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Flowing Stream Strategy: Transformation of IBM
Course Coordinator: Prof. Sushil
Submitted By: Group 10

Sameep Kunja
2011SMN6501
Rajesh Sinha
2011SMN6502
Anita Singh
2011SMN6504
S. Gayathri
2011SMN6509
2011-14
Table of Contents
Chapter Description
1.
Introduction
Page
No.
1-7
Flowing stream strategy

About IBM
History of IBM
Beginning of Downfall
2.
Crisis
7-17
Failure at fundamentals
Breaking two promises
Failure in Strategic Planning
Crucial questions about IBM Experience
Summary
3.
Revival
17-28
Leadership
Steps taken to change the way IBM worked
4.
Learnings
28-35
5.
References
36
Strategic Change and Flexibility
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1 Introduction
1.1 Flowing stream strategy
Continuity and change have been hallmarks of strategic thinking. Previously, when the
environment was stable, the strategies were largely evolved around the issue of
continuity. However, in the last two decades, the globalization process made the
business environment highly turbulent and the concern for change has received
immense interest, both by strategic thinkers and practitioners. The combination of
continuity and change forces acting on an enterprise had led to the adoption of flowing
stream strategy1.
The combinations of continuity and change forces could be mapped on a continuitychange matrix (Sushil, 2005), as shown in Figure 1
The flowing stream strategy process entails categorizing continuity and change forces
that are acting on an organization and filtering the vital and desirable ones out of them.
The entire process can be represented through a strategy crystal that interlinks the
FLOWING STREAM STRATEGY: MANAGING CONFLUENCE OF CONTINUITY AND CHANGE, Prof. Sushil
Submitted By: Group 1 (2011SMN6501, 2011SMN6502, 2011SMN6504, 2011SMN6509)
April 27, 2013
Figure 1: Continuity Change Matrix
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continuity and change forces on one plane and Enterprise and Customers Factors on
the other plane as depicted in the following figure 2:
Figure 2: Flowing Stream Strategy Crystal

During a 20-year period, IBM has gone from success to failure to success; from a
technology company to a broad-based solutions provider using the flowing stream
strategy.
1.2 About IBM

International Business Machines Corporation (IBM), is an American multinational
technology and consulting corporation, with headquarters in Armonk, New York, United
States. IBM manufactures and markets computer hardware and software, and offers
computers to nanotechnology.
The company was founded in 1911 as the Computing Tabulating Recording Company
(CTR) through a merger of three companies: the Tabulating Machine Company, the
International Time Recording Company, and the Computing Scale Company. CTR
adopted the name International Business Machines in 1924, using a name previously
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infrastructure, hosting and consulting services in areas ranging from mainframe
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designated to CTR's subsidiary in Canada and later South America. Security analysts
nicknamed IBM Big Blue in recognition of IBM's common use of blue in products,
packaging, and logo.
In 2012, the company was ranked as follows:
#2 largest U.S. firm in terms of number of employees (433,362) (Fortune)
#4 largest in terms of market capitalization (Fortune)
#9 most profitable (Fortune)
#19 largest firm in terms of revenue (Fortune)
Globally, the company was ranked the #31 largest in terms of revenue by Forbes.
#1 company for leaders (Fortune)
#1 green company worldwide (Newsweek)
#2 best global brand (Interbrand)
#2 most respected company (Barron's)
#5 most admired company (Fortune)
#18 most innovative company (Fast Company).
The financial growth of the company in terms of stock prices is as depicted in the chart
Figure 3: Financial growth of IBM

IBM has been a pioneer from its inception and has released a whole host of products in
the market. Some of its better known products are as brought out below:-
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(Figure 3) below:
S.No.
Products
Keypunches and verifiers
Sorters, Statistical, and derived machines
Collators
Reproducing Punch, Summary Punch, Gang Punch, and derived machines
Calculating devices
Other Unit Record Equipment
Typewriters and dictating equipment
Copier/Duplicators
World War II ordnance and related products
10
IBM telephone switching systems
11
Computers based on vacuum tubes, the ASCC and the SSEC (1940s, 1950s)
12
Computers based on discrete transistors (1960s)
13
Solid state computers
14
Computers based on SLT or discrete IC CPUs (1964 to 1989)
15
Computers based on microprocessor CPUs (1981 to present)
16
Computers
17
Supercomputers
18
Microprocessors
19
Solid State Computer peripherals
20
Punched card and paper tape equipment
21
Printer/plotter equipment and terminals
22
Data storage units
23
Core storage
24
Magnetic drum storage
25
Direct Access Storage Devices
26
Magnetic tape storage
27
Optical storage
28
Storage networking and virtualization
29
Coprocessor units
30
Modems
31
Embedded systems
32
Airline Reservation Systems
33
Avionics and space systems
34
Bank and finance
35
Document processing
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36
Educational
37
Industry and manufacturing
38
Medical/science/lab equipment
39
Retail/point-of-sale (POS)
41
Telecommunications terminals
41
Computer software
42
Operating systems
43
Utilities and languages
44
Middleware and applications
45
Data centers
46
Services
Business analytics and optimization
Customer relationship management
Strategy and transformation
Supply chain
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A snapshot of IBMs as brought out above, gives the impression that the company has
been a great company since its inception and has only grown from strength to strength
over its many decades of operation. While this is largely true, the company being in the
high technology and innovation area has had to weather many a crisis. The next section
will bring out the major crisis that occurred in the company and how it was able to
transform itself from the brink of closure.
1.3 History of IBM

