The DNA of Success of IBM & US best-run companies
The DNA of Success of IBM & US best-run companies
Frank Li, De. 22, 2011 Updated Jan, 22, 2016
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Content
1. The 26-years’ IBM career
2. In search of excellence: lessons from US best-run companies
3. IMF Director Christine Lagarde warns of 1930s-style depression
4. The reason of poor - a story happened in Canada
Recently, there was a report that Buffett's firm buys $10.7 billion of IBM stock. People may be curious to ask that what caught the attention of the most successful investors in the world to have self-broken his long rule of refusing to invest in technology companies due to his thought that is difficult to predict which tech applications or hardware will prosper in the long run.
“But he said he recently changed his view of IBM (International Business Machines) based on what he read in the company's annual reports. He said he should have realized years sooner that the heart of IBM's business is providing service and equipment to information technology departments.”
As my view, Warren Buffet seems to has ignored the micro details. A micro, but is the key issue – It was that where does the vitality of IBM come from? What is the reason of an over one hundred years old Big Blue keeping in prosperity among the wreckages of failed enterprises.
I think, it was that IBM emphasizes people-oriented, and takes the staff as "working capital" as same as that of doing in German Companies.
Now let us to go into IBM with Mr. Kenneth Chang.
1. The 26-years’ IBM career
Mr. Kenneth Chang, who emigrated from Hong Kong to United States in 1958 when 40 years old, after 4 years’ work on the production of semiconductor chip from a beginner in GI Company, he transferred into IBM in 1963, and in the following nine years period, he was promoted 4 times and reached the highest technical position of IBM due to his creative works with many innovations and inventions, which shocked all people in IBM.
After worked 26 years in IBM, when he was preparing for retirement, his immediate executive requested him to summarize his achievements as archives for retaining in IBM. So the prototype of the book <26-years’ IBM career> was born. Later, under the request and the help of his youth's classmate friend in China, the prototype was further detailed and refined into a 158 pages’ book to have published 5100 copies. The book was not only introduced his achievements, but also involved great details of incentive method of IBM for encouraging employees to make creative job. It revealed the secret of IBM growing into Big Blue.
Oct. 7, 1995, I fortunately discovered it in a heap of the used books at a book stall in a Saturday Flea Market in North East China.
Since then I take it as valuable treasure. In the past 16 years, I have it with me. In this period, I once several times moved home, even when immigrating to Canada, the entire family property have to be compressed into a few suitcases and weighed accurate to grams, in this process, I have to throw away a lot of favorite books, however, I never consider to discard this book.
Because of I deeply believed that the successful experiences of well organized manufacturer are significant for helping other manufacturers’ stable running. It is not only important for whole society, but also for any individual, since it is the preconditions that can provide a stable and peaceful community, in which that people can work and live to enjoy a prosperous life.
Following are the photos of the author and the book cover.
As that of sophisticated lattice on the cover of the book, the task of Mr. Kenneth Chang was researching the way that links the diodes, transistors, resistors, capacitors and so on to be fixed in the designed point on a set of lattice.
As a common person, I never understand that how can integrated tens of millions of elements on a silicon wafer of only a square millimetre.
Here I would like to introduce about author and his creative works briefly.
He was with an Aeronautical radio background, before one week when he stepping on the job position of researching the manufacture of flat diode and triode in GI company of United States, he bought a book on semiconductor knowledge. That was the initial start of his knowledge on semiconductor.
In the summer of 1962, when he was on leave, a phone call asked him immediately return back to company because the production completely paralyzed with produced a large number of defects’ silicon chips.
The reason was that, in order to ensure the production smoothly in his leave period, GI Company hired a senior engineer from the large company - Texas Instrument Corp (TI) to work on his position. The senior engineer changed the production methods by copying the methods of TI, but totally failed.
Kenneth fixed the production line with his own methods and explained the reason that he improved the production with the methods that looks simple, even unscientific but were effective than that of being believed as highly advanced ones used in other companies, because of his methods were explored out from constantly trial and error in the practice of daily production. And, he illustrated with the comparison between the samples made in two ways. Since then, his popularity surged in GI company.
