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IBM

FOUNDED: 1910 VARIANT NAME: International Business Machines Corporation

Contact Information:

HEADQUARTERS: One New Orchard Rd. Armonk, NY 10504
PHONE: (914)499-1900
FAX: (914)765-6021
URL: http://www.ibm.com

OVERVIEW

IBM is the world's largest computer company, and throughout its history it has been a bulwark in the American economy. But in 2002, as IBM stock drop dramatically in June during a particularly horrendous economic time for computer hardware and software manufacturers, analysts were divided on whether "Big Blue" has seen its best days, or has merely run into a hurdle it will eventually clear. With clear indications that its sales expectations won't be met in 2002 and no real reason to trumpet a return to prosperity in 2003 or 2004, IBM management has prepared its shareholders and employees for widespread belt tightening, worker layoffs, and the peddling of its disk-drive operation to a rival company. In April 2002, IBM disclosed that it had endured its most dramatic earnings decline since 1993. Chief Financial Officer John Joyce projected a disappointing revenue prediction of $83 billion for 2002.

In addition to manufacturing hardware and software, IBM has diversified into the areas of Internet service and computer consulting. The company's struggles in 2002 were reminiscent of a similar crisis for IBM in the early 1990s that was met only after a major revamping, employee downsizing of 60,000 workers, and a reevaluation of the company's strong points and mission. Thousands—perhaps as many as 17,000 employees—will be axed by the end of 2002.

COMPANY FINANCES

From a financial standpoint, 2002 stands to be the worst year for IBM since 1993, and a crucial measure of the company's declining health was missing profit projections for the first quarter of 2002 by about __BODY__ billion. The company also was badly hurt by a Wall Street Journal article in 2002 that blasted the company for being too fast-and-creative with earnings reports. Revenues for 2002 reached $ 88.4 billion with about half that coming from IBM's services. IBM jettisoned its most troubled hard disk drive division, unloading it to Hitachi for $2 billion.

ANALYSTS' OPINIONS

Analyst David Robertson of Allied Investment Advisors in Maryland told a Business Week reporter that IBM's short-term problems have not dampened his belief that the company eventually will find a way back to its traditional high profits. Analysts are divided as to whether or not IBM should sell off its poorly performing PC division; other analysts criticize poorer returns for shareholders because of slumping earnings in the semiconductor area.

HISTORY

In 1910 Charles Ranlett Flint started the earliest ancestor of IBM under the name Calculating-Tabulating-Recording, or CTR, by merging three firms: International Time Recording Co., Computing Scale Co. of America, and Tabulating Machine Co. The last was founded by an engineer, Herman Hollerith, who had invented a tabulating machine—an apparatus that sorted and counted punch cards. This machine was first sold to the U.S. Census Bureau, and later to businesses that needed to organize large amounts of data economically. In 1915 Thomas Watson was hired as CTR's general manager and, by 1920, had built CTR into the leader in tabulating design.

CTR changed its name to International Business Machines—or IBM—in 1924. By focusing on large, custom systems for businesses, the company found that it had fewer competitors than those that made smaller, mass-produced systems. The company leased its products, instead of selling them, and reported profits throughout the 1920s. Initially, IBM held onto its market and customers by making punch cards that only worked with its own machines. By 1932, this policy had led to a U.S. government antitrust suit filed against IBM. At the time, IBM controlled 85 percent of the U.S. market for tabulating, keypunch, and accounting equipment.

The New Deal programs of the Depression years expanded government bureaucracy, which led to a need for large calculators; IBM supplied this equipment. World War II bolstered IBM's sales as well, and increased public- and private-sector demand for tabulators helping to triple IBM's sales.

In 1956 IBM took the lead in the computer business by introducing its 705 general-purpose business computer. Institutional customers appreciated the way IBM's computers utilized the equipment that they had already leased or bought. The recognizable blue-suited sales force was instrumental in placing IBM's computers into businesses. In 1961 IBM released the Stretch computer system, which used a magnetic memory core and transistors instead of the more primitive vacuum tube technology. With the capability of performing up to three quarters of a million additions per second, the Stretch was the most powerful computer on the market.