Select chronology of the important events in the history of IBM is listed below:
1911 Computing Tabulating Machines (CTR) was formed in 1911 via a merger of
Machines Company.
1924 CTR was renamed International Business Machines (IBM)
1956 Tom Watson Jr. succeeded his father as CEO in 1956 and led IBM into the digital
computer age. This was a major turnaround for the company.
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International Time Recording Company, Computing Scale Company and the Tabulating
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1964 IBM announced its most important product to date, System/360, which was the
original name of IBMs family of mainframe computers. System/360 in the 1960s and
1970s was as revolutionary as Windows was to Microsoft in the 1980s and 1990s. The
introduction of this product had a devastating effect on the IBMs competitors. IBM
benefited from the major technological shifts and brought entirely new capabilities for
customers to the market. For IBM the integrated circuit was the most important
technology shift, though the circuit had been invented elsewhere. This invention made
computers significantly smaller, more reliable and cheaper, making mainframe
computers available for a large group of customers.
1980s IBM was probably the best example of a vertically integrated corporation: almost
all stages of design, production and commercialization of computers remained internal
to the firm (Ernst 2003). IBM was the world leader in computer manufacturing and it
seemed that the companys leadership position would remain unchallenged for many
years to come.
1.4 The beginning of downfall
Since the position of IBM had been unchallenged for so many years, the company had
not developed sophisticated strategies to cope with fierce competition.
With the advent of the next big thing, which was the rise of UNIX, IBM was under
serious attack. UNIX was an open operating system, supported by Sun and HewlettPackard, which offered customers the first attractive alternative to IBMs mainframe
computers.
IBM also failed to see that personal computers (PCs) would be widely used by business
major challenge to IBM core enterprise computing market.
In addition, IBM gave control over the operating system to Microsoft, the microprocessor
to Intel and in the early nineties IBMs leadership position started to crumble. Fujitsu,
Digital Equipment and Compaq were the competitors for hardware components and
were catching up fast. EDS and Andersen Consulting were gaining ground in
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and enterprises, and did not accord priority to the PC market. IBM did not see PCs as a
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information services, while Intel and Microsoft were more profitable in the PC market
than IBM at that time.
The once so comfortable position of Big Blue was fading away at a very rapid pace.
The strategy of IBM at different points in time can be depicted through the following
figure:
Figure 4 (Source: IBM's Decade of Transformation: Turnaround to Growth, LYNDA M.

APPLEGATE, ROBERT AUS TIN, ELIZABETH COLLINS, Harvard Business School, 9-805130Rev. July 08, 2009)
2 Crisis
stock price was the lowest it had been since 1983. By 1992, more than 60,000 jobs had
been lost and, in spite of John Akers (the CEO until 1993) efforts at transformation, the
company was failing and was on the verge of extinction by the end of 1994. IBM was
once the poster of American dominance. However by 1994, the company had lost
almost $16 Bn due to the changing dynamics in the IT Industry. In 1994, the company
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In the early 1990s, many Wall Street analysts had written off IBM as a company; its
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had enough cash to sustain for just another 100 days. When Lou Gerstner took over in
1993, the services unit was 27 percent of revenues and the software unit didnt even
exist. The reason behind sudden slide in fortunes was attributed to its elephantine size,
a laidback corporate culture and inability to integrate the business effectively to offer a
bouquet of solutions to its customers.
During the 1980s and early 1990s, IBM was thrown into turmoil by back-to-back
revolutions. The PC revolution placed computers directly in the hands of millions of
people. And then, the client/server revolution sought to link all of those PCs (the
"clients") with larger computers that laboured in the background (the "servers" that
served data and applications to client machines).
Both revolutions transformed the way customers viewed, used and bought technology.
And both fundamentally rocked IBM. Businesses' purchasing decisions were put in the
hands of individuals and departments - not the places where IBM had long-standing
customer relationships. Piece-part technologies took precedence over integrated
solutions. The focus was on the desktop and personal productivity, not on business
applications across the enterprise. Cost management and streamlining became a chief
concern. And IBM considered splitting its divisions into separate independent
businesses.
2.1 A Failure at Fundamentals
In the 1980s, IBMs profit margins suffered a steep decline. Because the companys
costs remained level, profits dropped. Critics of the company have widely attributed
IBMs decline to two factors. During this period, IBM became a follower of technological
development, more so than in the past. Such a change was marked because, in the
360 Series of computers. Also, the company displayed a surprising naivet in its
partnering strategies, giving Microsoft and Intel extremely profitable portions of the
industry while choosing to retain less profitable portions for itself.
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1960s, IBM had led the information technology industry with a grand innovation the
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Though these factors are very important, they are not the root causes of IBMs
difficulties. For example, the decline of profit margins was a result of falling customer
interest in mainframe computers. That IBM executives failed to foresee this was the
result of two more basic factors. First, IBMs enormous R&D effort of the 1970s should
have been directed at the microcomputer, which was about to burst onto the
technological scene bringing a future full of personal computers, networks, and
computer servers. Instead, the company squandered R&D on building a larger
mainframe. Second, IBM shifted its relationships with customers and lost touch with
their interests and concerns. Thus a partial explanation of IBMs difficulties is that its
profit margins on mainframes declined precipitously.
IBMs success was based on two commitments; they were not formal contracts but
understandings based on repeated assertions. To its customers, IBM had promised
effective, high-quality technology and service support, maintained by a close, continuing
relationship. IBM rented equipment to customers and was their partner in data
processing and office work. For a large company wanting to ensure that its information
systems were up-to-date (though not necessarily state-of-the-art) and reliable, IBM was
the answer. When in doubt, a chief information officer could buy IBM and be confident
that the choice would not be challenged.
2.2 Breaking Two Promises
During the late 1980s and early 1990s, IBM abrogated its contract with both its
customers and its employees. Although IBM had assured its customers a partnership, it
broke that promise in order to finance a substantial expansion. At the time, top
executives didnt realize that the company was altering its contract with customers.
IBM broke its promise of security to employees in order to bail out its shareholders. Both
factors doomed IBMs business to stagnation in the first half of the 1990s and left its
business prospects uncertain for the remainder of the decade. When IBM defaulted on
its commitments to customers, they grew angry at its arrogance for giving them
equipment that did not work properly, was delivered late, or did not meet expectations in
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When they later realized it, they didnt care. When the expansion failed to materialize,
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other ways and at its failure to keep up with emerging technology from other vendors.
The company was even castigated for failures in its service, something that was
previously unheard of.
When IBM defaulted on its commitments to its employees, many became disillusioned
and ineffective. Managers had let thousands believe that employment security had little
connection with performance. In attitude surveys, top performing IBM employees
complained bitterly that the companys management was far too tolerant of poor
performers. Had managers dismissed ineffective employees at less than half the rate
that is common in other computing firms, IBMs massive financial losses in the 1990s for
early retirements and layoffs could have been significantly reduced.
2.3 A Failure in Strategic Planning

