ACCT1014: Accounting, Behaviour and Organisations
IBM logo PHOTO: SILAS STEIN/ZUMA PRESS
International Business Machines Corporation (IBM) manufactures and markets computer hardware, middleware and
software and offers infrastructure, hosting and consulting services in areas ranging from mainframe computers to
nanotechnology. IBM originated in 1911 and has expanded to become one of the largest global corporations. In 2012
IBM had 435,000 employees worldwide. In 2016 they recorded the largest number of patents by any company for 23
consecutive years.
To maintain market share in a dynamic and rapidly changing industry, more recently IBM has steadily shifted its
business mix by exiting commoditizing markets such as PCs, hard disk drives and DRAMs and focusing on higher-
value, more profitable markets For example, IBM acquired PwC’s Consulting business in 2002, SPSS (statistical
package) in 2009, Kenexa (a recruiting business) in 2012.
They have diversified their strategy by investing in varying parts of the value chain such as:
1. Cognitive solutions: to see and analyse massive amounts of data that have been previously invisible to
computers and enterprises;
2. Cloud Platform: to be at the heart of the digital revolution; and
3. Industry focus: to offer industry-specific analytic solutions (i.e. health, retail, banking, telecommunications,
insurance and others).
More recent highlights can be found on their website:
IBM completes acquisition to expand role as solutions provider for public sector clients;
IBM and Optevia, will combine their Microsoft Dynamic CRM capabilities and portfolios offering;
The hunt for return on investment (ROI) in the mobile enterprise, believing the potential of mobile
technologies is largely unseen – and so far, untapped.
As an example of the shift to public sector clients with innovative technology is the recent move by IBM to open a
“blockchain” innovation centre in Singapore in collaboration with the Government. The blockchain technology works
by creating permanent, public "ledgers" of all transactions that could potentially replace complicated systems such as
clearing and settlement with one simple database. It uses what's called a shared ledger, a database spread across
several linked computers so no single company has sole control. Encryption technologies govern data to make it clear
who paid whom and why.
Nevertheless, IBM is not immune to controversy. In Australia IBM, has several Federal Government department
contracts (i.e. Defence, Immigration and Border Protection, Social Services, Health, IP Australia). However, it was
the contract with Australian Bureau of Statistics (ABS) that raised concerns over data security in August 2016. As a
result of “denial-of-service” attacks the ABS were forced to shut down their National census website which p revented
millions of Australians from filling out their census forms.
IBM’s financial performance is highlighted in the results below:
2014: $92.8 billion revenue; $21 billion pre-tax profit; $117.5 total assets.
IBMs Ratio Analysis financial year (2014 annual report)
Profit/Sales 21/92.8 22.63%
Sales/Assets 92.8/117.5 0.79
ROA 21/117.5 17.87%
2015: $81.8 billion revenue; $17.7 billion pre-tax profit; $110.5 total assets
IBMs Ratio Analysis financial year (2015 annual report)
Profit/Sales 17.7/81.8 21.64%
Sales/Assets 81.8/110.5 0.74
ROA 17.7/110.5 16.02%
By 2016 the changing trend was discussed the following Wall Street Journal article.
International Business Machines Corp. recorded its 19th consecutive quarter of declining revenue, as it continued to
try to offset declines in older businesses with sales in newer ones that are growing rapidly.
Fourth-quarter revenue at the Armonk, N.Y., computing giant slid 1% from the year-earlier period to $21.8 billion.
Net profit edged up nearly 1% to $4.5 billion, though that still left profit 11% lower for the full year, at $11.9 billion.
ACCT1014: Accounting, Behaviour and Organisations
Chief Financial Officer Martin Schroeter emphasized that annual revenue in IBM’s newer, faster-growing businesses
rose 14% and now makes up 41% of total sales—ahead of the company’s earlier forecast that nascent businesses
would contribute 40% by 2018.
“We feel pretty good about how we’re entering 2017 stronger than we entered 2016,” he said in an interview.
Like other older companies that sell information technology to corporate buyers, IBM is struggling to cope with the
move to cloud computing. That trend shifts customer spending from vendors who equip private corporate facilities to
those who offer subscriptions to services delivered through the internet, such as Amazon.com Inc.’s Amazon Web
Services for computing power and Salesforce.com Inc. for business apps.
Big Blue’s chief executive, Ginni Rometty, has responded by jettisoning low-growth, low-margin businesses and
revamping its remaining core assets to emphasize ones that she calls strategic imperatives. Foremost among these are
IBM’s own cloud-computing operations and Watson, its artificial-intelligence platform.
The transition has yet to rekindle growth for the company overall, however. IBM’s full-year revenue has declined for
five years, its pretax income has fallen for four, and its non-adjusted earnings per share has slid for three.
IBM has said its strategic-imperative businesses have been growing at double-digit percentages, while older, slower
businesses have been declining annually by percentages in the low teens, according to analysts.
