Financial Statement Analysis of Ibm Free Essays

string(23) " rivalry is very high\." Financial Statement Analysis of IBM Financial Statement Analysis of IBM I. Company Facts IBM – International Business Machines Corporation The home office of IBM is located in Armonk, Town of North Castle, New York, United States. IBM was founded in 1911 as the Computing Tabulating Recording Company (CTR) through a merger of three companies: the Tabulating Machine Company, the International Time Recording Company, and the Computing Scale Company. We will write a custom essay sample on Financial Statement Analysis of Ibm or any similar topic only for you Order Now CTR adopted the name International Business Machines in 1924, using a name previously designated to CTR’s subsidiary in Canada and later South America. Standard Industrial Classification Codes are 7379 which are mainly on computer and relative stuff. Chief Executive Officer (CEO) of IBM now is Virginia M. Rometty. Chairman of the Board of IBM now is Samuel J. Palmisano. The end date of recent fiscal year of IBM is Dec. 31st 2011. Main services IBM provides include business consulting, IT related services, outsourcing service and training. Main products IBM provides include mainframe, software, system and storage. IBM’s major operations consist of five business segments: Global Technology Services, Global Business Services, Software, Systems and Technology and Global Financing. In the latest fiscal year, IBM has an amount of 433,362 wholly owned employees all over the world. PricewaterhouseCoopers LLP (PwC) is the independent auditor retained to audit IBM’s consolidated financial Statements and the effectiveness of the company’s internal control over financial reporting. The stock ticker symbol is IBM. IBM common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, and outside the United States. And the latest stock price was $188. 32 on Nov. 14th 2012 on NYSE. II. Business and Strategy Analysis 1. Industry Description and Competitive Anlysis Since IBM is a highly diversified company, it concentrates on several industries at the same time. So let’s say IBM mainly concentrates on the computer related hardware and software manufacturing industries. As we all now, these two industries supplement each other and depend on each other while the most competitive companies always work on both industries at the same time. The computer related software and hardware manufacturing industry is characterized by significant research and development activity and rapid technological change. The rapid pace of innovation in this sector creates a constant demand for newer and faster products and applications. While the sector has grown faste r than most other industries over the past several decades, it faces challenges from rising costs, global market share, and the rapid pace of innovation. The main competitors for IBM now are Hewlett-Packard, Dell and Microsoft. Here I will use the Porter five forces analysis to give a competitive analysis among these four companies. Threat of new competition: The market of this industry is profitable in some parts like high-level software and frames, not too profitable in some other parts like PCs. So we can say the market is still profitable and is attracting the new entrants, which has the possibility to decrease profitability for all firms in this industry. While in this industry, because of the existence of several big companies, the barriers to entry are relatively high which are non-profitable for the new entry firms. The several big companies have held very high brand equity, customer loyalty, efficient distribution methods and scale effect to decrease the costs and increase the profits. There is not too much threat from the new firms to compete with IBM, there are high possibility for other main competitors like HP, Dell and Microsoft to enter the markets where IBM is making high profit, well they have the RD capabilities. But to make the biggest profits, although IBM’s main competitors are Hewlett-Packard, Dell and Microsoft, each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while Hewlett-Packard is more diversified as the leader in PCs and Imaging ; Printing as well as offering IT services and Microsoft concentrates on the computer software development. So we can conclude that there is threat of new competition, but the level is relatively low. Threat of substitute products or services: The threat of substitute products or services is relatively high compared with the threat of new competition. Also these threats come from the main competitors. For products, such as PC, most customers will compare the price, screen size, life time and other attributes instead of just the brand the same way as services such as IT consulting etc. Bargaining power of customers: The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. In this factor, because customers of these two industries have many channels to access the products and services, high information availability, different choices, differentiated advantages of products and customers is also kind of price sensitive. So we can conclude that the bargaining power of customers is strong. Bargaining power of suppliers: The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Because there are plenty of suppliers in most parts, presence of substitute keeps being produced, degree of differentiation of inputs is not high enough and supplier competition is very strong. Then we can conclude that bargaining power of suppliers is also in a lower level. Intensity of competitive rivalry: Intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Sustainable competitive advantages through innovation, all these four big competitive companies have strong RD team and invest much money on it. And we can always see the advertisements of their products anywhere. Each company has a differentiated competitive strategy to concentrate on their own areas and holds sustainable competitive advantages through innovation. So we can conclude that the intensity of competitive rivalry is very high. You read "Financial Statement Analysis of Ibm" in category "Papers" Given the Porter five forces analysis above, here we have a general conclusion that computer related hardware and software industries are relatively highly competitive and sustainable based on the current situation and future development trends. There do have some profitable niche market and some areas can be developed further. The big four companies have their own advantages and emphasis and also compete heavily with each other. There is no easy way for each of them to lead in all. 2. Industry’s Future Prospects Assessment When we come to talk about the future prospects of computer related hardware and software industries, I’m sure that it will not be that promising like nanotechnology or genetic therapy which is still in research period, since he computer related hardware and software industries have been developed many years, most of products, technologies and services have been mature enough. But it is still profitable and sustainable because the world has been established based on these two industries. Without their support, the world cannot step forward even a little. And the intense competition and fast replacement speed will drive these two industries to be developed faster and faster. There may be some lawsuits and governmental regulations there confronting companies, such as the plagiarization, copyright infringement, anti-monopoly, cutthroat competition, tax issue, local protection and so on. These will be the main legal issues that companies of two these industries are certainly meeting now and will still never end in the future. Plagiarization and copyright infringement will be the two main issues that these companies should pay more emphasis on cuz these two are the vital parts for them to keep their competitive advantages and make profits. Incorporating the relative small companies may be judged by the court saying it is buying the potential competitor due to the concern of monopoly of government. Cutthroat competition may not happen, while once it happened, it will certainly be a disaster. Tax issue and the local protection are always come together. Local government may protect the local companies by dealing high tax to the foreign competitors. Furthermore, due to the fast replacement speed, the price of products and services in these two industries will never be high as long as there is no monopoly. So the cost control is one of the key parts to determine these companies’ future. And innovation will never be too much. 3. Summarization and Evaluation of IBM’s Future Goals and Strategies The next decade holds enormous promise for IBM. They are uniquely positioned to deliver the benefits of a vast new natural resource – a gusher of data from both man-made and natural systems that can now be tapped to help businesses and institutions succeed in an increasingly complex and dynamic global economy. IBM has steadily realigned its business to lead in a new era of computing and to enable its clients to benefit from the new capabilities that era is creating. As a consequence, its investors benefit from a business model that is both sustainable over the long term and fueled by some of the world’s most attractive high-growth markets and technologies. It will be on track toward its 2015 Road Map goal of at least $20 in operation earnings per share and $20 billion in revenue growth by 2015. This goal for IBM is quite suitable. There are four high-growth spaces as following, growth markets, business analytics, cloud and smarter planet. These four spaces IBM is working hard on will certainly drive to high profits due to its high emphasis and profession. The world is undergoing disruption, but IBM now stands out among its industry peers and in business at large as distinctively able to keep moving to the future, and to keep generating differentiating value for its clients, its employees and the citizens of the world. III. Accounting Analysis The accompanying Consolidated Financial Statements and foot notes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). 1. Revenue The revenue recognition principle provides guidance on when a company must recognize revenue. To recognize means to record it. If revenue is recognized too early, a company would look more profitable than it is. If revenue is recognized too late, a company would look less profitable than it is. The company recognizes revenue when it is realized or realizable and earned. The company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. IBM’s revenue was growing in an increasing speed and its pre-tax income margin grew from 18. 9 percent in 2009 to 19. 7 percent in 2010 to 20. 02 percent in 2011 which is the ninth consecutive increasing year. If only based on this, IBM was doing better and better in last three years. 2. Major Expenses The expense recognition (or matching) principle, prescribes that a company record the expenses it incurred to generate the revenue reported. The expense recognition (or matching) principle aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses. This matching of expenses with the revenue benefits is a major part of the adjusting process. Under the accrual basis of accounting, expenses are recognized when incurred, usually when goods are received or services are consumed. This may not be when the goods or services are actually paid for. The point at which an expense is recognized is dependent on the nature of the transaction or other event that gives rise to the expense. The major expense of IBM includes stock-based compensation, prepared expense, advertising and promotional expense, research expense, development expense, engineering expense, workforce rebalancing charges, retirement-related costs, amortization of acquired intangibles assets, interest expense and other expense. Below tables show the main expenses IBM recognized from 2009 to 2011. Table 3-2-1 Total Expense and Other Income ($ in millions) For the year ended December 31:| 2011| 2010| 2009| Total consolidated expense and other (income)| $29,135| $26,291| $25,647| Total operating (non-GAAP) expense and other (income) | $28,875| $26,202| $25,603| Total consolidated expense-to-revenue ratio| 27. 30%| 26. 30%| 26. 80%| Operating (non-GAAP) expense-to-revenue ratio| 27. 00%| 26. 20%| 26. 70%| We can see from this table that the expense is increasing with time goes on. While compared with the increasing speed of revenue and that of expense-to-revenue, we can figure out a little bit progress on expense control of IBM. Table 3-2-2 Selling, General and Administrative ($ in millions) For the year ended December 31:| 2011| 2010| 2009| Selling, general and administrative expense| | | | Selling, general and administrative—other| $20,287| $18,585| $17,872| Advertising and promotional expense| $1,373| $1,337| $1,255| Workforce rebalancing charges| $440| $641| $474| Retirement-related costs| $603| $494| $503| Amortization of acquired intangibles assets| $289| $253| $285| Stock-based compensation| $514| $488| $417| Bad debt expense| $88| $40| $147| Total consolidated selling, general and administrative expense| $23,594| $21,837| $20,952| Non-operating adjustments| | | | Amortization of acquired intangible assets| ($289)| ($253)| ($285)| Acquisition-related charges| ($20)| ($41)| ($8)| Non-operating retirement-related (costs)/income| ($13)| $84| $127| Operating (non-GAAP) selling, general and administrative expense| $23,272| $21,628| $20,787| Table 3-2-3 Research, Development and Engineering ($ in millions) For the year ended December 31:| 2011| 2010| 2009| Total consolidated research, development and engineering| $6,258| $6,026| $5,820| Operating (non-GAAP) research, development and engineering| $6,345| $6,152| $5,943| Table 3-2-4 Interest Expense ($ in millions) For the year ended December 31:| 2011| 2010| 2009| Interest expense| $411| $368| $402| From all the tables above, we can find that the most important or the highest portion of the expense is the selling, general and administrative expense which includes most of the expense. 