Developing Strategic Management and Leadership Skills:The Fall of IBM - Essay Example

? Developing Strategic Management and Leadership Skills: A Case Study of 'The Fall of IBM' Table of Contents Table of Contents Introduction 2 Strategic Management & Leadership in Business 3 Definition of Strategic Management & Leadership 6 Function of Strategic Management & Leadership 7 Review of Business Management Theory 9 Business Management Theory in Organizations 11 Meeting Strategic Objectives in Business Management 12 Styles of Business Management 13 Adapting Management to Situational Challenges 15 Conclusion 16 Sources Cited 17 Introduction IBM is established as one of the largest multi-national companies in the world, a global leader in information technology, with a market capitalization larger than most developing countries’ entire annual GDP at around $210 billion USD currently. IBM as a company grew from a family oriented management team under founder Tom Watson and later CEO Tom Watson, Jr. to become one of the largest international manufacturers of mainframe computers in the 1960-70’s. Garreth Jones of Texas A&M University has written a historical account of what he calls “The Fall of IBM” (2009), detailing the strategic management and leadership styles of the former CEO’s of IBM who followed the Watson family as executives in the company. Jones (2009) highlights the changing market environment that would see mainframe computers go from the dominant product in corporate business management, to the introduction of the PC (Personal Computer), which made mainframes obsolete. While IBM managed this transition to become one of the largest makers of personal computers in the world at the time Microsoft Windows was introduced as an operating system in the 1980’s, the company would completely abandon that market within ten years to reorganize business operations around consulting services, software, research & development, and enterprise IT. This strategic transformation of IBM as a company over time to meet changing market and industry demands is taken as a case study in business management by students and scholars around the world. The continued success of IBM in the global marketplace today suggests that the previous generations of successive CEOs did manage the required transitions in the marketplace wisely, but that IBM is a very different company today as a result. A detailed analysis of the individual strategies employed by the leadership of IBM to meet competitive challenges can provide real business management lessons in how a large corporation can change to build situational responses and adaptations to meet strategic goals worldwide in a manner beneficial to staff, shareholders, and long-term company growth through expansion. The company Hewlett Packard (HP) is entering into a similar transition in the marketplace currently, considering the abandonment of its PC manufacturing business acquired through Compaq, and developing a larger software and services basis to its business model which has larger margins than the retail market. Such decisions mirror IBM’s previous choice to sell their Lenovo laptop division to Chinese ownership and exit the consumer PC market. While very few companies have the market share, international scope, research & development budget, or global retail sales network that IBM and HP have today, the leadership examples these companies display in managing changing marketplaces, technological innovation, and shifting consumer demands can be illustrative for business management students and industry executives who wish to prepare their own models of operation on tried and tested strategies of corporate leadership. Strategic Management & Leadership in Business Strategies of business management can be approached in two primary categories, those which are paradigmatic, or can be applied generally across business operations in a variety of sectors, fields, and industries, and those which are specialized, or focused for a particular single field of application only. It is important to consider the difference between paradigmatic and specialized approaches to business management initially, for some approaches that are used for a large, multi-national corporation may be inappropriate when applied in a small business context. Similarly, information technology may require specific attributes in organization, operation, and management of business that are not required in other specializations of industry, and vice versa. In this manner there is an initial responsibility in business management to know intimately and in detail all aspects of the operation under direction, as well as to know the relation of those operations to market forces such as supply and demand, competition, macroeconomic changes, legal landscape, etc. The knowledge of business operations and marketplace should therefore be considered the foundation for the strategic vision that is needed to project the business to a future level of status, operations, or profitability by implementing a well-organized, thought-out, and preferably tested plan for achieving the strategic goals of the enterprise. For example, Tom Watson made