Business Essays - Business and its Enviroment

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Business and its Enviroment

Background

IBM was first established in New York State on the 16th of June, 1911. At the time, the name of the company was Computing Tabulating Recording Company. The world's first dial recorder became one of the business strongholds of CTR. IBM is famously known as one of the few companies in the U.S which continued to prosper despite the Great Depression of the 1930s.

There have been very few business leaders that have pursued corporate excellence with the same zeal and acumen as the founder of IBM, Thomas J. Watson. Watson was no doubt a salesman with talent and enthusiasm. With his unique leadership qualities, it is little wonder that he remained the company's chief executive for over 40 years. It is also worth mentioning that the company was once serenaded by Wall Street as having the 'bluest of blue chip stocks'.

When IBM was first incorporated, cash registers and computers were their main line of business. The 'founding father' of the company soon realized the cash registers; aside from computers was also a very lucrative product that could bestow on the company a significant level of monopoly power. 'Although IBM was never formally related to National Cash Register, the computer company's paternalistic management style, its legendary sales techniques, and it fundamental reliance on anti-competitive pricing stems directly from the experience Watson took with when he was removed from NCR'. He was able to use all what he had learnt to build IBM into a highly successful global company.

IBM first started making significant earning and revenue in the early 1980s. In fact during that same period, IBM became the forerunner in terms of profit generation. By 1985, the company was widely regarded as the most profitable company in the world. This is because it had earned almost $6.6 billion in profits on over $50 billion in revenue. These figures were a lot higher than many of the world's leading corporations such as; Exxon and General Motors.

IBM dominated the computer market for quite some time. They were responsible for the transitioning from UNIVAC machines to more advanced computer machines. During the 1970s, the company was also able to learn from any mistakes Xerox had made and were still the leaders in the computer technology market. Furthermore, there was a time when IBM faced no major domestic or foreign competition that could threaten their market share dominance. They were enjoying almost absolute competitive advantage and scale economies. The company controlled such immense political, financial and technological power. The anti-trust laws that were legislated in order to police this overwhelming dominance did very little to hinder IBM's growth.

Many expert commentators and authors on the IBM phenomenon have stipulated that IBM has benefited from a strong central business rule which was original incorporated by the company's charismatic and pioneering executives, namely the Watsons.

The era of John Opel as CEO of the company in 1981 paved the way for a new horizon in the computing industry. This was largely due production of the IBM personal computer or PC. At the time, the PC was not yet a machine of technological reckoning. The one thing the IBM PC did do was to bring incorporate all the key qualities of a computer into a single and compact processing unit. The first IBM PC provided consumers with only 16 kilobytes of user memory, which was minutely expandable via the use of floppy disks and a monitor which was optional. The IBM PC was not wholly an invention of IBM as the company had subcontract the production of certain components of the machine. For example, the processor chip of the PC was produced by Intel, whilst the operating system was provided by Microsoft.

Today, the company has a vast array of computer software and hardware products. Their products include AMD processor-based servers, BladeCenter, Cluster servers, Linux servers, disk systems, storage software, tape systems, microdrives, hard drives, network attached storage and whole range of other products. Currently, IBM's corporate offices are located on Armonk, New York.

However, it must also be said that the immense success of the IBM PC also undermined the companies primary areas of business which their mainframe business. As the IBM PC gained notoriety, the $4 billion a year profits they were making from their mainframe business began to diminish. IBM has also been the largest corporate contributor to

charitable and educational ventures over many years. They have also provided jobs to hundreds of thousands technical students along the way. There is no doubt that IBM's employment and contributions have fallen as a result of the growth of other companies like Apple, Sun and Microsoft. These companies have now almost certainly taken over most of IBM's philanthropic roles.

It is also worth mentioning that 'IBM's values were formed in patriarchal times early in the 20th century, and the company clung to those ideals even as every major, old-style company was forced to give up on no-layoff policies and become more cold-blooded in dealing with employees'.

But as the modern business are began to dominate proceedings in the U.S and international computer markets, IBM soon had to let go of its traditional beliefs and employee-based systems. By the time Lou Gerstner was appointed as the CEO of the company, IBM had fully become a more 'mainstream' company. As such, this has meant that the company has had to embrace risk and relinquish its civil service mentality. They have also dedicated themselves to the creation of innovative products and have put more effective mechanism through which they can find out what consumers really want. Their employees are now trained to adapt to a fast-paced and constantly changing computer industry.

