Fall of IBM Changed

8/12/2019 Fall of IBM Changed

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1. History, Development Growth of IBM2. SWOT Analysis3. External Environment Surrounding IBM

6. Recommendation7. Conclusion

IBM4. Corporate Level Strategy5. Business Level Strategy


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1980- 1990Emergence of DEC

Apple, Dell

Minicomputer market developed

IBM share in minicomputer 24% in 1984

16% in 1988

28% in 1992

Personal Computer marketdeveloped

IBM market share in PC 37% in 1985

24% in 1988

16.5% in 1990

12% in 1992


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1990- onwardsDEC, Sun, Apollo,

HP

Intel, Microsoft

EDS, Andersen

Work stations

1992: growth 27% annually ascompared to 5% for thecomputer industry

Software and Services 1992: Software and services

accounted for 40% of IBMrevenue

Systems integration &Outsourcing: IBM share only 6% as

compared to 50% of EDS


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1990- onwards

1988 Restructuring

1990: IBM profit share indifferent segments

Mainframe hardware- 50% minicomputers- 6% PCs 18.5% Software & services- 12.4%

Akers reorganized IBM into 7Divisions based on Product

market segments Managers of each division

given autonomy andresponsibility

Single sale force continued


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1991 Restructuring

Reorganization to dilutecontention system of IBM

Downsizing of organizationstarted

PC business was placed inseparate operating unit andseparate Sales for PCs

Decentralization of decisionmaking authority

Reduced role of IBM corporateHQ


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Effect of 1991reorganization

Akers divided IBM into 13separate divisions

9 for main product lines

4 for marketing and serviceoperations

Each unit to work independentof each other

Single sale force continued

1991: loss of $2.8b ( first timein IBM history)

1992: loss of $ 5b


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1993:New Management

& New Plans

Louis Gerstner took over asCEO

He was an outsider to IBM

He hired outsiders for toppost like CFO, VP, VP ofcorporate marketing etc

Thrust on reengineering

11 person corporate executivecommittee

11 task forces to analyze IBMsmain processes


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Restructuring of relationshipsbetween corporate centre and thedivisions: No decentralization

Traditional strategy of providingfull line of hardware and softwarefollowed

Reduced workforce heavily from

4.05 lac to 2.5 lac


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26 Sept 1993

Gerstners 4 goals

To get the company to right size

To spend more time with customers

To determine the strategic issues byprocess reengineering

To build employee morale in the faceof huge layoffs

IBM announced a loss of $ 46mfor third quarter compared to $40m loss in 1992


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Domination of the global market in computers

Highly successful System360 and System370mainframe series

The mainframe became the industry standardthat competitors tried to match

High-priced lease strategy, backed by excellent

customer service

Strong bonding with customers


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Successful alliances and joint ventures withcomputer & software companies such as Inteland Microsoft to achieve product innovationand differentiation and enter new markets

Contention system (Project teams &committees to develop and debate the costs

and benefits of each project: successfulprojects)


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Steady cash flow

Focus on service, combined with a successfulsales force

Focus on Research & Development: High budget

Successful Product group structure (restructuringduring 1992): Divisions organized aroundproducts instead of functions, each group havingcontrol over its manufacturing and marketing


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No clear vision and mission statement

The IBM culture was relaxed and supremely confident ofits abilities and resources

Culture was slow and blinkered

Under estimated its competitors greatly

mainframes were king corporate mindset Too much focus mainframe market

big machines meant big revenues The bigger the better


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High cost and high-priced products

Used to high profit margins led to choking when low-cost competitors appeared

Unable to recognize importance of patents

Easy cloning At lower cost Sometimes, with even better quality

massive organization size

High costs in the value chain


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Blind to threats emerging from the emergence ofnew kinds of computer technology

Overly bureaucratic and centralized approach in

decision-making

Complexity of Contention system

Inordinate delays in Decision Making

Slow response to developing market segments

Laggard in launching new products


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Changes in technology

Emergence of new kinds of computers

Minicomputers PCs Workstations Software and services Systems integration & Outsourcing

Cheaper and faster technological breakthroughsas compared to mainframe computers


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Software design and providing customerservice, specifically for the design of generaloperating language and software applications

Data outsourcing and systems integrationalso had revenue-generating potential

Indirect control of software market bypurchasing large chunk of Microsoft stock atlow price:


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Countless opportunities to differentiate andinnovate products

If we try to look back, IBMs success was itselfthe result of moving quickly and decisively to

exploit the opportunities of new technology: thepunch card machine, the transistor, and theintegrated circuit.

