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THIS ARTICLE IS AN EXTRACT OF LINES FROM A REPORT SUBMITTED BY MUKESH PARTHASARATHY TO UNITEC NEW ZEALAND. PLAGIARISM IS A SEVERE OFFENCE. KINDLY USE CITATIONS IF YOU ARE REFERRING TO THIS ARTICLE IN YOUR PAPERS OR WEBSITES.
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The writer of this article has identified himself as the external consultant to IBM Corporation and takes a look into their planning processes and analyses and discusses them. The views of this writer is supported by strong citations, and references are respectfully acknowledged in the final section of this report. This writer feels that IBM has come a long way since its recovery from the potential valley of death it was facing during the early 1990s and finds out what made this recovery possible. The report also reveals the secret behind IBM’s success and what possibly could be done to further its already glowing business.
International Business Machines or IBM is one of the giants in the compute industry and has been involved in mainframes, computers- hardware and software, and computer services. IBM’s main strength has been mainframes but now it is competing well with its main rival Dell in the sales of computers.
“[In 1966] there were perhaps 35,000 computers in use, and it was estimated that there would be 85,000 by 1975. IBM set astride this exploding market, accounting for something like two-thirds of the worldwide business- that is the dollar value of general purpose computers then installed or on order. IBM’s share of this market [in 1965] represented about 77% of the company’s $3.6 billion gross revenues [and $477 million of profits].” (Mintzberg, Quinn, 1996, p.220)
“As of 1989, IBM had more than 5 million customers all over the world. Geographic areas are covered by four major organizational units, including IBM U.S., IBM World Trade Americas, World Trade Asia/Pacific, and IBM World Trade Europe/Middle East/Africa. The company had hired 135,000 people during the first-half of the 1980s so that it could pursue its sales revenue goal of becoming a $100 billion company by the end of that decade.” (Hoffman, O’Neill, 1993, p.586)
IBM follows a top-down organizational model as against the bottom-up organizational model of Dell. This makes the business of IBM management-driven instead of being customer-driven.
“IBM’S view of itself is flat: The world’s no.1 computer company has tried hard to push decision-making as far down in its organization as possible, investing line-of-business managers with significant authority.” (Hoffman, O’Neill, 1993, p.588)
IBM restructured its operations in January 1988, shifting from a product-oriented to a market-oriented approach to compete effectively. Although it restructured its operations, the process was a long and time-consuming affair, given the size of the IBM organization. IBM PC sales went down terribly during the 1990s and the company next was in the process of re-engineering itself.
“Strategy begins with goals, which naturally follow from an entity’s mission. But for practical purposes goals cannot stand in isolation. They are informed by an iterative sensing of the external environment and the organization’s internal capabilities. As much as some may think that everything devolves from goals, the fact is that practical people form goals based on what is feasible, given the environment in which they must operate their own resources and capabilities.” (Collis, 2005, p.2)
IBM which was the leader in computers during the 1970s and 1980s now had to change its way of doing business in order to compete in the area of PC sales. IBM, hitherto, has been the leader in mainframes. Although change does not happen overnight, IBM has travelled a long road to become what it is today- a giant in the computer sector.
“Breaking Free of the Old Formula: Success is often a barrier to market innovation because it enforces a formula that hamstrings innovation and change. For example, back in the late 1970s, the computing world was dominated by powerful mainframe computers, and IBM dominated that business. So, when personal computers began to appear, there wasn’t a lot of interest within IBM. The people with organizational clout and big budgets were mainframers who understood the making of big computers and their distribution via corporate leases. Desktop computing and the selling of small, inexpensive machines to individuals were alien ideas within IBM. The only way the company could get its first PC into the market was through a skunk works of engineers it set up in Boca Raton, Florida, far from the company’s centre of power.
