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IBM was one of the most successful companies in the world. During the 1970s and 1980s, the company had experienced strong growth in both revenue and profits and had a virtual market share for mainframe computers. However, in the early 1990s, IBM faced a rapid decline in its mainframe business. In 1992, IBM incurred a loss of $5 billion and by 1993, the "Big Blue" had reached its nadir, with its stock price was at an 18-year low. The brand had fallen below 250th in Interbrand's annual survey "Best Global Brands" with a brand value, estimated at a negative $50 million (Greenwald, 2006. p1). This decline was caused by a number of external and internal factors which worked in concert to weaken the company.
Although market demand expanded rapidly in the late 1980s and early 1990s, the demand for IBM's products and services declined mainly due to the emergence of substitute products and increased competition. IBM was hurt by the PC revolution which it had created a decade earlier. Its strength was in enterprise-wide computing and systems integration, not in the piece-part technologies which defined the new market. The general acceptance of the PC and the server revolution quickly saw a shift towards distributed computing and resulted in the structure of the computer industry moving from one that consisted of large vertically integrated firms such as IBM to one characterised by smaller firms concentrating on a specific part of the value chain. A particular feature was that software and services grew in importance as productivity demands increased, moving the industry away from the almost exclusive hardware focus on which the IBM corporation depended for more than two thirds of its revenues.
The move towards smaller computers gained momentum as rapid technological innovation allowed greater processing power to be placed in smaller, cheaper packages, further increasing the pressure on mainframe producers such as IBM. Industry segments developed further and new products and competitors emerged from a variety of sources. In the PC segment, IBM's early use of Intel and Microsoft allowed these firms to work with other companies to create IBM PC clones, the second wave of which seriously dented IBM's position in that market. Improvements in price-performance increased the level of competition and, as players struggled to maintain market share in the wake of lower component prices and over-capacity, computer prices fell faster than costs.
This decline in demand for IBM's products was exacerbated by a cyclical decline in demand caused by a general slowing of economic growth in the early 1990s. The situation was particularly acute in the computer industry where revenue declines exaggerated the national macroeconomic pattern as customer companies put IT investment decisions on hold. The depth and length of the global recession amplified the difficulties being felt across the subsidiary, and revenues, profits and market share all suffered.
As IBM grew, it increasingly lost touch with its customers. This was also true of the rest of the Corporation which became product and technology driven instead of market driven and often imposed solutions on customers. IBM's management failed to fully recognise that buyers had become better informed and more rational as they had matured and as a result other companies took better advantage of technologies IBM had pioneered. In addition, the PC revolution meant that purchase decisions were often made in places where IBM had no longstanding relationships and leverage. Lou Gerstner, appointed as CEO of IBM in 1993 noted:
Undeniably, we made some big mistakes. We became complacent. We took our eye off the marketplace. We were slow to exploit new technologies. But more than anything, it seemed that over the past decade the industry had moved away from our kind of computing and our way of working with customers. (Gerstner, 1993. p8)
A major cause of this loss of focus was that power was concentrated at the top of the organisation, away from the periphery which felt the effects of changing market conditions first. This reduced IBM's ability to identify and respond quickly to environmental changes and allowed small niche players to enter the market and compete successfully with the company. In addition, IBM sales offices functioned as revenue centres, without responsibility for costs or cost information, and commissions were based on revenues, not profits, often leading to unprofitable sales as heavy discounting was undertaken to win accounts and meet quotas.
High Cost Structure
Top management erroneously forecast that the revenue growth experienced up to 1988 would continue indefinitely, and built a cost base in anticipation of the demands that such growth would place on the organisation. Because of the external changes outlined earlier, expected revenues did not materialise and the company quickly found itself with a cost burden that was excessive relative to revenues and relative to competitors. Despite this, employment continued to rise in the late 1980s as did average remuneration growth which exceeded the general level of inflation and the level amongst competitors. By the start of 1992, total cost as a percentage of sales had increased to 120 per cent and was difficult to reduce via the shedding of labour since, inkeeping with the rest of the corporation, IBM had a tradition of 'full' or lifetime employment.
