28 Jun International Business Machines Corporation
Question
International Business Machines Corporation (IBM) manufactures and sells computer hardware and software, offers infrastructure services, and provides global consulting services. It dates to the 1880s but became known as IBM only in 1924, under the leadership of then-president Thomas J. Watson Sr. Watson led IBM for four decades and helped establish some of its most successful and continuing business tactics, such as exceptional customer service, a professional and knowledgeable sales force, and a focus on large-scale, COMPETITIVE DYNAMICS |custom-built solutions for businesses. Watson also created the company’s first slogan, “THINK,” which quickly became a corporate mantra. From the 1910s to the 1940s, IBM’s growth exploded, led primarily by sales of tabulating machines, which helped underpin the Social Security system in the 1930s, and of war-related technologies developed for the military during World War I and World War II. IBM evolved in the 1950s when Watson’s son, Thomas J. Watson Jr., took over as CEO. It was under his management that the company paved the way for innovations in computation. IBM worked with the government during the Cold War and built the air-defense SAGE computer system at the price of $30 million. In 1964, the firm launched a revolutionary large family of computers called the System/360, which used interchangeable software and peripheral equipment. For it to succeed, however, IBM had to cannibalize its own computer product lines and move its current systems to the new technology. Fortunately the risk paid off, and IBM architecture became the industry standard. By the 1960s, IBM was producing approximately 70 percent of all computers, beating out early competitors General Electric, RCA, and Honeywell. The 1980s—the beginning of the personal computing era—were pivotal for IBM. In 1981, the firm launched the first personal computer, which offered 18KB of memory, floppy disk drives, and an optional color monitor. IBM also opened up new channels of distribution through companies like Sears and Computer Land. However, its decision to outsource components of the PC to companies like Microsoft and Intel marked the end of IBM’s monopoly in computing. During the 1980s, its market share and profits eroded as the PC revolution changed the way consumers viewed and bought technology. IBM’s sales dropped from $5 billion in the early 1980s to $3 billion by 1989. The dip continued into the early 1990s when IBM felt pressure from Compaq and Dell and attempted to split the company into smaller business units to compete. The results were disastrous, and IBM posted net losses of $16 billion between 1991 and 1993. Things turned around when a new CEO, Louis Gerstner, refocused the company in a new strategic direction. Gerstner reconnected the company’s business units, shed its commodity products, and focused on high margin businesses like consulting and middleware software. IBM then introduced the iconic ThinkPad, which helped regain lost share. To rebuild its brand image, the firm consolidated its marketing efforts from 70 advertising agencies to 1 and created a consistent, universal message. In 1997, IBM’s chess-playing computer system, Deep Blue, also helped lift IBM’s brand image by defeating the world’s reigning chess champion in a historic event that captured the attention of millions. At the turn of the 21st century, IBM’s newest CEO, Samuel Palmisano, led IBM to new levels of success in the wake of the dot-com bust. He moved the company further away from hardware by selling its ThinkPad division to Lenovo and exiting disk drives. In addition, Palmisano embraced global consulting and data analytics by acquiring close to 100 firms, including PricewaterhouseCoopers. In high-tech problems, such as better water management, lower traffic congestion, and collaborative health care solutions. Its most recent campaign, entitled “Smarter planet,” highlights a few of the company’s accomplishments to date and explores IBM’s ideas for the future. Palmisano explained, “We are looking at huge problems that couldn’t be solved before. We can solve congestion and pollution. We can make the grids more efficient. And quite honestly, it creates a big business opportunity.” Today, IBM is the largest and most profitable information technology company in the world, with over $103 billion in sales and 388,000 employees worldwide. It employs scientists, engineers, consultants, and sales professionals in over 170 countries and holds more patents than any other U.S.- based technology company. From 2000 to 2008, IBM spent over $50 billion on R&D; and approximately 30 percent of its annual R&D budget goes toward long-term research.
1. Few companies have had such a long history of ups and downs as IBM. What were some of the keys to its successes? Can IBM’s plans to solve some of the world’s most challenging problems succeed? Why or why not?
2. Who are IBM’s biggest competitors today, and what risks does IBM face with its current strategy?
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