FREE ESSAY ON IBM - A CASE STUDY

IBM - A CASE STUDY

Introduction
This report is a case study on IBM from 1993 to the present. The reporters' objectives
were to define the problems within IBM in 1993; management tools used to remedy these
problems; if these solutions will lead to a sustainable competitive advantage; and what
kind of innovators IBM is and what streams of innovation IBM is involved with today. This
report is from a managerial science perspective, with a focus on innovation.
Executive Summary
This case involves IBM, an international computer hardware, software and services
company. The head of this organization in 1993, since 1985, was John Akers. Akers was
replaced that year by Louis V. Gerstner, Jr. During Akers' reign, the company had gone
from a workforce of 407, 000 in 1986 to 300, 000 in 1992 ; the stock had dropped from a
peak in 1987 of $1757/8 to $25 (split adjusted) in 1993 ; and a loss of $2.8 billion in
1991 to be followed by a loss of $8 billion in 1993 . Akers' effect on the structure of
the company resulted in, among other things, two outcomes; 13 highly defined divisions
that were theoretically autonomous from one another and many job losses. Gerstner was
brought in to remedy IBM's fiscal situation and bring IBM back into the black and back on
top of their industry.
Problems within IBM in 1993
Focus
One of the most notable problems within IBM was their focus. It seemed that
inter-politics within the organization overshadowed what should have been their prime
directive: the customer. They had dismissed the priority of putting the customer first
and letting the customer drive their innovation and, in turn, ended up trying to drive
their own innovation and directing the customer to what IBM thought they would need. In
an article in Communications Weekly, John Mulqueen states that IBM was more concerned
with "pushing inter-networking solutions as a means to control the customer." John
Joback, the president and CIO of First Virginia Services Inc noted that "they were more
focused on developing career paths for the sales people than with focusing on the
customer." One of the first things that any manager in any industry learns is that the
customer drives innovation. If managed properly, this will give their organization a
sustainable competitive advantage. 
Business Politics
It had become obvious to many that business politics were playing a part in impeding
IBM's growth. David Andrews, of the D.H.Andrews Group in Cheshire, Connecticut noted,
"IBM has a serious culture problem in developing software because internal debates became
so political that projects never seem to be completed." Even Gerstner acknowledged the
problem; "We have people who will not respond to a customer because one unit is debating
with another how they're going to share revenue." 
Business politics is a barrier that can interfere with the smooth running of any
organization. It occurs when any employee in upper management does something solely for
personal gain, rather than company growth. This is the most dysfunctional aspect of
business today .
Success
A senior executive at Chrystler once noted, "Living with success is always a challenge."
This is the next problem to face IBM. The company became too comfortable within their own
superiority; it became a victim of a barrier known as 'cushy chair syndrome' . IBM was
the industry leader and became too confident in their success, trying to create changes
within the organization instead of within the industry to stay on top as an innovator.
Their glorious history was one made up of successful incremental of changes and structure
; rather than discontinuous changes and experimentation, which is one of the key success
factors to keeping a sustainable competitive advantage . As well, their upper management
was that of an 'old guard' which had been around for some time, giving the aura of a
stale environment, one ill-conducive for innovation and change to occur .
Culture
The culture at IBM was one characterized by its extremely defined structure and
procedures; its inward focus; and its 'push back' arrogance of decision making through
ineffective, bureaucratic means . This over shadowed the company's basic beliefs in
excellence, customer satisfaction and respect for the individual and eventually blinded
them to the changes in the industry . In a 1993 letter to the shareholders, Gerstner
states, "We have been too bureaucratic and too preoccupied with our own view of the
world." 
This resulted in IBM's inability to define opportunities as well as future problems. In
1990, the US Industrial Outlook outlined three major changes in the trends of the
computer industry. They were:
? Maturing Demand for Hardware: (growth in software and services);
? Increased Competition (because anyone can buy the parts to put together a computer,
since IBM was not Intel's sole customer);
? Move To Open System Architecture (ie...an operting system that allows for programs of
different producers to interact as they do today with Windows 95 and its successors) .
IBM was unable to capitalize on these upcoming changes in the industry because their
arrogance didn't allow them to accept news from outside the company. Recognizing
different factors from a organization's environment is one of the key points in forming
strategic context to make strategic decisions . They had made past mistakes, most notably
subcontracting Microsoft to create their operating systems and Intel to manufacturing
their microprocessors without putting in pacts of IBM being a sole customer, or somehow
safe-guarding against competition . This ultimately led to the origin of two of their
biggest competitors, and the two biggest suppliers to their competitors .
