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Flowing Stream Strategy: Transformation of IBM Course Coordinator: Prof. Sushil

Submitted By: Group 10

Sameep Kunja 2011SMN6501

Rajesh Sinha 2011SMN6502

Anita Singh 2011SMN6504

S. Gayathri 2011SMN6509

Table of Contents

Chapter Description Page

No.

1. Introduction Flowing stream strategy About IBM History of IBM Beginning of Downfall

1-7

2. Crisis Failure at fundamentals Breaking two promises Failure in Strategic Planning Crucial questions about IBM Experience Summary

7-17

3. Revival Leadership Steps taken to change the way IBM worked

17-28

4. Learnings 28-35 5. References 36

Submitted By: Group 1 (2011SMN6501, 2011SMN6502, 2011SMN6504, 2011SMN6509)

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Strategic Change and Flexibility 2013

1 Introduction 1.1 Flowing stream strategy Continuity and change have been hallmarks of strategic thinking. Previously, when the environment was stable, the strategies were largely evolved around the issue of continuity. However, in the last two decades, the globalization process made the business environment highly turbulent and the concern for change has received immense interest, both by strategic thinkers and practitioners. The combination of continuity and change forces acting on an enterprise had led to the adoption of flowing stream strategy1. The combinations of continuity and change forces could be mapped on a continuity-change matrix (Sushil, 2005), as shown in Figure 1

Figure 1: Continuity Change Matrix

The flowing stream strategy process entails categorizing continuity and change forces that are acting on an organization and filtering the vital and desirable ones out of them. The entire process can be represented through a strategy crystal that interlinks the

1 FLOWING STREAM STRATEGY: MANAGING CONFLUENCE OF CONTINUITY AND CHANGE, Prof. Sushil


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continuity and change forces on one plane and Enterprise and Customers Factors on the other plane as depicted in the following figure 2:

Figure 2: Flowing Stream Strategy Crystal During a 20-year period, IBM has gone from success to failure to success; from a technology company to a broad-based solutions provider using the flowing stream strategy.

1.2 About IBM International Business Machines Corporation (IBM), is an American multinational technology and consulting corporation, with headquarters in Armonk, New York, United States. IBM manufactures and markets computer hardware and software, and offers infrastructure, hosting and consulting services in areas ranging from mainframe computers to nanotechnology. The company was founded in 1911 as the Computing Tabulating Recording Company (CTR) through a merger of three companies: the Tabulating Machine Company, the International Time Recording Company, and the Computing Scale Company. CTR adopted the name International Business Machines in 1924, using a name previously


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designated to CTR's subsidiary in Canada and later South America. Security analysts nicknamed IBM Big Blue in recognition of IBM's common use of blue in products, packaging, and logo. In 2012, the company was ranked as follows: #2 largest U.S. firm in terms of number of employees (433,362) (Fortune) #4 largest in terms of market capitalization (Fortune) #9 most profitable (Fortune) #19 largest firm in terms of revenue (Fortune) Globally, the company was ranked the #31 largest in terms of revenue by Forbes. #1 company for leaders (Fortune) #1 green company worldwide (Newsweek) #2 best global brand (Interbrand) #2 most respected company (Barron's) #5 most admired company (Fortune) #18 most innovative company (Fast Company). The financial growth of the company in terms of stock prices is as depicted in the chart (Figure 3) below:

Figure 3: Financial growth of IBM IBM has been a pioneer from its inception and has released a whole host of products in the market. Some of its better known products are as brought out below:-


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Strategic Change and Flexibility 2013 S.No. Products 1 Keypunches and verifiers 2 Sorters, Statistical, and derived machines 3 Collators 4 Reproducing Punch, Summary Punch, Gang Punch, and derived machines 5 Calculating devices 6 Other Unit Record Equipment 7 Typewriters and dictating equipment 8 Copier/Duplicators 9 World War II ordnance and related products 10 IBM telephone switching systems 11 Computers based on vacuum tubes, the ASCC and the SSEC (1940s, 1950s) 12 Computers based on discrete transistors (1960s) 13 Solid state computers 14 Computers based on SLT or discrete IC CPUs (1964 to 1989) 15 Computers based on microprocessor CPUs (1981 to present) 16 Computers 17 Supercomputers 18 Microprocessors 19 Solid State Computer peripherals 20 Punched card and paper tape equipment 21 Printer/plotter equipment and terminals 22 Data storage units 23 Core storage 24 Magnetic drum storage 25 Direct Access Storage Devices 26 Magnetic tape storage 27 Optical storage 28 Storage networking and virtualization 29 Coprocessor units 30 Modems 31 Embedded systems 32 Airline Reservation Systems 33 Avionics and space systems 34 Bank and finance 35 Document processing


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Strategic Change and Flexibility 2013 36 Educational 37 Industry and manufacturing 38 Medical/science/lab equipment 39 Retail/point-of-sale (POS) 41 Telecommunications terminals 41 Computer software 42 Operating systems 43 Utilities and languages 44 Middleware and applications 45 Data centers 46 Services

Business analytics and optimization Customer relationship management Strategy and transformation Supply chain

A snapshot of IBMs as brought out above, gives the impression that the company has been a great company since its inception and has only grown from strength to strength over its many decades of operation. While this is largely true, the company being in the high technology and innovation area has had to weather many a crisis. The next section will bring out the major crisis that occurred in the company and how it was able to transform itself from the brink of closure.

1.3 History of IBM Select chronology of the important events in the history of IBM is listed below: 1911 Computing Tabulating Machines (CTR) was formed in 1911 via a merger of International Time Recording Company, Computing Scale Company and the Tabulating Machines Company.

