Value chain analysis as a contemporary management technique

IBM is a globally integrated technology and consulting firm. It specializes in computer hardware, software, and Information Technology. It offers infrastructure, hosting and consulting services for the enterprise market. IBM's clients include many different kinds of enterprises, from sole proprietorships to the world's largest organizations, governments and companies representing every major industry and endeavor.

The majority of the company's enterprise business, which excludes the company's original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors: Financial Services: Banking, Financial Markets, Insurance; Public: Education, Government, Healthcare, Life Sciences; Industrial: Aerospace, Automotive, Defense, Chemical and Petroleum, Electronics; Distribution: Consumer Products, Retail, Travel, Transportation; Communications: Telecommunications, Media and Entertainment, Energy and Utilities; Small and Medium Business: Mainly companies with less than 1,000 employees.

IBM's business model

The company's business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and information technology (IT) solutions; and, providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients. The company's strategy is to focus on the high-growth, high-value segments of the IT industry.

The company's global capabilities include services, software, hardware, fundamental research and financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients.

The business model is flexible, and allows for periodic change and rebalancing. The company has exited commoditizing businesses like personal computers and hard disk drives, and strengthened its position through strategic investments and acquisitions in emerging higher value segments like service oriented architecture (SOA) and Information on Demand. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world's fastest growing markets. As a result, the company is a higher performing enterprise today than it was several years ago.

The business model, supported by the company's long-term financial model, enables the company to deliver consistently strong earnings, cash flows and returns on invested capital in changing economic environments.

Recent Developments

IBM also acquired global Big 4 Auditing Firm PricewaterhouseCoopers in 2002, giving it ownership of extensive business support consulting operations. Also, it acquired SPSS in 2009, giving it valuable product offerings in the data analytics industry. In 2005 the company sold its personal computer business to Lenovo, reducing revenue and expenses in its Systems and Technology division.

About Value Chain Analysis

Value Chain Analysis attempts to identify the most efficient aspects of a company's business operations by measuring each of the company's activities individually. It analyzes a business through the organization's generic value-added activities to understand how a firm develops a competitive advantage and creates shareholder value.

The value chain categorizes these activities into both primary activities and support activities. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement.

Analysis consists of identifying the costs and value drivers for each value activity. The "margin" or "added value" is the difference between the total value and the cost of performing the value activities.

The Need for Value Chain Analysis for IBM

IBM is undergoing major Supply-Chain Management challenges. Because IBM is a truly globally integrated company with an array of hi-tech products, IBM has the world's most complex supply chain system. With over 28,000 suppliers, IBM's supply chains are becoming more cumbersome and more expensive to operate. IBM has undergone a major shift in the past two decades from a hardware company to a software, information technology, and services company. Thus, there is a risk that some of IBM's traditional business activities are no longer the most optimal use of the company's resources.

IBM Business Activities Data

IBM's Services operations have accounted for an increasing segment of IBM's revenues. However, that does not necessarily mean that Services operations are the most profitable operations, or that they reflect IBM's competitive advantage most accurately.

IBM has five official business activities divisions: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing.

Global Technology Services:

Global Technology Services primarily provides IT infrastructure services and business process services, delivering business value through the company's global scale, standardization and automation.

Strategic Outsourcing Services - Comprehensive IT outsourcing services dedicated to transforming clients' existing infrastructures to ensure better quality, flexibility, risk management and financial value.

Global Process Services - A range of offerings from standardized processing platforms and business process outsourcing through transformational offerings that deliver improved business results to clients through the strategic change and/or operation of the client's business processes, applications and infrastructure (previously known as Business Transformation Outsourcing).

Integrated Technology Services - Project-based portfolio of services that enable clients to optimize their IT environments by driving efficiency, flexibility and productivity, while reducing costs.

Maintenance - A complete line of support services from product maintenance through solution support to maintain and improve the availability of clients' IT infrastructures.

GTS Services Delivery - Responsible for the worldwide delivery of IBM's technology- and process-based services. In support of technology-based services, GTS Services Delivery manages the world's largest privately owned IT infrastructure with employees in over 40 countries, supporting approximately 430 data centers.

2010 Revenue: $38,201 (in millions)

2010 Gross Margin: 34.7%

GTS gross profit margin declined 0.3 points to 34.7% in 2010. Segment pre-tax profit increased to $5,568 million with a pre-tax margin of 14.1%. On a normalized basis, segment pre-tax income in 2010 increased 4.8% and margin expanded 0.4 points to 14.8% reflecting the benefits from workforce rebalancing and an improved revenue growth trend.

Global Business Services:

Global Business Services primarily provides professional services and application management services, delivering business value and innovation to clients through solutions which leverage industry and business-process expertise while integrating the industry-leading portfolio of IBM and strategic partners, to define the upper end of client-valued services.

Consulting and Systems Integration - Delivery of value to clients through consulting services for Strategy and Transformation; Application Innovation Services; Enterprise Applications (SAP and Oracle) and Business Analytics and Optimization.