decisions in developing IBM from a cash-register and typewriter company to one that was on the forefront of the research, production, and distribution of advanced computers, mainframes and PCs. (Jones, 2009) If Watson had remained complacent with his business, satisfied with operating in typewriters and cash register machines, he could have simply devised an optimized sales and marketing plan for this business, possibly improving the machines and introducing new models every few years to keep customers happy and sales expanding. Watson could have focused on personal sales networks, friendly customer service, and radio or print advertising to manage his company profitably for the benefit of workers and shareholders. Yet, instead he made decisions that radically changed the direction of the company and placed it at the forefront of research and development in computing. This leadership can be seen as visionary, as it led to changes in human history in communication, business operations, and society that are considered revolutionary in retrospect in the same manner as the automobile, light-bulb, or telephone were transformative technologies in their historical epoch. From this understanding, a third type of strategic business management philosophy should be developed in contrast, that of ‘the paradigm-shattering’. If Watson had been merely following commonly accepted principles of business management that could be applied in any context, he would have been following a paradigmatic style of business management but lacking innovation. A ‘paradigm-shattering’ business management style leads to revolutionary products, services, and new inventions that literally change human history from their popular impact. It can be said that relatively few companies achieve ‘paradigm-shattering’ leadership in historical context, as IBM, Ford, GE, Apple, and Microsoft have done in the recent past. Even paradigm-shattering companies can devolve into “everyday” businesses selling “normal” products as a part of standard business operations, and lose the innovative edge which propelled them into market prominence and profit in the expansionary stage. Therefore, successful business managers should base their practice on: 1. An intimate knowledge of the company and its market. 2. A realistic decision as to whether the company is seeking ‘paradigm-smashing’ breakthroughs or a more standard, patient, conservative, and traditional management strategy. Certainly there should be organizational and budgetary differences between a company operating under conservative stewardship principles related to an existing product line, market niche, or competitive advantage, and a realization that such a company should be managed differently from one which is seeking to “change the world” through innovation and invention. Similarly, a company managing a stable dividend to shareholders would have different requirements than a private, venture-funded start-up or hedge fund. Business managers need to know the difference between the two scenarios when implementing long and short term strategic plans for company operations. Definition of Strategic Management & Leadership In summary, a definition of strategic business management is based on two main types of specialized knowledge: 1. Knowledge of the Company 2. Knowledge of the Marketplace From these two divisions of knowledge, a single vision must emerge which represents the direction of growth, sustainability of operations, profitability, and status of the company as it continues to work together towards the future. In the day to day management of business operations, there can be considered three general approaches to strategic management: 1. The Paradigmatic 2. The Paradigm-Shattering 3. The Specialized The paradigmatic approach to business management applies best practices that are considered valid across all sectors of business, such as sales and marketing strategies, market expansion, customer service, employee relations, etc. and seek to build profitability and sustainability for ownership interests or shareholders, as well as raising the salary, living conditions, and benefits to staff, or increasing company operations through product and service growth. The paradigm-shattering approach seeks new products and inventions that change human life in historically transformative ways, such as the printing press, light-bulb, automobile, PC, or iPhone/iPad. The paradigm-shattering approach can lead to huge profits, sales, prestige, and respect for a company, but it can also lead to failure and bankruptcy. Similarly, the paradigm-shattering company can become a standard, sluggish, non-innovating behemoth of a company that employs thousands of people but is slowly slipping into lower sales, waste, corruption, and mismanagement. The specialized approach suggests that there is something unique about the company, its products or services, and the marketplace niche the business operates in that requires it to be managed in a different way from other businesses, sectors, or mainstream business management consensus in principle. For example, a quickly expiring product like vegetable produce may call for different