IBM ex-COO Sam Palmisano's Leadership Style: A Case Study

As we know, business level strategy deals with how the company will compete, specifically looking at how our company positions itself against competitors. Our company, IBM, has been known to take big risks and bets to establish ourselves over our competitors. For some background, not long after the beginning of the company, IBM failed to dominate the industry of the U.S Air Force’s automated defense system even after we had access to this research. A company known as RAND Corporation became the front runner and programmed these computers.

Although this seemed like a setback, IBM had a position of the largest of all 8 computer companies, having 70% of the market share. This is just an example of how IBM has been challenged in its history and forced to overcome and adapt to its competitors.

The current strategy has focused in on what our company calls “strategic imperatives.” These main focus points were brought about due to the continuation of IBM’s strategy already in place by previous CEO, Sam Palmisano.

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Since implementing these new imperatives, there has been a growth in the company, somewhat positively positioning itself against its competitors. I think the specific strategy IBM has narrowed in on is differentiation. The attempt to be unique from other companies in a way that provides value to the customer is exactly what IBM has done through cloud computing, big data, and systems of engagement. These three aspects are what the CEO thinks are the major issues in the technology and service industry, so establishing a great platform will differentiate and put the company well above its competitors.

Corporate level strategy has more to do with where the company will compete and how we will create value through coordination of market activities through the specific industries IBM will be in. As touched on above, IBM has positioned itself in the specific industry of technology and service while also specializing in the 3 strategic imperatives. The company practices horizontal integration by merging with competitors of the cloud service models such as Amazon, Google App Engine, Microsoft Software and more. However, they relied on vertical integration strategy through the 70’s in which they did most of their work themselves. Not long after their largest competitor, the Apple computer was invented, they realized that vertical integration would no longer be of value in the growing and ever changing computer industry. They also demonstrated horizontal integration like in 2004 when the company invested in Lenovo and acquiring smaller companies in the similar fields.

IBM went through several strategic shifts over the last 10-20 years. Beginning in 2003, CEO Sam Palmisano shifted the e-business strategy even deeper than before. His main focal points were hardware, software and services, aiding in making their IT service one of the largest. His shift really dug into these three aspects in order to have “software play a bigger role.” Furthermore, Palmisano acquired 54 companies in the corresponding fields in order to aid in the shift. The change transitioned the entire position of the IBM company, moving from a multinational company to a global enterprise, showing that the company itself could react to technological change.

The next strategic shift occurred when our current CEO Rometty took over for Palmisano. Before the position of CEO, she worked as Senior Vice President and assisted in creating the last strategic shift alongside Palismano which contributed to her hesitancy to move away from this culture. It was at the point when the company failed to see growth that Rometty decided to implement the next strategic change, focusing on the strategic imperatives as mentioned in part a.

I feel as if IBM was more reactive, responding to the stimuli instead of creating the situation. For example, the first strategic shift was prompted by the technological change and challenges of globalization. These stimuli occurred and thus led IBM to change their ways instead of IBM being the forerunner in software. Secondly, the strategic shift under Rometty occurred due to previous problems in the company and a struggle for new direction. Again in this case, something had to happen in order to prompt a shift in the company. I think the lesson that can be learned is that simply acting on stimuli can cause the company to fall behind. In the future, the company should continually change based on external and internal drivers in order to stay ahead. These changes should be thoroughly thought through, however, staying in the same place while the world around you is progressing will not lead the company to growth.

As mentioned, IBM’s change throughout the company’s life has been prompted by external impetuses. Dates and major events in history have forced growth in the company and developed into what it is today. The Social Security Act of 1935 is one of the major events that stimulated change and opened the door of opportunities for the company due to the fact that IBM was able to secure employment data for a mass amount of people. This was the largest accounting event and as a result made way for more government contracts like one with the U.S air force for computer development. World War 2 was the external driver that sparked this contract, aiding IBM in becoming one of the largest computer companies over its competitors and generating mass profit.

Another significant external factor that was a driver of change is when Steven Jobs and Steve Wozinak created the Apple computer. The creation of the personal computer and the hesitancy to move with this technological change virtually led to their 8-billion-dollar loss. This is an example of how not moving with changes in the industry can lead to a disrupt in the company. The fact that IBM underestimated the power of the personal computer market made them late to the game, creating their first pc in 1981. The delay of this creation would make it impossible to lead the market.