3. Investments IBM’s 2009 cash investment was $1. 2 billion for six acquisitions — five of them in key areas of software. And after investing $ 5. 8 billion in R D and $3. 7 billion in net capital expenditures, IBM was able to return more than $10 billion to you — $7. billion through share repurchase and $2. 9 billion through dividends. Last year’s dividend increase was 10 percent, marking the 14th year in a row in which it has raised its dividend. IBM’s 2010 cash flow has enabled it to invest in the business and to generate substantial returns to investors. Our 2010 cash investment was $6 billion for 17 acquisitions— 13 of them in key areas of software. After investing $6 billion in RD and $4 billion in net capital expenditures, IBM was able to return more than $18 billion to you— $15. billion through share repurchases and $3. 2 billion through dividends. Last year’s dividend increase was 18 percent, marking the 15th year in a row in which it has raised its dividend. Over the past decade, IBM has returned $107 billion to you in the form of dividends and share repurchases, while investing $70 billion in capital expenditures and acquisitions, and almost $60 billion in RD. IBM’s 2011 cash flow has enabled IBM to invest in the business and to generate substantial returns to investors, while spending $6. billion on RD. In 2011 IBM invested $1. 8 billion for five acquisitions in key areas of software and $4. 1 billion in net capital expenditures. IBM was able to return $18. 5 billion to you — $15 billion through share repurchases and $3. 5 billion through dividends. Last year’s dividend increase was 15 percent, marking t he 16th year in a row in which IBM has raised its dividend, and the 96th consecutive year in which it has paid one. From the table and the description above, the RD investment was always above 5% of total revenue. IBM put much emphasis on its RD to keep the sustainable development and competitive advantages. 4. Inventories Raw materials, work in process and finished goods are stated at the lower of average cost or market. Cash flows related to the sale of inventories are reflected in net cash from operating activities in the Consolidated Statement of Cash Flows. Table 3-4-1 Inventories ($ in millions) At December 31:| 2011| 2010| 2009| Finished goods| $589| $432| $533| Work in process and raw materials| $2,007| $2,018| $1,960| Total| $2,595| $2,450| $2,494| 5. Property, Plant and Equipment Property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land improvements, 20 years; plant, laboratory and office equipment, 2 to 20 years; and computer equipment, 1. 5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 25 years. Below is the table of Property, Plant and Equipment from 2009 to 2011 including the depreciation. Table 3-5-1 Property, Plant and Equipment ($ in millions) At December 31:| 2011| 2010| 2009| Land and land improvements| $786| $777| $737| Buildings and building improvements| $9,531| $9,414| $9,314| Plant, laboratory and office equipment| $26,843| $26,676| $9,314| Plant and other property—gross| $37,160| $36,867| $35,940| Less: Accumulated depreciation| $24,703| $24,435| $23,485| Plant and other property—net| $12,457| $12,432| $12,455| Rental machines| $2,964| $3,422| $3,656| Less: Accumulated depreciation| $1,538| $1,758| $1,946| Rental machines—net| $1,426| $1,665| $1,710| Total—net| $13,883| $14,096| $14,165| The data from the table show a relatively steadily decreasing status of IBM’s property, plant and equipment in all. This means a good control and a relatively 6. Goodwill and Intangibles Below tables show the intangibles from 2009 to 2011 Table 3-6-1 Intangibles in 2009 ($ in millions) At December 31, 2009:| GrossCarryingAmount| Accumulated Amortization| Net Carrying Amount| Intangible asset class| | | | Capitalized software| $1,765| ($846)| $919| Client relationships| $1,367| ($677)| $690| Completed technology| $1,222| ($452)| $770| Patents/trademarks| $174| ($59)| $115| Other*| $94| ($75)| $19| Total| $4,622| ($2,109)| $2,513| Table 3-6-2 Intangibles in 2010 ($ in millions) At December 31, 2010:| GrossCarryingAmount| Accumulated Amortization| Net Carrying Amount| Intangible asset class| | | | Capitalized software| $1,558| ($726)| $831| Client relationships| $1,709| ($647)| $1,062| Completed technology| $2,111| ($688)| $1,422| In-process RD| $21| $0| $21| Patents/trademarks| $211| ($71)| $140| Other*| $39| ($28)| $11| Total| $5,649| ($2,161)| $3,488| Table 3-6-3 Intangibles in 2011 ($ in millions) At December 31, 2011:| GrossCarryingAmount| AccumulatedAmortization| NetCarryingAmount| Intangible asset class| | | | Capitalized software| $1,478| ($678)| $799| Client relationships| $1,751| ($715)| $1,035| Completed technology| $2,156| ($745)| $1,411| In-process RD| $22| ($1)| $21| Patents/trademarks| $207| ($88)| $119| Other*| $29| ($22)| $7| | $5,642| ($2,250)| $3,392| The net carrying amount of intangible assets decreased $96 million during the year ended December 31, 2011, primarily due to amortization, partially offset by intangible asset additions. No impairment of intangible assets was recorded in any of the periods presented. Total amortization was $1,226 million, $1,174 million and $1,221 million for the years ended December 31, 2011, 2010 and 2009 respectively. The aggregate intangible amortization expense for acquired intangibles (excluding capitalized software) was $634 million, $517 million and $489 million for the years ended December 31, 2011, 2010 and 2009 respectively. In addition, in 2011 the company retired $1,133 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization for this amount. The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at December 31, 2011: Table 3-6-4 Estimated consolidated statement of financial position ($ in millions) | Capitalized Software| Acquired Intangibles| Total| 012| $480| $634| $1,113| 2013| $250| $590 | $840 | 2014| $70| $446 | $516 | 2015| —| $340 | $340 | 2016| —| $303 | $303 | The changes in the goodwill balances by reportable segment, for the years ended December 31, 2009, 2010 and 2011, are as follows: Table 3-6-5 Goodwill Balances in 2009 ($ in millions) Segment| Balance anuary 1, 2009| Goodwill Additions| Purchase Price Adjustments| Divestitures| Foreign Currency Translation and Other Adjustme nts| Balance December 31, 2009| Global Business Services| $3,870 | —| —| —| $172 | $4,042 | Global Technology Services| $2,616 | $10 | $1 | —| $150 | $2,777 | Software| $10,966 | $994 | ($50)| ($13)| $708 | $12,605 | Systems and Technology| $772 | —| ($7)| —| $1 | $12,605 | Total| $18,226 | $1,004 | ($56)| ($13)| $1,031 | $20,190 | Table 3-6-6 Goodwill Balances in 2010 ($ in millions) Segment| Balance anuary 1, 2010| Goodwill Additions| Purchase Price Adjustments| Divestitures| Foreign Currency Translation and Other Adjustments| Balance December 31, 2010| Global Business Services| $4,042 | $252 | $0 | —| $35 | $4,329 | Global Technology Services| $2,777 | $32 | ($1)| —| ($104)| $2,704 | Software| $12,605 | $4,095 | ($52)| —| $315 | $16,963 | Systems and Technology| $766 | $375 | ($1)| —| ($1)| $1,139 | Total| $20,190 | $4,754 | ($54)| —| $245 | $25,136 | Table 3-6-7 Goodwill Balances in 2009 ($ in millions) Segment| Balance anuary 1, 2011| Goodwill Additions| Purchase Price Adjustments| Divestitures| Foreign Currency Translation and Other Adjustments| Balance December 31, 2011| Global Business Services| $4,329 | $14 | $0 | ($10)| ($20)| $4,313 | Global Technology Services| $2,704 | —| ($1)| ($2)| ($55)| $2,646 | Software| $16,963 | $1,277 | $10 | ($2)| ($127)| $18,121 | Systems and Technology| $1,139 | —| ($6)| —| $0 | $1,133 | Total| $25,136 | $1,291 | $2 | ($13)| ($203)| $26,213 | Purchase price adjustments recorded in the 2011, 2010 and 2009 were related to acquisitions that were completed on or prior to December 31, 2010, 2009 or 2008 respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. There were no goodwill impairment losses recorded in 2011, 2010 or 2009 and the company has no accumulated impairment losses. IV. Financial Analysis 1. Financial Ratio Display and Interpretation 2. 1 Liquidity and Efficiency Ratios a. Current ratio 2011 Current ratio=Current assetsCurrent liabilities=50,92842,123=1. 21:1 2010 Current ratio=Current assetsCurrent liabilities=48,11640,562=1. 19:1 The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm’s current assets to its current liabilities. Here, we can conclude that IBM is totally able to pay for its debt. b. Quick ratio (Acid-test ratio) 2011 Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities=11,922+4,895+18,38242,123=0. 84:1 2010 Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities=10,661++4,895+17,39140,562=0. 81:1 Quick assets are cash, short-term investments, and current receivables. These are the most liquid types of current assets. The acid-test ratio, also called quick ratio, reflects on a company’s short-term liquidity. The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. Here, the quick ratio is pretty good for IBM. c. Accounts receivable turnover 2011 Accounts receivable turnover=Net salesAverage accounts receivable, net=106,91617,886. 5=5. 97 times 2010 Accounts receivable turnover=Net salesAverage accounts receivable, net=99,87016,724=5. 97 times An accounting measure used to quantify a firm’s effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. d. Inventory turnover 2011 Inventory turnover=Cost of goods soldAverage inventory=56,7782,522. 5=22. 51 times 2010 Inventory turnover=Cost of goods soldAverage inventory=53,8572,472=21. 89 times The Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. e. Days’ sales uncollected 011 Days’ sales uncollected=Accounts receivable, netNet sales*365=18,382106,916*365=62. 75 days 2010 Days’ sales uncollected=Accounts receivable, netNet sales*365=17,39199,870*365=63. 56 days Accounts receivable turnover provides insight into how frequently a company collects its accounts. Days’ sales uncollected is one measure of this activity. f. Days’ sales in inventory 2011 Days’ sales in inventory=Ending inventoryCost of goods sold*365=2,59556,778*365=16. 68 days 2010 Days’ sales in inventory=Ending inventoryCost of goods sold*365=2,45053,857*365=16. 0 days Days’ sales in inventory is a useful measure in evaluating inventory liquidity. A measure of how quickly a company turns its inventory into sales. Days’ sales in inventory is linked to inventory in a way that days’ sales uncollected is linked to receivables. g. Total assets turnover 2011 Total assets turnover=Net salesAverage total assets=106,916114,942. 5=0. 93 times 2010 Total assets turnover=Net salesAverage total assets=99,870111,237=0. 90 times The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets. 2. 2 Solvency Ratios a. Debt ratio 2011 Debt ratio=Total liabilitiesTotal assets=96,197 116,433 =82. 6% 2010 Debt ratio=Total liabilitiesTotal assets=90,279113,452=79. 6% A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. b. Equity ratio 011 Equity ratio=Total equityTotal assets=20,236116,433=17. 4% 2010 Equity ratio=Total equityTotal assets=23,172113,452=20. 4% A financial ratio indicating the relative proportion of equity used to finance a company’s assets. The two components are often taken from the firm’s balance sheet or statement of financial position (so-called book value), but the ratio may also be calculated using market values for both, if the company’s equities are publicly traded. c. Interest coverage ratio 2011 Interest coverage ratio=Income before interest expense and income taxesInterest expense=22,904411=55. times 2010 Interest coverage ratio=Income before interest expense and income taxesInterest expense=20,923368=56. 9 times A metric used to measure a company’s ability to meet its debt obligations. It is calculated by taking a company’s earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy. 2. Profitability Ratios a. Return on total assets 2011 Return on total assets=Net incomeAverage total assets=15,855114,942. 5=13. 8% 2010 Return on total assets=Net incomeAverage total assets=14,833 111,237=13. 3% A ratio that measures a company’s earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. b. Return on equity 2011 Return on equity=Net income-Preferred dividendsAverage equity=15,855-3,47321704=57. % 2010 Return on equity=Net income-Preferred dividendsAverage equity=14,833- 3,177 22963. 5=50. 