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IBM Group Project

Strategy, Organization Design & Leadership
SM 80.53






Submitted by

Francisco Martins da Silva 114551
Mia Osawa 114566
Archana Sharma 115341
Anuj Shrestha 114554
Pattanun Rueangtrakarn 114282










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1. Introduction .............................................................................................................................................. 3
2. Industry Analysis ....................................................................................................................................... 5
Threat of New Entrants ............................................................................................................................. 6
Supplier Bargaining Power ........................................................................................................................ 6
Buyer Bargaining Power ............................................................................................................................ 6
Threat of Substitutes................................................................................................................................. 6
Intensity of Rivalry .................................................................................................................................... 6
3. Environment Analysis ................................................................................................................................ 8
Political/Legal ............................................................................................................................................ 8
Economical ................................................................................................................................................ 8
Social ......................................................................................................................................................... 9
Technological ............................................................................................................................................ 9
Environmental ........................................................................................................................................... 9
4. Internal Analysis ...................................................................................................................................... 10
IBMs Value Chain ................................................................................................................................... 10
IBMs resources, capabilities and core competencies ............................................................................ 14
5. Strategy Formulation .............................................................................................................................. 15
SWOT Analysis......................................................................................................................................... 15
Value creation and pricing options: IBMs competitive advantage ........................................................ 16
Strategy formulation process.................................................................................................................. 16
Scenarios ................................................................................................................................................. 17
IBMs strategic sweet spot ...................................................................................................................... 18
6. Strategy implementation ........................................................................................................................ 19
CONCLUSION, LESSONS LEARNED & RECOMMENDATIONS ....................................................................... 20
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1. Introduction
One of IBM's founder, Thomas J. Watson Sr. coined the slogan, Think, that appeared all over the
company in the 1930's. Since then IBM has been through a series of transformations. The early 1990's
saw IBM come close to bankruptcy with $8 billion losses and shares selling at $12 each. Lou Gerstner,
former chairman and CEO (1993-2002) saved Big Blue and his successor, Sam Palmisano, oversaw a
10.2% annual increase in its stock price during his nine years as IBMs chairman and CEO.

Gerstners strategy of listening to the clients proved him right: IBM being a large multi-faceted technology
company, it was ideally situated to provide integrated solutions to customers. In the process, IBM
discovered the joys of a blue ocean strategy: a big opportunity with little competition.

In 2002, Palmisano succeeded to Lou Gerstner, who brought struggling IBM back on its feet and put it on
a viable course. Palmisano saw IBM's unique strength as offering complete solutions tailored to
customers needs something no other company could match. This led to the formulation of a single
globally integrated enterprise strategy. Executing this strategy required seamless integration of IBMs
product capabilities with its geographic reach. This meant abandoning IBMs existing organizational
structure, in which product silos and geographic entities operated independently (frequently leading to
more competition than collaboration). Palmisano shifted IBM's focus from hardware to high-end software
services (see figure 1). To concentrate on customer solutions and enable an optimized focus strategy,
Palmisano spun off personal computers and sold IBM's PC business to China's Lenovo. He continued to
sell hardware and acquired many software and analytics companies.

In 2012, Virginia M. Rometty succeeded Sam Palmisano as IBMs CEO.


Figure 1: IBM income mix
IBMs mission:
As per IBMs statements, its mission is to strive to lead in the invention, development and manufacturing
of the industrys most advanced information technologies, including computer systems, software, storage
systems and microelectronics. In a nutshell, it seeks to translate advanced technologies into value for
their customers.
IBMs vision:
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IBM is dedicated to each of its shareholders (cf. values below), and has consequently adopted a vision of
providing solutions for a small planet. This vision includes various perspectives: finding solutions to
make life easier, being efficient, satisfying stakeholders and helping in build a smarter planet.

IBMs values:
Both IBMs mission and vision translate into a set of values, which dictate each of the companys decision
and incentive. As a company, it bases itself on the following values:
- Dedication to every clients success
- Innovation that matters for the company and for the world
- Trust and responsibility in all relationships
- Building, maintaining and developing any thing that will differentiate IBM with clients, investors,
employees and communities.
- Adopt and implement the slogan: Our mission, our aspirations
- Base every decision on this set of values: how we make decisions at our company and how we
behave and act, collectively and individually).