As of more recent, the development of the cloud computing initiative became a large external driver for IBM, changing mainframe computers to personal computers with shareable resources. The two types of clouds, public and private, are what drove IBM in their shift in the company and advancement in the cloud. Private requires much more work and investments for the company itself as opposed to public cloud which is easily accessible by all. IBM’s creation of their first private cloud in 2007 was their way of exploring the technological change occurring in the external environment.

The role of leadership in managing change at IBM started with John Akers when he realized the companies mistake in being hesitant in the pc market and was forced to make some changes. As a leader, he saw the competitors around him leading different aspects of technology and mimicked them by dividing IBM into more niche, specific units. This would allow the company to have the capability to compete against these companies in a more effective way. The next leader and CEO, Louis V. Gerstner took on a role of leadership of opposite of Akers, dissolving the previous dividing units of IBM.

Gerstner was able to analyze the company and recognize this tactic made them inflexible, thus moving back to a more centralized position as one unit. Gerstner definitely demonstrated he was able to take risks and change the company based on the changing environment by even developing a separate sector solely dedicated to keeping up with the latest business opportunities. Keeping up with the external drivers of the technological industry has proven to be IBM’s biggest challenge, where this group might assist in moving them from being reactive to proactive. Gerstner had an effective role as a leader, completely turning around the company from when it seemed to be too far behind or at too much of a loss. His demonstration of situational awareness and focus on results is what drove the company back to a position of success.

IBM being a prominent technological company has several strengths, one of which being its brand name and brand awareness due to its position of one of the largest technological companies and industry dominance. They have recently been able to build their brand by becoming strong in communication and interaction with its customers. This is a strength because it builds brand loyalty, retaining its customers, while also ensuring information is available precisely when it is needed. This strength has been further built upon by its creation of Watson in 2011, an artificial intelligent computer system. Watson will assist in the communication aspect by engaging with humans making business decisions. Watson also added to the brand awareness when it competed on Jeopardy by displaying its perception in answering questions with wit and with efficiency. IBM’s cloud computing also became a strength with the development of the cloud and cloud computing centers in 2008. The company centered much of its business efforts around the cloud by helping customers understand and configure the cloud, forming alliances with Google, and even developing certification programs. IBM clearly put a great deal of effort into the cloud initiative and is continuing to make improvements and efforts.

Although the brand has built itself up to be so successful, its size could actually be one of its weaknesses. The strategic leverages CEO Rometty has put into play could make it difficult for all 100,000 employees to be adequately trained in these three growth areas. The size of the company could also cause delay in responding to customer’s specific needs, which is a problem if they are trying to build their brand and brand loyalty. They will need to find a way to make their massive company seem more personable and change in step with the industry to continue increasing in profits.

The opportunity for growth and expansion is always available for IBM despite their already massive size. Regarding the cloud initiative, they looked at creating a public cloud location which would be used for customers to get the help they need with their private cloud but in a public atmosphere. The company also has the opportunity to expand internationally and have projects located in countries such as India and China.

Some threats exist in direct conflict to its double-digit growth projections needed. There is a threat of alienating customers if the company focuses on the high margin products.

There is also the threat of profit loss because of less focus internationally since 2009. The sole focus on North and South American sales has led to a loss in market share. Yet, China has made known they want to develop their own IT industry and wants to partner with companies to do so. IBM has the threat of profit loss if they don’t expand international, but also the threat of diluting revenue if they partner with China. The threat summed up can be said that the global environment is becoming more complex. Lastly, there is a threat of their Watson creation being seen as unethical and unpredictable. Due to the fact that Watson is of artificial intelligence, people of power are raising concerns which will as a result can cause consumers to worry. For example, the CEO of Tesla Elon Musk, has a raised concerns and because of his huge social platform and his business man status, people will naturally raise concerns alongside him. Positive results have been observed only one year after the creation of Watson, however 5 members of congress have taken their position against it which, again, may raise some concerns.

