Nt1330 Unit 3 Individual Assignment

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Word count: 2413

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The International Business Machines Corporation is an American computer manufacturing company
based in New York. 1911 marks its beginning when 3 companies- The Tabulating Machine Company, The International Time Recording Company, and The Computing Scale Company of America merged to form The Computing Tabulating Recording Company (CTR) by a financer, Charles Flint (Lee K., 2003, p123).

MERGER OF 3 COMPANIES

Flint hired Thomas J.
Watson in 1914 to lead the company and after surviving the Great Depression, Watson changed the name of CTR to International Business Machines (IBM) in 1924 (ANBHF, 2005, p14). From the beginning, IBM has defined itself not by selling products, which ranged from punch card tabulators to electronic computers, but by its research and development (Bellis, 2013).

IBM has had a major impact on the US economy over several decades. It has been a leading supplier of business machines, computer, and information technology services (Agarwal et al., 2009, p285).

Any entrepreneurship firm typically deals with 3 types of
environments:

These environments play a significant role in the functioning of an organisation. This paper concentrates on one aspect of every environment undergone by IBM.

THE EXTERNAL MARKET ENVIRONMENT

The external market environment can be considered as a key variable to examine the behaviour and the performance of a firm (Westhead et. al, 2011, p176). By analysing the external environment, the firm can find ‘entrepreneurial opportunity’ to offer value to the society by coming out with innovative products (Hughes M., 2013)

“IBM’s history is characterized by its manifold efforts at major strategic transformations in addition to continued incremental strategic renewal in order to cope up with events in the external environment” (Agarwal et al., 2009, p285).

One of the reasons why entrepreneurs struggle with the external environment is because of excessive external change and information overload (Hughes M., 2013).
During the 1980s and early 1990s, IBM felt prey to back-to-back revolutions. The PC revolution placed computers directly in the hands of common man, followed by the client-server revolution which required to link all of those PCs (the "clients") with larger computers that laboured in the background (the "servers" that served data and applications to client machines) (IBM Archives).

Looking at their past records, the top management at IBM felt that the sales of mainframes would reach 100 billion dollar by 1990. Mainframes were the pillars of IBM’s success in the 1980s. IBM’s high goals lay merely on increased production of mainframes which got shattered when the market changed (Singh A., 2006).

Both revolutions transformed the way customers viewed, used, and bought technology and this fundamentally shook up IBM. Purchasing decisions were now individuals’ and departments’ choices and not in the places where IBM had built its long-term customer relationships (IBM Archives). IBM had lost its customer relationships and under the leadership of John Akers, the strategy shifted from a long-term relationship with rental customers to a short-term relationship of a buy-sell transaction. When a firm loses its touch with the customers, it loses the context of its business and so it cannot make correct decisions (Mills D.Q. et.al,
1996, p108).

The IT industry had fragmented in this period almost killing IBM (Hemp P. et.al, 2004). Under the pressure from investors, John Akers, the then CEO, began to break up IBM into “Baby Blues” i.e. broke the Big Blue into 13 business units in order to give the units autonomy to serve the customer needs (Hartley R.F., 2011, p88). Piece-part technologies took the front seat over integrated solutions (IBM Archives). His strategy of disintegration failed as IBM was known for its “singleness” and instead of correcting it he let the company break up and the market to decide (Mills D.Q. et.al, 1996, p148). At a time when the demand and competition for Personal Computers was high, IBM’s PC division was lagging behind (Hartley R.F., 2011, p80). In 1990, its market share dropped as its competitors sold PCs at a much lower rate. The top market players- Hewlett Packard and Sun Microsystems were bringing out in the market, PCs tied up with mini and mainframes (Hartley R.F., 2011, p81). Akers is considered to be the man who nearly ruined IBM (24/7 Wall Street, 2011)

With the rise of the Internet and network computing the company experienced a dramatic shift in the industry in 1990s (IBM Archives). IBM faced the problem of coming to the market rapidly with technological innovations at a time when the IT industry was revolutionizing (Hartley R.F., 2011, p80). In 1993, IBM declared a loss of $8 billion and it had reached close to bankruptcy (Magloff L.) Throughout 1992, IBM kept losing its market share due to industry price wars (Hartley R.F., 2011, p81). Also, as per a former IBM customer, “IBM didn’t adjust its pricing. There was no reason to pay more for IBM products when its standards and service quality are degraded” (Mills D.Q. et.al, 1996, p113).