inventory, warehousing, and distribution management than a company that can produce and store widgets at surplus waiting for long-term interest or demand to increase. Specialized approaches to business management should also evolve directly out of the personal knowledge of the administrator in the company and marketplace. Function of Strategic Management & Leadership The function of strategic management and leadership is directly dependent on the vision of the CEO or management team. The vision of strategic management represents the direction that the leadership views the company taking in the future in reference to its products, services, and brand, as well as their position in the marketplace through sales, status, and support. IBM spent many years and hours of the employees’ time in research and development as a core company proficiency. This is an example of the Watson family’s initial paradigm-shattering leadership which navigated the company from a retail cash register and typewriter company to one at the leading edge of computer research. A paradigmatic leadership approach may have attempted to simply manage existing operations and products in the most efficient manner possible. Therefore, it can be seen as the visionary aspect of the leadership which established the course changes required to steer a company like IBM into new directions initially. Had management not done so, in all likelihood IBM would have joined the other bankrupt, out-of-business, and forgotten companies of the past who failed to see changes in technology approaching or whose products and services were surpassed by new inventions. Many companies may feel unwilling to place large costs into research and development, or may in fact not have sufficient resources available outside of cost of operations to expand into exploratory research in new fields and technology. Thus, there is a return to the innate, personal knowledge that the business manager has about the company, its finances, its board’s philosophy, or the shareholder sentiment which may all determine or limit the possibilities open to innovative management. A company such as Volkswagen, for example, may be always improving and upgrading the core technology of its automotive products, or expanding into trucks and commercial vehicles from cars, but it may be unwilling to stray too far from core automotive competency in manufacturing. On the other hand, a company like GE may have research and development going on in many diverse directions that no single person can clearly understand completely because of the diversity and size of operations. A company such as GE may also stray out of its core competency of electronics into consumer finance to disastrous consequences for other sectors of the business. In these examples, business managers in large companies can read and study case histories with multi-nationals such as IBM, and analyze the manner in which IBM’s leadership adapted to market change in order that they may learn lessons that will serve them in their own companies. The understanding of the principles that have led to success and failure historically may not always be absolute in predicting future results, but nevertheless these case histories provide a means for strategic leadership to generate vision for the company and its direction for the future. The vision of the CEO or management team needs to be in harmony with macroeconomic changes, political developments, marketplace shifts, consumer sentiment, technological evolution, and many other factors which will impact business operations positively or negatively. A CEO or management team may have great vision, a perfectly executed plan, and detailed sales projections for a product line, but in the encounter with real market dynamics, these plans may fail miserably. For example, the Time-Warner merger with AOL may have seemed a great idea when envisioned by the CEOs of all companies involved, but historically it was disastrous and led to great shareholder losses as the benefits and synergies were not brought forward. The brightest minds at AIG failed in risk management during the 2007-8 economic crisis and sub-prime mortgage meltdown. The regular failure of central planning, government employment policies, and big business suggests that size or inertia is not enough for making things happen efficiently, and that strategic leadership requires a pragmatic adaptation to changing environments to bring its vision into successful achievement. Yet, at the same time, the vision itself must be correctly identified, planned for, and implemented in organizational structures in a manner that concretely accomplishes its goals. Historically, IBM has managed this as an example to other companies, and its management history continues to be paradigmatic for the information technology sector. Review of Business Management Theory IBM’s success as a multi-national giant in information technology seems a smooth transition historically, but in fact represents a successful navigation of a marketplace which changed radically from the early 1970’s to today. When Tom Watson, Jr. resigned as head of the company in 1971, T.V. Learson became CEO