International Business Machine's Strategy in Major Decision Making - Case Study Example

Introduction Decision making is one of the core aspects of business management. A good business can only stand when good decisions are made pertaining to running the business. In most businesses, decision making is done by senior personnel and managers. Most managers and business leaders make important decisions by relying on their gut instinct and sometimes hurriedly oftentimes leading to poor results (Rasiel 32). Before any decision is made of implemented, it should be examined especially by considering alternative decisions. It is therefore highly encouraged that decisions are made based on evidence and logic (Hitt, Ireland & Hoskisson 26). There are a number of software programs in the market that aid managers in making the right decisions by feeding them with bits of information to assess logic and validity of evidence. Nonetheless, whatever approach is used, for managers to make working business decisions, they need to have a clear vision of the future of the business, understand and consider risks and uncertainty, acknowledge that their decisions will impact other people and also have a process in place to review and improve decisions (Smith 29). Successful businesses often display such characteristics in their decision making. Impeccable decision making allows firms to invent new strategies, adapt to new changes in the environment and power innovation (Ibid). One of them that have excelled in following the right procedures in decision making is the international computing and IT solutions firm, IBM. This paper will therefore analyze IBM’s strategy in major decision making with support from relevant sources such as books and company reports. IBM’s Background In the last one century, the International Business machine (IBM) has been at the helm of computer technology, powering innovation after innovation. Having started in the late 19th century through the merger of three different companies, Tabulating Machine Company, International Time Recording Company and Computing Scale Corporation to form the Computing Tabulating Recording (CTR) (Jain, Haley, Voola & Wickham 2012 p. 366), the company rose over time to be the world’s second most profitable company with net income of US$6 billion on revenues of US$69 billion by 1990 (Applegate, Austin & Collins 1). However, the firm’s success did not last long as the firm made losses of US$16 billion between 1991 and 1993. This prompted the introduction of a new CEO, Lou Gernster, in 1pril 1993 who was mandated to guide the firm into profit making ways. The loss making period of IBM coincided with the rise of its competitors such as Dell and Compaq and Hewlett Packard. With Gernster at the helm, IBM was back on a solid financial footing by 1995. This was after massive lay-offs rendering over 75000 people jobless, and closing down of the PC manufacturing unit among other stringent measures. The new approach in IBM also saw the abandonment of SBUs in favour of an integrated firm. The top management was also reorganized and teams formed to head operations and deliberate on strategy. Gernster opted for a harmonized global approach that did away with localized country and regional strategies. Common financial, cultural, and business processes were pursued at all levels. Although such moves faced pockets of resistance, the management pushed even harder with some employees quitting in resistance to change. Supply chains were reengineered and products approach was changed. The firm concentrated more on solution-centred products rather than just hardware. Consequently, by 2000, IBM was the world’s largest IT consulting and web services organization providing 38% of the firm’s US$88.4 billion revenue (Applegate, Austin & Collins 1). The firm thus concentrated in supplying internet-related services and associated hardware and software. All such transformation for the firm required critical decisions that would optimize the firms operations. Decision making in IBM In every decision making situation, the management is faced with several alternative options. According to Holsapple (32), it is important to select the alternative that has the optimal impact on the organization and all stakeholders. The optimization decision strategy assists in selection of optimal alternatives. Therefore, before settling on an optimal alternative, a selection of alternatives must be gathered with each alternative’s impact on the organization and other stakeholders clearly outlined. For instance, in the case of IBM, the choice to do away with strategic business units (SBU) and approach the market as one IBM was made with due consideration alternative approaches and comparison to pre-existing strategy of approaching the marketing as specialized SBUs each dealing within a particular market segment. Such an integrated approach to the market for IBM therefore increases the satisfaction to consumers. It should be noted that this approach by the management was informed by surveys from consumers. Lou Garnster in his personal capacity visited customers, analysts, and industry experts to understand the needs of the market and the shortcomings of IBM’s products. He summarized their responses as “We don’t need one more disk drive company, we don’t need one more database company or one more PC company. The one thing that you guys do that no one else can do is help us integrate and create solutions” (Applegate, Austin & Collins 5). Therefore, IBM had to clearly identify who its customers are and classify them according to needs. In proper strategic business management terminology, classification