Few companies have had such a long history of ups and downs as IBM. What were some of the keys to its recent success? Can its plan to solve some of the world’s most challenging problems succeed? Why or why not? International Business Machines, abbreviated IBM and nicknamed “Big Blue”, is a multinational computer technology and IT consulting corporation. IBM manufactures and sells computer hardware and software and offers infrastructure services, hosting services, and consulting services in areas ranging from mainframe computers to nanotechnology.
IBM current businesses consist of 5 major divisions: Global Technology Services segment; a Global Business Services segment; a Software segment; Systems and Technology segment; and a Global Financing segment. IBM is a dominant innovator, with nearly 67,000 patents secured since 1993. In fact, Big Blue has been the top recipient of patents for 20 consecutive years, and in 2012 it received 6,478 new patents. IBM has been able to leverage their intellectual capital into businesses as diverse as life sciences, automotive and banking and more importantly, a constant revenue stream for the company.
After several months on the job as IBM CEO Lou Gerstner’s diagnosis of the company’s problems was clear: Costs were out of line, they had lost touch with customers, the firm was too decentralized, and they had stayed with their old strategy too long. He summarized this by saying, “We don’t move fast enough in this company. This is an industry in which success goes to the swift more than the smart. We’ve got to become more nimble, entrepreneurial, focused, cost driven. Based on his understanding of customers’ needs, Gerstner recognized that the market was shifting. He pursues a completely different approach than the old IBM business model.
These insights led to a transformation that subsequently led IBM to exit the network hardware business, application software, storage, and personal computers and to enter the services businesses and develop a freestanding software business. It also led to a realistic evaluation of the firm’s core capabilities resulting in the decision to exit consumer businesses which required skills very different from IBM’s enterprise focus. After reviewing IBM’s strategies, it found that “The Company didn’t lack for smart, talented people. Its problems weren’t fundamentally technical in nature. It had file drawers full of winning strategies.
Yet the company was frozen in place. The fundamental issue in viewing is strategy execution”. To begin the transformation he emphasized focus, speed, customers, teamwork, and getting the pain behind them. He did this by developing a few global core processes, centralizing the company to leverage its strengths as a provider of solutions to customers, fixing the core businesses, redesigning the metrics and reward systems, and relentlessly driving the culture toward a focus on the marketplace. He began to assign customer responsibility to senior executives who acted as ombudsmen for the customer relationship.
This forced senior managers to listen to customers’ problems and complaints and created a sense of urgency about the marketplace. Incentives were changed so that business unit heads were no longer rewarded solely on the performance of their business but on how well they operated as a team. Since 2002, Sam Palmisano, has continued the transformation of the company into an “on-demand business” using advanced computer and software technologies to quicken the flow of knowledge within companies and help executives respond instantly to changes.
This entails offering open architecture, integrated processes, and self-managing systems—selling computing services, not computers. This has required a transformation of the company around customer needs. Who are IBM’s biggest competitors today, and what risks do they face with their current strategy? IBM’s main competitors are Hewlett-Packard Company (HPQ) and Dell (DELL), 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.
Since IBM relies heavily on its Software and Services segment, it mainly competes with Hewlett-Packard in the servers and IT services markets and with Dell in the servers and software markets. In addition to HP and Dell, IBM also competes with firms such as Accenture (ACN), Amazon (AMZN), Apple (AAPL), EMC (EMC), and Microsoft Corporation (MSFT). During IBM’s profitability decline in the 1990s, the company found some strategy issues as below, bad decisions in terms of industry focus too much reliance on brand name poor decisions dealing with outsourcing technology a bad focus on market position, and high costs IBM considers solutions its primary focus and product on the basis of Michael Porter’s business strategy model.
Threat of Entrants: Low Very few companies can enter into the solutions business for the following reasons: high brand recognition of IBM (decreases threat) One-stop shopping for IBM products (decreases threat) diverse divisions within IBM allow breadth of product (decreases threat) high start-up and research and development cost (decreases threat) Threat of Substitutes: Moderate
There is room for substitutes in the solutions business for the following reasons: IBM has strong customer loyalty (decreases threat) differentiated competition is unwilling to enter one-stop shopping market (decreases threat) open-source software and hardware (increases threat) some customers do not need one-stop shopping (increases threat) Supplier Power: Low The suppliers in the industry have very little power for the following reasons: the ability to provide all the parts of a solution (decreases power) production of software and hardware (decreases power) Buyer Power: Moderate.
The buyer has limited power for the following reasons: most firms cannot demand price discounts (decreases power) customers demand customized products (increases power) extreme downward movement of technology prices (increases power) commoditization of mainframes (increases power) Rivalry: Moderate Rivalry in this market remains moderate for the following reasons: slowed growth of IT solutions market (decreases rivalry) other companies offer limited solutions (increases rivalry) Use of Complimentary Goods: High Synergies with hardware and software increase the value of solutions for the following reasons: a constant need for hardware(increases use) a constant need for software(increases use) IBM’s ongoing strategies have overcome by transforming its corporate culture and by implementing strategies to harmonize the company.
The change in culture created risk-taking, motivated workers that produce top-notch products and services. Management created a front, back, and centers that unified IBM’s different business units in a way that creates competitive solutions for its customers. IBM also continues to differentiate its products. IBM offers a one-stop technology shop where a company can solve all its technology needs including the purchase of mainframes, software, and information services. This differentiation allows IBM to maintain profitability.