First case Study: Indicative Answers to the Case Questions Disaster and recovery strategies at IBM Over the last twenty years, there have been few companies that have equalled the profit disaster that befell IBM during the early 1990s. However, it should be recognized that the seeds of the problem were sown during the 1980s and were not simply the fault of the management at the time when the difficulties were declared. Important strategic mistakes were made at IBM during the 1970s and 80s. Even though some of them had been recognized, it is not always possible in corporate strategy to provide instant solutions: large corporations develop conflicting interests that are not always easy to reconcile and cannot make rapid changes because of the size of the organization. For example at IBM, there was a conflict between the need to preserve the highly profitable mainframe computers and the need to develop the smaller machines that might steal business from the larger models. Moreover, with a very large company, it takes time to discuss and agree any changes that need to be made. 1. What was the strategic significance of IBM’s decision to obtain supplies of computer chips and software from other manufacturers rather than make them itself? This allowed the suppliers to develop their business on the basis of the reputation of IBM. The mistake made by IBM was not to buy in supplies, but to allow their suppliers to sell the same goods to competitors of IBM. As IBM established the market, it was developing a common standard – the IBM compatible computer – that was ready-made for its suppliers to use as the basis of developing their business. 2. How big a part did the change in computer technology play in IBM’s problems? Could this have been predicted by IBM? What is the significance of your answer for corporate strategy? Computer technology was one of the major problems that IBM faced during the 1980s: small computers were becoming more powerful and more easily able to compete with at least some of its products. Technology may be difficult to predict where it is revolutionary. However, in the case of IBM, it was essentially evolutionary so might have been predicted. Where something such as technology cannot be predicted, it makes it difficult to develop rigid corporate strategy for many years ahead. Prescriptive approaches may be impossible in fast changing environments. 3. How important was the decision of IBM’s suppliers to spend marketing funds on branding their products? What strategic significance does this have for the late 1990s in computer markets? It has proved vital: value added has shifted from the assembler of computer components such as IBM to the supplier of exclusive, branded supplies such as Intel and Microsoft. Branding has been a method of delivering that exclusivity: the Pentium chip and Windows 95 have locked customers into Intel and Microsoft respectively and provided real competitive advantage. 4. Can you think of any reason why companies like Hewlett-Packard continued to make profits during this period? They had differentiated products that could not be easily imitated by their competitors. They were also more innovative and used this to reduce costs, increase value for money for their customers and provide genuinely new products. Importantly, Hewlett-Packard were more adaptable as a company. The company was able to change with the market more easily than IBM. Moreover, H-P was less arrogant than IBM and more willing to work to improve its products as a result. It is important to realize that IBM’s problems were partly the result of its culture and style, just as much as technology and marketing. 5. Use the five key elements of strategy to evaluate IBM’s corporate strategy. What conclusions do you draw for these and added value? • Sustainability: the company’s strategy was only partially sustainable over time. It worked well at the mainframe level but not for smaller computers. • Distinctiveness: the small computers had no distinctive features beyond being branded and sold by the largest computer company in the world. This gave them some advantages but they were not technically as advanced nor as cheap to produce as their competitors. • Competitive advantage: this was in decline over the years. • Exploitation of linkages between the organization and its environment: IBM never really exploited the linkages that it undoubtedly had in earlier years with, for example, its suppliers and its customers. It allowed others to muscle in and take share. • Vision: the IBM vision was very clear in earlier years but seemed to be one of catching up during the 1980s. By contrast, other companies had a much clearer sense of their direction and purpose. It has to be said that the above comments are made with all the wisdom of hindsight. They were not so easy to identify at the time, which is why corporate strategy is not always so easy or straightforward. Q.2 What are the strengths and weaknesses of IBM? And what are the opportunities and threats that it faces from the competitive environment surrounding the company? IBM offered large, fast and reliable machines that undertook tasks never before operated by machinery:accounting, invoicing and payroll. Above all, choosing IBM meant that risk was low for customers: ‘No one ever got fired for buying IBM.’ Hence, IBM was the market leader in large mainframe computers and earned around 60 per cent of its profits from such machines.In the late 1980s, IBM recognized the competitive threat from Microsoft and Intel. It launched its own proprietary software,OS/2 Warp, in 1994, to counteract this. It also negotiated with Apple to set up a new computer chip standard, the Power PC Chip, with the aim of attacking Intel.