of clients into groups according to their needs is called market segmentation (Hill & Jones 119). In most cases, organizations create different products/services to meet different market segments. However, for some organizations such as Mercedes Benz, they concentrate on a particular segment. IBM targeted different market segments with different services and products. The decision by IBM supply different products and target different market segments allows the firm to satisfy customer needs better. This was in recognition of the fact the market is not a homogenous place and that clients have varying needs depending on the industry, business structure and location among others. The new decision point required IBM to forego the previous market segment that largely dealt with computer hardware such as storage devices and PCs’. IBM addressed the needs of the new market segment by providing all round IT solutions to customers including associated hardware. In most cases, IBM was required to develop solutions that incorporated competitors’ systems and hardware i.e. a shift from proprietary to open technology (Applegate, Austin & Collins 9). This was the trickiest decision that IBM had to undertake in agreeing to incorporate competitors’ product as inputs in developing their services. This meant that the firm moved from manufacturing tangible products in the form of hardware to supplying services. This created a demand-driven and customer-oriented sensibility in product development (Ibid 9). The other decision that faced IBM was cost cutting in order to be capable of delivering the new product offering in the market. One of the preferred and widely used cost cutting measures among many multinationals is laying-off excessive workforce. Grobler says “coupled with proactive restructuring strategies, downsizing can be another tool to put the organisation back on the road to domination rather than death, where the organisation is losing its market share” (240). On the other hand Vollman and Brazas (24) differentiate downsizing from rightsizing by saying that rightsizing is having the right number of people doing the right kind of things while downsizing is just reducing costs by cutting the number of workers. For IBM, it appears that the firm embarked on both downsizing by cutting down over 40000 employees when Gernster took over. However, this must be noted that the laying off employees was not random just to cut costs. Vollman and Brazas (26) warns that poorly planned lay-offs lead to talent drain and lack of job security among retained employees both of which have a long term effect of lowering productivity and increasing employee turnover. In the case of IBM, the lay-offs were strategic in the sense that the firm was changing its positioning in the market from a hardware manufacturer to an integrated solutions provider. This therefore meant doing away with a number of departments and employees that were not part of IBM’s core business. IBM was faced with the decision to reengineer its growth path in line with new products. Reengineering or reinvention involves managers focussing on the business processes underlying the value creation process and not the functional activities (Jones & Hills 219). Previously, the firm had relied on innovation as its growth engine which placed more weight on individuals rather than teams. Gernster realized that this growth path was no longer tenable in the new marketplace and with the new product offering. As such, IBM embarked on a new growth strategy, that of applying technology. Each member of the Corporate Executive Committee (CEC) was assigned a responsibility for a functional reengineering project such as sales, procurement and product development (Applelgate, Austin & Collins 7-8). This coincided with explosive growth in the IT applications industry as firms were still struggling with how to make computers relevant and task specific in various processes in their operations. This placed IBM at the centre of this industry of technology application. This had a lot of ramifications on the internal operations for the firm especially in changing the competitive and marketing strategy. To remain relevant, the firm had to revaluate its resources and capabilities as the ‘new firm’ with a new product offering was more reliant on knowledge, experience and expertise of the retained personnel rather than the technical qualities of its products. The other critical decision made By Gernster that has contributed to the current state of the firm is the decision to retain IBM as a single unit rather operate as SBUs. The new leader recognised that one of the strongest competitive points for IBM in the market was its strong brand name. The firm had been in operation since the early 20th century had been strongly identified with the early PC’s in the market. He thus theorized that breaking the firm down into smaller SBUs would dilute the brand and might lead to confusion among consumers. Jones and Hill (193) recognise that operating via SBUs allows firms to introduce numerous products into the market at the same time without eroding core products. Firms such as carmaker Toyota, Honda have specialized in running SBUs that enable them to develop different products for different market segments. IBM managed to run its IT solutions service provision and outsourcing its retained laptop brand of ThinkPad whose manufacturing it outsourced. This allowed the firm to concentrate on its chosen market of technology application. The move to operate as a single unit was made on trial and error basis. This is because there is no perfect information in the world of