Read the case and answer the following 5 discussion questions.
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
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 cloudcomputing 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,
IBM 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
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
history—a 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.
EXHIBIT MC7.1 / IBM Navigates Wave after Wave of
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.
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
consultants—over 100,000—in 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.
1. Why has IBM been underperforming the broader technology
market for several years now? What are the reasons for its
sustained competitive disadvantage?
2. Describe the three current transformations that IBM is facing.
What causes these transformations? Who are the main
3. What are dynamic capabilities? Explain. Looking at IBM’s
track record of technological transformation depicted
in Exhibit MC7.1, which role did dynamic capabilities play in
these successful transformations?
4. Do you believe that IBM is likely to master the current threepronged tech transformation as identified? Why or why not?
5. IBM’s decision to end greater work flexibility and require colocation of employees in the office was met with some
consternation. How do you see IBM’s decision, and what are
likely positive and negative consequences?
Sources: Simons, J. (2017, May 18), “IBM, a pioneer of remote work, calls
workers back to the office,” The Wall Street Journal, McMillan, R. (2016, Jan.
28), “IBM CEO Rometty getting $4.5 million bonus for 2015,” The Wall Street
Journal, Langley, M. (2015, Apr. 20), “Behind Ginni Rometty’s plan to reboot
IBM,” The Wall Street Journal, “Systems of engagement and the enterprise,”
IBM website; Hiltzik, M. (2015, Feb. 2), “IBM redefines failure as ‘success,’
gives underachieving CEO huge raise,” Los Angeles Times, February 2;
Belvedere, M. (2014, Oct. 22), “IBM no longer a tech company: Mark
Cuban,” CNBC, Goldman, D. (2011, Oct. 25), “IBM CEO Sam Palmisano to
step down,” CNN Money, Harreld, J.B., C.A. O’Reilly, and M. Tushman (2007),
“Dynamic capabilities at IBM: Driving strategy into action,” California
Management Review 49: 21–43; Gerstner, L.V. (2002), Who Says Elephants
Can’t Dance? (New York: HarperBusiness); Grove, A.S. (1996), Only the
Paranoid Survive: How to Exploit the Crisis Points that Challenge Every
Company and Every Career (New York: Currency Doubleday); and various
resources at ibm.com and IBM annual reports (diverse years).
Frank T. Rothaermel prepared this MiniCase from public sources. This
MiniCase is developed for the purpose of class discussion. It is not intended
to be used for any kind of endorsement, source of data, or depiction of
efficient or inefficient management. All opinions expressed, all errors and
omissions are entirely the author’s. Revised and updated: July 31, 2017.
©Frank T. Rothaermel.
1. As quoted in: Lohr, S. (2014, May 13), “IBM’s Virginia Rometty on
leadership and management,” The New York Times.
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