Investors recently have shown optimism that IBM’s transition is on track. The share price suffered in the years
between 2013 and 2016, but during the past year rebounded more than 20%. Its share price rose to 11.8 times
expected earnings per share from 9.1 during the period, exceeding that of Hewlett Packard Enterprise Co. and
approaching that of Oracle Corp., two other big, mature IT companies.
IBM “took their medicine upfront by divesting of the right things and investing in the right things,” said Patrick
Moorhead, an analyst with Moor Insights & Strategy.
Still, IBM shares slid about 2% in after-hours trading on Thursday following the earnings release, after ending roughly
flat in 4 p.m. trading on the New York Stock Exchange. That occurred even though IBM’s adjusted quarterly earnings
of $5.01 per share exceeded its own and analysts’ forecasts.
Some analysts expect the contribution of strategic initiatives to total revenue to reach 50% in the second half of this
year, which would mark a milestone in the turnaround Ms. Rometty has sought since taking her post in late 2012.
IBM has been working feverishly to build these new businesses, especially Watson, which offers of commands and
functions that software developers can use to stitch artificial intelligence into their programs.
Watson, led the way to the current era of artificial-intelligence in which it is a focus of many big tech companies . IBM
has built out its platform to include AI as a service, tools for build-it-yourself intelligent apps, and specialized AI
applications in industries including health care, finance, insurance, and automotive.
IBM doesn’t disclose revenue from Watson-branded operations, but Ms. Rometty has forecast that the multifaceted
artificial-intelligence technology would have 1 billion users by the end of 2017.
Even if revenue from new businesses overtakes that from the old, core revenue, profit growth might remain elusive.
Some analysts are concerned that the new businesses are cannibalizing older businesses, accelerating their decline.
Credit Suisse analysts in a recent research note wrote, “The concern we have is the faster [revenue from strategic
initiatives] grows, the quicker Core declines.”
Required:
1. Describe the strategy at IBM.
- IBM was previously a cost leader by selling products such as such as PCs, hard disk drives and DRAMs.
- A change in product mix, now they are a product differentiator – Strategy is based on 3 pillars – Cloud Data &
engagement, now they provide service – Artificial Intelligence, more complex & diverse activities.
2. Describe the different personnel you would find at IBM. What are the different skills, different motivations
for being part of IBM and different values?
- R&D staff, operational & support staff (Eg: IT specialist).
- Reliant on staff, up to date with latest technology & innovation.
- Providing the staff with a good environment, staff should be well paid, reward staff for good performance so that
they feel part of a team (Eg: Intrinsic Qualitative i.e. promotion of staff, vs Extrinsic Monetary rewards)
- Carrot & stick theory Giving them reward for good performance & penalize for non-performance Management
accounting information can help to set boundaries by designing performance measurement (KPI of managements)
accordingly.
- KPI should be achievable, realistic and help motivate employees.
- Accounting systems can help recognize where areas are performing well or not performing so well Helps senior
managers make decisions about further actions for improved performance in the future.
- Need to sack people or make them redundant if they are not helping IBM achieve the desired targets i.e. Profit, EBIT
share price.
- If IBM wants to design and use leading edge technology, they will need to let people innovate Management
cannot control costs too tightly. Management might need to take some risk to do this Management accounting
information can help with setting some boundaries.
How does Key performance indicators (KPIs) affect workers performance?
Some people may work harder for the same payment.
Others will receive greater rewards in exchange for proportionately greater effort.
Replace labour with less costly machinery.
Some workers may resign when KPIs are unachievable.
3. What are the ‘scarce resources’ at IBM?
- Labour: Reliance on labors that are technology adept.
- Capital: Changing the asset composition They are now providing services instead of selling products Think of
what products & what type of investments.
- IBM need to make choices between different items because the resources necessary to fulfil their strategies are
limited.
ACCT1014: Accounting, Behaviour and Organisations
4. Describe the complex and diverse activities evident at IBM. Are they cost leaders, differentiators or hold
niche market position? Provide evidence by examples of KSFs.
- More on differentiation & niche market Exited commodity (Cost Leader) position.
- Examples includes the opening of blockchain, Watson etc.
- Key Success Factor (KSF) Number of patents, premium selling price, marketing, traditional financial measures
(Eg: ROI), market share in new area IBM want to be a differentiator to capture a larger market share.
5. Using the Boston Matrix, can you find evidence of “Hold, Build Harvest, Divest” strategies at IBM?
- Divest: Exited commodity market Don’t sell hardware anymore, now creating service (Artificial intelligence,
block chain etc).
- Hold: High market share & high growth Recorded largest number of patents for 23 consecutive years, IBM has
the intention on protecting its market share by innovation, holding & developing technology.
- Build: Lower profit but share profit increased, artificial intelligence leader in field of big technology companies by
offering cloud technology, Watson, block chain, cognitive solutions.
- Effort by IBM to change its product mix to fit with the changing strategies.
