Abstract: A Bright Star Declined
Over the past 2 decades, IBM reach heights of unprecedented success, down to failure, and up to success again. In 1980, they were lagging in the personal computer business but by 1985, they had taken over 40 percent of the market share (Kanter 46). By 2005, IBM made its exit from the PC business and switched to consulting (Kanter 47-8). This is a drastic shift indeed for a company which provided virtually no consulting services in 1990 to becoming one of the largest services companies some 20 years later. IBM today is now an exemplar of how a company can transform to offer open systems and on-demand capabilities for a range of its services. In order to better understand the transformation that IBM has undertook over the years and what has been a main source of light as its star has dwindled, it is helpful to understand a concept in business literature called "dynamic capabilities" (Teece 1319). IBM's use of dynamic capabilities has helped it succeed in areas like mainframe computers as well as move away from it and into new areas such as digital media. IBM's strategic innovation combines theory and practice that are useful for business and create new ways of thinking about strategy (Teece 1320).
In the beginning of the 1990s, many analysts on Wall Street had negatively written off IBM as a company with which to invest. During this time, IBM's stock price was the lowest it had been since 1983. IBM laid off over 60,000 people in 1992, and in spite of the th-CEO's efforts as restructuring and transforming the organization, the company was still failing (Marquis and Moss). Gerstner assumed leadership in 1993 and by 2001, services and software combined totaled nearly $35 billion and $13 billion respectively. Combined, these figures represented nearly 58 percent of total revenues (Marquis and Moss). The market cap on IBM had therefore increased from $30 billion in 1993 to $173 billion (Marquis and Moss). Additionally, the share price increased over 7 times. The new CEO Sam Palmisano has continued to lead IBM in this trend, so that today IBM has revenues of over $91 billion, and over 70% of this figure comes from software and services (Marquis and Moss). Over the past 15 years, IBM has had to transform itself from primarily a provider of computer hardware to a supplier of a range of information technology services and solutions. IBM has grown, contracted and grown again. In 1986, IBM employed over 400,000 employees, but by 1994 this figure dropped to just over 200,000. Today, it has grown to over 330,000 (Kanter 44). In 1990, IBM provided little to zero in the consulting services sector, yet today it has grown to become one of the largest services companies with over 190,000 employees in their Global Technical Services and Global Services units (Kanter 46). This 20 year period has seen IBM reach heights of unprecedented success, down to failure, and up to success again. In 1980, they were lagging in the personal computer business but by 1985, they had taken over 40 percent of the market share (Kanter 46). By 2005, IBM made its exit from the PC business and switched to consulting (Kanter 47-8). This is a drastic shift indeed for a company which provided virtually no consulting services in 1990 to becoming one of the largest services companies some 20 years later. IBM today is now an exemplar of how a company can transform to offer open systems and on-demand capabilities for a range of its services. Compared to other great technical behemoths like Xerox, Polaroid and Phillips, IBM has continuously been able to transfer their rich source of intellectual capital into business solutions for a range of sectors that include life sciences, automotive sectors, banking, as well as make healthy and substantial profits along the way. In order to better understand the transformation that IBM has undertook over the years and what has been a main source of light as its star has dwindled, it is helpful to understand a concept in business literature called "dynamic capabilities" (Teece 1319). IBM's use of dynamic capabilities has helped it succeed in areas like mainframe computers as well as move away from it and into new areas such as digital media. IBM's strategic innovation combines theory and practice that are useful for business and create new ways of thinking about strategy (Teece 1320). In order to understand how dynamic capabilities has helped IBM succeed, this paper first reviews briefly contemporary thinking about strategy and how dynamic capabilities pose an improvement over older strategy frameworks. This paper then illustrates how the company's touch with near failure led to the creative evolution of the IBM Business Leadership Model and how a host of strategic process initiatives managed by IBM's Strategy Group and involve over 25,000 executives to help locate and capture opportunities in over 140 global regions which face constant change of competitors and technologies (Kanter 48). This process is one that has, as former CEO Gerstner describes, "helped the elephant dance”(as quoted in Kanter 49).
