Saturday, July 11, 2015

The IBM story : The rise, the fall and the phoenix effect

Reading the articles "Competitor Analysis: Understand Your Opponents" and "The Five Competitive Forces That Shape Strategy" brought to forefront some vivid examples in computing sector in general. Foremost amongst them is the past, present and future of IBM, a 104-year old company which has gone through every phases possible, the rise, the fall and the re-rise from the ashes of its own downfall.

IBM was one of the pioneers of computer industry and one of the earliest also. Its origin in 1911 was consolidation and merger of four different companies and the purpose being to offer a variety of products under one roof. As per Charles Flint, it was a strategic triumph, as he quoted: "... instead of being dependent for earnings upon a single industry, would own three separate and distinct lines of business, so that in normal times the interest and sinking funds on its bonds could be earned by any one of these independent lines, while in abnormal times the consolidation would have three chances instead of one to meet its obligations and pay dividends." . As evident, he was taking into account, suppliers, consumers as well as the threats of new entrants. He also made sure IBM offered substitutes in some industries where it was not a major player. This was one of the earliest examples of a strategic implementation of the forces that shape any organization's strategy. Over the next 50-60 years, IBM successfully warded off any threat to its almost monopoly like situation in the industry. IBM got involved in US Census process, which was expensive, troublesome yet that served as a reminder to other organizations from entering into the fray. IBM was in short making it difficult for competitors to enter its domain and fight for profits. As early as 1920's, IBM was already established across North America, Europe, South America, Asia and Australia which made sure it was independent of consumers and suppliers at any one geography. IBM succeeded during the great depression of 1929, courtesy of its investment in people, manufacturing, and technological innovation. IBM hired people during this period, which made IBM a place to work to. The thinking behind this move being, highly talented people will continue to work for IBM even when new entrants tried to poach these great minds. This prevented new entrants from doing substantial innovative research of their own. IBM worked with the government forces at various time-frames to market itself as a frontrunner to both private and public motives. Involvement in the space exploration program, world war II, new innovations in computing kept IBM at the front till the mid 1970s. IBM also invested hugely in human resources, its suppliers and support to its consumers, thus becoming a monopoly in the industry. There was a saying back in the 1960s and 1970s, "You do not get fired for buying from IBM". But this was the calm before the storm that would almost bring IBM to its knees.

This started in the early 1970s and was very evident by the early 1980s. IBM became complacent of its position in the industry. It failed to see the future and prepare accordingly. It allowed a new entrant and this was the begin of the downfall. The nemesis, Microsoft and Intel. IBM contracted its software and hardware to these companies and itself stuck with few of the legacy systems. It did innovative research but these did not bring in profits as expected by IBM. The demand was elsewhere. What IBM failed to see was the "personal" consumer demand that was going to come in over the next few decades. It also failed to realize the importance of its suppliers, Microsoft and Intel. Very soon these suppliers were to produce substitutes for IBM products and eventually enter the market as a competitor. As IBM assessed the situation, it was clear that competition and innovation in the computer industry was now taking place along segmented, versus vertically integrated lines, where leaders emerged in their respective domains. Examples included Intel in microprocessors, Microsoft in desktop software, Novell in networking, HP in printers, Seagate in disk drives and Oracle Corporation in database software. IBM's dominance in personal computers was challenged by the likes of Compaq and later Dell. And all this started because IBM decoupled its software and hardware components and contracted them to outside of IBM. By 1993, IBM was no more viewed as the organization dinosaur that it was.

Rather than fade away into oblivion, IBM decided to rise from its own ashes. It split into autonomous business units to compete more effectively with other competitors. It sold few of its legacy systems which were in RED or providing low margins, a more of "what-not-to-do" from a strategy perspective. It resumed its own services and software division, finally acknowledging that the future lied in this field. IBM did something back then which marked a shift in the industry outlook : IBM began providing services even to its competitors from a client perspective. This made IBM a favorable vendor for many enterprise level clients. IBM invested heavily in middleware and considering that IBM still holds almost 90% of the legacy systems in the world, this played to its strength. This again made it difficult for other competitors and suppliers to compete with IBM. Consumers were limited in their bargaining powers. The company invested into getting into the personal computing sector too. Reinventing the IBM brand image also helped IBM. It forayed into other sectors which were thought to be out of reach of certain organizations like supercomputing, cloud computing, internet applications, e-commerce, gaming consoles. The considerable investment, both in terms of financial and other resources, made it difficult for other organizations to compete on an equal footing with IBM. IBM was back in the market and was again considered a relevant computing partner.

Like IBM, there are other organizations which would have gone through a similar process in its own history. Some survived, some marched all the way to the top like Apple, some perish or join others like Novell. The key point is identify the industry, its parameters and preparing the organizational strategy accordingly to succeed where others may find it difficult to exist.

Source :
Competitor Analysis: Understand Your Opponents by HBR
The Five Competitive Forces That Shape Strategy by Michael E. Porter
https://en.wikipedia.org/wiki/History_of_IBM

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