Case Study II:

Emerging Business
Opportunities at IBM

October 19, 2009

Sunwoo Hwang (Senior Consultant)

HWANG & Company

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Project Overview

This project purposes to specify pitfalls of the EBO system and thereby figures out
strategic alternatives to achieve the initial goal of two points of annual revenue growth.
Day 1 (Overview)

Case Analysis
Challenge for Growth
The Three Horizons of Growth Model
Emerging Business Opportunities

Issue Identification &

Hypothesis Generation
Day 2-3 (Situation)

Evaluation and Analyses

Key Issue
Can IBM achieve the
planned target of double
digit revenue growth by
improving performance of
the EBO system while
appropriately managing
existing EBOs?

Day 4 (Complication)

Interpretation

Day 5-7 (Resolution)

Strategy Development
and Proposition

Porters 5-forces Analysis

Weaknesses of the EBO System

Evaluation of the EBO System

Causal Analysis with Financial Metrics Organic EBO System

Strategy Proposition

Lessons from the EBO System

Introduction of Needs to improve the EBO system

| page 1

Implementation

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Challenge for Growth

Large / Long
Timeframe

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

Question 1-1

Project Management/
Compliance Risk

Answer to Q1

Breakthrough Innovation

It was because
large firms like

Uncertainty/Financial
Risk

Small / Short
Timeframe

H1

H2

Incremental Innovation

High Growth Businesses

Missed Opportunities
Incremental Thinking

Strategic Positioning /
Sustainability Risk

Successful Large Institutions

Small / Local

Large / Leveraged
Opportunity

Source: categories of innovation and risk profiles

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IBM
-Was Insular, inward-

looking, powerfully
bureaucratic, and
inflexibly hierarchical

Opposite to
Innovation

Investment

Why do large
companies like
IBM find it so
difficult to create
new businesses?

Dumb Ideas or
Mandatory Projects

H3

-Had a goal of

defending core
businesses while
increasing productivity
and profit contribution

Missed
Opportunities,
Incremental
Thinking

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Challenge for Growth

Unlike other great technical companies, IBM has been able to transform itself into broadbased solution provider and make healthy profits along the way
Growth Factors

Technology Company

Broad-based Solution Provider

IBMs Turnaround

1980s

1990s

2000s

2010s

Time

Cash Flow

A Business Lifecycle Approach to Leading Innovation

LS1

LS2

Business
Lifecycle
Details

| page 3

LS3 LS4

LS5

LS6 LS7 LS4 Time

Lifecycle Stage 1: Idea to Opportunity

Lifecycle Stage 2: Business to Market Launch
Lifecycle Stage 3: Market Adoption to Sustainability
Lifecycle Stage 4: Growth to Maturity
Lifecycle Stage 5: Transformation
Lifecycle Stage 6: Decline
Lifecycle Stage 7: Turnaround

Technology
Company

Broad-based
Solution
Provider

During a 20-year period, IBM has gone from

success to failure to success; from a
technology company to a broad-based
solutions provider. Unlike other great
technical companies such as Xerox, Philips,
and Polaroid that failed to capture the
benefits of their innovation, IBM has been
able to leverage their intellectual capital into
businesses as diverse as life sciences,
automotive, and banking--and make healthy
profits along the way.
Source: Making Strategy Real: Dynamic Capabilities
at IBM

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The Three Horizons of Growth Model

Question 2
1) What is
the model?

Profit

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

2) What are
key features
of each
business?

Horizon 3
Future Business

Horizon 2
Horizon 1

Growth Business

Mature Business
Uncertainty / Time Horizon
Extend and defend core business
Increase productivity and profit
contribution

Scale proven business models,

increase market share, and grow to
opportunity

Test business models, prove viability,

capabilities, and value
Deliberate initiatives to seed growth
opportunities

Profit Impact

Current; will eventually flatten out and

decline

Substantial profits may be 4~5 years in

the future

Most will not succeed

A few can secure longer-term future

Outputs

Annual operating plan: tactical plans,

resource decisions, budgets

Business-building strategies:
investment budget, detailed business
plans for new ventures; viable products