The sequence of events in which IBM executives created the companys financial
disaster in the early 1990s began a decade earlier. In 1980, IBM executives reviewed
current trends and made one of the largest miscalculations in business history. They
concluded that IBM should continue building itself to support $100 billion in sales by
fiscal 1990. This target represented a doubling of then-current revenues but was seen
as an in 1980, IBMs first published corporate strategy had several key elements: to
grow the business, to be the most profitable firm in the industry, and to compete where
it chose (that is, not to be all things to all customers). That none of these items focused
on the customer symbolized the companys growing hubris. It would do business on its
own terms, not on those of the customer or the marketplace.
To fund the new capacity, IBM needed more investment dollars. It accelerated its move
from IBM or from financial institutions. Before the end of the 1980s, U.S. firms did not
have to consolidate their leasing/finance subsidiaries (even if wholly owned), so that the
corporation could account for the leased equipment as sales. Thus the shift from rentals
to leases was shown as an increase in sales. This decision, seen as a financial move to
raise cash for investment, had an enormous adverse impact on IBMs relations with its
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from rentals to sales. Specifically, it pushed sales financed by leases to its customers
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customers. IBM managers responded to the forecast and related growth plan by hiring
tens of thousands of employees and adding billions of dollars in plant and equipment to
IBMs balance sheet. In retrospect, they were wildly optimistic, even negligently so.
Building and equipment contractors recall IBMs lavish spending, which marked a great
capacity build-up. In Fishkill, New York, IBM quickly built, at enormous cost,
semiconductor plants with the super-clean rooms needed for manufacturing. Two years
after they opened, the plants were shut down. In California, laboratories were built at
breakneck speed. They were opened, then closed, dismantled, and rebuilt. Mistakes
costing tens of millions of dollars were made.
To finance such extravagance, IBM accelerated a transition that, over almost two
decades, took it from a revenue stream that generated 85 percent by renting (it had
been 95 percent) to one of 12 percent renting and 88 percent customer purchases. The
company was abandoning the foundation of guaranteed revenue: the rental base.
In 1985, a peak year for IBMs revenue and profits, few recognized that the strong
performance was largely a bubble from the sell-off of rental equipment. The continuous
revenue stream from renting had shrunk to only about 12 percent of the total. Added to
this was another 30 percent of revenue from contract maintenance, so that some 42
percent remained secure from the need to be recreated by sales each year. By the early
1990s, renting was only about 4 percent, and maintenance, about 29 percent. IBM had
converted its stable revenue stream to one that fluctuated with the economy and with
the intensity of industry competition. The customer loyalty to IBM that renting had
maintained and the stable revenue stream that cushioned the firms finances through
the business cycle were both cast aside. In effect, through the 1980s, IBM managers
sold off one of its greatest business assets, its rental base, and deluded themselves into
realizing it.
In the mid-1980s a new model started to appear. It argued that vertical integration was
no longer the way to go. The new breed of successful information technology
companies would provide a narrow, horizontal slice of the total package. So companies
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thinking that business had never been better. They liquidated the company without
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that sold only databases began to emerge, as well as companies that sold only
operating systems that sold only storage devices, and so on. Suddenly the industry
went from a handful of competitors to thousands and then tens of thousands, many of
which sold a single, tiny piece of a computer solution.
It was in this new environment that IBM faltered, and so it was logical for many of the
visionaries and pundits, both inside and outside the company, to argue that the solution
lay in splitting IBM into individual segments. This conclusion, however, appeared to me
to be a knee-jerk reaction to what new competitors were doing without understanding
what created fragmentation in the industry.
Two things really drove the customer to support this new, fragmented supplier
environment:
Customers wanted to break IBMs grip on the economics of the industryto rip
apart IBMs pricing umbrella, which allowed it to bundle prices and achieve
significantly high margins.
The customer was increasingly interested in delivering computing power to

individual employees (the term was distributed computing, in contrast to the
mainframes centralized computing).
2.4 Crucial Questions about IBMs Experience

Was IBM a victim of its own success? The answer is certainly yes. Intoxicated with good
fortune, the company overreached in the 1980s and paid a bitter price in the 1990s.
IBMs top executives attempted to manage the corporation from the top, despite its
great size and complexity, and in so doing exceeded their capabilities. But IBM is a
between its various businesses. It requires a high degree of central coordination and
direction. It needs a judicious blend of decentralized operating management and
centralized strategic direction. In the 1980s, IBMs executives failed to get the mixture
right.
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closely integrated company, operates in only one industry, and has much synergy
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IBMs basic management techniques were obsolete in the modern work environment.
IBMs lengthy study of decisions before they could be made, its emphasis on
consensus, its interminable executive meetings that focused on ideas and plans, not
operating results, its full employment practice that became a refuge for poor performers
all were rendered obsolete in a more competitive, rapidly changing business
environment. IBM chief executives were too inbred, too steeped in the arrogance of
success, and too certain of their own judgment in a time of challenge. IBMs culture
contributed greatly to each shortcoming.
Why have large companies like IBM been unable to convert the strengths of
bigness into marketplace success?
They base overly optimistic strategies more on pride than on reality.
They focus on financials that inadvertently cripple other functions, including

production and marketing.
Top executives of large firms believe that they can dictate what customers should
buy, only to discover they cannot.
Large U.S. businesses have broken their pact with employees and, when they
lose employee loyalty, can find nothing to replace it.
Top executives flee into reorganizations when faced with strategic crises, leaving
the crises unresolved.
The major problems that IBMs new CEO Louis V. Gerstner, Jr in 1993 identified
are as follows:
While IBM had extremely bright people who were very committed, and, at times,
quite convinced of what needed to be done, there was little true strategic
segmentation raised. Rarely did they compare their offerings to those of their
competitors. There was no integration across the various topics that allowed the
group to pull together a total IBM view.
Loss of customer trust supported by some disturbing customer ratings on quality.
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underpinning for the strategies discussed. Not once was the question of customer
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Prices of products were extremely high and did not consider market realities or
customer requirements. In fact, existing customers were being milked since they
had invested substantially into IBM products and now could not shift easily to
products of other competitors.
The mindless rush for decentralization, with managers leaping forward saying
make me a subsidiary.
Cross-unit issues not being resolved quickly.
Major tension in the organization over who controlled marketing and sales
processes. IBM product salespeople were legendary for going to customers and
denigrating another IBM product that might serve in equal capacity in a customer
solution. In fact, IBM divisions would bid against one another, and a customer often
got multiple IBM bids.
A confusing and contentious performance measurement system, causing serious

