IBM Group ProjectStrategy, Organization Design & Leadership

SM 80.53

Submitted by

Francisco Martins da Silva      114551Mia Osawa                                  114566Archana Sharma                       115341Anuj Shrestha                            114554Pattanun Rueangtrakarn         114282

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1. Introduction.............................................................................................................................................3

2. Industry Analysis......................................................................................................................................5

Threat of New Entrants...........................................................................................................................6

Supplier Bargaining Power.......................................................................................................................6

Buyer Bargaining Power..........................................................................................................................6

Threat of Substitutes...............................................................................................................................6

Intensity of Rivalry...................................................................................................................................6

3. Environment Analysis..............................................................................................................................8

Political/Legal..........................................................................................................................................8

Economical..............................................................................................................................................8

Social.......................................................................................................................................................9

Technological...........................................................................................................................................9

Environmental.........................................................................................................................................9

4. Internal Analysis....................................................................................................................................10

IBM’s Value Chain..................................................................................................................................10

IBM’s resources, capabilities and core competencies...........................................................................14

5. Strategy Formulation.............................................................................................................................15

SWOT Analysis.......................................................................................................................................15

Value creation and pricing options: IBM’s competitive advantage........................................................16

Strategy formulation process................................................................................................................16

Scenarios...............................................................................................................................................17

IBM’s strategic sweet spot.....................................................................................................................18

6. Strategy implementation.......................................................................................................................19

CONCLUSION, LESSONS LEARNED & RECOMMENDATIONS......................................................................20

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1. IntroductionOne of IBM's founder, Thomas J. Watson Sr. coined the slogan, Think, that appeared all over the company in the 1930's. Since then IBM has been through a series of transformations. The early 1990's saw IBM come close to bankruptcy with $8 billion losses and shares selling at $12 each. Lou Gerstner, former chairman and CEO (1993-2002) saved Big Blue and his successor, Sam Palmisano, oversaw a 10.2% annual increase in its stock price during his nine years as IBM’s chairman and CEO.

Gerstner’s strategy of listening to the clients proved him right: IBM being a large multi-faceted technology company, it was ideally situated to provide integrated solutions to customers. In the process, IBM discovered the joys of a “blue ocean” strategy: a big opportunity with little competition.

In 2002, Palmisano succeeded to Lou Gerstner, who brought struggling IBM back on its feet and put it on a viable course. Palmisano saw IBM's unique strength as offering complete solutions tailored to customers’ needs — something no other company could match. This led to the formulation of a single globally integrated enterprise strategy. Executing this strategy required seamless integration of IBM’s product capabilities with its geographic reach. This meant abandoning IBM’s existing organizational structure, in which product silos and geographic entities operated independently (frequently leading to more competition than collaboration). Palmisano shifted IBM's focus from hardware to high-end software services (see figure 1). To concentrate on customer solutions and enable an optimized focus strategy, Palmisano spun off personal computers and sold IBM's PC business to China's Lenovo. He continued to sell hardware and acquired many software and analytics companies.

In 2012, Virginia M. Rometty succeeded Sam Palmisano as IBM’s CEO.

Figure 1: IBM income mix

IBM’s mission:As per IBM’s statements, its mission is to strive to lead in the invention, development and manufacturing of the industry’s most advanced information technologies, including computer systems, software, storage systems and microelectronics. In a nutshell, it seeks to translate advanced technologies into value for their customers.IBM’s vision:

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IBM is dedicated to each of its shareholders (cf. values below), and has consequently adopted a vision of “providing solutions for a small planet”. This vision includes various perspectives: finding solutions to make life easier, being efficient, satisfying stakeholders and helping in build a smarter planet.

IBM’s values:Both IBM’s mission and vision translate into a set of values, which dictate each of the company’s decision and incentive. As a company, it bases itself on the following values:

- Dedication to every client’s success- Innovation that matters – for the company and for the world- Trust and responsibility in all relationships- Building, maintaining and developing any thing that will differentiate IBM with clients, investors,

employees and communities.- Adopt and implement the slogan: “Our mission, our aspirations”- Base every decision on this set of values: “how we make decisions at our company” and “how we

behave and act, collectively and individually).

