In the early 1990s, the worlds largest computer company, International Business Machines, suffered one of the largest profit disasters in corporate history. Essentially, its problems were rooted in poor corporate strategy. This case study examines how IBM got into such difficulties.
Over the period 1991 - 93, IBM (US) suffered a net loss of almost US$16 billion (half the total GDP of the Republic of Ireland). During this period, the company had many of the characteristics of a supposedly good strategy: a dominant market share, excellent employee policies, reliable products (if not the most innovative), close relationships with national governments, responsible local and national community policies, sound finances and extensive modern plant investment around the world. Yet none of these was crucial to its profit problems, which essentially arose from a failure in corporate strategy. This case study examines how this came about: see Figure. 1.5. The reasons for the major losses are explored in the sections that follow. Clearly the company was continuing to sell its products, but its costs were too high and it was unable to raise its prices because of increased competition.
IBM market domination 1970 - 85
During the 1970s and early 1980s, IBM became the first-choice computer company for many of the world's leading companies: it had a remarkable global market share approaching 60 per cent. It constructed its computers to its own proprietary standards so that they were incompatible with other computers but helped maintain the company's domination of the market.
In essence, IBM offered large, fast and reliable machines that undertook tasks never before operated by machinery: accounting, invoicing and payroll. Above all, choosing IBM meant that risk was low for customers: 'No one ever got fired for buying IBM.' Hence, IBM was the market leader in large mainframe computers and earned around 60 per cent of its profits from such machines.
Reflecting its dominance of global computer markets, the IBM culture was relaxed and supremely confident of its abilities and resources. Because of its sheer size and global reach, the company was split into a series of national companies, each operating with a great degree of independence. This meant that central management control was limited, with many key strategic decisions being taken at national company level. Often, central management did not even know what was happening in key product groups until the end of the year, when all the figures for the group were added up. For major new market developments, the initiative was often taken by IBM's North American subsidiary. Throughout this period, IBM central HQ was content to rely on the success and profitability of its mainframe computer range and observe the rapid growth of another small but related market in which it had no involvement: the personal computer (PC) market.
Development of the PC market
During the late 1970s and early 1980s, small PCs with names like Osborne, Commodore and Sinclair were developed. Some of these were particularly user-friendly - for example, Apple computers. In these early years, IBM preferred to maintain a lofty technical distance. It took the view that the PC market was small and PCs would never handle the mainframe tasks. Some of these small machines were built around common computer chips and software. Although they did not have the capacity to handle any of the large computational problems of computer mainframes, the PC market was growing fast - over 100 per cent per annum in some years. In the late 1970s, IBM was exploring new growth areas and decided to launch its own small machine onto the market.
The launch of the IBM PC in 1983
Because IBM's existing company structure was large and nationally based and its culture was so slow and blinkered, it chose to set up a totally new subsidiary to manufacture and market its first PC. Moreover, it did not use its own proprietary semiconductor ships and operating software. It acquired them respectively from the medium-sized chip manufacturer Intel (US) and from what was then a small software company called Microsoft (US).
IBM took the view that it was doing Intel and Microsoft and all PC customers a favour by making the IBM designs into the world standard. Indeed, IBM was rather proud of establishing the global benchmark in what was a small specialist market sector, as well as holding the lead in the much larger mainframe market. IBM finally launched its first PC in 1981 without trying either Intel or Microsoft exclusively to itself; the new PC cost US$30000 and, by today's standards, was very small. Although the claim 'IBM-compatible' quickly became a common standard for most PCs, except Apple, these developments had two consequences for IBM:
Its worldwide PC standard allowed competitors to produce to a standard design for the first time;
No restriction was placed by IBM on Intel and Microsoft supplying similar products to other companies.
IBM reasoned that these issues did not matter because it would dominate the small PC market just as it did mainframes. In addition, IBM judged that the small PC would never replace the large mainframe, so it posed no significant threat to its main business. As it turned out, the company was at least partially wrong on both counts.