In 1993, to pull out the company from the major external crisis, the top management showed their readiness and decided to appoint a non-IBM personnel as the CEO- Louis V. Gerstner (Hartley R.F., 2011, p82). He made IBM profitable and placed the company in the market again (Hartley R.F., 2011, p88).

Source: Hartley R.F., 2011, p89

Also, IBM’s stock price nearly tripled in the third year of his tenure from 40 to 114. At first the top management was dicey about his capabilities but he proved to be a revolutionary. Gerstner realised that IBM’s competitive advantage lay in integration since the customers were looking for a single-stop shop for solving their technological problems and hence, he started off by unifying IBM (Hartley R.F., 2011, p89). Secondly, he revived and transformed the company’s culture (Mills D.Q. et.al, 1996, p161).

Source: Mills D.Q. et.al, 1996, p161

And lastly, he aggressively cut the prices and stuck to the company’s roots i.e. its mainframe business (Hartley R.F., 2011, p90). Gerstner found an opportunity in the weaknesses of IBM through the external environment changes to lead the company to heights.

According to my learning from Burke-Litwin model (Appendix-I), I think it was appropriate of IBM’s board to change the senior leadership i.e. the position of CEO from John Akers to Louis Gerstner. He in turn changed the other transformational variables like the culture and the strategy of IBM which led to change in transactional variables and hence, the performance. Additionally, I think Gerstner could have shifted focus from mainframes to Personal Computers since the IT industry was competitive in it at that time.

THE INTERNAL FIRM ENVIRONMENT

Internal firm environment involves continuous interaction of people, structure and process of an organisation. If one of them fails, the system or the organisation as a whole fails.

Source: Hughes M., 2013, “The Personal Task Environment and Entrepreneurship:
Building a Sustainable and Innovative Firm by Managing People and Firm Design”

This paper states how changes in these three elements bring about a transformation in IBM.

In 2002, Louis Gerstner gave the reigns of IBM in the hands of Samuel J. Palmisano. The internal environment has to change to meet new challenges at each stage of the firm’s life-cycle and Palmisano realised that in the phase of transition of industry, the command-and-control culture would no longer work (George B., 2012). Also, it is the job of the top management to recognise the challenges through their knowledge and to tackle those depends on their vision for change (Hughes M., 2013). Palmisano believed that IBM had only undergone financial transformation and it needed a business model transformation because he felt that the then current model was not sustainable to keep the performance steady (George B., 2012 and Useem M., 2012). He did not want the company to slip back to complacency (Hemp P. et.al, 2004).

Palmisano opined that even though reintegration was a big opportunity for IBM but it also posed a major challenge. Despite having a wide range of computer products, services and the best expertise, it was difficult to get people in diverse business units, in various geographical areas and with different financial targets to work together and come up with a single price customized solution (Hemp P. et.al, 2004). He was of the view that the top-down management processes would stifle bureaucracy that would in turn not allow for speed, flexibility and innovation that IBM’s customers expect (Mascarenhas O.A., 2011, p79).

Palmisano had a strong belief that the solution to the problem lay in a new organisational structure (Hemp). He recognized that IBM cannot function solely from the top and it required several leaders globally to operate collaboratively to fulfil its customer’s varied needs. To solve the problem, he first abolished the Corporate Executive Committee (Hemp P. et.al, 2004).

Palmisano realised that reorganizing the formal structure would not be enough to bring about a change, there was a need to change the company’s culture for higher performance (George B., 2012). A strong bottom-up value system was crucial to bring together and motivate the highly skilled workforce of IBM which was spread across 170 countries (Mascarenhas O.A., 2011, p79). He started off by launching a massive global collaboration- Values Jam – An online interactive system to determine what IBM’s values should be (George B., 2012). “Palmisano summarized the values as follows:
1. Dedication to every client’s success
2. Innovation that matters- for our company and for the world
3. Trust and personal responsibility in all relationships”

These values were to be the yardstick for decentralized decision making (Mascarenhas O.A., 2011, p80). In his interview with Michael Useem in 2012, Palmisano mentioned that his first reaction after occupying the seat of CEO was he has to keep the performance of IBM going. Palmisano had identified IBM’s major weaknesses within its existing capabilities i.e. deficiencies in software and consulting expertise and addressed this through acquisition of Price-Waterhouse Coopers in 2002 because he supposed the firm’s strength lay in providing complete solutions customised as per customer’s needs (Agarwal et.al, 2009, p287 and George B., 2012).