IBM was certainly poised to extend its dominance well into the 21st century. Then came the meteoric rise if competitors such as Microsoft, Apple and Compaq. The increased competition within the market meant that thousands of IBM employees around the world consequently lost their jobs, their retirement hopes and their security. Their stocks also were affected by all these adverse changes. Many experts on IBM have expressed that most of the problems which the company has experienced the past and is currently experiencing are largely due to 'lethal combinations of corporate hubris, inflexibility and an inability to understand what was happening in the computer market place. However, many of the legal and financial problems which IBM faced in the mid to late 1980s have now been rectified.

Regardless of all this, IBM is still a major player in the computing industry. Their reputation is one that will always stand the test of time. This fact is one that will be true for a long time to come.

Part B

Analysis

Early on in IBM's history, the company enjoyed the benefits of monopolistic market. This is because they were the pioneers of computer technology. For quite some time, the company was more or less the only provider of computer technology both in the U.S and internationally. This meant that IBM could have unrivaled control over demand and supply as well as the power to set prices as they chose. Furthermore, IBM was able to amass supernormal profits and spectacular revenue during their period of dominance.

In many ways the, the U.S versus IBM was one of the great single-firm monopoly cases of all time. This was most certainly true in terms of the time and resources expended on the case. Nowadays, the computer technology industry is a very different environment to the one IBM operated in back in the early 70s and 80s. The emergence of a market that closely resembles a perfect competitive one has meant that IBM now faces many factors, both national and international, which affect its business operations and overall market share. The monopolistic advantages which they once enjoyed have most certainly faded away in the present-day computer market.

One major factor which IBM faces is the fact that the computer technology market is not only characterized by large firms such as Apple and Microsoft, but also relatively newer and quickly growing companies like Hewlett-Packard and Dell. The implications of this, is that prices will be lower than under a monopolistic market arrangement, this in turn will have consequences on overall revenues and profits. Furthermore, the product which all these firms are selling, including IBM's products can be described as relatively homogenous. This makes price setting very difficult indeed since customers will have good information about prices and as such, prices will tend toward costs. When the general price level is well above costs, some firms will reason correctly that they can attract business from their competitors and earn increased profits by shading the price somewhat whilst leaving it marginally above costs in order to accrue a profit.

This is really main factor that has affected IBM even till now. Independent peripheral manufacturers have certainly had significant effects on IBM's profits and revenues. When independent peripheral manufacturers began offering equipment imitative of IBM equipment, they did so at a price discount because customer would not otherwise patronize them. As these independent peripheral equipment manufacturers' reputations grow, they eventually achieve more success which then forces companies like IBM to reduce their prices.

Another external factor which affects IBM is the fact that the computer technology industry today is one where there is a constant need for research and development and the introduction of new products. This is needed not only to obtain some sought of a market share edge in a highly competitive market but also to keep up with the innovation of rival firms. As a consequence, IBM has to make regular and substantial investments into the researching and development of new and innovative computer technology products. Not doing so will mean that their products will fast become obsolete and they would in turn quickly lose any market share they have. This scenario is true for every firm which competes in the modern computer technology industry both at home and in foreign territories.

Conservation and ecology have become a major aspect of today's health and socio-economics debates and government policies. The activities of energy intensive companies like those that operate within the computer technology field are now coming under closer scrutiny by ecology experts, activists and government officials. As IBM falls within this category, the company will have to focus on ensuring that their production processes use renewable energy and are friendly to the environment as a whole. As more debate continue about how carbon gases affect the global warming, an increasing number of companies like IBM will to make decisions and investment in order to ensure they remain an environmentally friendly company and meet all their social responsibility requirements.

IBM is a multinational company which has power to manage and be enterprising in business. Their power cannot be compared to the power of the state. The state alone decides the conditions under which a national or multinational company can operate within a territory. The success of a company like IBM will depend on its capacity to adapt to a diversity of political, social and cultural climates. It must be integrated into a national environment and to respond positively so far as its interests are not being unjustly infringed upona.

