Corporate Profit Disaster and Solution at IBM

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Executive Summary

International Business Machines Corporation was once the dominant player in the computer manufacturing industry when government entities and large corporations relied on mainframe computers to manage their data. However, the management of IBM’s decision to support Microsoft, Intel Inc., and Apple Inc. in their effort to develop PCs meant for individuals as opposed to large corporates proved to be a significant strategic mistake. Instead of these firms becoming strategic partners that IBM could easily control, they became its major rivals in a market dominated for decades. The emerging competitive rivalry and its low governance structure led to the corporate profit disaster that the firm witnessed from 1990 to 1993. The paper discussed various ways that this firm could have overcome this problem.

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International Business Machines Corporation, popularly known as IBM, is an American corporation technology company with its headquarters in Armonk, New York (Orlando et al., 2016). Founded in 1911, the firm has achieved massive growth over the years, and it currently has over 350,000 employees and a clientele base spreading across 170 countries (Orlando et al., 2016). For several decades, this Company dominated the computer market when personal computers had not emerged. Governments worldwide, large corporations, and non-profit marking entities relied on its products when it had no competitors (Coyne et al., 2018). However, the Company’s fortunes began to change in the 1970s when new firms started entering the market.

The new entrants targeted the personal computer (PC) market as a segment that IBM had ignored. The management did not view such an entry as a threat to its existence. It assisted these firms with its technology to dominate this emerging market. However, several strategic mistakes made by the top management unit led to a corporate profit disaster (CPD). In this paper, the aim is to discuss this CPD and to propose the strategic direction that it should take in the future to ensure its operations remain sustainable.

Choice and Understanding of Theory, its History, and Application in the Case Study

In the corporate world, successful firms have learned how to apply various theories to overcome different challenges and take advantage of the market’s opportunities (Hiriyappa, 2018). They can help avoid costly mistakes similar to what IBM went through in the late 1970s, 1980s, and part of the 1990s. When selecting an appropriate theory, the focus should be on the specific area of investigation that is of interest. In this case, I have chosen a positioning school for the analysis.

The positioning school is an analytical ideology which holds the idea of positioning a company within the context of its industry based on Michael Porter’s five forces theory (Ashour, 2018). Strategic positioning is valuable because it allows for analyzing the general market and competitive environment (Orlando et al., 2016). I have considered it because it seeks to explain how and why different firms operating in the same industry experience different success levels. It all depends on a firm’s ability to understand various market forces and develop an effective response strategy (Alam, 2018). When assessing the external environment, it is essential to understand that positive factors present opportunities for growth and opposing forces that threaten a firm’s sustainability in a given market.

The positioning school focuses on environmental threats that a firm has to overcome (Ashour, 2018). An environmental threat refers to any external factor or entity that can negatively affect the level of a company’s performance (Ashour, 2018). As the author notes, an individual firm such as IBM may not have the capacity to control these external forces within the computer industry. It may be possible to identify their existence, such as stiff competition or government interventions, or when they are likely to occur. Still, it is not easy to stop them from happening. The ability of a firm to manage these challenges defines its position within a given industry.

My understanding of this theory has developed significantly over the past two months as I have read more materials explaining it in detail. I have learned that stiff market competition may be beneficial, although it is always considered a major existential threat to a firm. The competitive rivalry will force the management to invest in creativity and innovation, besides embracing best practices in the industry (Wunder, 2019).

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It means that heightened rivalry makes it possible to develop unique products that meet customers’ expectations in the best way possible because of the constant desire to deliver better quality than what rivals offer. It also motivates companies to embrace new production strategies based on best practices and emerging technologies, which can significantly lower production costs (Dhir, 2019). I learned that a firm’s approach when managing these external forces defines its ability to achieve success.

I chose this school over the other schools because it explains forces that a firm must understand and overcome to gain a competitive edge over rivals in the market. IBM was down from its dominance in this industry because it ignored competition and failed to monitor and appropriately interpret forces in this industry. My knowledge of the history of strategic management has developed in connection to the positioning school.

I have gained more in-depth knowledge about how companies can deal with forces such as competition, substitute products, powerful buyers, and influential sellers, as discussed in various literature reviewed (Hiriyappa, 2018). The approach that I can take when dealing with such threats is significantly different from the strategy I used before learning this theory. I will focus on assessing each threat, such as entering a new firm into the market, then developing a unique strategy of addressing it based on market research outcome.

The following case shows that one of the biggest mistakes the management of IBM made in the 1970s and 1980s was to ignore competition (Lynch, 2015). The concept of ‘too big to fall’ among the top managers made them miss the potential threat of Apple Inc., Intel Inc., and Microsoft. At this time, these three firms were relatively small and had not demonstrated the potential to compete with IBM.

Application of Strategy to Understanding the Current Strategic Position of the IBM Case Study

This section focuses on applying Porter’s five forces theory to understand IBM’s current strategic position and how it lost its competitive advantage in this market.