Recovery Strategy Formulation
The changes were key to the recovery of IBM, as Gersnter noted:
â€¦ we had to make some changes right at the top of the organisation, and bring in people who are not part of the past and who have tremendous leadership qualities, and who could create a vision of how this company can recover... (Gersnter, 2003. p285)
After analysing the firm's operations, the top management team developed a turnaround plan to transform IBM into a lean, customer-focused organisation and formed a team for its implementation. The multi-phase strategy, called the Blueprint, was based on five principles. First, increasing customer focus. Second, increasing market specialisations and selecting targets more carefully instead of chasing every opportunity. Third, becoming a leading consultancy and services company, taking advantage of the growth potential identified in those areas. Fourth, redefining internal processes and reshaping the company to better serve customers. Fifth, devolving power to employees to make IBM more market responsive.
Retrenchment and Restructuring
Salaries and graduate recruitment were frozen and employee benefit programmes were cut. A staff reduction scheme, the Career Transition Programme, removed 10 per cent of the company's employees. In the absence of unions, the company quickly moved to more flexible staffing arrangements through outsourcing and the use of temporaries from agencies, eventually selecting the company to manage and supply staff for its call centre. Manufacturing plants were operating at capacity, leading to a large reduction in average production costs. Training in management, personal, and professional skills was transferred to agencies in a further effort to reduce costs. Distribution Services were also spun off to form High-tech Logistics. In property management, IBM's office space was aggressively reduced as businesses were charged for real estate use, and the company actively sought new tenants for its vacated space.
After the first wave of cost reductions was complete, the focus turned to making each business 'best of breed' through competitive benchmarking and rigorous cost/efficiency analysis. This process involved exposing all departments to market realities and clearly communicating the budgets within which they would have to operate. To facilitate this, the Transformation Project put in place a set of management systems with the explicit aim of reducing the selling, administrative and general expense.
As a result of restructuring efforts management layers were cut from 8 to 4 and more power was devolved to employees. This enabled better customer service and a quicker response to environmental changes. Meanwhile, the company explored a number of different business options in an effort to stimulate growth and reduce its dependency on hardware Sales.
Since the mid-1990s, IBM shifted its focus from selling computer hardware to providing a broad-based information technology services and solutions. As a result, IBM increasingly looked for partners who can skillfully combine business insight with technology expertise.
In 2002, IBM acquired PricewaterhouseCoopers Consulting and established itself as the global leader in IT services, with 55,000 employees and $13 billion in revenue (Fontana & Bednarz, 2003). The acquisition expanded IBM's service delivery portfolio by providing it with strategy, consulting, business process, vertical industry expertise and also increase their client base. IBM is changing its definition from International Business Machines, to international business models.
In early 2005, IBM sold its Personal Computer business to Lenovo Group, the leading Personal Computer brand in China and across Asia. The sale further strengthened IBM's ability to capture the highest-value opportunities in the rapidly changing information technology industry. Over years, IBM have aggressively repositioned itself, continued to transform and stabilise itself to be the world's leading provider of innovation-enabled solutions for businesses and institutions. In the process of doing so, IBM have successfully balanced the company's brand heritage as it has undergone changes in its business strategy (Greenwald, 2006, p14).
Theories and Case Analysis
Management of Change
According to Wilson (1992), change management is the process of introducing controlled change during the project life cycle. The intention behind a change control process is to evaluate the risk, at the end-user level, against the urgency and importance of the change. The management need to analyse change, predict the likely consequences and handle resistance and blockages along the way. Change management is a crucial part of organisation growth and survival. Without proper management of change, managers cannot accurately analyse how and when change may occur and therefore the growth and success of the organisation may be stunted.
Planned or Emergent Change
Change is a indispensable part of organisation life. Planned change is a term first coined by Kurt Lewin (1951) to distinguish change that was consciously embarked upon and planned by an organisation (Burnes, 2004). According to Wilson (1992), planned change strategies would be those processes in which there was a smooth transition from some previously articulated strategic vision towards a future desired state. Planned approach to change is now most closely associated with the practice of Organisation Development (OD). According to French and Bell (2000), OD is about people and organisation and people in organisation and how they function. OD is also about planned change involves common sense, hard work applied diligently over time, a systematic, goal-oriented approach, and valid knowledge about orgnisation dynamics and how to change them.
