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THE FALL OF IBMCase was prepared by Gareth R. Jones Corporate Strategy Dr. Amin Wibowo, MBA. • MM UGM Yogyakarta, 23 Okt 2010 • Kelompok 3 AP-14: • Bayu Setiaji • Nureni Susilowati • Sri Muniati Free Powerpoint Templates

IBM (dominant global mainframe manufacturer) • : - T.V. Learson as CEO after Tom Watson Jr. • - 75 % share of the world market for mainframe computers • - Strengh in R & D (developed IBM’s system / 360 mainframes • continued by system / 370 series becoming the backbone of IBM’s mainframe product line from the early 1970s on and the industry standard to match and outperform in competition • 1973 : - Frank Cary as new CEO • - IBM still dominate the mainframe market • By 1980 : IBM’s market value of $ 26 billion • (= 4 x its size in 1971)

Increasing Competition • Thefirst major problem in the Carry era : • The mainframe computer market was starting to mature. • IBM also had saturated the international market. IBM’s rate of growth was faling eventhough its revenue were increasing. (increasing at a decreasing rate) • Major competitors were Amdahl, Honeywell, Burroughs, Univac, NCR, and Control Data. • A major threat to IBMS’s domination of both US market and global market : • The existence of a low cost global competitors • vs • The expensive IBM system

Cont’d • Initially, competed at IBM-compatible peripheral equipment (such as disk dirives, storage device, printer at lower price. • The nature of competition was changing, competitors selling cheaper, higher performing IBM-compatible CPUs. • IBM was still pursuing its high-priced lease strategy by excellent customer service. • Another threat of low cost came from leasing companies • The price of integrated circuits was plummeting at this time. • Japanese companies had technical capability to build a powerful computer that match or exceed the IBM 370.

IBM’s respon • Cary announced that IBM would spend $ 10 billion to build new automated plants to produce low-cost computers over a six-year period. • 1981 : John Opel as new CEO, concerned about competition from Japan and carried on with Cary’s strategy. • 1980 – 1985 : IBM spent $ 32 billion to determine ways to reduce manufacturing costs. • It was unlikely for IBM: price competition (low cost) vs customer service and support activities raised costs so much. • IBM’s strategy : competed on its unique ability to provide customers with an integrated, full line computer service.

Changes in Technology • Innovation caused a change in IBM’s strategy during 1970s. • Before : the same IBM mainframe for several years. • Now : the computer life span was getting shorter, IBM was forced to replace its computers every 2 – 3 years. • A major change in IBM’s strategy : phase out the leasing system and instead to begin selling machines  increased revenue in the short term but major results in the long term. • Leasing system : • Tied IBM to its customers, ensured them would look first at IBM machines when they upgraded and expanded systems. • Facilitated customers with excellent customer service • Guaranteed IBM a steady cash flow and control market. • The end of leasing : more easy to fluctuations in its product demand because its customer would be able to shop around.

Cont’d • From 1980 on : major competitors from 370 clone manufacturers like Amdahl (faster 370 processor than IBM) and Hitachi Data System (low price machine generate record sales on 1980s). • Customers began more comfortable buying 370 clones that also promised quality support, service at low cost. • Led to price discounting. • IBM attempted to offer unique package (software and service) but its sales growth for the biggest mainframe dropped annually from 12 % in 1984 to 5 % in 1990. • The independent computer leasing companies disassembled one larger mainframe to make two smaller machines. • IBM was forced to reduce the price of its machines.

Cont’d • The end of leasing and the low cost competition changed nature of industry competition. IBM’s strategy was now focus on protecting its mainframe market blinded it to threats from the emergence of new kinds of computers such as minicomputers, PC, and workstations : • To protect its mainframe market from competitors and hang on its customers at all cost. • To devote most of immense resources to developing technically superior mainframe product, lowering the cost of production, supporting its very expensive but very succesful for sales force. • The way handled the emerging threat from new kinds of computers illustrates many of the problems as result of IBM’s operating structure, culture, and a corporate mindset, that “Mainframe were King” IBM’s managers was difficult to see emerging problems in its environment and react quickly.

