How did IBM, under the leadership of Louis Gerstner, improve its technological leadership in the global marketplace
Read the IBM Background information and the IBM Mini case, “He Loves to Win. At I.B.M., He Did.” in the week 4 “Readings & Tools” section:
Submit a paper with at least 1250 words, with at least 4 references, that answers the following four case questions:
What role did the Internet play in improving the strategic competitiveness of IBM?
How did Mr. Gerstner combine the various processes of structure, technology, and people to make IBM a more competitive company?
What lessons have you learned from this case that are useful for analyzing the situation of a similar company, like Apple Computers?
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In 1993, when Louis V. Gerstner Jr. became chairman and chief executive, the question asked about I.B.M. was whether it would survive. Mr. Gerstner said. “And we didn’t need the vision,” he added. “We needed to save the company economically.” Instead, he gave marching orders to the I.B.M. troops. “We were going to build this company from the customer back, not the from the company out,” he said. “That was the big message from my first six months in the company, that the company was going to be driven from the marketplace.” As one symbolic step, he abolished the ritual of the I.B.M. organization chart. These fold-out charts were minor masterpieces of draftsmanship and printing, an intricate latticework of lines, color-coded boxes and asterisks. Lovely to behold, they recalled the engineering drawings of Leonardo da Vinci, according to one executive. Producing them was a cottage industry within I.B.M., and thousands of them were pinned on the office walls of its workers. When asked about how to revise the organization chart under his management, Mr. Gerstner declared there would be no more organization charts, that anyone asking for one was focusing on the wrong thing. Early on, he also changed incentives to put I.B.M. and its people more in step with the marketplace. When he came to the company, only 300 employees received stock options. Today, more than 60,000 do. He told his top 300 executives soon after he arrived that he expected them to own I.B.M. stock equal to one to four times their yearly compensation. Mr. Gerstner argues that strategy and corporate culture are intimately linked. “You can’t talk a culture into changing,” he said. “You can’t just exhort people to be different. You’ve got to point to fundamental strategic changes you’re going to implement in a company and then drive the execution of that strategy. And it is in the execution of the strategy that the culture begins to change.” The first major decision Mr. Gerstner made was to decide to keep the company together, not split it up into 13 loosely linked “Baby Blues.” Under that plan, put forward by his predecessor, John F. Akers, in December 1992, some would be spun off as separate companies with their own names, like AdStar, for the disk storage unit. This so-called federation plan was moving ahead briskly when Mr. Gerstner arrived. “It was an extraordinary Balkanization of the company under way when I walked in,” he said. “There were investment bankers sticking their flag on every piece of I.B.M. they could.” Auditors had been hired, costing millions of dollars, to create stand- alone financial statements for the spinoff candidates. “Every unit had run for the hills,” Mr. Gerstner recalled, “creating their own human resources policies, their own communications policies.” In theory, the federation plan addressed I.B.M.’s fundamental trouble that as an integrated company it was not quick and nimble. It would be better off aping the personal computer industry, where fast-moving technology specialists like Microsoft and Intel prevailed. “That was the industry model that I.B.M. was responding to,” Mr. Gerstner said. “And I looked at that and I said, `Wait a minute, as a customer of I.B.M.’s, I’m not terribly drawn to that as a model for I.B.M.’ ” Mr. Gerstner, an I.B.M. customer at American Express and RJR, liked the concept of “integrated solutions” that I.B.M. could distill the complexity of computing to solve business problems for companies. In his early travels for I.B.M., he heard similar sentiments from customers. Aside from its breadth, in Mr. Gerstner’s view, I.B.M. had another unique feature: its research prowess. “Now, I walk in and they’re atomizing the company,” he said. “I see both of I.B.M.’s distinctive competencies being destroyed.” Within 90 days of his arrival, Mr. Gerstner irrevocably decided to keep the company together. “I knew it was a big risk, but I never doubted that it was the right thing to do at I.B.M.,” he said. “What scared me” he added, was the need to do three things at once: change I.B.M.’s economic model, its strategy and its culture. First, though, Mr. Gerstner had to cut costs. Work force cutbacks and plant closings were already under way, but he went deeper. In July 1993, he announced the company would eliminate an additional 35,000 jobs, bringing the declared total for the year to 60,000 and bringing the charge against earnings to $8.9 billion. As a result, I.B.M. reported a record loss of $8.1 billion in 1993 and, the next year, its worldwide employment fell to a low