Why Do Large Companies Like IBM Find It Difficult to Create New Businesses - Case Study Example

Q why do large companies like IBM find it so difficult to create new businesses? What are the primary barriers to success? Large organizations areoften victim of their own glory and over the period of time develop as complacent organizations. The inability to clearly visualize the future and strategic orientation of the external world make it more difficult for them to expand or evolve into new arenas with better prospects. The change that took place within the personal computer industry especially during 1990s clearly indicated a marked shift towards more open business models where small and more agile competitors were more successfully than the larger and more dominant organizations like IBM. The success of Dell over IBM can easily be attributed to the fact that Dell attempted to exploit a market niche which was hardly considered as future market prospect by the IBM. As mentioned in the case study that the mangers at IBM often considered new opportunities for innovation as a distraction from their core business activities thus limiting themselves to only those opportunities which corroborated their existing strengths. Inability of the senior management to reward and look for new and strategic opportunities and rather reward short term results. Though, short term results play a critical role in keeping the organization is momentum however, it is really critical that the organization and its management must develop the skills and aptitude to reward the long term strategic building of the business. Large organizations such as IBM therefore lack the ability to focus on thinking beyond what they are good at and focus more on achieving the near term results. Large organizations are also often pre-occupied with their existing markets and demand patterns observed in existing markets may serve as a satisfying factor for them. A higher and consistent demand from existing markets therefore is one of the reasons why large organizations fail to create new businesses because short terms strategic business targets are often achieved from existing markets rather. This however, also indicates that the large organizations often become complacent and stop looking for new opportunities. It is also important to note that the strategic financial objectives of the firm may be different as compared to growing organizations. Since large organizations often pass through their maturity stage therefore they focus on achieving sustainable profit targets rather than taking actions to drive higher P/E values. Since cash flow patterns are more predictable for mature organizations therefore the need to drive higher value by creating new opportunities. Ability to take risks is another important factor which frightens most of the organizations to look for new markets and businesses. The more conservative the management approach is more difficult it would be to invest in risky and new businesses. Large organizations often focus on their existing businesses offering stable returns rather than forecasting new opportunities to invest into new businesses. This inability also therefore restricts them to look for more risky adventures which can otherwise provide higher returns and offer new opportunities to diversify. Q#2 What is your evaluation of the “horizons of growth” model? What are the distinguishing features of emerging, H3 businesses? The development of horizons of growth model took place in the midst of serious strategic disasters where large organizations failed to enjoy the benefits perceived to be obtained from mergers and acquisitions. The so called consolidation myth did not seem to have worked for most of the companies and it was argued that while looking for new business approaches and opportunities, it is also critical that the businesses must keep their eye on consolidating their existing core competencies. The alternative to deal with such situation was presented in the form of Horizons of growth model which presented the idea of the three horizons of growth by outlining and indicating the three distinctive growth phases or horizons which an organization need to account for. The first horizon was to consolidate on the existing core competencies of the firm so that the firm continues to enjoy its traditional competitive advantage. In the next horizon stage is the stage where organization actually starts building the emerging businesses which can actually support the medium term profitability and growth objectives of the firm. Last horizon is based on the creation of viable options to look for and generate long term prospects therefore at this horizon; organizations often tend to look for visionary leadership to conceive ideas which can be materialized in future. The horizons of growth model may be a relatively more predictable model to measure and predict the future growth prospects. It is however, also important to note that organizations have to pursue all three horizons together in order to achieve the objectives and as such management shall be more pro-active in visionary. The most distinguishing factor of H3 businesses is the fact that they reflect the long term future opportunities for the firm which is considered as necessary to ensure the long term future of the firm. Since, H3 businesses are mostly less developed therefore a more creative and visionary leadership and management is required to materialize these businesses into reality. Q#3 The evolution of the EBOs at IBM began in two distinctive phases- i.e. one under the era of Thompson and second and most important phase was that of the corporate strategy era. At the time of