Sometimes the best approach to breaking free of the old formula and addressing a new market is through a new subsidiary or new operating unit that has been given substantial autonomy- and no rule book.” (Collis, 2005, p.56)
IBM had its worst years during the early 1990s as people rejected its mainframes and opted for PCs. IBM suffered huge losses because of this and infact; it went through a massive downsizing process. Perhaps, IBM never took its competitors seriously. Infact one wonders if it took a close look at its operational and strategic environment- the industry, customers, and competitors. We discuss this in the next section of this report.
IBM belongs to the computer industry and as such can be associated with hardware, software, and information technology. The range of services it offers is baffling.
“International Business Machines Corporation (IBM) is an information technology (IT) company. The company’s major operations comprise a global services segment, a systems and technology group, a personal systems group, a software segment, a global financing segment and an enterprise investments segment. The majority of the company’s enterprise business, which excludes the company’s original equipment manufactures(OEM) technology business, occurs in industries that are broadly grouped into six sectors: financial services, public, industrial, distribution, communications, and small and medium business(mainly companies with less than 1,000 employees).” (answers.com, 2006)
IBM’s clients include multinationals, medium and large organizations, research organizations, small business, and individuals needing home solutions.
Its competitors include other giants like Dell computers, Hewlett-Packard, Apple Computers among others.
“No discussion of the competitive environment would be complete without some discussion of Michael Porter’s five forces framework. Porter identified the following forces as governing industry competition:
•Threat of new entrants
•Bargaining power of suppliers
•Jockeying for position among current competitors
•Bargaining power of customers
•Threat of substitute products organization” (Collis, 2005, pp.13-14)
All these five forces identified by Michael Porter had its effect on IBM during the early 1990s and literally put its mainframes out of business. IBM never thought small in order to compete effectively in PC sales. This helped its rivals Dell, HP, and others to gain the upper hand and the inaccurate positioning of its products made the bargaining power of its customers and suppliers more demanding with IBM finding it difficult to make both the ends meet. Ultimately IBM reengineered and reinvented itself to recover from the potential valley of death it was encountering to become a major force to reckon with in the computer industry.
“After a highly visible fall from the heights of information technology leadership in the early 1990s, IBM is healthy and growing again. The new millennium has brought record revenue and established IBM as the leader in servers, middleware, business transformation and outsourcing services, and momentum continues to build. Of course, a transformation of this magnitude doesn’t happen overnight. It entails nothing less than a reinvention of the company, and it makes for a compelling story- a story that is still unfolding” (www-306.ibm.com, 2006)
What made IBM come out of its slump in the PC market?
What are the factors or secrets behind this recovery?
What must be the strategic plan IBM consciously or unconsciously followed?
This will be discussed in the subsequent sections of this report.
IBM’s strategic plan can be discussed from so many different angles:
The first angle of looking at the planning method at IBM is the Business Systems Planning (BSP) methodology. BSP was developed by IBM to take into consideration the Dell model of doing business. Thus it combined the bottom up approach of Dell with its own top down approach to deliver solutions effectively.
“The methodology focuses on business processes which in turn are delivered from an organization’s business mission, objectives and goals. Business processes are analyzed to determine data needs and, then, data classes. Similar data classes are combined to develop databases. The final BSP plan describes an overall information systems architecture as well as installation schedule of individual systems.” (viu.eng.rpi.edu, 2006)
The second angle of looking at IBM’s strategy is the aspect of reengineering. This strategy involved reengineering the core processes at IBM in order to stay effective among its competitors that included Dell, Compaq, and HP. IBM started focusing more on Customer Relationship Management (CRM) and revamping of its information systems.
“In 1993, under the guidance of then IBM chairman and CEO Lou Gerstner, the company began its turnaround from a near-death experience. And a big part of that was the strategic initiative to reengineer IBM’s core processes. Between 1996 and 1998, IBM reduced redundant costs associated with decentralization and, as a result, achieved US $5billion in cost avoidance and savings. Between 1999 and 2002, IBM’s priority shifted to integrating elements of these processes to create a more horizontal flow of work across the business. So rather than optimizing processes by business unit or within functional domains-like billing-the company focused on creating processes that would make working with IBM a better experience for its clients, IBM Business Partners and suppliers. During this phase, IBM gained more than US $7billion in new efficiencies.” (Www-306.ibm.com, 2006)
The third angle of looking at IBM’s strategy is e-business. IBM saw the enormous potential of the internet in leveraging its business process and started applying itself to providing more and more online services to its customers worldwide. IBM used ICT to increase its revenues dramatically. This is particularly a very radical move considering the fact that IBM was chiefly involved in the hardware sector.