IBMs objectives:
Today, to work its way through struggling times, IBM seeks to grow and develop its businesses by re-
shifting the focus on profitable sectors. This has to be operated within the framework of a leadership
respecting all the values IBM sets as its guiding principles.


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2. Industry Analysis























The IT industry faces a big challenge of a continuously evolving technology. The competition being
intense as well, it forces companies to drive down costs while maintaining their innovativeness. Although
IBM holds the largest share of any one company (see Table1), it still does not hold a dominant position in
High
Low High/Low
THREAT OF NEW ENTRANTS
Lucrative industry attracts many
rivals
High threat on a specialized
front such as unique service or
product
Market is easy to enter with
increasing availability of labor
BARGAINING POWER OF
SUPPLIERS
Abundance of low-cost skilled
workers in emerging
economies that are employed
by companies.
BARGAINING POWER OF
BUYERS
High, if substitutes easily
available.
Low, if service is unique and
proprietary or vendor has close
relationship with the client

THREAT OF SUBSTITUTION
Low for the current product
portfolio and technology from
R&D.
Low, as IBM gives many products
free.
High, if service is copied or
provided by the competition
INTENSITY OF RIVALRY
IBM, large player in the
market; hence focus of
rivals.
Rivalry from small
companies which can
attack any weakness it has
High
High/Low
Figure 2: Porter's five forces analysis
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this industry. Porter's five forces analysis (see figure 2) can be used to formulate the industry analysis for
IBM.
Threat of New Entrants
The IT and business consulting market attracts many new entrants in lieu of the new opportunities due to
the evolving technology market. This industry is a lucrative and global business where it is increasingly
easy to compete from any part of the world. This holds true, especially for emerging countries with an
increasing number of skilled and low-cost workers (like China and Vietnam), which are underbidding India
(once the leading low-cost bidder for Western outsourcing businesses). This opens up the opportunity for
new entrants who can provide the same business automation and cost saving services at lower prices.
Threat: High
Supplier Bargaining Power
The increasing popularity and ease of open source has created a plethora of open standards tools and
software. Hence, IBM can't rely on customer lock-ins as there are many alternatives. This has led IBM to
embrace many of its competitors products and even to acquire many competing companies (in the
objective of lowering suppliers bargaining power). By "Suppliers" we also mean IBM's consulting base,
employees who work for IBM, a competitor, or outsourced labor.
Threat: Low
Buyer Bargaining Power
This industry consists of mainly two types of segments: low-cost service on the one hand, leading edge IT
products and services on the other hand. Low-cost services reduce the overhead costs for clients, calling
for a larger and mature market, whereas leading edge clients seek for the best services and products for
which they are willing to pay a premium price, but the choices in such cases are limited. IBM positions
itself in the leading edge market and hence it has to constantly evolve its products and services to avail
premium charges. Otherwise the niche market could move to lower-margin competitive segment.
Threat: Medium
Threat of Substitutes
IBM has a wide range of products and services, which has helped it to cover the entire market and gain
the largest shares. There are many bundled products, which are offered free by IBM to create customer
loyalty and customer lock-in. However, due to the possibility of competition creating similar products
(giving customers more choices), the threat of substitution increases. In the meantime, IBM has a wide
range of acquisitions, which supplements its current arsenal of products, and hence reduces the eminent
threat of substitution. Last, the threat of substitutes is reduced by IBM as it is continuously engaging in
licensing or protected partnerships (in the past twenty years, IBM has been on the top US-patent
recipient), consequently minimizing the risk of learning opportunism of partners by protecting its
intellectual property.
Threat: Medium
Intensity of Rivalry
Competition in this industry is fierce, but IBM enjoys a large share of the leading edge IT consultancy
market. Many of IBMs products set the market standard, allowing IBM to control the direction and
progress of the market. Many of IBMs competition are either niche-oriented or cost-leaders, or are
complementary. This increases the threats of rivalry, as IBM represents the main rival for most of the
competitors and due to the breadth of IBM, such companies can chip away at the profits of IBM in
specialized areas where IBM is weak. Intense rivalry has decreased the profit margin for IBM in recent
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months and has led to the lay-off of many employees in order to cut costs, enough to offset declining
sales.
Bloomberg quoted Laurence Balter, an analyst at Oracle Investment Research, who estimated that with
IBMs $1 billion restructuring charge, IBM would cut 6,000 to 8,000 jobs globally at most 1.8% of IBMs
total workforce of 434,246 at the end of 2012.
1

The table below lists IBMs main competitors:

Table1: Revenue of top 6 vendors
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Threat: High

It is clear from Porters Five Forces model that the biggest problem for IBM is the existing rivalry; however
the market is growing, with a need of new innovative solutions from their suppliers. The key factor for
success will be attaining a high level of differentiation, which will guarantee profitability, and market
growth.