IBM’s objectives:Today, to work its way through struggling times, IBM seeks to grow and develop its businesses by re-shifting the focus on profitable sectors. This has to be operated within the framework of a leadership respecting all the values IBM sets as its guiding principles.

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2. Industry Analysis

High

Low High/Low

THREAT OF NEW ENTRANTS

Lucrative industry attracts many rivals

High threat on a specialized front such as unique service or product

Market is easy to enter with increasing availability of labor

BARGAINING POWER OF SUPPLIERS

Abundance of low-cost skilled workers in emerging economies that are employed by companies.

BARGAINING POWER OF BUYERS

High, if substitutes easily available.

Low, if service is unique and proprietary or vendor has close relationship with the client

THREAT OF SUBSTITUTION

Low for the current product portfolio and technology from R&D.

Low, as IBM gives many products free.

High, if service is copied or provided by the competition

INTENSITY OF RIVALRY

IBM, large player in the market; hence focus of rivals.

Rivalry from small companies which can attack any weakness it has

High

High/Low

Figure 2: Porter's five forces analysis

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The IT industry faces a big challenge of a continuously evolving technology. The competition being intense as well, it forces companies to drive down costs while maintaining their innovativeness. Although IBM holds the largest share of any one company (see Table1), it still does not hold a dominant position in this industry. Porter's five forces analysis (see figure 2) can be used to formulate the industry analysis for IBM.

Threat of New EntrantsThe IT and business consulting market attracts many new entrants in lieu of the new opportunities due to the evolving technology market. This industry is a lucrative and global business where it is increasingly easy to compete from any part of the world. This holds true, especially for emerging countries with an increasing number of skilled and low-cost workers (like China and Vietnam), which are underbidding India (once the leading low-cost bidder for Western outsourcing businesses). This opens up the opportunity for new entrants who can provide the same business automation and cost saving services at lower prices.Threat: High

Supplier Bargaining PowerThe increasing popularity and ease of open source has created a plethora of open standards tools and software. Hence, IBM can't rely on customer lock-ins as there are many alternatives. This has led IBM to embrace many of its competitors’ products and even to acquire many competing companies (in the objective of lowering suppliers’ bargaining power). By "Suppliers" we also mean IBM's consulting base, employees who work for IBM, a competitor, or outsourced labor.Threat: Low

Buyer Bargaining PowerThis industry consists of mainly two types of segments: low-cost service on the one hand, leading edge IT products and services on the other hand. Low-cost services reduce the overhead costs for clients, calling for a larger and mature market, whereas leading edge clients seek for the best services and products for which they are willing to pay a premium price, but the choices in such cases are limited. IBM positions itself in the leading edge market and hence it has to constantly evolve its products and services to avail premium charges. Otherwise the niche market could move to lower-margin competitive segment.Threat: Medium

Threat of SubstitutesIBM has a wide range of products and services, which has helped it to cover the entire market and gain the largest shares. There are many bundled products, which are offered free by IBM to create customer loyalty and customer lock-in. However, due to the possibility of competition creating similar products (giving customers more choices), the threat of substitution increases. In the meantime, IBM has a wide range of acquisitions, which supplements its current arsenal of products, and hence reduces the eminent threat of substitution. Last, the threat of substitutes is reduced by IBM as it is continuously engaging in licensing or protected partnerships (in the past twenty years, IBM has been on the top US-patent recipient), consequently minimizing the risk of learning opportunism of partners by protecting its intellectual property. Threat: Medium

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Intensity of RivalryCompetition in this industry is fierce, but IBM enjoys a large share of the leading edge IT consultancy market. Many of IBM’s products set the market standard, allowing IBM to control the direction and progress of the market. Many of IBM’s competition are either niche-oriented or cost-leaders, or are complementary. This increases the threats of rivalry, as IBM represents the main rival for most of the competitors and due to the breadth of IBM, such companies can chip away at the profits of IBM in specialized areas where IBM is weak. Intense rivalry has decreased the profit margin for IBM in recent months and has led to the lay-off of many employees in order to cut costs, enough to offset declining sales.