problems when closing sales with customers.
A bewildering array of alliances that didnt make any sense and therefore customer
requirement for integration was ignored.
Research-and-development units would hide projects they were working on, so

other parts of the company would not learn of them and try to take advantage of
their knowledge. It went on and on in a staggering array of internal competition.
Teamwork was not valued, sought, or rewarded.
Bureaucracy at IBM and it was extremely difficult to get integrationintegration of a

solution or integration across geographies.
To its employees, IBM had promised employment security. Once a person had a job
with IBM, he or she was set for life. Benefits were good, the salaries competitive,
and the working environment excellent but there was no requirement or benchmark
for performance. Bonuses were paid to executives based solely on the performance
of their individual units. In other words, if your operation did well but the overall
corporation did poorly, it didnt matter. You still got a good bonus. This encouraged
a me-centered culture instead of team building culture.
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A high power Management Committee (MC) consisting of six persons which was
the ultimate position of power that every IBM executive aspired to as the apex of his
or her career. However, over time, IBM people had learned how to exploit the
system to promote their own agendas. So by the early 1990s a system of true
contention was apparently replaced by a system of pre-arranged consensus. Rather
than have proposals debated, the corporate staff, without executives, worked out a
consensus across the company at the lowest possible level. Consequently, what the
Management Committee most often got to see was a single proposal that
encompassed numerous compromises. Too often the MCs mission was a
formalitya rubberstamp approval.
While the corporation could add up its numbers quite well in total, the internal
budgeting and financial management systems were full of holes. There was not one
budget but two or three, because each element of the IBM organization matrix (e.g.,
the geographic units versus the product divisions) insisted on its own budget. As a
result, there really wasnt single, consolidated budget. Allocations were constantly
debated and changed, and accountability was extremely difficult to determine.
IBMs communications department staffed for the most part with well-meaning but
untrained employees was in shambles. For decades the position had been a
rotation slot for sales executives being groomed for other top jobs. Typically, IBM
executives believed that the only real problem the company had was the daily
beating it was getting in the press. They felt that if we had more positive stories in
the media, IBM would return to profitability and everything would be normal again.
IBM was bloated and inefficient. It had piled redundancy on top of redundancy. It
was running inventory systems, accounting systems, fulfilment systems, and
distribution systems that were all, to a greater or lesser degree, the mutant offspring
of systems built in the early mainframe days and then adapted and patched
together to fit the needs of one of twenty-four independent business units. Instead
of the typical one Chief Information Officer for the company, it had by actual count,
128 people with CIO in their titlesall of them managing their own local systems
architectures and funding home-grown applications.
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Similarly, If there was a financial issue that required the cooperation of several
business units to resolve, there was no common way of talking about it because
they were maintaining 266 different general ledger systems. At one time HR
systems were so rigid that you actually had to be fired by one division to be
employed by another.
One would expect to find the best internal IT systems in the world within IBM.
Though IBM was spending $4 billion a year on this alone, yet they didnt have the
basic information needed to run business. The systems were antiquated and
couldnt communicate with one another.
Branding of the company was chaotic. IBM executives had their own advertising
budgets, their personal agencies, and the discretion to order up an ad anytime they
wanted to do so. One month thered be no IBM advertising in important industry
magazines; the next month they had so many pages that it seemed as if IBM were
sponsoring a special issue. The latter was especially true in November and
December, when marketing departments wanted to spend leftover dollars in their
budgets. Software, to IBM, was simply one part of a hardware-based offering. Since
every computer needs an operating system, and most need databases and
transaction processing capability, IBM built many of these software assets but never
viewed them as a unique business. Rather, they were buried inside IBM hardware
or sold as an add-on feature. And critically, none of this software worked with
computers made by manufacturers other than IBM. IBM didnt have a software
mentality, much less a real software business. Most of what they had was built for
the mainframe world at a time when the bulk of the customer investment was in
distributed systems.
IBM had 4,000 software products, all of which were branded with separate names
(most of which were unmemorable and un-rememberable). They were made in
more than thirty different laboratories around the world. There was no management
system, no model for how a software company should run, and no skills in selling
software as a separate product.
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2.5 Summary
How could IBMs failures be summarised? First and foremost, IBMs difficulties reflected
a failure to manage fundamentals. Any business depends on two relationships: those
with customers and those with employees. Everything else, no matter how significant
including shareholder relations just gets in the way. Every executive decision should
be made in a context of satisfying customers and employees. Because employee
conduct is crucial to customer satisfaction both in service and product a company
cannot destroy the loyalty of its employees without suffering serious repercussions.
When loyalty has been lost, a company must revive performance by rewarding
employees for success immediately, not in the long term as employment security does.
Large companies can survive and prosper only if they address these fundamental
issues.
3 Revival
3.1 Leadership The board of IBM did an incredibly smart thing. They hired Lou
Gerstner. Gerstner had never run a technology company.
But in his previous experiences as part of senior management
at RJR Nabisco and American Express, he had come to realize
the value of totally integrated IT services. He recognized that
one of IBM's enduring strengths was its ability to provide
integrated solutions for customers - someone to represent
more than piece parts or components. Splitting the company
would have destroyed a unique IBM advantage.
Gerstner understood that the long term potential for IBM would be in its ability to deliver
companies in the world) and services as customized and ultimately very
profitable,
packages to corporate customers. Though he didnt have detailed information into the
problems within IBM, he was aware of some fundamental problems like poor customer
service which he had faced while being the head of RJR Nabisco and American Express.
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complete IT solutions that bundled hardware, software (IBM is still one of the largest
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So in his very first speech to the executives on the day of his taking over as CEO of
IBM, he clearly spelt out his functioning style, his management philosophy and
practice which were as follows:
I manage by principle, not procedure.
The marketplace dictates everything we should do.
Im a big believer in quality, strong competitive strategies and plans, teamwork,