1
http://www.forbes.com/sites/petercohan/2013/06/14/as-it-shrinks-in-a-growing-market-does-ibm-have-a-
strategy/
2
Source: IDCs Worldwide Quarterly Server Tracker, August 2013
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3. Environment Analysis

Drivers External Factors
Influence
on
Industry 0
to 10 (A)
Impact on
Company
-5 to 5 (B)
(A) * (B)
Probability
of change
Political/Legal Conflicting regulations between
different countries; compliance with
local laws vs. global operations.

Patent laws are in a flux in the US and
worldwide; patent reform changes
nature of competition.

4



8

-1



3

-4



24

Low



Medium
Economical Global recession from US economic
troubles

Shift away from US as primary market
9


7
-4


3
-36


21
High


High
Social Workforce growing older; fewer young
employees and more diverse workers

Workers separated geographically;
trend of employees working from home
or regional offices

6


8

2


3

12


24

High


High
Technological Technology quickly becomes
widespread / copied by low cost rivals

Disruptive technology; new invention
creates or destroys an industry quickly
(soon-to-be obsolescence)

8


9

-4


+/- 5

-32


+/- 45

High


Medium
Environmental Focus on green or low consumption
sustainable energy

Natural disasters

4

2

2

-4

8

-8

Medium

Low
Table 2: Environmental factors affecting IBM
Political/Legal
IBM is a multinational company operating in many countries, often resulting in IBM needing to navigate
between conflicting regulations. What may be legal in one country may not be in another; financial
practices may differ. In the same perspective, workers rights, patent law or export controls are all factors
that need to be taken to consideration.
Economical
Economic recessions can impact clients who may cut back on spending in IT and business operations.
IBM may find that it needs to rely less on US operations for profit than with emerging countries coming on
line (for example, Chinese companies looking for premium IT services).
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Social
Workers are gradually graying, becoming older as baby boomers move toward retirement. Employee
needs and desires change as workforce becomes more diverse. Technology allows employees to
collaborate and work far away from each other; however downsides of isolation and separation need to
be addressed. The empowerment of the working class and rising inflation has increased the demands for
higher wages, which puts pressure on many IT companies (especially IBM) and also makes it hard to
retain quality employees. The collaboration of employees throughout the world also creates some
problems with collaboration due to the cultural differences and time differences. Despite the ranks of
skilled workers in India and other countries, competition has shrunk the pool of available candidates.
Employees work in a virtual organization, where location is no longer defined; employees are connected
to each other through networks and technology.
Technological
IBM is the trendsetter and market maker for new technology in IT automation and business. It is likely that
old standards can be disrupted overnight with the introduction of a new technology. IBM needs to
continuously innovate as anything can be copied or adopted by rivals. As competitors become adept at
duplicating the same types of services IBM develops, competition increases and profits drop. Because
IBM does not force clients to use any particular product, it is easy for clients to move to IBM, vice-versa at
the risk of them easily moving elsewhere (no customer lock-ins have the same pros and cons for any
competitor).
Environmental
Natural disasters can disrupt IBM operations, as facilities are located worldwide. The focus on green
technology is also an important issue as clients and governments try to address the rising global warming
issues.




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4. Internal Analysis
IBMs Value Chain

The value chain designed by Porter plots an organizations activities depending on whether they are
primary or supporting activities. The combination of all these activities enables the transformation of
inputs into outputs. It is crucial for a company to assess its own value chain so as to understand how it
creates value: the bottom line of any company is to make profit by creating outputs of greater value than
the inputs. By describing this process, a company is able to put into words why it exists in the first place:
what is its leading objective, its reason to be? Put into an equation, it sums up to:

Value created / captured Cost of creating that value = Profit margin


Figure 3: Value chain


Figure 3 depicts Porter's value chain for IBM. The red arrows indicate weak linkages, while green arrows
show strong links.