Decisions to explore; initial project

plan, project milestones

Traditional budgets and controls

Profit
Return on invested capital
Costs
Productivity or efficiency

High revenue growth

Market share gains
New customer acquisitions
Capital investment efficiency
Expected net present value

Project-based milestones
Option valuation
Rate of conversion from idea to
business launch
Number of initiatives

Focus

Measures

Source: Mehrdad Baghai, Stephen Coley, and David White, The Alchemy of Growth (Reading, MA: Perseus Press, 1999).
| page 4

Selection and Graduation Criteria of EBOs

HWANG & Company

The EBO Management System has following selection and graduation criterion

Research

[Horizon 3]
Emerging Business Opportunities
New Markets

Business Units

Pervasive Computing

Sales &
Distribution

New Business Models

External Sources
(Customers, VC)

Business Transformation
Consulting
Digital Media

[Horizon 2]
Growth Businesses
IBM Global Service
Sales, Marketing &
Distribution
New
System
&
Markets
Technology Group
Software Group

Life Sciences

Selection Criteria
Strategic alignment
Cross IBM leverage
New source of client value
$1bn+ revenue potential
Market leadership
Sustained profit

New / Disruptive Technologies

Linux

Source: How does IBM innovate Kris Pederson (VP, IBM GBS), June 2009
| page 5

Graduation Criteria
Strong leadership team in place
Clearly articulated strategy for
profit contribution
Early market success
Proven client value proposition

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Analysis with the Porters 5-forces Model

The 5-forces analysis shows that the EBO system is attractive as primarily represented
from its low internal rivalries and threat of substitutes
Threat of New entry (Medium)

Power of suppliers (Medium)

Financing matter largely
managed by a separate
function of corporate
investment fund at IBM
Difficulty of EBO initiative,
which is determined by
senior management at
Strategic Leadership Forum
(SLF)
Empowerment once an
EBO has launched
Relatively generous
yardstick applied to
measure performance

| page 6

High risk in new business initiatives

Needs to have breakthrough idea /
technology
Relative Independency from existing
businesses
Power of customers (High)
Intensity Rivalry(Low)
Each EBO runs independently from others
in general
Low exit barriers
No guarantee of success
High product/service differences
Threat of substitutes (Low)
Managers of existing businesses at IBM
consider EBOs as threat to core businesses
Potential benefit from H3 businesses
transition to H2 & H1

No immediate incentive to
share risks embedded in
EBOs regardless of their
potential profit
Mostly, not specified
customers in the early stage
No brand identity

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Evaluation of IBMs EBO System

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

What is your
evaluation of
IBMs EBO
System?

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2nd Era 3rd Era

Evaluation

Weak

Guideline for leader

Strong

Corporate
Level
Leadership

Strategic taskforce system

Strong

Senior managers attention

Strong

Team Level
Leading skill

Team Leaders experience

Strong

No. of qualified leader

Weak

Outputs

Review meetings for health

checking

Strong

Measures

Progress for revenue

performance

Strong

Formalized process for

identifying EBO

Strong

Transition guideline from H3 to

H2 and from H2 to H1

Weak

Selecting EBO
1st Era: Before Thompson Era
2nd Era: Thompson Era
3rd Era: CSTeam Era

1st Era

Clear and specific vision

proposal

Shared value

Question 4-1

Evaluation Criteria

Graduating
EBO

Evaluated by Jaeeun Song

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Weaknesses of the EBO System

The exposed weaknesses of the system is summarized as below, asking a question of

whether or not the expected poor leadership caused the problem on the EBO system
Summary of Exposed Weaknesses
Critical Tasks

Structure
Vague Transition
Guideline among
Horizons
(H3 H2, H2 H1)

Question 4-1
What is your
evaluation of
IBMs EBO
System?

Not many
qualified
leaders

People & Skills

No clearly specified
vision or team target

Leadership

| page 8

Culture

Hypothesis

Didnt the EBO

system run as good
as senior
management
hoped because of
IBMs poor
leadership?

