strategy report ibm

7/24/2019 Strategy Report IBM

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HWANG & Company

October 19, 2009

Case Study II:

Emerging BusinessOpportunities at IBM

Sunwoo Hwang (Senior Consultant)


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Emerging Business Opportunities

Evaluation of the EBO System

Challenge for Growth

This project purposes to specify pitfalls of the EBO system and thereby figures outstrategic alternatives to achieve the initial goal of two points of annual revenue growth.

Project Overview

| page 1

Day 2-3 (Situation) Day 4 (Complication) Day 5-7 (Resolution)

InterpretationStrategy Development

and Proposition

Can IBM achieve theplanned target of doubledigit revenue growth by

improving performance ofthe EBO system while

appropriately managingexisting EBOs?

Issue Identification &Hypothesis Generation

Introduction of Needs to improve the EBO system Implementation

Strategy Proposition

Organic EBO System

Day 1 (Overview)

Key Issue

Evaluation and Analyses

Porters 5-forces Analysis

Lessons from the EBO System

Causal Analysis with Financial Metrics

Weaknesses of the EBO System

The Three Horizons of Growth Model

Case Analysis


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Successful large firms tended to develop strong cultures that become an enormousimpediment to the companies ability to adapt, generating risks of missed opportunities


| page 2

Why do largecompanies likeIBM find it sodifficult to createnew businesses?

Large/Long

Timeframe

Small / Local Large / Leveraged

Investme

nt

Opportunity

Dumb Ideas orMandatory Projects

Project Management/Compliance Risk

Breakthrough Innovation

Uncertainty/FinancialRisk

Incremental Innovation

Missed OpportunitiesIncremental Thinking

High Growth Businesses

Strategic Positioning /Sustainability Risk

Small/Short

Timefr

ame

Source: categories of innovation and risk profiles

Question 1-1

It was becauselarge firms likeIBM

-Was Insular, inward-looking, powerfullybureaucratic, and

inflexibly hierarchical-Had a goal ofdefending corebusinesses whileincreasing productivityand profit contribution

Successful Large Institutions

Opposite toInnovation

H3

H2H1

Answer to Q1

MissedOpportunities,

IncrementalThinking


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Unlike other great technical companies, IBM has been able to transform itself into broad-based solution provider and make healthy profits along the way


| page 3

A Business Lifecycle Approach to Leading Innovation

CashFlow

Time

Lifecycle Stage 1: Idea to OpportunityLifecycle Stage 2: Business to Market LaunchLifecycle Stage 3: Market Adoption to SustainabilityLifecycle Stage 4: Growth to MaturityLifecycle Stage 5: TransformationLifecycle Stage 6: DeclineLifecycle Stage 7: Turnaround

LS1 LS2 LS3 LS4 LS5 LS6 LS7 LS4

Source: Making Strategy Real: Dynamic Capabilitiesat IBM

During a 20-year period, IBM has gone fromsuccess to failure to success; from a

technology company to a broad-basedsolutions provider. Unlike other great

technical companies such as Xerox, Philips,and Polaroid that failed to capture the

benefits of their innovation, IBM has beenable to leverage their intellectual capital into

businesses as diverse as life sciences,automotive, and banking--and make healthy

profits along the way.

TechnologyCompany

Broad-basedSolutionProvider

BusinessLifecycleDetails

Technology Company Broad-based Solution Provider

GrowthFacto

rs

Time1980s 1990s 2000s 2010s

IBMs Turnaround


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Concept of the 3 horizons of growth model was introduced to develop the EBO system.

| page 4

The Three Horizons of Growth Model

Mature Business

Growth Business

Future Business

Horizon 1

Horizon 2

Horizon 3Profit

Uncertainty / Time Horizon

Focus

Profit Impact

Outputs

Measures

Scale proven business models,increase market share, and grow toopportunity

Substantial profits may be 4~5 years inthe future

Business-building strategies:investment budget, detailed business

plans for new ventures; viable products

High revenue growthMarket share gainsNew customer acquisitionsCapital investment efficiencyExpected net present value

Extend and defend core businessIncrease productivity and profitcontribution

Current; will eventually flatten out anddecline

Annual operating plan: tactical plans,resource decisions, budgets

Traditional budgets and controlsProfitReturn on invested capitalCostsProductivity or efficiency

Test business models, prove viability,capabilities, and valueDeliberate initiatives to seed growthopportunities

Most will not succeedA few can secure longer-term future

Decisions to explore; initial projectplan, project milestones

Project-based milestonesOption valuationRate of conversion from idea tobusiness launchNumber of initiatives

1) What isthe model?