The Minicomputer Market • Minicomputer was affordable to small businesses, specialized technical, scientific application, cheaper than mainframe computer. • IBM had ignored this new market segmen, preferring to focus its resources on developing and improving its 360 and 370 series. • MIT’s researchers founded the Digital Equipment Corporation (DEC). As it grew, it was quickly expanding its own national service network, imitating IBM’s. • DEC’s challenge was still seen as a minor issue, Carry - CEO IBM - formed the General Systems Division in 1969 to produce the System/3 – IBM’s small powerful minicomputer. IBM tried to adapt its existing mainframe technology to the minicomputer.

Cont’d • IBM’s managers philosophy : “ The bigger the better”. Big machines meant big revenues.  Minicomputer as insignificant earning. • The result : the System/3s were developed too big, too expensive to compete with DECs machine but too small to compete with IBM’s own mainframe. • Reorganizing IBM’s Data Processing Division to change manager’s mindset and support IBM’s move into new market : • - General System make minicomputers • - Data System make the mainframes

Cont’d • Huge unit rivalry between mainframe and minicomputers division, failed to cooperate and share technological resources  Finally, a minicomputer called The 8100 didn’t have a technological edge over the DEC machines. • Nevertheless minicomputer was succesful in the market through IBM’s powerful sales force. By the end of 1980, more over than 100,000 minicomputer had been sold. • IBM and DEC were the industry leader, HP and Wang were also increasing their market share.

Cont’d • In 1986, DEC introduced new VAX 9000 minicomputer that had the same speed and capacity as IBM’s largest 370 mainframe, the 3090, but cost only 25 %. IBM’s mainframe shocked ! Its gave evidence that minicomputer might be feasible substitutes for mainframes. • DEC’s share of the minicomputer market grew from 19% in 1984 to 25% in 1988, while IBM’s share dropped from 24% to 16 % in the same period. • In 1988, IBM brought out the AS/400 series based RISC technology, a minicomputer that was superior to DEC’s VAX. IBM increased its market share from 16 % in 1988 to 28% in 1992, while DEC’s market share fell.

The Personal Computer another breakthrough,Computer on a Chip • In 1977, PC was developed by Steven Jobs and Stephen Wozniak, cofounders of Apple Computer. • In 1980, Apple’s sales had grown to $ 117 million. • IBM decided to create its own machine to compete with Apple’s. Disadvantage of IBM’s mainframe machines were not compatible with those of its rivals. • In 1981, IBM outsourced and bought the inputs it needed from other companies make its PC. Example, Intel supplies the 8088 microchip, Microsoft delivered MS-DOS. • Finally, computer stores – not IBM’s sales force – used to sell the New IBM PCs to get customers quickly. • IBM’s first PCs more powerful than the first Apple’s and became the industry standard for all other PCs.

Cont’d • In 1984, IBM has seized 40 % of the PC market. • Its competitors rapidly imitated it. • In 1986, Compaq (founded in 1981) clone IBM PCs and produced high powered machines with Intel’s powerful new 386 chip. Zenith and Packard Bell, attacked the low price segment and producing PCs that undercut IBM’s. • In 1988, IBM fought back with the PS/2 that were compatible with the existing industry standard but its own older standard. • Cheaper rivals with powerful machines vs premium price of IBM. • IBM’s share of PC sales in US dropped from 37% in 1985 to 24% in 1988 and declined to 16,5 % in 1990.

Cont’d • In 1991, a major price war in the PC market. • IBM reduced prices three times and price of the PS/2 were cut 25 %. • Typical 386 PC, $ 3,500 in early 1991, $ 1,600 in late 1991, and only $ 1,200 in early 1992. • In 1992, IBM introduced new low price lines of computer such as the PS/Value Point with reduced part of the features of the high end PS/2. • Although very succesful and in great demand but it didn’t hold dominant position in the PC market. • In 1992, market share was 12 % same as its rivals, Apple and twice that others like Dell, Compaq, and NEC. • In 1993 is still price wars. • Dell Computer introduced price cuts of 5% to 22% across its entire product line. • IBM cut prices 16 % on some models, include the PS/Value Point. • Apple cut prices five times in 1993 for reduction up to 33 %.

