In 1990's IBM was at its lowest point in its history of operations. The low stock price combined with job losses almost sealed the fate of this company but in 10 years it bounced back and increased its market capitalization from mere $ 30 billion to $ 173 billion (Charles A. O'Reilly III, August 10, 2006). How IBM was able to achieve this comeback?
This transformation was achieved by tapping into its core competencies and reconfiguring it to adapt to changing environment. This strategy of dynamic capabilities evolved due to company's misfortune in 1990s and helped them to rise as one of leaders of IT industry.
First, we look at the advantages that dynamic capabilities offer over other strategies and how it helped IBM develop new models like IBM business Leadership model to capture market across the globe with changing times.
Strategy, in layman terms is about making and executing quality plans to help the firms achieve its objectives. This is particularly difficult in fast changing markets due to complexity of the competition and uncertainty of the direction of the market.
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This is where dynamic capabilities come into place which focuses on core competencies and how management is able to change and adapt these to ever changing environments. This strategy was developed due to the fact that many companies fail to achieve its objectives because it was not able to adapt itself to market and technological changes. With the help of dynamic capabilities, companies are able to focus on their core competencies and adjust it according to customer's demands and competition which helps them to maintain advantage over their competitors (Eisenhardt, 2000). It also helps firms to explore new opportunities by developing new competencies, for example IBM was able to diversify into services sector where they became industry leaders.
Core competencies are basically business processes which give companies advantages over its competitors and are specific to companies. For example, Dell's supply chain and Wal-Mart's logistical processes are their core competencies (Case Study Inc, 2008). They are crucial for companies to maintain competitive advantage but they may become obsolete over time due to rapidly changing circumstances. Dynamic capabilities help in this regard by reconfiguring and adjusting competencies to address changed situations.
How dynamic capabilities are implemented?
This approach can be achieved if the management is not only able to sense market and technological shifts and changes in customer's demands and competition but also adapt to these changes by adjusting their focus to address new challenges. This quote summarizes the above quite well:
"Winners in the global marketplace have been firms that can demonstrate timely responsiveness and rapid flexible product innovation, coupled with the management capability to effectively coordinate and re-deploy internal and external competencies." (Teece, 1997)
This approach defined IBM model which is based on two processes: Strategic Insight and Strategic execution.
These strategies help firms by providing services and products for which customers are willing pay and competitors cannot easily imitate. They are also dynamic as they compel the organization to change with period of time.
Although, the strategies look good in theory but they are always difficult to implement in practice because of variety of reasons. Firstly, strategists who are generally academics do not want involve themselves with specific details of company for the execution of strategy. They are not able to transform their strategies into actionable plans and therefore, they are often ignored by line personnel who are directly responsible for field strategies. Companies also review these strategies annually by which time many changes may occur which can deem that strategy obsolete. IBM's model after their brush with failure implements a possible solution to this problem. Their failure in 1990s was because of undelivered results and out of tune with customers. They shifted their focus to completely new concepts with respect to their old model by focussing on the application of technology rather than its invention. This lead to development of IBM as a successful focussed solutions provider and closed down their hardware operations businesses. They based their approach on not to sell products and service but to solve customer's problems. This transformation was marked by radical change in how IBM developed their strategy and approached strategic insight and execution. Prior to 1999, their strategy was like any other large company which was monitoring of technological developments and annual strategic review process but after seeing these strategies are out of tune with customers and competition management and were prepared by staff just for sake of it and not actually described what the firm needed to remain competitive. The management decide that they need a strategy which would accurately describe company's position and realties and suggest changes to remain competitive. As a result, IBM Business Leadership model was developed which not only covered strategic insight and execution but also associated plan which stated that for every strategy there should be an actionable plan associated with it. With this new model, they redefined that strategy in not only about awareness of new opportunities but also the capabilities to capture them.
Always on Time
Marked to Standard
For a large company, IBM believes that strategy cannot be built at the top because it has to be handled by local managers who know their customers and has understanding of local market as they are directly responsible for company's performance. This approach now involves 25000 managers in both formation and execution of strategy.
According to IBM business leadership model, strategies are developed because of performance gap or an opportunity gap and general managers requires both strategic insight to assess new opportunities and strategic execution to take advantage of these opportunities to close the gap.
Strategic Insight which involves sensing new opportunities, according to IBM model includes four disciplines:
Strategic Intent: This sets overall objective and direction for the organization. This enables them to set priorities which will provide them with strategic advantage.
Market Insight: This involves focus on customers' needs and development in technologies, competition and market.
Innovation Focus: This involves focus on devising new ideas and concept not only limited to products and services but also focus on business models.
Business design: This involves customer selection, value proposition value capture, scope of activities and sustainability.
Strategic execution includes implementation of business design which is a result strategy making process and allocation of required resources for the implementation of that design. This can only be achieved after alignment of four key elements which includes critical tasks and process, formal organization, people and skills and culture (See Figure 1).
After 1990s IBM focused on solutions which integrated technologies and services from various suppliers which will be valued by customers. This required that they have to use their core competency of technologies and adapt themselves to learn the capability to better serve the customers with integration of technology into solutions. Their campaign of "On-demand business" (IBM, 2006) is to shift the focus away from conventional elements like products and services to integrated solutions personalized for customers.
This change in focus required the major overhaul of strategy department of IBM as they were not relevant for line mangers and were academic oriented rather than action oriented. They built a new process which involved general managers in formation of strategy according to their perspective. This led to development of strategies which are relevant to market, customers and competition.
Their strategic model includes mechanisms which underlie two capabilities of sensing and capturing new opportunities. Although, this model can imitated by competitors but they cannot copy the integrated way IBM accomplish these processes.
IBM's strategic insight initiative model includes a technology team which assess the market for new technologies, a strategy team which analyze the success of existing strategies, Integration & Values Team which is responsible for company-wide strategic efforts and Deep Dive effort where feasibility of new technologies is studied. Each of these processes helps IBM to address and assess new changes (See Figure 2).
In addition to strategic insight, Strategic execution model of IBM includes processes such as Emerging Business Opportunities (EBOs) which focus on addressing new opportunities and markets, Strategic Leadership Forums (SLFs) where common platform is provided to alleviate specific performance and opportunity gaps faced by local managers and Corporate Investment Fund which is a major source of funding for new opportunities and initiatives (Gerstner, 2002).
Together these processes epitomize the strategic insight and execution followed by IBM. In their context, strategy is not a top down annual process but ongoing conversation between mangers that forms the crux of this company. The company's strategists have no designs on any other job within the company so they can objectively analyze current strategies and develop new ones to address the market changes. The model focus on only two things: customer satisfaction and shareholder returns.
In the end, we would like to conclude that although in large companies strong forces are present to prevent change but it is possible to easily adapt to ever changing environment and IBM is an appropriate example.
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Source of Figure