978-1259913747 IBM At The Crossroads Case

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Textbook Strategic Management 3rd Edition

Authors Frank Rothaermel

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Structure of the Case

At the beginning of the case we find Virginia Rometty, CEO of IBM, reflecting on the company’s

declining revenues and its ability to adapt to changes in its environment. We learn that she played

a major role in helping to develop and implement Sam Palmisano’s aggressive strategy to increase

profit margins, especially in the face of competitive hardware and software pricing. Following some

strategic missteps in the personal computer market, Palmisano vowed that IBM would never be left

behind again; in that spirit, he led IBM’s transformation from a multinational company with world-

wide operations to a more seamless global enterprise. Now it is 2015, the the third year of Rometty’s

tenure as CEO, and she is wondering, Is it time for further changes at IBM? Should IBM adapt to disrup-

tive cloud computing and data analytics, or will the current strategy of offering customers integrated solutions

continue to work?

The next section of the case provides readers with a historical overview of IBM’s successes, failures,

and redemptions, followed by brief insights of the lives of past CEOs, including Lou Gerstner who

positioned IBM to get back in the game after the largest single-year corporate loss in U.S. history. (“The

Louis Gerstner Era”). Gerstner reversed a previous decision to split IBM into multiple business units,

deciding instead that IBM’s strength lay in its ability to provide “integrated solutions.” He rebuilt the

company around three strategic pillars: the development of a broad computer services unit, a move to

more “open systems,” and the embracing of a “networked world” view of computing. IBM’s breadth

and integrated service platform provided a significant advantage in the new Internet environment, and

IBM quickly emerged as a leader in e-business.

Sam Palmisano, a life-long IBMer, assumed the helm in 2003 and continued the process of trans-

formation begun by his predecessor (“The Sam Palmisano Era”). He boldly pushed the company into

IBM at the Crossroads

TEACHING NOTE

MHE-FTR-034

1259420477

REV: APRIL 8, 2015

Teaching Note — IBM at the Crossroads

of McGraw-Hill Education.

themselves. IBM made its first foray into the cloud in 2007. The “Blue Cloud” was a combination of

software and hardware components through which IBM sought to provide customized, cloud-based

services for its clients. The company expanded into Cloud Computing Centers in 2008, to enable its

clients to transition to virtualized data centers. Later that same year, it added cloud consulting and

technology services, as well as a cloud-based certification program. It also announced an alliance with

Google to promote educational and commercial cloud-based services. The companies hoped that IBM’s

reputation would drive the sale of Google Apps, while IBM would provide the necessary infrastructure

and services. In its efforts to maintain its reputation as a “reference point” in the industry, IBM has

staked some kind of initial claim on almost every emerging cloud front.

Data analytics (“IBM’s Data Analytics Initiative”) resulted from firms having more information

available than ever before. For example, it is estimated that Walmart collects more than 2.5 petabytes

of data every hour. As a result, IBM, SAS, and other firms are lining up to help customers use the data

they amass. Data analytics, also called Big Data, examine the growing amount of data firms collected

to identify patterns or other relevant information so that managers can make better decisions. The

business implications of data analytics can be compelling. For example, Netflix analyzed its subscriber

data to develop its hit show “House of Cards.” With appropriate data analytics platforms, firms can

boost sales by making relevant recommendations to customers, increase efficiency of operations, and

reduce fraud. In 2009, IBM moved into data analytics with a massive advertising campaign to promote

the idea of building a “smarter” planet. IBM has embraced social media and enjoyed a huge marketing

success by having its computer Watson compete on Jeopardy!, the television game show.

In 2015, Rometty doubled down on the current strategy with a $4 billion investment in “strategic

imperatives,” which included cloud computing and data analytics. However, increased profits and

sales growth from those areas have not offset declining revenues and IBM’s stock price. Will continuing

the current strategy meet current competitive demands, grow revenues, and enable Rometty to avoid

being the CEO that failed IBM?

