Analysis of the Fall of IBM Case

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History, development and growth

International Business Machine (IBM) has undergone rampant growth in the computer industry over the years. In 1971, the company had a global market share of 75% in relation to mainframe computers. The high rate of growth witnessed by the company during this period resulted from increased investment by the firm’s management team in research and development. Research and development enabled the company to conduct effective innovation to its mainframe computers thus attaining a higher position in the market. For example, the innovation resulted into development of a new series, that is, System/ 370.

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The 370 series formed the basis upon which the company improved its mainframe computers. Innovations conducted on the 370 series were aimed at improving the performance of various components such as printers and software. According to Jones and Peters, more emphasis was given to its storage capacity (661). During the1980s, IBM managed to dominate the mainframe market. For instance, it managed to attain a revenue level of$26billion which represents a four times increase in its market value compared to that in 1970’s. However, the company’s success was faced by a challenge since the mainframe computer market was becoming saturated.

This resulted into a decline in IBM’S growth rate despite the fact that the company was experiencing an increase in its revenue levels. In addition, the firm was facing intense competition in the market. This is due to the fact that there was an increase in the number of investors who were venturing the mainframe market due to its profit potential. Some of IBM’s major competitor during this period included Burroughs, Univac, NCR, Control Data and Honeywell (Jones & Peters 362).

These companies threatened the survival of IBM due to increased price war. For instance, these companies were providing mainframe technology similar to IBM’s but at a lower price. In addition, the competitors started providing peripheral equipments such as Central Processing Units (CPUs), storage devices and printers which were compatible with those offered by IBM. The company also faced low-price competition from foreign firms such the Japanese firms. To cope with the high rate of competition, IBM’s management team adopted a low cost strategy. This resulted into the firm increasing its financial investment in the production of low cost computers (Jones & Peters 362).

Changes in technology also promoted the firm to adopt a selling strategy and abandon the leasing strategy. This is due to the fact that mainframe computer’s lifespan was becoming short. However, the selling strategy posed a risk to IBM’s customer base. This is due to the fact that the customers would be able to shop from competing firms culminating into a reduction in the demand for its products. In addition, the selling strategy resulted into an increase in low cost competition. The management of IBM did not give consider the emergence of new computer products such as minicomputers, workstations and personal computers.

To cope with technological changes, IBM’s management started investing in development of minicomputers. These computers did not effectively penetrate its target market which was the research institutes. This is due to the fact that IBM’s mainframe had already dominated the market (Jones & Peters 363). The innovation of AS/400 minicomputer series in 1988 was a success to the firm. This is due to the fact that it was compatible with the traditional IBM mainframe. The result was an increase in the number of customer who adopted the new technology. This boosted IBM’s market share from 16% to 28 %.

IBM also ventured into personal computers market to compete with Apple which was the market leader in 1980’s. IBM’s Personal Computers succeeded in the market due to their effectiveness of operation. By 1984, IBM had managed to attain approximately 40 % of the PC’s market. In this market segment, IBM faced a challenge due to emergence of competitors such as Compaq who ventured in the production of personal computers (Jones & Peters 365). This culminated into intense price war within this market segment. The success of IBM’s personal computers was also threatened by the company’s structure of centralized decision making. The rigidity in decision making made it difficult for IBM to deal with the intense price war.

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The management was also reluctant to venture into workstation segment which was proving to be more effective. However, there was increase in competition in this market segment which prompted IBM to innovate it own workstation. By 1991, the company had attained 18% of this market segment (Jones & Peters 367). IBM also incorporated provision of outsourcing services to various companies. Outsourcing enabled the firm to manage data for various business firms for a fee (Jones & Peters 368).

To improve on customer loyalty, IBM ventured into provision of consultancy services. Considering the increased incorporation of electronic commerce amongst large and small and medium enterprises (SMEs), IBM ventured into development of software to enhance electronic commerce (Jones & Peters 377). Over the years, IBM has managed to improve on its market capitalization which is approximately $155 billion today. According to Jones and Peters, the firm has managed to emerge as the leading firm in consulting and business computer services (373).