1924 CTR was renamed International Business Machines (IBM)

1956 Tom Watson Jr. succeeded his father as CEO in 1956 and led IBM into the digital computer age. This was a major turnaround for the company.


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1964 IBM announced its most important product to date, System/360, which was the original name of IBMs family of mainframe computers. System/360 in the 1960s and 1970s was as revolutionary as Windows was to Microsoft in the 1980s and 1990s. The introduction of this product had a devastating effect on the IBMs competitors. IBM benefited from the major technological shifts and brought entirely new capabilities for customers to the market. For IBM the integrated circuit was the most important technology shift, though the circuit had been invented elsewhere. This invention made computers significantly smaller, more reliable and cheaper, making mainframe computers available for a large group of customers.

1980s IBM was probably the best example of a vertically integrated corporation: almost all stages of design, production and commercialization of computers remained internal to the firm (Ernst 2003). IBM was the world leader in computer manufacturing and it seemed that the companys leadership position would remain unchallenged for many years to come.

1.4 The beginning of downfall

Since the position of IBM had been unchallenged for so many years, the company had not developed sophisticated strategies to cope with fierce competition.

With the advent of the next big thing, which was the rise of UNIX, IBM was under serious attack. UNIX was an open operating system, supported by Sun and Hewlett-Packard, which offered customers the first attractive alternative to IBMs mainframe computers.

IBM also failed to see that personal computers (PCs) would be widely used by business and enterprises, and did not accord priority to the PC market. IBM did not see PCs as a major challenge to IBM core enterprise computing market.

In addition, IBM gave control over the operating system to Microsoft, the microprocessor to Intel and in the early nineties IBMs leadership position started to crumble. Fujitsu, Digital Equipment and Compaq were the competitors for hardware components and were catching up fast. EDS and Andersen Consulting were gaining ground in


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information services, while Intel and Microsoft were more profitable in the PC market than IBM at that time.

The once so comfortable position of Big Blue was fading away at a very rapid pace. The strategy of IBM at different points in time can be depicted through the following figure:

Figure 4 (Source: IBM's Decade of Transformation: Turnaround to Growth, LYNDA M. APPLEGATE, ROBERT AUS TIN, ELIZABETH COLLINS, Harvard Business School, 9-805-130Rev. July 08, 2009)

2 Crisis In the early 1990s, many Wall Street analysts had written off IBM as a company; its stock price was the lowest it had been since 1983. By 1992, more than 60,000 jobs had been lost and, in spite of John Akers (the CEO until 1993) efforts at transformation, the company was failing and was on the verge of extinction by the end of 1994. IBM was once the poster of American dominance. However by 1994, the company had lost almost $16 Bn due to the changing dynamics in the IT Industry. In 1994, the company


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had enough cash to sustain for just another 100 days. When Lou Gerstner took over in 1993, the services unit was 27 percent of revenues and the software unit didnt even exist. The reason behind sudden slide in fortunes was attributed to its elephantine size, a laidback corporate culture and inability to integrate the business effectively to offer a bouquet of solutions to its customers.

During the 1980s and early 1990s, IBM was thrown into turmoil by back-to-back revolutions. The PC revolution placed computers directly in the hands of millions of people. And then, the client/server revolution sought to link all of those PCs (the "clients") with larger computers that laboured in the background (the "servers" that served data and applications to client machines).

Both revolutions transformed the way customers viewed, used and bought technology. And both fundamentally rocked IBM. Businesses' purchasing decisions were put in the hands of individuals and departments - not the places where IBM had long-standing customer relationships. Piece-part technologies took precedence over integrated solutions. The focus was on the desktop and personal productivity, not on business applications across the enterprise. Cost management and streamlining became a chief concern. And IBM considered splitting its divisions into separate independent businesses.

2.1 A Failure at Fundamentals

In the 1980s, IBMs profit margins suffered a steep decline. Because the companys costs remained level, profits dropped. Critics of the company have widely attributed IBMs decline to two factors. During this period, IBM became a follower of technological development, more so than in the past. Such a change was marked because, in the 1960s, IBM had led the information technology industry with a grand innovation the 360 Series of computers. Also, the company displayed a surprising naivet in its partnering strategies, giving Microsoft and Intel extremely profitable portions of the industry while choosing to retain less profitable portions for itself.


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Though these factors are very important, they are not the root causes of IBMs difficulties. For example, the decline of profit margins was a result of falling customer interest in mainframe computers. That IBM executives failed to foresee this was the result of two more basic factors. First, IBMs enormous R&D effort of the 1970s should have been directed at the microcomputer, which was about to burst onto the technological scene bringing a future full of personal computers, networks, and computer servers. Instead, the company squandered R&D on building a larger mainframe. Second, IBM shifted its relationships with customers and lost touch with their interests and concerns. Thus a partial explanation of IBMs difficulties is that its profit margins on mainframes declined precipitously.

IBMs success was based on two commitments; they were not formal contracts but understandings based on repeated assertions. To its customers, IBM had promised effective, high-quality technology and service support, maintained by a close, continuing relationship. IBM rented equipment to customers and was their partner in data processing and office work. For a large company wanting to ensure that its information systems were up-to-date (though not necessarily state-of-the-art) and reliable, IBM was the answer. When in doubt, a chief information officer could buy IBM and be confident that the choice would not be challenged.