A second important perspective on organisational change is an emergent, processual approach that has appeared since the 1980s (Pasmore, 2009, p5). This approaches take the view that many crucial forces for change happen outside the organisation and managers must be acutely aware of the environment around them in order to manage change appropriately. Burnes (2004) states that emergent change emphasize that change should not be perceived as a series of planned events within a given period of time. Rather, it is best viewed as a continuous, open-ended process of adaptation to change circumstances and conditions. When emergent processes are involved, change comes from the ongoing activity of organisation actors as they respond to problems and opportunities.
Wilson (1992) proposed that there are four levels of change, each level has various issues and complexities, meaning that different approaches and change models will be needed. The level of change are identified below,
Degree of change
1 Can be both operational and strategic
No change in current practice
2 Mainly operational
Change involves producing more of the same goods or services
3 Mainly strategic
Change occurs within existing parameters of the organisation (e.g. Change, but retain existing structure, technology etc.)
4 Predominantly strategic
Change involves shifting to redefining exsting parameters. (e.g. Structure and technology likely to change)
Table 1 - Level of Organisational Change (Wilson,1992, p20)
Levels 1 and 2 are concerned with minor changes that would most probably have an immediate environment that is relatively stable. Therefore, a planned approach would be best suited to changes at these levels. Levels 3 and 4 in Table 1 involve complex strategic change decisions and "tend to reveal more of the nature of unprogrammed and emergent organisational activities" (Wilson, 1992, p20). Therefore, an emergent approach would be most suitable for these types of changes.
In case of IBM's transformation, internal and external forces acted as major drivers for change. Internal force including IBM's poor management and high cost structure; external force came from the decline of demand for IBM's products and services due to the emergence of substitute products and increased competition, also the slowing of economic growth in the early 1990s. IBM's change was its response to these crisis, IBM needed some fundamental change in order to survive. Further more, IBM's change was a long-term and continuous transformation, which the Big Blue tried to move away from the confines of the slow-growing and highly competitive computer industry, and to transform itself into a company that helps other firms run their business. All these evidence show that IBM's transformation was a emergent change, which also meet the characteristics of level 4 in Table 1.
During the change process, IBM precisely identify the company's core competencies to make the change more effectively. From the basic root level perspective it is clearly evident that IBM's root competence is embedded in their presence and pioneering position within the computing industry ranging from both their ability to compete in sectors of hardware and software.
According to Pettigrew & Whipp (1993), the implementation of change is an "iterative, cumulative and reformulation-in-use process." Successful change is a result of the interaction between the content (objectives, purpose and goals); the process (implementation); and the organisational context (the internal and external environment). We can further evaluate the IBM case, by using the "central interrelated factors of successful change management", which is also presented by Pettigrew & Whipp (1993). In terms of environmental assessment, when Louis Gerstner took over IBM in 1993, he monitored both external and internal environment and he recognised, over the past decade the industry had moved away from mainframe computer towards smaller ones and from hardware sales towards integrated IT solution. Also, IBM's conventional way of working make them lost touch with their customers, and they have missed many new business opportunities. So he spearheaded the
turnaround process, which began with a systematic analysis of customer profiles and client needs. In terms of human resources, at the beginning of the transformation, the company had to slash billions in expenses, mainly through layoffs. But at the same time, Gerstner emphasized that an organisation is a collective capacity of its people to create value, change is made by company's employees not itself. Over the years, the top management pushed IBM forward, also with a successful transformation in culture.
IBM's transformation was very successful. The transformation was massive and extensive which proof that large organisations can make fundamental changes. When the change strategy was formed, IBM was a hardware-based company. Over the transformation, IBM have significantly grown, with a focus on their services business. The transformation of IBM is one of the great comeback stories in the history of corporate America. In 2005 IBM had more than $91 billion in sales compare to $62 billion in 1993 (Ludy, 2005). In the 2009 Interbrand Study, IBM was ranked as the 2rd most valuable brand in the world with an estimated brand value of over $60 billion. CEO Palmisano noted that IBM is not defending the past anymore as the company is off and running into a new world of business, beyond computers (Greenwald, 2006, p14).
