ASSIGNMENT 1
Case: IBM's Decade of Transformation: Turnaround to Growth
Direction: Copy the title " IBM's Decade of Transformation: Turnaround to Growth" then paste it in the
Google box. Read the case and give your insights about the case. A write-up of the case is mandatory.
IBM Background and History
IBM is short for International Business Machines. It is also known as “Big Blue.” IBM is
considered one of the world’s biggest Information Technology Company. In the 2009 Fortune 500 list, the
company is ranked 14th best company in the world. It also ranks as the 28th best of global companies on
the 2009 Forbes Global 400 list. IBM manufactures and sells computer hardware and software, and
offers infrastructure services, hosting services, and consulting services in areas ranging from mainframe
computers to nanotechnology. It is difficult to find a company that deals in so many areas. IBM faces
intense competition from other major players in the industry such as Microsoft for desktop productivity
application, Oracle for database products, and Cisco for cloud computing. Even though being the second
most profitable company in the world in 1990, IBM began posting considerable losses between 1991 and
1993. IBM lost a staggering $16 billion. Mainframe computers were the cornerstone of IBM till the ‘90s,
which was the source of almost half of IBM’s revenues. But at the time other companies such as Compaq
and Dell gave priorities to interconnect mainframe, midrange and increasingly mobile personal
computers with distributed data sources and applications that led to fewer sales of IBM’s mainframe
computers.
The company was originally founded as the Tabulating Machine Company by Herman Hollerith; it
was renamed and incorporated by Thomas J. Watson as IBM when Tabulating Machine Company was
merged with International Time Recording Company and the Computing Scale Corporation in 1911.
Presently, it is known as International Business Machine Corporation. IBM has operations in more than
170 countries; it has customer /client relationships with more than 219 companies such as 3Com,
VMware, NVidia, and the like. IBM develops and manufactures information technology related products
and services that help its clients to deliver business values and be more innovative. Through the Global
Technology Services unit, IBM provides critical information technology infrastructure services and
business process services that help clients to integrate resources for continuous innovation. The Global
Business Services unit provides professional consulting services and application outsourcing services
which is intended to deliver business value for its clients. The System and Technology unit provides
solutions for business clients that need advanced computing power and storage management. The
Software unit provides middleware such as Web Sphere, Tivoli and operating systems that can be used to
enhance the capabilities of a business’s IT infrastructure. Additionally, the company assists its internal
and external clients with financing through its Global Financing unit. IBM encourages people from
diverse background to work for the company. It has employed 399,409 employees worldwide and five of
its researchers have received Nobel Prizes. IBM reported revenue of $95.757 billion and total asset of
$109.0 billion for full-year 2009. Samuel J. Palmisano now serves as the current President and Chief
Executive Officer of IBM. The company is trading in New York Stock Exchange under the name of IBM.
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Company Problems and Struggles
Under the leadership of Thomas Watson Jr., IBM became the leading player in the growing field
of Information technology. IBM products such as its mainframe computers were universally considered
as the best solutions to a variety of problems. The Company became so successful that it became the
target of US Government’s antitrust suits by the mid-1960s. IBM’s domination started to dwindle from
the early 1990s. IBM reported its first loss in 1990; its earnings fell 74.8% at the end of the year. IBM
quickly dropped to 45th rank in the Forbes lists. Though the early signs of trouble such as decline of
return of sales appeared before, the company management was very much in denial about these
problems or signs. The company faced stiff competition from other new information technology
companies, such as Microsoft Corporation and Intel Corporation. The Internet boom created a demand
for client-server/network technologies, but the company failed to acknowledge consumer demands. In
addition, IBM faced problems with its size and organizational culture; the company had 20 separate
business units, 125 data centers, and 128 CIOs were working to manage all these business units and data
centers. The company also had 31 private and separate networks; hundreds of different configurations
techniques were used for installation processes. IBM was experiencing three times higher data
processing costs than the market average and the company had difficulties offering continuous streams
of new products, or services. IBM also faced trouble with its asset management. Its asset structure of
$77.7 billion was too big, and with each dollar spent in assets brought only 81 cents in revenue. The
company needed to acquire 17 percent after-tax return –on –assets to stay profitable, but the company
was able to earn 6 percent after tax income in 1989.
IBM was facing strong pressure from investors to improve its profitability. In order to improve
the situation, IBM Board of Directors appointed Lou Gersnter as a Chief Operating Officer. He was given
responsibilities to re-organize the organizational culture, re-engineer global functions and processes, and
use the latest technologies for continuous innovation to add value, both for stake holders and the
organization.
During the 1980s and early 1990s, IBM was thrown into turmoil by one after the other
revolutions. Their revenues flattened and then declined. Their stock price was reduced to half and
company had to lay off half of its workforce. There are many factors that contributed to company’s fall
such as:
PC explosion and increasing power of microprocessors.