2.2 Breaking Two Promises

During the late 1980s and early 1990s, IBM abrogated its contract with both its customers and its employees. Although IBM had assured its customers a partnership, it broke that promise in order to finance a substantial expansion. At the time, top executives didnt realize that the company was altering its contract with customers. When they later realized it, they didnt care. When the expansion failed to materialize, IBM broke its promise of security to employees in order to bail out its shareholders. Both factors doomed IBMs business to stagnation in the first half of the 1990s and left its business prospects uncertain for the remainder of the decade. When IBM defaulted on its commitments to customers, they grew angry at its arrogance for giving them equipment that did not work properly, was delivered late, or did not meet expectations in


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other ways and at its failure to keep up with emerging technology from other vendors. The company was even castigated for failures in its service, something that was previously unheard of.

When IBM defaulted on its commitments to its employees, many became disillusioned and ineffective. Managers had let thousands believe that employment security had little connection with performance. In attitude surveys, top performing IBM employees complained bitterly that the companys management was far too tolerant of poor performers. Had managers dismissed ineffective employees at less than half the rate that is common in other computing firms, IBMs massive financial losses in the 1990s for early retirements and layoffs could have been significantly reduced.

2.3 A Failure in Strategic Planning The sequence of events in which IBM executives created the companys financial disaster in the early 1990s began a decade earlier. In 1980, IBM executives reviewed current trends and made one of the largest miscalculations in business history. They concluded that IBM should continue building itself to support $100 billion in sales by fiscal 1990. This target represented a doubling of then-current revenues but was seen as an in 1980, IBMs first published corporate strategy had several key elements: to grow the business, to be the most profitable firm in the industry, and to compete where it chose (that is, not to be all things to all customers). That none of these items focused on the customer symbolized the companys growing hubris. It would do business on its own terms, not on those of the customer or the marketplace.

To fund the new capacity, IBM needed more investment dollars. It accelerated its move from rentals to sales. Specifically, it pushed sales financed by leases to its customers from IBM or from financial institutions. Before the end of the 1980s, U.S. firms did not have to consolidate their leasing/finance subsidiaries (even if wholly owned), so that the corporation could account for the leased equipment as sales. Thus the shift from rentals to leases was shown as an increase in sales. This decision, seen as a financial move to raise cash for investment, had an enormous adverse impact on IBMs relations with its


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customers. IBM managers responded to the forecast and related growth plan by hiring tens of thousands of employees and adding billions of dollars in plant and equipment to IBMs balance sheet. In retrospect, they were wildly optimistic, even negligently so. Building and equipment contractors recall IBMs lavish spending, which marked a great capacity build-up. In Fishkill, New York, IBM quickly built, at enormous cost, semiconductor plants with the super-clean rooms needed for manufacturing. Two years after they opened, the plants were shut down. In California, laboratories were built at breakneck speed. They were opened, then closed, dismantled, and rebuilt. Mistakes costing tens of millions of dollars were made.

To finance such extravagance, IBM accelerated a transition that, over almost two decades, took it from a revenue stream that generated 85 percent by renting (it had been 95 percent) to one of 12 percent renting and 88 percent customer purchases. The company was abandoning the foundation of guaranteed revenue: the rental base.

In 1985, a peak year for IBMs revenue and profits, few recognized that the strong performance was largely a bubble from the sell-off of rental equipment. The continuous revenue stream from renting had shrunk to only about 12 percent of the total. Added to this was another 30 percent of revenue from contract maintenance, so that some 42 percent remained secure from the need to be recreated by sales each year. By the early 1990s, renting was only about 4 percent, and maintenance, about 29 percent. IBM had converted its stable revenue stream to one that fluctuated with the economy and with the intensity of industry competition. The customer loyalty to IBM that renting had maintained and the stable revenue stream that cushioned the firms finances through the business cycle were both cast aside. In effect, through the 1980s, IBM managers sold off one of its greatest business assets, its rental base, and deluded themselves into thinking that business had never been better. They liquidated the company without realizing it.

In the mid-1980s a new model started to appear. It argued that vertical integration was no longer the way to go. The new breed of successful information technology companies would provide a narrow, horizontal slice of the total package. So companies


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that sold only databases began to emerge, as well as companies that sold only operating systems that sold only storage devices, and so on. Suddenly the industry went from a handful of competitors to thousands and then tens of thousands, many of which sold a single, tiny piece of a computer solution.

It was in this new environment that IBM faltered, and so it was logical for many of the visionaries and pundits, both inside and outside the company, to argue that the solution lay in splitting IBM into individual segments. This conclusion, however, appeared to me to be a knee-jerk reaction to what new competitors were doing without understanding what created fragmentation in the industry.

Two things really drove the customer to support this new, fragmented supplier environment:

Customers wanted to break IBMs grip on the economics of the industryto rip apart IBMs pricing umbrella, which allowed it to bundle prices and achieve significantly high margins.

The customer was increasingly interested in delivering computing power to individual employees (the term was distributed computing, in contrast to the mainframes centralized computing).

2.4 Crucial Questions about IBMs Experience

Was IBM a victim of its own success? The answer is certainly yes. Intoxicated with good fortune, the company overreached in the 1980s and paid a bitter price in the 1990s. IBMs top executives attempted to manage the corporation from the top, despite its great size and complexity, and in so doing exceeded their capabilities. But IBM is a closely integrated company, operates in only one industry, and has much synergy between its various businesses. It requires a high degree of central coordination and direction. It needs a judicious blend of decentralized operating management and centralized strategic direction. In the 1980s, IBMs executives failed to get the mixture right.


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IBMs basic management techniques were obsolete in the modern work environment. IBMs lengthy study of decisions before they could be made, its emphasis on consensus, its interminable executive meetings that focused on ideas and plans, not operating results, its full employment practice that became a refuge for poor performers all were rendered obsolete in a more competitive, rapidly changing business environment. IBM chief executives were too inbred, too steeped in the arrogance of success, and too certain of their own judgment in a time of challenge. IBMs culture contributed greatly to each shortcoming. Why have large companies like IBM been unable to convert the strengths of bigness into marketplace success?