In this structured aspect of IBM, the reward and recognition that people deserved fell by
the wayside. These rewards and recognitions would have provided for a motivation tool for
all employees to strive for high goals to not only improve their own level of achievement
within the company, but, in turn, improve the company level of achievement within the
industry . As well, the structure was such that there was no support for risk and no open
tolerance of mistakes. These are the two fundamentals of providing an environment
conducive to promoting and nurturing creativity and innovation .
IBM Today
IBM, in and effort to regain and increase profits, has implemented several changes.
Issues regarding these changes will be discussed here. IBM has failed in the past because
of their inability to play two roles at once; to both maintain superiority in the
computer industry and effectively innovate within it .
New Leadership
Louis V. Gerstner, Jr. has made architectural changes in the organization in an effort to
better react to its environment. He tried to implement a strategy designed to keep IBM
whole; dismantling Akers' vision of autonomous divisions; employing a powerful new
technology, and vastly improving competitiveness . He has cut thousands of jobs in an
effort to eliminate expenses. As of 1994 the companies worldwide workforce was reduced
from a high of 407 000 in 1986 to 256 000 . His has spearheaded IBM' s integration into
an all encompassing 'one-stop shopping' solutions provider, "to be, in fact," Gerstner
says, "the only full-service provider in the industry." This has been much more than a
simple shift for IBM. IBM is dramatically rethinking the way it goes to market. 
He has kept IBM's mainframe operation as it provided him with some financial breathing
room. The main reason for this was the drop in mainframe prices. One type of storage unit
of a mainframe that originally cost $60 000 had its price dropped $18 000 . Their
Solutions platform has integrated software, hardware, consultants, and the Internet to
provide business overall service for clients.
Another key to IBM has been its move into the microprocessor market with a partnership
with Motorola and Apple. This move gives IBM more control over the production of its
hardware. Thus IBM will rely less on Intel. By becoming an all encompassing corporation,
Gerstner feels that IBM will be in a unique position to "analyze the market to develop
solutions that fit, selling solutions that fit the customer, and developing solutions,
components, and assets that can be altered to fit the customer's environment and
requirements, at both technical and business levels." 
Under Gerstner, IBM has enjoyed some success. Since he has taken the helm, IBM stock has
increased more than four fold to $175 (pre-split). In 1996 revenues were $75.9 billion
resulting in $5.4 billion in net earnings. This has been a dramatic improvement for the
$8 billion loss and $25 per share price he originally faced. However, there is question
to where or not this level of profitability is sustainable under the current changes. The
changes don't seem very drastic. In an article in Fortune Magazine, Stratford Sherman
noted, "he seems to be attempting a conventional turnaround, deep-cleaning and
redecorating the house rather than gutting and renovating it. Gerster's IBM is more or
less the same institution that has vaporized $60 billion of market value since 1987."
Through the cutbacks in its workforce, IBM has eliminated a large potion of where any
innovation can occur. One of the sources of innovation is an organization's employees .
This elimination not only resulted in a brain drain at IBM but also crippled worker
morale. With innovation you must ask people to deal with the unknown and try to provide a
comfortable setting for that to occur. IBM has gone in the opposite direction, thus
hindering innovation.
Architectural Innovation:
Since the time of the article, "What Went Wrong At IBM: The Toughest Job In American
Business," in 1993, IBM has gone under some changes to its organization structure.
Acquisition of Lotus:
Through the acquisition of Lotus Corporation, IBM hoped to integrate that company's loose
and effectively innovative management style into IBM. However the $3.5 billion buyout
seems to have helped Lotus more than IBM. Lotus was promised "an unprecedented level of
autonomy," and benefited from IBM's deep pockets that were utilized for marketing.
However IBM has not integrated Lotus to the point that any management style that could
have been a benefit to IBM has rubbed off. This is an example just purchasing a company
that may be considered to be innovative will not result in that innovative management
process to influence the parent company.
Power Architecture: 
Power architecture has become the hardware and software basis for most of IBM's
operations. It is the coordination of developing and designing a microprocessor and the
programs specific to that system. The premise behind the design is that by having a
single hardware package to base its systems, IBM would be in a better position to
integrate its operations and cut manufacturing costs . Moreover it would allow IBM to
alleviate themselves of their dependency on Intel for microprocessors. According to
Gerstner, "we believe that the microprocessor is the fundamental engine of system
development." Along with providing a new platform for its systems, this is also an
example of IBM's ability to innovate incrementally. Other than being a little cheaper and
versatile than its competitors', IBM's microchips cannot be seen as significantly better
. 
