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UNIVERSITI MALAYSIA SARAWAK

Faculty of Economics and Business


Corporate Master in Business Administration
Semester 1 (2014/2015)
EBB 6133: STRATEGIC MANAGEMENT

Case Study Assignment 3


The Evolving Strategy IBM

Name
Chai Lee Sia
Chen Sze Nee
Cherry Chai Ling Ling
Norshamsiah Samsudin
Tan Chee Ming

Matric No.
14030068
14030057
14030062
14030214
14030140

Lecturer : Associate Professor Dr Lo May Chiun

TABLE OF CONTENTS

Page
Executive Summary

Introduction

Literature Review

Case Discussion Question

Question 1

Question 2

Question 3

10

Question 4

12

SWOT Analysis

14

Conclusion

16

Recommendations

17

References

20

LIST OF TABLE
Page
Figure 1: Globally Integrated Model

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.

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.

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
Early to mid-1980s
Late 1980s to early 1990s
Mid-1990s onwards
Late 1990s into 2000s
2000s onwards
Source : Lynch, Richard (2009)

Objectives
Grow and maintain market dominance
Survive competitive threat
Restart growth
Develop new vision of computer grid available on demand
Globally Integrated Enterprise

Palmisano, has chosen to strategize IBM into a globally integrated enterprise. This
concept was introduced in the Policy Journal Foreign Affairss 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
Step 2

Craft the strategy and organization to implement the vision


Get rid of the businesness that dont fit and acquire the capabilities that you
do need
Step 3
Make sure the economic model is profitable
Step 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
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 dont 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 worlds 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.
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.
A corporations 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.

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 IBMs competitive advantage.
Although IBM was the market leader with distinctive competencies, the external market was
fast-changing. Therefore, the IBMs 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 todays global environment, competitive conditions are
intense and therefore firms do as much as they could to response to pressure for both cost
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 IBMs 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.

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
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.

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 IBMs 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.
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. IBMs 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 IBMs
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 Indias 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.

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. IBMs 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 IBMs
market share in its core information technology services business.
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 IBMs 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. Hence, the economy and
political situations in India could affect IBMs 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.

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 crossfunctional 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 employees 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).

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 companys 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 clients 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.
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.

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 Palmisanos Transformation of IBM. Harvard Business
Publishing.
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