and the ‘IBM 360 Mainframe Computer’ was the major company product. (Jones, 2009) The IBM mainframe was an example of a paradigm-smashing product, as it "fully automated a company's manual information processing systems, such as payroll, accounting, and customer record keeping" that businesses traditionally relied upon for management. (Jones, 2009, p.197) These mainframe computers made IBM into one of the most important and recognized companies in the world, and they built strong connections from this in government, military support, higher education, and utility consultation. The price of IBM mainframe computers was prohibitive to retail consumers at this time, but the high margins in enterprise technology allowed IBM to scale into even more research and development as a company. Jones reports that Learson and Watson both concentrated heavily in R&D, allowing IBM to create the successor to the 360 Mainframe with the 370 system. (Jones, 2009) Frank Cary became CEO of IBM in 1973, and on the power of the 370 mainframe system in enterprise IT, he was able to grow IBM to four times its size in 1971 to a market capitalization of $26 billion in 1980. (Jones, 2009) By the 1980’s, other silicon chip manufacturers had begun to produce personal computers that could outperform IBM’s mainframe computers. In summary, the challenges faced by IBM at this point in history were huge, as its entire product line, software system, and application network were threatened with redundancy. The introduction of Microsoft Windows enabled PCs to be produced and assembled from components from a variety of manufacturers, and separated the hardware and software platforms from manufacturer dominance. Apple Computer continues to follow the integrated OS and hardware model, whereas IBM was totally undercut and devastated by this development. IBM enjoyed huge margins and near monopolistic dominance in mainframe computers in the 1970’s but by the 1980’s they were just one of many PC makers, and Microsoft itself had captured the OS market making IBM just one of many software developing companies. The vast investment into staff, training, production facilities, and software for mainframes gradually and then swiftly became redundant. IBM’s management team led the company in producing retail hardware and software equipment for the consumer market in the 1980’s, but gradually stopped doing so, exiting this market with the sale of Lenovo to the Chinese in 2004. While IBM still manufactures experimental silicon chips, servers, and custom software for enterprise, government, and higher education, Intel-based computers dominate the retail and business environment. Microsoft and Apple maintain their share of the consumer operating system, and companies like Oracle, HP, Cisco, and Samsung enjoy most of the business IBM once called its mainstay in research and development. IBM may be more profitable than ever, but the loss of its traditional mainframe, retail PC, and enterprise IT business are what Jones (2009) and others refer to as “the fall of IBM”. (Jones, 2009) Business Management Theory in Organizations Jones (2009) documents IBM’s response to its marketplace challengers in his analysis. He notes that in 1986, DEC introduced the VAX 9000 computer to the marketplace which “had the same speed and capacity of IBM’s largest 370 mainframe, the 3900, but cost only 25% as much”. (Jones, 2009, p. 200) This product can be seen as shattering to IBM’s marketplace complacency, threatening its business model, products, and margins directly. IBM responded by producing a PC two years later on the RISC architecture that outperformed the DEC PC. (Jones, 2009) According to Jones, these two years were represented by huge market competition between the two companies, with IBM falling and then gaining +/- 10-15% in market share for PCs each year. (Jones, 2009) What is important above all is that IBM was producing PCs in that era at a 56% margin, less than but comparable to the mainframe business, whereas PC makers operate with margins of around 10% today (Jones, 2009) This shows clearly how competition and technological innovation attacked IBM’s core market, and how it responded. Jones (2009) wrote "in the mainframe market, IBM made its own chips, circuit boards, disk drives, tape drives, and printers; wrote its own proprietary software for its machines; and helped to develop software to meet the needs of its customers”. (Jones, 2009, p.201) As the PC market grew and changed, this model was attacked by a supply chain of manufacturers around the world who produced components. In this manner, “IBM clone” computers could be made with all of the functionality of an IBM machine, but running Windows or Apple software. IBM could not compete in this price environment, and the smaller manufacturers of components gradually reduced its margins in the retail sector. Compaq was the leading manufacturer of IBM PC “clones”, and from a 40% market share of retail PCs in 1984, the company gradually saw its sales percentages decline as competitors undercut its prices and outpaced it in introducing innovative new software, (Jones, 2009) Companies such as Packard Bell added additional