How IBM changed its strategy and revived its fortunes
After a disastrous period from 1991 to 1993, the world’s largest computer company, IBM, managed to revive its fortunes over the following three years. This case examines how this was achieved.
During the three years 1994–97, IBM was able to report a net income after tax of US$18 billion, compared to a loss of over US$16 billion in the previous three years (see Case study 1.1). It achieved this remarkable turnaround by adopting radically different strategies on leadership, new investments and cost cutting. It also took advantage of a major new area of customer demand in computers, which IBM was uniquely placed to serve. And it also had some luck.
Background
During the 1990s, the computer market continued to grow rapidly with strong demand for small personal computers (PCs), networked computers and large, mainframe machines. Some commentators had thought that the increased power of small PCs would grow large enough for them to replace the larger machines, but this did not happen for two reasons:
1 Mainframe machines were still needed to handle large quantities of data, such as those generated in the banking industry.
2 New global networks using telecommunications were being developed. These carried large amounts of data and required mainframe computers to handle the switching between national centres. Such networks were not only for telephone and data connections, but for a significant new development in telecommunications – the Internet.
In spite of problems elsewhere, IBM had never lost its dominance of the global mainframe computer market. Nevertheless, it was a stroke of luck that the major development of the Internet happened around this time for the company. It provided a means of boosting its most profitable product area at a time when it was under pressure with its range of small PCs.
Changes in the PC market 1993–97
Buoyant mainframe demand was also important because it provided protection for IBM against declining profits in the PC industry. Many major PC manufacturers were under pressures – not only IBM, but also Compaq, Packard-Bell, Apple and Fujitsu. It was the major suppliers to the PC industry who were gaining ground, namely Intel with its computer chips and Microsoft with its software. The suppliers had used the earnings generated from IBM and other companies to invest in two areas that would deliver them sustainable competitive advantage:
1 Proprietary technology, which they patented to make sure that it could not be readily used by competitors and was highly desirable for the successful development of powerful PCs.
2 Branded products such as Windows software and Pentium II computer chips. Effectively, by making these the global industry standard, Microsoft and Intel respectively ensured that all the leading PC manufacturers were encouraged to install the branded supplies and no others.
In this way, the major PC manufacturers became mainly involved in the assembly of branded supplies. This meant that the amount of value that the PC manufacturers were able to add to their supplies was very limited. Thus their profits from the basic PC declined significantly while the profits of the suppliers rose steadily (see Table 2) It was against this strong competitive background that IBM had to find a solution to its difficulties.
Table 2 The decline of IBM and the growth of Intel and Microsoft (US$ million)
Source: Company accounts.
New leadership at IBM: Mr Louis Gerstner
After the former chief executive, John Akers, stepped down in 1993, Louis Gerstner was appointed as his successor. The new man came from the food industry with a strong reputation for knowing how to cut costs. He knew little about the computer industry but said, at the time, that this was no problem. However, he subsequently admitted that his lack of knowledge had been a disadvantage. Importantly for IBM, this was the first time a leader had been appointed from outside the company with its clear lesson for those remaining inside.
Mr Gerstner began by spending several months reviewing the situation and talking with IBM customers. He wanted to develop a customer-driven strategy (see Chapter 5) and devoted the majority of his time to understanding their views. Over the next year, he and his immediate colleagues then made three major strategic decisions:
1 IBM would remain one company. Large customers wanted integrated-technology solutions to their problems and IBM had sustainable competitive advantage in this area. It would therefore not be demerged and the main parts would be retained.
2 IBM would refocus its strategy around its customers. Complicated corporate strategy was not needed, rather a simple focus on the needs of customers, their technology requirements and, where appropriate, new R&D and new acquisitions. IBM expected to become closer to its leading customers, perhaps even taking over some functions such as data processing and telecommunications network links that were previously run by its customers.
3 IBM needed all senior managers to work actively for the new focus and structure. Mr Gerstner said that some managers had appeared to be blocking strategies that were essential for survival: he called it ‘pushback’. He actually removed several senior executives during 1993–94.
