Need For Change In Decline And Crisis Commerce Essay


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.

External Causes

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.

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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. IBM sought to regain control by introducing its MCA proprietary architecture, but the rest of the industry, led by Compaq, developed their own alternative standard (EISA), which better protected customer investments. 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. Low-end PC systems moved from highly differentiated to near-commodity status. Microsoft captured the operating system market for PC's and, together with other companies such as Lotus, began to dominate the market for application software. Intel's domination of the microprocessor segment was underpinned by huge R&D investments leading to rapidly successive launches of new processors. Finally, competitive pressure in the larger computer market increased with the arrival of DEC in minicomputers and NEC, Fujitsu and Hitachi in mainframes.

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.

Internal Causes

Poor Management

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)

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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:

… 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 Move

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.

Transformation and Stabilisation

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.

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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 which is the leading computer company in China. The sale was part of IBM's strategy to move away from the confines of the slow-growing and highly competitive computer industry, and to continue to transform and stabilise itself into a company that helps other firms run their business. In the process of doing so, however, IBM have successfully balanced the company's brand heritage as it has undergone changes in its business strategy.

Case Analysis

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, as averse to the other type of change that might come about by accident, by umpulse or that might be forced on an organisation. (Burnes, 2004) 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.

Obviously, IBM's evolution or transformation which started over 10 years ago was a planned, long-term change with an initial focus on people, organisation and governance. This transformation has produced impressive results in cost reducing while also preparing IBM for an on-demand environment which are significant OD.

Kurt Lewin introduced the three-step change model. He views behaviour as a dynamic balance of forces working in opposing directions. Driving forces facilitate change because they push employees in the desired direction. Restraining forces hinder change because they push employees in the opposite direction. Therefore, these forces must be analysed and Lewin's three-step model can help shift the balance in the direction of the planned change.

According to Lewin, the first step in the process of changing behavior is to unfreeze the existing situation or status quo. The status quo is considered the equilibrium state. Unfreezing is necessary to overcome the strains of individual resistance and group conformity. Unfreezing can be achieved by the use of three methods. First, increase the driving forces that direct behaviour away from the existing situation. Second, decrease the restraining forces that negatively affect the movement from the existing equilibrium. Third, find a combination of the two methods listed above. Some activities that can assist in the unfreezing step include: motivate participants by preparing them for change, build trust and recognition for the need to change, and actively participate in recognizing problems and brainstorming solutions within a group

(Robbins, 2007).

Lewin's second step in the process of changing behavior is movement. In this step, it is necessary to move the target system to a new level of equilibrium. Three actions that can assist in the movement step include: persuading employees to agree that the status quo is not beneficial to them and encouraging them to view the problem from a fresh perspective, work together on a quest for new, relevant information, and connect the views of the group to well-respected, powerful leaders that also support the change.

The third step of Lewin's three-step change model is refreezing. This step needs to take place after the change has been implemented in order for it to be sustained or "stick" over time. It is high likely that the change will be short lived and the employees will revert to their old equilibrium (behaviours) if this step is not taken. It is the actual integration of the new values into the community values and traditions. The purpose of refreezing is to stabilize the new equilibrium resulting from the change by balancing both the driving and restraining forces. One action that can be used to implement Lewin's third step is to reinforce new patterns and institutionalize them through formal and informal mechanisms including policies and procedures (Robbins, 2007).

IBM's transformation process supports the three-step change model. In terms of steps, as a start of the change, all employees were afforded a clear picture of where the company wanted to go and how it intended to get there. A few highly visible adjustments were made to demonstrate the new beginning. Customer Satisfaction Project was launched; assessment of performance switched from a financial basis to one encompassing quality and human considerations; and new quality training courses were run. Amplified internal communications reinforced the sense of Change. The actions taken initiated the unfreezing of old behaviours and brought home to employees the gravity of IBM's situation.

The following move involved a period between in which retrenchment was emphasised: employment levels were drastically reduced; the remaining workforce was better utilised through improved business processes; assessment and incentive programmes were altered to support turnaround initiatives; real estate use was considerably reduced; internal departments that were kept were exposed to market forces through benchmarking, and thus managed their costs and service levels better; quality awareness was improved; customer satisfaction was given high priority; and, power was pushed down through the organisation to take decision-making closer to customers.

The company further emphasised its shift from being a provider of individual goods and services to being a provider of 'solutions' made up of bundled goods and services. The concurrent rapid increase in the demand for such solutions served to reinforce the reorientation. To refreeze the transformation, the two big transactions of acquisition and sale were made to strengthen its new position further.

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.

No doubt IBM's transformation was very successful. The transformation was massive and extensive which proof that large organisations can make fundamental changes. When this 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 from a computer hardware company to a services and business solutions provider is one of the great comeback stories in the history of corporate America. In 2005 IBM had more than $91 billion in sales and a profit of nearly $8 billion. In the 2009 Interbrand Study, IBM was ranked as the second 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.

The Role of Culture in Organisational Change

The transformation of IBM under Louis Gersnter is perhaps the most notable corporate change story in recent business history. However, it is also clear that the potential end of the company was in sight for many insiders and outsiders. This gave the board of directors license to hire a new CEO from outside the company. Such a move sends a strong signal to the corporation that wholesale change is order. In Gerstner's autobiographical account, he makes it quite clear that waiting so long to make the change brought the company perilously close to bankruptcy. While helpful as a motivational tool, this strategy is, to say the least, high risk.

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) advises 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.

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.