IBM implement the On-Demand Strategy for Itself?
“IBM has committed to becoming the premier on demand business and has identified four focus areas: Integrated Supply Chain, Total Buyer Experience, On Demand Workplace, and IT Enablement.”
Information Technology (IT Enablement – reducing underutilization) and Creating an On Demand Workplace:
o IBM originally had a patchwork of IT support systems to service about two dozen business units. In the past 15 months, 155 data centers were consolidated into 12. The number of internal networks was reduced from 31 to 1. 16,000 applications that organize and distill information for IBM cut to 5300 right now. 1 CIO from 128.
o Since 1994, IT spending has gone down 31%, or 2 billion dollars. Nonetheless, the firm has created w3, the IBM intranet that connects 320,000 employees, and allows an employee’s computer to become his or her office, saving some other 2 billion in real estate costs. In implementing this new strategy, IT plans to become more important with less funds directed toward the maintenance of its systems. This is being achieved through the simplification and consolidation described above.
Integrated Supply Chain and Creating a Total Buyer/Distributor Experience:
o Automation, or creating touchless, self-configuring optimizing manufacturing designs, is the fastest way to go about achieving an on-demand supply chain, with the ultimate goal of giving the business the ability to adapt/change on its own.
o The on-demand supply chain has first been implemented at IBM’s new 300 mm Semiconductor plant in NY, where cycle time has improved 50%, process yields are up to 2 points higher, and direct spending on labor is 50% lower than in the previous facility. The change has been to wire the system such that customer orders are plugged into the system electronically by the customers themselves.
The manufacturing plant then automatically responds to the new ordering information requirements and re-optimizes the manufacturing strategy accordingly (and instantaneously). It does so based on new manufacturing algorithms run on Linux grids that self-configure and optimize production for the plant at any given time.
o The first distributor to take advantage of this seamless, touchless, on-demand manufacturing was Magirus, a key European IBM distributor. Through electric automation of their ordering system, the company has seen IBM manufacturing cycle time go down 70%, and orders filled with 99.5% accuracy. This is a huge competitive advantage.
ON DEMAND STRATEGY GOALS:
o Exceed financial expectations of the on-Demand strategy. IBM wants to be #1 in customer satisfaction (currently #3), wants to be #1 in employee satisfaction (currently at the industry average), as well as have the biggest market share in all of the product markets in which it participates.
o IBM wants to be a role model in moving toward the on-Demand strategy and wants to make all of its internal workings on-Demand for its customers.
o Want to enable businesses today to respond in real time to whatever the day brings—a change in supply or demand, a shift in the preferences of buyers, students or citizens, the vagaries of capital markets or the aftermath of a natural disaster.
SELLING THE STRATEGY TO OTHER COMPANIES:
Evaluate your business processes. Are they responsive enough? Are they integrated to the point where they can provide real-time information and enable you to respond rapidly to market changes?
Consider your infrastructure. Is it properly aligned to support your business goals? Is it being fully utilized? Are you getting the maximum return on the IT investment that you've made?
Look at your organization and culture. Is it primed for growth? Are there opportunities to unlock hidden value through collaboration or outsourcing?
HOW THE 5 PORTER FORCES WORK INTO IBM:
Direct Rivalry
• "Either you innovate or you're in commodity hell," Mr. Palmisano explained during a 90-minute interview at the company's headquarters in Armonk, N.Y. "If you do what everybody else does, you have a low-margin business. That's not where we want to be." - Samuel J. Palmisano, Chairman and CEO of IBM.