Suggested Answers

AnAlySIS: FocuS on InternAl And externAl envIronMent

1. Perform an industry analysis for each of IBM’s top market segments: services, software, and

hardware. Are these attractive industries? Why or why not?

See Exhibit TN-1 for an analysis based on Porter’s five forces (industry) for each of IBM’s three

primary market segments. The information is drawn from information in the case supplemented with

identified sources. A key to the color coding is as follows:

With respect to software, incumbent firms face a high threat of new entrants and widely available,

low-cost substitutes. Writing software code requires technical capability, but little capital, while the

Teaching Note — IBM at the Crossroads

The major threat to the hardware segment is high interfirm rivalry. High fixed costs in a highly com-

petitive and fragmented market create extreme price pressures, driving most major players to outsource

at least part of their manufacturing processes to Asia (where labor costs are significantly cheaper).

power. Companies may choose to hire and train their own service staff in-house, but this can be a costly

and labor-intensive alternative.

It is also important to consider the potential impact of the cloud, big data and analytics, and systems

of engagement on each of these three industry sectors. The combined effect of current environmental

changes is likely an increase in the demand for computing services and consulting services to design

and integrate them. However, if firms adopt public cloud, it will likely have a negative impact on both

Financing is a valuable complement to IBM’s software, services, and hardware activities (see Case

Exhibit 9), adding value when offered in tandem.

Sources:

IT hardware market growth: http://www.statista.com/statistics/203393/

global-market-forecast-of-it-hardware-from-2007-to-2015/

2. Looking at IBM’s resources, capabilities, and competencies, can IBM gain (and sustain) a

competitive advantage? Why or why not?

The VRIO framework (see Exhibit TN-2) is a useful tool for analyzing a firm’s resources and capa-

bilities and determining its source of strategic competitive advantage.

Teaching Note —IBM at the Crossroads

of McGraw-Hill Education.

such as $8 billion in cash and investments on hand (see Case Exhibit 4), patents, a global presence, and

a wide breadth of product and service offerings. While these are all costly and/or difficult to imitate,

only the patents and portfolio breadth are rare. The degree to which they are organized to capture

value is more difficult to determine, although the company’s global presence has declined from 2009

(see Case Exhibit 6).

Not surprisingly in a knowledge- and service-based industry, IBM’s intangible resources and capa-

bilities tend to satisfy more of the VRIO criteria. All are valuable, and all but the company’s open-

systems perspective and experience in multiple cloud sectors are rare (many other large competitors

in services, software, and hardware) is rare, but competition is increasing and it is not clear whether

IBM is organized to meet demands for achieving desired revenue growth in cloud computing, big data

and analytics, and systems of engagement.

ForMulAtIon: FocuS on BuSIneSS,

corporAte or GloBAl StrAteGy

3. Describe IBM’s strategic shifts over the last 20 years. What lessons can be learned?

As part of their analytical process, IBM’s strategic leaders should take stock of lessons learned from

two previous strategic shifts in the IT industry: the fall of mainframes, the rise of the Internet, and the

combined forces of cloud computing, data analytics, and systems of engagement.

Fall of mainframe computing. IBM relied on a vertically integrated strategy through the 1970s, build-

ing all of its key components like processors, operating systems, peripherals, and databases in-house.

Teaching Note — IBM at the Crossroads

IBM’s vertically integrated strategy no longer provided a competitive advantage in the new PC era.

PCs could be sold in a variety of retail outlets, eliminating the need for a highly trained sales force. Data

processing centers were no longer essential, as PCs had their own memory and processing systems

Rise of the Internet. In contrast, IBM was among the first companies to embrace the rise of the

Internet. Then-CEO Gerstner recognized that integrated solutions were essential to helping customers

navigate the complexities created by this new technology, and reversed a predecessor’s decision to split

the company into 13 “Baby Blues.” Next, he initiated a broad computer services unit that sold bundles

Combined forces of cloud computing, data analytics, and systems of engagement. Under CEO

Virginia Rometty, the environment that IBM confronts has continued to change and drive competition

from additional fronts. This has led to reduced revenue in traditional areas and investment in pursuing

work to leverage a return to computing power on servers (cloud), accumulation of large amounts of

• Reducingcomplexityforthebusinesscustomerisanimportantcriterionforsuccess.