In 1970 IBM introduced the first "floppy" (5 1/4 inch) disks, which were made by forming thin wafers of silicon and then cutting them into chips, thus setting the stage for much smaller systems. IBM subsequently released a new system, the 370 family. It was faster and could do more simultaneous tasks than prior systems. In 1973, IBM doubled the storage space on floppy disks with the 3340 disk storage unit, which functioned like main memory but at a much lower cost.

In 1975 IBM attempted to release its first personal computer, the 5100, weighing 50 pounds and costing about $5,000. Sales were disappointing. Realizing that demand for personal computers was minimal at the time, IBM focused on building mainframes. It was not until 1980 that IBM tried again to crack the personal computer market. By then, many other companies were already making the machines, and IBM was not able to gain immediate control of the market. That same year, it rolled out the IBM 3687 Holographic Scanner, which was used with the IBM 3683 supermarket terminal to read bar codes. Throughout the 1990s, IBM continued to grow by producing many new systems and personal computers, and by providing various consulting services. It expanded its overseas operations and, in the late 1990s, continued to dominate the mainframe and computer-related service markets.

In 2001 and 2002, the faltering of IBM has been major news on the business pages of the nation's newspaper, although other companies such as Apple and Hewlett Packard also have been seeing plummeting stroke prices by June of 2002.

STRATEGY

In a 2002 New York Times interview, Louis V. Gerstner said that three specific strategies were "the fundamental underpinnings" for IBM in recent years. IBM built up its computer management services "that sold bundles of hardware, software, consulting and maintenance to manage business processes like manufacturing, purchasing or marketing." As a services unit, IBM Global Services began to , "look at technology through the eyes of the customer," he told the Times, not merely selling IBM products but working closely with the customer even if it meant sharing profits by using the products of Sun Microsystems, Microsoft and Oracle. "The customer would not accept a services company if all it did was flog I.B.M. products," he told the New York Times. Closely linked to the number one strategy, IBM decided its software would need to be made compatible with major competitive hardware, and vise versa with IBM hardware and competitor software. Third, and this strategy was adopted late but fully in 1995, was to gain mastery of the Internet and use its powerful computers, talented personnel and the best minds in technology to become competitive with what Gerstner termed the "ënetworked world' model of computing." Said Gerstner, "We were able to articulate a role for I.B.M. in the networked world that spoke of the value of all we did."

CEO Gerstner explained IBM's developing view of itself as a provider of solutions to the customer's needs, "Our ability to integrate is a unique advantage of this company. So we said: All right, now let's go build a strategy around integrating the technology into solutions for customers. That was the fundamental decision we made."

Aside from the company's strategy as a vendor, Gerstner once said in an annual company statement that IBM is "committed to maximizing shareholder value and to making productive use of our cash." IBM has made dozens of strategic acquisitions of companies, including Lotus Development Corp., the maker of the popular Lotus Notes messaging software.

INFLUENCES

Unquestionably, IBM is looking for leadership in 2002 to newly named CEO Samuel Palmisano. In an apparent gesture intended to motivate, Palmisano sent a message to all IBM employees to warn them that some cutbacks and layoffs would be inevitable as the company fought back in mid-2002 to stop losses and return to at least modest profitability by 2004.

CURRENT TRENDS

To restate an old cliché, much at IBM is broken, but the big question is whether management can do anything to fix the problem. Nearly the first thing new IBM CEO Samuel J. Palmisano did after taking his position in 2002 was sell off the troubled hard-disk drive business. The second was to save costs by announcing some immediate layoffs with thousands more to follow by the end of 2002. Analysts wondered how Palmisano would try to solve two additional pressing problems, plunging sales of personal computers and semiconductor chips, a part of the microelectronics group at IBM. Early indications have been that Palmisano believes both personal computers and chips are crucial to IBM's services component and overall company strategy for long-term success. The company has spent well over $5 billion on chip development since October 2000.

PRODUCTS

IBM makes leading computer hardware and software, and provides consulting services through its IBM Global Services unit. Hardware products include mainframes, servers, midrange, and desktop machines. Recent introductions are impressive though IBM emphasis seems to be more on marketing existing products in 2000s, note analysts.

Nonetheless, IBM has added clout in 2002 to its Web services group with an upgraded version of its Unix-based operating system called AIX version. The upgrade adds speed and versatility. The company also launched an upgrade of WebSphere Studio Application Developer for Linux and WebSphere Studio Site Developer, a business Web site building and maintenance package with wireless, portal and voice applications.