• As an information handling company, IBM must compete with other information handlers. Additionally, they have to compete with other technology creators. In the new strategy, they must compete with technology consulting firms. To do this IBM has utilized Command and Technology. IBM has:
o For the tenth consecutive year, received the most U.S. patents over any other company -- 3,288 U.S. patents in 2002, nearly double the number of the next closest company. Over the past decade, the U.S. Patent Office has issued IBM 22,357 patents - more than for ten of our top U.S. competitors combined.
o Achieved the world's largest portfolio of software patents. IBM received 7,500 software patents between 1993 and 2002. The number of software patents received by IBM in 2002 was 1,332.
o Been awarded the 2000 U.S. National Medal of Technology for the company's record of innovation in storage technology. This marks the seventh time that IBM and its scientists have received the nation's highest award for technological innovation, more than any other company or organization.
o IBM has employed a total of five Nobel Prize Laureates: two still working with the company.
o In October 2002, acquired PricewaterhouseCoopers Consulting. With some 30,000 employees and offices in 52 countries, PwC Consulting brought additional depth and leadership capabilities to IBM's services-led business.
o All of this is part of IMPLEMENTING THE ON-DEMAND STRATEGY, which should establish IBM as the first-mover in what is and will be a heavily competitive industry.
Barriers to Entry:
• First Mover Advantage: Automation leads to accelerating velocity of the business (doing more, faster), which means more market share and higher revenues until other companies adopt and implement the strategy.
• Companies which move first to become on demand will be first to respond with flexibility and speed to external threats, marketplace opportunities, and the needs of their customers, employees, and partners.
• Economies of Scale: More variability in the fixed cost structure because less technology maintenance costs in a more streamlined organization. Faster return on capital invested. Manipulation of huge client base as an IT provider to implement the new strategy.
• The On-Demand Strategy has been one huge attempt at differentiating IBM’s product from the competition, which it is convinced, should allow IBM to reap bigger profit margins. IBM is moving toward making itself far more a side-by-side partner with businesses, helping them improve their marketing, planning, procurement and customer service, rather than merely a supplier of hardware and software.
• This is the new way for securing and maintaining relationships with big corporate customers, as profit margins in supplying the hardware and software for these companies’ mainframes are dwindling.
• Bundling IT consulting with hardware and software supplies. Through integrated business solutions, IBM is taking advantage of its huge network of products/services.
Substitution:
• IBM has strong competitors and resulting direct substitute products in all three of its businesses: Software, Hardware, and IT services.
• The main rival in software is Microsoft, which IBM uses Linux and Open Source systems in its mainframes to compete with. Additionally, Oracle products such as Oracle Financial have made back office outsourcing less necessary for small to midrange businesses.
• In Hardware, the main rivals are Sun Microsystems, which specializes in Servers and Mainframe Computing, and Cisco, which specializes in complex networks and virtualization, or making a network of computers as powerful as one large supercomputer.
• In Services, IBM was unparalleled in its new combined on-Demand strategy until recently. Hewlett-Packard now speaks of its corporate offerings as its "adaptive enterprise initiative"; Microsoft says its offerings will make companies "agile" businesses; and Computer Associates simply copied the "on demand" phrase.
• IT services also rivals include companies like Accenture, and smaller more boutique-like firms that cater to smaller markets. IBM Global Services still is the behemoth here though, with $52 billion in new contracts in 2002. They signed a $5 billion dollar outsourcing deal with JP Morgan Chase, and today signed a 2 billion dollar deal with Sprint. The latter expects its customer service costs to plunge $550 million over the next three years. There is no substitute for that.
Buyer/Supplier Power:
• IBM’s diversified products and services and original position in the Information Technology field make it independent of any Supplier or Buyer Power. This is a particular advantage in the IT industry when Microsoft has such a strong hold on software operating systems and Intel such a strong hold on processing chips. Because personal computing is just one segment of IBM’s business, IBM has been able to focus on open source/standards computing, which has led it to use Linux operating systems in its servers and its own in-house semiconductor manufacturing plants.
• IBM is investing in the technology truth that corporate customers don't so much buy technology products, since the technology changes so fast, as invest in a relationship with a trusted supplier. This is the basis for IBM’s on-Demand strategy.
WHAT IS IBM?