New competitors such as HP, SUN, and the like.
Maturing demand for hardware and the arrival of new technologies such as client-
server computing.
Large organization with minimal coordination.
IBM Turn Around
While under the leadership of John Akers, IBM reduced costs by cutting nearly 200,000 jobs in
the mid '80s. From these measures, IBM was saving around $8 billion from its annual costs. It was a
concern that IBM needed a new strategy and a new boss. After IBM anticipated a continuation in its
losses in 1992, the board hired Louis Gerstner to lead and supervise the break up and sale of the
company. The new CEO quickly enforced his concept within the company of “putting the customer first”.
After visiting with customer from all around, Gerstner wanted to introduce “one IBM” to the market. This
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was a concept of integrating the entities of IBM and using it to create solutions for its clients. He began
to delegate different jobs and responsibilities to senior executives. Gerstner hired different heads to take
up different challenges of IBM. First he hires Jerry York to initiate a standard analysis to establish a
comparison between IBM’s cost in each of its businesses and its competitors. The company also built up
a $10 billion cash cushion that Gerstner used in part to pump up research and development. As a result
of these studies, IBM determined that the company was too expensive by $7 billion. This prompted
Gerstner and York to execute more layoffs and appoint managers to handle the underperforming areas
of the business. He then hired Rick Thoman as the overseer of the distressed PC department. Thoman
downsized the brands within IBM’s PC division and exploited its successful ThinkPad brand. Doing this,
IBM would still have the ability to target people who sought a high-quality and reliable productivity tool
and simultaneously slim its executive teams.
The concept of “One IBM” was the force that drove the reorganization of IBM. Gerstner formed
the Corporate Executive Committee, designed to meet every two weeks to concentrate on corporate
strategy and the turnaround of IBM. He also formed the Worldwide Management Council that met
monthly to define and implement international strategies and operations. The sales organization was
also reorganized to better accommodate customer response. In the 2003, Gerstner delegated
accountability of a functional reengineering project to each member of the CEC. Two priorities were set
for these projects: Get cost out as quickly as possible and “cleansheet” the process and redesign it for
global use. Gerstner expressed his high expectations of members of CEC and their improvements of their
delegated tasks. The executives assigned to these projects were working to find common processes. The
executives were regulating and simplifying these processes so they could be used in other areas of the
business. This would make it increasingly possible for IBM to enter the market as “One IBM”.
Conclusion/Analysis
Under the leadership of Gerstner, IBM was transformed from a company that primarily
manufactured mainframes to a company that offered complete IT solutions. The company was able to
change its focus from being product centric to being customer centric. IBM realized the need to
continuously reinvent the business model of a company amidst rising competition and changes in the
business environment. Unnecessary costs were cut down in the process and many new relevant
technological innovations led the way for a successful turnaround for IBM. Other companies can greatly
benefit by reviewing IBM’s strategic and operational planning and in their use of technology. Such
lessons would help any company in IBM's position towards competitive forces in today's IT market,
facilitating better management techniques, inventory control, efficient operations, and implementation
of technology.
IBM Turn Around journey teach us with different techniques and how to overcome problems:
Facing the needs of customers, integrate company resources and talents, and propose
new directions
Resource Integrator: create new value
Opportunity: find opportunities (observation)
Confidence: confidence (courage)
Teaming: form a competitive team (reduce Risk, increase profitability)
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Use existing advantages in a huge organization, inject agility, entrepreneurial spirit,
flexible integration, customer-oriented elements, transform from manufacturing to
service companies, sell DRAM, PC departments, buy consultants and Software company.
In the future, the importance of managing partners is no less important than how to
beat competitors.
Transformation is painful: changing blood, workers must learn new skills, organizations
must have a new culture, and leaders must break through themselves
When faced with difficulties, the answer is to cut costs first and improve efficiency. The changing
economic environment forces companies to accelerate change and innovation, and continue to innovate.
IBM's efforts to become one IBM, the search for strategic direction, and the launch of its Emerging
Business Opportunities (EBOs) and having wisely stop unworkable projects, declining businesses, and
transfer resources. And also give promising innovations and transform new processes to drive new
growth. Trying to conduct strategic experiments to strengthen alliances with customers, competitors,
and suppliers to reduce risks.
Those excellent companies that were once admired and imitated eventually lost their leading
position in the industry when breakthroughs occurred in the market and technology. It can be seen that
good management and improved product performance may not necessarily boost market demand.
IBM's ability to create new businesses. There is a system for the development of new businesses. From
the idea of starting a business, to how to manage ideas, to evaluate the milestones reached by the new
business, there are different management skills and organizational procedures in different types of new
business development stages. You must break the rules and commit to technological innovation, so that
IBM can maintain the vitality of technological innovation. Focus on smart earth, emerging markets, cloud
computing, business analysis markets, Focus!
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