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IBM Case Solution

Solution Id Length Case Author Case Publisher
779 964 Words (3 Pages) B. Tom Hunsaker Thunderbird School of Global Management : TB0535
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Value Chain Management in IBM has become more complex over the period of time. It can be clearly observed that value chain expenditures are increasing from the time of the company’s inception. $3.4 trillion was spent on the value chain system of IBM in 2005. However, the high costs are due to the fact that IBM is transforming itself into a company that helps other firms run their business in areas such as accounting, human resources, procurement and customer service. On the demand side of value chain, processor developers and software suppliers have higher profit bracket than those of other suppliers. On the supply side of value chain, retailers enjoy a high profit. Therefore, IBM itself does not have a large bracket of profit from the server products. The three major components of IBM value chain are wholesalers, retailers and business orders. They are also known as the value drivers for the company as they are the main distributors of the products made. IBM is required to keep the distributors satisfied because of the fact that the distributors enjoy high bargaining power. Bargaining power of distributors is high because of increasing competition over time.

Following questions are answered in this case study solution:

  1. What are the major components of IBM value chain?

  2. Which of these components experienced most changes within the period discussed in the case study?

  3. How industry that IBM operates in can be analyzed based on Porter’s Five Forces concept? Using this model describe major changes that happened in the industry during the considered period.

IBM Case Analysis

IBM has been evolving its value chain according to its macro level and micro level environment. The company’s value chain has been divided into four main components. The company started with manufacturing of mainframe computers, and then shifted its focus to software. Currently, the company has expanded its value offering to consultant services, as well. The value chain of the company has been tagged as “three-legged” stool, which is based on hardware, software, and consultancy. In pursuit of enhancing the consultancy section, the company acquired Power House Cooper in the early 2000’s. Now, the company not only provides hardware and software to its customers, but it also ensures that the system is completely implemented and the customer’s employees are well trained to use the system. Moreover, the consultancy services range from simple employee training to bringing a cultural change in the customer’s organization. The company’s evolution has been commendable when it comes to adoption and innovation.

Which of these components experienced most changes within the period discussed in the case study?

The demand side of value chain was predominantly changed in order to transform the business of IBM from hardware to services and then to software. IBM planned to stream high revenues from software and annuity revenues from services area of the business. This change was due to the fact that the world was becoming more instrumented, connected to each other and technologically sound. Hence, the management of IBM put its focus on global technologies and high end corporate solutions. It began to provide services related to integration and opted innovation as its priority. The company also reviewed its governance system to maintain a performance based discipline in the organization. The IT led innovation and institutional change in the company managed to provide a greater value creation than the previous years. IBM transformation increased the value created in its value chain system.

The level of change brought in each component was different as per the company’s micro level and macro level environment. However, the most significant and prominent change that was brought in the value chain was in the consultancy segment. Lou Gerstner, a former McKinsey consultant, made sure that special emphasis is laid on the consultancy part. He combined all the components and portrayed an image of the company that provides solution, not only hardware and software. Moreover, Gerstner expanded the consultancy component of the value chain to e-business. The company provided e-business services to its business customers and developed an image in which business customers took pride in associating themselves with IBM. Later, Samuel Palmisano took over IBM as the CEO. He ensured that the customers get end-to-end solutions regarding their business and other aspects related to business. In pursuit of expanding the consultancy services, the company entered Business Process Transformation Services (BPTS) market. So, the consultancy component of the value chain endured the largest amount of change.

How industry that IBM operates in can be analyzed based on Porter’s Five Forces concept? Using this model describe major changes that happened in the industry during the considered period.

Porter’s Five Forces

1. Supplier Bargaining Power

There are two larger processor developers for the server industry i.e. AMD and Intel. These two companies are responsible for the majority of chip supply to the server producers including IBM. Due to the high competition among the server producers; there is a high bargaining power of suppliers for the core components of the products.

2. Bargaining Power of Buyers

Bargaining power of buyers is moderately high in United Kingdom as the buyers can easily switch between brands, and the cost of switching brands is low. Competitors such as HP and Dell increase the bargaining power of buyers for the company.

3. Threat of New Entrants

Server industry is a high investment industry because of the need of establishing departments such as research and development, support and services, production and distribution department. Expenditure of $171 million on the technology of server products is an example of high investment cost. Hence, there is a low threat of new entrants in the industry.

4. Threat of Substitutes

The industry of web hosting is becoming a threat for the business of IBM with time. Server products are likely to be substituted for web hosting because of the lower cost and technology support. 

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