I think Palmisano has taken correct actions to take the Big Blue11 to the next level since “reassessing an organisation’s values and its internal culture is the foundation for building new systems and processes that ultimately create the right set of behaviours that will propel the organization forward” (Rouse W.B., 2006, p81).

THE ECONOMIC AND POLICY ENVIRONMENT

“The Economic and Policy environment creates growth opportunities that occur due to circumstances and events in the environment (like unfilled market need, technological breakthrough, or lax competition). Economic recession and economic growth can cause ‘push’ towards entrepreneurship” (Hughes M., 2013).

IBM’s reaction to the Great Depression is a perfect example of how an organisation adapts to changing economic environment (Simpkins R.A. et.al, 2009, p64). In the 1930s, companies faced an extreme version of challenges. Sales fell, stock prices slumped, employees ' retirement accounts went down the drain, companies cut workforces, and the public lost faith in business. “The economy seemed instantly, shockingly crippled” (Anonymous, 2003).

The value of executives’ IBM holdings was slashed to half and the share prices kept falling. At such a time when IBM was almost about to collapse, Thomas Watson Sr., the then CEO, reacted differently than other companies’ CEOs. "Mr. Watson has the idea that the troubles of the times are not so much due to overproduction as to underproduction” (Anonymous, 2003). While IBM’s competitors were reducing inventories and slicing the workforce, IBM refused to lay off its employees, invested in research and development, kept his factories open and stocked inventories when demand was low. Watson believed that the Great Depression would end shortly and he wanted to be prepared to capture the market to provide new up-to-date accounting machines (IBM Icons of Progress). He always showed optimism when he addressed his employees or in public (Anonymous, 2003).

Source: Greulich P.E., 2011, p11

Revenue dropped from 1929 to 1934 and IBM edged towards insolvency. By 1934, Watson needed a miracle as he was counting on the Depression to end which was nowhere in sight. His sheer luck saved IBM from collapsing. In 1935, President Franklin Roosevelt signed the Social Security Act which required employers to establish record-keeping practices (Van Horn C.E. et.al, 2003 ,p293). Overnight, demand for accounting machines soared and only one company could have met the demand – IBM. IBM had warehouses full of machines and it could instantly make more as its factories were yet running and fully staffed (Anonymous, 2003).

It provided the punched card equipment and the expertise about accounting and payroll data that made it possible to implement the law. “The project had an immense impact on IBM. The Social Security project catapulted IBM from a midsize corporation to the global leader in information technology” (IBM Icons of Progress).

Source: Yost J.R., 2005, p23

IBM had the least revenue as compared to its major competitors and market leaders in 1928 but in 1939 IBM turned the tables and it made the most profit (Yost J.R., 2005, p23). By the end of 1939, IBM’s revenues had increased by 81 percent over 1935 levels (IBM Icons of Progress).

In this way, the paper provides evidence that the economic environment can provide growth opportunities to the firm and also that change in policies can have a great impact on the firm’s functioning and performance.

In my opinion, Mr. Watson should not have taken such a huge risk because his plans were highly dependent on his optimistic view that the Great Depression would end soon and the market would start rolling again. Had the Social Security Act not been signed, IBM’s existence would have been a history. Mr. Watson should have waited for the Depression to end and a new policy to come out because policy makers can help in providing support and incentives keeping the economic condition in mind (Hughes M.,2013).

To conclude, changes in all three environments can provide growth opportunities for any company. It is the entrepreneur who has to exploit these opportunities for the betterment of the firm. IBM has proved its capabilities over several decades by the CEOs’ expertise. It has been successful in utilising the opportunities found in the different environments and today it ranks the 20th in the Fortune 500 list (CNN Money).