Cont’d • PCs dominated the computer industry with world sales of $ 93 billion vs mainframe sales $ 50 billion. • Laptop segment of the PC market reached $ 5,67 billion in 1990, but IBM didn’t have a product for this segment until 1991 faced market leader Toshiba as well as Apple. • Powerful PCs could become a threat to IBM’s mainframes. • The computer industry always had been dominated by technological change. • IBM’s success was itself the result of moving quickly and decisively to exploit the opportunities of new technology. • IBM’s competitors moved quickly to develop powerful new netware software that could link PCs together so netware could work as effectively as a mainframe.

Workstations The fourth wave of computers • The innovators were Sun Microsystem and Apollo. • Very powerful PCs designed to be connected to each other and to a mainframe through software. • Analyzing financial results and track inventories much faster than PCs. • More cheaply than minicomputers or mainframes. • Network of workstation linked to an even more powerful workstation or minicomputer called a file server. • First developed for scientist and engineers but were utilized by business professionals. • By 1988, the workstation market was $ 4,7 billion, have 45% profit margin compared t 58% for minicomputers. • Prior to 1989, IBM was a small player in this segment. IBM failed to see the potential of an emerging market, only a 3,9 % market share in 1987, compared to Microsystem’s 29% and Apollo’s 21%.

Cont’d • IBM and DEC introduced workstation based on RISC processor. • In 1986, IBM RT PC workstation but failed due to an underpowered. • In 1989, IBM RS/6000 workstation. • In 1991, 18 % market share of RS/6000. • This segment was growing 27 % annually by 1992, compared to 5 % for computer industry. • Price of workstation fell, more small businesses could afford its. • Workstation could be used in networks with larger mainframe thus controlling workstation market protected mainframe market. • By the end 1991, the workstation market was $ 11,3 billion • IBM’s competitors : DEC, Sun, Apollo, HP – all which sold RISC workstation

Software and Services • Software : the instructions that allow computers to perform tasks. • Rapidly expanding segment of the computer industry for the past 20 years. • By 1981, 33 % of total computer industry revenue from software and services then rose to an estimated 50 % in 1993. • By 1990, 33 % of IBM’s total revenues from software and service, but 68 % of this revenue came from supporting customer IBM mainframe systems  IBM was not in a strong position to compete in the new software and service market  IBM’s failure. • In 1980, IBM purchased a large chunk of Microsoft stock at a low price. IBM soon found that developing new application software was a difficult business to be in.

Cont’d • Difficulty to develop new application software : • First, IBM had a hard time recruiting talented programmers. • Second, talented software programmers found they could make more money in business for themselves; started his or her own company. • (Bill Gates, Microsoft’s chairmans, gives his top programmers large stock option to encourage their best performance and as results become millionaires. • IBM allied with many small, independent software companies to develop software for IBM machines quickly (mainframes, minicomputer, worstations, and PCs). • In 1988, IBM launched application software • In 1992, Software and services accounted for 40 % of IBM’s revenue. • By the year 2000, IBM wanted to achieve 50 % of revenues from software and service.

System Integration and Outsourcing • System integration : a service that analyze various aspects of a customer’s business, then custom design and install an appropriate mix of hardware and software to meet the customer’s need. • Outsourcing data processing : one company agrees to take over and manage all aspects of the data processing function for another company in return for a fee. • By 1992, system integration and outsourcing market generated more reveneu than the mainframe market. • IBM’s failure to develope this segment get started when IBM capped the amount of money that Ross Perot (one of IBM’s star salesman) could earn from commisions in selling computers and ignored his plan to start a division which would be to provide data management services to customers. Perot left IBM and started Electronic Data Services (EDS)

Cont’d • The system integration market and outsourcing market were growing at 19 % annually. • Competitors – principally EDS and Andersen Consulting gain a first-mover advantage and dominate the market. • EDS had 50 % of outsourcing business compared to IBM’s 6 %. • Andersen dominated the market on software and hardware needs. • IBM for government contracts. • IBM developed alliances with : • - Coopers & Lybrand for management consulting • - AT & T to make IBM’s mainframe work better • In 1991, IBM established the Integrated System Solutions Corporation. • In 1992, IBM received a 10-year, $ 3 billion agreement to run computer systems for McDonnell Douglas Corporation. Outsourcing for 30 companies.