8% The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. c. Net income as a percentage of net sales (Profit margin ratio) 2011 Net income as a percentage of net sales=Net incomeNet sales=15,855106,916=14. 8% 2010 Net income as a percentage of net sales=Net incomeNet sales=14,833 99,870=14. % A ratio of profitability calculated as net income divid ed by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. d. Gross profit rate (Gross margin ratio) 2011 Gross profit rate=Net sales-Cost of goods soldNet sales=106,916-56,778106,916=46. 9% 2010 Gross profit rate=Net sales-Cost of goods soldNet sales=99,870-5385799,870=46. % A company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obliga tions. 2. 4 Market ratios a. Price-Earnings ratio 2011 Price-Earnings ratio=Market price per common shareEarnings per share=183. 8813. 25=13. 9:1 010 Price-Earnings ratio=Market price per common shareEarnings per share=146. 7611. 69=12. 6:1 P/E ratio is an equity valuation measure defined as market price per share divided by annual earnings per share. b. Dividend yield 2011 Dividend yield=Annual cash dividends per shareMarket price per share=2. 90183. 88=1. 6% 2010 Dividend yield=Annual cash dividends per shareMarket price per share=2. 50146. 76=1. 7% A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. . Comparison and Interpretation of Ratio Values With Main Competitors Microsoft All the comparisons are based on the data of 2011. 3. 5 Liquidity and Efficiency Ratios a. Current ratio 2011 IBM Current ratio=Current assetsCurrent lia bilities=50,92842,123=1. 21:1 2011 Microsoft Current ratio=Current assetsCurrent liabilities=74,91828,774=2. 60:1 The lower current ratio means that Microsoft has more resources to pay its debts over the next 12 months. b. Quick ratio (Acid-test ratio) 2011 IBM Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities=11,922+4,895+18,38242,123=0. 84:1 011 Microsoft Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities= 9,610+43,162+14,98728,774=2. 35:1 Microsoft has a higher quick ratio which means that Microsoft’s shot-term liquidity is better than that of IBM. c. Accounts receivable turnover 2011 IBM Accounts receivable turnover=Net salesAverage accounts receivable, net=106,91617,886. 5=5. 97 times 2011 Microsoft Accounts receivable turnover=Net salesAverage accounts receivable, net=69,94314000. 5=5. 00 times The similar accounts receivable turnover means that both the companies have a relatively good ability to use its assets efficiently. . Inventory turnover 2011 IBM Inventory turnover=Cost of goods soldAverage inventory=56,7782,522. 5=22. 51 times 2011 Microsoft Inventory turnover=Cost of goods soldAverage inventory=53,8571,372=39. 25 times Microsoft has a higher inventory turnover which means a better inventory control. e. Days’ sales uncollected 2011 IBM Days’ sales uncollected=Accounts receivable, netNet sales*365=18,382106,916*365=62. 75 days 2011 Microsoft Days’ sales uncollected=Accounts receivable, netNet sales*365=14000. 569,943*365=73. 1 days IBM has a faster pace to collect its accounts. f. Days’ sales in inventory 2011 IBM Days’ sales in inventory=Ending inventoryCost of goods sold*365=2,59556,778*365=16. 68 days 2011 Microsoft Days’ sales in inventory=Ending inventoryCost of goods sold*365=1,37253857*365=9. 30 days Microsoft has a quicker speed to turn its inventory into sales. g. Total assets turnover 2011 IBM Total assets turnover=Net salesAverage total assets=106,916114,942. 5=0. 93 times 2011 Microsoft Total assets turnover=Net salesAverage total assets=69,94397408. 5=0. 72 times IBM has better abilities to use its assets to efficiently generate sales. . 6 Solvency Ratios a. Debt ratio 2011 IBM Debt ratio=Total liabilitiesTotal assets=96,197 116,433 =82. 6% 2011 Microsoft Debt ratio=Total liabilitiesTotal assets=51,621 108,704 =47. 5% IBM has a higher proportion of debe relative to its assets, which means a higher risk. b. Equity ratio 2011 IBM Equity ratio=Total equityTotal assets=20,236116,433=17. 4% 2011 Microsoft Equity ratio=Total equityT otal assets=57,083108,704=52. 5% c. Interest coverage ratio 2011 IBM Interest coverage ratio=Income before interest expense and income taxesInterest expense=22,904411=55. times 2011 Microsoft Interest coverage ratio=Income before interest expense and income taxesInterest expense=28,071295=95. 2 times Microsoft has better ability to meet its debt obligations. 3. 7 Profitability Ratios a. Return on total assets 2011 IBM Return on total assets=Net incomeAverage total assets=15,855114,942. 5=13. 8% 2011 Microsoft Return on total assets=Net incomeAverage total assets=23,15066213. 5=35. 0% Microsoft is more efficient in generating earnings by using its assets. b. Return on equity 2011 IBM Return on equity=Net income-Preferred dividendsAverage equity=15,855-3,47321704=57. % 2011 Microsoft Return on equity=Net income-Preferred dividendsAverage equity=23,150-5,39451629=34. 4% IBM has a better performance in generating profitability by using shareholders’ investment. c. Net income as a percentage of net sales (Profit margin ratio) 2011 IBM Net income as a percentage of net sales=Net incomeNet sales=15,855106,916=14. 8% 2011 Microsoft Net income as a percentage of net sales=Net incomeNet sales=23,15069,943=33. 1% Microsoft is better in keeping earnings in how much out of every dollar of sales. d. Gross profit rate (Gross margin ratio) 011 IBM Gross profit rate=Net sales-Cost of goods soldNet sales=106,916-56,778106,916=46. 9% 2011 Microsoft Gross profit rate=Net sales-Cost of goods soldNet sales=69,943-56,77869,943=18. 8% Higher percentage of IBM means it retains more on each dollar of sales to service its other costs and obligations. 3. 8 Market Ratios a. Price-Earnings ratio 2011 IBM Price-Earnings ratio=Market price per common shareEarnings per share=183. 8813. 25=13. 9:1 2011 Microsoft Price-Earnings ratio=Market price per common shareEarnings per share=26. 872. 73=9. 84:1 P/E ratio gives a clear comparison, Microsoft is better. b. Dividend yield 2011 IBM Dividend yield=Annual cash dividends per shareMarket price per share=2. 90183. 88=1. 6% 2011 Microsoft Dividend yield=Annual cash dividends per shareMarket price per share=0. 64 26. 87=2. 4% Microsoft give higher percentage of dividend. 3. Comparison and Interpretation of Ratio Values with Key Business Ratios All the comparisons are based on the data of 2011. Only compared with those available online. 4. 9 Liquidity and Efficiency Ratios Table 3-3. 1-1Liquidity and Efficiency Ratios with Key Business Ratios Item| IBM 2011| IBM 2011| Key Business Ratios| Current ratio| 1. 21:1| 1. 19:1| 1. 9:1| Quick ratio| 0. 84:1| 0. 81:1| 0. 68:1| Return on equity| 57. 0%| 50. 8%| 13. 96%| Net income as a percentage of net sales| 14. 8%| 14. 9%| 10. 2%| Price-Earnings ratio| 13. 9:1| 12. 6:1| 13. 2:1| Dividend yield| 1. 6%| 1. 7%| 2. 05%| The lower current ratio means IBM has a more resource to pay its debts over the next 12 month compared to the industry average. IBM has a higher quick ratio which means that IBM’s shot-term liquidity is better than industry average. A higher return on equity ratio means IBM has a better performance than industry average in generating profitability by using shareholders’ investment. A higher Net income as a percentage of net sales means IBM is better in keeping earnings in how much out of every dollar of sales than industry average. IBM’s P/E ratio increased and exceeded the industry average and is a little bit better. Its stock performed well last year. A lower dividend yield ratio means less dividend compared to industry average gave to shareholders. In conclusion, IBM had a quite well performance in last two years. All the ratios shows that IBM had got an obvious growth and improvement. 4. Common-size Comparative Statements Analysis Appendix 1 is IBM Common-Size Comparative Balance Sheets A 0. 4% point increase in cash and equivalents, which is likely balanced with a 0. 87% point decline in Marketable securities, both steady status in inventories and property, plant and equipment, a marked increase 8. 5% in retained earnings and with most of the good increase and good decrease in percentage means a better performance year in 2011 than that in 2010. App endix 2 is IBM Common-Size Comparative Income Statement A 0. 33% decline in cost of services, a 0. 39% decline in cost of sales, a 0. 11% decline in cost of financing, a 0. 82% decline in total cost contributes a 0. 82% increase in gross profits, and a 0. 2% decline in net income (loss) shows a better performance of IBM in 2011 than that in 2010. Appendix 3 is IBM Common-Size Comparative Cash Flow Statement A 4. 01% increase in net income, a 1. 29% decline in inventories, a 5% decline in other assets/other liabilities, a 0. 09% increase in investment in software, a 0. 61% in non-operating finance receivables – net, a 21. 17% increase in acquisition of businesses, net of cash acquired, and a 21. 37 increase in net cash flows from investing activities gives a enough evidence to show the better performance of IBM in 2011 than that in 2010. So in conclusion, IBM performed better in 2011 than in 2010. 5. Trend Analysis Appendix 4 is IBM Income Statement Trend Percent The base period is 2009 and the trend percent is computed in each subsequent year by dividing that year’s amount by its 2009 amount. Total revenue in trend percent is 100% in 2009, 104. 29% in 2010, and 111. 65% in 2011; Total cost is 100% in 2009, 103. 62% in 2010, and 109. 25% in 2011; Total expense other income is 100% in 2009, 102. 51% in 2010, and 113. 60% in 2011. These data shows a good control of cost but a relatively bad expense control. IBM used the relatively same cost generates more revenue but fewer revenue with the same expense. Total revenue falls short of that for total expense other income in 2011 but exceeded in 2010, IBM fails to show an ability to control these expenses as it expands in 2011. Appendix 5 is IBM Balance Sheet Trend Percent The base period is 2009 and the trend percent is computed in each subsequent year by dividing that year’s amount by its 2009 amount. Total revenue in trend percent is 100% in 2009, 104. 29% in 2010, and 111. 65% in 2011; Total assets are 100% in 2009, 104. 60% in 2010, and 106. % in 2011; Retained earnings are 100% in 2009, 114. 38% in 2010, and 129. 61% in 2011. With these percent, we can figure out that IBM was more efficient in using its assets in 2011. Management has generated revenues sufficient to compensate for this asset growth. And in retained earnings shows a better in expense control and higher efficiency in generate revenues. So in conclusion, IBM did a quite good job in 2011. V. Prospective Analysis and Summary Here, based on what I have calculated and the interpretation. We can definitely come to a conclusion that IBM is still growing and it did very good in most parts. As the trend analysis listed above, the faster growing total revenue and the slower growing total cost shows a quite good control of the cost. IBM used the relatively same cost generates more revenue. And IBM was becoming more efficient in using its assets to generate revenue. The fairly good current ratio gives an average performance in giving the debts in next 12 months. And with the quite good quick ratio, return on equity, net income as a percentage of net sales, P/E ratio in 2011 which are higher than the average key business ratios and the ratios of IBM in 2010, we can anticipate a good performance in 2012 and far future. Common-size comparative statements analysis also gives a quite good result, such as the increase in cash and equivalents, gross profits, net income, acquisition of businesses, net of cash acquired, net cash flows and retained earnings, the decline in cost of goods and inventories. Although IBM didn’t perform as well as Microsoft, and there is still some defects in its performance in last two years. As a whole, I would like to invest my hard -earned dollars into the stock of IBM. Appendix 1 | | | Common-size Percent| Report Date| 12/31/2011| 12/31/2010| 12/31/2011| 12/31/2010| Cash ; cash equivalents| 11,922,000| 10,661,000| 10. 4%| 9. 40%| Marketable securities| 0| 990,000| 0. 00%| 0. 87%| Notes ; accounts receivable – trade, net| 11,179,000| 10,834,000| 9. 60%| 9. 55%| Short-term financing receivables| 16,901,000| 16,257,000| 14. 52%| 14. 33%| Other accounts receivable| 1,481,000| 1,134,000| 1. 27%| 1. 00%| Finished goods| 589,000| 432,000| 0. 51%| 0. 38%| Work in proc ess ; raw materials| 2,007,000| 2,018,000| 1. 72%| 1. 78%| Inventories| 2,595,000| 2,450,000| 2. 23%| 2. 16%| Deferred taxes| 1,601,000| 1,564,000| 1. 38%| 1. 38%| Prepaid expenses ; other current assets| 5,249,000| 4,226,000| 4. 51%| 3. 2%| Total current assets| 50,928,000| 48,116,000| 43. 74%| 42. 41%| Land ; land improvements| 786,000| 777,000| 0. 68%| 0. 68%| Buildings ; building improvements| 9,531,000| 9,414,000| 8. 19%| 8. 30%| Plant, laboratory ; office equipment| 26,843,000| 26,676,000| 23. 05%| 23. 51%| Plant ; other property, gross| 37,160,000| 36,867,000| 31. 92%| 32. 50%| Less: accumulated depreciation| 24,703,000| 24,435,000| 21. 22%| 21. 54%| Plant ; other property, net| 12,457,000| 12,432,000| 10. 70%| 10. 96%| Rental machines, gross| 2,964,000| 3,422,000| 2. 55%| 3. 02%| Less: Accumulated depreciation| 1,538,000| 1,758,000| 1. 2%| 1. 55%| Rental machines, net| 1,426,000| 1,665,000| 1. 