We may have the personal experience of that, in daily life, there are many actual objective results are contrary to the common sense of us with unfounded subjective judgments. Unfortunately, most people are always acting according to own subjective judgments, rather than based on the objective results from the practical trial.
His excellent work in GI helped him applied a position in IBM. When he submitted his resignation to the executive of the GI, the executive committed to increase his wage to 20% higher than that of IBM did and plus 5,000 shares of GI stock. Later, the stock rose to $40 per share, in which 5000 shares become $200,000, thus his friends felt regret for him. However, until retirement, he still believed that left GI into IBM is a right choice.
Another example of the harm of the unfounded subjective judgment happed in IBM.
In the process of semiconductor chips’ manufacturing, silicon chips need to go through hundred of processing steps. In which, a step is to thoroughly dry the photosensitive coatings on the silicon chips, otherwise, in the subsequent process would produce defects. According to the common sense of unfounded subjective judgment, for preventing from the dust in the process of drying, production technology designed to put the coated silicon chips into the metal box, and covered with lid before baking to dry. This technology was unstable, easily impacted by personal operation or environmental temperature or humidity, often resulting in defects, sometimes was a lot.
After careful observation and analysis, in the operation, Kenneth changed the production technology with the test that dried several coated silicon chips by keeping the metal boxes open, he found that drying effect was perfect. He increased the number of silicon chips for testing, the results were satisfied. The method was promoted to the large scale production, and to be warming welcomed. An immediate executive who wrote that, on the notebook for two shifts’ transfer, “Chang led us out of the forest.”
Later, he simply designed aluminum plate to replace the metal box. Thus largely facilitated the operation, and greatly improved the production efficiency.
IBM internal
There is a patent and reward system with a Plateau Award in IBM.
Accumulates one point on each published being approved article regarding science and technology on the Science and Technology Bulletin.
For each patented patent, the inventor will accumulate 3 points. The bonus for first patent is $1,500, plus souvenirs and gold-plated pins, etc.. For each subsequent patented patent will award cash $ 500.
For each accumulation of 12 points, issue a Plateau Award $ 3600 with publishing the names and photos of the winner in company publications. Another accumulation of 12 points with another Plateau Award, and so on. Company may also give quota of awards depending on the circumstances from $10,000 to $100,000. It is very few of people who could achieve third Plateau Award.
Kenneth Chang entered the IBM in 1963, but until 1968, by the reminding of others, he began to pay attention on the reward system of IBM. And since then he achieved seven patented patents, published 9 papers, gained 30 points, and one patent was on pending.
The incentive policy of IBM largely promoted the inventive activities of employees. The report of U.S. patent awards surge in 2010; IBM still tops is the vivid proof.
The number of U.S. patents awarded jumped significantly from 2009 to 2010 among the 10 companies that got the most. IFI Claims
I think those mentioned above are main reason that IBM can grow into the Big Blue taday and outstanding in the forest of the world leading Companies.
The success of IBM has benefited from its unique corporate culture. The success of Kenneth Chang also benefited from the corporate culture, which is emphasizing people-oriented, and taking the staff as "working capital" with a incentive system that encourages the employee to creatively work.
Suppose that Kenneth Chang was working in some of Canadian Companies, he would be ousted in weeks due to his self-determined to do innovation, and straightforward proposals for improvement. Because of under different corporate culture, facing the proposals, in most of the bosses, supervisors, or colleagues, the first sense were that of they have been despised, the first psychological reaction is uncomfortable. Thus they would make everything possible even by despicable way to squeeze out the thorns from their eyes. They never care about the benefit would be gained from those proposals. This is not the nonsense; it was the personal experiences of mine in some Companies.
This year, 2011, Mr. Kenneth Chang will be 91 years old. I'm sure that, as a man of active thinking and unceasingly enterprising, he will be still in health, because he has basic conditions for healthy, which is the mental health first. Now, I have an idea that is to contact with him and get permission for translating the book into English. Since that I have deeply felt out the old-fashioned and poor on the management in most of local enterprises of Canada compared with that of most of multinational corporations.
