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Impact of Credit Crunch on Ibm

In: Business and Management

Submitted By bhars
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TABLE OF CONTENTS

Introduction 2 Global Impacts of the Credit Crunch 3 IBM – International Business Machines 4 Table 1: IBM’s Financial Performance History 2000-2009. Source: IBM Annual Report 2009 5 Table 2: Earnings per share 2006 to 2010 projection. Source: IBM Annual Report 2009. 6
How the Credit Crunch Impacted IBM’s Operations 7 Global Integration 7 Changing Business Scope 7 Revenue 8 Human Resource Management Impacts 8 Price Instability 8 Exchange Rate Fluctuation 8 Interest Rate Fluctuations 8 Debt 9 Notable Impacts 9
IBM’s Operational Strategy 10 Strategic Response 10 HRM Strategy 10 Value Chain Strategy – Developing a Business of Values 11 Table 3: IBM Value Chain. Source – ibm.com/services 12 International Strategy 13 Institutional Strategy 13
Recommendations for Future Growth 14 Delivering Value to Customers 14 Human Resource Capital 15 Research and Development 16
References 17
Bibliography 18

Introduction

The ‘Credit Crunch’ emerged in 2007 with the first effects being felt by the U.S. Mortgage industry. The term ‘credit crunch’ came was used to describe the collapse of the subprime mortgage industry that resulted in a freeze in lending by financial institutions. With non-payment of loans, huge debt and no capital gains, financial institutions began to go under. Investment banks, financial services and real estate market felt immediate impacts. Trillions of U.S. dollars were lost, huge government bailouts were necessary and a global slowdown of consumer spending and economic activity. In fact, by early 2008, the effects snowballed to global markets.

Prior to 2007 and this global economic crisis, the lending habits of the Mortgage industry had opened the way for this eventual collapse. Mortgages were granted to low income earners at low interest rates. These were called subprime loans – loans granted to borrowers who did not meet acceptable lending criteria. Failure to repay and refinance these loans was the outcome that left lending institutions in billions of dollars in debt.

One of the most significant outcomes of the financial crisis would have been the collapse of Lehman Brothers. In just two weeks, Lehman lost ten trillion dollars in market share – crippling the global stock market. By this time the U.S. government stepped in with a $700 billion bailout and stimulus plan. $250 billion was used to bailout the banking sectors and went to large banks, AIG was loaned $85 billion and mortgage companies Fannie Mae and Freddie Mac nationalized and received $200 billion in bailout (Financial Times).

While these large organisations suffered tremendous losses, smaller enterprises were having negative impacts from the credit crunch. With a volatile stock market and a slow economy, customers spending declined. Those unable to procure loans for capital spend or payments of debt became victims of acquisitions or were forced to declare bankruptcy. This period signaled an era of unsurpassed business closure and economic slowdown.

Global Impacts of the Credit Crunch

The credit crunch had almost immediate effects to organisations globally. Many experienced huge losses, bankruptcy and the very core effect of any credit crunch – the unavailability of access to credit from lending institutions. The world witnessed the collapse Northern Rock in the UK. This activity put a hold on any major capital ventures or investments for most organisations. This also meant that companies with large cash flows, who still maintained buying power, were therefore able to acquire companies that were in trouble and going under.

Some notable impacts globally were:
Liquidity – Financial Institutions began tightening lending standards. This made it more difficult for businesses to borrow the money needed to fund daily operations or in some cases, much needed capital expenditure.
Employment – With consumers cutting back on spending, many businesses cut back on payrolls, causing rise in unemployment or flexible working hours.
Injection – Huge government bailouts were necessary to salvage economies. Particularly with banks and mortgage companies. The U.S. government injected billions of dollars in large lending institutions like AIG, China’s government invested in an estimated $500 billion Stimulus Plan, Iceland, Latvia & Hungary took large billion dollar loans from the IMF in order to save their economies.
Rising inflation rates
Consumer spending declined
Foreclosures, unpaid mortgages
Bankruptcy
Business closure, mergers and acquisitions
Oil Prices fell under $40 per barrel

IBM – International Business Machines

Changes in global trends have swayed IBM’s Technology Analysts into changing its strategic direction. With the vast changes in the world’s economy and IBM’s Operations spanning to 170 countries worldwide, impacts were heavily felt. This study attempts to examine those and analyse the company’s response.

