avatar IBM World Trade Corporation Manufacturing


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    because you can.

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    One of the wonderful things about starting any new venture is the freedom. To have big ideas, breathe life into them, and build them. From scratch. That freedom is appealing, but exists – practically speaking – for relatively few. Until now. Because whether you’re two friends tinkering in a garage, or you work inside one of the most venerable enterprises on earth, the rise of a globally connected world offers a truly rare opportunity: the chance to start something totally new. This is what we believe at IBM . And it is the core idea we are taking to customers (and pursuing ourselves): how to seize this unique moment and rethink what you do, reconceive what you offer and, along the way, reinvent who you are.

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    Louis V. Gerstner, Jr. Chairman a nd Chie f Ex e cutive O ffic er

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    le tte r to share ho lde rs Dear fellow investor, Last year my message to you was one of continuity. We were making our strategic vision of a networked world real, in the marketplace and in the laboratory. We were intensifying execution across all our businesses to produce marketplace wins and consistent revenue growth. I said that we planned to stay the course. We did that in 1998 , and the results were strong. Our market our portfolio of businesses – we still had substantial cash on value – probably the most important measure of progress to hand to return to shareholders via dividends and our ongoing investors – grew $ 69 billion. (It has grown by $ 146 billion since stock buyback program (another $ 6.9 billion of IBM shares in our major restructuring in 1993 .) Last year, IBM’s share price 1998 ). Even then, we finished the year with $ 5 .8 billion in cash. rose 76 percent. As 1999 began, our Board of Directors approved We had our difficulties, too. Some were external – the economic the second IBM stock split in two years. distress in Asia and Latin America, soft memory chip prices and There were good reasons for this growth in investor confi- a PC price war. Some were of our own making – wrestling with dence in IBM. For the fourth straight year, we reported record important product transitions in our server line, for example. revenue – $81.7 billion. Our earnings rose to $6.3 billion. We set a But overall, in the marketplace and inside the company, IBM new record in earnings per share. Customer satisfaction improved remains on track. measurably. After making substantial investments – $ 5.6 billion You might expect, then, that my message for 1999 would be in research and development, $6.5 billion on capital expendi- the same – continuity and staying the course. But continuity is tures, and $ 700 million to acquire companies that strengthened not my message to you this year. 3

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    No year is easy to predict, but 1999 promises to be unique for merely accessing content. At the time IBM articulated this our industry and for IBM. Like every year, we see significant “ vision,” it sounded downright uncool. And the gurus said so. opportunities combined with a truckload of uncertainties. This Well, today this position is feeling a lot less lonely. In fact, year, those uncertainties include continuing softness in Asia and it’s getting pretty crowded, as the prevailing opinion swings our Latin America, the impact of the Euro conversion and, of course, way and people talk about this transformation in terms of a the much publicized Year 2000 problem (more on Y2K later). “ networked society” and a “ networked economy.” What makes 1999 different, though, is that a historic shift – At IBM we call this “ e-business,” and it represents an enor- something IBM began talking about three years ago – is taking mous opportunity. We expect the overall information technology hold, and it’s reshaping everything: how we work, how we industry to grow at an annual rate of 10 percent, to $1.6 trillion by shop, how we interact with our governments, how we learn, 2002. Of that, the e-business segment will grow to $600 billion, what we do at home. Every day it becomes more certain that and it will grow twice as fast as the industry overall. (We intend the Internet will take its place alongside the other great trans- to capture a good chunk of that new business.) formational technologies that first challenged, and then funda- I said that 1999 is going to be unique. Here’s why: With this mentally changed, the way things are done in the world. fundamental change just beginning, I believe that the next two One school of thought says a new mass medium has been years are going to witness a sweeping shakeup. In just about all born when it’s used by 50 million people. Radio took nearly 40 businesses – including information technology, but also bank- years to hit that threshold. TV took 13 years. Cable TV, 10 years. ing and retailing and health care, and in the noncommercial The Internet did it in less than five. As I write this, more than world, too – we will see new leaders emerge, and we will see 140 million people are online. Today the Net is largely a U.S. some old, longtime leaders sink. Competitors will spring up out phenomenon, but that won’t last long. Already seven countries of nowhere – competitors called “ something.com.” other than the United States have about 10 percent of their Savvy businesspeople know this and are intensely focused populations using the Web. In China, which is really just now on what to do. IBM holds daylong seminars on the new world joining the world economy, Web growth is astonishing. of e-business for CEOs and CIOs from every part of the world. Figuring out what all those people were going to do when Of late there have been no empty seats. In the pages of this they were linked by the Web has kept the gurus in overdrive. Annual Report, you will read what we tell these customers We used to hear a lot about the Information Superhighway, about e-business and what it takes to succeed in the evolving with the Web playing the role of local library. Next, you heard networked world. We’ll also tell you why we think IBM is about the Wired World, in which people sent e-mails and then uniquely qualified, structured, situated and ready not only to relaxed in chat rooms. All of that has happened, but it isn’t benefit from all this change, but to emerge stronger than ever. where the real action is. As we stand on the brink of the 21 st century, with the mass From the beginning, IBM’s position has been consistent. media full of millennial retrospectives and predictions, there’s Since 1995 we have been saying that the Net is about mainstream a strong temptation to make grand pronouncements. I’m going business, not browsing – about conducting real commerce, not to try to resist that temptation. However, at our CEO/ CIO ’94 ’95 ’96 ’97 ’98 81.7 78.5 75.9 71.9 64.1 REVENUE ( $ in billio ns)