IBM has a work dispute adjudication system
Any business is made up of people, it is inevitable conflict between each other. Especially in scientific activities.
R & D management is a dark field; it is difficult to control balance. Because, in the process of research and implementation of R & D project, will involve cooperation of many sectors, in particular, the need for leadership in coordinating role.
So, the distribution of the bonus created by R & D need to take care of all aspects, especially, the main management may take big share. Finally, the prize money into the hands of the actual developers will be rarely.
For dealing this thorny but important issue, IBM set up a complaints system. If someone feels unfairly, he or she can manage up a complaint to higher management, if it is not satisfied with the results, it allowed continuing to appeal to a higher level of, until reaches to top management.
As my view, besides complaint, for solving this problem, company should regulate the prize money as two parts, one for administrative staff, other one directly put on the hands of researchers.
Perhaps the inventor of the inventive concept has no ability to conduct implement, however, because the breeding process of the concept of invention is a special intellectual work, it is not that any person can do, therefore, the inventor of the concept should get of 50 % above in total bonus.
The purpose for doing in this way is to encourage people to innovate, rather than that of only sit back waiting to share the fruits of others.
IBM and the origination of CIS
IBM, McDonald, Coca-Cola, Sony, and Canon is the world well known brands. It is that the design of Corporate Identity System (CIS) helps them being identified out easily from a number of companies.
As a complete corporate image design system, Corporate Identity System is considered to originate from IBM. In mid-50s, the chairman and CEO of IBM, Thomas John Watson, Sr. who led IBM to have conducted CI design under the guideline of "presenting the advantages and features of IBM through certain designs, making the designs unified in application".
Thomas John Watson oversaw that company's growth into an international force from 1914 to 1956. Watson developed IBM's distinctive management style and corporate culture, and turned the company into a highly-effective selling organization.
“In early 60s, some large and medium-sized enterprises in America began to apply factors that can build up and represent the company image to effectively publicize the CI, which involve the whole publicity strategy and methods that can penetrate all fields. After a long period, this complete plan and design were widely accepted and labeled as corporate identity systme. Imported to Japan in 70s, CIS theory was employed by a few far-sighted companies and helped to make great profits.”
2. In search of excellence: lessons from the US best-run companies
Above is the name of a book that translated from mandarin. The writers were Thomas J. Peters and Robert H. Waterman. I bought it at same book stalls with
For over three years, “Peters and Waterman studied more than 43 successful American companies to discover the secrets of the art of management. The companies specialized in a number of areas: consumer goods, high technology, and services. What he discovered was that regardless of how different each company was, they shared eight basic principles of management that anyone can use on their way to success. Here they are, amply illustrated with anecdotes and examples from the experiences of the best-run companies in the world.”
Their findings suggest that eight attributes are common for an excellent organization:
1. Bias for action.
2. Close to the customer.
3. Autonomy and entrepreneurship.
4. Productivity through people.
5. Hands on, value driven.
6. Stick to the knitting (Focus on what you do best),
7. Simple form lean staff.
8. Simultaneous loose-tight properties (Balance in centralized/decentralized).
Michael Gering commented the author as“Tom Peters is widely credited with having created the management guru industry.”
Here, the “Autonomy and entrepreneurship.” and the “Productivity through people” is focused on emphasizing people-oriented, and takes the staff as "working capital".
The success of IBM demonstrates the importance of a comprehensive incentive system. The physical and intellectual level is similar between modern people. They are lazy or industrious depending on the effective incentives measure. The ignorant and lazy employees from the poor managed Companies into German Companies; they will become smart hard-working employees. The smart hard-working employees from German Companies into poor managed Companies; they also would become ignorant and lazy, because they do not have the opportunity to demonstrate their talents. On other hand, they must blindly follow the stupid directing with closed mouth; otherwise, they will be ousted soon.
3. IMF Director warns of 1930s-style depression
The article of
From the anxious face of Christine Lagarde, we can read out the severity of current world economy and the sense of responsibility as one of the senior leaders of world core organization.