All information and Statistics in this presentation come from either http://www.IBM.com, http://www.nytimes.com, or http://www.wsj.com:
IBM's character has been formed over nearly 100 years of doing business in the field of information-handling. Nearly all of the company's products were designed and developed to record, process, communicate, store and retrieve information -- from its first scales, tabulators and clocks to today's powerful computers and vast global networks. IBM helped pioneer information technology over the years and it stands today at the forefront of a worldwide industry that is revolutionizing the way in which enterprises, organizations and people operate and thrive.
Currently, from an investment outlook, IBM believes investors, particularly those who invest in the technology sector, reward companies that adapt, that continually create and lead the high-value spaces—“because that’s the only way to deliver consistent, long-term earnings growth in an industry that is constantly evolving.” It believes investors reward companies that “manage for the long haul, run highly efficient operations and are managed by experienced and disciplined leaders. And, at a time when industry growth projections are highly unreliable, the firm is catering to investors rewarding companies that outperform their competitors—no matter the rate at which the industry is growing or contracting.” They say, “This is why we have made marketshare a top priority.”
FROM IBM’s 2002 ANNUAL REPORT:
o IBM is the world's largest information technology company, as well as the world's largest business and technology services provider ($36 billion); and the world's largest IT financier ($35 billion in assets).
o All of IBM's core businesses - from servers to storage systems, to middleware, to services - gained marketshare in 2002.
o In terms of IT finance, IBM signed $35 billion in new financial agreements in 2002, $14 billion for customer and government financing and $22 billion for commercial financing.
o IBM Global Services signed $53 billion in new contracts in 2002, of which 42 contracts were each worth in excess of $100 million, and five which exceeded $1 billion.
o In October 2002 IBM acquired PricewaterhouseCoopers Consulting. With some 30,000 employees and offices in 52 countries, PwC Consulting brought additional depth and leadership capabilities to IBM's services-led business.
o IBM paid an effective tax rate of 30.0% in 2002, up from 29.7% in 2001.
SOME 2003 STATISTICS:
o IBM took in 89 billion dollars in revenue last year and 62% of its sales are overseas from one of its locations in 90 countries. 57% of its 316,000 person workforce is deployed outside of the US. The company plans to expand to 330,000 in 2004.
o IBM common stock is currently at a 52-week-high of $100.00. Market Capitalization is $170.7 billion. P-E ratio is 22.87.
o The current Chairman and CEO of IBM is Samuel J. Palmisano.
HISTORY:
Charles R. Flint arranged the merger of the International Time Recording Company, Computing Scale Company, and the Tabulating Machine Company to form the Computing-Tabulating-Recording Company (C-T-R) in 1911. The new company was based in New York City and had 1,300 employees. C-T-R was renamed International Business Machines Corporation on Feb 14, 1924, because the scope of the business was widening into electronic keypunching.
When the diversified businesses of C-T-R proved difficult to manage, Flint turned for help to the former number two executive at the National Cash Register Company, Thomas J. Watson, Sr. Within 11 months of joining C-T-R, Watson became its president. The company focused on providing large-scale, custom-built tabulating solutions for businesses, leaving the market for small office products to others. During Watson's first four years, revenues more than doubled to $9 million. He also expanded the company's operations to Europe, South America, Asia and Australia.
During the Great Depression of the 1930s, IBM managed to grow while the rest of the U.S. economy floundered. Because Watson continued the firm’s capital investments, IBM was ready when the Social Security Act of 1935 brought the company a landmark government contract to maintain employment records for 26 million people. It was called "the biggest accounting operation of all time," and it went so well that orders from other U.S. government departments quickly followed.
After inventing several primitive electronic calculators in the 40s (most of the production facilities were used then to manufacture war materials) IBM in the 1950s took computing first to vacuum tubes and then transistorized machines. By 1959, IBM had an automatic production line for transistors and had created the three most powerful mainframes in the world.
In 1969, under the stewardship of Watson’s son as CEO, IBM changed the way it sold technology. Rather than offer hardware, services and software exclusively in packages, marketers "unbundled" the components and offered them for sale individually. Unbundling gave birth to the multibillion-dollar software and services industries, of which IBM is today a world leader.