They base overly optimistic strategies more on pride than on reality. They focus on financials that inadvertently cripple other functions, including

production and marketing. Top executives of large firms believe that they can dictate what customers should

buy, only to discover they cannot. Large U.S. businesses have broken their pact with employees and, when they

lose employee loyalty, can find nothing to replace it. Top executives flee into reorganizations when faced with strategic crises, leaving

the crises unresolved.

The major problems that IBMs new CEO Louis V. Gerstner, Jr in 1993 identified are as follows:- While IBM had extremely bright people who were very committed, and, at times,

quite convinced of what needed to be done, there was little true strategic underpinning for the strategies discussed. Not once was the question of customer segmentation raised. Rarely did they compare their offerings to those of their competitors. There was no integration across the various topics that allowed the group to pull together a total IBM view.

Loss of customer trust supported by some disturbing customer ratings on quality.


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Prices of products were extremely high and did not consider market realities or customer requirements. In fact, existing customers were being milked since they had invested substantially into IBM products and now could not shift easily to products of other competitors.

The mindless rush for decentralization, with managers leaping forward saying make me a subsidiary.

Cross-unit issues not being resolved quickly. Major tension in the organization over who controlled marketing and sales

processes. IBM product salespeople were legendary for going to customers and denigrating another IBM product that might serve in equal capacity in a customer solution. In fact, IBM divisions would bid against one another, and a customer often got multiple IBM bids.

A confusing and contentious performance measurement system, causing serious problems when closing sales with customers.

A bewildering array of alliances that didnt make any sense and therefore customer requirement for integration was ignored.

Research-and-development units would hide projects they were working on, so other parts of the company would not learn of them and try to take advantage of their knowledge. It went on and on in a staggering array of internal competition. Teamwork was not valued, sought, or rewarded.

Bureaucracy at IBM and it was extremely difficult to get integrationintegration of a solution or integration across geographies.

To its employees, IBM had promised employment security. Once a person had a job with IBM, he or she was set for life. Benefits were good, the salaries competitive, and the working environment excellent but there was no requirement or benchmark for performance. Bonuses were paid to executives based solely on the performance of their individual units. In other words, if your operation did well but the overall corporation did poorly, it didnt matter. You still got a good bonus. This encouraged a me-centered culture instead of team building culture.


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A high power Management Committee (MC) consisting of six persons which was the ultimate position of power that every IBM executive aspired to as the apex of his or her career. However, over time, IBM people had learned how to exploit the system to promote their own agendas. So by the early 1990s a system of true contention was apparently replaced by a system of pre-arranged consensus. Rather than have proposals debated, the corporate staff, without executives, worked out a consensus across the company at the lowest possible level. Consequently, what the Management Committee most often got to see was a single proposal that encompassed numerous compromises. Too often the MCs mission was a formalitya rubberstamp approval.

While the corporation could add up its numbers quite well in total, the internal budgeting and financial management systems were full of holes. There was not one budget but two or three, because each element of the IBM organization matrix (e.g., the geographic units versus the product divisions) insisted on its own budget. As a result, there really wasnt single, consolidated budget. Allocations were constantly debated and changed, and accountability was extremely difficult to determine.

IBMs communications department staffed for the most part with well-meaning but untrained employees was in shambles. For decades the position had been a rotation slot for sales executives being groomed for other top jobs. Typically, IBM executives believed that the only real problem the company had was the daily beating it was getting in the press. They felt that if we had more positive stories in the media, IBM would return to profitability and everything would be normal again.

IBM was bloated and inefficient. It had piled redundancy on top of redundancy. It was running inventory systems, accounting systems, fulfilment systems, and distribution systems that were all, to a greater or lesser degree, the mutant offspring of systems built in the early mainframe days and then adapted and patched together to fit the needs of one of twenty-four independent business units. Instead of the typical one Chief Information Officer for the company, it had by actual count, 128 people with CIO in their titlesall of them managing their own local systems architectures and funding home-grown applications.


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Similarly, If there was a financial issue that required the cooperation of several business units to resolve, there was no common way of talking about it because they were maintaining 266 different general ledger systems. At one time HR systems were so rigid that you actually had to be fired by one division to be employed by another.

One would expect to find the best internal IT systems in the world within IBM. Though IBM was spending $4 billion a year on this alone, yet they didnt have the basic information needed to run business. The systems were antiquated and couldnt communicate with one another.

Branding of the company was chaotic. IBM executives had their own advertising budgets, their personal agencies, and the discretion to order up an ad anytime they wanted to do so. One month thered be no IBM advertising in important industry magazines; the next month they had so many pages that it seemed as if IBM were sponsoring a special issue. The latter was especially true in November and December, when marketing departments wanted to spend leftover dollars in their budgets. Software, to IBM, was simply one part of a hardware-based offering. Since every computer needs an operating system, and most need databases and transaction processing capability, IBM built many of these software assets but never viewed them as a unique business. Rather, they were buried inside IBM hardware or sold as an add-on feature. And critically, none of this software worked with computers made by manufacturers other than IBM. IBM didnt have a software mentality, much less a real software business. Most of what they had was built for the mainframe world at a time when the bulk of the customer investment was in distributed systems.

IBM had 4,000 software products, all of which were branded with separate names (most of which were unmemorable and un-rememberable). They were made in more than thirty different laboratories around the world. There was no management system, no model for how a software company should run, and no skills in selling software as a separate product.