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    FI NANCI AL HI GHLI GHTS International Business M achines Corporation and Subsidiary Companies (Dollars in millions except per share amounts) 1998 1997 For the year: Revenue $X81,667 $X78,508 Income before income taxes $X..9,040 $..X9,027 Income taxes $X..2,712 $..X2,934 Net income $X..6,328 $..X6,093 Earnings per share of common stock — basic $X....6.75 $....X6.18 Earnings per share of common stock — assuming dilution $X....6.57 $....X6.01 Cash dividends paid on common stock $X.....814 $.....X763 Per share of common stock $......X.86 $....X.775 Investment in plant, rental machines and other property $..X6,520 $..X6,793 Average number of common shares outstanding (in millions) Basic 935 983 Assuming dilution 960 1,011 At year end: Total assets $X86,100 $X81,499 Net investment in plant, rental machines and other property $X19,631 $X18,347 Working capital $..X5,533 $..X6,911 Total debt $X29,413 $X26,926 Stockholders’ equity $X19,433 $X19,816 Number of employees in IBM / wholly owned subsidiaries 291,067 269,465 Number of common stock holders 616,800 623,537 32.0 28.8 28.3 6.3 27.5 6.1 26.7 5.4 4.2 3.0 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 TOTAL EXPENSES AS A 5 NET I NCOM E PERCENTAGE OF REVENUE ( $ in billio ns) ( afte r adjustme nts)

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    NEW PRODUCTS Nearly half of 1 9 9 8 ’s $ 3 5 . 4 billion in ha rd w a re re ve nue was generated by products introd uc e d in the past 1 2 m ont hs. meetings and whenever I meet with customers, I am asked wo rkings of 2 6 major industries, from banking to entertainment where IBM stands on a wide variety of technology issues. I’d to education. In working with thousands of customers, we like to cover a few of these, because I believe they are the ones come to understand which issues are common from industry on which the new leaders will be focusing more and more over to industry – and we can leverage that knowledge for our the next two years. At IBM, we are. customers very quickly. • The Internet isn’t just creating new businesses. It’ s • The greatest competitive advantage in the information creating new business models. te chnology industry is no longer techno lo gy. Businesses and institutions are finding that the Net is the most Without question, strength in basic and applied research potent tool they’ve ever had to build competitive advantage . remains essential in our industry – not only to achieve the I don’t mean just online retailing, which has been getting a lot b reakthro ughs that make new products possible, but also of attention lately. Many of the most impactful e-business because they give the discoverer a unique ability to foresee, and so lutio ns we are building with our customers are aimed at shape, the future. transforming less glamorous but extremely important processes However, technology changes much too quickly now for like supply chain management, customer service and support, any company to build a sustainable competitive advantage and distribution. on that basis alone. Someone is always inventing some software But the important point is that e-business is not simply a code or device that is a little faster or ch e ap e r. More and matter of adding another distribution channel or introducing more, the winning edge comes from how you help customers some new efficiencies. It is driving customers to do business in use technology – to steal a march on their competitors, to a fundamentally different way. implement entirely new business models. That means creating This feverish search for new business models is having integrated solutions that draw on the full range of products another interesting effect. It’s creating a breeding ground for a and, inc reasingly, servic es. And it means connecting the new generation of startup companies. This may not be surprising. dots between what you learn in the lab and what you learn in What has been unexpected is that every business and institu- the marketplace. tion now has a chance to rethink what it does. We understood this when we decided six years ago to keep IBM is in a strong position to help. In our solutions business IBM together. And we’ve seen it borne out most clearly where we have amassed thousands of experts who understand the inner all the pieces of information technology come together – in $184.38 S T OCK P ERFORM AN CE 1 9 9 8 End-of-week closing prices $ 1 0 5 .6 3 6 Dec. 31, 1998 Jan. 2, 1998

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    information technology services. With its huge current demand, You experience this every time you go online to buy a solid fundamentals underlying future demand and lack of a book or trade stock. Where is the transaction executed? Where dominant competitor, I/ T services has all the earmarks of is the data managed and stored? Where does the processing a classic growth business. take place? A teeny part is handled by your PC. Most of the I believe that IBM is well positioned to win a dispropor- work is done behind the scenes, in the network, by bigger tionate share of that growth. IBM Global Services has grown in computer systems. just eight years from a $ 4 billion to a $ 24 billion business, with Businesses deploying network applications have to handle an better than 20 percent annual growth. And its market leader- exponential increase in the volume of interactions and trans- ship is increasing, because the 126,000 IBMers who work in actions, and they need to do something useful with the tidal services can draw on all the technology and human assets of wave of information generated from those interactions. Both IBM, including an R&D community with a strong record of needs are driving the rediscovery of enterprise computing – that innovation (they just marked their sixth straight year of U.S. is, industrial-strength servers and the software that runs on them. patent leadership). As the Net takes over much of the work previously per- formed by PCs, we’re seeing another interesting development: • The PC era is over. a proliferation of new personal computing devices – personal This is not to say that PCs are going to die off, any more digital assistants, Web-enabled TVs, screenphones, smart cards than mainframes vanished when the IBM PC debuted in 1981 . and a host of products we have yet to imagine. One market Indeed, IBM’s own PC business was an important turnaround research firm predicts that sales of non- PC Internet devices will story in 1998 . But the PC’s reign as the driver of customer surpass PCs within five years. This explosion of “ information buying decisions and the primary platform for application appliances” will bring computing to millions of new users – development is over. In all those respects, it has been sup- perhaps a billion people – faster and more affordably than the planted by the network. PC could ever have taken us. 18 6.8 6.5 5.9 15 4.7 12 10 3.1 3 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 7 CAPI TAL I NVESTM ENTS NUM BER OF ACQUI SI TI ONS ( $ in billio ns)