Bloomberg quoted Laurence Balter, an analyst at Oracle Investment Research, who estimated that with IBM’s $1 billion restructuring charge, IBM would cut 6,000 to 8,000 jobs globally– at most 1.8% of IBM’s total workforce of 434,246 at the end of 2012.1

The table below lists IBM’s main competitors:

Table1: Revenue of top 6 vendors 2

Threat: High

It is clear from Porter’s Five Forces model that the biggest problem for IBM is the existing rivalry; however the market is growing, with a need of new innovative solutions from their suppliers. The key factor for success will be attaining a high level of differentiation, which will guarantee profitability, and market growth.

1http://www.forbes.com/sites/petercohan/2013/06/14/as-it-shrinks-in-a-growing-market-does-ibm-have-a- strategy/2Source: IDC’s Worldwide Quarterly Server Tracker, August 2013

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3. Environment Analysis

Drivers External Factors

Influence on

Industry 0 to 10 (A)

Impact on Company -5 to 5 (B)

(A) * (B) Probability of change

Political/Legal Conflicting regulations between different countries; compliance with local laws vs. global operations.

Patent laws are in a flux in the US and worldwide; patent reform changes nature of competition.

4

8

-1

3

-4

24

Low

Medium

Economical Global recession from US economic troubles

Shift away from US as primary market

9

7

-4

3

-36

21

High

HighSocial Workforce growing older; fewer young

employees and more diverse workers

Workers separated geographically; trend of employees working from home or regional offices

6

8

2

3

12

24

High

High

Technological Technology quickly becomes widespread / copied by low cost rivals

Disruptive technology; new invention creates or destroys an industry quickly (soon-to-be obsolescence)

8

9

-4

+/- 5

-32

+/- 45

High

Medium

Environmental Focus on ‘green’ or low consumptionsustainable energy

Natural disasters

4

2

2

-4

8

-8

Medium

LowTable 2: Environmental factors affecting IBM

Political/LegalIBM is a multinational company operating in many countries, often resulting in IBM needing to navigate between conflicting regulations. What may be legal in one country may not be in another; financial practices may differ. In the same perspective, worker’s rights, patent law or export controls are all factors that need to be taken to consideration.

EconomicalEconomic recessions can impact clients who may cut back on spending in IT and business operations. IBM may find that it needs to rely less on US operations for profit than with emerging countries coming on line (for example, Chinese companies looking for premium IT services).

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SocialWorkers are gradually graying, becoming older as baby boomers move toward retirement. Employee needs and desires change as workforce becomes more diverse. Technology allows employees to collaborate and work far away from each other; however downsides of isolation and separation need to be addressed. The empowerment of the working class and rising inflation has increased the demands for higher wages, which puts pressure on many IT companies (especially IBM) and also makes it hard to retain quality employees. The collaboration of employees throughout the world also creates some problems with collaboration due to the cultural differences and time differences. Despite the ranks of skilled workers in India and other countries, competition has shrunk the pool of available candidates. Employees work in a ‘virtual organization’, where location is no longer defined; employees are connected to each other through networks and technology.

TechnologicalIBM is the trendsetter and market maker for new technology in IT automation and business. It is likely that old standards can be disrupted overnight with the introduction of a new technology. IBM needs to continuously innovate as anything can be copied or adopted by rivals. As competitors become adept at duplicating the same types of services IBM develops, competition increases and profits drop. Because IBM does not force clients to use any particular product, it is easy for clients to move to IBM, vice-versa at the risk of them easily moving elsewhere (no customer lock-ins have the same pros and cons for any competitor).

EnvironmentalNatural disasters can disrupt IBM operations, as facilities are located worldwide. The focus on ‘green’ technology is also an important issue as clients and governments try to address the rising global warming issues.

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4. Internal Analysis

IBM’s Value Chain

The value chain designed by Porter plots an organization’s activities depending on whether they are primary or supporting activities. The combination of all these activities enables the transformation of inputs into outputs. It is crucial for a company to assess its own value chain so as to understand how it creates value: the bottom line of any company is to make profit by creating outputs of greater value than the inputs. By describing this process, a company is able to put into words why it exists in the first place: what is its leading objective, its reason to be? Put into an equation, it sums up to:

Value created / captured – Cost of creating that value = Profit margin

Figure 3: Value chain

Figure 3 depicts Porter's value chain for IBM. The red arrows indicate weak linkages, while green arrows show strong links.