The X-axis represents the supporting activities:

Organizations infrastructure

IBM was reorganized in a decentralized organization following Sam Palmisanos nomination as the
companys CEO. Today, it is organized in seven service lines
1. Strategy & Transformation
2. Business Analytics and Optimization
3. Application Management Services
4. Mid Market
5. SAP Applications
6. Microsoft Applications

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With its close to half a million employees around the world, IBM is today the 18
th
largest firm in the USA.
Therefore, it requires frequent adaptations to maintain an optimal operational efficiency. The
decentralization process was enabled by the division of the company in numerous sub-companies,
divisions, etc. having each its own organizational structure. This translates in the periodic necessity to
restructure the company to maintain its full efficiency. The details of the organizational structure are
described below in figure 4.

Figure 4: IBMs organizational structure

HR management

To reduce any redundancy or overhead costs in the goal of maximizing the productivity, IBM has
integrated HRM in its supporting activities to improve the firms capacity to innovate. Thanks to a more
consistent HRM, IBM is able to provide an optimal environment to its employees, resulting in clear list of
key priorities, goals, and objectives. It led the organization to a sharper focus for the learning,
development, and knowledge sharing, but also to a shared strategy to which the employees are
committed. By adopting a pro-active (rather than a reactive) HR strategy, IBM has been able to
implement change successfully: for example, IBMs HRM has helped the company acquire smoothly 125
companies since 2000 and transform these acquisitions into a global integration (generating savings of $6
billion since 2005). Amongst others, IBMs HRM has notably developed three skills to promote an optimal
operational improvement:
1. Reinvent talent development with Global Enablement Teams (which consist of sending top people
from mature markets to growing markets to promote a two-sided learning).
2. Reinforce global teams (as contradictory as the formulation may seem, IBM is aiming at a centralized
decentralization) by reducing the barriers between each team across the world.
3. Link the HR activities to business results by creating a performance-orientated culture.




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Technology development

The key differentiation between IBM and its competitors is the R&D. IBM spends approximately 5-6 billion
annually (including capitalized software costs), hence focusing its investments on high-growth
opportunities. The company also has some of the best technology registered in its account that made
revolutionary changes, such as the transfer of massive amounts of business data around the world.
- Procurement:
IBM has developed business partner relationships, which allows IBM to deliver products and services at a
competitive cost, all the while respecting customers demand of infrastructure security. The company also
did a various number of Merger and Acquisitions to transform its business into a high value offering
including a global service segment (such as network solutions, data storage or data transfer).


The Y-axis describes the primary activities:

Inbound logistics, Operations, and Outbound logistics

Since the organizational infrastructure of IBM is complex, it becomes harder to manage, and costlier to
run. In order to reduce costs all the while improving customer service, it is necessary for IMB to adopt an
optimized supply chain management by reducing any unnecessary steps. Moreover, IBMs Business
Performance Management allows the firm to visualize end-to-end processes across the entire
organization by the use of an IT system. IBM can analyze the actions execution in real time against goals
and make adjustments promptly when needed. Therefore, IBMs supply chain, manufacturing processes
and logistics are designed in the objective of minimizing inventory and improving the response to market
opportunities or external risks. This gives a competitive advantage to IBM.

Marketing / sales
The company has realigned its operations and organizational structure in 2005 to give more authority to
its sales and delivery teams. It allows an increased flexibility and a more efficient decision-making. The
company also broadened its services to other Asian countries to increase sales and gain a considerable
profit in some of the fastest growing economies (such as China, India, Taiwan, Hong Kong, Singapore,
Thailand, Indonesia or the Philippines).

Service
IBM provides technology and transformation services to clients and businesses; it also invests in
improving the ability to help its clients innovate. This gives IBM a high value-added resulting from
optimized internal logistics (with the implementation of profitable processes). Apart from these services,
IBMs remaining services can be categorized into three groups:
1. The IT technology services, which offer strategic outsourcing, integrated technology services, and
hosting.
2. IT infrastructure delivery, which is increasingly becoming strategic to drive productivity, efficiency and
margin improvement.
3. The transformation and high end business value such as consulting, systems integration, application
services, business transformation, outsourcing, asset innovation, and strategic business
development.