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    All of this is very good news for IBM – the company that, in both the enormous, underutilized stores of data that organiza- many ways, invented enterprise computing. In recent years tions already possess, and the sea of information that pervasive we’ve invested heavily to reinvent our server and enterprise computing devices will generate. We call this capability Deep software lines. Middleware products like Tivoli systems Computing – named after our chess-playing supercomputer management, Lotus Notes and Domino, and DB2 Universal Deep Blue, which combined ultrafast processing power with Database have been standout performers. The advent of sophisticated analytical software. non- PC devices is also benefiting our OEM (original equipment In Deep Computing, we’re already applying what we manufacturer) business, where we sell IBM components like learned from Deep Blue to real-world initiatives that were pre- chips and disk drives to other technology companies, many viously inconceivable, like modeling pharmacological agents, of them our competitors. It’s a business that’s already growing simulating weather patterns for more accurate forecasting, at double-digit rates. and mining databases in retail or insurance for patterns and insights. What the future holds – solutions in everything from • We’re only at the beginning – more is coming. genomics to financial markets to disease control – is almost Two more things actually – and they’re both extensions of impossible to fathom today. But we’re out there pushing the the network computing revolution. edges and learning. First, the basic components of computing – processors, • The Year 2000 problem is important, and it’s being memory, storage, networking – are becoming so small, power- addressed. But a lot of work remains to be done – fast. ful and inexpensive that soon computing will be embedded in all kinds of everyday things that don’t look at all like computing While no one knows for sure what will happen, we believe devices: cars, roads, machine tools, vending machines, houses. the largest companies, institutions and government agencies When all these are connected to the Net, they will make will be ready, particularly those in technologically advanced possible a new class of applications, invisible to end users but nations. They got an early start fixing their systems, and they vitally important to businesses and institutions. Imagine this: are using this year to test extensively. Less certain is how smaller Automakers will be able to gather real-time information about businesses and emerging nations will fare. They’ve got to pick the performance of their cars. Soft drink companies can tie up the pace. together their vending machines to learn what’s selling (and To help our customers worldwide, we have deployed thou- not selling), at what prices, in what regions, at what tempera- sands of IBMers and mobilized thousands of our business partners. tures. Imagine not just a billion connected people, but a trillion Most of our client teams are working through specific plans with connected devices. We call this Pervasive Computing. their customers. We will deploy even more IBMers to the extent The second major development looks like the polar opposite we can (we’ve already asked our people to alter vacation plans). of Pervasive Computing, but it’s really just the flip side. A new And internally, we are working just as hard to ensure that class of heavyweight computing systems is emerging that will IBM’s own essential operations are ready. make possible new ways to gain insight – and foresight – from * * * PATENT LEADERSHIP In 1998 , for the sixth consecutive year, IBM was awarded the most U.S. patents, shattering the previous record (our own) by more than 40 percent. We received 2,658 U.S. patents in 1998 , 934 more than in 1997 , and we eclipsed the next closest company by 38 percent. 8

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    e - IBM IBM itself is turning into one of the world’s largest e-businesses. In 1998 , we sold more than $3 billion of products and services over the Internet. As I look at the information technology industry today – its More and more, however, my colleagues are preoccupied economic fundamentals, its technological underpinnings and not with our achievements of the recent past, but with the vast even its emotional tonality – I see an industry that looks, oper- prospects opening before us. Not that we’re taking anything for ates and trades more like a business at the beginning of a granted – like confusing a bull market with personal and insti- growth cycle than one reaching maturity. tutional success. But it’s as if, on our journey back up to a Perhaps even more remarkably, I see the same qualities familiar plateau, we shot right past it and kept on going. in IBM. This is something I never dreamed of six years ago. Spurred The thing that most surprises and delights me about our by the extraordinary adventure of building a networked world, company is not how we’ve reinvented our internal processes this large and storied enterprise now believes that its best years from the ground up. Nor how we’re relentlessly improving lie ahead of it – that its past, and that of the information tech- execution and teamwork. Nor even that we’re practicing what nology industry as a whole, were just a preamble. As we move we preach, making encouraging strides toward becoming into 1999 , with all its near-term momentum and all its external the world’s premier e-business – in everything from procure- uncertainties, what we are most acutely aware of is the trajec- ment, where Net-based purchasing should save IBM nearly a tory of this underlying shift, of a company and an industry that quarter of a billion dollars in 1999; to e-commerce, where our feel as though they are just getting started. online sales in December reached $ 38 million a day; to using And of one more thing: a group of people who can’t quite distance learning to improve IBMers’ skills. believe their good fortune. To be at this place, and at this time. As important as all that is, the thing that most persuades me Count me among them. that we are at a key inflection point in IBM’s history is simply what it actually feels like to be here today. Given what we have accomplished over the past six years, it would have been natural for IBMers to indulge themselves in well-deserved pride at having turned the ship around, or com- fort in resuming a familiar role and stature. When I came to IBM in 1993 , frankly, my fondest wish was for the company to Louis V. Gerstner, Jr. return to its former position of leadership. Chairman and Chief Ex ecutive Officer 9

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    Start up. In the networked world, everyone can. The details are unique for each customer. But the steps – the basics of e-business – are surprisingly consistent. We think there are five. They’re also a way of understanding what we’re doing, investing in and building across IBM today. It all begins with a commitment, a decision to... Join the 1. M OV EM E A few years ago, it was clear the Net was coming. But at that time it wasn’t clear if it would be much more than a planetary from the way governments deliver services to citizens and students access the wisdom of university faculties, to the way physi- chat room and an electronic newsstand. cians treat patients and enterprises of all However, back then, IBM was saying the kinds serve customers of all kinds. Net would become much more than those It’s a powerful idea. And like all new things. We said that it would not just ideas, you can ponder it and po ssibly miss change technology. It would spark an all- so mething big. Or yo u can start experi- out revolution in the way the world works. menting, learn, and push it for all it’s Many of our customers held the same view. worth. You can be part of the movement. They saw a chance to reinvent everything 10

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    Gary Briggs e -busine ss marke ting strate gist NT

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    consider the facts The Internet is the epicenter of change today... It took radio nearly 40 years to reach 50 million people. TV took 13 years. Cable TV, 10 . Not six years after the birth of the World Wide Web, more than 140 million people are online – and some estimate that 5 0 ,0 0 0 new users – workers, students, buyers, sellers, patients and citizens – come online every day in the United States alone. They use the Net both as a medium and as a because the incentives destination – the largest, most restless, round-the- are irresistible... clock marketplace the world’s ever seen. The Net dissolves barriers that once limited market access and opportunity. It creates new ways to achieve global reach, find new customers, improve service, conceive and deliver new offerings. It fundamentally alters the economics of transactions. The cost of basic banking transactions drops from $ 1 to one cent on the Net. Companies that once spent $ 35 to process an expense form do it for less than $ 5 using intranets. 12