Their brand image is synonymous with big and

old they need to create products appealing to ayounger generation and reposition theircompany.


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IBM needs to maintain a competitive edge inthe marketplace and innovation is key andworking with IT-related companies to createnew products in the ever changing market;

use patents to generate revenue.

High individual consumption power

Increased globalization .


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Potential competitors

New Computer systems and allied products

Many market segments but common sales force

Rapid reduction in hardware due to technologicalchanges

Mainframe market saturation

Customers have low switching costs


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Clone manufacturers

local or foreign aggressive strategies for cost leadership product differentiation

low-price alternatives to the IBM mainframe quality support low-cost service

High turn over rate of technology

Mainframes becoming obsolete and the productlife cycle shortening, as new technologicalinventions are making their way


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External analysis stages

Macro-environment Broad trends shaping the national and

international environment

political, economic, social and technologicaltrends (i.e. PESTEL factors, key drivers )

Micro-environment operating environment or industry sector in

which the firm competes

range of issues such as suppliers, customers,competitive intensity, threat of new entryand of substitute products arising (i.e. thefive-forces analysis)


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Competitor analysis To understand the rival offers from other firms

seeking to serve the same customers

To out manoeuvre rivals with innovation andcompetitive moves.

Market analysis To evaluate the current needs of todays

customers

To understand the emerging needs of

tomorrows customers so new products can beanticipated

To have different strategy in different marketsegments.


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IBM

Socialolitical

Technological

Environmental

Economic

Legal

PESTEL Analysis for Macro environment factors


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Political factors:

There were no significant/strict regulationsgoverning the activities within the computerindustry.

Companies in the computer industry should alsovalue the protection of their patents. Patent rights

can help eliminate threat from clone manufacturersand similar kinds of competitors and thus protect acompanysmarket share and position.


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Economic factors Since 1970, several US industries have declined due to

the entry of low-cost Japanese competitors. TheseJapanese companies had great technical capabilities that

can match or even exceed US products, thus posing amajor threat to IBMsdomination of the global market

Steadily falling price of integrated circuits is shorteningthe lifespan of every computer technology, especially the

mainframes. This plunging of costs is making computertechnology innovation more feasible for the computerindustry players.


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Social factors:

A great number of employees were laid off. This may haveproduced a bad image of IBM to the workers who were

promised a stable employment.

IBM lost quite a great number of customers, especiallywhen it decided to end its leasing system. This evidentlyproduced a negative effect to the company on the form ofsignificant revenue declines

IBMscustomers were becoming price conscious. Since IBMlagged behind technological breakthroughs, old and newcustomers were starting to look away from them.


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Technological factors:

The technological breakthroughs as manifested by theminicomputers, PCs, workstations, microprocessors, and

software brought numerous opportunities and only asingle significant threat: the fast rate of obsolescence.

IBM required to create a mindset that in order to grabthese opportunities, gain competitive advantage andthus be successful, speed is required. A company mustact quickly and decisively to exploit the opportunitiesbrought about by technological change.


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Environmental factors:

The rapid obsolescence of computer technologyposed a threat to the environment as technological

wastes in the form of obsolete/useless/brokencomputers and component parts making their wayto disposal areas.

Harmful chemicals were used to make these techproducts and if these were not disposed ofproperly, it may harm not only nature but also thepeople.


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Legal Factors:

Laws and regulations for cross-country operationsand labour laws are some of the laws that IBM mayhave to comply with.