payoff for performance, and ethical responsibility.
I look for people who work to solve problems and help colleagues. I sack politicians.
I am heavily involved in strategy; the rest is yours to implement. Just keep me

informed in an informal way. Dont hide bad informationI hate surprises. Dont try
to blow things by me. Solve problems laterally; dont keep bringing them up the line.
Move fast. If we make mistakes, let them be because we are too fast rather than too
slow.
Hierarchy means very little to me. Lets put together in meetings the people who can
help solve a problem, regardless of position. Reduce committees and meetings to a
minimum. No committee decision making. Lets have lots of candid, straightforward
communications.
I dont completely understand the technology. Ill need to learn it, but dont expect
me to master it. The unit leaders must be the translators into business terms for me.
Once he formally took over and met hundreds of executives, employees, customers,
Board Members, Heads of rival companies like Bill Gates etc, he was able to get a hang
of some of the basic problems within IBM. He understood the problems that were
highlighted in the previous chapter, he assimilated and reflected over what needed to be
Keep the company together and not spin off the divisions.
Change their fundamental economic model.
Reengineer how they did business. Its priorities would start with the customer.
Everything at IBM would begin with listening to customers and delivering the
performance they expected.
Sell underproductive assets in order to raise cash.
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done and took some critical decisions:
Reinvest in the mainframe.
Remain in the core semiconductor technology business.
Protect the fundamental R&D budget.
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Also within the first few weeks he did a number of very un-IBM things as follows:
He made a big mainframe pricing announcement stating that mainframe prices,

both hardware and software, were coming down, and coming down quickly. The
price of a unit of mainframe processing moved from $63,000 that month to less than
$2,500 seven years later, an incredible 96-percent decline. Mainframe software
price/performance improved, on average, 20 percent a year for each of the next six
years. This program, probably more than any other, saved IBM. Over the short term
it raised the risk of insolvency as it drained billions of dollars of potential revenue
and profits from the company. However, the plan did work. IBM mainframe capacity
shipped to customers had declined 15 percent in 1993. By 1994, it had grown 41
percent, in 1995 it had grown 60 percent, followed by 47 percent in 1996, 29
percent in 1997, 63 percent in 1998, 6 percent in 1999, 25 percent in 2000, and 34
percent in 2001. This represented a staggering turnaround. While pricing was not
the only reason IBM survived, it would not have happened had they not made this
risky move.
The need for coopetition - whereby they both cooperate and compete with
companies like HP, Sun Microsystems, Microsoft etc while providing integrated
solutions to the customer.
Laid-off nearly 100,000 employees, this from a company that had previously
enjoyed an employed-for-life reputation.
Effectively used the power of the internet as a communications vehicle in his efforts
Introduced a casual dress code, which resulted in the formally conservativelydressed executives, uncomfortably wandering around IBMs offices in their weekend
golfing outfits.
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to change the internal culture and the external perceptions of the company.
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Consolidated all the companys advertising, which was being handled by more than
80 agencies around the world, into a single one, Ogilvy & Mather, New York, who
he had worked with during his time at American Express.
A Solutions for a Small Planet campaign, which completely flipped the uncaring
Big Blue perception of the company on its head by demonstrating how IBM was
helping solve the day-to-day problems of its customers, large and small, around the
world
Cancelled the no-alcohol on the premises policy.
Hired a true PR professional in IBMs history to hold the top communications job.
3.2 Steps taken to change the way IBM worked and its culture: Over the next
couple of years, they implemented the following far reaching measures:
3.2.1 Capitalising the Business

