THE FALL OF IBM

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Nov 7, 2013 (3 years and 11 months ago)

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T
HE FALL OF IBM


Case was prepared by Gareth R. Jones

MM UGM Yogyakarta, 23 Okt 2010

Kelompok 3 AP
-
14:



Bayu Setiaji



Nureni Susilowati



Sri Muniati


Corporate Strategy

Dr. Amin Wibowo, MBA.


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IBM

(dominant global mainframe manufacturer)

1971

:

-

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

1970
s

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
)


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Increasing Competition

The

first

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


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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
.





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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
.



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Changes in Technology


Innovation

caused

a

change

in

IBM’s

strategy

during

1970
s
.


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
.










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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

1980
s)
.



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
.




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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
.






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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
.



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Cont’d


IBM’s

managers

philosophy

:



The

bigger

the

better”
.

Big

machines

meant

big

revenues
.



Minicomputer

as

insignificant

earning
.


The

result

:

the

System/
3
s

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






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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
.

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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
.

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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
.



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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
.




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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

%
.






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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
.




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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
%
.


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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

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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
.





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20

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
.




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21

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)


Free Powerpoint Templates

Page
22

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
.



Free Powerpoint Templates

Page
23

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
.


Free Powerpoint Templates

Page
24

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


Free Powerpoint Templates

Page
25

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)



Free Powerpoint Templates

Page
26

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


Free Powerpoint Templates

Page
27

The 1998 Restructuring


In

January

1988
,

Akers

reorganized

IBM

into

7

divisions

based

on

the

main

product

market

segments

in

competing

:

1.
PC

systems

2.
Mid
-
range

systems

3.
Mainframes

4.
Information

systems

and

communication

5.
Technology

development

6.
Programming

7.
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
.

Free Powerpoint Templates

Page
28

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
.

Free Powerpoint Templates

Page
29

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



Free Powerpoint Templates

Page
30

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
.


Free Powerpoint Templates

Page
31

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
.



Free Powerpoint Templates

Page
32

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
.


Free Powerpoint Templates

Page
33


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

:
Restructuring’s policies

Free Powerpoint Templates

Page
34

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
: Critique of Analysts

Free Powerpoint Templates

Page
35

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
.



Free Powerpoint Templates

Page
36

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)




Free Powerpoint Templates

Page
37

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
.



Free Powerpoint Templates

Page
38


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”
.


Free Powerpoint Templates

Page
39



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
.



Cont’d

: Gerstner and his team

Free Powerpoint Templates

Page
40


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”
.


Free Powerpoint Templates

Page
41

Four goals Gerstner had for IBM

1.
To get the company to the right size.

2.
To spend more time with customers.

3.
To determine the strategy issues by process reengineering.

4.
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.


Free Powerpoint Templates

Page
42

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
.


Free Powerpoint Templates

Page
43

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
.


Free Powerpoint Templates

Page
44


Was

Gerstner’s

strategy

working,

and

when

could

IBM’s

investors

and

employees

expect

to

see

the

results

?


Free Powerpoint Templates

Page
45

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”
.







Free Powerpoint Templates

Page
46

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
.



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47

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’
.


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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

differenc
e

for

IBM
.





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