Technological advance and branding in the later 1980s
Although computer markets were driven by new technology, the key development was IBM's establishment of the common technical design mentioned above. This meant that its rivals at last had a common technical platform to drive down costs. IBM was unable or unwilling to find some way of patenting its design. IBM's strategic mistake was to think that its reputation alone would persuade customers to stay with its PC products. However, its competitors were able to exploit the new common IBM-compatible PC design to produce faster, reliable and cheaper machines than IBM, using the rapid advances in technology that occurred during the 1980s.
IBM and other computer companies continued to spend funds branding their products. However, their suppliers, such as Intel and Microsoft, also began to spend significant sums on advertising. Microsoft's 'Windows' was launched in the late 1980s and Intel's 'Pentium' microchip was launched in 1993 both were destined to dominate their respective markets.
IBM slips into disaster 1986 - 93
In the late 1980s, IBM recognised the competitive threat from Microsoft and Intel. It launched its own proprietary software, OS/2 Warp, in 1994 to counteract this. It also negotiated with Apple to set up a new computer chip standard, the power PC Chip, with the aim of attacking Intel. Although both initiatives had some innovations, they were too little and too late. IBM struggled on with the concepts, but the software made little headway against the established Microsoft and the chip was abandoned in the mid-1990s.
By 1993, IBM's advertising was forced into claiming that its PCs used the Microsoft 'Windows' operating system and its computer chips had 'Intel inside'. The IBM PC was just one of many computers in the small-computer market.
New organisation structure: 1991
Recognising the need for change, the company began to develop a new organisation structure in 1991. Up to this time, the organisation had been centred on two central aspects of the company:
1 Products. The company provided the most complete range of products from mainframes to telecommunications networks, from PCs to computer software. Each main product group sold its products independently of other groups.
2 Country. The company was the leading provider in most countries, with the ability to provide computer solutions tailored at national level for the particular requirements of each country. Each major country had its own dedicated management responsibilities.
While this provided strong local responsiveness it meant that global and international company customers were not always well served through country companies and individual product offerings. In a new organisation announced in 1991, the major global industries such as banking, insurance, oil and gas, manufacturing, telecommunications companies and transport were tackled by dedicated teams with a complete range of products worldwide: the new structure involved the development of Industry Solutions Units (ISUs). Each ISU had its own dedicated management team and was measured not only on sales but also on customer satisfaction. However, the country and the product managers were reluctant to give up control to the ISUs, which often operated internationally across many countries. This resulted in confusion among customers and some internal political battles inside IBM.
Future IBM strategy: 1993 strategic perspective
After the major profits problems of the early 1990s, IBM clearly needed a major shift in strategy. A new chief executive, Mr Lou Gerstner, was recruited from outside the computer industry, but he was faced with a major task. The conventional strategic view in 1993 was that the company was too large. Its true strengths were the series of national IBM companies that had real autonomy and could respond to specific national market conditions, and the wide range of good IBM products. But the local autonomy coupled with the large IBM product range meant that is was difficult to provide industry solutions. Moreover, its central HQ and research facility had difficulty in responding quickly to the rapid market and technological changes that applied across its global markets. The ISUs had been set up to tackle this but did not seem to be working. The most common strategy solution suggested for IBM was therefore to break up the company into a series of smaller and more responsive subsidiaries in different product areas - a PC company, a mainframe company, a printer company and so on.
Q.1 Relates to the case study on IBM supplied as part of this examination.
1. Using appropriate management studies models:
a) Identify IBM's strengths and weaknesses and explain how these may have accelerated or halted IBM's decline. (25 marks)
b) Identify the competitive threats faced by IBM from its rivals. Outline what strategies would you recommend to IBM in response to those threats and explain why you would recommend them. . (25 marks)
It had the 1st mover advantage in the computer industry.
Dominant market share, excellent employee policies, reliable products
Close relationship with national government
Extensive modern plant investment around the world
It constructed its computers to its own proprietary standards so that they were incompatible with other computers but helped maintain the company's domination of the market.
IBM offered large, fast and reliable machines that undertook tasks never before operated by machinery: accounting, invoicing and payroll.
IBM was the market leader in large mainframe computers and earned around 60 percent of its profits from such machines.