The X-axis represents the supporting activities:

Organization’s infrastructure

IBM was reorganized in a decentralized organization following Sam Palmisano’s nomination as the company’s CEO. Today, it is organized in seven service lines

1. Strategy & Transformation2. Business Analytics and Optimization3. Application Management Services4. Mid Market5. SAP Applications6. Microsoft Applications

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With its close to half a million employees around the world, IBM is today the 18 th largest firm in the USA. Therefore, it requires frequent adaptations to maintain an optimal operational efficiency. The decentralization process was enabled by the division of the company in numerous sub-companies, divisions, etc. having each its own organizational structure. This translates in the periodic necessity to restructure the company to maintain its full efficiency. The details of the organizational structure are described below in figure 4.

Figure 4: IBM’s organizational structure

HR management

To reduce any redundancy or overhead costs in the goal of maximizing the productivity, IBM has integrated HRM in its supporting activities to improve the firm’s capacity to innovate. Thanks to a more consistent HRM, IBM is able to provide an optimal environment to its employees, resulting in clear list of key priorities, goals, and objectives. It led the organization to a sharper focus for the learning, development, and knowledge sharing, but also to a shared strategy to which the employees are committed. By adopting a pro-active (rather than a reactive) HR strategy, IBM has been able to implement change successfully: for example, IBM’s HRM has helped the company acquire smoothly 125 companies since 2000 and transform these acquisitions into a global integration (generating savings of $6 billion since 2005). Amongst others, IBM’s HRM has notably developed three skills to promote an optimal operational improvement: 1. Reinvent talent development with ‘Global Enablement Teams’ (which consist of sending top people

from mature markets to growing markets to promote a two-sided learning).2. Reinforce global teams (as contradictory as the formulation may seem, IBM is aiming at a centralized

decentralization) by reducing the barriers between each team across the world.3. Link the HR activities to business results by creating a performance-orientated culture.

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Technology development

The key differentiation between IBM and its competitors is the R&D. IBM spends approximately 5-6 billion annually (including capitalized software costs), hence focusing its investments on high-growth opportunities. The company also has some of the best technology registered in its account that made revolutionary changes, such as the transfer of massive amounts of business data around the world.

- Procurement: IBM has developed business partner relationships, which allows IBM to deliver products and services at a competitive cost, all the while respecting customers’ demand of infrastructure security. The company also did a various number of Merger and Acquisitions to transform its business into a high value offering including a global service segment (such as network solutions, data storage or data transfer).

The Y-axis describes the primary activities:

Inbound logistics, Operations, and Outbound logistics

Since the organizational infrastructure of IBM is complex, it becomes harder to manage, and costlier to run. In order to reduce costs all the while improving customer service, it is necessary for IMB to adopt an optimized supply chain management by reducing any unnecessary steps. Moreover, IBM’s Business Performance Management allows the firm to visualize end-to-end processes across the entire organization by the use of an IT system. IBM can analyze the actions’ execution in real time against goals and make adjustments promptly when needed. Therefore, IBM’s supply chain, manufacturing processes and logistics are designed in the objective of minimizing inventory and improving the response to market opportunities or external risks. This gives a competitive advantage to IBM.

Marketing / salesThe company has realigned its operations and organizational structure in 2005 to give more authority to its sales and delivery teams. It allows an increased flexibility and a more efficient decision-making. The company also broadened its services to other Asian countries to increase sales and gain a considerable profit in some of the fastest growing economies (such as China, India, Taiwan, Hong Kong, Singapore, Thailand, Indonesia or the Philippines).

ServiceIBM provides technology and transformation services to clients and businesses; it also invests in improving the ability to help its clients innovate. This gives IBM a high value-added resulting from optimized internal logistics (with the implementation of profitable processes). Apart from these services, IBM’s remaining services can be categorized into three groups:1. The IT technology services, which offer strategic outsourcing, integrated technology services, and

hosting.2. IT infrastructure delivery, which is increasingly becoming strategic to drive productivity, efficiency and

margin improvement.3. The transformation and high end business value such as consulting, systems integration, application

services, business transformation, outsourcing, asset innovation, and strategic business development.

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By analyzing IBM’s Value Chain, we conclude that:

+ IBM's strength is its wide portfolio of end-to-end services, which is aligned by the strong link between Technology Development, Procurement and Inbound Logistic. This can be explained by the fact that IBM has aggressively acquired or developed a wide array of technology platforms that meet the challenges of clients’ needs, as well as a willingness to support non-IBM products.