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By analyzing IBMs Value Chain, we conclude that:

+ IBM's strength is its wide portfolio of end-to-end services, which is aligned by the strong link between
Technology Development, Procurement and Inbound Logistic. This can be explained by the fact that
IBM has aggressively acquired or developed a wide array of technology platforms that meet the
challenges of clients needs, as well as a willingness to support non-IBM products.
- However, IBM shows some signs of weakness when it comes to aligning its operational activities to
the organizations infrastructure, especially the HR management. This may result from the fact that
IBM emphasizes its activities related to the technology management (for the inbound logistics) and to
their customer service management (for the outbound logistics). Also, as Table 3 shows, IBM's
revenues have been declining gradually, compelling the company to resort to lay-offs and widening
margins to increase profits. Even such cost cutting measures have failed to show considerable
improvement to the income through the years. These minimalistic incremental profits are a result of
cutting overhead costs and improving efficiency, but there is a limit to how long this trend can
continue. There is a need for increased revenues to increase profits. The economic slowdown in most
parts of Europe and the slow recovery of the US market is partly the cause of declining revenues and
diminishing profits, along with the lack of differentiation between IBM's pool of consultants and the
same pool at IBM's close competitors. This is the outcome of the weak relationship the areas of
Human Resource Management, Organization's infrastructure and Operations, consequently indicated
in yellow.

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Table 3: IBM 5-year financial results






3
http://www.marketwatch.com/investing/stock/ibm/financials
Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013
Sales/Revenue 95.76 99.87 106.92 104.51 99.75
Sales Growth - 4.29% 7.06% -2.25% -4.55%
Gross Income 43.38 45.68 49.88 49.84 48.51
Gross Income Growth - 5.31% 9.19% -0.08% -2.68%
Gross Profit Margin - - - - 48.63%
Operating Expenses 26.2 27.03 29.11 28.87 29.73
Research & Development 5.82 6.03 6.26 6.3 6.23
Other SG&A 20.38 21 22.85 22.57 23.5
SGA Growth - 3.13% 7.72% -0.82% 2.96%
Net Income 13.43 14.83 15.86 16.6 16.48
Net Income Growth - 10.49% 6.89% 4.72% -0.73%
Net Margin Growth - - - - 16.52%
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IBMs resources, capabilities and core competencies

Resources & capabilities
Some of IBM Resources include:
The IBM family of mainframes includes the zEC12, zBC12 and Enterprise Linux Server
(ELS) platforms, which provides businesses with a high performance, extremely secure, resilient,
and efficient platform.
The new IBM DB2 11 for z/OS enables enterprises, amongst others, to take advantage of the
scale, performance and availability to integrate the results of Hadoop processing into its
enterprise data store.
Enterprises using IBM IMS 13 have the ability to combine integrated analytics with unstructured
and social data seamlessly, merging knowledge from various types of data and eliminating the
need for separate, siloed systems.
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A few of IBM capabilities include IBM Commerce, IBM Digital Marketing Optimization.
Core Competencies:
Cloudant, Inc.: recently, IBM announced that it has completed the acquisition of Cloudant Inc., a
database-as-a-service (DBaaS) provider that enables developers to easily and quickly create
next generation mobile and web apps.
Aspera: IBM announced it has completed the acquisition of Aspera, Inc., a privately held
company that securely speeds the movement of massive data files around the world
The new IBM Capacity Management Analytics solution can help IT managers track, predict and
avert performance issues and unforeseen capacity requirements before they occur, ensuring the
availability of services for end customers
In 2013, IBM introduced new business analytics and cloud software solutions to help clients take
advantage of new workloads. Also, enhancements to IBM DB2 for z/OS and IBM IMS are prime
examples of how companies can manage big data to achieve a competitive edge.
IBM is introducing IBM Cognos tm1, which provides deep insight for Chief Financial Officers to
create, analyze and manage sophisticated financial plans, providing greater visibility into
enterprise profitability.
The latest enhancement to the cloud solution portfolio is the IBM Entry Cloud Configuration for
SAP Solution on zEnterprise v2. This cloud enablement offering combines high-performance
technology and services to automated, standardized and accelerated day-to-day SAP operations
for reduced operational costs and increased ROI.