Application Management Services - Application development, management, maintenance and support services for packaged software, as well as custom and legacy applications.

2010 Revenue: $18,223 (in millions)

2010 Gross Margin: 28.3%

GBS gross profit increased 3.4% in 2010, in line with revenue growth. Gross profit margin of 28.3% was flat year-to-year. Segment pre-tax profit improved 0.5% to $2,569 million with a pre-tax margin decline of 0.3 points year over year. On a normalized basis, segment pre-tax income in 2010 increased 2.5% with a pre-tax margin of 14.2%, flat compared to 2009. Throughout 2010, GBS improved utilization and delivery excellence, while continuing to invest in globally integrated capa-bilities and skills to support growth initiatives.

Software:

Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes, and applications across a standard software platform. IBM middleware is designed on open standards, making it easier to integrate disparate business applications, developed by different methods and implemented at different times.

Approximately two-thirds of external software segment revenue is annuity-based, coming from recurring license charges and ongoing subscription and support. The remaining one-thrid relates to one-time charge arrangements in which clients pay one, up-front payment for a perpetual license. Typically, the sale of OTC software includes one year of subscription and support. Clients can also purchase ongoing subscription and support after the first year, which includes product upgrades and technical support.

Websphere Software - Delivers capabilities that enable clients to integrate and manage business processes across their organiza-tions with the flexibility and agility they need to respond to changing conditions quickly.

Information Management Software - Enables clients to integrate, manage and use their information to gain business value and improve their outcomes.

Tivoli Software - Helps clients manage their technology and busi-ness assets by providing visibility, control and automation across their organizations.

Lotus Software - Enables businesses to connect people and processes for more effective communication and increased pro-ductivity through collaboration, messaging and social networking software.

Rational Software - Supports software development for both IT and embedded system solutions with a suite of Application Lifecycle Management products.

Business Analytics - Enables clients to better analyze their data and predict outcomes in order to make better business decisions.

Operating Systems - Software that manages the fundamental processes that make computers run.

2010 Revenue: $22,485 (in millions)

2010 Gross Margin: 86.9%

Software gross profit of $19,537 million in 2010 increased 6.2% versus 2009, driven primarily by the year-to-year growth in software revenue. The improvement in the gross profit margin was primarily driven by the divestiture of the lower gross margin PLM revenue.

Systems and Technology:

Systems and technology provides client with business solutions requiring advanced computing power and storage capabilities. Approximately half of Systems and Technology's server and storage sales transactions are through the company's business partners: with the balance direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology, products and packaging solutions to clients and for IBM's own advanced technology needs.

Systems - A range of general purpose and integrated systems designed and optimized for specific business, public, and scientific computing needs.

Storage -- Data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information.

Retail Store Solutions -- Point-of-sale retail systems (network connected cash registers) as well as solutions which connect them to other store systems.

Microelectronics - Semiconductor design and manufacturing pri-marily for use in IBM systems and storage products as well as delivering semiconductors and related services to external clients.

2010 Revenue: $17,973 (in millions)

2010 Gross Margin: 38.5%

The increase in external gross profit for 2010 versus 2009 was due to improved operating leverage driven by higher revenue.

Global Financing:

Global Financing facilitates clients' acquisition of IBM systems, software and services. Global Financing invests in financing assets, leverages with debt and manages the associated risks with the objective of generating consistently strong returns on equity. The primary focus on the company's offerings and clients mitigates many of the risks normally associated with a financing company. Global Financing has the benefit of both a deep knowledge of its client base and a clear insight into the products and services that are being financed. This combination allows Global Financing to effectively manage two of the major risks (credit and residual value) that are normally associated with financing.

Client Financing - Lease and loan financing to end users and internal clients for terms generally between two and seven years. Internal financing is predominantly in support of Global Services' long-term client service contracts.

Commercial Financing. Short-term inventory and accounts receiv-able financing to dealers and remarketers of IT products.

Remanufacturing and Remarketing. As equipment is returned at the conclusion of a lease transaction, these assets are refurbished and sold or leased to new or existing clients both externally and internally. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold or leased internally to Systems and Technology and Global Services. Systems and Technology may also sell the equipment that it purchases from Global Financing to external clients.

2010 Revenue: $2,238 (in millions)

2010 Gross Margin: 51.3%

Global Financing gross profit increased 3.4% compared to 2009 primarily due to higher used equipment sales gross profit. Gross margin increased 2.0 points primarily due to a higher financing margin.

IBM Value Chain Analysis

IBM's 2010 financial results reflect the company's continuing shift to higher value areas such as software and services, while divesting commoditizing businesses such as mobile computers and printers.

Within software and services, the Software division is the most profitable (by %) by far, with $22,485 (in millions) in revenue and a gross profit margin of 86.9%. In 2010, Key Branded Middleware revenue increased 10.8% (11% adjusted for currency) and gained market share again in 2010 as the Software business extended its lead in the middle-ware market. Software revenue continued to mix to the faster growing branded middleware which accounted for 62% of total software revenue in 2010, an increase of 3 points from 2009..