Economic globalization has made the world become an inseparable whole. Any part occur problem, will lead to a domino effect to destroy the world economy. Now, the world economy is acting as a leaky boat, only if we join hands to fill gaps, there is a hope to be survival. Otherwise, there no one will be safe.
4. The reason of poor - a story happened in Canada
Here, I think, there is a necessary to mention a story happened in Canada. It can help us understand the great role of opium of the people unveiled by Karl Marx in 1843.
In 2003, I met an old man who came from a poor populous country - India. I asked his views on Canada. He seemed to be angered by my question and answered loudly, Bill! Bill! Too much bills. Working! Working! Every day working!
His answer had somewhat charm of poetry and aroused me to think of some of the scenes about his mother country.
Some people are praying for the happier life by hands clasped together, some one says they are praying for the next time, because they have been convinced that everything is predestined by the pre-existence.
Also, there some people are not praying, but squatting in the side of the street to watch the streetscape because they do not care good or not for the life of next time.
They made me clear the reason of that why are the living standards of the people in his mother country seems to have been in marking time. Although, there are some reports on the progress of this country, but the majority of them is the cajoling from abroad or narcissistic from domestic. It can not cover up the reality of ignorance and poverty.
I wonder whether the incentive of IBM can work for those people who addicted in the spiritual opium and satisfied the status quo.
How IBM Became A Multinational Giant Through Multiple Business Transformations
From a scammy amalgamation of companies to one of the world's most respected technology firms, IBM’s story is a testament to business transformation and self-reinvention.
By Tefi Alonso December 5, 2022
Table of contents
Humble beginnings: How did IBM start?
IBM's Golden Period: the strategy and tactics
IBM used to penetrate the computer industry
The decline during the last decade and IBM's enterprise strategy to return to the top
Here's what you'll learn from IBM's strategy study:
How an accurate diagnosis of your organization’s most pressing challenge can help you form a coherent strategy to overcome it.
How developing your strategic instinct to recognize change early and decisively transforming your business rely on unifying your organization towards a single direction.
How focusing on short-term financial gains is putting your long-term survival and profitability in jeopardy.
IBM stands for International Business Machines Corporation and is a multinational technology corporation with over 100 years of history and multiple inventions that are prevalent today. Its headquarters are in Armonk, New York, but it operates in over 170 countries.
Institutional investors own over 55% of IBM, while around 30% belongs to mutual funds, and individual investors own less than 1%. Since 2020, IBM’s current Chairman and CEO is Arvind Krishna.
IBM’s market share and key statistics:
Source: Pete McClymont, CC BY 2.0, via Wikimedia Commons
Humble beginnings: How did IBM start?
IBM was founded in 1911 as the Computing-Tabulating-Recording Company (CTR) in Endicott, New York, United States.
CTR was the product of three and a half amalgamated companies:
The Tabulating Machine Company
The International Time Recording Company
The Computing Scale Company
The Bundy Manufacturing Company
The company’s founding was very well-timed. It coincides with the profound shift of the United States’ agricultural economy to an industrial one. At that time, inventions and innovations were introduced at an unprecedented rate, evolving people’s way of life and defining our modern lifestyle.
Hollerith 1890 tabulating machine with sorting box | Source: Jennifer, CC BY-SA 2.0, via Wikimedia Commons
The company’s success at these times was due to the wide range of products it offered that were in high demand in industrializing economies from time recording clocks and commercial scales to various mechanical data handling systems, tabulating machines.
But it was CTR’s corporate culture and managerial practices that enabled it to pioneer and serve that demand.
IBM’s scammy and problematic birth
The birth of IBM was the result of the vision and leadership of CTR's first president, Charles Ranlett Flint.
Flint was notorious for combining companies, creating monopolies, and having other people manage them while he simply owned stocks. That’s what he intended to do with the creation of CTR as well.
Here are the companies that formed what later became IBM:
In 1900, Flint bought The Bundy Manufacturing Company, the inventor of the “punch card” that allowed factories to convert working hours into salaries. The company was quite successful due to increased demand from emerging factories and the founder’s acute business skills. Flint merged the company with the International Time Recorder (ITR).