In 1973, under Frank T. Carey, IBM introduced the floppy disk, Bank ATM’s, and the electronic laser prism price reading machines used by cashiers in supermarkets. These were the most significant inventions by IBM that affected the mainstream consumer until 1981, when IBM introduced the PC. When designing the PC, IBM for the first time contracted the production of its components to outside companies. The processor chip came from Intel and the operating system, called DOS (Disk Operating System) came from a 32-person company called Microsoft.
During the 1980s and early 1990s, IBM was thrown into turmoil by back-to-back revolutions. The PC revolution placed computers directly in the hands of millions of people. And then, the client/server revolution sought to link all of those PCs (the "clients") with larger computers that labored in the background (the "servers" that served data and applications to client machines). Both revolutions transformed the way customers viewed, used and bought technology. And both fundamentally rocked IBM. Businesses' purchasing decisions were put in the hands of individuals and departments - not the places where IBM had long-standing customer relationships. Piece-part technologies took precedence over integrated solutions. The focus was on the desktop and personal productivity, not on business applications across the enterprise. By 1993, the company's annual net losses reached a record $8 billion. Cost management and streamlining became a chief concern. And IBM considered splitting its divisions into separate independent businesses.
Louis V. Gerstner, Jr. arrived as IBM's chairman and CEO on April 1, 1993. Gerstner brought with him a customer-oriented sensibility and the strategic-thinking expertise that he had honed through years as a management consultant at McKinsey & Co. Soon after he arrived, he had to take dramatic action to stabilize the company. These steps included rebuilding IBM's product line, continuing to shrink the workforce and making significant cost reductions. Despite mounting pressure to split IBM into separate, independent companies, Gerstner decided to keep the company together. He recognized that one of IBM's enduring strengths was its ability to provide integrated solutions for customers - someone to represent more than piece parts or components. Splitting the company would have destroyed this unique IBM advantage. This advantage is exactly what is exploited by IBM’s new Business on Demand Strategy.
BUSINESS ON DEMAND – The New, New Thing?
There is somewhat of a comparison to Jim Clark’s New New Thing Ideas… This is Healtheon not just for health care, but 12 industries ranging from health care to finance. “The promise of on demand is that a company or institution can provide products, services, information, health care, education, government services and so on—all “on demand” for customers, citizens, patients and students. These “sense-and-respond” or “real-time” enterprises enjoy enormous competitive advantages. They are able to convert fixed costs into variable costs. They can greatly reduce inventories. And, most compellingly, they are extremely responsive to the needs of their customers, employees and partners.”
Samuel J. Palmisano, Chairman and CEO of IBM, said in an interview with the NY times, "We now see an opportunity to set the agenda again." He concluded: "I am confident that we are on the verge of the next great opportunity for our company, and for the entire information technology industry." He was talking about IBM’s new E-business On-Demand Strategy. What is it, and how does it work?
Currently, the pace of change in the information technology industry is accelerating, and its scope and impact are widening. The ON-DEMAND STRATEGY is IBM’s response to this new market environment. In their words, the strategy entails evolving IBM into “an enterprise whose business processes – integrated end-to-end across the company and with key partners, suppliers and customers – can respond with speed to any customer demand, market opportunity or external threat.” By making themselves into the first and ultimate On-Demand company, IBM plans to serve as a role model and consultant for other companies who want the same for their own firm operations. IBM is trying to position itself as a company which will either build you a self-sustaining on-demand infrastructure (using its own research facilities, hardware and software) or the company to which you can outsource all of your data processing needs, organizing and distilling the information for you in such a way that enables you to respond to the market in real-time.
The value added to a company by IBM via the on-demand strategy is the remolding of the firm’s business model so that it is flexible enough to thrive in an increasingly turbulent market environment. This means transforming companies into even more focused, streamlined, responsive, variable and resilient enterprises that connect their businesses end-to-end with suppliers at one extreme and customers at the other, seamlessly fusing the best of business and technology. This should accelerate value creation. People want and will invest in a company that is intuitive in sensing and responding to change; flexible in terms of structuring costs and adapting processes; focused on the unique things that set it apart; and resilient in managing change and threats.