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    creating opportunities for all businesses and institutions... We’re watching the creation of nothing less than a new economy. By one estimate, Internet commerce grew from $ 12 billion in 1997 , to more than $ 30 billion last year, and will surpass $ 4 2 5 billion by 2 0 0 2 . You can find other estimates that see a $1 trillion marketplace in the (and for the information same timeframe. What’s harder to measure – but even more significant – is the value of the Net as it transforms technology industry). the internal operations of organizations and redefines Our industry is growing about 10 percent a year, and the important work of noncommercial institutions. spending on e-business hardware, software and services is growing twice that fast. At these rates, the overall information technology industry should reach $ 1.6 trillion by the year 2 0 0 2 , and e-business will account for $600 billion of that total. 13

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    AIR CANADA SAAB CARS USA Site provides travelers with Extranet connects 225 the convenience of secure dealers and 20 service online ticketing for 545 centers. Dealers and global destinations. First- technicians go online to year bookings soared to order parts, trace deliveries, STATE OF ARIZONA 25 times the anticipated check warranties and ServiceArizona is used by 7,000 volume, and Air Canada is maintain service histories. Arizona residents a month to seeing major reductions in Saab estimates this renew vehicle licenses online, distribution costs – its Web-based system will lift saving the state $325,000 a second largest expense. productivity by up to year. Online renewals cost the www.aircanada.ca 25 percent at each dealership. state $1.60 versus $6.60 for an in-person transaction. www.saabusa.com www.servicearizona.ihost.com all can play FEDERATED DEPARTM ENT STORES In 1998, Federated Department Stores created its online sub- sidiary, macys.com. The site offers 250,000 items for sale, ONE GREAT THING about experience: you learn. We’ve from socks to diamonds. In the worked on nearly 18,000 network computing fourth quarter, volume increased RECREATION 700 percent and traffic across EQUIPM ENT INC. ( REI) engagements with customers large and small, in the site jumped 550 percent. REI’s fastest-growing business: all sorts of industries. From this work we’ve www.macys.com online sales. E-commerce revenues rose 360 percent over learned that while online retail sales – “ e-tailing,” 1997. Revenue through the as some call it – is exploding, it’s just one aspect Web site exceeded per-store volumes generated by most of e-business. Prime movers in this revolution of the chain’s largest physical also include universities, hospitals, government stores, and online orders averaged twice the amount of agencies and nonprofit institutions that embrace traditional purchases. www.rei.com the Net to transform what they do. And some of the most astounding results (and returns on invest- ment) come when customers build e-business solutions inside their enterprises to unlock the ideas of their own people. Here, a handful of e-business pioneers. 14

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    SHELL CHEM ICALS This extranet application auto- SCHNEIDER AUTOM ATION mates delivery of chemical A global extranet at Schneider products, allowing for just-in- Automation, the U.S. subsidiary time shipments to customers, AM WAY OF AUSTRALIA of France’s Groupe Schneider, electronic billing and pay- 8,000 distributors now gives sales and service staff in ment. Sales of chemicals access sales and product 130 countries instant access to increased at 45 percent of information over the Net. customer and product informa- TIENDAS E.W ONG Shell Chemicals’ accounts, In its first year, the Web tion. The industrial automation Peru’s first online and its customers eliminate system reduced order equipment manufacturer says supermarket offers 15,000 costly excess inventory. processing costs by the networked application was items for sale. Operating www.shellchemicals.com nearly $2 per order. instrumental in a 60 percent costs are half those of tradi- www.amway- au.com jump in customer satisfaction. tional stores, and profit www.schneiderautomation.com margins from online sales are 35 percent higher. www.ewong.com LEHIGH VALLEY SAFETY SUPPLY This small business once sold industrial work boots off a truck in a few eastern U.S. states. Its Web site M .D. ANDERSON now lists 250 varieties of CANCER CENTER boots and fields orders This secure Net-based disease from M alaysia, Pakistan, management tool at this Texas KOREAN NATIONAL Thailand and offshore oil rigs. hospital allows doctors to OPEN UNIVERSITY www.safetyshoes.com track treatment outcomes and More than 200,000 students – measure appropriateness at 13 regional and 31 remote of tests, prescriptions and education centers throughout procedures. For one major the Republic of Korea – use surgical procedure, test costs the Web and digital library were reduced 35 percent, and technology. The Web site the length of patient hospital will soon hold 10,000 hours stays came down 30 percent. of broadcast lectures and www.mdanderson.org learning materials. www.knou.ac.kr/imsi1.htm 15

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    Behind the scenes at the making of an IBM e-business TV commercial – among the most distinctive and recog- nizable advertising campaigns on television today, according to market research.

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    it’s called e-business BUT IT’S A LOT M ORE THAN A NAM E, or the tag line in an information we’ll capture – analyze it, extract new ad campaign. It’s true that over the last two years insights and apply them? we’ve invested hundreds of millions of dollars to So in 1998 , we started to move beyond broad- promote our point of view on what the Net is all band marketing to define in detail the business and about. And our ads do introduce a lot of customers technology implications involved in becoming an to the idea of e-business. But that’s just where the e-business. We created a methodology – a model conversation starts. describing the nature of this transformation – When customers decide to use the Net to trans- and we began taking it to customers and business form time-honored ways of working, they have to partners. The response has been encouraging, as ask and answer some very big questions. Where do we more and more customers are joining the movement – start? What kind of applications and infrastructure the e-business movement. should we build? How are we going to use all the

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    2. Suzanne O’ Connell industry so lutio ns e x pe rt LEA

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    Because in a movement like this one – global, hair-trigger fast and playing out on largely uncharted terrain – there will be leaders. People with some courage, and a restless bone or two. We consider ourselves fortunate to count thousands of them among our customers. Be one They’re captains of industry – or plan to be soon. And they’re worth watching. They’re found across all industries, and their organizations come in all sizes. But they have a lot in common. They don’t settle for incremental improvement. OF THE They dream about breakthroughs, and search for entirely new models – new ways to build competitive advantage, sell, enter markets, learn, and win. They share one more trait. A sense that in this movement, disproportionate rewards DERS will be earned by those who strike first. 19

