Loyola University of Chicago

Quinlan School of Business

Corporate Strategy - MGMT 574

- GROUP 3 -
George Henry
Robert Kolodenko
Michelle Lewis
Eliana Placido

Spring 2017
IBM Case Study
 IBM is a high tech company that competes in the technology industry against some of the

most well known corporations in the world. In its early days, the firm was focused on data-

processing equipment, government contracts, and mainframe computing. As the industry

evolved, IBM’s focus has had to shift, and their main focus now is in the cloud computing and

the data analytics space.

Early on IBM relied on a vertically integrated strategy where product development was

in-house. They owned the databases, operating systems, and processors that were used in all of

their product offerings. As the market changed, their vertical integration strategy adapted to

outsourcing some of their products, instead of owning all levels of production in-house. IBM’s

decision to outsource some of the products is an example of backwards integration. As time

went, on their vertical integration strategy developed into a growth by acquisition model. A huge

piece of IBM’s vertical strategy was providing end to end integrated services. They were able to

provide the service aspect (consulting, outsourcing), software piece, as well as the system's piece

to create a complete portfolio of all their customers’ needs.

As they moved into a more horizontal strategy, their focus was on expansion of their

product lines and developing new technologies. Competing in a heavily saturated cloud

computing space, IBM’s goal was to become more well known in the big data and analytics area.

One way they aimed to achieve this was by expanding their product lines by offering services

such as outsourcing, maintenance, integration and consulting. They also expanded their software

platforms to offer unique features that would serve to strengthen their systems and finance

business as well.

IBM’s global strategy modeled Ghemawat’s AAA triangle by leveraging all 3 A

strategies. Early on, IBM set up an adaptation strategy where they set up individual business
units in each country. These companies operated individually and did not utilize any of the

economies of scale IBM could potentially exploit. As time went on, they shifted towards

aggregation where they grouped together mini-IBM’s into regions to exploit some of those

economies of scale. And finally, IBM utilized the arbitrage aspect of the AAA framework as

they started to outsource different aspect of their services to India to drive down costs.

As new advancements in technology entered the market, IBM’s position as market leader

became severely threatened. Their hardware & software business, which had been cash cows for

them, was struggling as new technology replaced the need for these offerings. It became clear to

IBM that they could not rely on their market dominance and size to sustain them through these

transitional times. IBM must re-invent themselves in this evolving market, and because they

were late to notice this market shift, they had allowed competitors to steal market share. This

brought on many strategic issues that IBM had to overcome to remain competitive.

One of the strategic issues that IBM faced was in educating the market that they had

better offerings than their competitors in this market. IBM’s new offerings were so complex that

there was a learning curve that IBM had to anticipate to prove to its customers that their product

did in fact provide value. They were challenged with preparing and teaching their customers

how their new offerings would create value to their business, which required heavy investment

on IBM’s part.

Another challenge IBM faced was expanding their business globally. Upon initial

deployment of this new technology, IBM focused primarily in North America only, failing to

reach the vast amount of economic activity available outside North America.

In addition, IBM’s failure to react to the power and speed of this computer revolution

allowed other competition to enter the market, resulting in a heavily saturated market. IBM was
challenged with keeping up with the constantly evolving technology field and changes in

consumers wants and demands. Failure to do this in this past meant that it had already forfeited

the opportunity to dominate this new market, so they had to make sure they were more proactive

so as to avoid this happening again in the future.

The last critical issue that IBM must overcome is to grow in this market at a rate that

would offset the losses they have seen in their legacy businesses. Essentially, IBM must aim to

achieve double digit growth in this new area in order to become whole again. It seemed as

though the viability of their company heavily depended on their growth in this new market,

which made their business strategy very risky.

Reviewing IBM and the issues they’ve faced over the past hundred plus years, we’ve

developed some alternative strategies we think they can focus on to stay competitive in their

target market. The first piece is to continue working and developing new technologies, but also

be such to invest in legacy products that are operating at a loss. If they can expand the market on

some of their legacy products, we see a potential to keep customers happy as well as earn some

additional dollars needed for growth. Another strategy we recommend is creating education

programs for their new technologies. In the cloud computing and analytics space this is a very

common practice as it indirectly markets the products and allows individuals and companies to

become experts in the platforms. Most competitors have certified engineers and architects

(Amazon Web Services and Microsoft Azure) to facilitate this initiative, so IBM would benefit

from this to get people committed to the platforms and products they’re developing. The final

piece we feel IBM should do is to achieve growth through further M&A activities where they

can recognize synergies and efficiencies.