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2.5 Summary How could IBMs failures be summarised? First and foremost, IBMs difficulties reflected a failure to manage fundamentals. Any business depends on two relationships: those with customers and those with employees. Everything else, no matter how significant including shareholder relations just gets in the way. Every executive decision should be made in a context of satisfying customers and employees. Because employee conduct is crucial to customer satisfaction both in service and product a company cannot destroy the loyalty of its employees without suffering serious repercussions. When loyalty has been lost, a company must revive performance by rewarding employees for success immediately, not in the long term as employment security does. Large companies can survive and prosper only if they address these fundamental issues.

3 Revival 3.1 Leadership The board of IBM did an incredibly smart thing. They hired Lou Gerstner. Gerstner had never run a technology company.

But in his previous experiences as part of senior management at RJR Nabisco and American Express, he had come to realize the value of totally integrated IT services. He recognized that one of IBM's enduring strengths was its ability to provide integrated solutions for customers - someone to represent more than piece parts or components. Splitting the company would have destroyed a unique IBM advantage.

Gerstner understood that the long term potential for IBM would be in its ability to deliver complete IT solutions that bundled hardware, software (IBM is still one of the largest companies in the world) and services as customized and ultimately very profitable, packages to corporate customers. Though he didnt have detailed information into the problems within IBM, he was aware of some fundamental problems like poor customer service which he had faced while being the head of RJR Nabisco and American Express.


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So in his very first speech to the executives on the day of his taking over as CEO of IBM, he clearly spelt out his functioning style, his management philosophy and practice which were as follows: I manage by principle, not procedure. The marketplace dictates everything we should do. Im a big believer in quality, strong competitive strategies and plans, teamwork,

payoff for performance, and ethical responsibility. I look for people who work to solve problems and help colleagues. I sack politicians. I am heavily involved in strategy; the rest is yours to implement. Just keep me

informed in an informal way. Dont hide bad informationI hate surprises. Dont try to blow things by me. Solve problems laterally; dont keep bringing them up the line.

Move fast. If we make mistakes, let them be because we are too fast rather than too slow.

Hierarchy means very little to me. Lets put together in meetings the people who can help solve a problem, regardless of position. Reduce committees and meetings to a minimum. No committee decision making. Lets have lots of candid, straightforward communications.

I dont completely understand the technology. Ill need to learn it, but dont expect me to master it. The unit leaders must be the translators into business terms for me.

Once he formally took over and met hundreds of executives, employees, customers, Board Members, Heads of rival companies like Bill Gates etc, he was able to get a hang of some of the basic problems within IBM. He understood the problems that were highlighted in the previous chapter, he assimilated and reflected over what needed to be done and took some critical decisions: Keep the company together and not spin off the divisions. Change their fundamental economic model. Reengineer how they did business. Its priorities would start with the customer.

Everything at IBM would begin with listening to customers and delivering the performance they expected.

Sell underproductive assets in order to raise cash.


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Reinvest in the mainframe. Remain in the core semiconductor technology business. Protect the fundamental R&D budget. Also within the first few weeks he did a number of very un-IBM things as follows: He made a big mainframe pricing announcement stating that mainframe prices,

both hardware and software, were coming down, and coming down quickly. The price of a unit of mainframe processing moved from $63,000 that month to less than $2,500 seven years later, an incredible 96-percent decline. Mainframe software price/performance improved, on average, 20 percent a year for each of the next six years. This program, probably more than any other, saved IBM. Over the short term it raised the risk of insolvency as it drained billions of dollars of potential revenue and profits from the company. However, the plan did work. IBM mainframe capacity shipped to customers had declined 15 percent in 1993. By 1994, it had grown 41 percent, in 1995 it had grown 60 percent, followed by 47 percent in 1996, 29 percent in 1997, 63 percent in 1998, 6 percent in 1999, 25 percent in 2000, and 34 percent in 2001. This represented a staggering turnaround. While pricing was not the only reason IBM survived, it would not have happened had they not made this risky move.

The need for coopetition - whereby they both cooperate and compete with companies like HP, Sun Microsystems, Microsoft etc while providing integrated solutions to the customer.

Laid-off nearly 100,000 employees, this from a company that had previously enjoyed an employed-for-life reputation.

Effectively used the power of the internet as a communications vehicle in his efforts to change the internal culture and the external perceptions of the company.

Introduced a casual dress code, which resulted in the formally conservatively-dressed executives, uncomfortably wandering around IBMs offices in their weekend golfing outfits.


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Consolidated all the companys advertising, which was being handled by more than 80 agencies around the world, into a single one, Ogilvy & Mather, New York, who he had worked with during his time at American Express.

A Solutions for a Small Planet campaign, which completely flipped the uncaring Big Blue perception of the company on its head by demonstrating how IBM was helping solve the day-to-day problems of its customers, large and small, around the world

Cancelled the no-alcohol on the premises policy. Hired a true PR professional in IBMs history to hold the top communications job.

3.2 Steps taken to change the way IBM worked and its culture: Over the next couple of years, they implemented the following far reaching measures:

3.2.1 Capitalising the Business They sold 8,000 acres of undeveloped land. They sold first-class real estate that

They didnt need, like the tallest building in Atlanta and the corporate headquarters in New York City. They hired outside providers and cut full-time staff to 42.

They sold much of the corporate airplane fleet. Massive investments in expensive training centres which housed and fed tens of

thousands of people a year were drastically cut. In 1993 they had four such private facilities within an hours drive of the Armonk headquarters.

Over the previous decade, IBM had amassed a large and important fine-art collection, most of which was stored in crates out of sight from anyone. Some of it did show up now and again in a public gallery in the IBM tower on 57th Street in Manhattan. They had a curator and a staff who maintained this collection. In 1995 the bulk of it was sold at auction at Sothebys for $31 million.