22%| 1. 47%| Plant, rental machines ; oth property, gross| 40,124,000| 40,289,000| 34. 46%| 35. 51%| Less: Accumulated depreciation| 26,241,000| 26,193,000| 22. 54%| 23. 09%| Plant, rental machines ; other property, net| 13,883,000| 14,096,000| 11. 92%| 12. 42%| Long-term financing receivables| 10,776,000| 10,548,000| 9. 26%| 9. 30%| Prepaid pension assets| 2,843,000| 3,068,000| 2. 44%| 2. 70%| Deferred taxes| 3,503,000| 3,220,000| 3. 01%| 2. 84%| Goodwill| 26,213,000| 25,136,000| 22. 51%| 22. 16%| Intangible assets, net| 3,392,000| 3,488,000| 2. 1%| 3. 07%| Deferred taxes| -| -| | | Deferred transition ; set-up costs ; other deferred arrangements| 1,784,000| 1,853,000| 1. 53%| 1. 63%| Derivatives, non-current| 753,000| 588,000| 0. 65%| 0. 52%| Alliance investments – equity method| 131,000| 122,000| 0. 11%| 0. 11%| Alliance investments – non-equity method| 127,000| 531,000| 0. 11%| 0. 47%| Prepaid software| 233,000| 268,000| 0. 20%| 0. 24%| Long-term deposits| 307,000| 350,000| 0. 26%| 0. 31%| Marketable securities| -| -| | | Other receivables| 208, 000| 560,000| 0. 18%| 0. 49%| Employee benefit related| 493,000| 409,000| 0. 42%| 0. 6%| Prepaid income taxes| 261,000| 434,000| 0. 22%| 0. 38%| Other assets| 598,000| 663,000| 0. 51%| 0. 58%| Total investments ; sundry assets| 4,895,000| 5,778,000| 4. 20%| 5. 09%| Total assets| 116,433,000| 113,452,000| 100. 00%| 100. 00%| Taxes| 3,313,000| 4,216,000| 2. 85%| 3. 72%| Commercial paper| 2,300,000| 1,144,000| 1. 98%| 1. 01%| Short-term loans| 1,859,000| 1,617,000| 1. 60%| 1. 43%| Long-term debt – current maturities| 4,306,000| 4,017,000| 3. 70%| 3. 54%| Short-term debt| 8,463,000| 6,778,000| 7. 27%| 5. 97%| Accounts payable| 8,517,000| 7,804,000| 7. 31%| 6. 88%| Compensation ; benefits| 5,099,000| 5,028,000| 4. 8%| 4. 43%| Deferred income| 12,197,000| 11,580,000| 10. 48%| 10. 21%| Other accrued expenses ; liabilities| 4,535,000| 5,156,000| 3. 89%| 4. 54%| Total current liabilities| 42,123,000| 40,562,000| 36. 18%| 35. 75%| U. S dollar notes ; debentures| 24,192,000| 21,766,000| 20. 78%| 19. 19%| Other debt in Euros| 1,037,000| 1,897,000| 0. 89%| 1. 67%| Other debt in Japanese yen| 1,123,000| 1,162,000| 0. 96%| 1. 02%| Other debt in Swiss francs| 173,000| 540,000| 0. 15%| 0. 48%| Other currencies debt| 177,000| 240,000| 0. 15%| 0. 21%| Long-term debt| 26,702,000| 25,606,000| 22. 93%| 22. 7%| Less: net unamortized premium (discount)| -533,000| -531,000| -0. 46%| -0. 47%| Add: SFAS No. 133 fair value adjustment| 994,000| 788,000| 0. 85%| 0. 69%| Long-term debt before current maturities| 27,161,000| 25,863,000| 23. 33%| 22. 80%| Less: Current maturities| 4,306,000| 4,017,000| 3. 70%| 3. 54%| Long-term debt| 22,857,000| 21,846,000| 19. 63%| 19. 26%| Retire ; nonpension postretire benef obligs| 18,374,000| 15,978,000| 15. 78%| 14. 08%| Deferred income| 3,847,000| 3,666,000| 3. 30%| 3. 23%| Income tax reserves| 3,989,000| 3,486,000| 3. 43%| 3. 07%| Executive compensation accruals| 1,388,000| 1,302,000| 1. 19%| 1. 5%| Disability benefits| 835,000| 739,000| 0. 72% | 0. 65%| Derivatives liabilities| 166,000| 135,000| 0. 14%| 0. 12%| Restructuring actions| 347,000| 399,000| 0. 30%| 0. 35%| Workforce reductions| 366,000| 406,000| 0. 31%| 0. 36%| Deferred taxes| 549,000| 378,000| 0. 47%| 0. 33%| Enviromental accruals| 249,000| 249,000| 0. 21%| 0. 22%| Non-current warranty accruals| 163,000| 130,000| 0. 14%| 0. 11%| Asset retirement obligations| 166,000| 161,000| 0. 14%| 0. 14%| Other liabilities| 777,000| 841,000| 0. 67%| 0. 74%| Total other liabilities| 8,996,000| 8,226,000| 7. 73%| 7. 25%| Total liabilities| 96,197,000| 90,279,000| 82. 2%| 79. 57%| Common stock| 48,129,000| 45,418,000| 41. 34%| 40. 03%| Retained earnings| 104,857,000| 92,532,000| 90. 06%| 81. 56%| Treasury stock, at cost| 110,963,000| 96,161,000| 95. 30%| 84. 76%| Net unreal gains (losses) on cash flow hedge derivatives| 71,000| -96,000| 0. 06%| -0. 08%| Foreign currency translation adjustments| 1,767,000| 2,478,000| 1. 52%| 2. 18%| Net change retirement-related benefit plans| -23,737,000| -21,289,000| -20. 39%| -18. 76%| Net unrealized gains (losses) on mktble secur| 13,000| 164,000| 0. 01%| 0. 14%| Accum gains ; (losses) not affecting ret earns| -21,885,000| -18,743,000| -18. 0%| -16. 52%| Total stockholders’ equity| 20,138,000| 23,046,000| 17. 30%| 20. 31%| Non-controlling interests| 97,000| 126,000| 0. 08%| 0. 11%| Total equity| 20,236,000| 23,172,000| 17. 38%| 20. 42%| Appendix 2 | | | Common-size Percent| Report Date| 12/31/2011| 12/31/2010| 12/31/2011| 12/31/2010| Services revenue| 60,721,000| 56,868,000| 56. 79%| 56. 94%| Sales| 44,063,000| 40,736,000| 41. 21%| 40. 79%| Financing revenue| 2,132,000| 2,267,000| 1. 99%| 2. 27%| Total revenue| 106,916,000| 99,870,000| 100. 00%| 100. 00%| Cost of services| 40,740,000| 38,383,000| 38. 10%| 38. 43%| Cost of sales| 14,973,000| 14,374,000| 14. 0%| 14. 39%| Cost of financing| 1,065,000| 1,100,000| 1. 00%| 1. 10%| Total cost| 56,778,000| 53,857,000| 53. 11%| 53. 93%| Gross profit| 50,138,000| 46,014, 000| 46. 89%| 46. 07%| Selling, general administrative – base expense| 20,287,000| 18,585,000| 18. 97%| 18. 61%| Advertising promotional expense| 1,373,000| 1,337,000| 1. 28%| 1. 34%| Workforce reductions – ongoing expense| 440,000| 641,000| 0. 41%| 0. 64%| Retirement-related expense| 603,000| 494,000| 0. 56%| 0. 49%| Amortization expense-acquired intangibles| 289,000| 253,000| 0. 27%| 0. 25%| Stock-based compensation| 514,000| 488,000| 0. 8%| 0. 49%| Bad debt expense| 88,000| 40,000| 0. 08%| 0. 04%| Total selling, general administrative exps| 23,594,000| 21,837,000| 22. 07%| 21. 87%| Research, development engineering expenses| 6,258,000| 6,026,000| 5. 85%| 6. 03%| Intellectual property custom development income| 1,108,000| 1,154,000| 1. 04%| 1. 16%| Foreign currency transaction gains (losses)| (513,000)| (303,000)| -0. 48%| -0. 30%| Gains (losses) on derivative instruments| 113,000| 239,000| 0. 11%| 0. 24%| Interest income| 136,000| 92,000| 0. 13%| 0. 09%| Net ga ins from securities investments assets| 227,000| (31,000)| 0. 1%| -0. 03%| Other income (expense)| 58,000| 790,000| 0. 05%| 0. 79%| Total other income (expense)| 20,000| 787,000| 0. 02%| 0. 79%| Interest expense| 411,000| 368,000| 0. 38%| 0. 37%| Total expense other income| 29,135,000| 26,291,000| 27. 25%| 26. 33%| Income (loss) bef income taxes – U. S. opers| 9,716,000| 9,140,000| 9. 09%| 9. 15%| Income (loss) bef inc taxes – Non-U. S. opers| 11,287,000| 10,583,000| 10. 56%| 10. 60%| Income (loss) from continuing operations before income taxes| 21,003,000| 19,723,000| 19. 64%| 19. 75%| U. S federal income taxes (benefit) – current| 268,000| 190,000| 0. 5%| 0. 19%| U. S. federal income taxes (benef) – deferred| 909,000| 1,015,000| 0. 85%| 1. 02%| Total U. S. federal income taxes (benefit)| 1,177,000| 1,205,000| 1. 10%| 1. 21%| U. S. state local inc tax (benef) – current| 429,000| 279,000| 0. 40%| 0. 28%| U. S. state local inc tax (benef) †“ deferred| 81,000| 210,000| 0. 08%| 0. 21%| Total U. S. state local income taxes (benef)| 510,000| 489,000| 0. 48%| 0. 49%| Non-U. S. income taxes (benefit) – current| 3,239,000| 3,127,000| 3. 03%| 3. 13%| Non-U. S. income taxes (benefit) – deferred| 222,000| 69,000| 0. 21%| 0. 07%| Total non-U. S. ncome taxes (benefit)| 3,461,000| 3,196,000| 3. 24%| 3. 20%| Provision for income taxes| 5,148,000| 4,890,000| 4. 81%| 4. 90%| Net income (loss)| 15,855,000| 14,833,000| 14. 83%| 14. 85%| Weighted average shares outstanding-basic| 1,196,951. 006| 1,268,789. 388| 1. 12%| 1. 27%| Weighted average shares outstanding-diluted| 1,213,767. 985| 1,287,355. 388| 1. 14%| 1. 29%| Year end shares outstanding| 1,163,182. 564| 1,227,993. 544| 1. 09%| 1. 23%| Net earnings (loss) per share-basic| 13. 25| 11. 69| 0. 00%| 0. 00%| Net earnings (loss) per share-diluted| 13. 06| 11. 52| 0. 00%| 0. 00%| Dividends per share of common stock| 2. | 2. 5| 0. 00%| 0. 00%| Total number of employees| 433,362| 426,751| 0. 41%| 0. 43%| Number of common stockholders| 504,093| 523,553| 0. 47%| 0. 52%| Appendix 3 | | | Common-size Percent| Report Date| 12/31/2011| 12/31/2010| 12/31/2011| 12/31/2010| Net income (loss)| 15,855,000| 14,833,000| 79. 89%| 75. 88%| Depreciation| 3,589,000| 3,657,000| 18. 08%| 18. 71%| Amortization of intangibles| 1,226,000| 1,174,000| 6. 18%| 6. 01%| Stock-based compensation| 697,000| 629,000| 3. 51%| 3. 22%| Deferred taxes| 1,212,000| 1,294,000| 6. 11%| 6. 62%| Net loss (gain) on asset sales other| (342,000)| (801,000)| -1. 2%| -4. 10%| Receivables (including financing receivables)| (1,279,000)| (489,000)| -6. 44%| -2. 50%| Retirement related| (1,371,000)| (1,963,000)| -6. 91%| -10. 04%| Inventories| (163,000)| 92,000| -0. 82%| 0. 47%| Other assets/other liabilities| (28,000)| 949,000| -0. 14%| 4. 85%| Accounts payable| 451,000| 174,000| 2. 27%| 0. 89%| Net cash flows from operating activities| 19,846,000| 19,549,000| 100. 00%| 100. 00%| Payments for pl ant, rental machines other property| (4,108,000)| (4,185,000)| -20. 70%| -21. 41%| Proc from disp of plant, rental machines oth prop| 608,000| 770,000| 3. 06%| 3. 4%| Investment in software| (559,000)| (569,000)| -2. 82%| -2. 91%| Purchases of marketable securities other investments| (1,594,000)| (6,129,000)| -8. 03%| -31. 35%| Proceeds from disposition of marketable securities other investments| 3,345,000| 7,877,000| 16. 85%| 40. 29%| Non-operating finance receivables – net| (291,000)| (405,000)| -1. 47%| -2. 07%| Acquisition of businesses, net of cash acquired| (1,811,000)| (5,922,000)| -9. 13%| -30. 29%| Divestiture of businesses, net of cash transferred| 14,000| 55,000| 0. 07%| 0. 28%| Net cash flows from investing activities| (4,396,000)| (8,507,000)| -22. 5%| -43. 52%| Proceeds from new debt| 9,996,000| 8,055,000| 50. 37%| 41. 20%| Payments to settle debt| (8,947,000)| (6,522,000)| -45. 08%| -33. 36%| Sht-tm borrows (repays)-less than 90 days-net| 1,321,000| 817,000 | 6. 66%| 4. 18%| Common stock repurchases| (15,046,000)| (15,375,000)| -75. 81%| -78. 65%| Common stock transactions, other| 2,453,000| 3,774,000| 12. 36%| 19. 31%| Cash dividends paid| (3,473,000)| (3,177,000)| -17. 50%| -16. 25%| Net cash flows from financing activities| (13,696,000)| (12,429,000)| -69. 01%| -63. 58%| Eff of exch rate chngs on cash cash equivs| (493,000)| (135,000)| -2. 8%| -0. 69%| Net change in cash cash equivalents| 1,262,000| (1,522,000)| 6. 36%| -7. 79%| Cash cash equivalents, beginning of year| 10,661,000| 12,183,000| 53. 72%| 62. 32%| Cash cash equivalents, end of year| 11,922,000| 10,661,000| 60. 07%| 54. 53%| Cash paid during the year for income taxes| 4,168,000| 3,238,000| 21. 00%| 16. 56%| Cash paid during the year for interest| 956,000| 951,000| 4. 82%| 4. 86%| Appendix 4 | Trend Percent| Report Date| 12/31/2011| 12/31/2010| 12/31/2009| Services revenue| 110. 15%| 103. 16%| 100. 00%| Sales| 115. 05%| 106. 36%| 100. 00%| Financing revenue| 91. 46%| 97. 5%| 100. 00%| Total revenue| 111. 65%| 104. 29%| 100. 00%| Cost of services| 109. 68%| 103. 33%| 100. 00%| Cost of sales| 110. 05%| 105. 64%| 100. 00%| Cost of financing| 87. 30%| 90. 16%| 100. 00%| Total cost| 109. 25%| 103. 62%| 100. 00%| Gross profit| 114. 51%| 105. 09%| 100. 00%| Selling, general administrative – base expense| 112. 36%| 102. 93%| 100. 00%| Advertising promotional expense| 109. 66%| 106. 79%| 100. 00%| Workforce reductions – ongoing expense| 92. 83%| 135. 23%| 100. 00%| Retirement-related expense| 187. 27%| 153. 42%| 100. 00%| Amortization expense-acquired intangibles| 101. 40%| 88. 7%| 100. 00%| Stock-based compensation| 123. 26%| 117. 03%| 100. 00%| Bad debt expense| 59. 86%| 27. 21%| 100. 00%| Total selling, general administrative exps| 112. 61%| 104. 22%| 100. 00%| Research, development engineering expenses| 107. 53%| 103. 54%| 100. 00%| Intellectual property custom development income| 94. 14%| 98. 05%| 100. 00%| Foreign currency trans action gains (losses)| -51300. 00%| -30300. 00%| 100. 00%| Gains (losses) on derivative instruments| 941. 67%| 1991. 67%| 100. 00%| Interest income| 144. 68%| 97. 87%| 100. 00%| Net gains from securities investments assets| -202. 8%| 27. 68%| 100. 00%| Net real gains (losses) from real est activs| -| -| 100. 00%| Other income (expense)| 16. 48%| 224. 43%| 100. 00%| Total other income (expense)| 5. 70%| 224. 22%| 100. 00%| Interest expense| 102. 24%| 91. 54%| 100. 00%| Total expense other income| 113. 60%| 102. 51%| 100. 00%| Income (loss) bef income taxes – U. S. opers| 102. 02%| 95. 97%| 100. 00%| Income (loss) bef inc taxes – Non-U. S. opers| 131. 03%| 122. 86%| 100. 00%| Income (loss) from continuing operations before income taxes| 115. 80%| 108. 74%| 100. 00%| U. S federal income taxes (benefit) – current| 56. 6%| 40. 17%| 100. 00%| U. S. federal income taxes (benef) – deferred| 67. 79%| 75. 69%| 100. 00%| Total U. S. federal income taxes (benefit) | 64. 88%| 66. 43%| 100. 00%| U. S. state local inc tax (benef) – current| 357. 50%| 232. 50%| 100. 00%| U. S. state local inc tax (benef) – deferred| 43. 78%| 113. 51%| 100. 00%| Total U. S. state local income taxes (benef)| 167. 21%| 160. 33%| 100. 00%| Non-U. S. income taxes (benefit) – current| 138. 01%| 133. 23%| 100. 00%| Non-U. S. income taxes (benefit) – deferred| 89. 88%| 27. 94%| 100. 00%| Total non-U. S. income taxes (benefit)| 133. 