UNIVERSITI MALAYSIA SARAWAK

Faculty of Economics and BusinessCorporate Master in Business Administration

Semester 1 (2014/2015)

EBB 6133: STRATEGIC MANAGEMENT

Case Study Assignment 3The Evolving Strategy IBM

Name Matric No.

Chai Lee Sia 14030068

Chen Sze Nee 14030057

Cherry Chai Ling Ling 14030062

Norshamsiah Samsudin 14030214

Tan Chee Ming 14030140

Lecturer : Associate Professor Dr Lo May Chiun

TABLE OF CONTENTS

Page

Executive Summary 1

Introduction 2

Literature Review 4

Case Discussion Question 6

Question 1 6

Question 2 8

Question 3 10

Question 4 12

SWOT Analysis 14

Conclusion 16

Recommendations 17

References 20

LIST OF TABLE

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Figure 1: Globally Integrated Model 3

Executive Summary

IBM first started to go international by selling its products through overseas sales

offices. Then, they shifted to a classic “multinational” enterprise with small branches in

major national markets. However, by the 1990s, this strategic orientation was no longer

working well for IBM because of the emergence of more efficient competitors. This caused

IBM to shift to a globally integrated enterprise strategy. The reason for this shift is to lower

the costs structure of IBM by locating operations based on economics, expertise and the right

business environment. This resulted in IBM shifting its global services delivery function to

India to tap into the low cost and skilled labor market. IBM hopes to develop the human

capital that see themselves as global professionals and thus help IBM achieve higher profits

through efficiency and innovation.

Introduction

This case study is about how IBM's CEO, Sam Palmisano redefined the Global

Corporation. IBM was founded in 1911 by Thomas J Watson. Its headquarters is in New

York, US. Over time, IBM's business operations has shifted from a hardware oriented

business to a broad-based supplier of information technology service and solutions business

as at today. IBM only dedicates 20% of its services to the manufacturing of its hardware and

80% in consulting the computer and technology fields. In 2009, IBM had employed more

than 319,000 people worldwide in more than 150 countries and had a market capitalization

of $119 billion.

IBM was awarded over 38,000 U.S patents from 1993 to 2007. It has invested

approximately $5 billion a year in its R&D and engineering since 1996. As a direct result of

its investments, IBM currently has approximately 26,000 patents in the U.S about 40,000

patents worldwide.

IBM started to expand internationally in the classic 'international' pattern where it

undertake most of its activities at home, and selling its products internationally through its

sales office placed in overseas. In 1970s, It was then move to a classic 'multinational'

enterprise with small branches placed in major national markets around the world. IBM has

moved towards 'globally integrated' enterprise in recent decades whereby it locating work and

operations anywhere in the world based on economics, expertise and the right business

environment.

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Figure 1 : Globally Integrated Model

This case study discusses about how IBM strategized in response to the changes in the

global market to achieve its competitive position in the changing industry environment by

taking advantage of the opportunities and countering the threats. IBM has adapted a

strategic shift in its business strategies where it emphasised on integration of operations,

talent and human capital development, sharing resources and also integration on new

technologies.

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Literature Review

In 1992, IBM stock price was at its lowest since 1983. By 1992, more than 60,000

IBM employees lost their jobs albeit John Akers’ (the CEO until 1993) effort at

transformation. In 1993, Louis Gerstner took over as IBM CEO. By 1994, IBM was able to

post solid financial results, with profits of US$5 billion. The share price increased. Since

then, Sam Palmisano has continued this remarkable transformation.

IBM objectives and strategies keep shifting over time as summarized below:

Period ObjectivesEarly to mid-1980s Grow and maintain market dominanceLate 1980s to early 1990s Survive competitive threatMid-1990s onwards Restart growthLate 1990s into 2000s Develop new vision of ‘computer grid’ available on demand2000s onwards Globally Integrated EnterpriseSource : Lynch, Richard (2009)

Palmisano, has chosen to strategize IBM into a ‘globally integrated enterprise’. This

concept was introduced in the Policy Journal Foreign Affairs’s article (2006). This concept

made his strategy the best in the corporate history. Below are the summarized steps that he

has taken in IBM globally integrated enterprise strategy:

Step 1 Craft the strategy and organization to implement the visionStep 2 Get rid of the businesness that don’t fit and acquire the capabilities that you

do needStep 3 Make sure the economic model is profitableStep 4 Empower the teams that can deliver for the customers but hold them

accountable Source : Bower, Joseph L (2012)

Step 1 : Craft the strategy and organization to implement the vision

Palmisano takes step by step in transforming IBM into a single globally integrated

enterprise. It focuses on serving the need for processed information in the form of solutions

for enterprises all over the world. The corporate executive committee and council of barons

were dissolved. On the other hand, he replaced them with team of strategy, technology and

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operation members. Every team member has their own task which need to be resolved

quickly. The team do not review and discuss; they make things happen.

Step 2 : Get rid of the businesness that don’t fit and acquire the capabilities that you do

need

He sold over the businesses that do not bring profit to the company, for instance, PC

and hardware businesses. In addition, he bought over the consulting arm of

PriceWaterhouseCoopers to provide professionals who understand the process needs of key

industries. These consultants were partnered with technologists to ensure their integration

into the company is successful.

Step 3 : Make sure the economic model is profitable

He acquired lots of software company in order to leverage their efforts profitably ane

repeatedly. In addition, R&D were built all around the world. Spending roughly US$6 billion

a year on research and development, IBM has built a global capability with eight laboratories

on three continents – in addition to partnerships with many top universities (Jim Bramante,

Ron Frank & Jim Dolan 2010).

Step 4 : Empower the teams that can deliver for the customers but hold them

accountable

IBM InnovationJam event was created. It is the largest online brainstorming session

ever held. Everyone from all over the the world is eligible to participate in the event. The

most successful project which include the creation of an on-demand system for real time

analysis of traffic flow; infusing intelligence into the world’s utility grids; introduction of

smart healthcare payment systems and a new business unit to provide solutions and services

would become IBM Smart Partner (IBM 100)

As a conclusion, there are certainly setbacks of any company of IBM size. So did

IBM. Nevertheless, IBM managed to respond well with its strategic shifts.

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Case Discussion Question

Question 1

In the 1970s and 1980s Palmisano states that IBM was organized as a classic

multinational enterprise. What does this mean? Why do you think IBM was organized

that way? What were the advantages of this kind of strategic orientation?

A classic multinational enterprise as stated by Palmisano is a corporation that having

branches or operating decision in few countries around the world to attain maximum local

responsiveness and match different national conditions in different countries. This is also a

multidomestic strategy. This multinational enterprise tailors goods or services it produced to

local market and derives revenue from operations in foreign countries. IBM was organized as

a classic multinational enterprise with many mini IBMs or branches setup in major national

markets across the world. These markets were segmented by high cross border trades

barriers, differences in business practices and localization among those countries.

When IBM started to expand the business internationally, overseas sales offices were

setup to sell the products and services. However, most operating activities still remains in the

home country and this global strategy was unable to cater for different market conditions and

needs around the globe. In 1970s, IBM moved away from this classic international pattern

model and entered into the classic multinational enterprise model to ensure that the company

continued to survive in the international market. This was due to the challenges faced in the

international markets such as high cross border trades barriers, differences in business

practices in different countries and localization issues. Therefore, this model was formed to

deal with the differences and uncertainties across the international markets.

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A corporation’s strategic orientation reflects the directions and actions implemented

by the corporation that will lead the corporation to achieve superior performance of the

business in the future. The strategic orientation adopted by IBM in 1970s was to ensure the

corporation stays relevant and able to compete in industry segments affected by differences

among local countries and sustain in the variations of competition in long term. This model

allows the company to take advantage of customizing business processes in different locality,

while also being able to produce goods and services in areas where the cost of production is

lower. This new strategy catered the ever changing markets to meet the market demand and

requirements in different countries. Other advantages of this strategic orientation would

include more employment opportunities creation, produce in economics of scale at lower

average cost and lower prices for consumers, higher profit for research and development and

ensure the products quality and standards.

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Question 2

By the 1990s, the classic multinational strategic orientation was no longer working well

for IBM. Why not?