There may be laws specific to the manufacture and

distribution of computer technology; which requirescompliance


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Intensity

of RivalryBargainingPower of

SuppliersBargainingPower of

Buyers

Threat of

SubstitutesThe Threatof Entry

Five Forces Analysis for Micro environment factors


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Technology plays a big role in the computer industrythat IBM belongs

Because of the rapid growth of technology, costsaccompanying such growth are continually increasing

The threat of new entrants is low because of severalfactors

One factor is the cost of research and development which isenormous

Adapting to the latest technology to survive the industry isalso costly

Building and maintenance of plants


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IBM outsourced and bought the inputs from othercompanies to make its PC

Intel supplied the microchip that was the heart of personalcomputers

Microsoft delivered the programming language and

software applications for the new IBM machine

Thus, power of suppliers is assessed to be high onmajor suppliers

Thus, the overall power of both major and minorsupplier is assessed to be medium.


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Customer demand drove the prices of IBMsproducts down to cope with the existing andunavoidable price competition

Switching costs of buyers are also becoming low,

as there are many product choices for the buyers

Consumers began to feel more comfortableabout buying clones from companies thatpromised quality support and service at low costs

Thus, bargaining power of buyers is assessed tobe high.


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Competition was increasing from companies thatwere trying to find ways to attract IBMs customers

Competitors began selling cheaper and highperforming IBM compatible central processing units

that posed a threat to the company

The end of the leasing program also led to increasedcompetition from independent computer leasingcompanies that would buy older mainframes and thensell the older processors at a price that wasfrequently only 10% of the cost of IBMs newestmachine


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These companies were also said to dismantlemainframes to make smaller computers

Entry of Japanese competitors posed a threat to

IBM because they had the technical

capability to build a powerful computer thatmatched IBMs mainframe system

Customers began buying clones from competingcompanies who promised quality similar to IBM.


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IBM was also experiencing an increase on low-costcompetitions on its outsourcing services business.

In the 1990s, IBM faced tough competition fromToshiba and Apple regarding personal computers

It was also in 1990s that severe competition existedin terms of workstations. Major competitors at thattime were DEC, Apollo, Sun, and HP

Clearly, in all developed and developing segments ofthe computer market, IBM was facing stiffcompetition.


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There are already new products that are much

more attractive to the consumers aside fromthe mainframes and other products that IBM

produces

There was a threat on new technologiesbeing developed to outperform the products

of IBM. An example was the introduction ofMinicomputers which acted as a substitute tosome IBM mainframe applications


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Even though IBM was successful with its PCdivision, clones were being made whichreduced IBMs sales. New and much improvedproducts are also emerging in the market that

has considerably being welcomed with openarms by the consumers posing a high threatof substitute to IBMs products.


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1. Determine each competitors probable reaction tothe industry & environmental changes

2. Anticipate the response of each competitor to thelikely strategic moves by the firm

3. Develop a profile of the nature & success of the

possible strategic changes each competitor mightundertake


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1. Future goals of competitors

2. Its current strategy

3. The key assumptions it makes about itself &about the industry

4. Its capacity in terms of Strengths &Weaknessess


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STRATEGIC ADVANTAGE

ORGANISATIONAL CAPABILITIES

COMPETENCIES

SYNERGISTIC EFFECTS

STRENGTHS & WEAKNESS

ORGANISATIONAL ORGANISATIONALRESOURCES BEHAVIOUR


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FINANCIAL CAPABILITY FACTORS

MARKETING CAPABILITY FACTORS

OPERTAIONS CAPABILITY FACTORS PERSONNEL CAPABILITY FACTORS

INFORMATION CAPABILITY FACTORS

GENERAL MANAGENT CAPABILTY FACTORS


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Well established giant organization

Market leader in mainframe computers

Well integrated and hierarchical HR structure

Capability of innovation and diversification

Strong financial position


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Advantage of worldwide clientele

Strong bonding with clientele

Economies of scale

Unified and gigantic sales force

Belief in Prestige and quality product


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1. PERSISTENT NEGATIVE CASH FLOW

