Market..Oriented PerspectivesUnderlie Successful Corporate,Business, and MarketingStrate giesIBMSwitches Strategies'

For decades InternationalBusinessMachines fo-cused most of its efforts on the hardware side ofthe computer industry: first on large mainframecomputers, then on personal computers (PCs),andthen, as the Internet began to take off in the mid-1990s, on serversand related equipment. Itstargetcustomers for that hardware were typicallyorgani-zations rather than individualconsumers and usu-ally large organizations that needed lots of data-processingcapacityand had the financialresourcesto afford it. The firm did not ignore consumers orsmall businesses, but it relied on independent re-tailers, such as Circuit City, and value-added re-sellers to reach those segments while focusingmuch of its own marketing and sales effort onlarge organizations.

IBM'scompetitivestrategywas also quite consis-tent over the years. Giventhat the firm was neverthe lowest-costproducer in the industry,it did nottry to compete with low prices. Instead, the firmpursued a qualitydifferentiationstrategy by offer-ing superior products backed up by excellenttech-nicals:.:rviceand sellingthem at premiumprices.

Toimplement its strategy, the company tried toensure a steady stream of cutting-edge products byallocatingvast resources to R&Dand product de-velopment. IBMalso generallyfollowed an "open

architecture" policy. In its PC business, for instance,the firm licensed its PCcDOSoperating system (de-veloped in collaboration with Microsoft) to othermanufacturers and software developers. This helpedexpand the number of PC-DOS users, thereby pro-viding incentives for IBM'slicensees to develop moreinnovative applications software to run on PC-DOSsystems, which in turn enhanced the usefulness andcustomer value of IBM'shardware.

On the marketing side, the firm maintained sub-stantial advertising and promotion budgetsJo keeppotential customers informed abo~t its constantlyevolving product lines and to burnish the identityof the IBM brand. More important, though, werethe millions spent recruiting, training, and com-pensating one of the world's largest and mosttechnically competent salesforces.

Technology Changesand Competitor. ActionsRequire a Shift in Strategy

For decades IBM's corporate, business, and mar-. keting strategies were all very successful. By the

mid-1990s, however, several of IBM's traditionalbusinesses were in trouble. The company's share of

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the worldwide PCmarket fell to about 8 percent in1999, third behind Dell and Compaq. Worse, thefirm's PCbusinesswas projected to lose $400 mil-lion, on top of a $1 billion loss in 1998. Similarly,while serversales,made up mostly of UNIX-basedcomputers, were growing rapidly around theworld, IBM was able to capture only a small shareof that business.Its growth rate in the servermar-ket during the late 1990swas only about one-thirdas fast as that of major competitors such as SunMicrosystems.Even its venerable mainframe busi-ness, which had been a low-growth but highlyprofitable market throughout the 1980s and early1990s, suffered a profit squeeze due to fallingpricesand declining demand.

IBM'sperformance problemscan be traced to avariety of factors, which all worked to make thefirm's tried-and-true corporate, competitive, andmarketing strategies lesseffective than they oncewere. For one thing, major technological changesin the macroenvironment-such as the rapid in-creasein power of desktop PCs,the emergenceofthe Internet, and the development of internal,organizationwide computer networks (or intra-nets)-greatly contributed to the decliningdemandfor large mainframe computers and centralizeddata-processingsystems.

Also, IBM's quality differentiation strategy be-came lesseffective as some of its product-marketsbegan to mature'and customers' purchasecriteriachanged. Technicaland performance differencesamong competing brands became less pro-nounced as the PCindustry matured, for example,and later buyers tended to be lesstechnically so-phisticated, more price-conscious,and more inter-ested in buying equipment that was easy to use.IBM'spremium price position put it at a disadvan-tage in attracting such customers.Worse, a num-ber of competitors, notably Dell, provided morebenefits at lower prices by offering custom-designed systems, convenient direct purchasingover the Web, and user-friendlyservice and sup-port programs.

EvenIBM's traditional focus on large organiza-tional customerscontributed to the firm's problemsin the newly emerging marketsfor serversand re-latedequipmentandsoftware.It wasslow to pursuethe manysmallstart-upbusinessesat the forefront ofthe dot-com revolution, leaving an open field forSun,Hewlett-Packard,and other competitors.

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A New Corporate Strategy..., When Lou Gerstnertook over as IBM'schief executive in 1994, he and a task

~. forceof other executives,includingmanyfrom the marketing and salesranks, reexaminedallthe firm's businesses,customer segments, com-petitors, and potential competitors. Their conclu-sion: The Internet would change everything. Theyforesaw that "[t]he real leadershipin the [informa-tion technology] industry was moving away fromthe creation of the technology to the applicationof the technology," saysGerstner. "The explosivegrowth is in services." Further, "[w]e concludedthat this [the Internet] was not an informationsuperhighway.This was all about business,doingtransactions,not looking up information."