3.2.2 Improving Internal Processes IBMs expense-to-revenue ratio was wildly out of range with those of their

competitors. On average, competitors were spending 31 cents to produce $1 of


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Revenue while IBM were spending 42 cents for the same end. When multiplied, this inefficiency times the total revenue of the company, they discovered that they had a $7 billion expense problem! Since the repositioning of the mainframe was a long-term challenge but the only way to save the company, at least in the short term, was to slash uncompetitive levels of expenses. So in 1993 they began what ultimately became one of the largest, if not the largest, reengineering projects ever undertaken by a multinational corporation. It would last a decade and, as it unfolded, change almost every management process inside IBM. At any given time, more than sixty major reengineering projects were under wayand hundreds more among individual units and divisions. Most of the work centered on eleven areas. The first six we called the core initiatives, meaning those parts of the business that dealt most with the outside world: hardware development, software development, fulfilment, integrated supply chain, customer relationship management, and services. The rest focused on internal processes, called enabling initiatives: human resources, procurement, finance, real estate, and surprisinglyat least at first glanceinformation technology. From 1994 to 1998, the total savings from these reengineering projects was $9.5 billion. Since the reengineering work began, they achieved more than $14 billion in overall savings. Hardware development was reduced from four years to an average of sixteen monthsand for some products, even faster. They improved on-time product delivery rates from 30 percent in 1995 to 95 percent in 2001, reduced inventory carrying costs by $80 million, write-offs by $600 million, delivery costs by $270 million and avoided materials costs of close to $15 billion.

They had hundreds of data centers and networks scattered around the world; many of them were largely dormant or being used inefficiently. They saved $2 billion in IT expenses by the end of 1995 by going from 155 data centers to 16, and consolidated 31 internal communications networks into a single one.

Once he had decided that IBM would not be broken into smaller pieces, they threw out the investment bankers who were arranging IPOs of all the pieces of the enterprise. They sacked the accountants who were creating official financial statements required in order to sell off the individual components. They stopped all


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the internal activities that were creating separate business processes and systems for each of these units, all of which were enormous drains of energy and money. For example, even in the midst of financial chaos, they had managed to hire more than seventy different advertising agencies in the United States alone. Human resources people were willy-nilly changing benefits programs so that if an employee left one IBM business unit for another, it was like entering another country, with different language, currency, and customs.

3.2.3 Customer Focus He announced Operation Bear Hug. Each of the fifty members of the senior

management team was to visit a minimum of five of IBMs biggest customers during the next three months. The executives were to listen, to show the customer that they cared, and to implement holding action as appropriate. Each of their direct reports (a total of more than 200 executives) was to do the same. For each Bear Hug visit, they had to send a one to two page report to the CEO and anyone else who could solve that customers problems. These meetings became a major step in reducing the customer perception that dealing with IBM was difficult. Bear Hug became a first step in IBMs cultural change, that emphasized that they were going to build a company from the outside in and that the customer was going to drive everything they did in the company. It created quite a stir, and when people realized that the CEO really read every one of the reports, there was quick improvement in action and responsiveness.

With the rise of the Internet and network computing the company experienced another dramatic shift in the industry. But this time IBM was better prepared. All the hard work IBM had done to catch up in the client/server field served the company well in the network computing era. Once again, customers were focused on integrated business solutions - a key IBM strength that combined the company's expertise in solutions, services, products and technologies. In 1995, Gerstner articulated IBM's new vision - that network computing would drive the next phase of industry growth and would be the company's overarching strategy. That year, IBM acquired Lotus Development Corp., and the next year acquired Tivoli Systems Inc.


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Services became the fastest growing segment of the company, with growth at more than 20 percent per year.

In May 1997, IBM dramatically demonstrated computing's potential with Deep Blue, a 32-node IBM RS/6000 SP computer programmed to play chess on a world class level. In a six-game match in New York, Deep Blue defeated World Chess Champion Garry Kasparov. It was the first time a computer had beaten a top-ranked chess player in tournament play, and it ignited a public debate on how close computers could come to approximating human intelligence. The scientists behind Deep Blue, however, preferred to stress more practical concerns. Deep Blue's calculating power - it could assess 200 million chess moves per second - had a wide range of applications in fields calling for the systematic exploration of a vast number of variables, among them forecasting weather, modelling financial data and developing new drug therapies and consequently new customers.

As the decade drew to a close, IBM stood on the threshold of the new century having re-established itself as a leading information technology innovator. Its leadership helped create the e-business revolution. And it had successfully transformed itself, achieving an impressive business turnaround. As the new century opened, IBM moved confidently into a future it helped create, one that is linked to the ubiquitous and surging presence of the global networks that are connecting every computer, and soon perhaps, every electronic device in the world.

3.2.4 Employee Communications Opened up a clear and continuous line of communications with IBM employees. An essential element of any successful corporate transformation is public acknowledgment of the existence of a crisis. If employees do not believe a crisis exists, they will not make the sacrifices that are necessary to change. Nobody likes change be it a senior executive or an entry-level employee, change represents uncertainty and, potentially, pain. So there must be a crisis, and it is the job of the CEO to define and communicate that crisis, its magnitude, its severity, and its impact. Just as important, the CEO must also be able to communicate how to end the crisisthe new strategy, the new company model, the new culture. All of this takes enormous commitment from the CEO


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and proper communication becomes an absolute essentiality. No institutional transformation takes place, without a multi-year commitment by the CEO to put himself or herself constantly in front of employees and speak in plain, simple, compelling language that drives conviction and action throughout the organization. The employees through constant communication bought into the CEOs belief that the unique opportunity for IBM, the distinctive competence, was an ability to integrate all the parts for their customers.