AlphaWorks:
AlphaWorks is a relatively new management system Gerstner has implemented into IBM to
help reduce inter-group conflict and to "bring Big Blue's immense research and
development operation closer to the realities of the marketplace." Introduced in 1996,
the function of AlphaWorks is to act as a buffer between all the different units within
IBM. It acts as a communication tool with the responsibility of cutting out redundancies
and reducing inter-group politics. It employs a matrix structure whereby AlphaWorks, with
the business unit, develops a product with the other relevant units within IBM to bring
the idea on line. It has a lot of power. AlphaWorks holds the key to whether or not a
product is placed on the market. 
The matrix structure that IBM implemented to bring AlphaWorks online adds another layer
to the already large hierarchical form IBM has. Another barrier to innovation is an
extensive hierarchy whereby employees are not allowed freedom to develop . IBM is in
conflict with itself. In IBM's own publication "IBM Systems Journal," the corporation
contradicted itself by stating that "yesterday's strong organizational hierarchies and
strict work rules are no longer economically rewarding." This extra layer in the
hierarchy directly inhibits any innovation that IBM is capable of. Sherman also noted
that, "by involving more people in a routine decision, matrix structures can inhibit
action and muddy accountability." 
Areas of Competition:
There are three areas where a firm can compete; price, deliverability, and quality . In
today's economy the areas where competition is most effective is competing on
deliverability and quality . IBM has made attempts, some unsuccessful, to compete in each
of these areas. In 1994 & 1995 IBM experienced difficulty in filling its customers
orders. As a result of the shortage of IBM's Aptiva PC during the 1994 holiday season,
its share of worldwide PC shipments was further weakened . In 1996 IBM felt that
something had to be done. The worldwide service and support offerings were restructured
into one organization in an effort to offer faster and cheaper assistance. However this
is only a reactionary move by IBM. Their competitors already offer such support services,
therefore this does not add any value for the customer and it does not address their
manufacturing blunder. This typifies IBM's inability to implement a strategy and shows
the importance of making effective strategic choice 
An attempt of IBM to add quality for its small business customers is through their
telesales department. They nurture client relationships, pitch IBM solutions, and, when
needed, refer customers to product and service specialists within the call center or to
resellers in their region . IBM is trying to show that it also considers the little guy
to be important, but they must do a lot to convince small businesses that they care.
"Clearly, for many customers, perception is reality. And the most daunting perception is
that IBM is just too big to meet the needs of small customers." Furthermore there is
still much room to improve. As an example, Richard Laermer, an entrepreneur who runs a
10-person media relations company in NewYork, says he has e-mailed IBM numerous times
asking about products, and has never gotten a message back .
IBM's Business Solutions Department has been very successful for the corporation. It is
another an example of how IBM has taken existing systems and technology within its
organization made architectural innovation along with incremental ones to create value
for its customers. This is the one area where IBM has been able to add value for
customers in terms of quality.
Culture:
There have been some cultural changes at IBM. The company dress code has been eased, but
still exists. Gerstner has tried to get business units to work together and think about
the customer first (a key component to innovation - be customer focused). He has tried to
foster a team approach by banning profit taking between divisions on ideas, copyrights,
names, and other intellectual property. In his early years, Gerstner was outraged to
learn that Eduquest, the IBM group that sells PCs to schools, had been told it would have
to pay royalties to the IBM PC unit if it labeled its computers 'IBM' .
Lower level managers are given more control. Foe example, they are free to evaluate and
rank their subordinates any way they feel fit. The company broke with long tradition of
safeguarding its research by posting experimental technologies on the Internet available
for the public . This allows for a better insight and understanding of IBM on the part of
the customer. Furthermore, evidence of the autonomy that Lotus was given is that Jeff
Papows, President of Lotus said that, "I wanted to cut the price of Notes in half, even
though I couldn't quantify the results in terms of increased volume and market
elasticity. It was a risk, no question. And to (his) credit, Lou..., without flinching,
said 'You're right, go for it'."
Conclusion
But there still remains question as to has anything really changed. IBM still suffers
from the 'cushy-chair' syndrome, business politics, and an extensive organizational
structure. These all mean that IBM cannot be an innovator. In his own words alluding to
the 'cushy-chair' that still exists at the top of IBM is that "IBM will continue to be
the primary source, the dominant source, of technology in this field. I'm absolutely
convinced of that because of the almost impossible task for anybody in the next five
years to duplicate our R&D function." This is an example of an axiom which promotes the
idea that R&D is the most effect manner to be a successfully innovative organization. 