4
http://www-03.ibm.com/press/us/en/pressrelease/42228.wss
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5. Strategy Formulation
In this report, we have decided to directly link the SWOT analysis, the Value Creation and the pricing
options to the strategy formulation rather than separating these entities. This is motivated by the fact that
once the internal analysis done (part 4), these three elements can then be used as a basis to
understanding where IBM can create a sustainable niche in the market: it is therefore used here as a
stepping stone used to kick off the strategy formulation.
SWOT Analysis
Strengths
Industry Leadership
Abundant Resources
End-to-end enterprise
solutions
Quick Response
High Acquisitions
Brand name & reputation
Financial assets
Strategically innovative (ex:
backward integration)
Product diversification to
minimize risk
Weaknesses
Reliance on High Margins
High Operating cost
Weak Employee Value
proposition
Limited market (fast PLCs
where market saturation is
quickly reached)
Opportunities
Emerging Markets
Increasing demand of cloud
computing
Look for new emerging markets
and develop products and
services
Create demand through marketing
Streamline internal operating cost
Enter new markets to increase
revenues and profit margins
Threats
Cost Competition
Low Entry Barriers
Lack of Skilled workers
Slow global economy
Create strategy to create skills
hard to imitate
Create value for the clients by
increasing the value of its
services: acquire skilled
consultants to provide a
comprehensive end-to-end
solution.
Address skills building and create
a meaningful employee value
proposition.
Table 4: IBM SWOT Analysis


These statements about the internal environment enable the strategic managers to precise the corporate
strategy, which is to be set, formulated and then implemented. This is motivated by the necessity for a
company to achieve a strategic alignment (between its corporate strategy and its activities, its targets).
IBM is a pioneer in the IT industry and enjoys market leadership. It has quickly addressed the needs of
clients by providing complete business solutions and holds a deep cash reserve to spend as necessary.
As per IBM, its main strategy is to generate higher value: though these words may appear as quite vague
and general, it nonetheless stresses the importance of certain priorities IBM has set for itself, which may
be resumed as follows:
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- Continuously strive for higher value, more profitable technologies
- Always look to tap into new markets
- Participate in the globalization process by being a truly international enterprise
- Ensuring the stakeholders interests
- Setting the bases to enable an optimized R&D (for a optimized future competitive advantage)

All these priorities have to be operated within the framework of IBMs own growth and leadership in the
high-tech industry.
The main weakness IBM faces is the growing competition with many small and large competitors going
for IBM's market share. Since IBM has a higher margin, clients are moving to cheaper providers who
provide the same quality of service. Another issue is the shortage of skills. The increasing demand for
skilled labors has provided the employees with the option to keep moving on between high paying jobs.
This has decreased loyalty to work for IBM among employees. In order to tackle this, IBM needs to create
a stronger and meaningful employee value proposition, which gives the appropriate rewards to
employees, based on their performance, satisfying both their intrinsic and extrinsic needs.
IBM has a huge base of fresh graduate hires, which puts a lot of stress on its ability to provide skilled
labor to its clients. Timing is critical, and spending time to bring its employees up to speed on the latest
technology puts IBM at risk of losing business to low-cost rivals. This represents a lack of competitive
advantage all the more when considering that retaining and deploying skilled employees shortens the
time (especially when IBM can't just count on the wide margins driving profits).
Value creation and pricing options: IBMs competitive advantage
With regards to IBMs business operating area, the strategy formulation must be the result of a value
creation strategy: to maintain its competitive advantage, should IBM conduct a cost-leadership or a
differentiation strategy? As per the value creation model, IBM must decide whether to create more value
or lower its costs.
However, as explained above (cf. value chain), their attempts to lower the operational costs have proven
to be of limited success. On the other hand, their main competitive advantage comes from relying on
their core competencies to attract customers with new products or services (cf. IBMs core competencies).
Consequently, IBM would be able to increase its profit margins by setting a premium price for unique
products. This goes along with the necessity of being a quick (if not the first) mover, to gain market
shares before competitors kick in a considerable threat in the high-tech industry where the product life
cycles are becoming shorter and faster.
Strategy formulation process
Against the rising competition, new entrants and the declining hardware business, IBM has registered a
decreased growth rate in the past decade, making the coming years crucial for the companys future.
Once all the elements analyzed in the industry, environment and internal analysis have been plotted in
the SWOT analysis, we may conclude that IBM needs to adapt an attack and differentiation strategy for
two reasons:
- Even if an unsuccessful attack strategy would bring the company down, it is the key to staying
afloat.
- A cost reduction strategy being a time-limited option, IBM needs to focus on creating a long-term
sustainable competitive advantage by differentiating its products.
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Moreover, considering the nature of IBMs industry and products, it is crucial to attract, maintain and
retain the best talent: in a tacit knowledge environment, the path dependency theory is all the more strong
and employees represent one of IBMs most crucial assets. Should it be unable to retain its employees,
competitors or new entrants would quickly swipe them away and reduce IBMs competitiveness.
Therefore, IBMs organizational structure needs to be modified in a more HR-, employee-centered
approach (though some efforts have already been made in this perspective as explained in part 4: cf.
Porters Value Chain). This can be achieved by adopting a participative approach. Having fuelled the
R&D pipeline, IBM will be able to attack by pushing attractive new products or services onto the market.
Moreover, to fight efficiently against competitors like HP, IBM can orchestrate organic or inorganic growth
to support its own strength with the help of strategic partnerships and alliances. This goes along with
adapting to current trends: to ensure success in new markets or with new products, IBM must rely on the
expertise of specialized partners who will bring skills, knowledge, and capabilities to be added to IBMs
already vast portfolio of internal resources (cf. part 4: IBMs resources, capabilities and core
competencies). For example, IBMs major profits come from software and devices, out of which IBM
expects to generate at least 50% of its profits by 2015
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but it also seeks to focus on the recently
emerging cloud computing business (which also has consistent profit margins). We may here note that
IBM has already engaged in that path by acquiring Softlayer and other cloud computing companies (in the
objective of building its own computing capability).
Hence, IBMs strategies involve creating a niche for itself rather than following a response strategy
against its competitors. After evaluating its current capabilities and weaknesses we have listed worst and
best case scenarios for IBM with its outcomes. The successful strategy implementation will rely on the
judicious application of these scenarios and IBMs ability to increase its capabilities through acquisitions.
Scenarios
The below scenarios can represent the worst and best case scenarios for IBM in the near future.