In 2008, amidst the credit crunch, IBM’s Financial Statement for that Fiscal Year showed an increase in revenue from 2007. This was a clear result of external revenue’s increase of 2.3% due to growth in Financing Revenue – up 7.9% to 19.39 billion dollars (IBM Annual Report, 2008/2009). Internal revenue grew by 27.7%.

Overall Revenue for 2009 amounted to $95.8bn down 5% from the previous year, however; the company’s cash flow was $15.1bn, $800m more than 2008. The steady cash flow over a period of three years amidst a global financial crisis afforded IBM a ‘high-value market position’ (IBM Annual Report 2009).

During this period of market and financial turbulence, IBM’s strategic Internationalisation, Capital Expenditure, investment in Research and Development, Acquisitions and Diversification has resulted in strong Earnings per Share, increased cash flow and continued revenue growth.

Table 1: IBM’s Financial Performance History 2000-2009. Source: IBM Annual Report 2009

Table 2: Earnings per share 2006 to 2010 projection. Source: IBM Annual Report 2009.

How the Credit Crunch Impacted IBM’s Operations

Global Integration

IBM has made significant investments in expanding to global markets. This has brought a positive impact on the company’s revenue and growth. IBM has invested in operations in the BRIC (Brazil, Russia, India and China) markets. This was a profitable venture as some of these countries were not hard hit by the negative credit crunch effects. The BRIC markets jointly grew 17.6% in 2008 when compared to the previous year – India’s revenue being 25.8% of the total. The company increased its Research and Development in order to facilitate these rapidly growing markets. IBM’s Trinidad and Tobago and Caribbean operations showed continued growth and limited effects from the credit crunch.

Changing Business Scope

IBM has always been renowned for its PC Business. The PC was seen as IBM’s cash cow for many years. Leading up to the credit crunch, the world of technology became increasingly driven by competition. Media other than computers, such as phones, cameras and cars were now digitalized. There were the Generation model changes available to consumers at fast rates of turnover. Technology companies were forced to innovate, not just to keep up with trends, but to present affordable and workable solutions for companies and consumers who were now experiencing the impacts of the credit crunch as well as limited cash flow and access to capital expenditure. The future for IBM had to be a diversification strategy with moving into higher-value software and services in order to survive changing economic climates globally.

Revenue

The company’s revenue in 2008 amidst the credit crunch went up by 5% from its $91.3 billion net profit in 2007 to $103.6 billion in 2008 (Annual Report 2008). This was their highest profit in over a decade. The company maintained strong performance while globally, large, medium and small corporations were experiencing great loss and threat of closure or bankruptcy.

Human Resource Management Impacts

Over 4000 jobs were lost at IBM’s North American Operations in 2008. With North America being directly hit by effects of the credit crunch, the company sought ways to deal with the lessening of revenue. Entire offices were closed and replaced by virtual offices with the use of technology to remotely access the company’s systems. This was seen as a cost effective measure to hold on to capital.

Price Instability

Exchange Rate Fluctuation

The fluctuation of exchange rates in operating nations to the U.S. dollar has affected the company’s results. This resulted in some denomination of company assets and liabilities. This poses a liquidity risk and has a direct impact on cash flow. This rate fluctuation has also affected the company’s pricing and procurement decisions. Supplies may be purchased in a multiple function currency and sold in other currencies. At December 31, 2008, a decrease of $1, 007 million in the fair value of the company’s financial instruments was shown.

Interest Rate Fluctuations

Higher interest rates were placed on lending for this period as financial institutions became extra vigilant and cautionary with lending. Re-financing costs soared.

IBM’s Global Financial business delivered strong results for 2008, but was adversely affected by interest rates fluctuation. This can either increase or decrease financial revenue and borrowing costs. The Global Financial business facilitates financing to clients who do not wish to pay cash or borrow from a third party financial institution. It relies on the ability of its clients to keep their payment obligations and for new ones to participate. High interest rates can deter decisions to choose this business option when purchasing IBM’s services or software.