2%| 123. 21%| 100. 00%| Provision for income taxes| 109. 23%| 103. 76%| 100. 00%| Income (loss) from continuing operations| -| -| 100. 00%| Net income (loss)| 118. 10%| 110. 49%| 100. 00%| Weighted average shares outstanding-basic| 90. 19%| 95. 60%| 100. 00%| Weighted average shares outstanding-diluted| 90. 49%| 95. 97%| 100. 00%| Year end shares outstanding| 89. 11%| 94. 07%| 100. 00%| Earnings (loss) per share from continuing operations-basic| -| -| 100. 00%| Net earnings (loss) per share-basic| 130. 93%| 115. 51%| 100. 00%| Earnings (loss) per share from continuing operations-diluted| -| -| 100. 0%| Net earnings (loss) per share-diluted| 130. 47%| 115. 08%| 100. 00%| Dividends per share of common stock| 134. 88%| 116. 28%| 100. 00%| Total number of employees| 98. 99%| 97. 48%| 100. 00%| Number of common stockholders| 92. 70%| 96. 28%| 100. 00%| Appendix 5 | Trend percent| Report Date| 12/31/2011| 12/31/2010| 12/31/2009| Cash cash equivalents| 97. 86%| 87. 51%| 100. 00%| Marketable securities| 0. 00%| 55. 28%| 100. 00%| Notes accounts receivable – trade, net| 104. 13%| 100. 91%| 100. 00%| Short-term financing receivables| 113. 32%| 109. 00%| 100. 00%| Other accounts receivable| 129. 7%| 99. 21%| 100. 00%| Finished goods| 110. 51%| 81. 05%| 100. 00%| Work in process raw materials| 102. 40%| 102. 96%| 100. 00%| Inventories| 104. 05%| 98. 24%| 100. 00%| Deferred taxes| 92. 54%| 90. 40%| 100. 00%| Prepaid expenses other current assets| 133. 02%| 107. 10%| 100. 00%| Total current as sets| 104. 07%| 98. 33%| 100. 00%| Land land improvements| 106. 65%| 105. 43%| 100. 00%| Buildings building improvements| 102. 33%| 101. 07%| 100. 00%| Plant, laboratory office equipment| 103. 69%| 103. 04%| 100. 00%| Plant other property, gross| 103. 39%| 102. 58%| 100. 0%| Less: accumulated depreciation| 105. 19%| 104. 05%| 100. 00%| Plant other property, net| 100. 02%| 99. 82%| 100. 00%| Rental machines, gross| 81. 07%| 93. 60%| 100. 00%| Less: Accumulated depreciation| 79. 03%| 90. 34%| 100. 00%| Rental machines, net| 83. 39%| 97. 37%| 100. 00%| Plant, rental machines oth property, gross| 101. 33%| 101. 75%| 100. 00%| Less: Accumulated depreciation| 103. 19%| 103. 00%| 100. 00%| Plant, rental machines other property, net| 98. 01%| 99. 51%| 100. 00%| Long-term financing receivables| 101. 24%| 99. 10%| 100. 00%| Prepaid pension assets| 94. 4%| 102. 23%| 100. 00%| Deferred taxes| 83. 50%| 76. 76%| 100. 00%| Goodwill| 129. 83%| 124. 50%| 100. 00%| Intangible assets, net| 134. 98%| 138. 80%| 100. 00%| Deferred transition set-up costs other deferred arrangements| 100. 68%| 104. 57%| 100. 00%| Derivatives, non-current| 133. 27%| 104. 07%| 100. 00%| Alliance investments – equity method| 113. 91%| 106. 09%| 100. 00%| Alliance investments – non-equity method| 26. 62%| 111. 32%| 100. 00%| Prepaid software| 74. 68%| 85. 90%| 100. 00%| Long-term deposits| 99. 03%| 112. 90%| 100. 00%| Other receivables| 33. 71%| 90. 76%| 100. 00%| Employee benefit related| 115. 46%| 95. 78%| 100. 00%| Prepaid income taxes| -| -| -| Other assets| 76. 37%| 84. 67%| 100. 00%| Total investments sundry assets| 91. 00%| 107. 42%| 100. 00%| Total assets| 106. 80%| 104. 06%| 100. 00%| Taxes| 86. 59%| 110. 19%| 100. 00%| Commercial paper| 978. 72%| 486. 81%| 100. 00%| Short-term loans| 108. 65%| 94. 51%| 100. 00%| Long-term debt – current maturities| 193. 79%| 180. 78%| 100. 00%| Short-term debt| 203. 05%| 162. 62%| 100. 00%| Accounts payable| 114. 54%| 104. 95%| 100. 00%| Compensation benefits| 113. 19%| 111. 61%| 100. 00%| Deferred income| 112. 7%| 106. 78%| 100. 00%| Other accrued expenses liabilities| 86. 83%| 98. 72%| 100. 00%| Total current liabilities| 117. 00%| 112. 67%| 100. 00%| U. S dollar notes debentures| 132. 58%| 119. 29%| 100. 00%| Other debt in Euros| 30. 26%| 55. 35%| 100. 00%| Other debt in Japanese yen| 71. 76%| 74. 25%| 100. 00%| Other debt in Swiss francs| 35. 74%| 111. 57%| 100. 00%| Other currencies d ebt| 62. 11%| 84. 21%| 100. 00%| Long-term debt| 111. 22%| 106. 66%| 100. 00%| Less: net unamortized premium (discount)| 101. 14%| 100. 76%| 100. 00%| Add: SFAS No. 133 fair value adjustment| 147. 70%| 117. 9%| 100. 00%| Long-term debt before current maturities| 112. 45%| 107. 08%| 100. 00%| Less: Current maturities| 193. 79%| 180. 78%| 100. 00%| Long-term debt| 104. 22%| 99. 61%| 100. 00%| Retire nonpension postretire benef obligs| 115. 18%| 100. 16%| 100. 00%| Deferred income| 108. 00%| 102. 92%| 100. 00%| Income tax reserves| 109. 98%| 96. 11%| 100. 00%| Executive compensation accruals| 119. 66%| 112. 24%| 100. 00%| Disability benefits| 105. 03%| 92. 96%| 100. 00%| Derivatives liabilities| 25. 58%| 20. 80%| 100. 00%| Restructuring actions| 78. 68%| 90. 48%| 100. 00%| Workforce reductions| 89. 9%| 99. 27%| 100. 00%| Deferred taxes| 116. 81%| 80. 43%| 100. 00%| Enviromental accruals| 101. 63%| 101. 63%| 100. 00%| Non-current warranty accruals| 129. 37%| 103. 17%| 100. 00%| Asset r etirement obligations| 143. 10%| 138. 79%| 100. 00%| Other liabilities| 99. 49%| 107. 68%| 100. 00%| Total other liabilities| 102. 01%| 93. 28%| 100. 00%| Total liabilities| 111. 51%| 104. 65%| 100. 00%| Common stock| 115. 11%| 108. 63%| 100. 00%| Retained earnings| 129. 61%| 114. 38%| 100. 00%| Treasury stock, at cost| 136. 58%| 118. 36%| 100. 00%| Net unreal gains (losses) on cash flow hedge derivatives| -14. 6%| 19. 96%| 100. 00%| Foreign currency translation adjustments| 96. 24%| 134. 97%| 100. 00%| Net change retirement-related How to cite Financial Statement Analysis of Ibm, Papers

Scope of Strategic Marketing free essay sample

Chapter 1 Scope of strategic marketing Marketing is a philosophy that leads to the process by which organizations, groups and individuals obtain what they need and want by identifying value, providing it, communicating it and delivering it to others. The core concepts of marketing are customers’ needs, wants and values; products, exchange, communications and relationships. Marketing is strategically concerned with the direction and scope of the long-term activities performed by the organization to obtain a competitive advantage. The organization applies its resources within a changing environment to satisfy customer needs while meeting stakeholder expectations. Implied in this view of strategic marketing is the requirement to develop a strategy to cope with competitors, identify market opportunities, develop and commercialize new products and services, allocate resources among marketing activities and design an appropriate organizational structure to ensure the performance desired is achieved. There is no unique strategy that succeeds for all organizations in all situations. In thinking strategically about marketing many factors must be considered: the extent of product diversity and geographic coverage in the organization; the number of market segments served, marketing channels used, the role of branding, the level of marketing effort, and the role of quality. It is also necessary to consider the organization’s approach to new product development, in particular, its position as a technology leader or follower, the extent of innovation, the organization’s cost position and pricing policy, and its relationship to customers, competitors, suppliers and partners. The challenge of strategic marketing is, therefore, to manage marketing complexity, customer and stakeholder expectations and to reconcile the in? uences of a changing environment in the context of a set of resource capabilities. It is also necessary to create strategic opportunities and to manage the concomitant changes required within the organization. In this world of marketing, organizations seek to maximize returns to shareholders by creating a competitive advantage in identifying, providing, communicating and delivering value to customers, broadly de? ed, and in the process developing long-term mutually satisfying relationships with those customers. [2] Strategic Marketing Understanding marketing – antecedents The fundamental management issue in marketing is to determine a superior value position from the customer’s perspective and to ensure that, by developing a consensus throughout the organization, value is provided, communicated and delivered to the customer g roup. The core concepts of marketing are needs, wants and demands which directly affect the identi? cation and selection of relevant customer values re? cted in products, services and ideas that the organization provides, communicates and delivers in the form of exchanges to build long-term satisfactory relationships with customers (Figure 1. 1). Needs are the internal in? uences which prompt behaviour, e. g. biological needs refer to a person’s requirements for food, air and shelter while social needs refer to issues such as security, personal grati? cation and prestige. Wants are culture bound and may be satis? ed using a number of technologies, e. g. a teenager may listen to music on one of the rock radio stations or on DVDs played on a computer. Demand refers to the ability and willingness of a customer to buy a particular product or service which satis? es the want and the more latent need. A student may want a BMW but can afford only a bicycle. The organization may set out from the start or be established with those objectives or, more likely, as a result of trial and error and experience, the organization evolves into a position over time of being the desired source of value. The core concepts of marketing may be decomposed into a number of basic components: Identify and select the customer value Needs Wants Demands Provide, communicate and deliver customer value Products, services and ideas Exchange of values and relationship building Customers Figure [1. 1] Core concepts of marketing Scope of strategic marketing [3] Provide the value – product planning – packaging – branding – pricing Communicate the value – advertising – personal selling – direct marketing – sales promotion Deliver the value – channels of distribution – logistics – servicing Successful organizations recognize value positions and ensure that learning occurs throughout the organization as a result of discovering the value position. Choosing the value position is one of the most important strategic decisions facing the organization. Once chosen, it the task of management to ensure that everyone in the organization directly contributes to delivering the chosen value. Marketing and sales orientations A sales emphasis is very different from a marketing emphasis in the organization. Four important areas where they differ separate the two approaches: organizational objectives, orientation, attitudes to segmentation and the perceived task facing marketing in the organization (Kotler 2002). A sales emphasis results in objectives which are aimed at increasing current sales to meet quotas and to derive commissions and bonuses. Little discrimination is made between products or customers in terms of pro? ts unless these differences are written into the incentives. In contrast, objectives with a marketing emphasis take pro? ts into account. Marketing objectives include an explicit consideration of product mixes, customer groups and different communications and ways of reaching the market in attempting to achieve pro? table sales and market shares at acceptable levels of risk. The selling and marketing orientations produce very different emphases in the organization. A selling orientation predominantly re? ects a production approach whereby something is produced and the task is to sell it thereby [4] Strategic Marketing Market orientation Market research Product research and development Production Sales orientation Communications Sales Technology orientation Figure [1. 2] Alternative business orientation of the ? rm increasing consumption (Figure 1. 2). A focus on sales means a focus on individual customers rather than market segments or market classes. Such organizations are very knowledgeable about individual accounts and the variables which in? uence speci? c sales transactions but they are less interested in developing an approach to an entire segment of similar needs and wants in the market. A technology orientation is similar to a sales orientation except that the organization also engages in product research and development (Figure 1. 2). A marketing approach attempts to determine ways of offering superior value to the more pro? table segments without damaging individual customer relationships. A marketing approach re? cts an integrated approach based on research and feedback. Customer needs are ? rst evaluated through market research, an integrated marketing effort is developed to satisfy customers so that the organization achieves its goals, especially those affecting shareholders. This is a customer orientation and contrasts very bluntly with a narrow competitor orientation based on sales in which the organization by capit alizing on the weaknesses of vulnerable competitors or by removing its own competitive weaknesses attempts to obtain high sales and long-run pro? s (Figure 1. 