The New Computer Industry • By 1990, 50 % gross profit of IBM from mainframe, hardware, software, peripherals, and maintenance, 6 % from minicomputers, 18.5 % from PCs and workstation, 12.4 % from non maintenance software and services. • By 1990, IBM was facing stiff competition in all the developing segments of the computer market, from companies that were mainly specialized in one market nieche (Example : Microsoft in the software, Sun Computer in the workstation). • 1986, 80 % of computer industry profits from mainframe sales, but by 1991, sales of mainframe accounted for only 20 %. • PC revolution had reduced costs, customers buy much cheaper computer system replaced expensive mainframe and minicomputer.

Cont’d • Market share of suppliers of computer components rose from 20 % in 1986 to 31 % in 1991. • Share price of Microsoft and Intel soared. • Conner, Quantum, Seagate dominated disk drive. • Andersen Consulting and EDS led the system integration. • IBM’s share price fell dramatically from a high of $ 160 in 1987 to less than $ 50 in 1992. • IBM ‘s 370 system was the biggest mainframe to fight the trend of PCs and workstation, but it didn’t succeed. Sales growth dropped from 4 % per year in 1990 to less than 2 % per year in 1992. IBM’s 370 users switched to IBM AS/400 minicomputers that could perform the same task more easily and cheaply. • The mainframe market was now the third largest market behind PCs and minicomputes

IBM Fights Back • In 1985, John Akers became new CEO. His task of using IBM’s vast resources to make IBM as market leader and reduce IBM’s dependence on mainframes. • Problems : • Managers were still arogant, complacent, believed completely in IBM’s preeminence, ignore the warning sign. • It’s difficult to make innovative decisions to respond quickly to the rapidly changing environment. • Failure to develop products fast enough • A mistaken commitment to the mainframe computer. • Disoriented of salespeople  only selling and servicing the mainframe, not to satisfy customer needs (might be for minicomputer or workstation)

The biggest problem for IBM was its highly bureaucratic organizational structure that slowed decision making and continually frustated attempts to be innovative and enterpreunerial. • In 1987 : Akers launched a “ year of the customer” • Refocus the salesforce on meeting the needs of the customer rather than the needs of the mainframe. • Restructure the company • Change IBM’s highly centralized style of decision making

The 1998 Restructuring • In January 1988, Akers reorganized IBM into 7 divisions based on the main product market segments in competing : • PC systems • Mid-range systems • Mainframes • Information systems and communication • Technology development • Programming • Software • Idea : to demolish the mainframe mindset by giving the managers fof each division the autonomy and responsibility for developing new product for their respective markets. • Purpose was to focus activities more closely on the main segments of the computer market; to shorten the product development cycle and speed products to market.

Cont’d • The single sales force was remain a separate entity to sell the whole line of products. • Disadvantage of single sales force : • Each division would not be able to plan a sales strategy specific to its own competitive environment • Sales people would not be able to focus on a single product line. • 20,000 employees were transferred from staff and lab position to the sales force. • The commision system was changed so that sales people were evaluated on total revenue, not on the number of units rented or sold.

IBM’s Contention System • A “contention” system to control new product development : • Two or more project teams designed competing product prototypes • A series of committees at both division level and corporate level met over a period of months to debate the merits of each project. • A project would be approved after six members rated the two processes, which could take months or years. • The committee met to finalize the product plan. • During this process, if any member said “I non concur” meaning that he or she disagreed ct, it would be sent back for further review or scrapped. • Advantage : projects were generally successful. • Disadvantage : making decision was generally so long that products were late to market

Cont’d • To cut costs, increase profitability, get close to customers, reduce bureaucracy, Akers embarked to downsize the organization : • In 1985 worforce of 405,000 was reduced to 389,300 in 1988 through early retirement and attrition. • Overtime and temporary employees equivalent to 12,500 full time employees, were cut. • Closed plants, cut spending, reduced capital outlays, BUT costs grew faster than revenues during most of reorganization  not any change in IBM’s strategy or the way it made decisions. Product were still late to market ! • The 1988 Reorganizaton was a failure. • Most decisions still required approval by IBM’s corporate headquarters managers who had risen from mainframe division.

