Introduction
Strategic Management is an area which bears great significance in the corporate world since it helps executives and companies, in general, to adjust their processes according to specific strategies to attain better performance or profitability. This discipline came to prominence after WW2; one of its main contributors was Alfred Chandler, a historian who studied how strategic plans influenced American firms’ organizational structures in the late 19th century (Carter, Clegg, and Kornberger, 2008).
Over time, strategic management has been significantly expanded, and today, there are several schools of thought in this field, the main ones being the Design and Planning School, the Positioning School, and the Cultural School (Mintzberg, Ahlstrand, and Lampel, 1998). Using tools and ideas offered by these schools, one can analyze various case studies to better understand how strategic management affects organizations’ performance. One of such cases concerns IBM’s corporate profit disaster, which became a result of its failure in the industry of personal computers (Lynch, 2015). The Positioning School provides the best theoretical frameworks for analyzing this case, and the Design and Planning School offers better strategies for the company to espouse. Moreover, IBM’s governance is assessed from the shareholder value perspective.
Choice and understanding of theory and its history, and use with the case study
The three main theoretical schools of strategic management, namely, the Design and Planning School, the Positioning School, and the Cultural School, allow viewing companies’ strategic decisions from different angles. Nevertheless, the Positioning School provides better tools for analyzing the case of IBM, including assessing the current position of the company and identifying possible solutions which are available to it. This school is significantly influenced by the ideas of Michael Porter and rests on the premise that a strategy must be developed in response to the existing competition in the market (Mintzberg, Ahlstrand, and Lampel, 1998).
The Positioning School postulates that a company’s position in a particular industry can be analyzed to determine factors that affect it. Based on this information, a generic strategy can be selected (Mintzberg and Lampel, 1999). Despite such simplicity, the Positioning School’s approach can yield positive results since it utilizes reliable data and a set of standard strategies that have been proven successful in different scenarios. Moreover, this approach is especially relevant for large enterprises, making it suitable for the IBM case.
The choice of the Positioning School over the Design and Planning School was motivated by the IBM case study itself since the situation presented there concerns primarily external factors. The Design and Planning School promotes the SWOT analysis as a basic framework for evaluating a firm’s internal strengths and weaknesses and ignores the competition in the industry (Kokemuller, n.d.). The Positioning School and the five forces model by Porter can be extremely helpful in determining IBM’s position in response to its competitors and identifying opportunities for growth.
The reason why I opted for the Positioning School instead of the Cultural one, namely, the resource-based model (RBV) it utilizes, is because the latter is too focused on the internal processes (Mohiuddin, 2012). The Cultural approach helps learn the existing situation in the company but cannot assist in finding ways to tackle external challenges. The IBM case deals with the problem of the growing influence of competitors, and applying the RBV model to it would not provide any understanding of the state of competition in the industry.
After learning about the Positioning School for the first time, I noticed that it was similar to the Design and Planning school. This was not unusual since they both advance the same normalizing perspective, which explores the idea of how a strategy has to be formulated (Peleckis, 2015). Yet, after reading more literature on the subject, it became clear to me that the Positioning School developed later and significantly expanded the area of strategic management.
Compared to the Design and Planning, the Positioning School focused on the process of strategy formation as well as on the content. It also proposed a notion that a limited number of strategies could be applied to any company, the Design, and Planning School thinkers believed that there was no limit to the number of strategies. For example, Porter (1985) proposed three generic strategies, including cost leadership strategy, differential strategy, and focus strategy. He also identified five forces, which influence any given industry’s competition, which is an exceptional tool for analyzing the current strategic position of a company (Porter, 1980). Thus, learning about the Positioning School expanded my understanding of strategic management and allowed me to observe a historical development in this sphere.
The IBM case can be easily described using the Positioning School perspective and specifically the ideas of Michael Porter. According to Porter (1991), every successful company finds itself in a better position compared to other firms in the industry since it has a competitive advantage which stems from either lower costs or the ability to differentiate. During the 1980s, IBM enjoyed its competitive advantage due to the unique IBM-PC platform it developed and thus could charge a high price for it. Nevertheless, the external pressure from the competitors who managed to devise cheaper and better alternatives based on the IBM platform erased this competitive advantage.
The five forces model provides a reliable framework for analyzing IBM’s current strategic position, examining the bargaining power of buyers and suppliers, the threats of new entrants and substitute products, and rivalry among competitors (Harvard Business School, n.d.). Applying this model to the IBM case will expose all the aspects of the industry the company is in and present the information necessary for making the next strategic decision.
Application of strategy to understanding the current strategic position of the case study
As mentioned earlier, the IBM case will be best analyzed using Porter’s five forces model, which will allow identifying the company’s strategic position in the industry of personal computers. To my understanding, this model is an exceptional tool for any company which wants to get a full picture of its position in the industry.