CORPORATE CITIZENSHIP

IBM is the largest corporate contributor in the world and is well known for matching the charitable gifts of its employees. The company has been extremely involved in philanthropic attempts to get computers into classrooms through its Reinventing Education program. Essentially, IBM works with school districts and worldwide governments to help raise student achievement and computer literacy. In addition, IBM employees long have been devoted to giving their time to school districts and to serve students through the IBM Mentor-Place.

In 2002, New York Governor George Pataki gave two IBM operations the state's Governor's Award for environmental awareness. Since 1971, IBM has embraced a global Environmental management system committed to protecting the environment worldwide. In 2000 IBM started its popular recycling program to charge a small fee ($29.95) to take used personal computers and find a match with charitable organizations that can use them.

GLOBAL PRESENCE

IBM has a presence in more than 160 countries. It works with more than 1,000 businesses in central Europe and Russia alone, and is the leading vendor of personal computers in China. IBM's Global Campus Solution serves universities in the United States, Australia, Latin America, and Europe. Even in its research, IBM expands globally, with labs in Beijing working on Java, a programming language for use on the Internet. However, IBM rivals have done much better in China because Chinese businesses have shied away from multi-million dollar data management systems in favor of less expensive alternatives. IBM has positioned itself to serve not only international e-businesses, but also whole countries, according to Dr Michael Loh, Asia-Pacific leader of IBM Global Services Institute for Business Value.

EMPLOYMENT

IBM aims to be an employee-friendly institution. Working Mother magazine in 2001 found IBM to be in the top ten among all employers in providing a welcoming climate for females with children. IBM received Working Mother's number one ranking for childcare services in 2001. The company and its subsidiaries offer defined benefit and contribution plans to employees and a supplemental retirement plan to certain executives. Long considered a company with major security for employees, that image was shaken somewhat in 2002 as IBM began laying off the greatest number of employees it had turned loose since the early 1990s.

SOURCES OF INFORMATION

Bibliography

Cook, William J. "Interview with IBM CEO Louis Gerstner." U.S. News Online, 19 December 1997.

Foremski, Tom. "Palmisano Faces Tough Questions on IBM Plans." Financial Times e, 15 May 2002.

Hamid, Hamisah. "IBM Sees Online Deals between Markets." Business Times, 15 May 2002.

"IBM, Schiphol to Market Iris-Scan Security Check to Airports, Airlines." AFX European Focus, 25 April 2002.

"IBM." Hoover's Online, June 2002. Available at http://www.hoovers.com.

IBM Home Page, June 2002. Available at http://www.ibm.com.

Horvitz, Paul. " IBM's Gerstner Rides Services Profit." Bloomberg News, 16 October 2001.

Lohr, Steve. " He Loves to Win. At I.B.M., He Did.." The New York Times, 10 March 2002.

Martin, Jonathan. International Directory of Company Histories. Vol. 3. Detroit, MI: St. James Press, 1994.

Morgan Timothy Prickett." Palmisano Dodges IBM Layoffs, Revenue Growth Questions." ComputerWire, 16 May 2002.

"100 Best Companies for Working Mothers." Working Woman Magazine, June 2002. Available at http://www.workingwoman.com.

Tsao, Amy. "Can IBM Shake Its Big Blues." Business Week Online, 13 June 2002.

For an annual report:

on the Internet at: http://www.ibm.com or telephone: (800)426-3333

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. IBM's primary SICs are:

3571 Electronic Computers

3572 Computer Storage

3575 Computer Terminals

3577 Computer Peripheral Equipment

7371 Computer Programming Services

7372 Prepackaged Software

7373 Computer Integrated Systems Design

7374 Data Processing and Preparation

7375 Information Retrieval Services

7377 Computer Rental and Leasing

7378 Computer Maintenance and Repair

7379 Computer Related Systems

Also investigate companies by their North American Industry Classification System codes, also known as NAICS codes. IBM's primary NAICS codes are:

334111 Electronic Computer Manufacturing

334119 Other Computer Peripheral Equipment Manufacturing

454110 Electronic Shopping and Mail-Order Houses

511210 Software Publishers