Political/government policies and legislations will also have a significant effect on the way, IBM is able to conduct their business and make profits. This is because governments are the ones who define the market and thus will make legislations that will encourage competition and increase consumer price protection. As mentioned, the U.S versus IBM case was one of the most famous single-firm monopoly cases of all time. During that period, the computer industry was perhaps the most technologically progressive in the U.S economy. It was most certainly the fastest growing industry in the economy and IBM was the most well known company. It of course would have seemed a shocking anticlimax when William F. Baxter, the assistant attorney general in charge of the Antitrust Division in the Reagan Administration, agreed in January 1982 to a complete revocation of the case, stating that the case did not have merit0.

Many political and economics commentators were astounded as to why this had happened. Many believe that the motives behind this rather sudden change were political in nature. With this in mind, political forces and blocs are certainly important factors that have affected IBM in the past and will also affect them in the future. Aside from domestic politics, international politics will also be essential in stability of IBM's operations in other countries where they perform business or have other business interests.

Part C

Evaluation of IBM's response

Arguably one of the greatest problems IBM has faced in recent times has been intense competition from its rivals within the computer industry. In September 1986, IBM faced some of its steepest competition to date when Compaq came into New York to do business. New York was the home of IBM and Compaq came into the market to introduce a revolutionary PC that used the next-generation Intel 80386 chip and that operated several times faster than IBM's most powerful PC2. More importantly, it seemed that Compaq might be stealing the technology leadership of the PC industry from IBM. IBM was able to survive that 'scare' by embracing further miniaturization in PC production. After overcoming a few obstacles and perhaps the passage of more time that was beneficial, IBM was eventually able to also successfully built machines which were compatible with the Intel 80386.

It is also worth mentioning that in 1970, the company also had to make some changes to its concept of functional pricing due to the increased competition. The company realized that manufacturing costs of 'high and low performance drives do not differ substantially and the competition has concentrated in the higher performance area and priced their drives very competitively'3.

As part of its anticompetitive strategy, IBM decided to deal with the leasing companies. At the time, the companies had purchased the most 360 equipment and they were most likely going to be the ones to disrupt IBM's plans to commence the changing of their interfaces. Within a very short period of time, IBM began to eliminate a large degree of many of financial and marketing advantages which these leasing companies had enjoyed. Furthermore, the success of these companies was underpinned on these benefits. IBM began to significantly reduce the prices of its 360s. This meant that more people were now able to buy machines outright rather than simply getting them on a lease. Though this strategy was effective in solving the leasing problem, the company was criticized for being 'anticompetitive'.

In terms of social responsibility, IBM has been quite responsive to the current global debate on such issues. The company is wholly dedicated to environmental leadership in all of its commercial operations and the use of its technology. IBM's pioneering corporate policy on environmental issues was first enacted in 1971. As such, the company monitors closely all its operations through out the world in order to ensure the environment is protected. For example, from 1990 to 2006, IBM ensured that it avoided almost 3 million metric tons of carbon emissions. Furthermore, in 1998, the company became the first and only firm to publicize its specific PFC emissions reduction objectives. They were to reduce PFC emissions by 40% before the end of that year4.

It should also be highlighted that the company is also dedicated to ensuring its employment standards are up-to-date, maintains good community relations and ensures that employee well-being is well catered for. So in this regard of social responsibility and environmental conservation, IBM has not been found wanting. Rather, they can be considered as one of the first multinationals that started taking an interest such matters.

One of the main reasons why IBM is still going strong today after more than a century is because the company has been able to adapt to the constantly-changing business environment. Though it may have not always acted in a proactive manner or in prompt one, IBM has certainly got adaptability and an acumen for making good strategic pricing and marketing decisions. IBM's continued dedication to the research and development have also been one of its great strengths. For example, the company led the revival of the U.S semiconductor equipment market during the early 1990s. They also pioneered floppy discs and hard disks, both of which are an essential part of today's PCs. Their researchers have also brought the U.S no fewer than 2 Nobel Prizes in recent years. Moreover, the company has been known to spend $7 billion annually on research and development4a.

It has also been argued by many commentators that during the 1980s when the company was facing very stiff opposition, they failed to adapt but rather they fell into a 'cultural gridlock. Executives spent most of their time in meetings talking to one another using their ubiquitous overhead transparencies. They spoke their own language using their 3-letter acronyms and talking about transitioning to a new environment in order to solve the problems5.