- However, IBM shows some signs of weakness when it comes to aligning its operational activities to the organization’s infrastructure, especially the HR management. This may result from the fact that IBM emphasizes its activities related to the technology management (for the inbound logistics) and to their customer service management (for the outbound logistics). Also, as Table 3 shows, IBM's revenues have been declining gradually, compelling the company to resort to lay-offs and widening margins to increase profits. Even such cost cutting measures have failed to show considerable improvement to the income through the years. These minimalistic incremental profits are a result of cutting overhead costs and improving efficiency, but there is a limit to how long this trend can continue. There is a need for increased revenues to increase profits. The economic slowdown in most parts of Europe and the slow recovery of the US market is partly the cause of declining revenues and diminishing profits, along with the lack of differentiation between IBM's pool of consultants and the same pool at IBM's close competitors. This is the outcome of the weak relationship the areas of Human Resource Management, Organization's infrastructure and Operations, consequently indicated in yellow.

Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013Sales/Revenue 95.76 99.87 106.92 104.51 99.75

Sales Growth - 4.29% 7.06% -2.25% -4.55%Gross Income 43.38 45.68 49.88 49.84 48.51

Gross Income Growth - 5.31% 9.19% -0.08% -2.68%Gross Profit Margin - - - - 48.63%

Operating Expenses 26.2 27.03 29.11 28.87 29.73Research & Development 5.82 6.03 6.26 6.3 6.23

Other SG&A 20.38 21 22.85 22.57 23.5SGA Growth - 3.13% 7.72% -0.82% 2.96%

Net Income 13.43 14.83 15.86 16.6 16.48Net Income Growth - 10.49% 6.89% 4.72% -0.73%Net Margin Growth - - - - 16.52% 3

Table 3: IBM 5-year financial results

3http://www.marketwatch.com/investing/stock/ibm/financials

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IBM’s resources, capabilities and core competencies

Resources & capabilitiesSome of IBM Resources include:

The IBM family of mainframes includes the zEC12, zBC12 and Enterprise Linux Server (ELS) platforms, which provides businesses with a high performance, extremely secure, resilient, and efficient platform.

The new IBM DB2 11 for z/OS enables enterprises, amongst others, to take advantage of the scale, performance and availability to integrate the results of Hadoop processing into its enterprise data store.  

Enterprises using IBM IMS 13 have the ability to combine integrated analytics with unstructured and social data seamlessly, merging knowledge from various types of data and eliminating the need for separate, siloed systems. 4

A few of IBM capabilities include IBM Commerce, IBM Digital Marketing Optimization. 

Core Competencies: Cloudant, Inc. : recently, IBM announced that it has completed the acquisition of Cloudant Inc., a

database-as-a-service (DBaaS) provider that enables developers to easily and quickly create next generation mobile and web apps.

Aspera: IBM announced it has completed the acquisition of Aspera, Inc., a privately held company that securely speeds the movement of massive data files around the world

The new IBM Capacity Management Analytics solution can help IT managers track, predict and avert performance issues and unforeseen capacity requirements before they occur, ensuring the availability of services for end customers

In 2013, IBM introduced new business analytics and cloud software solutions to help clients take advantage of new workloads. Also, enhancements to IBM DB2 for z/OS and IBM IMS are prime examples of how companies can manage big data to achieve a competitive edge.

IBM is introducing IBM Cognos tm1, which provides deep insight for Chief Financial Officers to create, analyze and manage sophisticated financial plans, providing greater visibility into enterprise profitability.

The latest enhancement to the cloud solution portfolio is the IBM Entry Cloud Configuration for SAP® Solution on zEnterprise v2. This cloud enablement offering combines high-performance technology and services to automated, standardized and accelerated day-to-day SAP operations for reduced operational costs and increased ROI. 

4 http://www-03.ibm.com/press/us/en/pressrelease/42228.wss

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5. Strategy FormulationIn this report, we have decided to directly link the SWOT analysis, the Value Creation and the pricing options to the strategy formulation rather than separating these entities. This is motivated by the fact that once the internal analysis done (part 4), these three elements can then be used as a basis to understanding where IBM can create a sustainable niche in the market: it is therefore used here as a stepping stone used to kick off the strategy formulation.

