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Dynamic Capabilities at IBM

"You make the right decision for the long run. You manage for the long run, and you continue to move to higher value. That's what I think my job is."¹

Virginia Rometty, IBM chief executive officer.

JEWEL SAMAD/AFP/Getty Images

LED BY CEO Virginia Rometty, the IBM of today is an agile and nimble IT services company. Rometty was promoted to CEO in 2012 from her position as senior vice president of sales, marketing, and strategy. Rather than facing just one technological transformation, IBM and its clients are currently facing three disruptions at once:

1. Cloud computing: By providing convenient, on-demand network access to shared computing resources such as networks, servers, storage, applications, and services, IBM attempts to put itself at the front of a trend now readily apparent in services that include Google Drive, Dropbox, or Microsoft 365. Increasingly, businesses are renting computer services rather than owning hardware and software and running their own networks. One of the largest cloud-computing providers for businesses is Amazon Web Services (AWS), which beat out IBM in winning a high-profile CIA contract. This was seen as a major embarrassment given IBM's long history of federal contracts. Microsoft with its Azure cloud offering is another potent competitor, especially after CEO Satya Nadella focused Microsoft on a "cloud first, mobile first" strategy.

2. Systems of engagement: IBM now helps businesses with their systems of engagement, a term the company uses broadly to cover the transition from enterprise systems to decentralized systems or mobility. IBM identifies the traditional enterprise system as a "system of record" that passively provides information to the enterprise's knowledge workers. It contrasts that with systems of engagement that provide mobile computing platforms, often including social media apps such as Facebook or Twitter, that promote rapid and active collaboration. To drive adoption of mobile computing for business, IBM partnered with Apple to provide business productivity apps on Apple devices.

3. Big data and analytics: IBM now offers smarter analytics solutions that focus on how to acquire, process, store, manage, analyze, and visualize data arriving at high volume, velocity, and variety. Prime applications are in finance, medicine, law, and many other professional fields relying on deep domain expertise within fast-moving environments. IBM partnered with Twitter to provide IBM's business clients big data and analytics solutions in real time based on the vast amount of data produced on Twitter.

IBM's Core Competency: Providing Solutions

At its core, IBM is a solutions company. It solves data-based problems for its business clients, but the technology and problems both change over time. As an example, Page 467IBM helped kick-start the PC revolution in 1981 by setting an open standard in the computer industry with the introduction of the IBM PC running on an Intel 8088 chip and a Microsoft operating system (MS-DOS). Ironically, in the years following, IBM nearly vanished after experiencing the full force of that revolution, because its executives believed that the future of computing lay in mainframes and minicomputers that would be produced by fully integrated companies. However, with an open standard in personal computing, the entire industry value chain disintegrated, and many new firms entered its different stages. This led to a strategic misfit for IBM, which resulted in a competitive disadvantage.

Rather than breaking up IBM into independent businesses, Lou Gerstner, installed as CEO in 1993, refocused the company on satisfying market needs, which demanded sophisticated IT services. Keeping IBM together as one entity allowed Gerstner to integrate hardware, software, and services to provide sophisticated solutions to customers' IT challenges. IBM was quick to capitalize on the emergence of the internet to add further value to its business solutions. The company also moved quickly to sell its PC business to Lenovo, a Chinese tech company, in 2005 when substitution from tablet computers was just beginning to impact demand. In 2014, IBM followed up on this transaction with the sale of its server business also to Lenovo.

Exhibit MC7.1 shows IBM's dynamic capability to successfully transform itself multiple times over its more than 100-year historya history with periods of major disruptions in the data information industry, from mechanical calculators to the internet. In contrast to IBM, note how at the bottom of Exhibit MC7.1, strong competitors in one period drop from significance when a new wave of technology emerges.

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EXHIBIT MC7.1 IBM Navigates Wave after Wave of Technological Change

Source: IMB Prospectus (2004), "Evolution of the IT industry, Understanding Our Company," 5. Vertical axis shows total industry revenues. IBM relied on industry growth data from IDC (2004), 40 Years of IT: Looking Back, Looking Ahead, An IDC Special Edition Executive Whitepaper, John Gantz, chief research officer, and IBM's own records. Information in the last column to the right derives (research and depiction of 2018 wave) from author's analysis and estimate of industry growth from various industry sources. Visual emphasis added to IBM to show its ongoing competitive standing.

Challenges Ahead

Critics of Rometty's strategic approach, including the activist investor Mark Cuban, point out that IBM was slow to take advantage of these mega-opportunities, and they continue to watch IBM's stock performance with skepticism. The critics grew louder when Rometty received a pay increase and a $3.6 million bonus for her 2014 performance, during which revenue dropped about 6 percent and net income 27 percent. Overall, IBM's market cap plummeted by 50 percent: from a high of $240 billion in the spring of 2013 to some $120 billion early in 2016. And revenues for IBM have fallen for five straight years, from a high of $107 billion when Rometty became CEO to $78 billion in 2017. During the same period, IBM's (normalized) stock price fell by more than 30 percent, while the tech-heavy NASDAQ-100 index rose by over 110 percent during the same period. Thus, IBM is clearly underperforming the wider market by a huge margin and has done so for quite some time. Some critics even go so far as to call for a replacement of Rometty.

Rometty, however, stays committed to IBM's new strategic focus and argues that she is transforming IBM for the long run. She views the most recent waves of technology disruptions as creating major business opportunities and has made sure that IBM invests heavily to take advantage of them. IBM has trained all of its consultantsover 100,000in these three areas to help its business clients with their own transformation. Moreover, Rometty ended the option of IBM employees to work from home. In an attempt to foster innovation through co-location, she gave all IBM employees a choice: Start working from a regional office Monday through Friday, or leave the company. This came as a shock to many IBM employees as it has been a pioneer in providing telecommute options for its employees for decades. Indeed, IBM's strategic initiative of "the anytime, anywhere workforce" was extremely popular among its employees. Until recently, IBM believed that a distributed workforce, with many employees working from home, allowed it to further perfect the technology solutions it was providing for its customers with similarly distributed workforces.

Questions:

1. What is IBM's current market position?

a. Competitive Disadvantage

b. Competitive Advantage

c. Competitive Parity

d. Sustained Competitive Advantage

2. Explain your reasoning from question 1.

3. Identify Opportunities and Threats for IBM based on what you have read.

4. Based on the case, what are some of the Strength and Weaknesses from IBM?

5. Looking at IBM's track record of technological transformation depicted in Exhibit MC7.1, which role did dynamic capabilities play in these successful transformations?