As a result of their hesitation to deal with the problem by tackling 'outside world' problems instead trying to solve them internally, by the late 1980s, the company saw themselves overtaken by Microsoft, which at the time was a company run by 'kids'. All this illustrated the point mentioned above about IBM being able to adapt but not always in a prompt or proactive fashion. Their conservative way of business may have allowed their rivals like Compaq and Microsoft to gain the upper-hand. Perhaps the company also spent too long holding on to traditional company values upon which the company was built in the first place. This might have contributed to them stagnating in terms making the transition into the modern-day competitive market.

In trying to evaluate IBM's response to the challenges and factors they have faced, the Simon model economic theory can be used to good effect. The Simon model is one of the most original contributions to the behaviouralist view point and it was formulated by H.A Simon IN 19597. He propounded that the modern firm is not 'well-defined individual entity but rather a complex organization of both individuals and groups of individuals, each with its own goal or set of goals. Simon stipulates that the core objective of any firm is to survive. It is this objective that will dictate the company's long-term and short-term goals.

The solutions they come up with must be mutually accepted by all internal fractions within the organization itself. This view tends to imply that sometimes firms lean towards 'satisficing' rather than maximization. This means that the firm will seek to satisfy the main parties within the firm. This may or may not hinder the performance of the firm. It would appear that over the years, IBM may have adopted this sort of organizational behaviouralist approach and this approach may not have been the right one to take. As mentioned, many experts on the subject believe that the company should have been more 'outward-thinking' when looking for solutions to their competitive problems

When one weighs the response of IBM to the varying factors that have affected its business operations, it would certainly be clear that IBM has always tended to react to new factors and the scenarios which they present. This has perhaps been one of the criticisms of IBM over the years. Commentators have argued that the company, on many occasions, took a reactionary approach rather than a proactive one. The modern information technology industry is one that requires a proactive approach if firms are to gain market share and maximize their profits. All this explains why there is a variety of literature which highlight the fact that IBM was once leading firm in the industry but has faltered in recent times.

This tends to imply that IBM has no been forward-thinking enough and as such, they have not been effective in forecasting potential changes within the market. Or at least, they have not been as effective as they should have been. IBM has also been criticized for not willing to take risks and not being able to adjust its workforce quick enough. There is no doubt that time will tell whether IBM will ever regain the 'top spot' in the computer technology market. But the ever-growing computer technology market and intense vying for market share which exists between firms as well as the regular entry of new firms into the market make this very unlikely.

In many people's eyes, IBM was not so much a company as an institution. At one time, people once referred to IBM's passion for being right in rigorous processes, its thorough training of employees, its focus on consumers' desires, and its guarantee of lifetime employment. But the computer industry has moved out of the horse-and-buggy days that produced IBM's values and into rather fast-paced environment where change happened very quickly8. Regardless of what future IBM has, the company will always be remembered as being the pioneering company of modern day computer technology.

Bibliography

  • Delamarter, R.T(1986): Big Blue: IBM's use and abuse of power: The Truth About IBM's success and Ominous Implications of its stranglehold on the Information Society, Macmillan London pp 4-5
  • Carroll, P,(1993): Big Blues: The unmaking of IBM, Weidenfeld and Nicolson, pp 3,5-6
  • Fisher, M.F, McGowan, J.J and Greenwood, J.E (1983): US IBM: Folded, Spindled and Mutilated - Economic Analysis and U.S vs IBM, MIT Press, pp 1, 21, 169
  • Posner, R, 'A Program for the Antitrust Division', University of Chicago Law Review 38 (Spirng 1971), p 533
  • United States v. International Business Machines Corporation, Docket number 69 Civ. (DNE) Southern District of New York.
  • Maisonrouge, J(1989): Inside IBM: A European Story, Fontana, Collins, pp 212
  • Watson, T.J (1973), Winning the race, Lessons of Leadership part XCIII, IN Nation's Business, February 1973, pp 41-45
  • Andrews, P (1993): Gates: How Microsoft's Mogul Reinvented an industry, New York: Doubleday, pp 34
  • Griffiths, A and Wall, S (2nd ed)(2000): Intermediate Microeconomics, Prentice Hall, pp 212-213
  • Delamarter, R.T(1986): Big Blue: IBM's use and abuse of power: The Truth About IBM's success and Ominous Implications of its stranglehold on the Information Society, Macmillan London, pp 4

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