SWOT AnalysisStrengths Industry Leadership Abundant Resources End-to-end enterprise

solutions Quick Response High Acquisitions Brand name & reputation Financial assets Strategically innovative (ex:

backward integration) Product diversification to

minimize risk

Weaknesses Reliance on High Margins High Operating cost Weak Employee Value

proposition Limited market (fast PLCs

where market saturation is quickly reached)

Opportunities Emerging Markets Increasing demand of cloud

computing

Look for new emerging markets and develop products and servicesCreate demand through marketing

Streamline internal operating costEnter new markets to increase revenues and profit margins

Threats Cost Competition Low Entry Barriers Lack of Skilled workers Slow global economy

Create strategy to create skills hard to imitateCreate value for the clients by increasing the value of its services: acquire skilled consultants to provide a comprehensive end-to-end solution.

Address skills building and create a meaningful employee value proposition.

Table 4: IBM SWOT Analysis

These statements about the internal environment enable the strategic managers to precise the corporate strategy, which is to be set, formulated and then implemented.  This is motivated by the necessity for a company to achieve a strategic alignment (between its corporate strategy and its activities, its targets).

IBM is a pioneer in the IT industry and enjoys market leadership. It has quickly addressed the needs of clients by providing complete business solutions and holds a deep cash reserve to spend as necessary.

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As per IBM, its main strategy is to generate higher value: though these words may appear as quite vague and general, it nonetheless stresses the importance of certain priorities IBM has set for itself, which may be resumed as follows:

- Continuously strive for higher value, more profitable technologies- Always look to tap into new markets- Participate in the globalization process by being a truly international enterprise- Ensuring the stakeholders’ interests- Setting the bases to enable an optimized R&D (for a optimized future competitive advantage)

All these priorities have to be operated within the framework of IBM’s own growth and leadership in the high-tech industry.  The main weakness IBM faces is the growing competition with many small and large competitors going for IBM's market share. Since IBM has a higher margin, clients are moving to cheaper providers who provide the same quality of service. Another issue is the shortage of skills. The increasing demand for skilled labors has provided the employees with the option to keep moving on between high paying jobs. This has decreased loyalty to work for IBM among employees. In order to tackle this, IBM needs to create a stronger and meaningful employee value proposition, which gives the appropriate rewards to employees, based on their performance, satisfying both their intrinsic and extrinsic needs.

IBM has a huge base of fresh graduate hires, which puts a lot of stress on its ability to provide skilled labor to its clients. Timing is critical, and spending time to bring its employees up to speed on the latest technology puts IBM at risk of losing business to low-cost rivals. This represents a lack of competitive advantage all the more when considering that retaining and deploying skilled employees shortens the time (especially when IBM can't just count on the wide margins driving profits).

Value creation and pricing options: IBM’s competitive advantageWith regards to IBM’s business operating area, the strategy formulation must be the result of a value creation strategy: to maintain its competitive advantage, should IBM conduct a cost-leadership or a differentiation strategy? As per the value creation model, IBM must decide whether to create more value or lower its costs.

However, as explained above (cf. value chain), their attempts to lower the operational costs have proven to be of limited success. On the other hand, their main competitive advantage comes from relying on their core competencies to attract customers with new products or services (cf. IBM’s core competencies). Consequently, IBM would be able to increase its profit margins by setting a premium price for unique products. This goes along with the necessity of being a quick (if not the first) mover, to gain market shares before competitors kick in – a considerable threat in the high-tech industry where the product life cycles are becoming shorter and faster.

Strategy formulation processAgainst the rising competition, new entrants and the declining hardware business, IBM has registered a decreased growth rate in the past decade, making the coming years crucial for the company’s future. Once all the elements analyzed in the industry, environment and internal analysis have been plotted in the SWOT analysis, we may conclude that IBM needs to adapt an attack and differentiation strategy for two reasons:

- Even if an unsuccessful attack strategy would bring the company down, it is the key to staying afloat.

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- A cost reduction strategy being a time-limited option, IBM needs to focus on creating a long-term sustainable competitive advantage by differentiating its products.