2) What arekey featuresof eachbusiness?

Question 2

Source: Mehrdad Baghai, Stephen Coley, and David White, The Alchemy of Growth (Reading, MA: Perseus Press, 1999).


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The EBO Management System has following selection and graduation criterion

Selection and Graduation Criteria of EBOs

| page 5

Selection Criteria

Strategic alignment

Cross IBM leverageNew source of client value$1bn+ revenue potentialMarket leadershipSustained profit

Graduation Criteria

Strong leadership team in placeClearly articulated strategy forprofit contributionEarly market successProven client value proposition

[Horizon 3]Emerging Business Opportunities

New Markets

New Business Models

New / Disruptive Technologies

NewMarkets

IBM Global Service

Sales, Marketing &Distribution

System &Technology Group

Software Group

[Horizon 2]Growth BusinessesResearch

Business Units

Sales &Distribution

External Sources(Customers, VC)

Pervasive Computing

Business Transformation

Consulting

Digital Media

Life Sciences

Linux

Source: How does IBM innovate Kris Pederson (VP, IBM GBS), June 2009


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The 5-forces analysis shows that the EBO system is attractive as primarily representedfrom its low internal rivalries and threat of substitutes

Analysis with the Porters 5-forces Model

| page 6

Threat of New entry (Medium)

High risk in new business initiativesNeeds to have breakthrough idea /technologyRelative Independency from existingbusinesses

Intensity Rivalry(Low)Each EBO runs independently from othersin generalLow exit barriersNo guarantee of successHigh product/service differences

Threat of substitutes (Low)Managers of existing businesses at IBMconsider EBOs as threat to core businessesPotential benefit from H3 businessestransition to H2 & H1

Power of customers (High)

No immediate incentive toshare risks embedded inEBOs regardless of theirpotential profitMostly, not specifiedcustomers in the early stageNo brand identity

Power of suppliers (Medium)

Financing matter largelymanaged by a separatefunction of corporateinvestment fund at IBMDifficulty of EBO initiative,which is determined bysenior management atStrategic Leadership Forum(SLF)Empowerment once anEBO has launchedRelatively generous

yardstick applied tomeasure performance


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However, the result of concrete evaluation reveal value sharing, leadership settlement,and graduating guideline construction of the system turned out to be weaknesses.

Evaluation of IBMs EBO System

| page 7

What is yourevaluation ofIBMs EBOSystem?

Question 4-1

Shared value

Outputs

Measures

CorporateLevel

Leadership

Team LevelLeading skill

Categories Evaluation Criteria

Clear and specific visionproposal

Guideline for leader

Strategic taskforce system

Senior managers attention

Team Leaders experience

No. of qualified leader

Review meetings for healthchecking

Progress for revenueperformance

1st Era 2nd Era 3rd Era Evaluation

1st Era: Before Thompson Era2nd Era: Thompson Era3rd Era: CSTeam Era

Weak

Strong

Strong

Strong

StrongWeak

Strong

Strong

Selecting EBO

GraduatingEBO

Formalized process foridentifying EBO

Transition guideline from H3 toH2 and from H2 to H1

Strong

Weak

Evaluated by Jaeeun Song


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The exposed weaknesses of the system is summarized as below, asking a question ofwhether or not the expected poor leadership caused the problem on the EBO system

Weaknesses of the EBO System

| page 8

Critical Tasks Structure

CulturePeople & Skills

Not manyqualifiedleaders

Vague TransitionGuideline among

Horizons(H3 H2, H2 H1)

What is yourevaluation ofIBMs EBOSystem?

Question 4-1

Summary of Exposed Weaknesses

Didnt the EBOsystem run as goodas senior

managementhoped because of

IBMs poorleadership?