business. Erlandson, Stark and Ward (2006, p. 39) say that evidence from past data, trends and patterns in the market enable decision makers to predict a possible path of development of events. This is based on the fact that information on the future is never available. The authors thus argue that decisions made in organizations are never long term as they undergo evaluation constantly. The ability of decisions made as temporary solutions to arising challenges determines whether such strategies will be continuously in use until when they can longer be beneficial to the organization. The mixed scanning decision making strategy, proposed by Etzioni (1967), posits that the most effective strategy is the one that is most well-suited to the specific situation of the decision maker’s capacities. The model consists of examining the situation and one’s available resources for responding, then responding incrementally while scanning the environment to see how the response is working out, and then continuing the selected action, modifying the action, or changing to a different action f the scanning indicates such. In essence, decisions must utilize available resources. This was very obvious in the case of IBM around the time that Gernster took over. He realised that the strongest marketing point of IBM was it strong brand name and its knowledge base from its workforce. He thus set out to lay off workers whose knowledge base was not useful to the type of response to current market needs that he had conceptualised as a result of interviewing customers, analysts and industry experts. As a form on a growth path, IBM faced a critical decision in choosing its growth path. There are many options for firms seeking to grow and expand into new markets. The choice of any of the alternatives can mean success or failure in the growth or expansion strategy. Some major strategies that hinge on new markets include mergers and acquisition, licensing, franchising and formation of subsidiaries or regional branches. By 2003, under the new leadership of Sam Palsimano, IBM sales were growing. To expand into new markets and new products, the firm made a strategic move in acquiring the management consulting and technology services arm of PricewaterhouseCoopers, PWC Consulting, for US3.5 billion in 2002 in order to bolster its services division (Applelgate, Austin & Collins 7-8). This strategic move saw IBM nearly doubling its number of consultants in 52 countries. According to Harrison and John (120), the decision for a merger or acquisition can be informed by a number of reasons: 1) enter new markets 2) acquire new products or services 3) learn new resource conversion processes 4) acquire needed knowledge and skills 5) vertically integrate 6) broaden markets geographically or 7) fill needs in the corporate portfolio. For IBM, it appears the firm benefited from all the above. Applelgate, Austin & Collins (14) point out that IBM’s past experiences in working with PWC Consulting in their pursuit of becoming “One IBM” drove the hopes of combining its technology capabilities and its own to assist IBM’s customers in need of transforming. The expansion strategies at IBM are made in an incremental process. Jain et al. (366) note that incremental decision making strategy assists firms such as IBM in identifying its new target markets and products and the potential merger and acquisition partners to facilitate entry or expansion into the target markets. Since 1999, IBM has acquired over 130 firms as an expansion strategy. The latest acquisitions late last year and this year include Texas memory Systems (Aug 2012), Kenexa Corporation (Aug 2012), Butterfly Software (Sept 2012), StoredIQ (Dec 2012), Star Analytics (Feb 2013) and Urban Code (April 2013) (IBM 2013). These acquired firms have benefited the IBM in all the aspects noted by Harrison and John (120) as aforementioned. These firms are based in the US and other countries such Ireland, Israel, Canada and the UK. These step by step expansion strategies enable the firm to increase its product range, improve quality of services offered, expand its market share, offer its existing clients a more complete product and increase shareholder value (IBM 2013). Conclusion IBM takes continuous improvement in the products and services offered to its clients very seriously. In the dynamic filed of IT, innovation and technology application come in handy. In the day to day running of the firm, critical decision situations are many. However, critical decision situations at the company top management level are very critical as they determine the overall direction of the firm. It is apparent that the firm has successfully reengineered and repositioned itself in the market and as IT services brand as opposed to the previous of hardware manufacturer. The new position has seen the firm strengthen and expand its product offering and increase its market share through an ambitious expansion strategy driven by mergers and acquisitions. The firm uses a mixed scanning strategy in making key decisions which are constantly evaluated. Other decisions are made using the incremental strategy such as merger and acquisition. All in all, the decision making capacity of IBM is very impressive has enabled the firm to capitalise on its strengths, utilize its opportunities, manage the threats and address weaknesses. Works cited Applelgate, Lynda, Robert Austin and Elizabeth Collins. IBM's Decade of Transformation: Turnaround to Growth. Harvard Business Review 9-805-130. 2009. Web. Erlandson, D, Stark, P & Ward, D 2006, Organization Decision Making. 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