The classic multinational strategic orientation of IBM was such that IBM had small

branches in major national markets around the world. This structure was working well for

IBM in the 1970s because of the fragmented nature of the industry and high barriers of

multinational trade which kept IBM in a comfortable position. However, this strategic

orientation was operating at higher costs as IBM adopted separate supply chains in different

markets besides having employees who are differentiated by countries, regions and business

units.

By the 1990s, this strategic orientation was no longer competitive as over time

competitors inevitably emerge. The emergence of fierce competition from enterprises in

emerging markets such as China and India was threatening IBM’s competitive advantage.

Although IBM was the market leader with distinctive competencies, the external market was

fast-changing. Therefore, the IBM’s strategic managers were aware that they needed to take

proactive actions to reduce its costs structure in advance of the emergence of efficient global

competitors. Indian outsourcing firms such as Tata Consulting Service, Infosys and Wipro

started to take market share from IBM. IBM needed to react to this intensity of rivalry by

looking for ways to improve efficiency and adopting a low-cost model.

Therefore, in the mid 2000s, IBM acquired Daksh, an Indian firm specializing in

information technology services and invested heavily in it. IBM invested in Daksh to achieve

efficiency in costs and quality. In today’s global environment, competitive conditions are

intense and therefore firms do as much as they could to response to pressure for both cost

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reductions and local responsiveness. By investing in India, IBM was able to build a leading

market share while keeping its costs structure low.

IBM tapped into the Indian market to take advantage of its factor endowments, which

is the human capital. India provided IBM with low cost and skilled labor and IBM intends to

develop this human capital as its core competencies. IBM believes employees are important

drivers of IBM’s goals because employees build innovations and solutions (Palmisano,

2011). By developing this human capital, IBM hopes to produce managers and engineers

who are global professionals who are able to move effortlessly around the world and do

business effectively.

In addition, IBM is aware that to face globalization and threats of the external

competitors, it needs to utilize its limited resources and expertise. IBM was able to do so

successfully by paying attention to the knowledge assets and knowledge workers as a source

of competitive advantage. IBM also incorporated knowledge management as one of its

business strategies and this proved successful in growing profits for IBM with IBM Global

Services as one of its core businesses (Plescan, et al., 2010).

Therefore, IBM shifted from the classic multinational strategic orientation to a

globally integrated enterprise strategy by locating its operations anywhere in the world based

on economics, expertise and the right business environment. This includes locating its

semiconductor R&D and manufacturing operations in New York and Vermont, its

procurement center in China, global services delivery in India and support services in Ireland

and Brazil.

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Question 3

What are the strategic advantages to IBM of its globally integrated enterprise strategy?

What kind of organizational changes do you think had to be made at IBM to make this

strategy a reality?

As a globally integrated enterprise, IBM has gained the advantages of having work

and operations anywhere in the world based on economics, expertise, and the right business

environment. IBM has integrated operations both vertically and horizontally. IBM is a

vertically integrated company in both software development and hardware manufacturing. It

has only one global supply chain and global R&D. Its research and software development are

carried out in labs around the world. IBM's global procurement centre is in Chine while its

global services delivery is in India. IBM is now managed and deployed its workforce as one

global assets rather than being associated with specific countries, regions or business units.

Its employees are now leading integrated global operations instead of only focusing on their

national market.

IBM's global integrated enterprise strategy has enabled the company to take

advantage of national differences in the cost and quality of factors of production such as

labour, capital and technology know-how which in turn allow them to lower their cost

structures and boost profits. IBM has pursued strategy of horizontal integration by its

acquisition of Daksh, an Indian firm in the mid-2000s. This has brought IBM to better

positioned to effectively competes on cost and quality of factors of production against its

Indian rivals such as Wipro, Infosys and Tata Consulting services who started to take share

away from IBM in its core information technology services business. From the bought over,

IBM is gaining global competitive advantage whereby it gets access to low cost labour on top

of highly educated, but relative inexpensive, engineering and managerial talent that can staff

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its global services operations. On top of that, IBM managed to increase the number of its

customers.