“By early 2000 IBM was directing most of its strategic initiatives toward “e-business services” where it saw explosive growth opportunities. More than 50 percent of IBM’S R&D budget was directed to internet projects. Senior management believed that software and services were the soul of e-business and that the company had a full complement of resources to help corporate customers put integrated e-business capabilities in place. A growing majority of the company’s 130,000 consultants were working to provide customers with integrated e-commerce and internet technology solution. The company was operating e-business integration centres around the world where customers could meet with IBM specialists to develop next-generation e-business solutions. During the past three years, IBM had handled 18,000 internet-related jobs for customers, ranging from web page design to hosting entire online storefronts to hooking corporate databases into new online systems. IBM’s revenues from pure e-business projects totalled $3billion in 1999, but the company estimated that some $20 billion of its revenues was driven by customer demand for e-business solutions, an amount that was expected to grow sufficiently.” (Thompson, Strickland, 2001, p.C-170)
The following are the organizational constraints that could impact the planning process:
1.Communication between the top level management who come up with the plan and the employees at the bottom of the chart who go about implementing them. If the “distance” between them is large, then the planning process could very well end up being wastage of time.
2.Risks if not properly identified, can impact on the planning process. Risks can be small, medium, or high. High risk factors if not properly identified or under estimated can lead to chaos when the planning process is underway. IBM must carry out a sound SWOT analysis during the planning process.
3.Another factor that could impact on the planning process is the environment in which IBM operates. IBM must carefully take into consideration the various factors of the Porter’s five forces in order to avoid their planning process to be influenced or impeded by the environment.
4.Lack of necessary resources is another factor that could impact on the planning process. If IBM is not able to garner sufficient resources in terms of material and labour, then planning for large projects could run into trouble.
5.Improper estimation of the scope of the project could cost heavily on the planning process at IBM. The scope needs to be clearly defined and the domain boundaries-logical and physical-should be clearly marked.
6.Clear analysis of the requirements must be done. If IBM does not perform gap analysis during its SISP process, then there is going to be a gap or a distance between the audition performed and the desired results.
7.Another important constraint that cannot be ignored is the motivation factor. If the organization and its employees are not motivated enough to cope up with the changing trends, then the whole planning process becomes futile.
8.Ethical issues are another important factor that can impact the planning process. IBM being really global with its presence in many countries should not ignore this important factor. Unethical parameters hinder the planning process and can cost the company in terms of money and human resources.
9.Another constraint that could impact on the planning process is ignoring the stakeholders within the organization and outside the organization. The interests of the stakeholders need to be considered. Stakeholders influence and change every plan if their needs are not addressed correctly.
10.Budget is another constraint that can impede planning. If sufficient funding is not given by the IBM management, then plans are wastage of time and resources.
Integration of IT planning with business strategy and day today operations is preceded by doing a gap analysis first.
“Although generally there are difficult moments in every phase of applied strategic planning, the gap analysis is typically the “moment of truth”, a moment that can upset and dishearten even the most hard-boiled members of the planning team. After the performance audit is completed, it is necessary to identify gaps between the current performance of the organization and the performance required for the successful realization of its strategic business model.” (Goodstein, Nolan, Pfeiffer, 1993, p.261)
Thus the gap analysis reveals what needs to be done in order to leverage the business to the desired state.
IBM started closing these gaps slowly when they had a tough time during the early 1990s and started integrating their IT plans with business strategy and day-to-day operations. As cited in this report earlier while talking about IBM’s strategic plan, IBM started integrating between 1999 and 2002 to create a more horizontal flow of work across the business.