“A company is known by the men it keeps”

-Thomas Watson Sr.
(Source: Greulich P.E., 2011, p13)

REFERENCES

24/7 WALL STREET, (Feb 3, 2011), “America’s Ten Biggest Corporate Turnarounds”

AGARWAL AND HELFAT (2009), “Strategic Renewal of Organizations-Organization Science” Vol-20(2), pp. 281–293

ANONYMOUS (2003), “IBM founder 's Depression gamble pays off”
[Available at : http://usatoday30.usatoday.com/tech/techinvestor/2003-04-20-ibm-watson-bio_x.htm]

ANONYMOUS (2005), “Tom Watson-IBM”, American National Business Hall of Fame, ANBHF
[Available at: http://www.anbhf.org/pdf/Tom_Watson.pdf]

BELLIS MARY (2013), “IBM History-Profile of a Computer Manufacturing Giant”

CNN MONEY, “Fortune 500 list”
[Available at: http://money.cnn.com/magazines/fortune/fortune500/2013/full_list/]

GEORGE B. (January 18, 2012), “How IBM 's Sam Palmisano Redefined the Global Corporation”, Harvard Business Review

GREULICH P.E. (2011), “The World 's Greatest Salesman- An IBM caretaker’s perspective: Looking Back”

HARTLEY R.F. (2011), “Marketing Mistakes and Successes”, 10th Edition

HEMP P. AND STEWART T.A. (Dec 2004), “Leading Change When Business Is Good-
An Interview with Samuel J. Palmisano “, Harvard Business Review

HUGHES M. (2013), “Managing the external market environment to achieve growth”, presented in lecture 4 at Durham University

HUGHES M. (2013), “The Personal Task Environment and Entrepreneurship:
Building a Sustainable and Innovative Firm by Managing People and Firm Design”, presented in lecture 7 at Durham University

HUGHES M. (2013), “Drivers and barriers in firm start-up and growth”, presented in lecture 1 at Durham University
IBM ARCHIVES- Chronological History of IBM (Available at http://www-03.ibm.com/ibm/history/history/decade_1990.html)

IBM ICONS OF PROGRESS, “The Social Security System” [Available at : http://www-03.ibm.com/ibm/history/ibm100/us/en/icons/socialsecurity/]

LEE K. (2003), “Trouncing the Dow: A Value-Based Method for Making Huge Profits in the Stock Market”, McGraw Hill Professional

MAGLOFF L., “Examples of Transformational Change”, Demand Media
[Available at : http://smallbusiness.chron.com/examples-transformational-change-18261.html]

MASCARENHAS O.A. (2011), “Business Transformation Strategies: The Strategic Leader as Innovation Manager”, SAGE Publications, First edition

MILLS D.Q. AND FRIESEN G.B. (1996),”Broken Promises: An Unconventional View of what Went Wrong at IBM”, Harvard Business School Press

ROUSE W.B. (2006), “Enterprise Transformation: Understanding and Enabling Fundamental Change”

SIMPKINS R.A. AND PAKNEJAD B.S. (2009), “The Global Crosswinds of Change”

USEEM M. (2012), “IBM’s Sam Palmisano: ‘Always Put the Enterprise Ahead of the Individual’”

VAN HORN C.E. AND SCHAFFNER H.A., 2003 , “Work in America- An Encyclopedia of History, Policy and Safety”

WESTHEAD P., WRIGHT M., AND MCELWEE G. (2011), “Entreprenurship: Perspectives and Cases”, Financial Times, First Edition

YOST J.R. (2005), “The Computer Industry”

APPENDICES

Appendix-I Burke-Litwin Model (Burke, W.W. and Litwin, G.H. (1992) “A Causal Model of Organizational Performance and Change”, Journal of Management, 18 (3), pp. 523-545)

Burke-Litwin model is a causal model that explains which organisational variable affects more directly another variable and also how performance is affected by it. It distinguishes transformational and transactional dynamics in organizational behaviour and change. The external environment box represents the input, and the individual and organizational performance box the output. The feedback loop goes in both directions: that is, organizational performance affects the system’s external environment via its products and services, and the organization’s performance may be directly affected by its external environment. The remaining boxes in the model represent the throughput aspect of general systems of theory. All boxes have bi-directional arrows with every other box indicating its two-way influence on the variables, so a change in one leads to change in another (Burke et.al, 1992).