These strengths helped IBM to have a remarkable market share around the globe of 60% during the 1970s and early 80s.
Because of its sheer size and global reach, the company was split into a series of national
companies, each operating with a great degree of independence. This meant that central
management control was limited, with many key strategic decisions being taken at
national company level. Often, central management did not even know what was happening in key product groups until the end of the year, when all the figures for the group were added up.
Relied on the success and profitability of mainframes, didn't bother to enter the personal
Overconfidence lead their suppliers Microsoft and Intel become competitors, and they
moved ahead as no restrictions were placed by IBM on Intel and Microsoft for supplying
similar products to other companies.
Its strategic mistake of not patenting its design and thinking that its reputation alone would persuade customers to stay with its PC products .
Their overconfidence in not believing that the PC market will grow led to a halt in their
And since they didn't place any restrictions on Intel and Microsoft, which helped IBM develop its 1st Pc, made them its biggest competitors since they started supplying to other companies. Till the time IBM realized the need of the market, the competition in the PC market was way ahead. And Intel and Microsoft were the biggest players in the market.
In the late 1980s, IBM recognized the competitive threat from Microsoft and Intel. It launched its own proprietary software, OS/2 Warp, in 1994 to counteract this. It also negotiated with Apple to set up a new computer chip standard, the power PC Chip, with the aim of attacking Intel. Although both initiatives had some innovations, they were too little and too late. IBM struggled on with the concepts, but the software made little headway against the established Microsoft and the chip was abandoned in the mid-1990s.
Well after discussing the case study, I conclude that every business should evolve and adapt with the changing environment and competition. And it needs to be extra careful with its innovations so that others don't make benefit out of it. Had IBM put restrictions on Microsoft and Intel and had it been more careful with regard to the PC market, it would have continued its wide spread rule in the IT industry.
2. Explain Corporate Vision and explain how this is different from mission? (25 marks)
A vision statement looks into the future at least five years and defines a desired future state of the company.
Vision Statements also define the organizations purpose, but this time they do so in terms of the organization's values rather than bottom line measures. The vision statement communicates both the purpose and values of the organization.
For employees, it gives direction about how they are expected to behave and inspires them to give their best. Shared with customers, it shapes customers' understanding of why they should work with the organization.
A vision statement, on the other hand, describes how the future will look if the organization achieves its mission.
A vision statement, on the other hand, describes how the future will look if the organization achieves its mission.
Vision is a sort of roadmap of the future of a company and involves a choice about the strategic path to take. It is a direction - setting exercise, deciding which way we are going.
A mission statement defines what a company currently does, and how it plans to achieve its vision.
A Mission Statement defines the organization's purpose and primary objectives. Its prime function is internal - to define the key measure or measures of the organization's success and its prime audience is the leadership team and stockholders.
A mission statement gives the overall purpose of an organization, while a vision statement describes a picture of the "preferred future." A mission statement explains what the organization does, for whom and the benefit.
Mission typically focuses on the organization's present capabilities, its products and services and customers.
DIFFERENCE BETWEEN MISSION AND VISION
A Mission statement talks about HOW you will get to where you want to be. Defines the purpose and primary objectives.
A Vision statement outlines where you want to be. Communicates both the purpose and values of your business
It answers the question, "What do we do?"
It answers the question, "Why are we here?"
A mission statement talks about the present leading to its future.
A vision statement talks about your future.
It lists the broad goals for which the organization is formed. Its prime function is internal; to define the key measure or measures of the organization's success and its prime audience is the leadership team and stockholders.
It lists where you see yourself some years from now. It inspires you to give your best. It shapes your understanding of why are you working here
Your mission statement may change, but it should still tie back to your core values and vision.
Your vision should remain intact, even if the market changes dramatically, because it speaks to what you represent, not just what you do.
Breakthrough microprocessor architecture that puts broadband communications right on the chip
At IBM, we strive to lead in the invention, development and manufacture of the industry's most advanced information technologies, including computer systems, software, storage systems and microelectronics.
We translate these advanced technologies into value for our customers through our professional solutions, services and consulting businesses worldwide.