They sold 8,000 acres of undeveloped land. They sold first-class real estate that
They didnt need, like the tallest building in Atlanta and the corporate headquarters
in New York City. They hired outside providers and cut full-time staff to 42.
They sold much of the corporate airplane fleet.
Massive investments in expensive training centres which housed and fed tens of
thousands of people a year were drastically cut. In 1993 they had four such private
facilities within an hours drive of the Armonk headquarters.
Over the previous decade, IBM had amassed a large and important fine-art
collection, most of which was stored in crates out of sight from anyone. Some of it
did show up now and again in a public gallery in the IBM tower on 57th Street in
the bulk of it was sold at auction at Sothebys for $31 million.
3.2.2 Improving Internal Processes
IBMs expense-to-revenue ratio was wildly out of range with those of their
competitors. On average, competitors were spending 31 cents to produce $1 of
April 27, 2013
Manhattan. They had a curator and a staff who maintained this collection. In 1995
2013
Revenue while IBM were spending 42 cents for the same end. When multiplied, this
inefficiency times the total revenue of the company, they discovered that they had a
$7 billion expense problem! Since the repositioning of the mainframe was a longterm challenge but the only way to save the company, at least in the short term, was
to slash uncompetitive levels of expenses. So in 1993 they began what ultimately
became one of the largest, if not the largest, reengineering projects ever undertaken
by a multinational corporation. It would last a decade and, as it unfolded, change
almost every management process inside IBM. At any given time, more than sixty
major reengineering projects were under wayand hundreds more among
individual units and divisions. Most of the work centered on eleven areas. The first
six we called the core initiatives, meaning those parts of the business that dealt
most with the outside world: hardware development, software development,
fulfilment, integrated supply chain, customer relationship management, and
services. The rest focused on internal processes, called enabling initiatives: human
resources, procurement, finance, real estate, and surprisinglyat least at first
glanceinformation technology. From 1994 to 1998, the total savings from these
reengineering projects was $9.5 billion. Since the reengineering work began, they
achieved more than $14 billion in overall savings. Hardware development was
reduced from four years to an average of sixteen monthsand for some products,
even faster. They improved on-time product delivery rates from 30 percent in 1995
to 95 percent in 2001, reduced inventory carrying costs by $80 million, write-offs by
$600 million, delivery costs by $270 million and avoided materials costs of close to
$15 billion.
They had hundreds of data centers and networks scattered around the world; many
of them were largely dormant or being used inefficiently. They saved $2 billion in IT
consolidated 31 internal communications networks into a single one.
Once he had decided that IBM would not be broken into smaller pieces, they threw
out the investment bankers who were arranging IPOs of all the pieces of the
enterprise. They sacked the accountants who were creating official financial
statements required in order to sell off the individual components. They stopped all
April 27, 2013
expenses by the end of 1995 by going from 155 data centers to 16, and
2013
the internal activities that were creating separate business processes and systems
for each of these units, all of which were enormous drains of energy and money.
For example, even in the midst of financial chaos, they had managed to hire more
than seventy different advertising agencies in the United States alone. Human
resources people were willy-nilly changing benefits programs so that if an employee
left one IBM business unit for another, it was like entering another country, with
different language, currency, and customs.
3.2.3 Customer Focus
He announced Operation Bear Hug. Each of the fifty members of the senior
management team was to visit a minimum of five of IBMs biggest customers during
the next three months. The executives were to listen, to show the customer that
they cared, and to implement holding action as appropriate. Each of their direct
reports (a total of more than 200 executives) was to do the same. For each Bear
Hug visit, they had to send a one to two page report to the CEO and anyone else
who could solve that customers problems. These meetings became a major step in
reducing the customer perception that dealing with IBM was difficult. Bear Hug
became a first step in IBMs cultural change, that emphasized that they were going
to build a company from the outside in and that the customer was going to drive
everything they did in the company. It created quite a stir, and when people realized
that the CEO really read every one of the reports, there was quick improvement in
action and responsiveness.
With the rise of the Internet and network computing the company experienced
another dramatic shift in the industry. But this time IBM was better prepared. All the
hard work IBM had done to catch up in the client/server field served the company
well in the network computing era. Once again, customers were focused on
integrated business solutions - a key IBM strength that combined the company's
expertise in solutions, services, products and technologies. In 1995, Gerstner
articulated IBM's new vision - that network computing would drive the next phase of
industry growth and would be the company's overarching strategy. That year, IBM
acquired Lotus Development Corp., and the next year acquired Tivoli Systems Inc.
April 27, 2013
2013
Services became the fastest growing segment of the company, with growth at more
than 20 percent per year.
In May 1997, IBM dramatically demonstrated computing's potential with Deep Blue,
a 32-node IBM RS/6000 SP computer programmed to play chess on a world class
level. In a six-game match in New York, Deep Blue defeated World Chess
Champion Garry Kasparov. It was the first time a computer had beaten a top-ranked
chess player in tournament play, and it ignited a public debate on how close
computers could come to approximating human intelligence. The scientists behind
Deep Blue, however, preferred to stress more practical concerns. Deep Blue's
calculating power - it could assess 200 million chess moves per second - had a
wide range of applications in fields calling for the systematic exploration of a vast
number of variables, among them forecasting weather, modelling financial data and
developing new drug therapies and consequently new customers.
As the decade drew to a close, IBM stood on the threshold of the new century
having re-established itself as a leading information technology innovator. Its
leadership helped create the e-business revolution. And it had successfully
transformed itself, achieving an impressive business turnaround. As the new
century opened, IBM moved confidently into a future it helped create, one that is
linked to the ubiquitous and surging presence of the global networks that are
connecting every computer, and soon perhaps, every electronic device in the world.
3.2.4 Employee Communications

Opened up a clear and continuous line of communications with IBM employees. An
essential element of any successful corporate transformation is public acknowledgment
of the existence of a crisis. If employees do not believe a crisis exists, they will not
executive or an entry-level employee, change represents uncertainty and, potentially,
pain. So there must be a crisis, and it is the job of the CEO to define and communicate
that crisis, its magnitude, its severity, and its impact. Just as important, the CEO must
also be able to communicate how to end the crisisthe new strategy, the new
company model, the new culture. All of this takes enormous commitment from the CEO
April 27, 2013
make the sacrifices that are necessary to change. Nobody likes change be it a senior
2013
and proper communication becomes an absolute essentiality. No institutional

transformation takes place, without a multi-year commitment by the CEO to put himself
or herself constantly in front of employees and speak in plain, simple, compelling
language that drives conviction and action throughout the organization.
The employees through constant communication bought into the CEOs belief that the
unique opportunity for IBM, the distinctive competence, was an ability to integrate all
the parts for their customers.
He declared war on the geographic fiefdoms. They decided they would organize the
company around global industry teams. With the Citibank global model in mind, he
along with his executives built a customer-oriented organization which could support
them globally. They broke their customer base into twelve groups: eleven industries
(such as banking, government, insurance, distribution, and manufacturing) and a final
category covering small- and medium-size businesses.
3.2.5 Reviving the Brand
A successful company must have a customer/marketplace orientation and a strong
marketing organization. Thats why they also had to fix and focus IBMs marketing
efforts. They decided to consolidate all of IBMs advertising relationships into a single
agencynot just in the United States, but around the world. At the time, it was the
largest advertising consolidation in history and selected Ogilvy & Mather, which had
solid worldwide expertise and experience. That was exactly what IBM needed, since
the agency would manage advertising for all of their products and services, as well as
the overall brand, around the world. Solutions for a Small Planet, featuring an
international cast, from Czech nuns to old Parisians speaking in their native language
with all the dialogue subtitled were highly acclaimed. The campaign reaffirmed
class integrator. At the same time, it signalled that IBM was a very different company able to change and make bold decisions, just as they had done with the decision to
consolidate; able to move quickly; able to take risks and do innovative things; and we
were more accessible. The campaign humanized the IBM brand.
April 27, 2013
important messages: IBM was global, and that they were staying together as a world-
2013
3.2.6 Compensation Philosophy