Moreover, considering the nature of IBM’s industry and products, it is crucial to attract, maintain and retain the best talent: in a tacit knowledge environment, the path dependency theory is all the more strong and employees represent one of IBM’s most crucial assets. Should it be unable to retain its employees, competitors or new entrants would quickly swipe them away and reduce IBM’s competitiveness. Therefore, IBM’s organizational structure needs to be modified in a more HR-, employee-centered approach (though some efforts have already been made in this perspective as explained in part 4: cf. Porter’s Value Chain). This can be achieved by adopting a participative approach. Having fuelled the R&D pipeline, IBM will be able to attack by pushing attractive new products or services onto the market.

Moreover, to fight efficiently against competitors like HP, IBM can orchestrate organic or inorganic growth to support its own strength with the help of strategic partnerships and alliances. This goes along with adapting to current trends: to ensure success in new markets or with new products, IBM must rely on the expertise of specialized partners who will bring skills, knowledge, and capabilities to be added to IBM’s already vast portfolio of internal resources (cf. part 4: IBM’s resources, capabilities and core competencies). For example, IBM’s major profits come from software and devices, out of which IBM expects to generate at least 50% of its profits by 2015 5 but it also seeks to focus on the recently emerging cloud computing business (which also has consistent profit margins). We may here note that IBM has already engaged in that path by acquiring Softlayer and other cloud computing companies (in the objective of building its own computing capability).

Hence, IBM’s strategies involve creating a niche for itself rather than following a response strategy against its competitors. After evaluating its current capabilities and weaknesses we have listed worst and best case scenarios for IBM with its outcomes. The successful strategy implementation will rely on the judicious application of these scenarios and IBM’s ability to increase its capabilities through acquisitions.

ScenariosThe below scenarios can represent the worst and best case scenarios for IBM in the near future.

IBM's Worst Case: IBM may reach the limit to the improvements in operational efficiency and driving profits through high margins, cost reduction and layoffs. Revenues may remain flat and decrease profit growth. Competitors take advantage of IBM's de-motivated and isolated consultants/employees by poaching them with higher salaries and giving an opportunity to work in focused teams. This decreases IBM's niche advantages over its rivals.

IBM's Best case: IBM can increase profits by increasing revenues, lowering overhead cost and increasing the differentiation of their consulting services to raise entry barriers for rivals. Figure 4 shows IBM's strategic sweet spot as compared to its competitors. Identification of this spot will enhance IBM's market leadership and strengthen the position of IBM's consulting and service offerings.

Option 1: improve the HR management. IBM leaves employees to find their own learning path based on their position and industry understanding and devises a reward system to employees who successfully attain the skills that clients demand.

Pros ConsAlign the strategy to the organizational structure Risk of employees leaving IBM

5 http://www.fool.com/investing/general/2014/01/02/2014-will-be-a-big-year-for-ibm.aspx

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Promote employee innovation Costly to find, train and retain talent (time, money and efforts)

Option 2: restructuring. IBM aggressively hires employees with high-demand skills, lays-off employees with skills related to industries, which IBM plans to exit.

Pros ConsFast solution Bad organization climate

Hiring and firing processes are very costly

Option 3: a committed & aligned strategy. IBM counters the downsides of virtualization, bringing IBM employees together to transform IBM into a ‘Learning Organization’:

A Shared Mindset Speed of New Ideas Learning And Knowledge Management Accountability Collaboration Leadership

Pros ConsCreates a sustainable competitive advantageMay open the door to new markets or unforeseen opportunities

Risk of employees leaving IBMRequires the most time, efforts and money amongst the three options

IBM’s strategic sweet spotOptions 1 and 2 are the easiest to implement and may use financial rewards as incentives for employees to find the best solution to gain skills. The drawback to this approach is the threat of being copied by competition, as it doesn't provide any distinct capabilities. Employees who achieve high skills independently may not find any incentive to remain loyal to IBM, and can easily be poached by the competitors.

Option 3 is the hardest to implement as it requires time and considerable change for IBM but it does create a sustainable competitive advantage over time. This option makes the assumption that employees can become capable in new skills, avoiding the problem of recruitment in a tight labor market.

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Figure 4: IBM's strategic sweet spot

6. Strategy implementationIn order to implement the strategy as formulated above, IBM has to conduct a series of transformations with regards to its organizational structure / design and its leadership.