IBM had already recognised the need to offer one-stop computer service solutions to its major customers back in 1991; Case study 1 described the Industry Solution Units (ISUs) that were set up to tackle this. To build on IBM’s strength of being able to offer a one-stop technical solution to many major companies, Mr Gerstner confirmed that ISUs were to be the main organisational structure, even though their integrated solutions were more suited to IBM’s larger customers. Pushback against the ISUs would no longer be tolerated.
The new organisation culture and structure that began to emerge from this new strategic focus was an essential element of IBM’s recovery during the subsequent years. New leadership does bring new strategies. As Table 3 shows, IBM was able to turn around its fortunes during the latter part of the 1990s.
New strategies at IBM: 1993–97
In addition to the firm development of ISUs, IBM’s recovery from near disaster came from six main strategies:
1 New corporate culture. IBM had previously been self-confident and satisfied almost to the point of being rather insular. Over time, a new culture has emerged that is more lean, more responsive and willing to learn.
2 Cost cutting. IBM reduced its workforce by 86 000 to 215 000 in the period 1993–95. The R&D budget was also slashed, especially on the more esoteric products and on some mainframe development. Some of these job losses were accounted for by the sale of companies, rather than outright sackings.
3 Sale or management buy-out of some peripheral companies. Over the years, IBM had developed its product range into many related but non-core areas – for example, hard-disk drives and computer printing peripherals. The company took the view that it had to correct the fundamentals of the company and such products were not that important to this task. Some peripherals were therefore sold.
4 Reorganisaion of the company away from countries into global product groups. The old national companies were slowly replaced by world-wide product groups working across country boundaries. This meant that former national country chiefs lost their empires, but that the integration benefits of globalisation could be realised. Such benefits would typically show themselves in economies of scale and scope.
5 Acquisition of companies in fast-growing segments of the computer industry. IBM acquired the only remaining independent software company of any standing, Lotus Development, for US$3.25 billion cash in 1995. Having failed to break the stranglehold of its former supplier, Microsoft, in the market place, it bought out one of the few remaining successful developments particularly associated with computer networking as a platform for future IBM development. In 1998, IBM extended its activities in the fast-growing sector of systems integration and outsourcing by the acquisition of Data Sciences for US$170 million.
6 Investment in the fast-growing segment of computer service outsourcing. IBM continued to invest in its own activities to act as a major supplier of computer services to non-computer companies – for example, taking over and running the computing services of a major bank for a contractual fee. This service is called outsourcing.
Results of the IBM corporate turnaround
The results of its new strategies were successful with a major recovery in profitability: see Figure 3. Although IBM’s profits are little better at the time of writing than they were in the mid-1980s, at least the company has been able to stop the rot. It is also well placed with new growth strategies to develop further into the twenty-first century.
Figure 3
Table 3 summarises IBM’s situation over the years from the early 1980s to the late 1990s. It shows how IBM’s objectives changed and the new strategies that were developed to address the new objectives of the company. Both were changed significantly during this lengthy time frame. Although the strategies are presented as static statements at single points in time, they were more fluid and experimental at the time.
Table 3 How IBM’s objectives and strategies shifted over time
Sources for IBM case: see reference.
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The second case also references 7 Dec 1990, p14; 5 June 1991, article by Alan Cane; 8 Nov 1991, article by Alan Cane and Louise Kehoe; 5 May 1993, p17; 29 July 1993, p17; 14 Mar 1994, p17; 26 Mar 1994, p8; 28 Mar 1994, p15; 31 May 94, p21; 4 Oct 1994, p16; 10 Oct 1994, p23; 25 Oct 1994, p18; 12 Jan 1995, p22; 5 June 1995, p15; 6 June 1995, p21; 13 June 1995, p 21; 26 June 1995, p15; 29 Sept 1995, p21; 14 Dec 1996, p9; 18 Feb 1997, p4; 22 Nov 1997, p17; 5 Mar 1998, p17. The Economist, 16 Jan 1993, p23; 14 Dec 1996, pp102–3. Business Age, Apr 1994, p76.
Finally, the cases use material developed from the annual reports and accounts of IBM, Microsoft and Intel for various years.
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