As all of the following forces increase, the overall attractiveness of the technology industry will decrease and seem like a threat. The first force of Porters 5 forces is threats of new entrants and barriers to entry. There would be high risk for a company to enter into technological industry that IBM is already well established in. Several barriers exist that prevent other companies from perhaps entering the industry, being advantages independent of size, brand loyalty, technology, and the very high startup costs. To further prevent anyone from entering the industry IBM will spend more to keep their current customers. However, it may be easy to copy or recreate IBM’s products seeing that they are technological and not very unique compared to other technology companies which may be a reason competitor’s would enter.

Secondly, the bargaining power of buyers is dependent on the customer and if they want either low prices or high quality products. The bargaining power would be a weak force since there are many buyers not buying in large quantity. It would moderate in the aspect of standardized or undifferentiated commodities because technology can be easy replicated yet will have some uniqueness based on the company. The size of order is also a moderate force due to the fact that large companies will most likely order a large order from IBM.

The bargaining power of suppliers has the power to lower industry costs in terms of price and quality. IBM has a high supply which would be a weak force because a change in a single supplier’s operation would have no effect on IBM’s large supply as a whole. No substitutes exist for the IBM’s product which makes the bargaining power strong. Overall, the bargaining power of suppliers is somewhat high and should be a consideration for the company.

A threat of substitutes would exist when services outside of the industry could do the same thing as the actual service and product. The cost of switching to a substitute is somewhat moderate, thus making this force moderate. The attractiveness of price and product trade off would be moderate as well due to the fact that there are substitutes customer would consider before buying an IBM product. Overall, substitution should influence IBM as well.

Lastly, the rivalry among competitors has to do with companies in the same industry of technology competing for market share and profitability. Many of the products are similar and imitable which causes the rivalry to be more intense.

The trend in IBM’s financial performance over the last couple of years is trying to recover from the 6 years of diminishing quarterly sales. According to exhibit 4, IBM has been at a loss of net income from up until 2014. As CEO, Ginnie Rommetty has been tasked repositioning the company and turning their loss into a profit. She has done so by focusing on the strategic imperatives of cloud computing, data analytics, and security and has since seen a rise in profit. She believed that these three aspects are the main issues in technology today, that customers need help with them, and that they are the largest business opportunities for their company to potentially turn them around. Centering the company around these ideals have since launched the company into its 3rd consecutive quarter of gains. It was in 2014 that the new cloud computing had grown 60%, seeming like a huge success, although only making up 7.5% of their total revenues. Rometty knew that in order to make profits on this initiative it might take time and she was fine with waiting. The initiative and patience has paid off, their shares going from being down 6%, to rising 2.8% and their sales in system rising as well.

Based on my analysis my recommendations for Rometty would be to always stay up to date on what is currently happening and shifting in the technological industry. This will prevent the company from falling behind and being unable to establish dominance in the technological industry. It is important to be situationally aware and externally aware when running a company in order to continue being a leader in the industry. People want the latest, up to date technology so it is highly important to keep up with trends and what competitors are doing especially since the products are easily imitable. The establishment of a division under CEO Gerstner which was solely focused on new business opportunities that may arise proved to be a huge success because he turned the company around when it was far from being an innovation leader. Having people dedicated to scoping out new business opportunities should be established once more under Rometty as it was Gerstner.

Next, IBM could counterbalance the negatives that come with the vast size of the company by creating more new divisions. For example, it was mentioned that IBM struggled with meeting the customers’ specific needs and providing the customer service necessary to build lasting relationships. A new division could perhaps be created to be dedicated to coming up with ways to improve the customer experience which will in turn build the brand loyalty they are working toward. Instead of it being about a one-time transaction, the sale should be about establishing a relationship and making the customer feel valued. This will also make them less likely to switch to a competitor due to the similar cost and not much differentiation in technological products.

I also think that the creation of Watson has proved to be very successful, having 386 universities in collaboration with it as well as 34 million possibly benefitting from the Watson through WellPoint health plans. I think that because of this success, the company should focus to the continue to make improvements on this artificial intelligence to keep the success growing. They could start by answering the ethical questions that have been raised about Watson, but left unanswered. Although this might not be a pressing issue, it is a small area of improvement that could potentially increase profit. Any area where there is opportunity to increase profit should matter and can greatly contribute in the long run.