One of the fundamental ideas to business education is the idea of strategy and competitive advantage. These concepts commonly involve discussions pertaining to core competencies, SWOT analyses, five forces and range of other frameworks to provide insight for how leaders can assist their firms to succeed and proper (Pitelis and Teece 5-6). When we boil these concepts down to a single idea, the essence is essentially a single question in the field of strategic management: how to achieve and maintain competitive advantage. This basic question has been asked and answered by academics and managers for at least the last 100 years. While there is a wide consensus in both fields that the question of strategy is of crucial importance, as well as what the definition or meaning of the term entails, there are a disparate range of solutions. No one can seem to agree about how strategy works exactly. Despite the variation in definition, the term "strategy" is used widely in the same sense. "Strategy" refers to plans and actions firms undertake in order to meet and achieve objectives (Teece 1321). It is at once a process that involves developing plans for how to allocate resources as well as what actions will be involved to achieve goals. "Strategy" also reflects the management's apprehension of the assets and liabilities a firm faces, both in the internal and external environment (Teece 1321). At its most rote, fundamental level, strategy is a question about making sound decisions and executing on those decisions in the right way. What seems simple in its theory is far from simple in practice. One thing that makes this apparently easy conceptual process quite difficult is the complex and uncertain nature of competition and change in fast moving markets. Managers must be able to perform acute and adept environmental scans, to locate opportunities and threats and respond in creative ways that are distinct from the competition and which cannot be replicated as well as to follow through and ensure plans are implemented in a timely fashion. To further complicate the process, academic and business CEO David Teece notes that the skills which enable one to extract information from an environment are not the same as those required to exploit an opportunity (Teece 1330). Strategy entails both understanding market, technology and the need for transformation as well as the capability to actually execute plans (Teece 1330). Research in this area has explored how other companies respond to market shifts. Interestingly, some companies never see threats or alternatively, cannot change quickly enough in order to respond successfully to their own market advantage. For example, the senior management at Sears for years is known to have refused to believe the Wal-Mart was either a competitor or a threat (Pitelis and Teece 6). Strategy partly includes constant and continuous hypothesis formation and testing. Discussions of strategy in business academic literature are huge. Business academics have, generally, developed four main frameworks for thinking about strategy. The first is the widely known five forces framework developed by Michael Porter in which competitive advantage is realized by firms from a defensive posture against other competitors, for example, by raising strong barriers to entry within a given market. In this framework, strategy formation is about the industry structure, deterrence of entry and proper positioning. A second framework considers the resource-based view of strategy which entails that competitive advantage comes from the specific assets that are available to a firm and which can be used to glean profit or capture rents, for example through robust intellectual property, use of economies of scale or sophisticated branding. This view holds that profits arrive from having costs lower or high quality products (through excellence in operations or efficiency in supply chains) or certain insights into customer needs that enables firms to understand and cater to customer needs in a unique way that other competitors do not possess. A third and different approach to strategic management emphasizes the tools of game theory to provide a backdrop in which firms are able to outdo their competition. The gist of this approach involves strategic move making, such as bold but irreversible investments in capacity, to influence rival behavior. Intel is one great example of a firm engaging in this kind of game theoretic approach successfully. They have boldly exited businesses like semiconductor memory, as well as making public announcements about certain capacity expansions to signal their commitment to competitors. In the same way this happened with Nokia when they chose to divest themselves of all other businesses except telecom, which signaled their sole commitment on a single industry to competition. Recent conversations in academic business literature have begun to emphasize a fourth approach, which is dynamic capabilities in order to understand strategy formation. Dynamic capabilities builds upon the idea of core competencies but emphasizes the role of management in adapting these competencies to meet fast moving and rapidly changing environments.
It is this adaptive ability that extends existing competencies that separates dynamic capabilities from competencies. Senior management therefore has pressure to accomplish two crucially important tasks. First, they must be able to accurately sense changes in the wider competitive environment (Kanter 48). Second, they must be able to seize these opportunities and or threats by reconfiguring tangible and intangible assets. While former approaches to strategy were for the most part static (locate a position with advantage and then protect your share), dynamic capabilities focus on the need for organizations to constantly be focusing on change over time and to compete in emerging businesses and mature businesses alike (Kanter 49). Strategy Fixing at IBM. Through the 1980s, IBM captured approximately 40 percent of the entire computer industry's sales and 70 percent of profit (Hamel 138). In 1990 IBM sales were five times the nearest rival, but growth had slowed to under 6 percent (Hamel 138). Analysts at the time described the company as being infected with a mix of complacency and arrogance. Then CEO John Akers is quoted as having said "Everyone is too comfortable at a time when the business is in crisis”(Hamel 139). In 1991, IBM's stock price had plummeted to its lowest point since 1983. Between 1986 and 1993, IBM took 28 billion in charge offs and cut 125,000 people off its payroll, after having spent the last 70 years avoiding layoffs. In January of 1993, in the face of a growing disaster, CEO John Akers announced his resignation. The day after that, many of his immediate subordinates likewise announced their departures and after spending 7 months searching, Lou Gerstner was named the new CEO. Gerstner would become the first recruited outsider to run IBM in its company history. Business Week magazine described Lou Gerstner's job as "the toughest job in Corporate American today." After spending several months in his new role, Gerstner diagnosed many problems.he found confronting the company. The costs were not fitting, customer relationships were out of touch, too much decentralization existed within the firm, and the executive management had simply stayed in their old strategy for far too long. Gerstner stated these problems when he said, " “We don’t move fast enough in this company. This is an industry in which success goes to the swift more than the smartest people”(Hamel 140).