“IBM has shifted its focus to integrated, unique client solutions supported by business and technology innovation; identified business processes that would require radical transformation; and analyzed technologies and business practices that would foster improvement to business performance. Based on insights from clients and a wide range of internal and external experts, the company identified and nurtured more than 20 emerging business opportunities that had the potential to become multibillion dollar businesses in three to five years. Of these, life sciences, digital media, business transformation outsourcing and pervasive computing have already become over US$1 billion businesses for IBM, and the rest are growing by an average of 40 percent, year over year. The acquisition of PricewaterhouseCoopers Consulting was aligned with a US$1 billion investment, through IBM Research, to deepen On Demand Business insights for clients, and it served to launch new business capabilities, such as the Center for Business Optimization. The rate and pace of horizontal integration across the business and ecosystem enabled significant business improvements.
IBM committed itself to becoming a living laboratory for On Demand Business — horizontally integrated, flexible and responsive — and focused on tackling the complex issues surrounding significant changes to essential business processes, organizational culture and IT infrastructure.” (www-306.ibm.com, 2006)
Integration of IT plans with business strategy and day-to-day operations has produced good results for IBM. Integration of the plans made the plans look simple, tangible, and implementable. As mentioned earlier in this report IBM uses BSP methodology which allows for two-way flow of information across the organization. This has immensely made the integration simple and easy. This is the crowning glory of IBM’s example of integration.
“When IBM created its Integrated Supply Chain in 2002, the driving force behind this decision was how to harness end-to-end supply chain capabilities for competitive advantage — how to enable IBM to become the most adaptive and responsive enterprise in the industry, in order to serve clients better. IBM integrated its 30 existing supply chains into one, working across 35,000 suppliers and 45,000 Business Partners. In addition to huge cost savings — nearly US$20 billion over the last three years — another long-term benefit has been the unprecedented level of flexibility that this cross-business view provides. This approach — linking the supply chain strategy to IBM’s business strategy and then assembling the right combination of skills and resources to support it — has never been more important. By creating a new model for managing the operations of the business, IBM is moving toward operating at the speed of clients’ demand and becoming not only faster and more efficient, but a qualitatively different kind of enterprise.” (www-306.ibm.com, 2006)
There are different stages to an IT strategic planning process as there are different approaches proposed by different thinkers in this field. Planning typically starts with identifying what needs to be achieved and finally going about achieving the same. Before we go into that let us first define what is meant by the term strategic planning.
“Strategic planning can be defined as the process of developing and maintaining consistency between the organization’s objectives and resources and its changing opportunities. Hence strategic planning aims to define and document an approach to doing business that leads to satisfactory profits and growth. This approach, or strategy, sets the general direction for the use and management of all resources, including, of course, information, throughout the organization, and generally this direction will remain valid for an extended time period.” (Robson, 1994, p.15)
The first step is the idea to plan. This is what is meant by planning to plan.
In the second stage of values scan, the values of the company, the employees, stakeholders etc are examined.
“All business decisions are based on values. The values scan phase of applied strategic planning involves an in-depth examination of personal values, organizational values, the operating philosophy, the organization’s culture, and the stakeholders. The strategic plan must be congruent with the organization’s values; if not, either the values or the plan must change.” (Goodstein, Nolan, Pfeiffer, 1993, p.166)
In the third stage of mission formulation there is the creation of the mission statement. The mission statement is created to exactly tell what the organization wants to achieve.
The fourth stage of strategic business modelling is concerned with finding out the LOB. LOB stands for Lines Of Business. This is a set of activities that the company will engage in so as to achieve its targets.
The fifth stage of performance audit is logically the next step in the planning process and takes a look at what the current strengths and weaknesses are. It brings out how much success has been achieved and where the company is lagging behind. It is also considered as a very controversial stage because it can attract resentment within the organization.
The next stage is doing the gap analysis which tells how far the company must go in order to achieve its goals. What amount of leverage is required and in what direction.
The next stage is the stage of integrating action plans.
