International Business Machines Corporation

914-499-1900

1 New Orchard Road
Armonk, NY 10504

www.ibm.com  

Sales

$89 billion

Business Description 

Over the past decade, IBM has been a leader in the IT market's shift of focus from selling hardware, software, and services, to the creation of solutions to clients' business problems. During the early years of the Internet's entry into mainstream commerce, communications and business operations in the mid-to late-1990s, value was created first through providing widespread access and then through the integration of business processes, such as supply chain, customer relationships and human resources. Today, IBM is once again leading the industry toward the more fundamental, industry-specific transformations of on demand business.

In its relationships with its clients, IBM has found that a majority of enterprises are concerned with four main issues:

Demand for faster innovation

Reducing expenses

Integration across the organization's "value chain" (representing every transaction or interaction within an enterprise, with other enterprises, and with individuals)

Demand for predictable return on investment

        By redesigning their business processes and organizational structure, supported by and enabled by new systems operating environments, these clients are seeking to become "On Demand" businesses.

        IBM defines an on demand business as an enterprise whose business processes are:

Responsive to any client demand, market opportunity, or external threat;

Integrated end-to-end across the company; and

Integrated across industry value nets, the interconnected chains of partners, suppliers and clients.

        An essential aspect of an On Demand Operating Environment is that its infrastructure be based on industry-wide standards (commonly referred to as "open standards"). In IBM's view, an investment in such an infrastructure provides the greatest returns, rather than relying on proprietary control by a single company or affiliation of companies. One positive development in this regard is the emergence of "open source" operating systems and programming languages that benefit from further development by the business and information technology (IT) communities, as in the case of the Linux operating system or the Java programming language.

        However, to realize the full benefits of an on demand environment, solutions with the highest returns also require the transformation and integration of business processes within and among institutions.

        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.

Over the past decade, IBM has exited or greatly de-emphasized its involvement in consumer markets and divested itself of other non-core businesses to concentrate on the enterprise market. In IBM's view, the enterprise market represents approximately two-thirds of the IT industry's revenue, as well as twice the growth and three times the profits compared to consumer areas of the industry. As a result, IBM has made acquisitions and invested in emerging business opportunities important to its enterprise clients. Many of these investments have since grown to a point where their revenue and opportunity now can be considered part of IBM's mainline businesses. 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 around which the company's sales and distribution activities, as well as an increasing number of its services and products businesses are organized:

The IT Industry and IBM's Strategy

        IBM operates in both the business services and IT industries, which are comprised of the following three categories:

Business Value
 

 

Infrastructure Value

Component Value

        The primary rationale for IBM's investments in the Component Value category is to provide a competitive advantage in the Infrastructure Value category, which in turn is considered a competitive advantage in the Business Value category.

        IBM sees a shift in revenue and profit growth up from Component Value to Infrastructure Value and into the Business Value category, where revenue and profit potential are thought to be greatest in the decade ahead.

Business Value:

Overview: Services and software to improve business performance for its Enterprise Computing clients. IBM helps its Enterprise Computing clients transform their business processes and gain competitive advantage by applying its skills and experience to processes specific to the client's industry or to business challenges across industries and processes. The company enters into long-term relationships and creates solutions for clients, on its own or in partnership with other companies, drawing upon its broad product and service offerings, and relying on its BCS organization, the capabilities of IBM Research, its experience in chip design and application, and the company's own viewpoint of developing trends in business and technology.