How did IBM implement the On-Demand Strategy for Itself?
“IBM has committed to becoming the premier on demand business and has identified four focus areas: Integrated Supply Chain, Total Buyer Experience, On Demand Workplace, and IT Enablement.”
Information Technology (IT Enablement – reducing underutilization) and Creating an On Demand Workplace:
o IBM originally had a patchwork of IT support systems to service about two dozen business units. In the past 15 months, 155 data centers were consolidated into 12. The number of internal networks was reduced from 31 to 1. 16,000 applications that organize and distill information for IBM cut to 5300 right now. 1 CIO from 128.
o Since 1994, IT spending has gone down 31%, or 2 billion dollars. Nonetheless, the firm has created w3, the IBM intranet that connects 320,000 employees, and allows an employee’s computer to become his or her office, saving some other 2 billion in real estate costs. In implementing this new strategy, IT plans to become more important with less funds directed toward the maintenance of its systems. This is being achieved through the simplification and consolidation described above.
Integrated Supply Chain and Creating a Total Buyer/Distributor Experience:
o Automation, or creating touchless, self-configuring optimizing manufacturing designs, is the fastest way to go about achieving an on-demand supply chain, with the ultimate goal of giving the business the ability to adapt/change on its own.
o The on-demand supply chain has first been implemented at IBM’s new 300 mm Semiconductor plant in NY, where cycle time has improved 50%, process yields are up to 2 points higher, and direct spending on labor is 50% lower than in the previous facility. The change has been to wire the system such that customer orders are plugged into the system electronically by the customers themselves.
The manufacturing plant then automatically responds to the new ordering information requirements and re-optimizes the manufacturing strategy accordingly (and instantaneously). It does so based on new manufacturing algorithms run on Linux grids that self-configure and optimize production for the plant at any given time.
o The first distributor to take advantage of this seamless, touchless, on-demand manufacturing was Magirus, a key European IBM distributor. Through electric automation of their ordering system, the company has seen IBM manufacturing cycle time go down 70%, and orders filled with 99.5% accuracy. This is a huge competitive advantage.
ON DEMAND STRATEGY GOALS:
o Exceed financial expectations of the on-Demand strategy. IBM wants to be #1 in customer satisfaction (currently #3), wants to be #1 in employee satisfaction (currently at the industry average), as well as have the biggest market share in all of the product markets in which it participates.
o IBM wants to be a role model in moving toward the on-Demand strategy and wants to make all of its internal workings on-Demand for its customers.
o Want to enable businesses today to respond in real time to whatever the day brings—a change in supply or demand, a shift in the preferences of buyers, students or citizens, the vagaries of capital markets or the aftermath of a natural disaster.
SELLING THE STRATEGY TO OTHER COMPANIES:
Evaluate your business processes. Are they responsive enough? Are they integrated to the point where they can provide real-time information and enable you to respond rapidly to market changes?
Consider your infrastructure. Is it properly aligned to support your business goals? Is it being fully utilized? Are you getting the maximum return on the IT investment that you've made?
Look at your organization and culture. Is it primed for growth? Are there opportunities to unlock hidden value through collaboration or outsourcing?
HOW THE 5 PORTER FORCES WORK INTO IBM:
Direct Rivalry
• "Either you innovate or you're in commodity hell," Mr. Palmisano explained during a 90-minute interview at the company's headquarters in Armonk, N.Y. "If you do what everybody else does, you have a low-margin business. That's not where we want to be." - Samuel J. Palmisano, Chairman and CEO of IBM.
