By students, for students.

Imperilled Business Machines: the rise and fall and rise of IBM

In Finance, Management on January 21, 2013 at 11:14 am

IBM_PC_5150

IBM’s history reads like a thriller.

From its 1911 foundation, its character quickly emerges: professional, innovative and enigmatic – operating under the motto: ‘THINK’. From the 1950s to the 1980s IBM’s heroic rise was marked by large and farsighted investments. Under Thomas J Watson Jr. IBM produced the System/360 computer, computer languages, the hard and floppy disks, the supermarket checkout, an early ATM. The IBM PC stands out even among these impressive contributions. The computer was the most successful technology introduction of its time. Within a single month, unit sales had exceeded 5 year forecasts. In 1990, the company was the 2nd most profitable enterprise in the world and was believed to be set to benefit from the continued growth of the IT industry.

However, just as IBM was being lauded by many commentators as the ‘greatest company in the world’, the company succumbed to deep-seated structural problems and started bleeding profit at a startling rate. In 1991, the company’s earnings dropped to -$2.8bn, and would drop by 60% during each of the next 2 years.

IBM problems

(Click to enlarge) 

Beginning from basics

After initial attempts of cost cutting, which saw 40,000 leave the company, Loius Gerstner was appointed as the first outsider CEO in IBM’s history. While business analysts questioned whether Gerstner could save the technology multinational without an industry background, insiders knew that the real purpose of the appointment was to break the group up for sale.

Gerstner took control in April 1993 and began a revaluation of IBM’s competitive advantages from the perspective of their clients. In the first 2 months, Gerstner travelled thousands of miles visiting customers and analysts to one conclusion:

“They said repeatedly, ‘We don’t need one more disk drive company, we don’t need one more database company or one more PC company. The one thing you guys do that no one else can do is help us integrate and create solutions.’”

At the end of 1993, the CEO understood that selling of IBM’s businesses would be the worst possible course of action. Customers valued the scope of IBM’s products and expertise. He would respond by pushing for ‘One IBM’:

“[We had to change] the view that IBM was a group of fiefdoms. We needed to have a sense that we were going to operate as a team, as a global entity ….”

IBM solutions 1

IBM solutions 2

(Click to enlarge)

One IBM

Gerstner led IBM to transform its organisation, processes, culture and strategy to better serve customers. His and York’s cost control and efficiency drive made the group profitable: posting a profit of $382m in 1993, rising to $5bn by the end of 1994. IBM’s shift also complemented that of the global economy as a whole, as services became increasingly important in the 1990s. By 2000, IBM Global Services had grown into the world’s largest IT consulting and web services organisation, contributing 38% of IBM’s $88.4bn revenue.

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