3). In many situations marketing evaluates itself and presents its case to senior managers of the organization based on sales, ef? ciency or, worst of all, internal awards, not marketplace outcomes or ? nancial success. Senior managers deal with issues that involve the allocation of resources and how such allocation affects the return on investment. These hurdle rates are calculated differently from one organization to another but they need to be understood for a marketing programme to be effective and accepted. In a business world ominated by ? nancial considerations the ability of the organization to produce award-winning marketing programmes or attractive but fuzzy images in TV commercials is not of much value. Traditional marketing thinking assumes that the organization is in complete control of the marketplace, whereas in teraction and market integration are required. Scope of strategic marketing [5] Customer orientation Identify needs and wants of potential customers Provide and communicate values to match customer needs Satisfied customers Long-run profits Competitor orientation Capitalize on weaknesses of vulnerable competitors Remove own weaknesses Win market position from competitors Attract customers from competitors Minimize loss of customers to competitors High sales Defend market position Source : Adapted from Alfred, R. Oxfenfeldt and William L. Moore (1983): ‘Customer or competitor: which guideline for marketing? ’ in Stewart Henderson Britt, Harper W. Boyd, Robert T. Davis and Jean Claude Larreche (eds), Marketing Management and Administrative Action, New York: McGraw-Hill. Figure [1. 3] Customer and competitor orientation in the organization Strategic marketing concept Marketing has been de? ned as the management function responsible for identifying, anticipating and satisfying customer requirements pro? tably. Marketing is, therefore, both a philosophy and a set of techniques which address such matters as research, product design and development, pricing, packaging, sales and sales promotion, advertising, public relations, distribution and after-sales service. These activities de? ne the broad scope of marketing and their balanced integration within a marketing plan is known as the marketing mix. A modi? cation of a de? ition of marketing by Doyle (2000) suggests that marketing is the management process that seeks to maximize returns to shareholders by creating a competitive advantage in providing, communicating and delivering value to customers thereby developing a long-term relationship with them. This de? nition clearly de? nes the objectives of marketing and how its performance should be evaluated. The speci? c cont ribution of marketing in the organization lies in the formulation of strategies to choose the right customer, build relationships of trust with them and create a competitive advantage (Doyle 2000, p. 35). A marketing strategy consists of an internally integrated but externally focused set of choices about how the organization addresses its customers in the context of a competitive environment. A strategy has ? ve elements: it deals with where the organization plans to be active; how it will get there; how it will succeed in the marketplace; what the speed and sequence of moves will be; and how the organization will obtain pro? ts (Hambrick and Fredrickson 2001, p. 50). The organization must identify the problem that its customers use its products and services to solve. It is also necessary to identify the bene? ts customers seek from using a product or service available in the market. A market consists [6] Strategic Marketing of all the potential customers who share a particular need or want who might be willing and able to engage in exchange to satisfy that need or want. A marketing orientation helps to de? ne the organization’s business. Marketing is concerned with problem solving and customer bene? ts. The organization must be able to answer the following questions: What is the problem customers are trying to solve? What bene? ts do customers seek? How well does the organization’s product solve this problem and provide these bene? ts? A statement that the organization is in the movie business is not very useful. An organization is not in the movie business because that says nothing about customer needs. Some movie organizations assumed they were in the movie business when the entertainment business left them behind! Marketing is a philosophy that encourages the organization to ensure that the needs and wants of customers in selected target markets are re? cted in all its actions and activities while recognizing constraints imposed by society. This marketing concept ? rst received formal recognition in 1952 by one of its leading exponents, the General Electric Organization – the marketing concept: . . . introduces the marketing man at the beginning rather than at the end of the production cycle and integrates marketing into each phase of business. . . . marketing establishes . . . f or the engineer, the design and manufacturing man, what the customer wants in a given product, what price he is willing to pay and where and when it will be wanted. Marketing will have authority in product planning, production scheduling and inventory control, as well as in sales distribution or servicing of the product (General Electric Organization, New York, 1952, Annual Report, p. 21). Three aspects of this statement are interesting: the customer orientation; the pro? t orientation; and the emphasis on integrated organization effort. These three aspects are fundamental to the adoption of the marketing concept. Marketing means, therefore, being oriented to the needs of customers rather than emphasizing what is convenient to produce. Effective marketing requires that the organization analyses the needs that its products are supposed to satisfy. Customers do not buy ‘coffee’; they buy a warm stimulating drink or a unique caf? experience if it is Starbucks. Likewise, customers do not buy sisal; e they buy a material to make baling rope to tie things together or ? bre to serve as backing for a ? oor covering. The organization should realize that many alternative products may satisfy the needs identi? ed; there usually are many substitutes – for coffee include tea, cocoa, alcohol or soft drinks and for sisal include polypropylene ? re or polythene sheeting. The real lesson of a marketing philosophy is that better performing organizations recognize the basic and enduring nature of the customer needs they Scope of strategic marketing [7] are attempting to satisfy. It is the technology of want satisfaction which is transitory (Anderson 1982, p. 23). The products and services used to satisfy customer needs and wants change constantly. The adoption of a marketing philosophy confers speci? c authority and responsibility within the organization in regard to the provision, communication and delivery of customer value. Marketing is concerned with all parts of the organization; it is more than a set of tools, it is an orientation which pervades the thinking of the organization as a whole. Internal marketing In addition to equipping the organization to cope with the outside world of customers and competitors, it is also necessary to train and motivate all staff within the organization to provide the appropriate level of service to customers. Internal marketing is very closely related to human resource management and the way in which the organization develops its own distinctive corporate culture. Internal marketing is the task of successfully hiring, training and motivating able employees who want to serve customers well. It is obvious that it is necessary to determine the organization’s internal culture before venturing forth to serve customers in the external world. This internal market must be motivated to react in a certain desired way which is best described as marketing-like (Gronroos 1984, p. 3). Internal marketing helps employees make a strong connection to the products and services sold by the organization. Without such a connection employees may unwittingly undermine expectations set by the organization’s marketing communications. When people believe in what the organization does and stands for, they are motivated to work harder and their loyalty to the organization increases. According to Mitchell (2002), however, in most organizations internal marketing is done poorly, if at all, and few organizations understand the need to convince employees of the organization’s mission and purpose; they take it for granted. Since satisfying customers is central to the task of marketing, it is essential that everybody in the organization who deals with customers must be imbued with a sense of marketing which means internal marketing for some and external marketing for others. Customers exist, therefore, both within and outside the organization. By focusing on customers, in this way a different perspective of the organization is obtained. In traditional organizations the chief executive and senior manager appear at the top of the chart with sales and other front-of? e people at the bottom. In many such charts customers are not represented at all. A contrary view, driven by a strong sense of marketing and especially internal marketing places the customer on top, the front-of? ce people next, middle managers below that and ? nally senior managers (Figure 1. 4). As the front-of? ce people meet and serve customers, they should receive a lot of [8] Strategic Marketing Customers Front office Middle managers Sup port through customer service Senior managers Chief executive Figure [1. 4] Internal marketing and customer orientation ttention within the organization. Middle managers exist, in this view of the world, to support the layer of middle level operators. It is important to note that everybody is somebody else’s customer. That is why the customer is placed on top and is so important to the survival and growth of the organization. Responsibility in marketing Marketing should distinguish between the individual customer’s short-term needs and wants and the longer-term welfare of society. For example, large cars greatly contribute to the pollution and traf? congestion of cities and cigarettes cause major health problems, even death, for smokers and for those who inhale the smoke. It is necessary, therefore, to integrate pro? tability requirements with health, ecological and environmental constraints. For many years writers on marketing have been at pains to point out that the principal function of marketing ‘is not so much to be skilful in making the customer do what suits the interests of the business as to be skilled in conceiving and then making the business do what suits the interests of the customers’ (McKittrick 1957, p. 78). In a present-day context, to be skilful in conceiving the real interests of customers, the organization must balance environmental considerations against pro? tability requirements; society’s welfare against individual needs; and the long-term welfare of customers against their short-term wants. For these reasons, therefore, we must broaden the marketing concept to include wider dimensions. The two major assumptions behind marketing are that consumers know what they want and are informed and highly rational in satisfying their wants, and that customer sovereignty prevails (Dickinson et al. 1986, p. ). These authors argue that if the organization were right in assuming that customers know what they want, then the key issue would be to create the product, create awareness of it and make it available at an acceptable price. Scope of strategic marketing [9] The fact is that both goals and corresponding wants can be unstable, with wants being only vaguely articulated as consumers r emain open to persuasion as to what might better serve their interests (Dickinson et al. 1986, p. 20). This is especially true in high technology markets where new product development is frequently technology driven. The marketing concept also assumes that the customer is sovereign, i. e. organizations follow the dictates of the market in regard to exactly what should be provided. But customers do not always know exactly what they want and they may be unsure of their trade-offs among product or service attributes. Many organizations see no inconsistency in referring to marketing as the basis for management while at the same time accepting that customer perceptions are important and can be in? uenced. Social and ethical constraints Social responsibility in marketing means accounting for the relationship between marketing and the environment in which it operates. Social responsibility refers to the obligation of the organization, beyond the requirements of the law, to take into practical consideration in its decision making the social consequences of its decisions and actions, as well as pro? ts. This view of social responsibility implies constraints on the organization more rigorous than arise if the organization attempted to ful? l its economic and legal requirements only. The reasons for a greater interest in social responsibility stem from the greater involvement of business with government and the in? uence of myriad stakeholders in the organization: shareholders, institutional investors, employees and other regulatory and environmental bodies. The more important dimensions of the environment which relate to an appropriate application of marketing are the social and moral environment, the business environment and the physical