competition to IBM, while legacy consumers demanded that IBM maintain legacy system compatibility in its new computers, limiting the operating system. (Jones, 2009) In this way, IBM’s market share in retail PCs was reduced to 12% by 1992. (Jones, 2009) Meeting Strategic Objectives in Business Management How IBM responded to the redundancy and obsolescence of the mainframe computer market, and the loss of its dominance in the retail PC market, to continue to become one of the largest and most successful technology companies in the world today is an example in meeting strategic objectives through adaptation to market challenges. Jones cites the “Olsen philosophy” as being important to IBM’s downfall in this era. The “Olsen philosophy” refers to the IBM engineer’s rejection of the threat of the PC to IBM’s mainframe business by saying “PCs are just toys”. (Jones, 2009, p. 202) This can be seen as a classic failure to recognize a new, groundbreaking and innovative product that could potentially disrupt IBM’s billion dollar enterprise. Because of this, Jones (2009) and other analysts view IBM as being caught off-guard and unprepared for the dynamic changes in the PC marketplace in the 1980’s and 90’s, struggling to keep their products up to date and competitive despite being the industry leader at the time. The adoption of Intel chips by IBM into its own systems represents a type of capitulation in the silicon chip fabrication field for IBM, though they would continue to research and innovate in this field on a smaller scale. Jones (2009) also views IBM as being woefully unprepared for the advancement of the server sales industry, losing business to Sun, Cisco, DEC, HP, and Apollo. (Jones, 2009, p.202-3) Jones (2009) also suggests that IBM failed in software development, not succeeding in developing or advancing a consumer operating system on a level with Microsoft and Apple, and also not developing a range of successful consumer applications for the desktop, such as Office, Photoshop, or Autocad. These failures led to a major restructuring of IBM as a corporation under CEO Akers in the 1980’s and 1990’s. (Jones, 2009) The success of these efforts and their relationship to previous eras of innovation at IBM makes the importance of strategic leadership in business organizations clear. Styles of Business Management Akers’ reorganization of the company, downsizing, and new consumer retail offerings resulted in a $2.8 billion USD loss in the year 1991, the first loss ever recorded in the company’s long history of operations. (Jones, 2009, p. 208) In 1993 the company hired Louis Gerstner as a CEO and pledged another large reorganization of the company. (Jones, 2009) Gerstner initially advocated what is described as the “full line” philosophy, which meant that IBM would pledge to offer consumers a “full line” of products across the large range of devices, from PCs to servers, printers, monitors, chips, and other components. (Jones, 2009) Under Gerstner, IBM lost $8.7 billion USD in 1993. (Jones, 2009) Garret Jones (2009) suggests that Gerstner should have considered breaking up IBM into 13 or 14 companies at this stage, as advocated by previous CEO Akers, in order to downsize the company to efficient units that could manage core competencies autonomously with greater focus. Yet, with Gerstner’s experience in conglomerate management at RJ Nabisco, he was hired specifically to do the opposite, i.e. to manage IBM as a conglomerate and efficiency integrate the various entities into a profitable whole. IBM, at the size of operations that it existed at in that period, included staff with legacy training in outdated systems drawing large salaries, huge benefits, and these same staff were unable to understand the rapid changes going on information technology outside of the IBM bubble. IBM continued the “full line” philosophy until encountering huge corporate losses in being undercut by domestic and international competition in component makers. In 2003, the Akers spirit prevailed as Sam Palmisano was hired as CEO to create a transition of IBM to a “services company”. (Jones, 2009, p. 210) The view of Gerstner was essentially that the IBM brand would be enough to distinguish its products in the marketplace and business arena, but he clearly underestimated the consumer’s interest in buying the lowest cost product, and the innovation new companies were bringing into the PC market. Because of this IBM was forced to ultimately abandon the “full line” philosophy, and to become a specialized research, development, and IT services company, which they operate under great profitability and success today. Nevertheless, the IBM as a service, outsourcing, and contracting firm is a very different company as IBM as a market-dominating computer hardware and software manufacturer for enterprise business. IBM was faced with a situation in which it managed to thrive by adapting and changing core competencies and focus to more profitable areas outside of retail hardware and software, and this is consistent with the initial vision that got them into research and development in IT initially. Adapting Management to Situational Challenges In retrospect