“An action plan is where strategic planning and implementation overlap. It is also where mid-level managers can really make important and visible contributions to organizational success.” (Collis, 2005, p.78)
In this stage vertical operational plans and horizontal functional action plans are developed.
The next stage of contingency planning which is generally done based on a what-if method to plan correctly for future with options in hand. It takes into consideration all unknown events that may occur in future.
“Contingency plans are preparations for specific actions that can be taken when unplanned-for events occur. Five key concepts should be considered in planning for contingencies: the contingency-planning matrix, the organizational-status indicator, macroeconomic indices, expanded-business indices, and composite budget-variation indicators. However, contingency planning is almost worthless unless it is an integral part of a good applied strategic planning process.” (Goodstein, Nolan, Pfeiffer, 1993, p.322)
In the final stage of implementation, the plan gets implemented, i.e., gets executed.
1.IBM used a radical method called On Demand Business to leverage its prospects
On Demand Business can be defined as follows:
“An On Demand Business is an enterprise whose business processes — integrated end-to-end across the company and with key partners, suppliers and customers — can respond with flexibility and speed to any customer demand, market opportunity or external threat.” (www-360.ibm.com, 2006)
2.IBM uses the BSP approach to planning. The strength of this method is:
“Because BSP combines a top down business approach with a bottom up implementation strategy, it represents an integrated methodology. In its top down strategy, BSP is similar to CSF method in that it develops an overall understanding of business plans and supporting IS needs through joint discussions. IBM being the vendor of this methodology, it has the advantage of being better known to the top management than other methodologies.” (viu.eng.rpi.edu, 2006)
3.IBM used the enormous power of ICT and e-commerce to increase its revenues.
“The ibm.com Web site has long been recognized as a leading e-commerce environment. It is the focal point of IBM’s sales interaction with enterprise and small business clients, partners, original equipment manufacturer (OEM) partners and consumers. To maximize responsiveness, IBM combines a rich online environment with global sales center operations to create a fully integrated TeleWeb sales, service and support channel. In 2004, ibm.com recorded 284.4 million net Web visits and more than 15.2 million sales calls. The ibm.com site provides this capability in 83 countries and manages online transactions in 31 currencies.” (www-306.ibm.com, 2006)
4.IBM used the “Y” model effectively during its gap analysis stage to find success during the late 1970s.
“The “Y” model is a quick test for conceptually identifying a potential gap. It should be used to identify potential problems, to give the team direction regarding areas requiring further investigation, and to help the team plan the reduction of a potential gap.
•WHO? (customers or client groups)
•WHAT? (customer needs; products or services)
•HOW? (Activities, technologies, or methods of sale)
These three Ws occupy the three corners of the letter “Y”
However, the planning team should be cautioned to use this tool carefully, because there clearly are situations in which changing only one dimension could be a disaster, whereas there are other very selected cases in which simultaneously changing all these dimensions could succeed.
There are also rare instances in which the product is of such high quality, the market so ready, and the new delivery system so well suited, that it is possible to change all three dimensions at once and still find success. The entry of IBM into the minicomputer market in the late 1970s with the introduction of the IBM PC is an outstanding example of such a success. A new product (a personal computer) was introduced to a new market (individual users rather than organizations) by a new method of sale (through retail stores rather than sales representatives). Again, an alert planning team may be able to spot such an opportunity regardless of warnings posed by the model. Such situations are very rare-far more than most excited champions of new products would admit. Any such dramatic movement must be carefully examined for flaws. Before such an approach is adopted it is necessary to determine whether the payoff is commensurate with the risk. While the IBM-PC venture entailed risk, IBM saw the risk as moderate because of the corporation’s enormous resources. A smaller, less well-endowed organization would have to see the risk quite differently.” (Goodstein, Nolan, Pfeiffer, 1993, pp.269-270)
Weaknesses in IBM’s strategic planning processes:
1)It used the traditional top-down business model for doing business.