Cont’d • Akers’s decisions was decentralize authority to managers in the PC division : • to place the PC business in a separate operate unit. In 1991, formed the IBM PC Company and gave it control, design, production, distribution, and marketing of IBM PCs. • 1,200 former marketing and sales employees were transferred to new PC unit.

The 1991 Restructuring • Decentralizing decision making authority to the divisions and reducing the role of IBM corporate headquarters in setting divisional strategy. • Dividing IBM into 13 separate divisions : 9 based on company’s main product lines and 4 to be markerting and service operation organized geographically. • The goal of restructuring : to make the division independent units operating under a board IBM umbrella, thus freeing them from corporate control. Free up IBM’s powerful resources and make it more competitive.

Cont’d : Restructuring’s policies • Each division could freely negotiate transfer prices of inputs with other division or to outside company. • Performance of each division would be reported separately and accountable for its individual profits and losses. • Each divisional manager were responsible for developing annual business plans, signed a contract, and guarantee IBM a certain ROI. • Division heads would have control over long term development and business level strategy. • The hope was that the divisions would be freed from corporate bureaucracy.

Cont’d : Critique of Analysts • The sales division would still be responsible for selling the whole range of IBM products, and control over sales would be centralized at corporate headquarters. • Analysts were skeptical however, of having only one sales force, especially one in whih representatives were still biased toward mainframes. • Many analysts felt that one sales force was a mistake; giving each division its own sales force would be a better source of competitive advantage. Moreover, the huge costs of operating sales force could be allocate between division, causing rivalry among them.

Cont’d : Results of the 1991 Restructuring • In 1992, James Cannavino, the head of the PC unit took total control over the PC division’s strategy and organized the PC division around product instead of function. • The five product groups of the PC division was in charge of its own brand development, manufacturing, pricing, and marketing, so that the groups could respond changes in the PC market much more quickly, where products may have life span of only six months to a year. • Cannavino met with 32 CEOs of Silicon Valley and formed cooperation with them to speed development new hardware and software products. • The IBM PC division was the world’s largest company.

New Management and New Plans • In 1991, IBM’s revenues fell 5 % from 1990, the first decline since 1946. Loss of $ 2.8 billion was the first loss in IBM’s history. • In 1992, IBM’s losses increased to $ 5 billion on $ 65 billion in revenues. • In 1993, the stock fell below $ 46, the lowest price in 17 years. • Pressure for change at the top was increasing • in January 1993 John Akers resigned (CEO 1985 – 1993)

Critics for Akers • He never went far enough in implementing the reforms that would really turn around IBM. • Despite the fact that 100,000 workers were cut mainly through early retirement, but critics claimed that Akers had avoided initiating the major layoff that wee needed to restore profitability. • Decisions of the Board of Directors : • The BOD choose an outsider for the first time to be the CEO of IBM.

In March 1993, Louis Gerstner former CEO of RJR Nabisco was recruited as CEO of IBM. • No experience in the computer industry. • When he took over IBM, IBM’s stock price dropped $ 3. • Gerstner hired outsider to form a new top management team • Jerry York, former CFO at Chrysler - as IBM’s CFO • Gerry Czarnecki, in charge of cutback at Honolulu’s Honfed Bank – became a Vice President • Abby Kohnstamm, former senior vice president of card member marketing at American Express, to be a Vice President of Corporate Marketing. • Gerstner and his team analyzing IBM need “reengineering the corporation”.

Cont’d : Gerstner and his team • A two step process of Reengineering the Corporation : • Identifies and analyzes each of core business processes that make a business work. • Changes or reengineers core business from the bottom up to improve the way they function. • Gerstner formed an 11-person “corporate executive committee” of IBM’s top managers to be pioner the reeingineering effort with eleven task forces to analiyze main processes which were modeled as Cannavino from the PC division. • Analysts estimated Gerstner would : • Continue Akers’ approach of decentralizing decision making to division. • Spin-off IBM’s businesses into independent companies.