IBM also fails to provide their customer with added value in the two most functional
areas of competition, as referred to above. With the example of the mainframes components
and Lotus, IBM tried to improve only in price. In fact, there are many areas where IBM
has tried to only cut prices without improving the product beyond that of their
competitors, or themselves for that matter . Decreasing price is the most ineffectual way
to add value in today's economy . 
Although IBM made the mistake in the past of outsourcing their operating system and their
microprocessor to Microsoft and Intel respectively, they continue to make the same
mistake by outsource what is supposed to be the hub of their business: Solutions. One
example is Richard Evans, a part of the Global Services Unit at IBM, who is an internet
research consultant for both internal and external Solutions projects. Richard is an
employee of CNC consulting firm in Toronto .
Since IBM only incrementally improves its products and shuffles its structure, the two
streams of innovation it is involved with are architectural and incremental . At best IBM
will work in the expected and augmented Levitt rings, since it is involved with only
incremental . 
If IBM is to be considered any sort of innovator at all, one could argue that since they
place a high importance on reducing labour and energy costs by constantly reducing the
size of its workforce, they are Process Innovators . However, IBM also hold R&D in high
priority (over $5 billion spent in 1998 ), they are highly structure and are not very
successful innovators, they should be considered Product Innovators.
Louis Gerstner also shows that he has no long term vision for IBM with cutting the
workforce down as much as he has. The only gains that came out of that were short term,
and will result in more problems in the future. Although short-term vision is important,
long term vision need to be taken into equal consideration .
Since IBM shows little innovation and no discontinuous innovation, and no sort of
environment to foster or nurture discontinuous innovation, the reporters feel that IBM
has no sustainable competitive advantage . 
The reporters feel that although the shareholders didn't agree with Akers' vision of
autonomous divisions, IBM would have benefited from further differentiating these
divisions into separate entities altogether. The company is much too big for itself and
red-tape and bureaucracy play a big part in inhibiting the innovation that could flourish
within smaller organizations. 
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Ibid, p.149
Ibid, p.113
Ibid, pg. 19
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31, 1994
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Ibid
Ibid
The Economist, "What Went Wrong At IBM", Jan., 1993
Stratford Sherman, "Is He Too Cautious To Save IBM," Fortune, October 3, 1994
Manjuris (lecture), May 11, 1999
Ibid, May 4, 1999
Jill Gambon, "The New IBM," InformationWeek, November 11, 1996
David Kirkpatrick," Gerstner's New Vision For IBM," Fortune, November 15, 1993 
Ibid
Ibid
Ted Smalley Bowen, "AlphaWorks Thinks Outside the Blue Box," Info World, December 18,
1998
Manjuris (lecture), May 6, 1999
K.-T. Huang, "Capitalizing On Intellectual Assets," IBM Systems Journal, 1998
Stratford Sherman, " Is He Too Cautious To Save IBM," Fortune, October 3, 1994
Manjuris (lecture), May 11, 1999
Ibid
Barbara DePompa, Brian Gillooly, "IBM Picks Up Pieces," InformationWeek, February 13,
1995
Michael L. Tushman, Charles A. O'Reilly III, Winning Through Innovation, (Boston: Harvard
Business School Press, 1997), p.181
Ibid, p.54
Geoffrey Brewer, "Lou Gerstner Has His Hands Full," Sales & Marketing Management, May
1998
Ibid
Ibid
David Kirkpatrick," Gerstner's New Vision For IBM," Fortune, November 15, 1993
Jill Gambon, "The New IBM," InformationWeek, November 11, 1996
Louis V. Gerstner Jr., "The Last Thing Customers Need Is One More Parts Maker," Fortune,
November 15, 1993
Brenda Dalglish, "Big Blue Back In Black In 4Q: Revenues Down," Electronic News, January
31, 1994
Manjuris (lecture), May 6, 1999
Richard Evans, Internet Research Consultant, CNC (Interview), June 1999
Manjuris (lecture), May 11, 1999
Ibid, May 13, 1999
Ibid
IBM 1998 Income Statement, Internet,
"http://www.ibm.com/annualreport/1998/statements/ibm98arcsbs.html"
Michael L. Tushman, Charles A. O'Reilly III, Winning Through Innovation, (Boston: Harvard
Business School Press, 1997), p51
Ibid, p.30