“DEC, Hewlett Packard, Data General, Texas Instruments, and others offered quantity discounts on their minis of 30-40% to “systems houses”-sophisticated middlemen who bought components in bulk and packaged them into systems for various users. IBM, on the other hand, was used to letting its highly disciplined blue-suited sales force contact and service end users directly and refused to consider discounts of more than 15% for large orders of minis. In the words of a former IBM executive, “you really had to love the machine to take it at that price.” As a result of such practices, in the early 1980s IBM was still fifth in minicomputer sales but was finally learning and moving up fast.” (Mintzberg, Quinn, 1996, p.232)
2)IBM never thought small. This cost them heavily in their mainframes business.
“From 1983 to 1988, mainframe shipments declined 20 percent while personal computer shipments increased 59 percent and workstation shipments increased from 3,500 to 180,000 units. A frequently cited advantage of personal computer networks is lower costs, including hardware, software, and personnel. For example, Consolidated Insurance is converting from a $3million IBM mainframe to a $300,000 network of personal computers, thereby reducing its data processing staff from 30-10 persons and operating costs by $1million. Such long time mainframe users as Playboy Enterprises, Hiram Walker, Kaiser Aluminium, US Shoe, Harley Davidson, Arco Chemical, Colgate Palmolive, and Johnson and Johnson are all moving to replace IBM mainframes with minicomputers such as the AS/400 series. Several other organizations (e.g. Georgia Pacific and Pepperidge Farms) have switched to a combination of minicomputers and microcomputers.” (Hoffman, O’Neill, 1993, pp.598-599)
3)IBM uses the BSP methodology. It has some weaknesses, two of which are mentioned below: “
1.Major weakness of BSP is the considerable time and effort required for its successful implementation.
2.There is a problem of bridging the gap between top down planning and bottom up implementation.” (viu.eng.rpi.ed, 2006)
Conclusions and Recommendations:
1.IBM has to learn from its competitor Dell about making flexible plans. Rigid plans impede change and is not a good planning practice.
In the words of Michael Dell, the founder of Dell Computer Corporation:
“You don’t really know whether you’ve come up with the right plan until much later- when it either works or it doesn’t. What is the right plan? It’s the one that helps you identify what you need to do to ensure success. It’s the one that rallies your employees around a few common goals- and motivates them to achieve them. It’s one that involves your customer’s goals and your supplier’s goals and brings them altogether in a unified focus.”(Thompson, Strickland, 2001)
2.IBM must now seriously consider competition on the internet as that’s where all the action has shifted.
“The internet has opened up electronic channels to all types of customer, including directly to end-consumers. Selecting the appropriate channel to serve target customer groups or for delivery of the product or service is a key strategic decision. The newer channels, call centres and the internet are IS/IT based and the development and operation of these customer links is an integral part of both the business and IS/IT strategies.” (Ward, Peppard, 2002)
3.The LOBs of IBM needs to focus more on joint ventures and strategic alliances. IBM had developed such alliances with Apple and Fed Ex. Now they need more alliances and joint ventures on the internet and they also have to attract revenues through advertising. This is the planning process must provide scope for alliances.
4.IBM can also keep the option of applying the Strategic Systems Planning (SSP) methodology. This is especially useful in the SISP process when time can be saved by automated data management.
“Software produces reports in a wide range of formats and with various levels of detail. Affinity reports show the frequencies of accesses to data and clustering reports give guidance for database design. Users are guided through menus for on-line data collection and maintenance. The software also provides a data dictionary interface for sharing SSP data with an existing data dictionary or other automated design tools.” (viu.eng.rpi.edu, 2006)
5.IBM must make sure that its planning process is backed up with adequate funding.
“From the beginning, one of the thorniest issues IBM had to grapple with in its journey to On Demand Business was funding. No one authorized a big bucket of money and said, “Let’s go make all of this change right now.” Fundamental to IBM’s approach was the concept of value creation and reinvestment- tracking the savings and productivity gains and then reinvesting a large portion of these savings in its transformation initiatives. And continuing the cycle in an iterative fashion.” (www-306.ibm.com, 2006)
More funding must be allocated for development and sales of its PCs in order to increase its market share in this sector.