2. NEGATIVE PROFITS

3. DECLINING MARKET SHARE4. OVERMANNING, HIGH TURNOVER, & LOW

MORALE

5. UNCOMPETITIVE PRODUCTS OR SERVICES6. MISMANAGEMENT


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1. CHANGES IN TOP MANAGEMENT2. INITIAL CREDIBILITY BUILDING ACTIONS

3. NEUTRALIZING EXTERNAL PRESSURES

4. INITIAL CONTROL

5. INDENTIFYING QUICK PAY OFF ACTIVITIES6. QUICK COST REDUCTION

7. REVENUE GENERATION

8. DOWNSIZING OF WORKFORCE

9. MOBILISATION OF THE ORGANISATION

10. BETTER INTERNAL COORDINATION


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1. EXPANSION STRATEGIES

a) Expansion through integration

b) Expansion through diversification

c) Expansion through cooperation

d) Expansion through internationalization

2. RETRENCHMENT STRATEGIES


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a) Expansion through Integrationa) BETTER CONTROL OVER VALUE CHAIN

MITIGATING BUYERS & SUPPLIERSPOWER

b) BETTER AND EFFICIENT UTILIZATION OFRESOURCES

c) REDUCTION IN MUTUAL CONFLICTS


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a) TO MINIMISE RISKS

b) TO CAPITALISE ON ORGANISATIONAL

STRENGTHS

c) TO GROW IF GROWTH IN EXISTING BUSINESS

IS BLOCKED


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3- GENERIC STRATEGYOVERALL COST LEADERSHIP

PRICE OF THE PRODUCT IS A VITAL FACTOR

BRANDED PRODUCTS VERY COSTLY

DIFFERENTIATION MARKET TOO LARGE TO BE CATERED TO BY A FEW

FIRMS MAKING/ OFFERING A STANDARDISED PRODUCT


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CUSTOMER NEEDS TOO DIVERSIFIED TO BE SATISFIED

BY A STANDARDISED PRODUCT

BRAND LOYALTY POSSIBLE TO GENERATE & SUSTAIN

AMPLE SCOPE FOR INCREASING SALES ON THE BASIS OF

DIFFERENTIATED FEATURES & PREMIUM PRICING

FOCUS EXPENSIVE FOR COMPETITORS TO FOCUS ON TARGET

CUSTOMERS OF THE ORGANIZATION


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Gerstners Reengineering the corporation

Identify and analyze each of the core businessprocesses Manufacturing

Marketing R&D etc

Constitution of 11- member corporate executivecommittee to spearhead reengineering efforts

11- task forces formed to analyze IBMs mainprocesses


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Vertical integration between corporate center and thedivisions

Core traditional strategy of providing customers witha full line of hardware and software products andservices

Downsizing the workforce

Setting of goals To get the company to right size To spend more time with customers To determine the strategic issues by process reengineering To build employee morale in the face of huge layoffs


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IBM, should keep its position in the market asworld's largest information technology company

IBM should expand into new markets with

promising growth.

IBM has the advantage of being top brand byrapidly expanding into world markets all the

while developing new products, services, andsolutions to better help its wide variety ofcustomers from small to large


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To improve and maintain its corporate image,IBM needs to find new and better ways to bephilanthropic company worldwide

Improving job satisfaction, communities, and livingstandards

IBM can also offer scholarships, educationalassistance, and internships to improve educational

system, which enable them to have quality staff,partners,customer, and suppliers.


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Invest heavily on research and development

Researching on how to incorporate the internet to IBMsproduct would be a worthwhile investment

Partner with suppliers

Collaboration with suppliers will increase businessflexibility and executive level business decision support

IBM should even have good relations to its supplierssince parts supplied by them are essential for IBMsproducts

Keep consistent tracking of market changes andadapt promptly and efficiently


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Analysis of macro and micro level environmental factors

on IBM strategy concludes that IBM has strongcompetitors in hardware industry like Dell or Hp but IBMcan work more powerful in software industry with fewstrong competitors like Microsoft

IBM accuracy of understanding the demand forsoftware and services skills worldwide is growing.Therefore, the computer technology industry still hashigh market growth rate.

Although the external factors have impacted on

computer technology industry, IBM still exit on themarket as they have strong financial capacity,knowledgeable and competent management andexperience.


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Fall of IBM Changed

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