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    “ We’re on the trail of a killer. The Internet is the only communications medium that moves with the URGENCY WE NEED.” L. Jeannine Bookhardt-M urray, M .D., HIV Treatment Data Project In the battle against HIV and AIDS, researchers are learning that combinations of drugs succeed where individual medications fail. The HIV Treatment Data Project is a collaboration between the American Association of Health Plans and Lotus to create a safe, secure Web site where information on possible drug therapies is compiled and shared. The results are instantly available to doctors and researchers who have committed themselves to end this modern plague. Chrysler generated more than $ 2 billion in cost savings in 1998 with a Net-based application that tightened the partnership with its suppliers by inviting them to offer cost-saving ideas. The suppliers weighed in with more than 13,000 suggestions. In three out of four cases, Chrysler took action – and shared some of the savings with the idea’s originator. “ We turned to the Net to create the world’s most PRODUCTIVE suggestion box, and speeded up the implementation of a ton of great ideas.” Susan Unger, chief information officer, DaimlerChrysler

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    “ The Internet gives Schwab what we’ve been hoping for over many years, the complete empowerment of the INDIVIDUAL INVESTOR.” Charles Schwab, chairman and co-chief executive officer, Charles Schwab Corporation Three years ago, Charles Schwab had no Web business at all. Today, more than 2 million investors trade $ 6.2 billion a week over the Net, making Schwab the world’s leading online broker- age and one of the largest secure sites on the Internet. In the year’s final quarter, well more than half the company’s trading volume happened via… www.schwab.com. 21

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    “ The old model of TEACHING built around the ‘sage on the stage’ has to be rethought – has been rethought – and I don’t think there’s any going back.” Dr. Rafael Rangel, chancellor, M onterrey Institute of Technology 22

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    With 30 campuses in M exico and seven field offices across Latin America, the M onterrey Institute of Technology knows the value of distance learning. M exico’s largest private university uses a Collaborative Education System (based on Lotus LearningSpace software) to support 2,500 courses at 81 remote sites – and to put digitally delivered education within the reach of some 43,000 students.

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    In the quaint Scottish hamlet of Lugton, a four- person cooperative called Scottish Craft Brewers is online with an e-business Web site and is fulfilling orders from around the world. They built the site – and its secure ordering system – in hours. Since August, sales are up nearly 1,000 percent. “ The RESPONSE is almost frightening. I thought it would die off after Christmas, but it just keeps coming. I shipped to Slovakia, and I don’t even know where that is.” Christopher Lynas, director, Scottish Craft Brewers Cooperative. www.lugton.co.uk

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    “It’s true that we’re not a big company, and we’re no bigger in terms of staffing than we were before we put up the Web site. If this is DAVID VERSUS GOLIATH, then we’re David.com.” Lynne and Alan Kuwahara, owners, Hawaiian Greenhouse. www.hawaiian- greenhouse.com On the volcanic plains of the big island of Hawaii, the Kuwahara family has grown and sold world-class tropical flowers since 1965. But when massive international growers started to squeeze its sales, Hawaiian Greenhouse turned first to mail order, and then to the Internet. Today, 10 percent of all new orders originate on the Net and this small family business has found a way to compete with the big boys. 25

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    We’re watching the end of the PC era. That’s important. But the PC isn’t going to dry up and blow away. Its role is being redefined to serve as a key point of access to the Net – but not the only point of access. 3. Get BI G (and SM ALL) A panoply of new network access appli- ances is coming to augment the world of of enterprise computing to handle their escalating e-business workload – everything PCs – hand-held computers, Web-enabled from industrial-strength software like TVs, screenphones. By some projections, transaction systems and databases to highly these new devices will account for 40 per- reliable, secure, scalable servers. cent of all devices connected to the Net by As a result of these shifts, value is 2002 . This will bring computing and the being redefined in information technology. Net to millions of new users quickly. IBM It’s changing where customers invest, and will build some of these devices, but our it’s changing what leading technology main play will be the technologies – like companies work on. At IBM, this view of chips and disk drives – that power them. the future of computing is shaping all our We think things get even more interest- product development plans, from super- ing at the other end of the network connec- computers to ThinkPads, as well as our tion. As personal computing is redefined, work in creating the core underlying tech- customers are rediscovering the importance nologies that power them. 26

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    Mark Anzani S/39 0 hardware de ve lo pe r

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    personal computing is being redefined… (From left to right) Aptiva: award-winning PC family delivers superior technology – new ways to conduct networked transactions. WorkPad: it adds IBM technology both for the under-$1,000 market and for those seeking the power and perform- to the base 3Com product, enhancing PC-syncing and network functions. ance of a 450-megahertz processor and DVD multimedia. ThinkPad iSeries: Smart Card: applications range from secure user authentication to “e-cash” – introduced in October, it quickly became our fastest-selling notebook ever. and we’re working on Java-based solutions. Wearable PC: in September, IBM CrossPad: jointly developed by IBM and Cross Pen Computing Group, it creates researchers in Japan prototyped a computer with the power of a ThinkPad 560 a digital copy of handwritten notes. Screenphone: we’re working with companies yet small enough to carry in your pocket; the main unit attaches to a headset with like Deutsche Telekom to build new computing and communications devices and a one-inch display and a hand-held controller with a “TrackPoint” and microphone. 28

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    M AKE NO M ISTAKE. There will still be PCs – millions people very quickly. IBM will build some of and millions of them. But the PC is going to be these devices, but our presence will be most joined, augmented (and ultimately outnumbered) evident under the covers – in the leading-edge by a vast array of information appliances, a few chips and disk drives (like those at the bottom of them shown here. This will bring computing of this page) that will power all these new and access to the Net to hundreds of millions of personal computing devices. IBM UNDER THE COVERS M icrodrive (shown actual size) Silicon-on-insulator Silicon germanium The world’s smallest and lightest hard In August, IBM announced In October, we announced disk drive debuted in September. The a breakthrough in semiconduc- production of chips using our M icrodrive holds 200 times more data tor technology that “turbo- patented silicon germanium or images than a floppy disk, and charges” transistors so that they can run manufacturing process. Virtually every stakes out a leadership position in the faster or use less power. This advance telecommunications company is racing market for compact storage devices paves the way for development of more to incorporate silicon germanium to reduce for digital cameras, cellular phones efficient hand-held computing devices and production costs and sharpen the perform- and hand-held computers. more powerful network-based computers. ance of high-speed data links, cell phones, pagers, and other wired and wireless products.