IBM’s SWOT analysis

Strengths Weaknesses Opportunities Threats
Strong brand name.
IBM has been able to succeed over the years due to worldwide recognition of its brand name
IBM’s management team is not pro-active to changes in the competitive environment. High probability of the firm expanding its market share through development of electronic commerce software. SMEs are integrating e-commerce in their operation. Increased competition from other firms in the computer industry. For instance, incorporation of mergers and acquisitions is intensifying the degree of competition.
Financial stability of the firm has enabled it to conduct product innovation. Investment in research and development will enable the firm innovate venture into new computer market segments such as Computer Games segment. High volatility is characteristic of the technological environment.
Effective investment in research and development. Increase in demand for computer peripherals such as hardware and software.

External environment surrounding the company

Computer industry is faced with intense political challenges especially in the event of political instability. In addition many countries have policies aimed at protecting their domestic companies. This limits the capacity of firms to conduct expand their market share either through formation of joint ventures. Over the past years, there has been an increment in consumer purchasing power due to economic development. In addition, many individual and institutional customers are incorporating computer technology in their operation. This is due to advancement in educational levels. This shows that there is a high potential of IBM to increase its sales revenue. However, computer industry is very volatile due to technological innovations. In addition, the industry is also characterized by intense competition (Jones & Peters 368).

Corporate strategy

IBM’s top management team has adopted a corporate strategy which entails restructuring of the organization structure. The objective of this strategy is to improve on the decision making capacity of various divisional heads. Through restructuring, various divisional heads will be able to make decisions which will enable the firm to adjust to the market changes. The result is that the firm will be able to deal with increase in competition challenges.

In restructuring the firm, the management has broken down its operation into 6 groups to address the demands of the industry. These include financial services, distribution, industrial, communication, public and SMEs (Jones & Peters 380). The restructuring strategy also entailed regrouping the various operational divisions to improve on their cooperation. These groups include software, hardware, global services, global sales and distribution, global financing and research and development.

The firm has also incorporated acquisition strategy to be able to penetrate the market effectively. The acquisition strategy entails firms with superior technologies to attain a high competitive advantage. For example, in 1995, IBM acquired Lotus which enabled the firm to improve on its network. In 2002, IBM acquired PriceWaterhouseCoopers thus strengthening its consulting services (Jones & Peters 382).

Business level strategy

IBM’s business model entails provision of a comprehensive computing package. The package consists of variety of computer hardware, services and software. In the production of these computer products, IBM’s management team has adopted the concept of customization. This means that the entire firm’s operations are focused at the customers. In addition, the management is also committed at providing unique products to its customers. The objective of this strategy is to enable the firm improve on the level of customer satisfaction upon utilization of the company’s products. To effectively penetrate the global market, IBM’s management has also incorporated electronic marketing concepts. This has been achieved through incorporation of internet in the firms marketing strategy.

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To improve on the level of customer satisfaction; the management of the firm has incorporated the provision of various consultancy services.

As a business strategy, consultancy services would enable the firm improve on its future revenue streams. This is due to the fact that the consultancy services entailed planning, designing, implementing and maintenance of the customers Information Technology system (Jones & Peters 375). According to IBM’s management, provision of consultancy services will enable the customers effectively upgrade their IT systems culminating into an increment in customers switching cost. Through this, the firm will be able to develop a long term customer loyalty. This is due to the fact that the firm will be able to effectively demonstrate its capability of providing customized and comprehensive computer products with a capacity of enabling the clients improve on their profitability levels (Jones & Peter 377).

Structure and control system and how they match its strategy

To ensure that all the operation of the firm is focused at increasing the level of customer satisfaction, IBM’s management team incorporated the concept of pay to performance. This means remuneration of the firm’s employees was linked to their performance. The effect is that the firm’s employees became more committed to attaining the stipulated goals and objectives in relation to firm’s business strategy (Jones & Peters 379).

Recommendation

  • IBM’s management team should continuously scan the business environment to identify the possible technological changes which can be a threat to the firm’s operation.
  • To cope with the increasing competition in the global market, IBM’s management should scan the environment to identify potential firm with which it can form a joint venture relationship.
  • To ensure that the firm’s computer products meet the market needs, continuous research and development should be conducted.

Works cited

Jones, Gareth and Peters, Susan. “The fall of IBM.” Texas: Texas A & M University. 1994.

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