• Evenifacompanymissesoneturnoftheinnovationcycle,thereisstillhopetosurviveandgetback

in the game.

Teaching Note —IBM at the Crossroads

4. What are IBM’s business- and corporate-level strategies today?

IBM continues to apply a differentiated business-level strategy, striving “to create higher value for

customers than the value that competitors create, by delivering products or services with unique fea-

tures while keeping cost at the same or similar levels”. The company leverages three main value driv-

ers in order to differentiate itself from its competitors:

Under then-CEO Sam Palmisano, IBM positioned itself as a solution-driven consulting, services, and

software company (see Exhibit TN-1). As a result, IBM’s corporate-level strategy is best classified as

related linked. No single division generates more than 70 percent of firm revenues, and there are loose

At the corporate level, IBM has also used acquisitions and divestitures to reconfigure its portfolio of

businesses. Notable examples are:

From 2003 to 2007, IBM spent a total of $11.8 billion on 54 acquisitions, including 36 software and 18

services companies. IBM has also invested heavily in internal research and development. For example,

IMpleMentAtIon: FocuS on recoMMendAtIonS

And How to execute tHeM

5. How should IBM position itself to take advantage of current technology trends? Should IBM focus

on a particular segment or try to maintain vertical integration?

Historically, IBM’s competitive advantage has been its ability to provide integrated solutions (mak-

ing the complexities of the cloud simple) for large enterprises. Although it launched a public cloud

Teaching Note — IBM at the Crossroads

facility in Raleigh, North Carolina in 2010, IBM’s emphasis has been on building private or hybrid

clouds for clients. This allows IBM to provide clients a system of engagement to enable the mobile

Despite IBM’s increased emphasis and $4 billion investment in strategic imperatives related to cloud

computing, big data and analytics, and systems of engagement, revenue growth in these areas have not

offset declines in other areas. There are conflicting opinions on whether IBM will succeed.

6. What should IBM’s offensive and defensive plan look like?

Offense: Playing to its strengths, IBM’s major strategic moves should include:

• Targetlargeenterprises,andpossiblycitiesandnations.IBMshouldfocusonlarge-scaleprojects

where its breadth and experience add unique value.

Defense: Given technological change and environmental uncertainty, IBM should maintain strategic

flexibility by:

• AssessingitsenvironmentandhowIBM’scompetenciesfitandorneedtobeadjusted

• Analyzingtheeffectsofpotentiallydisruptivetechnology

Teaching Note —IBM at the Crossroads

of McGraw-Hill Education.

• RapidlydevelopinganddeployingITsolutionstoobtainafirst-moveradvantage

• Engaginginscenarioplanningandformulatingaroadmapforcontinuedadaptation

• Makingsureshort-termactionsareinalignmentwithlong-termcorporategoals

According to its Fourth Quarter 2014 earnings presentation, IBM’s performance objectives include:

• Generatelowsingle-digitrevenuegrowth

• Growthinitiativesandfutureexpansion—shiftinvestmentsandresources

Additional Resources

1. “Behind Ginni Rometty’s Plan to Reboot IBM,” the wall Street Journal, April 20, 2015; video:

2. “Systems of Record vs. Systems of Engagement,” February 11, 2014; video: https://www.youtube.

3. “IBM Watson: How It Works,” October 7, 2014; video: https://www.youtube.com/watch?v=_

4. “IBM’s Watson on Jeopardy!,” video: https://www.youtube.com/watch?v=WFR3lOm_xhE (3:52)

A short clip of IBM’s Jeopardy! demonstration.

5. “IBM Centennial Film,” January 20, 2011; video: https://www.youtube.com/

6. “Ginni Rometty Speaks” May 14, 2014; video: https://www.youtube.com/watch?v=27iTKq4rtKE

(7:16). CEO Rometty discusses her plans for IBM’s future growth.