Thompson, the evolution started slowly and more traditional manner as he was considered as one of the most respected personalities at IBM. First of all, his elevation to the post of vice president was a strong motivational signal for most of the managers working on the different EBO projects therefore there was a wide ranging acceptability of the change without any significant resistance to change. The beginning of Thompson era saw the consolidation of responsibility among the people working on EBOs as by doing so Thompson insured that the roles are clearly defined at the beginning so that everyone must have a very clear idea of what is expected from each other. This therefore allowed IBM to basically focus on the main strategic objective. These EBOs in this era started to evolve in more solid footing as Thompson was personally involved in the processing of reviewing the progress made and contemplated on the changes if required. These reviews however, were not considered as the traditional reviews at the IBM but were mainly focused on consultation and development of new ideas for making the process of EBOs more strategic and robust in nature. It is also important to understand that these reviews provided a very important insight directly to the top management of the firm on possible qualitative weaknesses which IBM was witnessing as in the past qualitative aspects of analyzing business opportunities were completely ignored. IBM’s traditional method for analyzing the new opportunities was largely based on evaluating the hard core financial data therefore this approach was significantly different from what was practiced in the past. This approach was however, personal centric and largely revolved around the personality of Thompson and as such the methodological insight from other quarters was not seriously taken into consideration. Besides the model adapted by Thompson was good for managing a limited number of EBOs and rather was significantly inefficient in managing large number of EBOs. It was because of this reason that a shift towards corporate strategy was made. With the retirement of Thompson, the corporate strategy group formally took over the development of EBOs and as such process was more formalized under the corporate strategy. The staffing was rationalized to add new expertise for project management; marketing and experts from other disciplined were introduced. Further, the processes and systems were more organized and refined besides adding some new elements of managing the EBOs. This therefore allowed IBM to develop competencies which were not traditionally its stronger points thus by focusing on corporate strategy approach, IBM achieved its strategic objectives. Q#4 The current EBO system was more mature and robust in nature as the changes made over the period of time reflected a lot of hard work and strategic insight behind the process. The current EBO system not only reflected broader spectrum of activities but it also included elements which were traditionally not recognized at IBM as the value drivers for the future growth and sustainability. Resource allocation is more efficient and productive in nature as well as the allocation and rationalization of funds became more easier in nature. As against the past practices, the analysis of the new projects was more qualitative in nature as against the quantitative analysis which was the hallmark of IBM in the past. Further, the existing system of EBOs also allows the development of succession planning as well as leadership from within the organization. By developing a system of accountability and responsibility into the new EBO system, the system provided strategic maturity and more formality to the development of emerging businesses at IBM. Q#5 The new system at IBM was firmly in place and presented new opportunities for future growth. However, there were still some problems and ambiguities associated with the process as despite such rigorous process the transition from H2 to H3 was relatively more difficult as IBM was mostly stuck at H2 phase. The development of H2 businesses was not up to the entire satisfaction of the IBM because it did not place a lot of attention on the development of such businesses. As discussed in the case, IBM failed to put in place and adequate and proper managerial approach in place to oversee such businesses. Too much focus was placed on conceiving H3 businesses because they provided better future growth prospects. In order to deal with the businesses reaching the H2 horizon, it is therefore really important that a more customized and tailored focus shall be applied to such businesses. The development of new approaches as well as focused managerial approach shall be one of the cornerstones for dealing with H2 business and as such Herreld must develop strategies which effectively integrate these businesses into the mainstream organizational activities. Since H2 businesses are more predictable as well as easier to manage, it becomes therefore really critical that the top management of IBM shall develop ownership for such businesses and promote those who actually materialized the idea into reality. In order to develop new EBOs it is also important that Herreld must take a broader and more proactive approach based on diversification as one of the strategies to pursue future growth opportunities. One approach which IBM planned to adapt was the strengthening of the corporate strategy staff which can then subsequently refine the ideas and materialize them into reality however, it would be better if the development of new EBOs takes place through multiple sources at IBM rather than solely relying on corporate strategy group. Read More