Gerstner at this time understood that the market was changing. The application of technology and not its invention would be the engine of growth for IBM. This would be an entirely different approach than the old IBM business model. These new insights led to a transformation which resulted in IBM exiting the network hardware business, application software, storage and personal computers and to enter the business of services and develop a standalone software business. It also led to a reevaluation of the firm's core capabilities which resulting in its decision to exit consumer businesses which needed skills much differently than IBM's focus on enterprise. However, Gerstner at this time new that having this strategic insight would be much different that accomplishing it. He is quoted as stating that he realized the two issues were entirely different (Hamel 143). Gerstner had other very insightful diagnostics that later would become public information. He stated that what happened to IBM was not some mysterious plague as in the bible, but simply competitors took their business away. After looking over IBM's strategies, he found that the company was not short of talent and that its problems were not at root technical problems. He said that he thought the major issue with IBM was actually execution. To begin the corporate change, Gerstner focused his efforts on customers, teamwork and getting the worst over with in the beginning. He developed a few global processes and centralized the corporation to focus on its strengths as a solutions provider to customers, as well as by fixing the core businesses and redesigning the metrics and reward systems and constantly driving the corporate culture to focus on the marketplace. (Kanter 49). Every meeting began with a focus on the customers. He made senior executives take on customer responsibilities and act as ombudsmen for the relationship with customers. This forced senior management to be constantly tied to the market and to hear their problems, insights and complaints. This also created an attitude of urgency with respect to the marketplace.
Gerstner's successor following 2002 was CEO Sam Palmisano who maintained the company's transformation into an on-demand business which utilizes software technologies for enterprises (Kanter 51). Selling services and not computers has meant that the company has had to change itself and adapt to new needs of the customer. Partnering with U.S. Postal Service, IBM has created new software to optimize the efficiency of mail handling. With Boeing they have developed software for network capable warfare products. IBM has partnered with Mayo Clinic to make advances in gene profiling and with Bang and Olufsen in developing an electronic dispenser of pills. Internally, these changes have required that IBM reimagine itself to be able to bring together a range of experts capable of solving customer problems (Kanter 53). One of the most important parts of this change transition was the huge shift in how IBM approaches its own process of creating and executing strategy. Until 1999, IBM's strategy process was familiar and indistinct from the strategy process at any other big organization. Technology developments were watched with intermittent projects to distill different issues. The most central part of strategy happened at the once per year annual strategic review, where business heads would present their future plans to senior management. Business heads of individual units would prepare a strategy document that would articulate the goings on in the unit's marketplace including competitor incentives, technological changes and financial implications. Together, these documents would culminate into what IBM called "the Spring Plan."(Hamel 140). In 1999, things changed quite a bit. Reading one of the strategic documents one day, Gerstner grew irritated at what he perceived as low quality and called the Senior Vice President of Strategy into his office, asking for an explanation (Hamel 141). What was later revealed was that unit managers did not write these documents themselves, but usually almost always farmed them out to lower level staff. What was realized was that these reports as well as the "Spring Plan" often consisted of window dressing and did not bear the real insights which unit managers possessed themselves (Hamel 141). Strategy, and the role of the strategy group at IBM, has a very different profile than conventional approaches. In the IBM context, strategy is an ongoing, disciplinedconversation between general managers and senior executives about the future of thecorporation—not an annual process or the work of a group of internal consultants. Asmentioned earlier, the strategy team itself is composed of managers who spend up to 30 months developing new skills. These individuals are assigned by IBM’s senior executives without the strategy unit’s input (Kanter 50). This not only broadens the perspective of the strategy group but is a valuable developmental tool for ensuring that the future senior managers of the company have deep strategic skills. One of the enablers of IBM’s strategy process is that the career strategists within the strategy department have no designs on any other jobs within the company; they have no personal or political agenda, so their role is to facilitate difficult or critical conversations with a focus on the facts and not some larger but hidden agenda (Kanter 50). Further, if the input from the strategy group is to be effective, this team needs to be in place through several investment cycles in order to ensure consistency of strategic choice over time. Without this continuity, the aggregate effects of investments are unlikely to give the strategy a chance to succeed.
Second, this is anchored on either a performance or opportunity gap as manifest in hard performance outcomes such as market share gain, margins, growth, or profit. The metrics used to assess the success of strategy implementation are always grounded in business outcomes—and where the business is gaining or losing traction. In the end, it is about only two things: customer satisfaction and shareholder return.. Third, this process highlights the importance of alignment or complementarities among the components (Teece 1349). For example, strategic execution occurs not from attention to people or incentives or culture but from the alignment of all of these with the critical tasks necessary to execute the chosen strategy. Effective strategy is not simply the articulation of a strategic intent but the linking of this to innovation, solid marketplace insight, and an appropriate business design. The overarching challenge is to ensure general management involvement and ownership in this process—and not to let it become a staff function. As useful as the IBM Leadership Model is in framing the strategic challenge, the risk is that it becomes “chartware”—and lower level managers become cynical about it (Kanter 52). By the time Gerstner left in 2002, IBM was nearly in the same market spot that it had occupied before he assumed leadership. What the real change required was that the company change its internal configuration in order to change the way it competes in the market. The core of dynamic capabilities is having the capability to sense new opportunities in the market and grab hold of them (Teece 1349). What the changes at IBM show is how organizations may be subject to strong powers internally that can hinder transformation, it is not impossible. The key to sustainable growth and profitability is the ability to reconfigure assets and create new possibilities out of thin air.
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