7. IBM has its own channel on YouTube with content on multiple areas, including IBM Cloud, IBM

Big Data and Analytics, and IBM social business. https://www.youtube.com/user/IBM.

8. IBM has two Facebook pages devoted to its activities:

Teaching Note — IBM at the Crossroads

of McGraw-Hill Education.

a. Cloud: http://www.facebook.com/IBMCloud.

b. Big Data: https://www.facebook.com/IBMbigdataanalytics

Contact your local representative from McGraw-Hill Education (http://shop.mheducation.com/

store/paris/user/findltr.html) for information about access to financial analysis spreadsheets.

Teaching Note —IBM at the Crossroads

ExhIBIt tN-1 An Analysis of IBM Based on Porter’s Five Forces

Threat of New

Entrants Power of Suppliers Interfirm Rivalry Power of Buyers Threat of

Substitutes

entrants.

•Easytoenteron

smallscale,either

firm.

•Regulatorybarriers

varydependingon

natureofservice.

•Largeincumbents

reputations.

softwareproviders;

productstend

tobehighly

differentiated.

importantinput;

turnoverleads

tohighswitching

costs.

•Somelarger

companies

2015–2016helps

tomitigaterivalry.

•Fragmentedmarket

withseveralother

majorplayers.

•Servicesprovided

bylargefirmsare

essentiallysimilar.

generated.

largebusinesses.

•Largerbuyers

exertstronger

importantfactorin

choosingservice

providers.

•Long-term

contractsincrease

tobuyers.

andtrainstaff

in-house.

•Thecloud,big

increasedservice

opportunitiesand

demand.

Software •Predictedgrowth

•Easyaccess

todistribution

•Strengthof

theirintellectual

property.

•Keysuppliersare

•Solesuppliers

ofdifferentiated

significantpower.

•IBMisconsistently

segmentsand

•Microsoftisthe

overallleader

butanticipated

growth~5percent

•Keybuyers

•Switchingcosts

industry-specific

applications.

•Consolidation/

largesize

•Open-source

throughservice

•Othersinclude

freeweb-based

andincreases

accessibility.

NOTE: Light yellow indicates the force is considered moderate

Orange indicates the force is rated as strong

No color indicates a favorable condition

Teaching Note — IBM at the Crossroads

Threat of New

Entrants Power of Suppliers Interfirm Rivalry Power of Buyers Threat of

Substitutes

Hardware •Keyentrybarrier

istechnological

capabilityandability

tostayonleading

expensesrequire

outlay;exacerbated

investmentcapital.

onspecialized

informationby

defendingpatents.

•Keysuppliers

areelectronic

component

manufacturerswith

differentiation.

costsforbasic

sophisticated

morepower.

•IBMisnota

significantplayer

andhasdivested

assets

toAsia.

butsignificantM&A

•Keybuyersareend-

usecustomers.

•Fragmentationand

differentiation

•Buyersare

buyershave

power.

•Productspurchased

•Long-termcontracts

increaseswitching

costsforbuyers.

•Itmaybepossible

tomanufacture

hardwarein-house,

butislikelytobe

costly.

havenoviable

needforcompanies

ExhIBIt tN-1 (continued)

Teaching Note —IBM at the Crossroads

of McGraw-Hill Education.

Is the Resource, Capability, or Competency…

and Is the Firm…

Advantage

Parity

Disadvantage

ExhIBIt tN-2

Applying the Resource-Based View: A Decision on Tree Revealing

Competitive Implications

ExhIBIt tN-3 IBM’s Tangible and Intangible Resources and Capabilities

IBM’s Resources and Capabilities

… are they?

Valuable

Rare

Costly to

Imitate

Organized to

capture value

Abilitytoprovideintegratedsolutions üüü ?

Teaching Note — IBM at the Crossroads

of McGraw-Hill Education.

Endnotes

1 http://searchitchannel.techtarget.com/feature/IT-consulting-market-outlook-Its-growing-but-slowly

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