IBM's Worst Case: IBM may reach the limit to the improvements in operational efficiency and driving
profits through high margins, cost reduction and layoffs. Revenues may remain flat and decrease profit
growth. Competitors take advantage of IBM's de-motivated and isolated consultants/employees by
poaching them with higher salaries and giving an opportunity to work in focused teams. This decreases
IBM's niche advantages over its rivals.
IBM's Best case: IBM can increase profits by increasing revenues, lowering overhead cost and increasing
the differentiation of their consulting services to raise entry barriers for rivals. Figure 4 shows IBM's
strategic sweet spot as compared to its competitors. Identification of this spot will enhance IBM's market
leadership and strengthen the position of IBM's consulting and service offerings.
Option 1: improve the HR management. IBM leaves employees to find their own learning path based on
their position and industry understanding and devises a reward system to employees who successfully
attain the skills that clients demand.
Pros Cons
Align the strategy to the organizational structure
Promote employee innovation
Risk of employees leaving IBM
Costly to find, train and retain talent (time, money
and efforts)

5
http://www.fool.com/investing/general/2014/01/02/2014-will-be-a-big-year-for-ibm.aspx
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Option 2: restructuring. IBM aggressively hires employees with high-demand skills, lays-off employees
with skills related to industries, which IBM plans to exit.
Pros Cons
Fast solution Bad organization climate
Hiring and firing processes are very costly

Option 3: a committed & aligned strategy. IBM counters the downsides of virtualization, bringing IBM
employees together to transform IBM into a Learning Organization:
A Shared Mindset
Speed of New Ideas
Learning And Knowledge Management
Accountability
Collaboration
Leadership
Pros Cons
Creates a sustainable competitive advantage
May open the door to new markets or unforeseen
opportunities
Risk of employees leaving IBM
Requires the most time, efforts and money
amongst the three options

IBMs strategic sweet spot
Options 1 and 2 are the easiest to implement and may use financial rewards as incentives for employees
to find the best solution to gain skills. The drawback to this approach is the threat of being copied by
competition, as it doesn't provide any distinct capabilities. Employees who achieve high skills
independently may not find any incentive to remain loyal to IBM, and can easily be poached by the
competitors.
Option 3 is the hardest to implement as it requires time and considerable change for IBM but it does
create a sustainable competitive advantage over time. This option makes the assumption that employees
can become capable in new skills, avoiding the problem of recruitment in a tight labor market.