IBM has benefited from the globally integrated enterprise strategy in terms of location

advantages. For example, IBM has set up its global procurement centre in China. IBM is

taking advantage of the lower-cost of raw material and wage rate there. Their goal is to lower

production cost. The strategic move enables IBM to gain access to a more global market.

Besides that, IBM's strategy of having only one global supply chain has increased the

integration among divisions so that different divisions are able to share skills and resources

more effectively and at the same time serve as a bridge to align enterprise operations

horizontally. The team are able to get together and share a common framework to configure

solutions that allows them to be replicable. This in turn will allow the company to increase

its productivity and efficiency. A global approach to the supply chain helped IBM in

leveraging its economic of scale.

To make this global strategy a reality, IBM needs to made changes in its talent

management system or adapt managerial changes. It needs to be more focused on talent

recruitment by attracting, retaining, developing and promoting the best people who can

significantly contribute to the company. The success of the company depend significantly on

its human capital. Line managers could create business model that would take advantage of

the company scales and integrations. The responsiveness of managers to the changing

environment or the competition means very much to the company. Greater speed and clarity

can be achieved by the increased clarity between the "demand signal" in the businesses and

the response of the talent system. Talented workforce able to translate business signals into

specific talent capabilities and enable the company to achieved first mover advantages.

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Question 4

According to the strategic choice framework introduced in this chapter, what strategy

do you think IBM is pursuing today?

IBM operates in more than 170 countries worldwide and derives more than half of its

revenues from sales outside the United States. It has adopted global standardization strategy

with respect on how it plans to compete and operate globally. IBM focuses on increasing its

profitability while lowering its cost but also provide superior services. It has moved towards a

“Global Talent Management Strategy: The Vision of the Globally Integrated Enterprise”. By

pursuing a global standardization strategy, IBM locates work and operations around the world

based on economics, expertise, and supporting industries.

Besides that, IBM revamps its supply chain to a global supply chain. In order to

pursue global standardization strategy, it had separated supply chain in different market with

one supply chain, a global one. IBM managed and developed its human capital (people in

different countries, regions and business units) as one global asset. In the early 20 th century,

IBM was the pioneer of its multinational business model where each of the countries with its

own administration, services operations and manufacturing. But this model did not do well

when India and China technology companies produced high quality goods and services. IBM

felt that they needed to change their corporate strategy to global integrated strategy to adopt

the low cost model, provided superior customer services and being pioneer in market. This

model has groups of IBM’s human capital around the world into competency centers. IBM

groups its employees with specific skills to lower the cost in addition to having the skilled

employees close to customers. They has reduced administrative employees and reassigned

technical specialists to serve the customer better and more competitively. IBM was unable to

operate inexpensively as Indian competitors. Therefore they focused on taking human labor

out of technology services.

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The business model of IBM is based on pursuing a low-cost strategy on global scale.

The production, marketing, research and development (R&D) are concentrated in a few

favorable locations whilst supply chain are separated in different markets. IBM’s

semiconductor R&D and manufacturing operation are concentrated only at upstate New York

and Vermont. The global procurement center is in China while the global services delivery is

in India. However, the supporting services of IBM’s external and internal Websites are

located at Ireland and Brazil. The people of each center are not focused on their national

markets but they are leading integrated global operations.

In the mid-2000s, IBM brought Daksh, an Indian firm that was a smaller version of

India’s big three information technology services firms. By acquisition strategy in the Indian

market, IBM is able to build a large global business with a leading market share that now

effectively competes on cost and quality against it rivals. The motive of expanding in India

market was to gain access to low cost labor and skill base in India. Besides that, IBM can find

a large supply of highly skilled people in India who can staff its global services operations,

and move seamless around the world. In general, IBM tends to use their cost advantage to

support aggressive pricing in world markets. They standardized product worldwide to reap

the maximum benefits from economies of scale.

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SWOT Analysis

Strengths

1. Strong Brand Name. IBM has a strong brand reputation which will significantly

influences consumers’ buying decision on the product. Thus, IBM will definitely

benefits from its brand reputation.

2. Many branches around the world. This enable IBM to locate the work and

operations anywhere in the world based on economics, expertise, and the right

business environment and subsequently, IBM integrated those operations horizontally

and globally. IBM locates its semiconductor R&D and manufacturing operation in

New York and Vermont, global procurement center in China, global services delivery

in India, external and internal web sites support services located in Ireland and Brazil.