Gerstner preferred to restructure relationship between the corporate center and divisions. • Announced his belief that IBM should continue traditional strategy of providing customers with full line of hardware and software product and services and announced his support for mainframe division. • Announced that he would not change the current companywide sales force structure of 40,000 salespeople. • Believed that IBM’s core strategy of being a full service compane was appropriate, buat main problem was that it was too big. To reduce size, he announced plans to shed 115,000 more job, reducing the workforce from 405,000 to 250,000. • Announcing that “the last thing that IBM needs now is a corporate vision”.

Four goals Gerstner had for IBM • To get the company to the right size. • To spend more time with customers. • To determine the strategy issues by process reengineering. • To build employee morale in the face of the huge layoffs. • Critics argued that : • He should aggresively pursued a strategy of breaking up IBM into fully independent operating units. • His new policy about sharing skill and resource between division would not work and was no break from past. • Too slow to reduce IBM’s operatig costs and the lavish way to spend its resources.

Gerstner’s opinion • No amount of cost cutting would solve IBM’s problems unless IBM could change from the inside out. • The problem for the company was to use those ideas effectively, and the start of this was to reengineer the company to make better use of its resources. • IBM also needed to increase integration among divisions so that they could share skills and resources more effectively. • Gerstner believed that continuing Aker’s strategy of breaking IBM up into 13 separate companies would do nothing to ensure the survival of the company in the long run.

Financial Performance On September 26, 1993, IBM announced a loss of $ 46 million for the third quarter, compared to $ 40 million loss in 1992, bringing its total loss in 1993 to $ 8,37 billion.

Was Gerstner’s strategy working, and when could IBM’s investors and employees expect to see the results ?

Group’ Solution (1) Gerstner became IBM’s CEO between 1993 until 2003 before stepped down, and Sam Palmisano became IBM’s new CEO in 2003, it meant Gerstner’s strategy had well done. In light of IBM’s history, an obvious morale of this story was that the leadership matters. When IBM’s B.O.D chose an outsider (Gerstner) because they wanted a new CEO who would have a fresh perspective on the company’s problem – had not been a part of IBM’s slow moving bueraucratic, culture characterized by slow, centralized decision making and power struggles between divisions, in spite of he had no background in the computer industry and that was viewed by many analysts as “an enormous mistake”.

Group’ Solution (2) A concept of corporate strategy rely on the resources – the assets, skills, and capabilities – of the firm. Resources are the critical building blocks of strategy because they determine not what a firm want to do, but what it can do. Resources determine the range of market opportunities that are appropriate for a firm to pursue and so have a major impact on corporate strategy. In this cases, Gerstner realized that IBM also needed to increase integration among divisions so that they could share skills and resources more effectively. He took Cannavino’s performance from PC Division as success model for other division. Through PC industry, IBM was able to build on its reputation and customer list in the computer mainframe business to gain dominance in the market for desktop machines, eventhough it was a late entrant and didn’t have the best technology. Indeed, Gerstner realized that.

Group’ Solution (3) Although the idea that resources underpin the sustainability of competitive advantage is simple, companies often have a hard time identifying and evaluating their own resources, assesing whether they are strengths or weaknesses, and understanding whether they can be sources of sustainable competitive advantage. Among many controversion about “mainframe mindset”, Gerstner made a smart decision. He announced his belief that IBM should continue traditional strategy of providing customers with full line of hardware and software product and services and announced his support for mainframe division. He realized that mainframe had to be a part of culture. Other firms might discover that some of their resources are not markedly better than those of competitors or are not particularly highly valued by consumer. The challenge for Gerstner was to understand what distinguishes valuable from ‘IBM’s mainframe’.

Group’ Solution (4) One of the big problems in IBM was weaknesses culture such as arogant, complacent, believed completely in IBM’s preeminence, ignore the warning sign. A corporate transformation cannot be achieved without the appropriate culture or attitude within the organization. This requires the process finding the best outcome for a company as a whole not for particular part of company as represent. Besides, the company climate has to be one of honesty and opennes. The process of choosing among alternative strategies, or more generally for making decision should also reflect a culture of constructive conflict. Gerstner have formalized this approach into “four goals for IBM” Conclusion : Gerstner can make a huge difference for IBM.

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