To enable the revival of the organization against economical downturns and an increasingly aggressive competition, IBM has to rely more consistently on its employees who are the sole source of their competitive advantage: the delivery of new products and services coming out of their R&D pipeline in an attack, differentiation perspective. This implies that IBM needs to switch from a relatively authoritarian structure to a participative approach: by empowering employees, they will be able to answer to the rising expectations of their customers by supporting AND being supported by an innovation-focused strategy. This could imply a wide range of alternatives, such as the 3M’s 20% policy, which leaves each employee 20% of free time to work on whatever project he / she has interest in.

Nonetheless, these facts have to be taken into consideration within another perspective: the necessity to optimize operational costs, as a result of the globalization process. Any competitor could easily overpass IBM by lowering their costs – hence increasing their profit margin; therefore IBM has to combine the necessity of an intensified R&D pipeline to a cost-reduction strategy in the areas where it may apply, without hindering the implementation of a differentiation strategy. This necessity sets the limit of a participative strategy, which implies that no organization can be completely left to itself, or this would lead to a state of chaos: the top management level needs to strike a balance between controlling the efficiency and letting its employees reach their top performance level.

By conducting an employee-centered strategy for the purpose of a differentiation strategy, IBM could successfully achieve its three main perspectives as defined by CEO Virginia Rometty 6:

1. Big Data Analytics: “Data is the new competitive resource, but like any natural resource, it must be refined,” Rometty said. “The advantage in eCommerce in the future might be determined by milliseconds. Businesses must have tools to do that.” IBM has invested $23 billion in analytic software and had $16 billion in Big Data-related revenue in 2013.

2. Re-making enterprise IT in the cloud: IBM strategy is to build a cloud computing enterprise in order to help companies adopt the new cloud computing strategies. IBM is mainly focusing its investments on cloud and mobile computing.

3. Social Engagement: Rometty provided an energized view of the social enterprise as a strategic centerpiece, tying the customer and employee experiences together.

6 http://www.businessesgrow.com/2014/02/11/ginni-rometty/#sthash.TIeIuVFw.Iv7IeaLD.dpuf

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CONCLUSION, LESSONS LEARNED & RECOMMENDATIONS

The example of IBM offers an insightful approach to understand a company’s organizational design, leadership and strategy. Having been through ups and downs since its foundation in the beginning of last century, IBM can be proud to have successfully maneuvered through these blows and still enjoy today a considerable brand image with satisfying (though decreasing) profits. The keys to this success revolve around two imperatives, apart from the indomitable “Think”, which sums up the motivation leading the company forward: growth and leadership.

To fight against the slowing growth of its profits, this report aimed at conducting an industry, environment and internal analysis to explain where IBM stands and try to understand where it should go. The key to IBM’s future success lies in continuously nurtured innovation, to protect the company against an increasingly aggressive and widespread competition. The innovation should target mainly the R&D pipeline to enable an innovative product line, but should also concern other areas of IBM’s value chain such as the HR or the strategy in itself.

In a nutshell, IBM needs to focus on what they do best by creating value (rather than lowering costs). However, the creation of that value can occur in various fields and must be supported by growth (whether organic or inorganic). As per Christine Dover, the Research Direction at IDC’s Software Business Solutions Group (one of IBM’s partners), the “best partners are no longer those who just drive revenue numbers, best partners invest in trained and qualified staff, work to earn high customer satisfaction ratings and sell value-added solutions”.

The proposed strategy consists of identifying IBM’s strategic sweet spot and investing the necessary resources into achieving that spot. Though costly in time, money and efforts, it will allow IBM to have a truly aligned strategy, mission and organizational structure. This requires identifying a balance point between a participative and authoritarian leadership, a centralized and decentralized organizational infrastructure, and a long-term attack and differentiation strategy. Let us quote IBM’s former CEO for the finishing statement: “If there’s no way to optimize IBM through organizational structure or by management dictate, you have to empower people while ensuring that they’re making the right calls the right way. And by “right”, I’m not talking about ethics and legal compliance alone; those are table stakes. I’m talking about decisions that support and give life to IBM’s strategy and brand, decisions that shape a culture. That’s why values, for us, aren’t soft. They’re the bases of what we do, our mission as a company… You’ve got to create a management system that empowers people and provides a basis for decision making that is consistent with who we are at IBM” (Harvard Business Review Interview, Leading Change when Business is good).

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