ITR was the core of CTR. By the time Flint created CTR, ITR was already a business group and an established player in selling and maintaining time recorders with an international presence. Flint had bought out almost all of his competitors, effectively creating a mini-monopoly.
The next company that formed CTR was the Computing Scale Company. A marginally profitable company that had created a commercial scale for small merchants like butchers and cheesemakers. It was part of Flint’s vision of mechanical data handling.
The fourth and last company that formed CTR was The Tabulating Machine Company. The main product of the company was the punch card tabulating equipment that automated parts of a manual and very labor-intensive process. It sped up “data entry,” increased accuracy, and reduced costs dramatically. It was Herman Hollerith’s invention, the second founder of CTR.
The merging of these three and a half companies didn’t make “business sense” at the time, nor was it the result of a careful business strategy.
At least not in the way we mean it today. It was a technical scheme that would allow Flint to protect his investment even if one of the companies wasn’t profitable and he had to sell it. Because, as it turns out, ITR was prosperous, and the tabulating business was slowly growing even though it required huge capital reinvestments. But the computing part of CTR was dying.
As a result, the child of this amalgamation was overvalued by twice its actual value.
This inflated value was supported by a loose argument of “economies of scale” since all these businesses were “measuring stuff.” From its very first days:
The stock was overvalued
The company was heavily in debt
There were a lot of internal clashes
The three businesses had no synergy
There was little attention to innovation
The board of directors only cared about profits
The customer and employee treatment was poor
In short, IBM was born with some of the worst conditions for any company.
IBM’s coherent business strategy that got it out of the pit
Just three years after its creation, in 1914, the company changed its culture, executive team, and product line.
In ten years, it went through an astounding business transformation.
The move that initiated this transformation was the hiring of Thomas J. Watson Sr. as general manager for the company. The previous leader of the company was simply a credibility mark that Flint had implanted to draw investors. Watson’s influence on the company, however, is so monumental that he is considered the third founder of CTR, who shaped it into IBM.
IBM President Thomas J. Watson 1920s
Watson carried out a series of initiatives that laid the foundation for what would later become America’s largest technology company of the previous century:
He built a mighty salesforce and a training program called “Sales School” that every salesperson had to graduate from.
He brought clarity of purpose with frequent communication of goals and performance measures.
He aligned daily actions with measurable targets that were part of the company’s strategy. He effectively created a culture of execution.
He created a new line of products in the data-processing industry.
He implemented initiatives to bring people from the three different divisions close together.
He improved efficiencies by bringing product developers and manufacturing staff into the same building enabling cross-functional support and information exchange.
He cultivated a system of shared beliefs and practices that empowered employees to make decisions that were consistent with the company’s priorities.
He trained customers on how to use their products, gaining valuable feedback and ideas.
Watson spent half of his career as a valued employee of the National Cash Register Company (NCR), where he learned everything he knew about running a business. When he came to CTR, he brought all of his knowledge with him. It included: the development of the salesforce, budget and personnel practices, and even some executives that worked for his previous employer.
Watson was a highly motivated, optimistic, and conservative man of principle. During his tenure, CTR grew and consistently developed its product lines to cover a wide range of business machinery.
He took CTR from a scammy amalgamation to a respectable and healthy organization giving it a new name: International Business Machines (IBM).
Key Takeaway #1: Diagnose the challenge and tackle it with a coordinated strategy
When Watson became general manager, the company was rotten. However, he was ambitious and driven. His approach transformed the firm and affected the company’s journey for many generations. It can be summarized into two distinct steps.
When faced with a crumbling organization:
Diagnose the most important challenge.
Make an honest swot analysis. Watson found that CTR had a dying division (weakness), a profitable one (strength), and a promising one (opportunity). He based his approach on these findings.Devise a coherent and executable strategy.
Create a strategic plan that addresses this challenge and coordinates resources. Watson applied all his expertise to developing a salesforce to seize the opportunity he found while internally reforming the company.
Watson practically transformed IBM’s culture into an improved copy of NCR’s culture. His experience fitted like a glove in IBM’s challenges. Some could argue that he happened to be a hammer who found its nail. Others that he found a nail and shaped himself into a hammer.