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Superficial Financial Analysis

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

85

IBM enjoyed 40% of the

computer industrys sales
Gerstner took over at IBM

Revenue
(Unit: Billion $)

Gerstner

93

Financial Metrics by leaderships

99

63
27%

02

Gerstner retired from IBM

03

Palmisano took over at IBM

(1993~2002)

Palmisano

Others

2001
Software

1993

12
2001

1993

2001

Service

Net Income

Stock Price

(Unit: Billion $)

(Unit: Billion $)

(Unit: $)

This HBS Case was published

89

110

173

Revenue

104

12

86

83

2008

2003

2008

(2003~present)
2003

| page 9

(Unit: $)

30

04
05

(Unit: Billion $)

15%

1993

01

Stock Price

41%

EBO Management System

was created

00

09

86

Market Cap

2008

2003

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Superficial Financial Analysis

No. Financial metrics show less than 1% CAGR both in revenue and net income between
1999 and 2005, the period during which both CEOs were in office 3 years each
Chronological Snapshot

85

IBM enjoyed 40% of the

computer industrys sales

Financial Metrics during the Case (EBO) Period

Revenue
(Unit: Billion $)
88

88

86

96

89

81

99

91

91

104

Gerstner took over at IBM

93

99

EBO Management System

was created

00
01
02

Gerstner retired from IBM

03

Palmisano took over at IBM

04

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net Income
(Unit: Billion $)
8
8

CAGR: 0.6%
8

12

10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

05

This HBS Case was published

09

Stock Price
(Unit: $)
97

110
77

71

86

92

77

93

105

83

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1999
| page 10

2002

2005

Key Lessons from the EBO System for New Business Creation

HWANG & Company

Key Lessons that we have learned from EBO System are as follows. For new business
creation, we need to commit ourselves to revolutionary goals but take evolutionary steps
Lessons for getting started with EBOs

Question 4-2
What are the
key lessons
for new
business
creation?

Thorough internal assessment of the root

causes why you haven't been able to
grow new businesses

Broad senior-level management buy-in

Needs to start small

Lessons for operating and sustaining EBOs

1

Active senior management sponsorship

Disciplined mechanisms for cross-company alignment actions

linked to critical milestones

Resourced fenced and watched to avoid premature cuts

Continued evolution

Commit to revolutionary goals

but take evolutionary steps.

Source: Lessons from IBM emerging business opportunities Blog, OneRiverRed, 2009
| page 11

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IBMs New Approach to Strategy

We see slightly different lessons from the new approach of IBM to Strategy. It stresses
the balanced leadership and the importance of alignment among the components
Conceptual Framework of the IBMs New Approach to Strategy

Strategic Insight
Technology
Team

Strategy
Team

Integration
& Values
Team

Deep
Dive

Leadership

Strategic Intent
Market Insight
Business Design
Innovation Streams

Sensing New
Opportunities

Strategic Execution

Emerging
Business
Opportunities
(EBOs)

Strategic
Leadership
Forums (SLF)
Corporate
Investment
Fund

Seizing New
Opportunities

Critical Tasks
Structure
People and Skills
Culture

Source Dynamic Capabilities at IBM: Driving Strategy into Action - J. Bruce Harreld
| page 12

Lessons from the new approach

Leadership by general managers
1 requires both strategic insight
and execution
2

Anchorage on either a
performance or opportunity gap

The importance of alignment or

3 complementarities among the
components.
Performance gap: a shortfall between expected
and actual results (Leaders dissatisfaction)
Opportunity gap: a discrepancy between
current business results and those achievable
with a new business design (Aspiration)

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Organic EBO system

Next, we propose to build an organic EBO system nurturing H3 businesses by exploiting

both internal and external resources
Organic EBO System

H1
Businesses

New Markets

Feeding from
Internal
Resources

H3
Businesses

H2
Businesses

H1-incubated H3s

Feeding from New Business

External
Models
Resources
New / Disruptive
Technologies

Inter-organizational
Innovation

H2-incubated H3s

Closed Innovation
| page 13

Open Innovation

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End of Document
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