The first force which has to be analyzed in relation to the IBM case is the bargaining power of buyers or customers, which constitutes their ability to simultaneously bring down prices and increase the quality of products (Porter, 2008). The industry of PCs in which IBM is involved provides substantial power to buyers since there is considerable competition among a variety of companies, including, apart from IBM, Apple and Commodore (Lynch, 2015).
Moreover, users who have replaced their IBM computer, which has Windows, with an Apple computer, which has its proprietary operating system, will not experience any difficulty in the process. This increased level of standardization allows customers to change their brand personal computers more easily. As a result of this situation, IBM is placed in a position where it is completely controlled by the customers’ behavior.
The next force is the bargaining power of suppliers, which manifests itself in their ability to receive more value by increasing prices for their components and materials and shift costs onto industry players. In the IBM case, suppliers, namely, Microsoft and Intel, have immense power over manufacturers of personal computers and can significantly raise prices for their products. IBM is under severe pressure from its suppliers and cannot gain an advantageous position by simply negotiating a lower price.
The concentrated industries of operating systems and chips where large companies such as Microsoft and Intel have the largest share of the market have complete control over the PC industry. Businesses which produce computers simply have no other alternatives, which leaves them only two choices, either to become self-sufficient or continue paying extra to suppliers.
Another force, according to the model, is the threat of new entrants, which depends on how easy it is for new companies to enter the industry and puts additional pressure on costs and prices. In the IBM case, the barrier of entry is rather low since all of the components, including hardware and software, of personal computers, are readily available for purchase from suppliers. The additional threat may come from Microsoft and Intel, which may decide to create their own personal computers and implement their latest technologies in them. The demand for personal computers in the early 1990s was extremely low, and the possibility of new entrants would reduce the profitability of the industry in the future.
The threat of substitutes, which are products that can perform a similar role or functions, is low in the industry of personal computers. Mainframes also produced by IBM can hardly compete with personal computers because of their large size and capacities, which are excessive for personal use. This exclusivity of personal computers makes the industry a promising area which can potentially bring many benefits in the future.
Finally, the rivalry among existing competitors is high in the PC industry since there are several large companies that sell their products to a small number of customers. Companies cannot bring down prices because of the suppliers and are stuck in a position where they have to find other means to market their products. IBM failed at successfully competing in the market of personal computers, and this resulted in a corporate profit disaster for the company.
Using the five forces model, it was possible to analyze the current strategic position of IBM in the PC industry. The obvious limitations of this approach are a narrow focus on one particular industry and the lack of tools to assess the internal processes of the company. Nevertheless, the analysis shows that IBM does not have a competitive advantage in the PC industry.
Understanding of Governance, Ethics or Corporate Social Responsibility
IBM is a large corporation which primarily concerned with making products which would yield good financial results. The problems of corporate responsibility are important for the company but do not constitute its priority, while governance is an area which is especially relevant for companies of the size of IBM. In such organizations, all the major strategic decisions are within the purview of the executives and CEOs, which puts them in a position where their choices affect their shareholders.
Thus, the shareholder theory should be considered as the basic approach to governance in the case of IBM. This approach postulates that the sole responsibility of a company’s managers is to maximize value for shareholders who represent a group in whose interest the company functions. Moreover, if the business succeeds in delivering good value for shareholders, all other parties involved, such as consumers, employees, and suppliers, will also benefit from it (Lazonick and O’Sullivan, 2000). The strategies employed by executives in the companies which espouse the shareholder value model are all aimed at achieving maximum profits since otherwise they risk losing their shareholders.
IBM has been paying dividends since 1913, and it is clear that the firm’s main objective has always been to deliver as much profit to its shareholders as possible (Beyman, 2017). As it is described in the case, in the 1970s-80s, the company was a global leader in providing reliable mainframe computers and generally was one of the most technologically-advanced businesses in the world (Lynch, 2015). The management’s strategy was simple and implied taking advantage of the current success, not paying much attention to new spheres. During this period, the company’s executives were successfully pursuing the shareholder value model, and IBM was able to pay good dividends.
This situation constituted effective governance on the part of the managers since they fulfilled their main objective of maximizing profits for shareholders. Yet, after entering the personal computers industry, the management made a series of mistakes, which prevented the company from retaining a competitive advantage in this sphere. The decisions not to patent their IBM-compatible platform and not to sign contracts with Microsoft and Intel to provide IBM with an exclusive right to their products were not in the interest of shareholders.
The loss of opportunities resulted in the corporate profit disaster, which negatively affected the dividends paid to shareholders and demonstrated the fact that governance at IBM was ineffective. The management ultimately failed at devising and implementing a strategy for the company’s activity in the industry of personal computers, which would maximize profits for shareholders and instead put IBM in an unfavorable strategic position. Moreover, apart from the failure to develop an appropriate strategy for personal computers, the company faced challenges with local subsidiaries and the inability to respond to technological changes (Lynch, 2015).