Whatever is true, his results were undeniable.
IBM’s Golden Period: the strategy and tactics IBM used to penetrate the computer industry
IBM went through the Great Depression and came out of it stronger, wealthier, and healthier.
It also went through World War II, which gave the company an explosive push that was hard to maintain once the war ended. IBM’s activities during WWII were plentiful and… complicated. One thing is certain, among the most important initiatives of Watson was the financial support of every IBMer’s family who went to join the fight and the promise that once the war was over, they would regain their job in the company.
As a result, once WWII ended, the company had more than 25% increased workforce at its disposal while a huge part of its revenue-generating business vanished nearly overnight: the military contracts.
Here’s how IBM faced these new challenges.
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IBM System 360 Model 30 central processor unit (CPU): one of the greatest products in history
IBM’s corporate strategy against an increased workforce and a vanished revenue stream
Watson recognized the problem from the beginning. His strategy may have been simple, but the flawless execution made all the difference since it wasn’t without obstacles.
The strategy had two key pillars, both focusing on technological advancement:
Improve, marginally, current products whose demand was still high. The strategic objective was to expand sales on those product lines to generate immediate cash and keep the business floating.
Invest in R&D of advanced electronics, a new technology that wasn’t fully understood nor ready to be commercialized. This was a necessary bet for the future of IBM.
It was obvious to Watson that the company should, one way or another, lead or at least ride a new wave of innovation and technological advancement. And that wasn’t possible with the company’s current product lines, internal structure, and culture.
IBM's Deep Blue: the first computer to win a match against a world champion.
The technological and business transformation that IBM went through was an undertaking that few high-tech companies have managed to pull off. Especially when so many stakeholders’ survival is dependent on the company’s well-being. Shareholders, banks that had provided loans, and employees were all highly incentivized to keep the status quo as is and fight against the transformation. “Since we’re selling, why change?” they thought.
This kind of resistance is typical when industry-reshaping technology emerges. Kodak went through the same but, unlike IBM, succumbed to stakeholder resistance, retained its status quo, and eventually died.
IBM’s strategic pivot faced a list of major challenges:
The best minds in advanced electronics were not working at IBM.
Advanced electronics was a relatively new industry that nobody could really understand or predict what problems it would solve and what use businesses would find in it.
New and strong players emerged while old rivals were still actively competing. Remington Rand was an old and active foe while researchers were leaving universities to start new companies and develop systems for the U.S. Army like ENIAC. The reason was that the US government was issuing funding programs investing millions in this new technology. Whoever demonstrated enough expertise and promise was winning the funding, conducting research, innovating, and reaping the benefits.
Sales resisted the new technology, clinging to its old and tested practices and propositions. In other words, sales and engineering weren't aligned.
The tactics IBM implemented to overcome these challenges and not only survive but also transform as a business in a record time are numerous. Since we can’t really know every single one of them, we’ll go through some of the most important events and principles that enabled the company to devise the solutions it needed.
How IBM overcame the challenges of its strategic pivot
The event that marked IBM’s transformation and sealed its strategic pivot was Watson’s son, Tom, entering the business.
Tom was a bright and ambitious young man who, with the help of his father’s influence and a series of chance events, became IBM’s Executive Vice President at the age of 33.
Tom understood the emerging new technology, and so he led that part of the business. On the other hand, Watson didn’t understand how it worked, so he focused on the more familiar, traditional and still revenue-producing product lines. The two clashed regularly and intensely on many issues. But it’s important to mention that their arguments were never focused on whether IBM needed to transform and adopt advanced electronics. They agreed on that part. They clashed only on the cadence of the transformation and the policies they put in place.
This distinction is crucial because it reveals that the company wasn't divided at its core, the direction everybody moved was the same. The clash between the old and the new was extremely productive because:
The company started building critical mass in electronics by reinvesting earnings and rental cash flow. It didn’t rely on government funding, but rather it developed its capacity slowly and safely.
In order to catch up with the industry’s velocity with its bootstrapped approach, IBM’s advanced electronics department had to do things differently. So it cultivated a culture of transparency and accountability where information flowed freely.