Porter’s five forces theory is one of the business models widely used over the past four decades because of its effectiveness in assessing a business environment. According to Henry (2018), Michael Porter developed this analytical tool for evaluating a firm’s competitive strength and position in a given industry in 1979 when he was a professor at the Harvard Business School. These forces affect all companies in that particular industry, but the approach that an individual firm takes defines its ability to succeed in the market. The market forces include rivalry among existing firms, the threat of new entrants, the threat of substitute products, suppliers’ bargaining power, and buyers’ bargaining power (Henry, 2018).

Suppliers’ power defines how easy it is for suppliers to dictate trade, such as driving up their products’ prices. Suppliers of unique products that can’t be accessed easily from other sources tend to wield incredible power. For IBM, most of its suppliers during the period of analysis were relatively powerless. It was their primary customer, and as such, they could not drive up prices at will (Heldman, 2018). IBM was a powerful buyer in this industry and could dictate terms of trade. As more firms started getting into the market, suppliers’ power increased, especially in the PC segment.

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The power of buyers assesses the ease with which buyers can dictate trade terms, such as driving down the price of products they purchase. For a long time, IBM was the only supplier of mainframe computers used by governments worldwide and significant corporations that needed such machines to manage their data (Lynch, 2018). As such, the power of the buyers to dictate terms of trade was significantly low. Most of these buyers had no alternative but to rely on this firm, which allowed IBM to define the price and other terms of trade. As shown in the case, as new firms started making an entry into the market, the buyers’ power increased as they could choose from different brands.

Competitive rivalry assesses the number and capabilities of competitors in the market. The case study shows that before the 1970s, the Company enjoyed a monopoly in this industry it didn’t have to worry about rivalry in the market (Lynch, 2015). Its only concern was to make its products available to its customers globally. The level of competitive rivalry in the market started growing in intensity. Instead of the management dealing with this threat through strategic policies, it created an environment for its rivals to flourish, hoping that it would control them as the dominant player in this industry (Heldman, 2018).

The threat of substitute products was another area that the Company’s management failed to focus on in its strategic management policies. As competitive rivalry stiffened, the threat of substitutes, which provided customers with alternatives to IBM products, became more common. Apple Inc. began offerings as alternatives to IBM (Lynch, 2015). As shown in the case, this firm failed to understand how to respond effectively to this threat. The case study shows that it took too long for the management to realize that these alternative products posed a significant threat to its survival in the market.

The threat of new entrants, which was unimagined by the Company’s management, started becoming real. As the computing technology became common because of the liberal policies that IBM’s management embraced, new firms offering the same products began to emerge (Cortada, 2019). Figure 1 below identifies the five forces in this model. When Apple Inc. entered the PC market, IBM’s management did not consider moving a strategic threat to its profitability (Cortada, 2019). However, some of its organizational buyers started embracing this new technology, and it became apparent that IBM sales were dropping significantly. Most of these customers switched from mainframe computers to PCs because of cost. The PCs were cheap but as effective as products that IBM sold at higher prices (Coyne et al., 2018).

Porter's Five Forces.
Figure 1. Porter’s Five Forces (Helinski, 2017).

My understanding of the above theory is that it is a tool that a firm can use to assess various forces in the industry and define a path of achieving sustainability because it identifies specific external factors that affect a firm’s operations. The theory of choice’s primary limitation is that it does not help assess broader market forces such as the political, social, technological, and economic environments.

Understanding of Governance, Ethics or Corporate Social Responsibility

This section focuses on governance at IBM as a significant component of the problem that it faced. The case study showed that the Company had developed a unique governance structure that effectively operated in the local and international markets (Orlando et al., 2016). However, as the market dynamics were changing, the Company failed to respond effectively. It emphasized more on ethical practices and corporate social responsibilities by directly assisting small start-ups that targeted the core of its business. It made it possible for Apple Inc., which later became its rivals, to successfully enter the industry (Cortada, 2019). As it turned out, the Company was successful in its CSR activities by empowering competitions that later claimed a large portion of its market within a short period.

The study showed that the Company failed in its corporate governance, especially when it became impossible to coordinate its different autonomous units in the overseas market. As the Company grew in size, management’s focus was to break the organizational structure down to smaller, semi-autonomous operational units (Kann & Biersteker, 2018). It became difficult for the management to focus on the threat emerging as Microsoft, Apple Inc., and Intel Inc. turned from business partners to market rivals.

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The autonomy made it difficult for the management to monitor and effectively respond to the threat of competition that was increasingly threatening its position in the market. VRIO/VRIN model can help assess how the management could have analyzed its competitive advantage in the market to develop effective governance that would have allowed it to outperform its emerging rivals.

The Company’s failure is explained based on the top managers’ inability to use the Company’s competitive edge over its rivals in the market. In this assessment, the first factor to consider is whether a firm’s resource or capability is valuable. The product that IBM was offering in the market before and when competition begun getting stuff was useful. Mainframe computers were still in demand, and PC were also gaining rapid popularity in the United States and the global market.