Earlier compensation at all levels consisted predominantly of salary. Relatively little
was paid in bonus, stock options, or performance units and there was little
differentiation in the system and annual increases were typically given to all employees
except those rated unsatisfactory. There was very little variance in the size of the
annual increase between a top-ranked and a lower-ranked employee. Increase sizes
were in a small band around that years average. For example, if there was a 5 percent
increase in budget, actual increases fell between 4 percent and 6 percent. All employee
skill groups (such as software engineers, hardware engineers, salesmen, and finance
professionals) were paid the same within a salary grade level, regardless of the fact
that some skills were in higher demand externally. There was also a heavy emphasis
on benefits. IBM was a very paternal organization and provided generously for all forms
of employee support. Pensions, medical benefits, employee country clubs, a
commitment to lifelong employment, outstanding educational opportunities - all were
among the best of any United States company. However, this was not sustainable in
the new scenario where IBM was losing cash very fast. The new CEO made four major
changes to the compensation system as follows:
Old System
New System
Commonality
Differentiation
Fixed rewards
Variable rewards
Internal benchmarks
External benchmarks
Entitlement
Performance
The idea was to make the employees to think and act like long-term shareholders - to
feel the pressure from the marketplace to deploy assets and forge strategies that
evaluator of relative performance, and this was a strong incentive for employees to look
at their company from the outside in. People had to understand that they all benefited
when IBM as a whole did well and, more often than not, lost out when they functioned
as a disjointed operation. Consequently, big changes were made to the IBM Stock
Options Program. Stock options were offered to tens of thousands of employees for the
April 27, 2013
create competitive advantage. The market, over time, represents a brutally honest
2013
first time. In 1992, only 1,300 almost all high-level executives received stock options.
Nine years later, 72,500 employees had received options, and the number of shares
going to nonexecutives was two times the amount executives received.
Also beginning in 1994, all executives would have some portion of their annual bonus
determined by IBMs overall performance. The most unusual part of this plan involved
the highest-level executives, including those who ran all their business units were paid
bonuses based entirely on the companys overall performance. In other words, the
person running the Services Group or the Hardware Group, had his or her bonus
determined not by how well the unit performed, but by IBMs consolidated results.
Executives at the next level down were paid 60 percent based on consolidated IBM
results, 40 percent on their business unit results. The system cascaded down from
there. The variable pay amounts were also tied directly to overall IBM performance to
ensure that everybody knew that if they worked hard at collaboration with colleagues,
doing so would pay off for them.
The various initiatives taken in the 1990s not helped IBM survive the crisis from the
brink of disaster but also achieve even greater heights in 2012 as brought out in the
Figure 4
April 27, 2013
figures 4, 5 and 6 below:
2013
Figure 6
So to summarise IBM didnt lack smart, talented people. Its problems werent
fundamentally technical in nature. It had file drawers full of winning strategies. Yet, the
April 27, 2013
Figure 5
2013
company was frozen in place. What it needed was someone to grab hold of it and shake it
back into action. The new CEO Louis Gerstner brought in that kind of strategic and cultural
change that helped IBM reach greater heights again just being more attentive to the
customer, ensuring faster cycle time, faster delivery time, and a higher quality of service.
4 Learnings
Prof. Sushil in his paper A Flexible Strategy Framework for Managing Continuity and
Change has identified Continuity forces in any company as depicted in the figure
below:
Figure 7
It is a paradox that the forces that contribute to better performance in the current
situation become counter - productive to lead change. Some of the important continuity
established culture, core competence, supply chain and distribution network and higher
level of business performance. These were some of the reasons for the downward
spiral of the business performance of IBM. The new CEO targeted a few of these
factors to bring about a change in the fortune of the organisation. The changes are
highlighted in Red in the figure 8 below:
April 27, 2013
forces are: large customer base, huge infrastructure, investment in technology, well
2013
Figure 8
As explained in the previous chapter the new CEO brought in the following changes with
regard to continuity forces as follows:
Maintained core competence but tweaked it to provide integrated solutions to customers
Improved the distribution network by integrating IT systems dealing with finance,

communication so that standard solutions are provided to particular types of problems
irrespective of which country the customer is located in.
Changed the bureaucratic culture, the company had grown into.
By changing the culture and the method of operations, he ensured performance of the
company improved considerably with faster cycle times, faster delivery times.
The 'actors' and `processes' linked with the enterprise create forces to maintain continuity,
the continuously changing business situation, in particular due to globalization, generates
be both external and internal.
The external change forces may emanate from changes on political, economic, social
and/or technological fronts, whereas the internal change forces may be because of poor
performance (low profitability, loss of market share), change in top management, and so
on. The change forces that have been identified by Prof. Suhil in the paper are depicted
April 27, 2013
forces that direct the organizations to strive for change. The situational change forces could
2013
in the Figure 9 below:
Figure 9
Like in the case of Continuity Forces, the new CEO targeted a few of the Change Forces
to improve the overall status of the company. The changes are highlighted in Red in the
Figure 10
By concentrating on only a few of the factors for initiating change, the CEO ensured that the
organization while reaching greater heights did not lead into chaos. As explained in the
April 27, 2013
figure 10 below
2013
previous chapter the CEO brought in the following changes with regard to Change forces as
follows:
Changed customer perception of the company by launching Operation Bear hug. This
operation also helped understand customer needs thoroughly and acting accordingly.
The Company embraced Globalisation by integrating all divisions across various

countries to provide integrated solutions.
Tapped into New Opportunities by moving into the Services Sector providing integrated
solutions to customers.
Acquired Lotus Development Corp. and Tivoli Systems Inc to increase its hold in the
Services sector.
It created the e-business revolution by linking itself to the ubiquitous and surging
presence of the global networks that are connecting every computer and smart devices.
The interaction between the continuity and change forces can be represented through the
Figure 11
April 27, 2013
flowing stream strategy crystal as depicted in the following figure:
2013
The relationship of elements in flowing stream strategy crystal are described in the
following table
Relationship
Continuity
Interaction
Forces
Customer Factors
Increasing competition puts pressure on enlarging and

maintaining the customer base. To meet the ever changing
customer needs and expectations in terms of product choices,
low cost and delivery mechanisms IBM will have to effectively
utilize its legacy of providing economical solutions by
maintaining and extending its core competency to provide
customized as well as integrated solutions to the customers.
For this they may optimally utilize their entrenched
infrastructure
Continuity
Forces
Enterprise Factors
The enterprise factors are critical in shaping the strategy of an

organization. This would require IBM to
1.To continue its focus on performance for achieving the goals
related for financial performance
2.Customer satisfaction will depend to a large extent on the
work culture prevalent in IBM and the integrated solutions
provided to customers.
3.Productivity improvement will be determined by the
effectiveness of the existing technology and the global supply
chain and distribution network
Continuity
Forces
Change Forces
The channel of divert was initially used by IBM but with the
maturity in the strategic performance it has started adopting the
strategy of integration.
Forces
Customer Factors
Customer factors are the one of the main forces to drive the
change. In case of IBM the customer factors like connectivity,
service and speed will require a shift to meet the challenges
presented by change forces of new and better technologies,
customer needs, e-Business and globalisation
April 27, 2013
Change