Hypothesis

No clearly specified

vision or team target

Leadership


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It seems from the financial metrics that the former CEO Gerstner had better managedIBM than current CEO Palmisano. Had the financial metrics been driven by leaderships?

Superficial Financial Analysis

| page 9

85

Chronological Snapshot Financial Metrics by leaderships

93

99

00

01

02

03

04

05

Gerstner took over at IBM

EBO Management System

was created

Gerstner retired from IBM

Palmisano took over at IBM

This HBS Case was published

IBM enjoyed 40% of thecomputer industrys sales

09

Revenue

1993 2001

Others Sof tware Service

63

86

27%

41%

15%

(Unit: Billion $)

30

173

1993 2001

Market Cap(Unit: Billion $)

12

110

1993 2001

Stock Price(Unit: $)

(1993~2002)

Revenue Net Income(Unit: Billion $) (Unit: Billion $)

(2003~present)

Gerstner

Palmisano

8

12

2003 2008

86 83

2003 2008

89

104

2003 2008



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No. Financial metrics show less than 1% CAGR both in revenue and net income between1999 and 2005, the period during which both CEOs were in office 3 years each

Superficial Financial Analysis

| page 10

85

Chronological SnapshotRevenue

Net Income

Financial Metrics during the Case (EBO) Period

(Unit: Billion $)

(Unit: Billion $)

93

99

00

01

02

03

04

05

Gerstner took over at IBM

EBO Management System

was created

Gerstner retired from IBM

Palmisano took over at IBM

This HBS Case was published

IBM enjoyed 40% of thecomputer industrys sales

09

88 88 86 81 89 96 91 9199 104

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

8 8 85

8 8 8 910

12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


9777

110

71 8692 77

93 105 83

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1999 2002 2005

CAGR: 0.6%


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Key Lessons that we have learned from EBO System are as follows. For new businesscreation, we need to commit ourselves to revolutionary goals but take evolutionary steps

Key Lessons from the EBO System for New Business Creation

| page 11

What are thekey lessonsfor newbusinesscreation?

Question 4-2

Commit to revolutionary goalsbut take evolutionary steps.

Source: Lessons from IBM emerging business opportunities Blog, OneRiverRed, 2009

Thorough internal assessment of the rootcauses why you haven't been able togrow new businesses

Broad senior-level management buy-in

Needs to start small

Lessons for getting started with EBOs

1

3

2

Active senior management sponsorship

Disciplined mechanisms for cross-company alignment actionslinked to critical milestones

Resourced fenced and watched to avoid premature cuts

Continued evolution

Lessons for operating and sustaining EBOs

1

2

3

4


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We see slightly different lessons from the new approach of IBM to Strategy. It stressesthe balanced leadership and the importance of alignment among the components

IBMs New Approach to Strategy

| page 12

Leadership by general managersrequires both strategic insight

and execution

Lessons from the new approach

Anchorage on either aperformance or opportunity gap

The importance of alignment orcomplementarities among thecomponents.

Performance gap: a shortfall between expectedand actual results (Leaders dissatisfaction)

Opportunity gap: a discrepancy betweencurrent business results and those achievablewith a new business design (Aspiration)

1

3

2Leadership

Strategic Insight

Strategic Execution

Strategic Intent

Innovation Streams

Business Design

Market Insight

Critical Tasks

People and Skills

Culture

Structure

Sensing NewOpportunities

Seizing NewOpportunitiesEmerging

BusinessOpportunities

(EBOs)

StrategicLeadership

Forums (SLF)

CorporateInvestment

Fund

Source Dynamic Capabilities at IBM: Driving Strategy into Action - J. Bruce Harreld

TechnologyTeam

StrategyTeam

Integration& Values

Team

Deep

Dive

Conceptual Framework of the IBMs New Approach to Strategy


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Next, we propose to build an organic EBO system nurturing H3 businesses by exploitingboth internal and external resources

Organic EBO system

| page 13

H3Businesses

Feeding fromInternal

Resources

Feeding fromExternal

Resources

H2Businesses

H1Businesses New Markets

New BusinessModels

New / DisruptiveTechnologies

Organic EBO System

Closed Innovation Open Innovation

Inter-organizationalInnovationH1-incubated H3s

H2-incubated H3s


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End of Document

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