It meant that this firm had a competitive advantage in this market. The second factor is the firm’s rarity (Ginter, Duncan, & Swayne, 2018). Before the 1970s, IBM’s product was scarce, which gave it a unique capacity to achieve rapid growth without worrying about competition. However, this changed when new firms entered the PC market, which means a competitive parity. The mainframe computers remained as the only rare products that the Company offered. The third factor is the imitability of the products of the firm. The mainframe computer segment of the market has proven to be less imitable (Wysocki, 2019).

The PC section was becoming increasingly imitable as numerous companies in China have also ventured into this segment of the market. It means that the firm IBM had been enjoying a temporary competitive advantage in the market. The case study shows that the firm’s governance structure denied it the ability to protect the competitive advantage. The last factor in determining how well the Company is well organized. When the firm started experiencing stiff competition and CPD, it poorly organized its corporate governance structure.

Its operations’ autonomous nature meant that the firm’s top management unit could not implement effective strategies meant to overcome emerging market challenges. Leadership wrangles created a chaotic governance structure at the firm. Instead of having a sustained competitive advantage, the firm had a new competitive advantage (Alam, 2018). The major weakness that pushed IBM into CPD was small market entrants gained market share and became the industry’s dominant players. Figure 2 below identifies the steps needed in this analysis.

VRIO Network.
Figure 2. VRIO Network (Lasserre, 2017).

IBM had a perfect opportunity to take advantage of the emerging PC market and assert itself as the industry leader. These start-ups did not stand a chance of rivaling this firm in this industry, especially if it denied them some of its basic designs (Ansoff, 2019). However, the decision to be liberal, hoping to control the market because of its dominance, led to its drastic fall. It is essential to critique the approach used in this analysis. The researcher relied heavily on the case provided as the basis of the study. The theory also had some limitations that compromised the ability to have a comprehensive understanding of the firm’s problems.

Future Strategic Direction

IBM’s chaotic management structure and its inability to monitor the market’s emerging competition led to its CPD. Based on the case analysis and discussion of governance, ethics, and CSR strategies discussed above, it is possible to define the future strategic direction that the Company should take to achieve success in the market. The case shows that its rivals have gained a significant market share and can’t be controlled as this Company’s top management unit had hoped for (Friedl & Biagosch, 2019). The following are the future strategic directions that the management of IBM should consider ensuring that it achieves sustainable growth:

The case study shows that IBM was reluctant to make a full entry into the PC market because of the belief that mainframe computers were more profitable. The management should consider making full entry into the PC industry as early as possible and treated these entrants as major competitors instead of viewing them as potential strategic partners. It is evident that Apple Inc. has made a successful entry into the PC market, based on the case presented, and is less interested in becoming a minor player in this industry. It is developing new products that threaten the position of this firm.

Porter’s theory demonstrates that when a firm fails to protect entry barriers, it makes it easy for other companies to enter the industry, which would increase competitive rivalry. The case study shows that this inaction by IBM opened a pathway into the industry for firms such as Apple Inc., which inevitably created a rivalry that did not exist before. To avoid such challenges, IBM should have been decisive in reinforcing its entry barriers, and this could have been through denying these new entrants access to its software (Lynch, 2015).

As shown in the case, IBM’s current management structure must change to achieve a sustainable competitive advantage, as explained in the VRIO theory discussed above. The existing corporate governance structure has created an environment where there is a lack of leadership. At its headquarters, the firm’s head has little authority in defining strategies and ethical practices at the national level in different countries. Similarly, leaders at the national level cannot define decisions at the headquarters. To address this problem, the head office should have the power to define and control activities at all firm levels. They should limit the autonomy to allow the chief executive to represent the firm’s strategic decisions.

The Company should consider having a strategic partnership in the PC market with firms that are not its direct rivals. For instance, products of Microsoft and Intel Inc. are not directly competing with IBM’s products. Instead of producing software that these new entrants have specialized in, IBM can focus on the PC and other software hardware segment that these two companies do not offer. Such strategic alliances allow all the partners to focus on what they can produce best (Özman et al., 2017).

The outcome of such a successful strategic partnership is the production of high-quality products that meet customers’ needs in the best way possible. The management of IBM should take advantage of such a strategic alliance to eliminate or significantly reduce market rivalry in this industry. Its products will be priced competitively and meet the expectations of its customers in the best way possible.

Conclusion and Recommendations

International Business Machines Corporation enjoyed many decades of business success in the computer and related software industry. The complex technology and cost associated with developing these products were prohibitive, which meant that the ease of entering this industry was extremely low. In the 1970s and early 1980s, Apple Inc., Intel Inc., and Microsoft emerged as firms that targeted PC as a new segment in this industry. Instead of responding to this new trend by creating products that could rival these new firms, IBM’s management supported these new entrants, hoping they would become strategic partners.

However, the case study shows that this move was a strategic mistake as these firms became significant rivals after a short while. By the early 1990s, this firm started struggling in this market. Its low corporate governance structure made things worse for the firm as it began to experience significant losses. The firm lost its market dominance and has been struggling in the PC market.

Reference Lists

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BusinessEssay. "Corporate Profit Disaster and Solution at IBM." November 19, 2022.