Change
Forces
Enterprise Factors
2013
The enterprise factors are the most important for determining

how effectively IBM can handle the change forces. Factors like
flexibility will have to be effectively utilized in the face of
changing business scenario due to globalization. Similarly the
risk factor will depend on the level of competition being faced in
new business environment. Development and adaptation of
new technologies will drive the learning level requirements of
IBM. Mergers and Acquisitions would need impetus to acquire
new technology bases and extend the customer base.
Enterprise
factors
Customer Forces
1 The financial performance and risk level of business will

determine the price of the product offered to the customers
2 Customers satisfaction would depend on the flexibility in
terms of product choices, customization, integrated services
and the level of service factor will govern
3 Productivity and Quality parameters determine the Delivery
mechanisms
4.Connectivity and speed will to a large extent depend on the
learning level of the IBM and its ability to be flexible for
April 27, 2013
providing better IT solutions
2013
The strategies adopted by the IBM to balance the change forces and continuity forces
can be represented through the strategy formulation matrix (figure 12) given below:
Figure 12
Strategies for confluence of continuity and change could be generated by understanding
the balance of continuity and change forces. As per the C-C matrix, there can be four
be metaphorically named according to the characteristics of that category. The
combinations are depicted in Figure 1 in section 1. Therefore, if we have to map the
transformation of IBM, we could say that the company moved from being a Tree to a
Flowing Stream:
April 27, 2013
possible combinations of the opportunities or innovative technological change and can
2013
April 27, 2013
Figure 13
2013
References:
1. A Flexible Strategy Framework for Managing Continuity and Change, Prof. Sushil
GIFT journal, International Journal of Global Business and Competitiveness 2005,
Vol. 1, No. 1, pp 22-32
2. Lou Gerstner, Who Says Elephants Cant Dance? Inside IBMs Historic
Turnaround (New York: Harper Business,2002).
3. Harreld,OReilly III, Tushman, Dynamic Capabilities at IBM: Driving strategy into
action, California Management Review, Vol. 49, No. 4, Summer 2007
4. Dittrich, Duysters, Ard-Peter de Man, Strategic repositioning by means of alliance
networks: The Case of IBM, Elsevier, Science Direct, July 2007
5. Fundamentals of Flowing Stream Strategy (Principle, Frameworks and strategies),
Class presentation of Prof. Sushil, DMS, IIT Delhi (class held on 21.04.13 and
24.04.13)
6. IBM Annual Report, 2000
7. IBM Annual Report, 2012
8. Applegate, Austin, Collins, IBM's Decade of Transformation: Turnaround to
Growth, Harvard Business School, HBS 9-805-130 REV: JULY 8, 2009
9. http://sloanreview.mit.edu/article/the-decline-and-rise-of-ibm accessed on April 10,
2013
10. http://www.mbaskool.com/business-articles/marketing/326-ibm-greatest-corporateturnaround-stories-of-20th-century.html accessed on Feb 10, 2013
11. http://en.wikipedia.org/wiki/Ibm_history accessed on Feb 02, 2013
12. http://www.forbes.com/2002/11/11/cx_ld_1112gerstner.html
13. http://www.huffingtonpost.com/howard-steven-friedman/americanturnaround_b_1691554.html accessed on March 10, 2013
turnaround_b_1691554.html accessed on March 10, 2013
April 27, 2013
14. http://www.huffingtonpost.com/howard-steven-friedman/american-

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Flowing stream strategy

Strategic Change and Flexibility

Submitted By: Group 1 (2011SMN6501, 2011SMN6502, 2011SMN6504, 2011SMN6509)

April 27, 2013

Figure 1: Continuity Change Matrix

Strategic Change and Flexibility

Figure 2: Flowing Stream Strategy Crystal

1.2 About IBM

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April 27, 2013

infrastructure, hosting and consulting services in areas ranging from mainframe

Strategic Change and Flexibility

Figure 3: Financial growth of IBM

Submitted By: Group 1 (2011SMN6501, 2011SMN6502, 2011SMN6504, 2011SMN6509)

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Keypunches and verifiers

Sorters, Statistical, and derived machines

Reproducing Punch, Summary Punch, Gang Punch, and derived machines

Other Unit Record Equipment

Typewriters and dictating equipment

World War II ordnance and related products

IBM telephone switching systems

Computers based on discrete transistors (1960s)

Solid state computers

Computers based on SLT or discrete IC CPUs (1964 to 1989)

Computers based on microprocessor CPUs (1981 to present)

Solid State Computer peripherals

Punched card and paper tape equipment

Printer/plotter equipment and terminals

Data storage units

Magnetic drum storage

Direct Access Storage Devices

Magnetic tape storage

Storage networking and virtualization

Airline Reservation Systems

Avionics and space systems

Bank and finance

Submitted By: Group 1 (2011SMN6501, 2011SMN6502, 2011SMN6504, 2011SMN6509)

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Strategic Change and Flexibility

Strategic Change and Flexibility

Industry and manufacturing

Utilities and languages

Middleware and applications

Business analytics and optimization

Customer relationship management

Strategy and transformation

1.3 History of IBM

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Strategic Change and Flexibility

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Strategic Change and Flexibility

Figure 4 (Source: IBM's Decade of Transformation: Turnaround to Growth, LYNDA M.

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April 27, 2013

Strategic Change and Flexibility

Submitted By: Group 1 (2011SMN6501, 2011SMN6502, 2011SMN6504, 2011SMN6509)

April 27, 2013

Strategic Change and Flexibility