Figure 4: IBM's strategic sweet spot
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6. Strategy implementation
In order to implement the strategy as formulated above, IBM has to conduct a series of transformations
with regards to its organizational structure / design and its leadership.
To enable the revival of the organization against economical downturns and an increasingly aggressive
competition, IBM has to rely more consistently on its employees who are the sole source of their
competitive advantage: the delivery of new products and services coming out of their R&D pipeline in an
attack, differentiation perspective. This implies that IBM needs to switch from a relatively authoritarian
structure to a participative approach: by empowering employees, they will be able to answer to the rising
expectations of their customers by supporting AND being supported by an innovation-focused strategy.
This could imply a wide range of alternatives, such as the 3Ms 20% policy, which leaves each employee
20% of free time to work on whatever project he / she has interest in.
Nonetheless, these facts have to be taken into consideration within another perspective: the necessity to
optimize operational costs, as a result of the globalization process. Any competitor could easily overpass
IBM by lowering their costs hence increasing their profit margin; therefore IBM has to combine the
necessity of an intensified R&D pipeline to a cost-reduction strategy in the areas where it may apply,
without hindering the implementation of a differentiation strategy. This necessity sets the limit of a
participative strategy, which implies that no organization can be completely left to itself, or this would lead
to a state of chaos: the top management level needs to strike a balance between controlling the efficiency
and letting its employees reach their top performance level.
By conducting an employee-centered strategy for the purpose of a differentiation strategy, IBM could
successfully achieve its three main perspectives as defined by CEO Virginia Rometty 6:
1. Big Data Analytics: Data is the new competitive resource, but like any natural resource, it must
be refined, Rometty said. The advantage in eCommerce in the future might be determined by
milliseconds. Businesses must have tools to do that. IBM has invested $23 billion in analytic
software and had $16 billion in Big Data-related revenue in 2013.
2. Re-making enterprise IT in the cloud: IBM strategy is to build a cloud computing enterprise in
order to help companies adopt the new cloud computing strategies. IBM is mainly focusing its
investments on cloud and mobile computing.
3. Social Engagement: Rometty provided an energized view of the social enterprise as a strategic
centerpiece, tying the customer and employee experiences together.



6
http://www.businessesgrow.com/2014/02/11/ginni-rometty/#sthash.TIeIuVFw.Iv7IeaLD.dpuf
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CONCLUSION, LESSONS LEARNED & RECOMMENDATIONS

The example of IBM offers an insightful approach to understand a companys organizational design,
leadership and strategy. Having been through ups and downs since its foundation in the beginning of last
century, IBM can be proud to have successfully maneuvered through these blows and still enjoy today a
considerable brand image with satisfying (though decreasing) profits. The keys to this success revolve
around two imperatives, apart from the indomitable Think, which sums up the motivation leading the
company forward: growth and leadership.
To fight against the slowing growth of its profits, this report aimed at conducting an industry, environment
and internal analysis to explain where IBM stands and try to understand where it should go. The key to
IBMs future success lies in continuously nurtured innovation, to protect the company against an
increasingly aggressive and widespread competition. The innovation should target mainly the R&D
pipeline to enable an innovative product line, but should also concern other areas of IBMs value chain
such as the HR or the strategy in itself.
In a nutshell, IBM needs to focus on what they do best by creating value (rather than lowering costs).
However, the creation of that value can occur in various fields and must be supported by growth (whether
organic or inorganic). As per Christine Dover, the Research Direction at IDCs Software Business
Solutions Group (one of IBMs partners), the best partners are no longer those who just drive revenue
numbers, best partners invest in trained and qualified staff, work to earn high customer satisfaction
ratings and sell value-added solutions.
The proposed strategy consists of identifying IBMs strategic sweet spot and investing the necessary
resources into achieving that spot. Though costly in time, money and efforts, it will allow IBM to have a
truly aligned strategy, mission and organizational structure. This requires identifying a balance point
between a participative and authoritarian leadership, a centralized and decentralized organizational
infrastructure, and a long-term attack and differentiation strategy. Let us quote IBMs former CEO for the
finishing statement: If theres no way to optimize IBM through organizational structure or by management
dictate, you have to empower people while ensuring that theyre making the right calls the right way. And
by right, Im not talking about ethics and legal compliance alone; those are table stakes. Im talking
about decisions that support and give life to IBMs strategy and brand, decisions that shape a culture.
Thats why values, for us, arent soft. Theyre the bases of what we do, our mission as a company
Youve got to create a management system that empowers people and provides a basis for decision
making that is consistent with who we are at IBM (Harvard Business Review Interview, Leading Change
when Business is good).