Debt

IBM has been in the business of lending to customers in order for them to buy product. This lending put the company at $34 billion in debt at the end of 2008. The challenge in a financial crisis would be whether or not customers would be in a position to repay. This put a strain on the company’s earnings as many companies were unable to finance their loans and IBM was forced to use its own resources to facilitate these.

In 2008, during the credit crunch, IBM incurred debt to purchase its own stocks at higher prices.

Notable Impacts

Other impacts during the credit crunch would have been consumer spending. In any company that offers goods and services, this was a period of challenge. IBM had to seek ways of shifting its strategic direction and product offering to offer to consumers more cost effective and timely products. Additionally, as consumer spending declined, Maintenance and Outsourcing Contracts faced the threat of non-renewal.

Decrease lending for capital expenditure also meant that the company needed to utilize its cash base for large spending. Acquisitions, Research and Development, Capital Investment and Operational costs had to be facilitated with the company’s cash in hand.

IBM’s Operational Strategy

Strategic Response

Strategy can be defined as ‘the pattern of decisions in company that determines and reveals its objectives, purpose or goals, produces the principle policies and plans for achieving those goals and defines the range of business the company is to pursue (Kenneth Andrews, Harvard Business School).

IBM’s strategic responses to the impacts of the credit crunch may be the reason for the company’s ability to experience growth in spite of economic turbulence.

Ten years before the emergence of a global financial crisis, the company’s analysts foresaw the need to examine its market penetration, product development and diversification strategies- IBM opened its operations to 170 countries worldwide with concentration of BRIC countries. These markets were beginning to emerge as leading business hubs. In 2008, non U.S. operations generated almost 65% of the company’s revenue (Annual Report 2009).

HRM Strategy

IBM’s operations span across the globe in 170 countries. This means that they may adapt international HRM Policies and identify what strategy can be used in its operation that aligns with cultural distance (Hofstede 2001). In some locations, virtualisation is practiced. Employees can work remotely rather than in an office. This can be a cost effective strategy, with less overhead cost and where employees are interconnected regardless of their location.

During the financial crisis, the company made decisions that had direct and indirect impacts to it’s over 400,000 employees worldwide. With the parent company being established in the U.S., issues such as headcount, international travel, contract workers, wages, flexible working hours and outsourcing had to be looked at.

In the period 2008/2009, the North American operations lost over 4000 of its staff members. At this period, when other units were showing strong performance, North America experienced the direct impacts of the credit crunch. The company sought ways to manage its cash flow, while remaining competitive.

While there had been a significant reduction in headcount at the North American Operations, there was simultaneously a significant rise in hiring in India by over 3000 new hires during the credit crunch. This strategy was used primarily because of:

Low pay wages
With technology – can be used as remote support with highly skilled labour

The company’s Human Resource strategy during the credit crunch was to create ‘Global centres of expertise.’ Global Purchasing and Procurement was set up in China. Human Relations tasks like expense processing were done in the Philippines. Back-office finance processing was done in Brazil. IBM’s expansion to India was partially to cater to the local market, but mainly to tap into India’s massive pool of low-cost labour.

Value Chain Strategy – Developing a Business of Values

IBM’s Value Chain Strategy can be seen as its main competitive advantage over other Technology Service Providers. The IBM brand already lends itself to the reason the company’s marginal cost can be competitive and still gain market share from its customers. IBM has its upper end suppliers of products. During the credit crunch, customers sought IBM’s global solutions and services to help businesses that were going under. The brand value and years of leading technological solutions, gave them the advantage with their range of new services that targeted supply chain and logistics strategies as the solution to saving companies. Their price strategy for these services was competitive enough to make them affordable and sought after during the crisis.

Table 3: IBM Value Chain. Source – ibm.com/services

International Strategy

IBM operates in locations all over the world, while maintaining control over their products and marketing. Research and development is also kept and managed from the home base. The company is known as a leader in Internationalisation.

Research and Development – IBM invests over $5 billion dollars on R & D every year. With eight labs in six countries along with 3000 scientists and engineers working on new innovation, the company invests largely on this aspect of the business. New innovations such as Service-Oriented Architecture (SOA), Business Intelligence and Analytics have been developed.

