IBM 2005 Annual Report Download - page 21
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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
20_ ManagementDiscussion
• Distribution:ConsumerProducts,Retail,Travel,Transportation
• Communications:Telecommunications,MediaandEntertain-
ment, EnergyandUtilities
• Small and Medium Business: Mainly companies with less
than1,000employees
INTERNALROUTES-TO-MARKET
Services consultantsfocusedonsellingend-to-endsolutionsfor
large,complexbusinesschallenges.
Hardwareandsoftwarebrandspecialists SellingIBMproductsas
parts of discrete technology decisions, and focusing on mid-
sizedclientsinterestedinpurchasing“turnkey”solutions,such
asthoseintheIBMExpressPortfolio.
ibm.com providesfast,easyaccesstoIBM’sproductandbusi-
nessexpertiseviatheWebandtelephone.Identifiesbusiness
opportunities for all of IBM’s routes to market and provides
online and telephone sales of standard hardware, software,
servicesandfinancingforallsizecompanies.
BUSINESSPARTNERSROUTES-TO-MARKET
Global/majorindependentsoftwarevendors. ISVsdeliverbusiness
processorindustry-specificapplicationsand,indoingso,often
influencethesaleofIBMhardware,middleware andservices.
Global/major systems integrators (SIS). SIS identify business
problemsanddesignsolutionswhenIBM Global servicesisnot
thepreferredsystemsintegrator;theyalsosellcomputinginfra-
structuresfromIBManditscompetitors.
RegionalISVsandSIS. SIS identifythebusinessproblems,and
ISVsdeliverbusinessprocessorindustry-specificapplications
tomedium-sizedandlargebusinessesrequiringIBMcomputing
infrastructureofferings.
Solutions providers, resellers and distributors. Resellers sell IBM
platformsandvalue-addedservicesaspartofadiscretetechnol-
ogyplatformdecisiontoclientswantingthird-partyassistance.
RESEARCH,DEVELOPMENT AND INTELLECTUAL PROPERTY
IBM’s research and development (R&D) operations differentiate
IBM from its competitors. IBM annually spends approximately
$5–$6billionforR&D,includingcapitalizedsoftwarecosts,focus-
ing its investments in high-growth opportunities. As a result
of innovations in these and other areas, IBM was once again
awardedmoreU.S.patentsin2005thananyothercompany.This
marksthe13thyearinarowthatIBMachievedthisdistinction.
Inadditiontoproducingworld-classhardwareandsoftware
products,IBMinnovationsareamajordifferentiatorinproviding
solutionsforthecompany’sclientsthroughitsgrowingservices
activities.Thecompany’sinvestmentsinR&Dalsoresultinintel-
lectualproperty(IP)income.SomeofIBM’stechnologicalbreak-
throughsareusedexclusivelyinIBMproducts,whileothersare
usedby the company’s licenseesfor their productswhen that
newtechnologyisnotstrategictoIBM’sbusinessgoals.Athird
groupisbothusedinternallyandlicensedexternally.
InadditiontotheseIPincomesources,the companyalso
generatesvaluefromitspatentportfoliothroughcross-licensing
arrangements and IP licensed in divestiture transactions. The
valueoftheseother two sourcesis not readilyapparentin the
financial results and Consolidated Statement of Earnings,
becauseincome on cross-licensing arrangements isrecorded
onlytotheextentthatcashisreceived.Thevaluereceivedby
IBMforIPinvolvingthesaleofabusinessisincludedintheover-
all gain or loss from the divestiture, not in the separately dis-
playedIPincomeamountsinfinancialresultsandConsolidated
StatementofEarnings.
INTEGRATED SUPPLY CHAIN
Just as IBM works to transform its clients’ supply chains for
greaterefficiencyandresponsivenesstomarketconditions,the
company continues to seebusiness value as itestablishesits
globally integrated supply chain as an on demand business,
transforming this function into a strategic advantage for the
company and, ultimately, improved delivery and outcomes for
its clients. Leveraging this experience, in June 2005, IBM
launched its supply-chainbusinesstransformationoutsourcing
service to optimize and help run clients’ end-to-end supply
chainprocesses,fromprocurementto logistics.
IBMspends approximately$38billionannuallythroughits
supply chain, procuring materials and services around the
world.Thecompany’ssupply,manufacturingand logisticsand
customerfulfillment operationsareintegratedinone operating
unitthathasreducedinventories,improvedresponsetomarket-
place opportunities and external risks and converted fixed to
variablecosts.Simplifyingandstreamlininginternal processes
has improved operations and sales force productivity and
processes and thereby the experiences of the company’s
clientswhenworkingwithIBM.Becausesomeofthecostsav-
ingsthisunitgeneratesarepassedalongtoclients,theywillnot
alwaysresultinavisiblegrossmarginimprovementinthecom-
pany’sConsolidatedStatementofEarnings.Whiletheseefforts
arelargelyconcernedwithproductmanufacturinganddelivery,
IBMisalsoapplyingsupply-chainprinciplestoservicedelivery
acrossitssolutionsandserviceslinesofbusiness.
In addition to its own manufacturing operations, the com-
panyusesanumberofcontractmanufacturing(CM)companies
aroundtheworld to manufactureIBM-designedproducts.The
useofCMcompaniesisintendedtogeneratecostefficiencies
and reduce time-to-market for certain IBM products. Some of
thecompany’srelationshipswithCMcompaniesareexclusive.
The company has key relationships with Sanmina-SCI for the
manufacture of some Intel-based products and with Solectron
for a significant portion of the manufacturing operations of