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    RS/6 0 0 0 This line of UNIX-based systems reaches from workstations to the most powerful computers on earth – the SP-class supercomputers. In 1998, the SP line recorded major wins at the U.S. National Weather Service and the San Diego Supercomputing Center. because enterprise computing is being rediscovered W HEN YOU TAKE A BUSINESS TO THE NET, you stake a lot So critical e-business applications have to run on the strength of your information technology on enterprise servers and equally burly software infrastructure. Things like your reputation, called “ middleware.” In combination, they make brand and customer relationships. Your online sure your application (and your reputation) systems have to be able to handle – not just the can handle unprecedented stress, unpredictable population of employees inside your business – spikes in usage, and that you’re ready when the but the population, period. And never go down. world comes calling. HARD FACTS M ESSAGING AND APPLICATION DATA ABOUT ENTERPRISE SOFTWARE COLLABORATION DEVELOPM ENT M ANAGEM ENT IBM ranks among the leaders in each of the key Lotus Notes and Domino are To become an e-business, M ore than 70 percent of the middleware segments, and our products run on all leaders and enjoy double- a customer must extend world’s data resides on IBM the industry’s leading operating systems – including digit growth rates. New its investment in existing systems. IBM ’s DB2 Universal HP- UX, Solaris, Windows NT, AIX, OS/ 2, OS/ 400 installations totaled more technology to the Internet. Database is a top choice and OS/ 390. than 14 million in 1998. In 1998, we maintained our among customers, number-one position in and grew faster than the 30 application development industry in 1998. software and tools, such as VisualAge for Java.

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    S/3 9 0 The workhorse and performance leader AS/4 0 0 It’s quick to deploy and easy to run NETFINITY In 1998 – its first full year in the among enterprise servers. Last year, we cracked the (requiring little or no support staff). That’s one marketplace – Netfinity set industry performance performance milestone of 1,000 MIPS (millions of reason 20 percent of new orders in the fourth standards and began delivering enterprise-class instructions per second) and notched more than 350 quarter of 1998 were from new customers. We technology to the industry-standard marketplace. competitive wins. shipped AS/ 400s in record numbers last year, and delivered a 94 percent performance improvement. TRANSACTION SYSTEM S SECURE PROCESSING M ANAGEM ENT NETW ORKING Transaction systems enable IBM ’s Tivoli subsidiary is a With our SecureWay family disparate applications to leader in systems management of products, IBM is the connect and interact. IBM ’s software and technology – and market leader in secure M Q Series is the de facto continues to grow faster than networking software, enabling message queueing standard. the industry. users to connect to the network, authenticate their identity, and do business 31 with security and reliability.

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    4. Get even BI GGER and DI SAPPEA Even as they carve out a place in the world of e-business, the leaders – our customers – cast an eye over the horizon, searching for the next big movements. We’re looking with them. And right now, we see two. The first is called Pervasive Computing. It is create very powerful systems that can the inevitable extension of the networked attack problems and challenges previously world – to connect not just individuals and beyond computing’s reach. institutions, but lots of everyday things that For us, pinpointing the next shift is will contain a little embedded computing fundamental to our business. It’s why we and networking capability. invest billions in exploratory research and The second trend is at the other end of technology development every year. This the wire, what we call Deep Computing. isn’t a dreamy, speculative look ahead. We It’s the union of ultrafast processors with see what we are uniquely able to see – and, advanced algorithms and software to often, see first. 32

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    R Bernie Meyerson IBM Fe llo w and pio ne e r o f silico n ge rmanium

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    c o mp u t i n g t a k e s o n the m yst e r i o u s … M EN WALKED on the moon three decades ago, but match are helping us create a new market oppor- there have remained myriad challenges beyond tunity we call Deep Computing. the reach of technology - problems too expensive This capability is now being applied to monu- or too time-consuming to be practically solved mental challenges - endeavors far more important with even the most powerful computers. But now than chess: modeling financial markets and weath- that's changing. A new capability began with Deep er patterns, challenges in biomedicine, data min- Blue, a chess-playing supercomputer that could ing and genomics. In the area of pharmaceutical consider 200 million possible moves per second, research, for example, Deep Computing allows coupled with analytical software so sophisticated re se archers to reduc e significantly the time some said it began to mimic the workings of the required to design new drugs. human mind. Today, the lessons of that chess Michelangelo’s second Pietà is a work of undeniable sorrow – said to be unique in its ability to move people to tears. Perhaps that dark power overcame the 34 sculptor the day he took hammer in hand and smashed chunks out of the work he intended as his tomb monument. He was stopped by a servant. The piece was never completed, but was re p a ired by an undistinguished sculptor.

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    Now, IBM researchers and art historian Jack Wasserman are A special six- lens camera M astering the geometric using Deep Computing tech- originally designed for cosmetic complexity of the Flore nt ine niques to create a near- perfect surgeons captures hundreds of Pietà generates new tech- replica – a digital one – based digital mesh “shape photos.” niques for digitizing very large on analysis of nearly 2 billion From these, a computer using a real- world objects. These bits of data. They hope their work special mathematical algorithm techniques allow scholars will lead to new theories about re c onst ructs a wireframe model to make computer models M ichelangelo’s concepts of of the sculpture. Though crud e , of objects to which they proportion and dimension, and this model contains millions o rdinarily would have what the work looked like of points and triangles to define no access, and to examine before pieces were reattached. surface contours. them in exquisite detail. 00

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    the unthinkable … PERHAPS EVEN M ORE PROFOUND than what Deep Computing people have a way to solve problems that aren’t merely lets us do, is what it lets us avoid. For the first hard, or time-consuming, or expensive. They can time, these technologies allow us to create digital apply massive amounts of computing power to solutions where the physical alternatives are no address some of the previously intractable quandaries longer acceptable. With these tools, thoughtful of humankind. The first atmospheric test of a thermonuclear device near the Enewetak atoll in the Pacific Ocean, in 1952. 36