Global Integrated Enterprise - IBM seeks to always maintain competitiveness in the global market. Global integration has enabled the company to cut expenses by $5 billion. The strategy has been to replicate small versions of the parent company in locations all over the world. These locations would have the same processes and value chain model as the parent company.

Institutional Strategy

Laurence Capron (1999) expressed cost-based and revenue-based synergies to justify acquisitions. In 2008, IBM was able to acquire failing businesses that would best fit both categories. They had cash flow, which in itself was an advantage over many businesses. This strategy brought and achievement of economies of scale, additional intellectual property and having bought some suppliers would enable a competitive price. From a critical perspective, the company may have taken on additional debt and unpredicted risks.

Recommendations for Future Growth

Technological sales and services is a volatile and highly competitive market. IBM must continue to focus on developing its products to maintain a strong competitive edge over rivals in the industry. The credit crunch has left many businesses vulnerable to closure and in many cases, with heightened growth and product development strategies. Focus must be made on areas that create value to the organisation’s publics.

Delivering Value to Customers

IBM must renew focus on its value chain strategy for 2010 and beyond. The brand has long been seen as strong determinant in the product or service’s marginal cost. With the economy slowly climbing out of the credit crunch, the company must hold on to its premium suppliers and maintain quality components. IBM’s customer base must continue to receive value for paying premium prices for goods and services. Competitors would copy these products and services and offer at a price advantage, however; the value to the customer lies in the brand.

Apple has used its value chain strategy to lock customers into product exclusivity. This has worked well for their product line and customer base as they have put up high entry and exit barriers while still maintaining value. Customers would pay way above market price for their products. IBM may have become vulnerable in this respect, in their effort to open their product to compatibility. On the other hand, customers may choose them as the option that is affordable.

Human Resource Capital

The trend of virtualization particularly with internationalisation may be seen to IBM’s Management Team as cost effective during any economic crisis. This would surely reduce overhead cost and can even mean 24-hour support availability as support staff is equipped to work virtually anywhere and has the technology to sign on and support at the customer’s convenience. There are many issues that could arise from this arrangement; while it may be rewarding in some ways, the core structures of Human Resource may be lacking (Beer et al 1984).
Working virtually is essentially working as an individual with limited peer engagement, self-supervision and without performance appraisal. Company loyalty may become fragmented and staff would no longer share in workplace camaraderie and goal sharing. The Management must re-introduce the workplace for North American staff in particular, as this is where the bulk of virtualization took place. Intellectual property can be easily lost and lack development when necessary.

Outsourcing was another Human Resource strategy used to negate credit crunch impacts. India was used as the outsourcing hub, gaining substantial staff following massive job cuts in North America. This strategy may benefit the company’s profitability, but puts a strain on the employees who expect to be replaced by outsourcing measures. The company may be perceived as having lost their basic human values as well as may face more litigation from staff who believe that they have been unfairly removed.

Research and Development

Most technology companies have R&D has their biggest expenditure and understandably so. IBM’s strategy should be no different. The company must hold an advantage during and after the credit crunch in order to keep its profit margin and hold on to its market share. R&D in the technology industry can keep the company sustainable and positioned for continuous growth. IBM’s offerings of cloud computing, supply chain solutions, financial management, value chain management tools, operational management tools, asset management and outsourcing capabilities has the company well positioned in a highly competitive market, as a leader in technological solutions.

Maintenance of this competitive advantage was crucial in 2007/2008 global financial crisis. Development of these solution post credit crunch is vital to sustain growth. Competition in this industry is strong. Rivalry exists in many forms and technology changes every day. There is a high threat of new entrants into this open market (Porter 1990). The recommendation to this solutions leader is to continue to put large capital investment into their forecasts and budgets for coming years. 2010 and beyond is the time to innovate and lead the competition, hold buyers and enjoy the benefits of a large market share.