The 604 Electronic Calculating Punch, the world's first mass-produced electronic calculator, was IBM’s first highly profitable product that came out of this approach.
The firm used its active customer network to understand customer needs and prioritize improvements on the data processing machines. Thus it created machines with validated demand.
The whole process enabled IBM to create “an infrastructure of knowledgeable customers, salesmen, and servicemen for electronic computers.”
As soon as the 1950s came, IBM entered the electronic computing market and became a highly competitive player. After that, it changed its strategy, took on larger computer projects, and became more dependent on federal funding to offset the associated risk.
It continued to accumulate knowledge and expertise, improving its processes and products.
Key Takeaway #2: Develop your strategic instinct and adapt fast
Develop your ability to recognize change and quickly transform your business to respond to it. To perform a successful business transformation, unite the organization towards a single direction.
If the need for change is clear at the top, it’s a matter of implementation and policies. It’s not easy, but it’s far more successful to lead a united organization than a two-headed one. So when you perform a business transformation:
Define the direction or destination as clearly as possible.
Align senior leadership with the desired direction.
Build guiding policies that take you from the old to the new. Don’t simply kill the old, transform it.
Treat the transformation as an idea worth spreading. Take advantage of your strengths and apply the Law of Diffusion of Innovations.
The decline during the last decade and IBM’s enterprise strategy to return to the top
IBM slowly but surely started shifting its business model again in the late half of the past century and the following decades.
This time, the strategic pivot was more fundamental. The company shifted from “components to infrastructure to business value.” In other words, it shifted from manufacturing computers and new technologies to offering IT consulting and integration services.
This is reflected in its revenue percentages by segment. In 1980, 90% of IBM’s revenue was generated from hardware sales. By 2015, the company was generating over 60% of its revenue from services and less than 10% from hardware sales.
However, the journey wasn’t as smooth as in past transformations.
The challenges of the consulting industry that has left IBM behind in the last decade
The shift, this time, was taking place less effectively.
The company was selling fewer and fewer pieces of hardware each year while its revenues from consulting services weren’t increasing as fast. The company wasn’t investing as much in R&D, and it entered the new era of computing with an extreme focus on financials.
In 2006 and in 2010, the company's leadership announced “Roadmap 2010” and “Roadmap 2015,” respectively. These were financial goals that were mistakenly used as strategic guiding policies. And to the company’s detriment, they dictated decision-making on every level.
Here are key facts that indicate this extreme financial focus was a terrible strategy at the worst timing:
IBM’s new CEO, Virginia Marie “Ginni” Rometty, didn’t enjoy employee support. Due to her merciless tactics and her relentless focus to please the stakeholders, employee morale, and thus productivity, was at an all-time low.
Revenue was decreasing year over year.
“Rebalancing the workforce,” AKA layoffs, became a regular quarterly tactic to make the numbers.
Current and ex-IBMers were losing faith and becoming less and less content with leadership.
Despite the lack of growth, stocks continued rising, paying dividends and high Earnings Per Share (EPS). That was the result of “financial gimmicks” like massive stock buybacks or stashing assets and profits outside of the US to avoid taxes.
Extreme focus on cutting back costs. Using overseas “global delivery skills,” AKA cheaper workers and even docking 10% of salaries to offer training to employees while charging high-end prices for IBM’s services.
But you can only cut costs for so much and save that much. There is a limit to how much cost-cutting you can do until you hurt operations and production. And IBM reached that limit well before 2015, the year “Roadmap 2015” was promising $20 EPS.
By the end of 2014, the company had amassed a huge debt, its hardware profitability had taken a nosedive, its margins had declined, the executive leadership forwent their personal annual incentive payments for 2013, and it abandoned the Roadmap.
To save the company, leadership had to come up with a radically different strategy. And it did. The 5 “imperatives” strategy was much more attractive to all the stakeholders and would prove to be much more effective.
IBM’s 5 imperatives and its strategy to recovering its past glory
IBM’s biggest weaknesses in the first one-and-a-half decade of the current century have been financial performance and strategic blunders.