3. Strong R&D team. IBM’s R&D team has been global for many years, with research

and software development carried out in labs around the world.

4. Business diversification. IBM segments its business into hardware such as

semiconductor, software and information technology services. IBM has also

diversified the business geographically across the world.

5. Integration of products and services. IBM offers hardware, software and services

which are inter-related, thus enable the corporation to provide one stop solution and

integrated product for the customers.

Weaknesses

1. Expensive service and software solutions. IBM faced stiff competition from

enterprises in emerging market like India and China, which possessed advantages of

inexpensive engineering and management talents. These enterprises had taken away

IBM’s market share in its core information technology services business.

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2. Focus mainly on services and customized products. IBM focuses on providing

information technology services and customized solutions for its customers. This

business model promises higher return but captures only a small share of the market.

The remaining market is often filled with off-the-shelf software products and services.

Opportunities

1. Globalization in business operation. Through the globally integrated enterprise

model, IBM is able to expand the business by integrating its global business

operations to attain better growth opportunities and higher profit margins.

2. Low cost labour from India. Cost of labour is generally low in India. Thus, IBM

sourced most of skilled and talent labour from India for its global services operations.

Furthermore, most Indians have a good command of the English language, which is

the de facto language of business around the world.

3. Increasing demand in information technology services. The information

technology services business is expanding and IBM is well positioned to benefit from

the growing market.

Threats

1. Competition from enterprises in emerging countries. Enterprises in emerging

markets such as China and India are threats to IBM. The enterprises took away IBM’s

market share in information technology services business as they gained advantages

of large supply of highly educated with inexpensive engineering and management

talents.

2. High investment in India. In order to compete with enterprises in emerging markets

and adopt the low-cost model for business operations, IBM invested heavily in India.

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Hence, the economy and political situations in India could affect IBM’s business as

IBM invested much money in one “basket”.

Conclusion

IBM is among the longest serving and largest organizations in IT industry. IBM had

market dominance for a long time based on their ability of management to develop effective

strategies to achieve company goals. This case study analyzes the evolving strategies at IBM

and their application towards the attainment of company goals.

IBM was the first IT firm that started to expand internationally. At the beginning, they

used classic multinational strategy to operate activities at home and selling its products

internationally through overseas sales office. However, this strategy was no longer working

in 1990s because the emergence of more efficient competitors. IBM had shifted their strategy

to globally integrated enterprise strategy. They built the good strategies to encourage

innovation and make sure the company is well placed in the market by integrated operations

horizontally and globally. IBM tries to manage their resources and capabilities as one global

asset.

IBM continues to develop strategies to meet the environmental changes. These

strategies are directed towards the analysis and understanding of various market issues. IBM

recognized the importance to adapt customer as center of innovation thus they continue to

maintain good relations with its operation environment to develop corporate strategies in

order to achieve sustainable profitability.

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Recommendations:

1. Employee relationship management to improve knowledge sharing

IBM is highly dependent on its talent and human capital in its global business entity.

Thus, it is essential that IBM should focus on its employee relationship management by

facilitate effective interaction among employee as employee are their major assets.

Managing human resources by building and maintaining individualized and mutually

valuable relationships with employees based on information technologies has becoming an

emerging trend of human resource. Ineffective interactions among employees often lead to

inefficient coordination effort especially for a company which has expanded globally where

cross-functional and cross-disciplinary interaction and cooperation are the key requirement to

success. It is essential that the employees perform together as a collective unit and contribute

equally towards the realization of a common goal.

Effective interaction not only can eliminate miscommunication but can also stimulate

opportunities for collective learning amongst employee and greatly enhance employee’s job

satisfactions. It enhances sharing of idea, information and knowledge that is crucial for the

purpose of innovation. According to Din and Haron (2012), knowledge sharing can

significantly enhanced individual capability to retrieve new data and resources for the

purpose of learning, problem solving, and self-improvement. Knowledge is more related to

action as compared to data and information. Thus, it is more valuable. (Davenport and Prusa,

1998).