• As an information handling company, IBM must compete with other information handlers. Additionally, they have to compete with other technology creators. In the new strategy, they must compete with technology consulting firms. To do this IBM has utilized Command and Technology. IBM has:
o For the tenth consecutive year, received the most U.S. patents over any other company -- 3,288 U.S. patents in 2002, nearly double the number of the next closest company. Over the past decade, the U.S. Patent Office has issued IBM 22,357 patents - more than for ten of our top U.S. competitors combined.
o Achieved the world's largest portfolio of software patents. IBM received 7,500 software patents between 1993 and 2002. The number of software patents received by IBM in 2002 was 1,332.
o Been awarded the 2000 U.S. National Medal of Technology for the company's record of innovation in storage technology. This marks the seventh time that IBM and its scientists have received the nation's highest award for technological innovation, more than any other company or organization.
o IBM has employed a total of five Nobel Prize Laureates: two still working with the company.
o In October 2002, acquired PricewaterhouseCoopers Consulting. With some 30,000 employees and offices in 52 countries, PwC Consulting brought additional depth and leadership capabilities to IBM's services-led business.
o All of this is part of IMPLEMENTING THE ON-DEMAND STRATEGY, which should establish IBM as the first-mover in what is and will be a heavily competitive industry.
Barriers to Entry:
• First Mover Advantage: Automation leads to accelerating velocity of the business (doing more, faster), which means more market share and higher revenues until other companies adopt and implement the strategy.
• Companies which move first to become on demand will be first to respond with flexibility and speed to external threats, marketplace opportunities, and the needs of their customers, employees, and partners.
• Economies of Scale: More variability in the fixed cost structure because less technology maintenance costs in a more streamlined organization. Faster return on capital invested. Manipulation of huge client base as an IT provider to implement the new strategy.
• The On-Demand Strategy has been one huge attempt at differentiating IBM’s product from the competition, which it is convinced, should allow IBM to reap bigger profit margins. IBM is moving toward making itself far more a side-by-side partner with businesses, helping them improve their marketing, planning, procurement and customer service, rather than merely a supplier of hardware and software.
• This is the new way for securing and maintaining relationships with big corporate customers, as profit margins in supplying the hardware and software for these companies’ mainframes are dwindling.
• Bundling IT consulting with hardware and software supplies. Through integrated business solutions, IBM is taking advantage of its huge network of products/services.
Substitution:
• IBM has strong competitors and resulting direct substitute products in all three of its businesses: Software, Hardware, and IT services.
• The main rival in software is Microsoft, which IBM uses Linux and Open Source systems in its mainframes to compete with. Additionally, Oracle products such as Oracle Financial have made back office outsourcing less necessary for small to midrange businesses.
• In Hardware, the main rivals are Sun Microsystems, which specializes in Servers and Mainframe Computing, and Cisco, which specializes in complex networks and virtualization, or making a network of computers as powerful as one large supercomputer.
• In Services, IBM was unparalleled in its new combined on-Demand strategy until recently. Hewlett-Packard now speaks of its corporate offerings as its "adaptive enterprise initiative"; Microsoft says its offerings will make companies "agile" businesses; and Computer Associates simply copied the "on demand" phrase.
• IT services also rivals include companies like Accenture, and smaller more boutique-like firms that cater to smaller markets. IBM Global Services still is the behemoth here though, with $52 billion in new contracts in 2002. They signed a $5 billion dollar outsourcing deal with JP Morgan Chase, and today signed a 2 billion dollar deal with Sprint. The latter expects its customer service costs to plunge $550 million over the next three years. There is no substitute for that.
Buyer/Supplier Power:
• IBM’s diversified products and services and original position in the Information Technology field make it independent of any Supplier or Buyer Power. This is a particular advantage in the IT industry when Microsoft has such a strong hold on software operating systems and Intel such a strong hold on processing chips. Because personal computing is just one segment of IBM’s business, IBM has been able to focus on open source/standards computing, which has led it to use Linux operating systems in its servers and its own in-house semiconductor manufacturing plants.
• IBM is investing in the technology truth that corporate customers don't so much buy technology products, since the technology changes so fast, as invest in a relationship with a trusted supplier. This is the basis for IBM’s on-Demand strategy.