He declared war on the geographic fiefdoms. They decided they would organize the company around global industry teams. With the Citibank global model in mind, he along with his executives built a customer-oriented organization which could support them globally. They broke their customer base into twelve groups: eleven industries (such as banking, government, insurance, distribution, and manufacturing) and a final category covering small- and medium-size businesses.

3.2.5 Reviving the Brand A successful company must have a customer/marketplace orientation and a strong marketing organization. Thats why they also had to fix and focus IBMs marketing efforts. They decided to consolidate all of IBMs advertising relationships into a single agencynot just in the United States, but around the world. At the time, it was the largest advertising consolidation in history and selected Ogilvy & Mather, which had solid worldwide expertise and experience. That was exactly what IBM needed, since the agency would manage advertising for all of their products and services, as well as the overall brand, around the world. Solutions for a Small Planet, featuring an international cast, from Czech nuns to old Parisians speaking in their native language with all the dialogue subtitled were highly acclaimed. The campaign reaffirmed important messages: IBM was global, and that they were staying together as a world-class integrator. At the same time, it signalled that IBM was a very different company - able to change and make bold decisions, just as they had done with the decision to consolidate; able to move quickly; able to take risks and do innovative things; and we were more accessible. The campaign humanized the IBM brand.


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3.2.6 Compensation Philosophy Earlier compensation at all levels consisted predominantly of salary. Relatively little was paid in bonus, stock options, or performance units and there was little differentiation in the system and annual increases were typically given to all employees except those rated unsatisfactory. There was very little variance in the size of the annual increase between a top-ranked and a lower-ranked employee. Increase sizes were in a small band around that years average. For example, if there was a 5 percent increase in budget, actual increases fell between 4 percent and 6 percent. All employee skill groups (such as software engineers, hardware engineers, salesmen, and finance professionals) were paid the same within a salary grade level, regardless of the fact that some skills were in higher demand externally. There was also a heavy emphasis on benefits. IBM was a very paternal organization and provided generously for all forms of employee support. Pensions, medical benefits, employee country clubs, a commitment to lifelong employment, outstanding educational opportunities - all were among the best of any United States company. However, this was not sustainable in the new scenario where IBM was losing cash very fast. The new CEO made four major changes to the compensation system as follows:

Old System New System Commonality Differentiation Fixed rewards Variable rewards Internal benchmarks External benchmarks Entitlement Performance

The idea was to make the employees to think and act like long-term shareholders - to feel the pressure from the marketplace to deploy assets and forge strategies that create competitive advantage. The market, over time, represents a brutally honest evaluator of relative performance, and this was a strong incentive for employees to look at their company from the outside in. People had to understand that they all benefited when IBM as a whole did well and, more often than not, lost out when they functioned as a disjointed operation. Consequently, big changes were made to the IBM Stock Options Program. Stock options were offered to tens of thousands of employees for the


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first time. In 1992, only 1,300 almost all high-level executives received stock options. Nine years later, 72,500 employees had received options, and the number of shares going to nonexecutives was two times the amount executives received. Also beginning in 1994, all executives would have some portion of their annual bonus determined by IBMs overall performance. The most unusual part of this plan involved the highest-level executives, including those who ran all their business units were paid bonuses based entirely on the companys overall performance. In other words, the person running the Services Group or the Hardware Group, had his or her bonus determined not by how well the unit performed, but by IBMs consolidated results. Executives at the next level down were paid 60 percent based on consolidated IBM results, 40 percent on their business unit results. The system cascaded down from there. The variable pay amounts were also tied directly to overall IBM performance to ensure that everybody knew that if they worked hard at collaboration with colleagues, doing so would pay off for them. The various initiatives taken in the 1990s not helped IBM survive the crisis from the brink of disaster but also achieve even greater heights in 2012 as brought out in the figures 4, 5 and 6 below:

Figure 4


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Figure 5

Figure 6 So to summarise IBM didnt lack smart, talented people. Its problems werent fundamentally technical in nature. It had file drawers full of winning strategies. Yet, the


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company was frozen in place. What it needed was someone to grab hold of it and shake it back into action. The new CEO Louis Gerstner brought in that kind of strategic and cultural change that helped IBM reach greater heights again just being more attentive to the customer, ensuring faster cycle time, faster delivery time, and a higher quality of service.

4 Learnings Prof. Sushil in his paper A Flexible Strategy Framework for Managing Continuity and Change has identified Continuity forces in any company as depicted in the figure below:

Figure 7

It is a paradox that the forces that contribute to better performance in the current situation become counter - productive to lead change. Some of the important continuity forces are: large customer base, huge infrastructure, investment in technology, well established culture, core competence, supply chain and distribution network and higher level of business performance. These were some of the reasons for the downward spiral of the business performance of IBM. The new CEO targeted a few of these factors to bring about a change in the fortune of the organisation. The changes are highlighted in Red in the figure 8 below:


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Figure 8 As explained in the previous chapter the new CEO brought in the following changes with regard to continuity forces as follows: Maintained core competence but tweaked it to provide integrated solutions to customers Improved the distribution network by integrating IT systems dealing with finance,

communication so that standard solutions are provided to particular types of problems irrespective of which country the customer is located in.

Changed the bureaucratic culture, the company had grown into. By changing the culture and the method of operations, he ensured performance of the

company improved considerably with faster cycle times, faster delivery times.