3. Write notes on the following: (25 marks)
Porter's Five Forces Model
Porter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market.
Porter's forces model close to a company which affect its ability to serve its customers and make a profit. A change in any forces requires a business unit to re - assess the market place given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability.
Porter's five forces include -
three forces from 'horizontal' competition:
Threat of substitutes,
Threat of new entrants;
Two forces from 'vertical' competition:
Power of suppliers
Power of buyer
The above five main factors are key factors that influence industry performance.
A starting point to analyzing the industry is to look at competitive rivalry. If entry to an industry is easy then competitive rivalry will likely to be high. If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high. Generally competitive rivalry will be high if:
â€¢ There is little differentiation between the products sold between customers.
â€¢ Competitors are approximately the same size of each other.
â€¢ If the competitors all have similar strategies.
â€¢ It is costly to leave the industry hence they fight to just stay in (exit barriers)
Power of suppliers
Suppliers are also essential for the success of an organization. Raw materials are needed to complete the finish product of the organization. Suppliers do have power. This power comes from:
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Impact of inputs on cost or differentiation
Presence of substitute inputs
Strength of distribution channel
Supplier concentration to firm concentration ratio
Supplier competition (ability to forward vertically integrate and cut out the buyer.
Power of buyers
The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes:
Buyer concentration to firm concentration ratio
Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer switching costs relative to firm switching costs
Buyer information availability
Availability of existing substitute products
Buyer price sensitivity
Threat of substitutes
Alternative products that customers can purchase over your product that offers the same benefit for the same or less price, the threat of substitute is high when:
Buyer propensity to substitute
Relative price performance of substitute
Buyer switching costs
Perceived level of product differentiation
Number of substitute products available in the market.
Threat of new entrant
The threat of a new organization entering the industry is high when it is easy for an organization to enter the industry i.e. entry barriers are low.
An organization will look at how loyal customers are to existing products, how quickly they can achieve economy of scales, would they have access to suppliers, would government legislation prevent them or encourage them to enter the industry.
So to summaries Porter's five forces model is essential to carry to help you understand your industry in depth before you enter it.
Example of IBM
Porter's Five Forces Framework:
The Threat of Entrants:
The threat of entry is low because the costs of R&D, support products and services, manufacturing, and distribution are very high.
Bargaining Power of Buyers:
The power of buyers is high because the switching costs for buyers are low; there are also many product choices for the buyers.
Bargaining power of suppliers:
There are two biggest processor suppliers in the world who have very strong power on the chip supplying. However, the power of supplier for other low required materials and parts is lower than the main suppliers.
Threat of Substitutes
The web hosting business of other companies and some advanced devices and computers could cause threat of substitutes.
The strength of competition in this industry is very high; the main rivals are HP, Microsoft, Dell, and Fujitsu Siemens Computers, they compete with international, national, regional, and local
Strategic management is multi-dimensional function. It is defined as the set of decisions and actions resulting in formulation and implementation of strategies designed to achieve the objectives of an organizations.
To achieve the defined set of objectives, organization plans for the effective strategy and implement which helps the firm in obtaining set objectives.
Strategic management is a steam of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives.
The formulation and implementation of plans and carrying out of activities relating to the matters which are of vital, pervasive, or continuing importance to the total organization is also called strategic management.
Strategic management helps an organization in formulating new strategies and implements the planned actions so that organization can easily attain its set objectives.
Strategic management specifies organizations mission vision and objectives develop policies and plans, which are designed to achieve the objectives and then allocating resources to implement the policies and plans, projects and programs.
The strategic management process means defining the organization's strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises it's competitors; and fixes goals to meet all the present and future competitor's and then reassesses each strategy
Strategic management process has following four steps:
Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it.
2. Strategy Formulation-
Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies.
3. Strategy Implementation-
Strategy implementation implies making the strategy work as intended or putting the organization's chosen strategy into action. Strategy implementation includes designing the organization's structure, distributing resources, developing decision making process, and managing human resources.
4. Strategy Evaluation-
Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as it's implementation meets the organizational objectives.