How Big Blue Reinvented Itself, An Analysis of IBM’s 1993 Pivot Through the Design School of Strategy Formation

Going into its 107th year, IBM is the only tech giant to reach that age thanks to its ability to successfully reinvent itself over the years (Darrow, 2016). One example of such reinvention is the 1990s successful pivot from a company selling mainly mainframes to an effective software and services consulting firm (Perlow, 2017), as personal computing was shaking the industry. Here, the design school of strategy formation is used to analyse how the company has been successful in matching its internal capabilities with external possibilities during this particular period.

The Design School of Strategy

The design school is one of the most important schools of strategic thought, with Mintzberg (1990) classifying it under the prescriptive category of strategy formation. The basic model of the design school, illustrated in figure 1, consists in finding a fit between the internal capabilities of an organisation with external events (Mintzberg, 1990). Furthermore, two other factors need to be considered in strategy-making, these being organisational values and social responsibilities (Mintzberg, 1990). This should then lead to the creation of strategies, their evaluation and finally the implementation of the chosen one (Mintzberg, 1990).

Figure 1

Figure 1. Basic design school model (Mintzberg, 1990)

Strategy formation is conscious and controlled, with action following once strategies have been formulated with reason (Mintzberg, 1990). The CEO is the main strategist, who applies deliberate and deterministic strategies as a ‘grand concept’ using a ‘command and control’ mentality (Mintzberg, 1990). Strategies should be unique and explicit, coming from individualized design and with structure following the strategy (Mintzberg, 1990). The school is subject to various criticism. Mintzberg (1990) argues that the main shortcoming is the inability to adapt and change, which leads it to overlook learning through trial and error. This view is however contested (Liedtka, 2000; Ansoff, 1991). Other criticism includes the limitations of the CEO, acknowledging that strategy and structure are not an integrated system and also downsides such as putting brakes on innovation and change (Mintzberg, 1990).

 

CEO Replacement, Strategy Formation and Action

In 1993, IBM recorded an $8 billion loss, at the time the biggest in American corporate history, which was preceded by two more years of straight losses (Denning, 2011). This was a period in which the technology sector was going undergoing major changes. IBM missed the personal computers and client-server computing trends, which left it badly positioned in the marketplace (IBM, 2018).

Figure 2

Figure 2. IBM’s revenue and net income history 1980-2005 (Thompson, 2017)

Before reassessing internal and external capabilities, IBM recognised the limitations of its strategist in formulating adequate responses to the changing environment, addressing one of the criticisms of the design school (Mintzberg, 1990). In 1993, John Akers was replaced by Lou Gerstner as CEO, the first time since 1914 that IBM recruited a CEO outside its own ranks (Denning, 2011). Striking was also the fact that Gerstner, a McKinsey & Company consultant, had no experience running a technology company before (Denning, 2011).

As the strategy decision-maker, Gerstner first step was to find a fit between internal capabilities and external possibilities, leading to the generation of several strategies. One tool useful in finding this fit is the SWOT analysis. Table 1 showcases how a potential SWOT analysis of IBM may have looked like in 1993.

Table 1

Table 1. IBM 1993 SWOT Analysis (on elaboration of the author)

Gerstner’s strategy formation also considered two other factors mentioned in design school theory: managerial values and social responsibilities. Gerstner (2014) believed that fundamental to a new strategy were redefining teamwork at IBM, respecting the dignity of the workforce and promoting customer-centricity. Gerstner also wanted to reverse the uncaring image of IBM (Parker, 2012).

Several strategies could have been implemented by looking at the SWOT. These included breaking up business units into separate companies to compete with smaller and more agile competitors. Gerstner assessed this option but believed it would have killed IBM’s unique advantage of providing integrated solutions (Denning, 2011). Instead, Gerstner recognized this strength and found a fit with the opportunity provided by customers being increasingly in need of integrated IT solutions at software and service level, now that these new technologies were emerging (IBM, 2018; Denning, 2011). This explicit strategy was followed by structure and action. To make this strategy work, Gerstner had to deal with the issue of an unsustainable cost structure, which led to three decisions (IBM, 2018; Denning, 2011; Mills, 1996): shrinking workforce, driving significant cost reductions and focusing on high-margin opportunities by shedding off commodity businesses. IBM then successfully moved into software and services with strategic acquisitions (Perlow, 2017). In 1994, IBM registered $3 billion in profit (IBM, 1994). Growth returned in all segments, with 1995 sales reaching $72 billion, up 12% from the last year (Mills, 1996). Later another shift in the industry rocked IBM, networks (IBM, 2018). However, IBM was well prepared and successfully adapted to this change (IBM, 2018), showing how Mintzberg’s (1990) criticism may not necessarily hold true. IBM was revived and entered the new century having re-established itself as a leading IT innovator.

 

References:

Darrow, B. (2016). Can This 105-Year-Old Tech Giant Reinvent Itself?. [online] Available at: http://fortune.com/ibm-105-anniversary/. [Accessed 1 May 2018].

Denning, S. (2011). Why Did IBM Survive?. [online] Available at: https://www.forbes.com/sites/stevedenning/2011/07/10/why-did-ibm-survive/#4597dc071cac . [Accessed 1 May 2018].

IBM (2018). Chronological History of IBM – 1990s. [online] Available at: https://www-03.ibm.com/ibm/history/history/decade_1990.html [Accessed 4 May 2018].

Liedtka, J. (2000). In Defense of Strategy as Design. California Management Review, 42(3), pp.8-30.

MarketLine (2017) International Business Machines Corporation Company Profile. [Online] Available at: MarketLine Advantage Database.  [Accessed 5 May 2018].

Mills, Q. (1996). The Decline and Rise of IBM. [online] Available at: https://sloanreview.mit.edu/article/the-decline-and-rise-of-ibm/ [Accessed 4May 2018].

Mintzberg, H. (1990), The design school: Reconsidering the basic premises of strategic management. Strat. Mgmt. J., 11: 171-195. doi:10.1002/smj.4250110302

Parker, G. (2012). Lessons from IBM’s near-implosion in the mid-1990s. [online] Available at: https://qz.com/26018/it-companies-could-learn-how-ibm-turned-around-in-the-nineties/ [Accessed 1 May 2018].

Perlow, J. (2017). How IBM Can Avoid the Abyss. [online] Available at: https://www.zdnet.com/article/how-ibm-steps-away-from-the-abyss/. [Accessed 1 May 2018].

Statista (2018). Revenue of IBM worldwide from 1999 to 2017 (in billion U.S. dollars). [online] Available at: https://www.statista.com/statistics/265003/ibms-revenue-since-1999/ . [Accessed 1 May 2018].

Thompson B. (2017). Microsoft’s Monopoly Hangover. [online] Available at: https://stratechery.com/2017/microsofts-monopoly-hangover/  [Accessed 4 May 2018].

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