point of 220,000, from 302,000 in December 1992. Looking back, Mr. Gerstner pointed to three strategic decisions that were “the fundamental underpinnings of building an integrated company.” First, he created a broad computer services unit that sold bundles of hardware, software, consulting and maintenance to manage business processes like manufacturing, purchasing or marketing. I.B.M. had a services arm before, but it merely kept the company’s machines up and running for customers. To be a real computer services company, Mr. Gerstner noted, “it had to be product agnostic.” “The customer would not accept a services company if all it did was flog I.B.M. products,” he said. His decision to move into services set off “an incredible bomb in the company,” Mr. Gerstner recalled, adding, “Here was a part of I.B.M. that was going to work closely with Oracle, Sun Microsystems and, God forbid, Microsoft.” Yet IBM Global Services became the company’s biggest business, the corporate vehicle that would, as Mr. Gerstner observed, “look at technology through the eyes of the customer.” His second crucial decision struck at another I.B.M. heritage, that of relying almost exclusively on its own homegrown technology. Before, when the company had gone outside when it plunged into the personal computer business in 1981 using Intel’s microprocessor and Microsoft’s operating system the move had been regarded as a grave mistake. But by early 1994, Mr. Gerstner had decided that I.B.M. would move to “open systems.” In other words, Mr. Gerstner said, “All of I.B.M.’s software would run on major competitive hardware, and all of I.B.M.’s hardware would support competitive software.” To do that, the company would have to adopt standard software protocols that allowed different hardware and software products to talk to each other. To Mr. Gerstner, the move toward openness was a technical manifestation of his broader strategy. “There’s no way that you can get a company built around proprietary control to accept the open model unless they start with the customer and realize this is what the customer wants,” he explained. His third decision, made in 1995, was to fully embrace the Internet and what I.B.M. calls the “networked world” model of computing. Moving to open systems made it easier for the company to adapt to the Internet early. But the networked model of computing suited I.B.M.’s strengths big data-serving computers are the equivalent of power plants on the network, and the Internet shift moved the center of computing away from the personal computer. As the Internet moved into the mainstream in the mid-1990’s, it brought an explosion of computing complexity, as all kinds of hardware and software had to be able to connect to the global network. I.B.M.’s breadth and its services group were big advantages in this new environment. “Here was a chance for I.B.M. to lead again,” Mr. Gerstner declared. “We were able to articulate a role for I.B.M. in the networked world that spoke of the value of all we did.” I.B.M. welcomed the sudden spread of Internet-style computing as a gift, Mr. Gerstner admitted. “The company was extraordinarily lucky that the networked model of computing arrived in the mid-90’s,” he said. “And let me tell you, having worked in industries where the cycle of change is measured in decades, if not centuries, one of the things that is extraordinary about this industry is that if you miss a turn of the wheel you have a chance to get back in the game” every 10 years or so. Still, it was his earlier decisions that put I.B.M. in a position to ride the Internet wave. Given the company’s size, that strategy evolved quite rapidly. In late 1995, it formed an Internet division, which was not a product group, but more a corporate SWAT team to make sure the entire company was marching toward the Internet. Then, it carved out its niche, trumpeted in a massive advertising and marketing campaign, beginning in 1997, to push “e-business.” Competitors scoffed and advertising experts scratched their heads, but the message resonated with corporate customers. The message helping companies do “e-business,” documented in ads by examples remained consistent, as did the strategy. Amid the dot- com mania in 1999, Mr. Gerstner told Wall Street analysts that he regarded the hot Internet start-ups as “fireflies before the storm,” suggesting that the big impact of e-business would be in the old economy. At the time, that was hardly conventional wisdom. At the conclusion of Mr. Gerstner’s tenure, his three strategic pillars have come together in what could be mistaken for the very word he avoided, a vision. And that strategy shift, actually executed, insured a real change in the corporate culture. THE company’s sheer number of recent hires is a clear sign of that and the buildup of the services business is a big reason. IBM Global Services employs 150,000 people, up from 7,600 in 1992. All told, more than half of I.B.M.’s employees have worked for the company for five years or less. In 1992, the figure was 14 percent. Having succeeded in an industry skeptical of outsiders, Mr. Gerstner feels free to assess it. The computer industry tends to go astray, he said, when it “tends to reach to promise value in utopian schemes” the paperless office, the cashless society, the notion that shopping Web sites would bring the demise of bricks- and-mortar stores. “The payoff from information technology is going to be in making transactions and processes more effective and efficient,” he asserted. “So it’s not about creating a new economy, it’s not about creating new models of behavior or new models of industry. It’s about taking a tool, a powerful tool, and saying, `How can I make my supply chain more effective and efficient, how can I make my purchasing process more efficient, how can I make my internal employee communications more effective and efficient, how can I as a government deliver services to constituents more efficiently and more effectively?’ ” “So the computer,” he continued, “is in a sense like the electric motor 120 years earlier. It’s an invention that in and of itself is kind of interesting, but doesn’t have a lot of value unless you like hitting the alt, control and delete keys, and all the other things you can do on a keyboard. Its value is in the application to other processes.” His reference to alt, control, delete the keys users strike to try to reanimate a personal computer, running Windows, that has crashed was a slap at Microsoft. Like many people, Mr. Gerstner, who travels everywhere with an I.B.M. Thinkpad notebook computer, finds PC’s too hard to use. He believes the problem reflects the technical parochialism of the industry. “There’s an absence of concern about ease of use and almost a pride in technical complexity,” he said. “What other industry would give you a product that, to turn it off, you first have to press a button labeled start? And you tell me one other industry where somebody could sell a product that you have to reboot on average five or six times a day to get it to work?” Yet, unlike so many in the software business, Mr. Gerstner did not let his critique of Microsoft drive his business decisions. In 1996, he decided that I.B.M.’s OS/2 operating system could not compete with Microsoft’s Windows. “Most of the big technical decisions we made were half as much business as they were technical,” Mr. Gerstner explained. “I mean, the decision to basically stop fighting Microsoft with OS/2 was hardly a technical decision. It was a decision on my part that it looked like we had lost, so why don’t we get on with doing something else?” That kind of unsentimental pragmatism has served I.B.M. pretty well for the last nine years.
KVANT AND IBM: A FAILED ALLIANCE
The Kvant and IBM alliance shows how difficult it can be for an alliance to succeed. The economic liberalization in Russia in the early 1990s led to widespread speculation that the nation was beginning an economic transformation that would produce tremendous economic growth. IBM had been active in Russia since the 1970s, but had no manufacturing facilities there. The firm wanted to participate in the potential economic growth in Russia, but rather than rushing in and opening a factory, IBM decided to form a strategic alliance with one of the leading computer manufacturers in the former Soviet Union. Kvant had recently become a private firm but had a strong history of technological success in the Soviet Union. The two firms formed an alliance in 1993 to assemble laptop computers. The alliance production varied according to the number of orders, but ranged up to 4,000 a month. Product quality was consistent with the worldwide standards of IBM, which are quite high. Although the alliance experienced some initial success, it was cancelled in 1996, despite the relatively heavy investment by IBM in training and equipment, because IBM learned how difficult it was to deal with certain Russian institutions and practices. For example, the Russian government had initially promised there would be tariff-free importation of computer parts, but the government never followed through on that promise. The tax on imported parts remained, and that was added to the 20 percent value-added tax (or VAT) on the finished product. The government, in the early stages, allowed certain charitable organizations to import goods tariff-free and did not charge them taxes. The net effect to the PC’s price was such that a group of Russian Afghan War veterans could go to Europe and buy IBM laptops, bring them back into Russia and still enjoy a 30 percent cost advantage over the IBM laptop the joint venture had assembled locally. Furthermore, the Moscow city government had also committed to buy large numbers of the IBM product and to provide other support to the joint venture, but ultimately failed to do so. IBM’s experience demonstrates that even two willing parties to an alliance may find that there are factors in the external environment that negatively affect the ability of the alliance to succeed. A firm must have an institutional strategy to cope with the elements in the institutional environment, such as the government, other powerful organizations, and individuals that can cause difficulty for a new entrant. IBM failed to cultivate connections with different levels of government in Russia that are necessary to navigate the sometimes treacherous local environment. Bruton, G., & Samiee, S. (1998). Anatomy of a failed high technology strategic alliance. Organizational Dynamics, 27(1), 51–64.
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