IBM Is Both an Outsourcer and a Major Outsource for Others

Few companies are better known for their manufacturing expertise than IBM. Nonetheless, even IBM has to adapt to the dynamic marketplace of today. In the area of personal computers, for example, IBM was unable to match the prices or speed of delivery of mail-order firms such as Dell Computer. Dell built machines after receiving orders for them and then rushed the computers to customers. IBM, in contrast, made machines ahead of time and hoped that the orders would match its inventory.

To compete against firms like Dell, IBM had to custom-make computers for its business customers, but IBM was not particularly suited to do such work. However, IBM did work with several distributors that were also having problems. The distributors were trying to custom-make IBM machines but were forced to carry a heavy inventory of parts and materials to do so. Distributors were also tearing IBM computers apart and putting them back together with other computer companies' parts to produce custom-made computers.

IBM decided to allow its distributors to store parts and materials and then custom-make computers to customer demand. In other words, IBM outsourced about 60 percent of its commercial PC business. Distributors such as Inacom Corporation became profitable, and IBM was able to offer custom-made PCs competitive in price with those of Dell and other direct-mail companies.

More recently, IBM has begun selling its technology—tiny disk drives, speedy new chips, and more—to its former competitors! For some of these new partners, IBM will design their new products and let them explore its labs. In short, IBM is doing a bit of reverse outsourcing in that it is offering itself as a research and product development company ready to work with others. Thus, IBM will sell networking chips to Cisco Systems and not compete with that company anymore. And it will likewise sell disk drives to EMC. IBM benchmarked its final products against these companies and saw that it was not winning. The winning strategy, it decided, was to join them and become an even better team. IBM's long-range strategy is to move away from hardware toward software development. It acquired PricewaterhouseCoopers to put more emphasis on services rather than hardware.

1			What does it say about today's competitive environment when leading companies such as IBM give up competing and decide to work with competitors instead?
2			What effects will outsourcing have on trade relationships among countries?
3			If more U.S. companies unite their technologies, what will that do to competitors in other countries? Should foreign companies do more uniting with U.S. companies themselves? What about U.S. companies uniting with foreign companies?
4			How much influence will the Internet have on world trade and outsourcing among countries? What does the Internet provide that wasn't available before?