 Our recommendation is for IBM to focus on a growth by acquisition strategy to compete

with competitors with dominance in the market. This would help IBM gain market share and the

capability to achieve economies of scale by focusing on the core competencies of each

acquisition and integrating this onto the IBM platform. IBM needs to make it a priority to teach

customers the benefits and potential values of Big Data & Analytics and Cloud Computing

Services. Launching a training initiative will increase brand awareness as customers become

better informed on the potential of the new technology.

IBM has transitioned from a technology-based company to a knowledge-based company.

With the decline of mainframe computing, IBM saw a need to change its vertically integrated

strategy. The shifts in the market forced IBM to shift to a horizontal corporate strategy. Now the

success of IBM relies on the learning curve of the new technology and this is the direction IBM

needs to go to establish a market presence.

IBM - Top Management Q&A

Q1: What is IBM going to do on global level? Specifically, do you believe that

acquiring companies or aligning with companies will be their strategy?

A1: This is a great question. As time has evolved IBM went from a vertically integrated

company doing everything internally and owning the entire production and supply chain process

to focusing more on corporate efficiencies, which lead them to venture down the outsourcing

and M&A road. With the lack of in-house expertise and their focus on acquisitions from 2003-

2007 ($11.8 billion worth) we assume that trend will continue into the future. As we also

discussed part of their recent global strategy (utilizing the AAA triangle described by Ghemawat

(2007)) arbitrage has been a main focus where they’re focusing on sourcing different aspects of

their business in the foreign markets based on the efficiencies they gain these markets (typically

due to wage variance).

 Q2: How, if necessary, will IBM survive or merge into the cloud computing world

with giants like SalesForce and Oracle dominating the market? Is cloud formatting not

the next generation of information storage?

A2: As we’d expect, another great question from our stakeholders! Unfortunately, it

doesn’t seem this stakeholder did as in depth of a five force analysis as we did. Frankly,

Salesforce and Oracle are not the dominant players in the market, yes competitors, but the

market is dominated by Microsoft, Amazon, and Google. But assuming all of those are our

competitors, we can all agree IBM has tough competition ahead. But over the past few years

we’ve (IBM) been able to grow our cloud computing revenues by 60%, but the best part of this is

that revenue only represented only 7.5% of our overall portfolio. We hope to expand that as

SaaS and PaaS is becoming real and shifting the way the industry is going, but if (god forbid)

our cloud computing business line fails, we shouldn’t experience the single largest operating

loss in a year (again).

Q3: If IBM had been more reactive to competition in the beginning could they be

Apple? Or at least more competitive with Apple?

A3: Very tough to say. At the time when Apple was building the personal computer in

Steve Jobs's and Woz’s garage the IBM leadership team did not see it as a threat. There was

no way there would ever be a world without mainframe computing, is what they thought. So, if

IBM invested the resources they had into personal computing and OS development rather than

focus their efforts elsewhere, could they have become Apple? Absolutely. But is that what IBM

wanted to do? Or the other places in the business they had resources allocated, what would've

happened with those business lines? It’s easy to take a high level perspective of “oh we missed

the boat” and “I wish we were apple”, but thinking realistically within IBM’s product portfolio,

some products that exist today (and make a lot of money) may not of existed if they got into the

arms race with Jobs and Woz.

 Q4: What products do you feel IBM should explore producing to maximize profits

and obtain new revenue streams?

A4: An alternative strategy we had discussed was creating an education and certification

platform for IBM’s product lines. I think a focus on analytics and machine learning would make

IBM much more marketable, as well as give them a product portfolio to succeed. So if they’re

able to develop ML products that become mainstream and tack education and industry

respected certification on top, that would be a huge revenue and profitability stream.
Appendix 1: Excerpt from CBS News Interview with IBM CEO