But if it had no strengths to leverage, then it wouldn’t be alive today. And its size is one of them. IBM is huge. For example, as of 2018, the company employed around 378.000 people and commanded one of the largest collections of PhDs in computer science and technology. IBM generates over $50 billion in revenue annually with consistently large profits. In 2017, the company had over $8 billion in cash.
The “five imperatives'' were a strategy that focuses on actual performance and not financial engineering to be successful.
The five imperatives were:
Analytics
Cybersecurity
Cloud computing
Social networking
Mobile technologies
The company made several acquisitions to close the competitive gap in all of those focuses while it shifted resources to support those initiatives. As a result, it surpassed its competition with analytics software and its capabilities to manage and analyze massive bodies of data. With a $2 billion acquisition of SoftLayer, it caught up with cloud computing and extended its services to include cybersecurity. A partnership with Apple Computer offered the promise of portable computing and app development platforms lodged in cloud servers. Finally, IBM offered management consulting as much as software services through its social networking focus.
Source: IBM Research, via Flickr, CC BY-ND 2.0 DEED
IBM's Strategy has focused even more in recent years, integrating the imperatives into two major pillars: hybrid computing and Artificial Intelligence (AI).
It puts everything under the umbrella term: Digital Transformation.
IBM’s focus on digital transformation propels it into the future
IBM’s future looks promising, and its strategy is putting it back at the center of computers and technology. In January 2018, the company announced its first quarter of YoY revenue increase since 2012.
AI-powered autonomous labs | Source: IBM Research, via Flickr, CC BY-ND 2.0 DEED
It focuses once again on delivering value to its customers by addressing the crucial challenges that accompany every digital transformation:
Managing the increased complexity of heterogeneous enterprise IT environments.
Extracting valuable insights from available data.
Sustaining operational competitiveness against disruptive market changes.
Increased cyber threats and increasing cost of cybersecurity.
A cohesive end-to-end execution of solutions that address all of these matters.
The way IBM addresses these challenges and chooses to differentiate itself is by adopting a platform-centric hybrid cloud approach paired with advanced AI capabilities. The infrastructure relies on Linux, containers, and Kubernetes as the architectural foundation.
In layman’s terms, the value proposition of the company is the sustainable and accelerating transformation of their client’s businesses and processes through:
Hybrid cloud that develops ability and speed.
Tailored and trustworthy data governance respecting privacy and generating data-driven business insights.
AI-driven decision-making that automates enterprise processes.
Consistency, security, and compliance.
The company is rapidly growing its ecosystem, enhancing client experience while driving value and innovation with its open-source technologies.
Key Takeaway #3: To succeed long term, focus on developing business capabilities instead of financial returns
Ambitious goals and financial promises are not strategies. They might provide some returns in the short term but ultimately set the company up for future failure. Cutting costs is not an infinite-returns-yielding tactic.
When the industry changes, new trends and technologies emerge, and your competitive advantage won’t be serving you for much longer:
Make a thorough analysis of the environment. Spot the most promising emerging trends in technology, customer expectations, and markets.
Perform an internal analysis to define your strengths, weaknesses, and current capabilities that power your competitive advantage.
Develop a strategy that takes advantage of your current capabilities, develops adjacent ones, and mitigates weaknesses to seize the opportunities you spot.
Until your new strategy is performing and your competitiveness relies on it, ensure cash flow and sustainability through your current healthy lines of products.
Why is IBM so successful?
IBM’s success over its long history can’t be attributed to a single cause.
In each distinctive phase, IBM demonstrated the qualities that enabled it to thrive and pioneer in technological advancements. One consistent quality that allowed IBM to stand the test of time has been its decisive adaptability, the ability to spot new trends and transform its business in time to lead change.
Its corporate culture of respect and hard work has been the cornerstone of every single one of its achievements.
Growth by numbers
Year
Year | |||
Total consolidated revenue | $104,5 b | $79,1 b | $57,3 b |
Total consolidated gross profit | $50,3 b | $36,2 b | $31,5 b |
Number of employees | 434,2 k | 366.6 k | 282.1 k |