IBM to Sell Personal Computer Division to Lenovo Group
Case Type: industry analysis; business competition, competitive analysis
Consulting Firm: IBM Global Business Services (GBS) second round full time job interview.
Industry Coverage: computers; software, information technology (IT).
Case Interview Question #00674: The year is 2004. We were hired by International Business Machines Corporation (IBM, NYSE: IBM) to support them with their portfolio strategy. Headquartered in Armonk, New York, United States, IBM manufactures and markets computer hardware and software, and offers infrastructure,
hosting and consulting services in areas ranging from mainframe computers to nanotechnology.
Currently (in year 2004) they have 10 lines of business, including personal computers, servers, mainframe computers, software, networking equipment, IT services, consulting services, etc. We are evaluating to understand which businesses our client should divest from, and what should be the strategy for the ones they keep. Specifically, our team is responsible for analyzing IBM’s personal computers (PC) division. Should our client IBM invest or divest on its PC division?
Additional Information: (to be given to candidate upon request)
1. PC Market Environment (in 2004)
- Market growth trends
- Average 4% per year sales growth
- 15% per year for notebook/laptops
- -5% per year for desktop PCs
- Fragmented Industry: 10+ players (Dell, HP, IBM, Acer, Fujitsu, Toshiba, Lenovo, NEC, Apple, Sony, etc)
- Market Shares and Growth Trends
- Competitor A (Dell): ~20% and slowly growing
- Competitor B (HP): ~13% and slowly growing
- Our client (IBM): 5% and slowly declining
- Other competitors: ~60%
2. Client Company
- Our client IBM has a very strong brand that is synonym of quality and state of the art technology, but so far its brand did not translate into the ability to charge a price premium on its products
- Manufacturing is currently 95% based on pre-configured systems.
- Our client IBM has not developed the capability to deliver customized systems in an adequate time frame for end users
- Our client IBM sells PCs through its website, but online sales are negligible
- Our client IBM has its own sales force to cater to corporate customers, but penetration for corporate customers is very low and this segment is not profitable for our client at this point.
- The Personal Computers (PC) division has no specific strategic importance to our client IBM.
3. Revenues and Costs
Important Notes to Interivewer
- Reveal only information that the candidate asks for.
- As soon as the candidate has information on Average Price, Gross Margins, Market Shares and Number of Units sold by our client, you should ask him/her to calculate COGS (cost of goods sold) and the number of units sold by Competitors A Dell, Competitor B HP, and our client IBM — only COGS (Laptops and Desktops).
- In summary, table cells in blank should be calculated by the candidate
| Laptops | Desktops | |||||||
| Average Price | Gross Margins | COGS | Units | Average Price | Gross Margins | COGS | Units | |
| Competitor A Dell | $1,000 | 9% | $910 | 8.0M Units/year | $600 | 5% | $570 | 4.0M Units/year |
| Competitor B HP | $1,500 | 15% | $1,275 | 5.2M Units/year | $900 | 10% | $810 | 2.6M Units/year |
| Our client IBM | $1,900 | 20% | $1,520 | 2.0M Units/year | $1,200 | 10% | $1,080 | 1.0M Units/year |
4. Competitors
A. Competitor Dell
- Competitor Dell’s core business is personal computers
- Dell uses a direct model for consumers and SME, and has a large and respected sales force for corporate clients
- Dell focuses on made-to-order model, having inventory turns 3x our client IBM’s and 2x Competitor B HP’s, and is renowned for its operational effectiveness
- Due to bargaining power with suppliers and its made-to-order model, Dell has negative working capital
- Despite its lower gross margin percentages, Dell still has EBITDA margins 2x industry average (when the industry average includes Dell).
- The industry’s average EBITDA margins not including Dell is negative.
B. Competitor HP
- Competitor HP’s core business includes personal computers, servers, networking equipment and IT services
- HP sells through big block retailers to consumers, and through its own sales force for corporate clients
- HP sells mostly pre-configured systems, but also delivers made-to-order computers
- HP has above market average EBITDA margins and inventory turns
5. Customers
Note: provide to candidate only characteristics explicitly asked for.
| Consumer (30% of the laptops market) | Corporate (70% of the laptops market) | |
| Preferred Channel | Direct service or retail | Specialized sales force |
| Competitive Features | Price, customization options | Price, reliability, sales force/tech support quality |
| Price Sensitivity | High | Medium-High |
| Perception of client’s products | Expensive, sleek, small level of customization, brand inspires quality (although consumers are not sure if computers are of good quality) | Expensive, not appropriate for corporate travel due to less than stellar build quality, reliability considered to be low because of “sleek look”, inadequate tech support and sales force |
| Perception of Competitor Dell’s products | Affordable, fair quality and reliability, easy to order | Affordable, decent quality, good sales force and excellent tech support |
| Perception of Competitor HP’s products | Expensive, very robust and reliable, decent variety of system configurations, “boxy” looking | Expensive, very robust and reliable, excellent sales force and tech support |
Possible Answer:
Our client IBM is losing share in a market where strong players such as Competitor Dell are thriving through the use of a direct sales model (and high customization level) for consumers, and strong sales force and tech support for corporate customers.
Not considering Competitor Dell, the PC industry has negative average EBITDA margin, evidencing a highly competitive environment.
Although our client IBM has a distinctive brand that many times is a synonym of quality and state of the art technology, it was not possible to realize any price premium without compromising market share.
Our client IBM’s COGS is significantly higher than Competitors Dell and HP, possibly due to economies of scale. Those competitors are also specialized on IT and personal computers, and have reached a high level of operational effectiveness (especially Competitor Dell), as evidenced by their higher inventory turns and higher EBITDA margins.
Our client IBM also is not aligned with customer needs for both consumers and corporate clients, and would have to improve significantly its tech support and sales force size and effectiveness. Investing in improving its sales force size and effectiveness would lead to high capital investments and would take a long time to ramp up on the learning curve.
Therefore, our client IBM should divest from its personal computers division since it seems unlikely that it will be able to compete effectively in that market and the overall market attractiveness is low.
An outstanding candidate would also consider the implications to our client IBM’s brand, potential companies that would acquire the division, and other alternatives to remain in the PC market such as alliances, outsourcing production, etc.