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2. Continuous Improvement

IT industry is fast-cycle market due the rapid change of technology and preferences of

customers. IBM should drive the rapid development of skills and capabilities to meet

changing business conditions. The strength of competition in this industry is very high. HP,

Mircosoft and Dell are the main rivals that compete at local area, regional, national and

internationally. IBM should have sustainable competitive advantages in a wide range of this

industry for a better performance across the board. Continuous product improvement

becomes an important characteristic behavior pattern because rapid new-product

development cycles keep the company in close touch with customers and their needs. IBM

requires fundamental rethinking of how a company’s goods or services are delivered to

customers, and it means that various parts of the organization will have to work together in a

new and different way.

3. Flexible Work Arrangement

Globally integrated enterprise is an open modular organization that is integrated into

the fabric of the networked economy and operates under a business model that makes

economic sense in the new global landscape (Carroll, T. 2014). Globally integrated enterprise

makes it possible for knowledge work to be performed by skilled people anywhere, anytime

in the world. Thus, one of the factors that would facilitate globally integrated enterprise is

flexible working arrangement for the employees. IBM employees should be able to work

from mobile locations. It gives them flexibility in terms of locations and hours. This enable

them to work side by side to solve the client’s problem for periods of time as needed. They

are also able to change their daily schedule to accommodate different time zones. This

flexible working arrangement could reduce cost and at the same time may improve the

quality of its service delivery.

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Flexible working arrangement should align with the strategic plans for IBM, enabling

growth. In order to cater for the high growth of customers segment and new market, the IBM

skilled workers should be placed everywhere and they are able to be reach anytime. This will

leverage the business resources as well as cost.

4. Accelerate the execution of globally integrated strategies

As globally integrated enterprise strategy is getting complex, and therefore the

execution requires careful planning compare to other change initiatives. Moving to a globally

integrated enterprise is an ongoing process. Timing is crucial and change must happen fast

enough in the electronics and information technology industry to catch up with the pace of

new technology. IBM is one of the enterprises at the forefront of such changes. Approaches

that can help IBM to accelerate the execution of its global integration strategies should be

established. The important factors that determine the successfulness of this strategy include

develop a roadmap that identifies and prioritizes actions required for moving forward,

formulate a common communications channel and governance framework, monitor the

implementation of the strategy and measure the result. Any lacking of the above factors will

lead to the failure of the strategy.

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References:

A Global Innovation Jam. IBM100 (n.d). Retrieved from

http://www-03.ibm.com/ibm/history/ibm100/us/en/icons/innovationjam/

Bower, Joseph L. (2012). Sam Palmisano’s Transformation of IBM. Harvard Business

Publishing.

Carroll, Tim (2012). Global Integrated Enterprise – IBM Transformation Story. IBM

Corporation.

Davenport, T. H. and Prusak, L. (1998) Working knowledge: How organizations manage

what they know. Boston Massachusetts: Harvard Business School Press.

Din, N. and Haron, S. (2012). Knowledge sharing as culture among Malaysian online social

networking users. Procedia- Social and Behavioral Sciences, 50, 1043-1050.

Industry Matter. Recommendations for an Industrial Compact. January 2014. Available at:

www.businesseurope.eu

Jim Bramante, Ron Frank & Jim Dolan, (2010),"IBM 2000 to 2010: continuously

transforming the corporation while delivering performance", Strategy & Leadership, Vol. 38

Iss 3 pp. 35 - 43

Lynch, Richard. (2009). Strategic Management. Pearson Education Limited.

Samuel J. Palmisano. (May/June 2006). The Globally Integrated Enterprise. Foreign Affairs.

Retrived from http://www.foreignaffairs.org/20060501faessay85310/samuel-j-palmisano/the-

globally-integrated-enterprise.html

Palmisano, S. (2011, July). IBM at 100. (R. Karlgaard, Interviewer) Forbes Asia.

Plescan, M., Borza, A., Bordean, O., & Mitra, C. (2010). Reinventing a Company the Success

Story of IBM, Revived and Driven Forward by its Knowledge Leader CEO. Proceedings Of

the European Conference On Intellectual Capital, 472-479.

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