it can be argued, as Jones (2009) does, that IBM failed in adapting to the challenges of new markets, such as the PC, the server industry, consumer software, and retail hardware, because the company was competing in these markets but was forced out of them. IBM attempted to maintain the “full line” philosophy but could not compete with the costs of Asian component makers and retail computer manufacturers working on smaller margins. More serious, however, is the company’s failure to ever produce an operating system equal in commercial success to Windows or Apple. With the resources, market advantages, and competitive advantages the company enjoyed from the mainframe era, it should have been able to introduce an operating system that was industry leading. Instead, it could not out-compete Microsoft, Apple, or even Sun in the OS field, and from the loss of the control of the OS, IBM became a minority player in the PC market. Similarly, IBM did not use the success of Lotus Notes or other early consumer software applications for the desktop to build business in the retail market. Their requirements for legacy support and transition of mainframe systems to PCs ultimately drained them of the energy that other companies tapped for innovation. As margins collapsed in retail hardware, IBM began developing more international contract work in IT consulting with enterprise business, government, military, higher education, and other specialized sectors. This is a more profitable sector by margin, and may give IBM a chance to return to “paradigm-shattering” business leadership rather than “paradigm-managing” administration. This can be seen in projects such as the ‘smart grid’ or the Watson artificial intelligence system. Rather than trying to mass-produce retail hardware and compete with the low cost production of Asia and other locations in PC components directly, IBM provides custom services and solutions in IT to the highest end clients with the largest budgets for implementation worldwide. These include lucrative government and Fortune 500 contracts. The company has capital raising ability at interest rates similar to the U.S. government, and its bonds can be used to expand in any direction. Thus, the discretion and conservative management style of today may lead to even greater innovation and specialization than the company would be able to achieve if it were going for mainstream dominance of the consumer environment. IBM retains a huge specialized labor force of IT professionals who are the leaders in their field internationally. The new leadership strategy focusing on specialized services and consulting gives IBM staff the ability to lead research and implementation of advanced systems that break new ground in innovation. For this reason, the new strategy can be seen as possibly more consistent with the original “paradigm-smashing” philosophy of IBM’s founders, as they can take on more projects with a wide reaching appeal through specialization than through generalization Conclusion IBM left the core specialization of the company in business and consumer hardware and software in the 1990’s following large losses from competition. HP is going through similar business reorganization today. The consumer retail hardware market has become a very low margin business, yet Apple competes in it very well and delivers amazing products to its customers worldwide. IBM failed in becoming successful as Apple in hardware-software systems marketed to the retail consumers, and they failed to provide a competitive product to Microsoft Windows in the PC operating system sector. As their near monopoly in mainframe computer systems was toppled by innovations in the PC, IBM initially underestimated this threat and then wasted resources trying to out-compete the challengers. In the end, IBM was forced to exit the retail hardware and software business to become a high-end IT consultation firm for governments, Fortune 500 companies, higher education, and the military primarily. This allows the company to innovate at a local level around the world, to be involved in the latest research in supercomputing, space, weapons technology, the smart grid, custom database systems, scientific research, records keeping, and other specializations. In retrospect, Garret Jones (2009) is correct in his analysis, as IBM could have and should have out-produced both Apple and Microsoft in the PC marketplace given the advantages that it had at the time. Yet, rather than a complete downfall of the company as Jones suggests, IBM management has reinvented their business to be more profitable and focused than it was before, and enabled it to return to “paradigm-smashing” research across a wide area of concerns. Because of this, IBM can be validated in exiting the retail hardware and software markets after they failed in competition with other companies, but the business opportunities lost by the company will not be soon forgotten by the historians, analysts, and investors that follow IBM’s moves in management very closely. Sources Cited Jones, Garret (2009). “The Fall of IBM”. Corporate Level Cases: Domestic and Global, Texas A&M University, 2009. PDF. Read More