environment. In recent years ethical issues, social and moral standards which are acceptable in a society, have become very important in marketing. Trust is a related issue which is an essential ingredient in building long-term relationships between organizations and their customers. Trust is well placed where ethical standards are upheld. It is misplaced where ethical standards are ignored or ? aunted. Both trust and ethics are highly dependent on culture and vary according to the culture and background of customers. Organizations operating in many cultures have greater dif? culty in coping with a heterogeneous set of customers, drawing on disparate cultures for their ethical standards. One example will illustrate the issue. In a questionable practice, with strong implications for marketing responsibility, advertising agencies in the US have begun to assist pharmaceutical organizations to recruit patients for clinical trials. According to Thomas Harrison, the Omnicom Group, Inc. , parent organization of advertising agency BBDO Worldwide, BBD Worldwide and TBWA Worldwide: [10] Strategic Marketing What you’re seeing is an emergency convergence between clinical development and the commercialization of drugs. The ultimate goal is to make drug development more ef? ient. What we want to try to do is look at the molecule in the test tube as a brand. A lot of people don’t think a brand is a brand until it has FDA (Food and Drug Administration) approval. But we are asking, ‘What is the maximum commercial potential of this molecule? What will it be when it grows up? What is the message? How should the clinical trial be developed? ’ (The Wall Street Journal Europe, Friday, Saturday, Sunday 15–17 March 2002, p. A 10). There is potentially a real ethical clash of science and business in such a development. There are clear bene? s for the advertising agency as becoming involved early in the process can be lucrative and can greatly increase the chance of acquiring the account if the product is ultimately launched. For the pharmaceutical organization the involvement of the agency can shorten the time and costly process of getting a drug from development to market. In these circumstances there could be a temptation for the agency to modify the test results or at least present them in such a way as to favour the pharmaceutical organization in anticipation of eventually being retained to produce the advertising campaign and thus obtain high advertising fees. This is a con? ict of interest – a potentially controversial practice that directly raises ethical questions for marketing. Environmental responsibility in marketing The view that marketing has a special responsibility when discussing the natural environment is also well developed. By promoting product manufacture and usage, the organization may be encouraging resource depletion, pollution or other environmental deterioration. Most organizations believe that it is not suf? cient to make pro? s and generate employment while ignoring an obligation to society regarding the preservation of the natural environment even though their behaviour is within the law. Some organizations, however, continue to ignore this implied obligation claiming that their behaviour is not illegal when they dump chemicals in watercourses, over-package products, or damage the atmosphere. Such organizations often cite a concern for the feasibility rather than the propriety of believing that they should not be expected to take action to protect the environment if their competitive position were to be jeopardized. In a general way, social responsibility is an investment in future pro? ts which should be made even at the expense of short-term pro? ts. Providing customer value in marketing networks Superior market positions depend on the organization’s customer base, relations with suppliers and partners, relations with customers (e. g. brand equity), facilities and systems, and the organization’s own endowment of technology Scope of strategic marketing [11] and complementary property rights. These are the organization’s assets or resource endowments which it has accumulated over time. In addition, the organization possesses certain capabilities, the glue that binds the organization’s assets together and enables them to be used to advantage (Day 1994, p. 38). Capabilities are so deeply embedded in the organization’s routines and practices that they cannot easily be traded or imitated (Dierickx and Cool 1989). The organization’s competitive advantages are derived, therefore, from the nature of the its products, markets, technological orientation, resources and knowledge. Providing customer value means delivering on a whole range of promises to the customer. Products and services that customers perceive have a superior value compared to those of competitors are demanded while others are not, hence, the importance of the concept of ‘value-added’ de? ned as the component of customer value provided by an individual organization within the overall business system. Value is derived from the business system in which the organization operates. Each organization leverages other participants in the system – customers, suppliers and particularly others who complement the organization in what it provides – in creating that value (Figure 1. 5). The value-added chain runs from suppliers through the organization forward to the customer aided by partners in the context of a competitive environment in? uenced by economic, political, legal and cultural factors. At each stage of the value chain there exists an opportunity to contribute positively to the organization’s competitive strategy, by performing some activity or process in a way that is better than one’s competitors, and so providing some uniqueness or advantage. If an organization attains such a competitive advantage which is sustainable, Competitors Legal Suppliers Company Economics Culture Customers Politics Partners Figure [1. 5] Marketing system [12] Strategic Marketing defensible, pro? table and valued by the market, then it may earn high rates of return even though the industry structure may be unfavourable and the average pro? tability of the industry modest. A long-term marketing orientation draws together suppliers, customers, competitors and partners in the business system to create value in the marketing system. It is the business system as a whole that creates value. The marketing system consists of ? ve major participant groups: customers competitors partners suppliers the organization itself. Viewing the value in the business system as the result of a network of important relationships highlights two important factors. First, decisions made by one organization affect and are affected by decisions by other organizations. Second, organizations often make decisions that are normally associated with those of other actors in the system. Thus, the organization makes important decisions which affect suppliers, just as suppliers make important decisions which are normally thought of as in the purview of the organization. Because so many decisions are part of a network in which a decision in one organization directly or ndirectly in? uences decisions in other organizations, major decisions must be consistent with the goals of the participants in the network and their products. Herein lies the importance of the contribution of the leading organization – the organization making the key contribution to the establishment and growth of the business system (Moore 1993). This key contributor of value or the business system leader emerges in the early stage of the evolution of the business system to begin the process of continuous improvement which draws the entire business system towards an improved future. A fundamental service provided by the business system leader is to encourage and persuade other organizations in the business system to complete the full value mix for customers by attracting ‘follower’ or ‘imitator’ organizations and thereby prevent them from developing other emerging business systems. The multitude of decisions in the business system must complement each other to maximize their overall positive impact on value. Within this framework the organization must decide its overall product–market business system strategy which has two elements – decisions on product–market segments and decisions on positions to adopt within the business system itself Scope of strategic marketing [13] Product? market and business system strategies Product? market segments Segment 1 Segment n Concentrate on key market segments Business system Production/operations Distribution Sales Concentrate on key business stages Service Customer Figure [1. 6] Generic product–market and business system strategies (Figure 1. 6). The organization’s resource base enables it to decide the appropriate positions on which to focus in the business system. Decisions regarding the relevant product–market segment to serve are discussed in Chapter 3 while decisions regarding the appropriate position in the business system to select are examined in Chapter 6. Sources of marketing advantage Sources of marketing advantage are reputation, brands, tangible assets, knowledge, customer service and people. To be worthwhile the marketing advantage must be sustainable. It must, therefore, be tangible, measurable and capable of providing competitive protection for some time. An illusory marketing advantage is one that is easily matched by competitors. The organization’s marketing advantage depends on how well it chooses its strategy: Concentrating on selected market segments. Offering differentiated products. Using alternative distribution channels. Using different manufacturing processes to allow higher quality at lower prices. Superior skills and resources, taken together, represent the ability of the organization to do more and better than its competitors. Superior skills are the distinctive capabilities of people in the organization that distinguish [14] Strategic Marketing hem from people in competing organizations, e. g. superior marketing skills that lead to fewer product failures in the marketplace or superior selling and distribution skills which lead to fewer returns of unwanted products and improved customer satisfaction. Organizational resources and marketing capabilities Organizations are endowed with different amounts and types of re sources and capabilities, which allow them to compete in different ways. Organizations which are better endowed have lower average costs than competitors and can provide products and services at lower cost or provide greater customer value. These resources are dif? cult to transfer among organizations because of transaction costs and because the assets may contain tacit knowledge (Teece et al. 1996, p. 15). Such resources and core capabilities of the organization, particularly those which involve collective learning and are knowledge based, are enhanced as they are applied (Prahalad and Hamel 1990). Resources and capabilities which are distinctive and superior, relative to those of rivals, may become the basis for competitive advantage if they are matched appropriately to market opportunities (Thompson Jr. nd Strickland 1996, pp. 94–5). These resources may, therefore, provide both the basis and direction for the growth of the organization itself, i. e. there may be a natural trajectory embedded in a organization’s knowledge base (Peteraf 1993, p. 182). Hence, the importance of studying the organization itself when attempting to predict its likely performance. Resources and capabilities determine the organi zation’s long-run strategy and are the primary source of pro? t. In an environment which is changing rapidly and where consumer tastes and preferences are volatile and myriad, a de? ition of the business in terms of what the organization is capable of doing may offer a more durable basis for strategy than a traditional de? nition, based solely on needs and wants of consumers. De? ning markets too broadly is of little help to the organization that cannot easily develop the capabilities to serve such a broad market. The organization’s ability to earn pro? ts depends on two factors: the success of the organization in establishing competitive advantage over rivals; and the attractiveness of the industry in which the organization competes. As was seen above, the two sources of competitive advantage are: the ability of the organization to reduce costs; and its ability to differentiate itself in ways that are important to customers. The ability to establish a cost advantage requires the possession of scaleef? cient plants, access to low-cost raw materials or labour and superior Scope of strategic marketing [15] Relative value branding product/service technology marketing networks Relative costs scale economies process technology access to low-cost resources Market power firm size financial resources market share Barriers to entry branding price power patents Competitive advantage Profits Industry attractiveness Figure [1. 