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    3.88 trillion calculations per 4.00 TERAFLOPS, ON THE WAY TO In the fall of 1998, IBM delivered an RS/ 6000 SP – SEC How powerful? Capable of performing nearly 4 trillion In the post- Cold War era, this is the kind of entry- “Before we had this tech- nology, calculations of the 100 Next up: development of a follow-on RS/ 6000 SP for the world’s fastest computer, calculations per second – level computing power complexity required the U.S. Department of twice as fast as any more than a person with the experts in charge of for stockpile stewardship Energy to model nuclear previously built – jointly a hand calculator could nuclear arsenals need. were absolutely impossible.” reactions more fully. It will developed with the U.S. perform in 63,000 years. It allows them to run highly – Dr. David Nowak, approach 100 trillion Department of Energy’s Another way to look at it: complex simulations that Accelerated Strategic calculations per second – Lawrence Livermore the supercomputer known certify the safety, security Computing Initiative dwarfing the 4 trillion National Laboratory. as “Blue Pacific” is and reliability of the stock- Program Leader, possible with Blue Pacific. 50 times faster than Deep piles – without performing Lawrence Livermore Blue, the supercomputer live tests. National Laboratory. that defeated chess grand- master Garry Kasparov. 37

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    a nd be c ome s i n vi si b l e THE EVOLUTION of information technology is as networked transformation. What’s next is an irresistib le as a force of nature. The basic elements explosion – from a world of a million e-businesses, of computing – processors, storage, memory – all and a billion connected users to a trillion connected grow inexorably faster, smaller and cheaper. That things – cars, clothes, household appliances, machine renders a few things pretty clear. tools, each emitting a little information and all of them One is that e-business is just phase one of this interwoven in the global information infrastructure. 3 482

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    Imagine intelligent vending machines sending regional distribution centers reports on what kind of soda is selling, what’s not, even the optimal time to send a route driver to empty the coin box. YOUR HOM E YOUR GROCERIES YOUR PACKAGE YOUR CAR Home buyers can now move Even the weekly ritual of Tod a y, you can track the We ’ re working with into a clean, spacious… grocery shopping is being status of any overnight automakers to prot ot yp e computing device. We’ re transformed. Safeway UK package from depot to w ireless links from the car working with partners in the and IBM are piloting hand- depot. Tom orrow, parc e ls to the Net, combined with home construction industry held devices that let shoppers with embedded computing IBM voice technology to and with Bell Atlantic in the make up grocery lists and and communications give drivers e-mail (voice- United States to deliver submit the order from home. capability might be tracked activated), driving dire c t ions IBM Home Director, which The supermarket fills the mile by mile, street by stre e t and updates on road condi- integrates everything from order and has it ready for and block by block, until they tions. Onboard sensors I nt e rnet access to control pick-up. Or shoppers can reach your door – and you. would alert drivers – and of security and lighting cruise store aisles scanning the nearest service center – systems, heating and air groceries and tracking if a problem were bre w ing. conditioning – all from any their total. Customers like And imagine the benefits P C or TV sc re e n. the convenience. The super- to automakers when these market likes the fact that links beam continuous high-spending families are information on engine doing more of their shopping performance directly to with Safeway. manufacturing and p roduct development.

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    There is a relentless drive in the information technology industry to make things more powerful, less expensive – and always faster. But for customers, the most important measure of speed isn’t found in the machines. It’s in how fast marketplace opportunity arises, and vanishes – and with it, the chance to lead. 5. Fast FORW The question they ask is: If everyone has access to the same technology (and they do), what’s the real source of competitive advantage? Here’s the surprising answer they get from the world’s largest info rmatio n techno lo gy co mpany: there is no unique competitive advantage in technology alone. Today, real advantage is found only when technologies are applied to solve problems, to create new capabilities for customers, quickly and cost-effectively. This requires skills, insight and knowledge – in other words, great people. This is the intensely human business of informa- tion technology services. It is the fastest-growing segment of our industry and, not coincidentally, the fastest-growing business in IBM.

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    ARD Anthony Rizzi glo bal se rvice s pro fe ssio nal

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    close the gap CUSTOM ERS SPENT ABOUT $ 1 BILLION A DAY on information providers like IBM Global Services for assistance in technology services in 19 98. Why? Because there's a areas spanning consulting and systems integration, yawning void between a big idea - or even a well- application development and Web site hosting. We crafted strategy - and marketplace execution. To get believe this trend will continue, for some of the from one to the other, as quickly and cost-effectively reasons described here. as possible, customers increasingly draw on service Demand outstrips supply. I t ’s a persistent dilemma that’s getting more acute. M any of our customers lack the in-house information technology st a ff they need, and they can’t hire sufficient skills. In the The world is embracing United States alone, want ads for hundreds of thousands of information technology jobs are going unanswered. IBM ’s new models. 126,000 services professionals – who garne red the industry’s top customer satisfaction ratings – are ready to help, and New models of retailing, distribution, banking, education. One consultancy w e ’ re hiring more every week. estimates that customers will dedicate fully half their e- business investments to services that help them make their moves to the Net. Over the past year, IBM has introduced more than 30 new e- business services – from Web site hosting, to e- commerce, to offerings for employee training and knowledge management.