Strategy: Drive on demand business innovation

Capabilities:

Business Consulting Services: Delivery of value to clients through consulting services for application innovation and systems integration, client relationship management, financial management, human capital, business strategy and change, supply chain management, and the transformation of business processes and operations. (Global Services)

Customer financing: Lease and loan financing to clients and internal clients for terms generally between two and five years. (Global Financing)

Engineering & Technology Services (E&TS): System and component design services, strategic outsourcing of clients' design teams, and technology and manufacturing consulting services. (Technology Group)

On Demand Innovation Services (ODIS): IBM Research scientists and experts work with BCS consultants to analyze clients' business challenges and provide solutions that address these challenges. ODIS offers a number of cross-industry micropractices with deep expertise in business optimization, security, mobile enablement, information mining and more. (Global Services)

Software and services to meet industry-specific needs: Solutions and applications built on an on demand, standards-based infrastructure to transform a process that is unique to specific industries. (All IBM Groups)

Infrastructure Value:

        Overview: Hardware, software and services integrated into a computing environment. Infrastructure Value concerns systems, such as high-volume server computers; middleware software that can interconnect disparate operating systems and applications with data; storage networks and devices. It also refers to such services as infrastructure management—whether on the client's premises or managed remotely at IBM's own facilities—and consulting about how to improve and strengthen the infrastructure and realize greater return on investment in it. Central to IBM's approach for building value in the infrastructure category is its support of open standards and its active promotion of Linux, the open source operating system, which helps IBM's clients control costs and allows them to benefit from the latest developments created by the Linux development community around the world. To support Linux development and deployment, IBM has enabled its servers and storage products to operate with Linux, IBM's leading middleware products are designed to work in a Linux environment, and Linux is a preferred choice for many of the company's services and consulting engagements.

Strategy: Deliver open and integrated offerings; expand partnerships; continue to exit select markets, such as application software.

Capabilities:

Application management services: Application development, management, maintenance and support services for packaged software, as well as custom and legacy applications. (Global Services)

Commercial financing: Short-term inventory and accounts receivable financing to dealers and remarketers of IT products. (Global Financing)

DB2 information management software: Advanced database and content management software solutions that enable clients to leverage information on demand. (Software)

e-business Hosting Services: Solutions for the management of clients' Web-based infrastructure and business applications, as well as a growing portfolio of industry-specific independent software vendor (ISV) solutions that are delivered as a service. (Global Services)

Integrated Technology Services (ITS): Design, implementation, and maintenance of clients' technology infrastructures. (Global Services)

Lotus software: Collaboration and messaging software that allows a company's employees, clients, vendors and partners to engage in real-time and asynchronous communication and knowledge management. (Software)

Personal computers: Desktop and notebook computers featuring ThinkVantage Technologies that provide enterprises and end-users with increased productivity and cost-effectiveness. (Personal Systems Group)

Printing systems: Production print solutions, on demand print-related solutions, enterprise workgroup print technologies, and print management software and services. (Personal Systems Group)

Rational software: Integrated tools designed to improve an organization's software development processes and capabilities. (Software)

Remarketing: The sale and lease of used equipment (primarily sourced from the conclusion of lease transactions) to new or existing clients. (Global Financing)

Retail Store Solutions: Point-of-sale retail checkout equipment, software, and solutions. (Personal Systems Group)

Servers: IBM eServer systems using IBM operating systems (zSeries and iSeries), as well as AIX, the IBM UNIX operating system (pSeries) and the Microsoft Windows operating system (xSeries). All servers can also run Linux, a key open-source operating system. (Systems Group and Software)

Storage: Data storage products, including disk, tape and storage area networks. IBM continues to be the leading vendor in storage services. (Systems Group)

Strategic Outsourcing Services: Competitive cost advantages through the outsourcing of processes and operations. (Global Services)

Tivoli software: Software for infrastructure management, including security, change, configuration, job scheduling, storage capability, performance and availability. (Software)

WebSphere software: Management of a wide variety of business processes using open standards to interconnect applications, data, and operating systems. (Software)

4

Component Value:

Overview: Component Value describes advanced semiconductor development and manufacturing for IBM's server and storage offerings, and services, technology and licenses provided to OEMs that create and market products requiring advanced chips and the other core technology elements.

Strategy: Leverage components for Infrastructure Value; continue to participate in select markets and to pursue outsourcing for manufacturing of select products.