References

Wall, S., Minocha, S. and Rees, B. (2010) International Business, Essex: Pearson

Porter, Michael E (1990) The Competitive Advantage of Nations, New York: The Free Press

Hofstede, Geert. (2001) Culture’s Consequences: Comparing Values, Behaviours, Institutions and Organizations Across Nations. 2nd ed. Sage

Porter, Michael E (1980) Competitive Strategy – Techniques for Analyzing Industries and Competitors, New York: The Free Press

Capron, L. (1999) ‘Horizontal Acquisitions/; the Benefits and Risk to Long-term Performance’, Mastering Strategy, p. 202, Financial Times Prentice Hall

http://www-05.ibm.com/innovation/se/pdf/highlights/integration/ibm_vcs.pdf IBM Value Chain [online] accessed Dec 1, 2010.

IBM – International Business Machines Annual Report 2006

IBM – International Business Machines Annual Report 2007

IBM – International Business Machines Annual Report 2008

IBM – International Business Machines Annual Report 2010

Beer, M., Spector, B., Lawrence, P.R., Quinn Mills, D. and Walton, R.E. (1984) Managing Human Assets, Free Press.

Bibliography

Weekes, P., Scott, B. and Gray, L., Managing People, Finance and Marketing, Vol 1, 2nd Ed. England, Pearson Customs Publishing

Gannon, Martin J. (2001). Understanding Global Cultures: Metaphorical Journeys Through 23 Nations. 2nd ed., Sage.

Sanders, Dan J. (2008) Equipped to Lead: Managing People, Process, Partners and Performance New York: Mc Graw Hill.

Hofstede, Geert. (2001) Culture’s Consequences: Comparing Values, Behaviours, Institutions and Organizations Across Nations. 2nd ed. Sage

Porter, Michael E (1990) The Competitive Advantage of Nations, New York: The Free Press

Porter, Michael E (1980) Competitive Strategy – Techniques for Analyzing Industries and Competitors, New York: The Free Press

Ansoff, H.I. (1968) Corporate Strategy, Penguin

Capron, L. (1999) ‘Horizontal Acquisitions/; the Benefits and Risk to Long-term Performance’, Mastering Strategy, p. 202, Financial Times Prentice Hall

IBM – International Business Machines Annual Report 2006

IBM – International Business Machines Annual Report 2007

IBM – International Business Machines Annual Report 2008

IBM – International Business Machines Annual Report 2010
Beer, M., Spector, B., Lawrence, P.R., Quinn Mills, D. and Walton, R.E. (1984) Managing Human Assets, Free Press.

http://www-05.ibm.com/innovation/se/pdf/highlights/integration/ibm_vcs.pdf IBM Value Chain [online] accessed Dec 1, 2010.

Wall, S., Minocha, S. and Rees, B. (2010) International Business, Essex: Pearson

http://news.bbc.co.uk/2/hi/7521250.stm Timeline: Credit crunch to downturn [online] accessed Dec 6, 2010

http://seekingalpha.com/article/98431-10-ways-the-financial-meltdown-impacts-tech Ten Ways the Financial Meltdown Impacts Tech, [online] access Nov 1, 2010

ftp://ftp.software.ibm.com/common/ssi/sa/wh/n/wsw14057usen/WSW14057USEN.PDF IBM - Moving towards Customer-Centric Pricing, [online] accessed 10 Nov, 2010.

http://www.itnews.com.au/News/124736,economic-crisis-a-return-to-normality-anz-ceo-says.aspx Economic crisis a 'return to normality', ANZ CEO says [online] accessed Dec 1, 2010

http://www.mindtools.com/pages/article/newTMC_90.htm The Ansoff Matrix [online] accessed Dec 10

Daley, J (2009) Aftermath of a financial crisis: Annual finsia and MCFS Banking and Finance Conference, Grattan Institute. p. 15-20

Liu, J., (2008) The SMEs strategic alliance in the market competition: Southern Forum 10: p. 28-29

http://www.suite101.com/content/ibm-global-sales-a18125#ixzz17NdJpRgC ‘IBM Global Sales: Big Blue targets Brazil Russia India China (BRIC) markets,’ [online] accessed Nov 1, 2010

The New York Times (2010) ‘Credit Crisis – The Essentials’, The New York Times, June 12 [online] accessed Nov 2, 2010

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