Consequently,IBM'stop executivesbeganto re-focus the corporate mission, de-emphasizing thedevelopment and manufacture of high-tech hard-ware while increasingthe emphasison providingcustomers with e-business engineering, design,and outsourcing services.To leveragethe firm's ex-isting competenciesand its long-term relationshipswith its traditional customers, many of the newservicesthe firm developedconcentrateon helpinglarge, bricks-and-mortarfirms (1) hook old corpo-rate databases(often on mainframes)into new on-line systems, (2) integrate Web technology intotheir internal businessprocessesto improve effi-ciency, and (3) develop and run company Websites. For instance,Lego, the Danishtoy manufac-turer, paysIBM to run its entire Web operation, in-cluding contracting with the Danish post office tohandle shipping.

But the corporation also has expanded thescope of both its new service and old hardwarebusinessesto embrace smaller customers. For ex-ample, in 2002 the firm released scaled-downversions of its database, e-mail, and network-management software that are easierto maintainand up to 80 percent cheaper than the standardversions.And IBM also appealsto such customerswith the promise of "e-businesson demand;" amenu of consultingservicesand software packagesthat can be tailored to the unique needsof firms inspecific i,ndustries-such as banks and hospitals-to improve the effectivenessand efficiencyof theirmarketing, planning, procurement, and customerserviceefforts. As a result, the company's revenues

from its small and medium businesssegment in-creased 14 percent in 2003.

New Businessand Marketing Strategies

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IBM's new corporate emphasis on e-business ser-vices as its primary path toward future growth alsohas forced some changes in the firm's competitiveand marketing strategies. At the business level, thefirm still seeks to differentiate itself from competi-

. tors on the basis of superior quality and to chargepremium prices for that quality. But in its new ser-vice businesses, competitive superiority dependson the knowledge, experience, and expertise of itsconsultants-and their familiarity with a cus-tomer's operations that comes from continuinginteraction-rather than the technical q\.lalityof itsproducts. Therefore, to implement its new service-based differentiation strategy effectively, the com-pany reorganized and reallocated many of its inter-nal resources.

For example, the firm created a stand-alonesoftware division with its own salesforce organizedto focus on making and selling products tailored tothe most common business problems of compa-nies in 12 different industry segments, such as fi-nancial services, life sciences, and consumer pack-aged goods. Similarly,about half of the company's$5 billion R&D budget is now focused on solvingbusiness problems rather than improving the tech-nical performance of its hardware. And the com-pany found that in order to understand and tailorservices and software to a customer's specific busi-ness problems, a team approach was required.Consequently, customer relationships are typicallymanaged by teams involving the sales executive incharge of the account, a representative from theservices division, a person in the software unit, andoften someone from the research labs. As Samuel J.Palmisano-the man who took over as CEO fromMr. Gerstner in 2002-points out, "For us to de-liver the value of 'e-business on demand,' we hadto reintegrate IBM."

Given that the success of IBM's competitivestrategy depends heavily on the knowledge andexpertise of its personnel and their ability to forgebeneficial relationships with customers, the firm'ssalesforce is even more crucial than ever. Many

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salespeople who used to spend a portion of theirtime selling the company's hardware have beengiven additional training and turned into full-timee-businessconsultants. The company also acquiredPricewaterhouseCoopersConsulting, a move thathelped IBMfocus more on executive-levelbusinessproblem solving instead of traditional technologyconsulting, like managing data centers for corpo-rate customers.

Of course, the superior expertise of IBM'speo-ple-and the firm's new focus on satisfying thee-commerce needs of companies in specific in-dustries-had to be effectivelycommunicated topotential customers. Thus, a $500 millionannualadvertisingbudget is dedicated to worldwide pro-motion of the "e-businesson demand" program.

The Bottom Line

IBM's new corporate, business, and marketingstrategies did not enable the firm to totally avoidthe worldwide downturn that shook the informa-

tion technology industry during the first years ofthe new century, but they helped the company rideout the storm in better shape than many competi-tors. And by the time of this writing, the financialpicture had brightened considerably. The firm's rev-enues topped $89 billion in 2003, an increase ofmore than 7 percent over the previous year. Andnearly two thirds of those revenues came fromglobal services and software sales, as shown in Ex-hibit 1.1, with the firm's service businesses postingmore than a 17 percent sales gain and its softwaredivision a 9 percent increase over 2002.

More importantly, IBMwas gaining market shareagainst such major competitors as Oracle, Sun, andBEASystems in nearly every service and softwaresegment in which it competed. As a result, IBM'searnings per share increased 41 percent to $4.34 in2003, a year that was much less profitable for manyother information technology companies.