Capabilities:

Application Specific Integrated Circuits: Manufacturing of customized semiconductor products for clients. (Technology Group)

Advanced Foundry: Full suite of semiconductor manufacturing and integrated supply chain services using either a client's or IBM's design. (Technology Group)

Standard products and custom microprocessors: Semiconductors designed and manufactured primarily based upon IBM's PowerPC architecture. (Technology Group)

IBM's major operations comprise a Global Services segment; three hardware product segments—Systems Group, Personal Systems Group and Technology Group; a Software segment.

Global Services is an important part of the company's strategy of providing insight and solutions to clients. While solutions often include industry-leading IBM software and hardware, other suppliers' products are also used if a specific client solution requires it. Global Services outsourcing contracts as well as BCS contracts with the U.S. Federal Government and its agencies are typically seven to ten years in duration. Other contracts range in periods generally up to one year, including consulting contracts and ITS.

The company's new Business Transformation Outsourcing (BTO) capabilities combine the insight of BCS with the company's process outsourcing capabilities to assume responsibility for the operations and management of a client's business processes in areas including human resources, procurement, customer relations management, finance and administration, among others. The company will only enter into BTO agreements with clients when it believes that IBM can leverage its business knowledge and technology to drive client productivity and cost improvements. These generally are large-scale, multi-year contracts ranging up to ten years in length that include the operation transformation of the client's business processes. BTO engagements may include support and involvement of various business units that have capabilities such as BCS, Application Management Services, e-Business Hosting Services, middleware and hardware.

Systems Group provides business solutions to clients. Approximately half of the Systems Group's sales transactions are through business partners and approximately 46 percent are direct to clients, slightly more than half of which are through the Web at ibm.com. While appropriately not reported as external revenue, hardware is also deployed to support Global Services solutions.

Technology Group provides leading semiconductor technology and products, packaging solutions and engineering technology services to OEM clients (approximately 78 percent) and, although appropriately not reported as external revenue, to the Systems Group (approximately 21 percent).

Using a "one-team" approach, Systems Group works hand-in-hand with the Technology Group on product planning and strategy given the high content level of Technology Group components inside Systems Group products. In recognition of the increasing degree of collaboration between the two segments and as discussed on page 118 of the IBM 2003 Annual Report which is hereby incorporated by reference, the company combined the Systems Group and the Technology Group in the first quarter of 2004.

Personal Systems Group includes the company's lines of personal computers, printers and point-of-sale terminals. These offerings are designed to assist clients to improve productivity and to reduce clients' total cost of ownership.

Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes, and applications across the clients' enterprise through the use of open standards. Middleware is designed to be the underlying support for applications provided by business partner independent software vendors (ISVs) who build industry- or process-specific applications according to open industry standards. Operating systems are the engines that run computers. Approximately 70 percent of Software volumes are directly with the end-user clients and about 20 percent are through Business Partners. While appropriately not reported as external revenue, the remainder is deployed internally to support Global Services solutions.

Approximately 40 percent of external Software revenue relates to one-time charge (OTC) arrangements whereby the client pays one up-front payment for a lifetime license. Typically, arrangements for the sale of OTC software include one year of maintenance. The client can also purchase ongoing maintenance after the first year, which includes product upgrades and technical support. The remaining software is sold on a monthly license charge arrangement.

Enterprise Investments develops and provides industry-specific IT solutions supporting the Hardware, Software and Global Services segments of the company. Primary product lines include product life cycle management software and document processing technologies. Product life cycle management software primarily serves the Industrial sector and helps clients manage the development and manufacturing of their products. Document processor products service the Financial Services sector and include products that enable electronic banking.

IBM Worldwide Organizations

The following three company-wide organizations play key roles in IBM's delivery of value to its clients:
• Sales and Distribution Organization, and related sales channels
• Research, Development, and Intellectual Property
• Supply Chain
 

Ticker

IBM

SIC Code

3570 - Computer & Office Equipment

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