IBM 2006 Annual Report Download - page 22

INTERNAL ROUTES-TO-MARKET
Services consultants focus on selling end-to-end solutions for large,
complex business challenges.
Hardware and software brand specialists sell IBM products as parts
of discrete technology decisions and as part of broader client solutions.
ibm.com provides fast, easy access to IBM’s product and business
expertise via the Web and telephone. In addition, ibm.com identifies
business opportunities for all of IBM’s routes to market and provides
online and telephone sales of standard hardware, software, services
and financing for all-size companies.
BUSINESS PARTNERS ROUTES-TO-MARKET
Global/major independent software vendors (ISVs). ISVs deliver
business-process or industry-specific applications and, in doing so,
often influence the sale of IBM hardware, middleware and services.
Global/major systems integrators (SIs). SIs identify business prob-
lems and design solutions when IBM Global Services is not the
preferred systems integrator; they also sell computing infrastructures
from IBM and its competitors.
Regional ISVs and SIs. SIs identify the business problems, and
ISVs deliver business process or industry-specific applications to
medium-sized and large businesses requiring IBM computing infra-
structure offerings.
Solutions providers, resellers and distributors. Resellers sell IBM
platforms and value-added services as part of a discrete technology
platform decision to clients wanting third-party assistance.
Research, Development and Intellectual Property
IBM’s research and development (R&D) operations differentiate IBM
from its competitors. IBM annually spends approximately $6 billion
for R&D, focusing its investments in high-growth, high-value oppor-
tunities. In 2006, the company’s investment in R&D was approximately
15 percent of its combined hardware and software revenue. As a result
of innovations in these and other areas, IBM was once again awarded
more U.S. patents in 2006 than any other company. This marks the
14th year in a row that IBM achieved this distinction.
In addition to producing world-class hardware and software
products, IBM innovations are a major differentiator in providing
solutions for the company’s clients through its growing services
activities. The company’s investments in R&D also result in intellec-
tual property (IP) income of approximately $1 billion annually. Some
of IBM’s technological breakthroughs are used exclusively in IBM
products, while others are licensed and may be used in either/both
IBM products and/or the products of the licensee.
In addition to these IP income sources, the company also generates
value from its patent portfolio through cross-licensing arrangements
and IP licensed in divestiture transactions. The value of these transac-
tions is not readily apparent in the Consolidated Statement of
Earnings, because income on cross-licensing arrangements is recorded
only to the extent that cash is received. The value received for IP
involving the sale of a business is included in the overall gain or loss
from the divestiture, not in the separately presented IP income
amounts on the Consolidated Statement of Earnings.
Integrated Supply Chain
Just as IBM works to transform its clients’ supply chains for greater
efficiency and responsiveness to global market conditions, the company
continues to derive business value from its own globally integrated sup-
ply chain, reinvented as a strategic advantage for the company to create
value for clients and shareholders. IBM leverages its supply-chain
expertise for clients through its supply-chain business transformation
outsourcing service to optimize and help run clients’ end-to-end sup-
ply-chain processes, from procurement to logistics.
IBM spends approximately $36 billion annually through its supply
chain, procuring materials and services around the world. The com-
pany’s supply, manufacturing and logistics and customer fulfillment
operations are integrated in one operating unit that has reduced
inventories, improved response to marketplace opportunities and
external risks and converted fixed to variable costs. Simplifying and
streamlining internal processes has improved operations, sales force
productivity and processes, and these actions have improved client
satisfaction when working with the company. Since some of the cost
savings this unit generates are passed along to clients, they will not
always result in a visible gross margin improvement in the company’s
Consolidated Statement of Earnings. IBM is continuing to apply the
supply-chain principles of product manufacturing and delivery to
service delivery across its solutions and services lines of business.
In addition to its own manufacturing operations, the company
uses a number of contract manufacturing (CM) companies around
the world to manufacture IBM-designed products. The use of CM
companies is intended to generate cost efficiencies and reduce time
to market for certain IBM products.
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHIN ES CORPORATION AND SUBSI DIARY COMPANIES
20 2006 Annual Report
Management Discussion ........................................................
Road Map ............................................................................. 
Forward-Looking and Cautionary Statements ..................... 
Management Discussion Snapshot ...................................... 
Description of Business ....................................................... 
Year in Review...................................................................... 
Prior Year in Review ............................................................. 
Discontinued Operations ..................................................... 
Other Information ................................................................ 
Global Financing .................................................................. 
Report of Management .........................................................
Report of Independent Registered Public Accounting Firm ....
Consolidated Statements .......................................................
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