Figure 1 - IBM's revenue and business areas in 1993 and 2005 (Luby, 2005)
The Role of Culture in Organisational Change
The organisation culture helps to maintain stable behavior patterns in organisations. Culture is self-reinforcing and a potentially significant barrier to change. The change efforts will not work unless they are compatible with the organszation culture.
Over a huge evolution and transformation, IBM need some strategies to minimise the adverse consequences for employees and overcome any resistance to change. The top management recognised real change in a company has to come from its employees. From the millions of decisions made every moment, every day, at every level of the corporation. Technology can enable new solutions, and management can mandate them, but they don't actually solve anything until employees use them, embrace them and rely on them. They understood that they should think more carefully that how they can change their culture to fit with the new structure and can smooth the way to a successful transformation.
According to Montana and Charnov (2008), corporate culture is the total sum of the values, customs, traditions and meanings that make a company unique. Corporate culture is often called "the character of an organisation" since it embodies the vision of the company's founders. The values of a corporate culture influence the ethical standards within a corporation, as well as managerial behaviour. Cultural transformation is a difficult task, particularly for large corporations with a long history. It is often the very successes of the past that make change so difficult.
In essence, the story of IBM's turn-around is about culture. Gerstner comments:
I came to see, in my time at IBM, that culture isn't just one aspect of the game - it is the game. In the end, an organisation is nothing more than the collective capacity of its people to create value. Vision, strategy, marketing, financial managment - any management system, in fact - can set you on the right path and carry you for a while. But no enterprise - whether business, government, education, health care, or any area of human endeavor - will succeed over the long haul if those elements aren't part of it's DNA. (Gerstner, 2003. p182)
In trying to reshape the culture to better allow for organisational change, Gerstner (2003) advised that, top management can't simply give a couple of speeches or write a credo for the company and declare that the new culture has taken hold. Instead, top management can create the conditions for transformation, provide incentives, define the marketplace realities and goals. If fact, in the end, management doesn't change culture. Management invites the workforce itself to change the culture.
In transforming IBM from a hardware company on the verge of collapse to a premier solution company in the information technology industry, Gerstner did as much to renew IBM's existing core values and culture as to change them. He worked with, not against, tradition and habit. Under Gerstner's leadership, IBM's culture was transformed into a more flexible and adaptive one.
IBM went back to it's strengths in technology, embraced its size as a competitive advantage, and drove for open standards in business computing. Gerstner retired from IBM in 2002, turning the reigns over to Sam Palmisano, an IBM career employee. In doing so, he once again demonstrated the organisational change is not about ignoring culture or about wholesale cultural change. It is about changing only parts of the culture and organisation while embracing the rest.
In practice, a change process rarely follows a simple sequence of stages. Some phases may take several iterations to complete such as IBM's cost and asset reductions. Since early 1990s, the business has launched two whole rounds of headcount reduction and spare property utilising together with best of breed scheme to encourage department cost-saving competition. At the same time, time constraints require most of these activities to be run in parallel which gives the business the most stress than ever.
To make a successful step through this kind of situation, business should take consider of all iterations and make necessary awareness across all employees as well as the public to remain reputation. Though requirements will often change or evolve during the change process, a detailed plan should be launched ahead and amended where necessary.
In fact, the passivity of the company was a significant drawback during the emergent change that forced by the pressure of the market environment. In 1990s, the poor performance of IBM mainly attributed to the lack of technology innovation, the negative economic cycle and the monopoly in the top management. However, if the company had a planned change for the development of its business, it might not be suffered the difficult period with low-efficient cost structure, unreasonable employment scheme and miserable profit margin. IBM lost its opportunity to take advantage from the innovation tendency and to counterattack the depressed environment.
According to Pasmore (2007), treating the two types of change separately and conflict with one another is confining. It is crucial to take into account both planned and emergent ways of modeling orgnisational change. Therefore, in this case, it highly recommended that IBM should link the planned and emergent changing together for the future development of the business.