Ultimately, IBM managers were not working in the best interest of their shareholders. The subsequent hiring of a new chief executive was done not only because there was a need to tackle the aforementioned challenges but also to make the company pursue the idea of shareholder value. Thus, it can be inferred that the ineffective governance and poor strategic decisions had wider implications for profits of the company and shareholders which eventually caused the change in the management.
The shareholder value model has certain weaknesses and limitations, for which it has been criticized by several researchers. For example, the model is prone to conflicts of interest between the management and shareholders since the former may abuse their position in order to gain benefits. This situation is described by the agency theory, according to which agents who are managers can employ strategies which involve risk or inflate share prices using accounting tricks (Clegg et al., 2016).
The problem may be potentially solved by appointing shareholders as executives, yet they often lack competencies which are necessary for running a company. Another point made by critics of this model concerns its neglect for social welfare and corporate social responsibility to the company’s workers, customers, suppliers, and even environment (Martin, Petty, and Wallace, 2009). Proponents of this view claim that businesses, in their attempt to maximize profits for shareholders, can abuse the rights of their employees and take advantage of their clients. This issue is particularly important in the current social environment when the general public often decides to hold companies accountable for their actions.
Future strategic direction
The five forces model analysis has shown that IBM occupies an unfavorable strategic position and does not have a competitive advantage in the sphere of personal computers. Yet, it still retains leadership in the segment of mainframe computers, which generates a lot of profit for the company. Based on this information, there can be several strategies implemented by IBM in the future, specifically using both the Positioning School and the Design and Planning School approaches.
The first strategy which could be potentially utilized by IBM in response to its failure to produce a successful personal computer and make it competitive is abandoning this sphere and focusing on the mainframes instead. This approach follows one of three generic strategies proposed by Porter, namely the differentiation strategy, which implies developing products with unique characteristics which reflect the company’s expertise (Mintzberg, Ahlstrand, and Lampel, 1998). According to one study, this strategy, compared to the cost leadership one, allows sustaining profitability for longer periods of time (Banker, Mashruwala, and Tripathy, 2014).
For IBM, implementing this strategy would mean investing its resources in the development and manufacturing of mainframes, the industry where they possess a competitive advantage. This would ensure the company’s ability to generate stable profits in the future and would make them stop losing money in the sphere of personal computers since it does not provide growth opportunities. The decision to opt for this strategy can also be supported by the fact that IBM tried to employ the differentiation strategy with personal computers by developing its own software and hardware but failed.
Another approach which can be employed by IBM belongs to the Design and Planning School and specifically to Ansoff and his product matrix, which proposes several options to a business wishing to improve their profitability (Meldrum and McDonald, 1995). The IBM case with personal computers concerns a situation which involves an existing market and an existing product, and the best way here would be the market penetration strategy. IBM can increase sales by marketing personal computers to the segments of society which constitute the majority of buyers of its PCs.
It also can attempt to negotiate lower prices with their suppliers, Intel and Microsoft, by buying larger quantities of their products and thus decrease its manufacturing costs. Moreover, IBM can offer discounts to its customers if they decide to buy their personal computers in bulk or recommend them to others. This set of techniques may be used as a part of a long-term strategy to gain a larger share of the market by selling more products and thus receive a competitive advantage. I personally believe that this option is the best solution here because it provides better flexibility and allows IBM to maintain its presence in a promising industry.
The theory of shareholder value fits IBM, and the company should pursue the idea of maximizing profits for its shareholders, yet governance practices have to be improved. The disaster with personal computers at IBM occurred as a result of poor strategic management on the part of executives, and the company must do everything to prevent such events from happening in the future. For example, shareholders can form a new board of directors who will be tasked with overseeing the performance of managers. This way, there will be additional control measures which may help detect any shortcomings in the decisions made by agents.
Additionally, transparency can be ensured based on disclosure laws, according to which managers will have to publish reports on the company’s performance (Clegg et al., 2016). Using this strategy, shareholders will receive enough knowledge about how the company is being run and make decisions concerning whether the level of governance at IBM is appropriate. A group of analysts may also be hired to advise the board of directors and shareholders on the best strategic moves in different situations.
Conclusion
The IBM case is analyzed using the Positioning School theories, the recommended future strategy for the company is best described by the Design and Planning School, and its governance is based on the shareholder value. The Positioning School provides the best tool, namely the five forces model by Porter, for assessing the current strategic position of IBM in the industry of personal computers. The analysis conducted with the help of the five forces model showed that IBM did not have a competitive advantage in the industry and had to employ strategies for gaining one.
The strategy of market penetration from Ansoff’s matrix, which implies increasing sales of personal computers and negotiating lower prices with suppliers, is the ultimate option for IBM. Corporate governance at IBM is premised on the idea of shareholder value, and poor strategic decisions by management negatively affect shareholders. The company should consider renewing its board of directors and ordering managers to publish reports on the firm’s performance and profitability.
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