The 'actors' and `processes' linked with the enterprise create forces to maintain continuity, the continuously changing business situation, in particular due to globalization, generates forces that direct the organizations to strive for change. The situational change forces could be both external and internal. The external change forces may emanate from changes on political, economic, social and/or technological fronts, whereas the internal change forces may be because of poor performance (low profitability, loss of market share), change in top management, and so on. The change forces that have been identified by Prof. Suhil in the paper are depicted


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in the Figure 9 below:

Figure 9 Like in the case of Continuity Forces, the new CEO targeted a few of the Change Forces to improve the overall status of the company. The changes are highlighted in Red in the figure 10 below

Figure 10 By concentrating on only a few of the factors for initiating change, the CEO ensured that the organization while reaching greater heights did not lead into chaos. As explained in the


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previous chapter the CEO brought in the following changes with regard to Change forces as follows: Changed customer perception of the company by launching Operation Bear hug. This

operation also helped understand customer needs thoroughly and acting accordingly. The Company embraced Globalisation by integrating all divisions across various

countries to provide integrated solutions. Tapped into New Opportunities by moving into the Services Sector providing integrated

solutions to customers.

Acquired Lotus Development Corp. and Tivoli Systems Inc to increase its hold in the Services sector.

It created the e-business revolution by linking itself to the ubiquitous and surging presence of the global networks that are connecting every computer and smart devices.

The interaction between the continuity and change forces can be represented through the flowing stream strategy crystal as depicted in the following figure:

Figure 11


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The relationship of elements in flowing stream strategy crystal are described in the following table Relationship Interaction Continuity Forces Customer Factors

Increasing competition puts pressure on enlarging and maintaining the customer base. To meet the ever changing customer needs and expectations in terms of product choices, low cost and delivery mechanisms IBM will have to effectively utilize its legacy of providing economical solutions by maintaining and extending its core competency to provide customized as well as integrated solutions to the customers. For this they may optimally utilize their entrenched infrastructure

Continuity Forces Enterprise Factors

The enterprise factors are critical in shaping the strategy of an organization. This would require IBM to 1.To continue its focus on performance for achieving the goals related for financial performance 2.Customer satisfaction will depend to a large extent on the work culture prevalent in IBM and the integrated solutions provided to customers. 3.Productivity improvement will be determined by the effectiveness of the existing technology and the global supply chain and distribution network

Continuity Forces Change Forces

The channel of divert was initially used by IBM but with the maturity in the strategic performance it has started adopting the strategy of integration.

Change Forces Customer Factors

Customer factors are the one of the main forces to drive the change. In case of IBM the customer factors like connectivity, service and speed will require a shift to meet the challenges presented by change forces of new and better technologies, customer needs, e-Business and globalisation


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Change Forces Enterprise Factors

The enterprise factors are the most important for determining how effectively IBM can handle the change forces. Factors like flexibility will have to be effectively utilized in the face of changing business scenario due to globalization. Similarly the risk factor will depend on the level of competition being faced in new business environment. Development and adaptation of new technologies will drive the learning level requirements of IBM. Mergers and Acquisitions would need impetus to acquire new technology bases and extend the customer base.

Enterprise factors Customer Forces

1 The financial performance and risk level of business will determine the price of the product offered to the customers 2 Customers satisfaction would depend on the flexibility in terms of product choices, customization, integrated services and the level of service factor will govern 3 Productivity and Quality parameters determine the Delivery mechanisms 4.Connectivity and speed will to a large extent depend on the learning level of the IBM and its ability to be flexible for providing better IT solutions


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The strategies adopted by the IBM to balance the change forces and continuity forces can be represented through the strategy formulation matrix (figure 12) given below:

Figure 12

Strategies for confluence of continuity and change could be generated by understanding the balance of continuity and change forces. As per the C-C matrix, there can be four possible combinations of the opportunities or innovative technological change and can be metaphorically named according to the characteristics of that category. The combinations are depicted in Figure 1 in section 1. Therefore, if we have to map the transformation of IBM, we could say that the company moved from being a Tree to a Flowing Stream:


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Figure 13


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References: 1. A Flexible Strategy Framework for Managing Continuity and Change, Prof. Sushil

GIFT journal, International Journal of Global Business and Competitiveness 2005, Vol. 1, No. 1, pp 22-32

2. Lou Gerstner, Who Says Elephants Cant Dance? Inside IBMs Historic Turnaround (New York: Harper Business,2002).

3. Harreld,OReilly III, Tushman, Dynamic Capabilities at IBM: Driving strategy into action, California Management Review, Vol. 49, No. 4, Summer 2007

4. Dittrich, Duysters, Ard-Peter de Man, Strategic repositioning by means of alliance networks: The Case of IBM, Elsevier, Science Direct, July 2007

5. Fundamentals of Flowing Stream Strategy (Principle, Frameworks and strategies), Class presentation of Prof. Sushil, DMS, IIT Delhi (class held on 21.04.13 and 24.04.13)

6. IBM Annual Report, 2000 7. IBM Annual Report, 2012 8. Applegate, Austin, Collins, IBM's Decade of Transformation: Turnaround to

Growth, Harvard Business School, HBS 9-805-130 REV: JULY 8, 2009 9. http://sloanreview.mit.edu/article/the-decline-and-rise-of-ibm accessed on April 10,

2013 10. http://www.mbaskool.com/business-articles/marketing/326-ibm-greatest-corporate-

turnaround-stories-of-20th-century.html accessed on Feb 10, 2013 11. http://en.wikipedia.org/wiki/Ibm_history accessed on Feb 02, 2013 12. http://www.forbes.com/2002/11/11/cx_ld_1112gerstner.html 13. http://www.huffingtonpost.com/howard-steven-friedman/american-

turnaround_b_1691554.html accessed on March 10, 2013 14. http://www.huffingtonpost.com/howard-steven-friedman/american-

turnaround_b_1691554.html accessed on March 10, 2013

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