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    A premium on security and privacy. Strategic partnerships When businesses send valuable intellectual pro p e rty over the Net, they have to know they can control access to their content, validate the ID of all catch on. p a rticipants in the transaction and provide a high level of security for the data. That’s why five major music labels are using the IBM Electronic M usic M anagement System to test the highly secure sale and digital distribution Customers seeking a competitive edge often decide to concentrate of CD-quality music over the Internet. This is just one of many IBM e-business on their core business, and entrust the management of the informa tion solutions across dozens of industries – all backed by services that make technology infrastruc t ure to an expert part ne r. This model, strategic e - c om m e rce safe, secure and very re a l. “out sourcing,” is well known in the United States. And it’s now sparking the imagination of customers like Cable and Wireless in the United Kingdom, Daiwa Bank in Japan and Caricentro in Italy. Of 38 outsourcing contracts we signed last year worth $100 million or more, nearly half were with customers outside the United States, m ore than double the percentage of two years ago. Speed without sacrifice. Speed or customization? It’s not an either-or decision. Through thousands of services engagements, we build insights in one industry, and use them to create tested, proven solutions that can be replicated (and customized) in others – to get our customers going very quickly. In fact, seven of our 10 fastest- growing global offerings – built around opportunities like enterprise re source planning – are less than two years old. Not by services alone. Customers who engage with our services business find they’ve also tapped a direct pipeline to solutions development teams in 26 industries, as well as the re sources of IBM Research. Often, this can provide a competitive edge for our customers – and for IBM . M onsanto’s decision to sign a long- t e rm, strategic outsourcing agreement with IBM was based, in part, on the opportunity it saw to team up its genomics scientists with our pattern recognition re se a rc he rs.

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    Five years at IBM . Of course, IBM is no startup, and we had our initial public offering more than 8 0 years ago. But in many ways our story over the last five years testifies to the transformational nature of our times. creating shareholder value $184.38 $.86 $169 $.775 $.65 $100 $.50 $.50 $104.63 $77 $75.75 $50 $43 $45.69 $36.75 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 44

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    the new blue IBM as workforce e- business NUM BER OF EM PLOYEES 1998 291,067 1997 269,465 1996 240,615 FROM A STANDING START in 1997, IBM turned itself into a multibillion dollar e-business during 1995 225,347 1998 , taking core business processes – like the 1994 219,839 way we sell and the way we buy – to the Net. IBM E- COM M ERCE REVENUES W OM EN AND M INORITY EXECUTIVES AT IBM $ 3 .3 billion Since 1994 , the number of women executives worldwide has increased 128 percent. And the number of minority executives in the United States has increased by 84 percent. IBM E- PROCUREM ENT EM PLOYEE GIVING W EB PURCHASES Individual employees in the United States contributed more than $190 million from 1994-1998 through matching grants $ 1 .8 billion and donations to nonprofit organizations and educational institutions. ( $ in millions) $43.9 $0 $39.2 $35.6 $35.9 $36.7 ’94 ’95 ’96 ’97 ’98 $0 ’94 ’95 ’96 ’97 ’98 ’94 ’95 ’96 ’97 ’98 PERFORM ANCE- BASED PAY In order to attract and retain the best professionals, IN DECEM BER 1 9 9 8 ALONE, IBM bought more IBM has increased its investments in performance- than $600 million in goods and services over based pay programs. the Internet. Variable Pay IBM employees share in the company’s success By streamlining procurement processes through IBM ’s variable pay program. Variable and taking them to the Web, IBM will save pay is a pool of cash distributed to employees, $240 million this year. based on the performance of the company, each business unit and each individual In 1998 , more than 14 million customer questions employee. Since 1994, the variable pay pool and problems were resolved via online support has grown by more than 60 percent, to systems, avoiding more than $300 million in $1.6 billion in 1998. call- center and field- specialist support costs. Stock Options The number of employees receiving stock options has grown substantially from 1994 to 1998 . IBM nearly doubled the number of employees who were granted stock options in 1996 , doubled that number again in 1997 , and then tripled it in 1998 . Options give a significant financial incentive to employees whose skills and expertise are critical to IBM ’ s business.

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    investing in reengineering innovation IBM TOTAL IBM U.S. PATENTS So ftware Ne two rk Co mputing Othe r 2,658 1,867 1,724 $9.5 BILLION IN SAVINGS 1,383 Since 1993 , IBM ’s reengineering efforts have 1,298 generated $ 9.5 billion in overall savings. $6.1 $5.6 $5.5 $5.3 $5.2 FROM 4 YEARS 16 ’94 ’95 ’96 ’97 ’98 TO M ONTHS Hardware development cycle time has been $1.1 reduced from 4 years to 16 months, and for $1.0 some products, it’s as fast as 6 months. ’94 ’95 ’96 ’97 ’98 $0.8 $0.6 $0.5 1– ’94 ’95 ’96 ’97 ’98 RESEARCH LABORATORIES 3 Three new laboratories were opened in the past five years. NEARLY LESS Yorktown • Zurich Beijing (1995) Since 1993 , IBM ’s internal information • • • Austin • • Delhi • Tokyo San Jose technology expenses have been reduced (1995) Haifa • (1997) by nearly a third.

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    engines of Ex cluding maintenance. growth ( $ in billions) $23.7 $19.5 $16.2 $11.9 $11.4 $11.2 TOTAL OEM HARDWARE REVENUE $6.8 $5.6 $ 4.0 $4.1 $2.8 ’94 ’95 ’96 ’97 ’98 ’96 ’97 ’98 ’96 ’97 ’98 End of year, ex cluding maintenance. $4.1 Backlog represents the total amount 34 of revenue remaining on signed contracts. 9.3 20 ( $ in billions) 1.35 4.5 $51 $2.7 ’94 ’95 ’96 ’97 ’98 $43 $1.9 $38 $1.5 $1.1 TIVOLI DISTRIBUTED SYSTEM S ’94 ’95 ’96 ’97 ’98 M ANAGEM ENT PERCENTAGE REVENUE GROW TH (19 9 6 -19 9 8 ) ’96 ’97 ’98 % NUM BER OF OEM CUSTOM ER 83 DESIGNS IN ASICs Since 19 9 4 , the number of customer designs in A SIC s ( Application-Specific Integrated Circuits) 27 % has grown at an annual rate of 52 percent. 158 Estimated industry average Ex cluding maintenance. 38 77 64 DISTRIBUTED DATABASE M ANAGEM ENT 26 29 32 REVENUE GROW TH (19 9 7 -19 9 8 ) 24 % ’94 ’95 ’96 ’97 ’98 54 13 % Estimated industry average ’96 ’97 ’98 47

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    Jayashree Subrahmonia re se arche r and co mmunity vo lunte e r because we CAN Chieko Asakawa me mbe r o f the te am be hind Ho me Page Re ade r te chno lo gy fo r the blind 48

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