7] In? uence of resources on the pro? tability of the ? rm process technology. Differentiation advantages derive from brand reputation, proprietary and patented technology and an extensive marketing network covering distribution, sales and services. The attractiveness of an industry depends on the power the organization can exert over customers, rivals and others in the business system, which derives from the existence of market entry barriers. Market entry barriers are based on brands, patents, price and the power of competitive retaliation. These are resources which are accumulated slowly over time and a new entrant can only obtain at disproportionate expense (Grant 1991, p. 115). Other sources of market power such as price-setting abilities depend on market share which is a consequence of cost ef? ciency, organization size and ? nancial resources. Grant (1991) has integrated these ideas in a way which serves as a very convenient summary of this discussion (Figure 1. 7). Strategic marketing effectiveness Marketing’s role in strategic planning for the organization means identifying the optimal long-term positions that will ensure customer satisfaction and support. These optimal positions are determined largely by fundamental changes in demographic, economic, social and political factors (Anderson 1982, p. 24). Thus, strategic positioning is more likely to be guided by longterm demographic and socioeconomic research than by surveys of consumer attitudes, the hallmark of the market-driven organization. Value in marketing is a combination of product or service quality, reasonable or acceptable prices and responsive service. It is noteworthy that marketing value combines high quality with acceptable prices. It is not low quality products at low prices or high quality at high prices. Value in marketing means delivering on a whole range of promises to the customer. [16] Strategic Marketing Marketing effectiveness is not necessarily revealed by current marketing performance. Good results and growing sales may be due to the organization being in the right place at the right time rather than having effective marketing management. This is frequently the situation during the entrepreneurial phase of an organization’s growth and development. The innovator frequently has considerable discretion in the market. At this stage the driving force is entrepreneurship rather than marketing. With acceptance of the product or service in the market and with the rise in competition which normally accompanies the acceptance of a new product or service, performance becomes more marketing-dependent. In a competitive environment, especially where customers have learned how to respond to various offerings, the situation changes. Improvements in marketing in the organization might improve results while another organization might have poor results in spite of excellent marketing planning. It depends on how well the organization matches its own resources against those of the competition to attract and hold the loyalty of customers. The marketing effectiveness of the organization in serving customers in the face of existing and potential competition is re? ected in the degree to which it exhibits ? ve major attributes of a marketing orientation: demonstrated customer philosophy integrated marketing orientation possesses adequate marketing information adopts a strategic orientation experiences a high level of operational ef? ciency. The performance of the organization on these individual attributes may be used to indicate which elements of effective marketing action need most attention. It should be recognized, however, that this evaluation provides general information only but has the merit of obtaining an approximate measure of the orientation of the organization. Key marketing success factors The organization attempts to convert skills and resources into superior market positions and thereby meet performance objectives. A knowledge of the key marketing success factors is essential to enable the organization to invest in markets and marketing to ensure performance objectives are attained. By identifying the key success factors the organization can dentify ways of obtaining the greatest improvement in performance for the least expenditure. The key success factors of any business are the skills and resources which exert Scope of strategic marketing [17] the highest degree of leverage on market positions and future performance. Having identi? ed them, the organization attempts to selectively allocate resources towards these sources of leverage. The drivers of market position advantage are the high leverage skills and resources that contribute most to lowering costs to or creating value for customers. Marketing focus on customers Marketing means identifying values desired by customers, providing them in some way, communicating these values to customer groups and delivering the value. Customer values refer to those bene? ts focused on solving customer problems and not merely on the products and services themselves. The focus is on the customer and on solving problems faced by the customer. This is an integrated longer-term view of marketing (Figure 1. 8). Seeking value from the customer’s perspective means building a long-term mutually pro? table relationship with customers instead of trying to maximize pro? s on each transaction. An emphasis on relationships rather than individual transactions focuses on the customer as the pro? t centre, not the product. It also means that attracting new customers is an intermediate objective in the process of maintaining and cultivating an existing customer base. This interactive approach views marketing as a continuous relationship with customers in contrast to the more traditional and almost adversarial view which is short term and focused on immediate sales. The ? rst sale to a customer is often very dif? cult, costs a lot and results in little or no pro? t. With a strong continuing relationship the customer becomes more pro? table. Such long-term relationships are established through the exchange of information, products, services and social contacts. In this way the organization–customer relationship is commercialized. The fundamental issue is to understand the customer’s perception of value and to determine a superior value position from this perspective and to ensure Identify and select customer value Integrated marketing effort Provide the value Communicate the value Deliver the value Customer satisfaction Achieve organizational goals Figure [1. ] Integrated marketing orientation [18] Strategic Marketing that, by developing a consensus throughout the organization, that value is provided and communicated to the customer group in selected markets. The role of marketing in the business system is: To understand the customer’s perception of value – identify the value the organization expects to provide. To det ermine a superior value position for the organization – provide the value expected. To determine the appropriate positioning and brand strategy – communicate the value. To distribute and price the product/service – deliver the value to the customer. References Anderson, Paul F. (1982), ‘Marketing, strategic planning and the theory of the ? rm’, Journal of Marketing, 46 (Spring), 15–26. Day, George (1994), ‘The capabilities of market-driven organizations’, Journal of Marketing, 58 (October), 37–52. Dickinson, Roger, Herbst, Anthony and O’Shaughnessy, John (1986), ‘Marketing concept and consumer orientation’, European Journal of Marketing, 20 (10), 18–23. Dierickx, I. and Cool, K. (1989), ‘Asset stock accumulation and sustainability of competitive advantage’, Management Science, 35, 1504–11. Doyle, Peter (2000), ‘Valuing marketing’s contribution’, European Management Journal, 18 (3), 233–45. Grant, Robert M. (1991), ‘The resource-based theory of competitive advantage: implications for strategy formulation’, California Management Review, Spring, 118. Gronroos, Christian (1984), ‘Internal marketing – theory and practice’, in The American Marketing Association 3rd Conference on Services Marketing, Services Marketing in a Changing Environment Vol. III. Chicago: American Marketing Association. Hambrick, Donald C. and Fredrickson, James W. 2001), ‘Are you sure you have a strategy? ’, Academy of Management Executive, 15 (4), 48–59. Kotler, Philip (2002), Marketing Management: Analysis Planning and Control (8th edn). Englewood Cliffs, NJ: Prentice Hall. McKittrick, J. B. (1957), ‘What is the marketing management concept? ’, in The Frontiers of Marketing Thought and Science, Frank M. Bass , ed. , Chicago: American Marketing Association. Mitchell, Colin (2002), ‘Selling the brand inside’, Harvard Business Review, 80 (1), 99–105. Moore, James F. (1993), ‘Predators and prey’, Harvard Business Review (May–June), 75–86. Peteraf, M. A. (1993), ‘The cornerstones of competitive advantage: a resource based view’, Strategic Management Journal, 14, 179–91. Scope of strategic marketing [19] Prahalad, C. K. and Hamel, G. (1990), ‘The core competence of the corporation’, Harvard Business Review, 68, 79–91. Teece, D. J. , Pisano, G. and Shuen, A. (1996), Dynamic Capabilities and Strategic Management, Working Paper, 53. Berkeley, CA: University of California Press. Thompson, Jr, A. A. and Strickland, A. J. III (1996), Strategic Management (9th edn). Chicago: Irwin.

Civial Affair Essays - Member States Of The United Nations

Civial Affair A Civil Affair There are many different reasons why civil wars occur. These violent conflicts arise in a nation and usually destroy and split the country. The United States felt the pain that civil war causes because of the issue of states rights and slavery. Spain experienced the agony of civil war firsthand because Gen. Franco attempted a coup and tried to install a Fascist government. These two countries experienced civil wars because of political decisions and government policies. The civil wars that occurred in El Salvador and Guatemala were different from those of the United States and Spain. These countries suffered from many problems that neither the United States nor Spain had to endure. In Central America both El Salvador and Guatemala had conditions that were conducive to violent civil war. El Salvador is a small country in Central America. Coffee production is the major source of income for the country. With this much importance on one crop, the country began to expand the production of coffee. As coffee production grew, there was less and less land available for the every day farmer to use for crops to feed his family and try to make a living. The Salvadoran government began to take away the opportunities many of the poor had to live on. This lead to a migration out of El Salvador and into Mexico and the United States; however, this still left a large number of unhappy Salvadorans who were still in El Salvador. By the early 1900's the landowners were pressing to get more land for the production of coffee. In the 1960's El Salvador had the worst land to people ratio in the world. The landowners wanted more land and the poor Salvadorans wanted land themselves. The conditions in El Salvador were quickly becoming hostile. The elite had no care for the welfare of the poor. They were producing coffee for export to the world. The poor would never make enough to buy coffee produced in El Salvador. The conditions in 1960's El Salvador were quickly leading to problems. In the 1970's El Salvador began to become more violent. The government began to develop a militaristic side. The poor began to form guerilla movements to show the government that they were fed up with the situation that existed in the country (Rosenburg 14). Over the years the economic system that developed in El Salvador was a push for the poor to become involved with the guerilla movements that existed. They had seen that their government would not take care of them. Even if they did not join the guerilla movement they would help the guerillas out in any way if they could. Soon the guerillas were waging terrorist attacks and kidnappings to cripple the Salvadoran economy and system. The government and the elite were waging their own attacks against the guerillas. The two sides basically beat each other up over and over again, but neither side really had the advantage. This lasted until, in the 1980's, the guerillas rose up in one last attempt to take control of the country. When thi s failed both the guerillas and the government realized that peace was needed. Peace was finally reached and the civil war in El Salvador finally ended. Throughout the duration of the civil war the elite justified their actions several ways. From the 1930's on violence and terror were considered a viable tool that the elite could utilize for their cause. In 1932 the military crushed a revolt by poor Salvadorans and since that time violence has been a tool of the elite. By using violence in 1932 and continuing to use it, the practice of violence against the poor became a part of elitist society (Rosenburg 12). The elite began to use violence in any situation, and they taught their children that violence was appropriate for dealing with the poor. From the start of El Salvador's coffee boom, the elite in society began to develop an attitude that would allow them to see the violence that took place as a natural occurrence that should take place. Much like El Salvador, Guatemala was a hot zone for Civil War. The production of coffee and cotton for