Big companies can reinvent themselves.

When it comes to large companies changing and adapting to new conditions, conventional wisdom especially around Disruptive Innovation theory, is not optimistic:

  1. Due to a number of factors including size, reward systems and culture, it is extremely difficult for large companies to reinvent themselves.
  2. For change to be successful, companies need to bring in outsiders untainted by functioning in the culture.
  3. Since change has a low probability of success, firms should concentrate on their key competencies and customers and be cautious about moves beyond their core.

A recent study out of Stanford’s Graduate School of Business on IBM’s successful transformation from hardware to solutions provider challenges the above thinking and suggests that large companies are well-suited to reinventing themselves. 

Back in 1999, IBM was a large company facing significant financial and market pressure and an uncertain future.  Internal analysis revealed that the company had failed to capture value from 29 separate technologies and businesses that where internally incubated.  Examples included the first commercial router (Cisco later dominated that market), new technologies to accelerate web performance (Akamai captured this market) and desktop PCs (Dell and Compaq took over this business).  The Stanford authors summed up IBM’s issues this way: “The maniacal focus on short-term results, careful attention to major customers and markets, and an emphasis on improving profitability all contributed to the firm’s ability to exploit mature markets — and made it difficult to explore into new spaces. The alignment that made the company a ‘disciplined machine’ when competing in mature businesses was directly opposite to that needed to be successful in emerging markets and technologies.” Not surprisingly, this assessment may sound familiar to other executives.  

IBM understood that their traditional business model was unsuited to capitalize on emerging technologies and market opportunities.  So, what did they do to change?   Use their global size, client & channel intimacy, and substantial resources & talent to their advantage while ignoring the cliché that large companies can’t be agile.

To focus sufficient management attention and resources, IBM situated its new technologies and products in a new, measurable line of business called the Emerging Business Organization (EBO). In the past, high potential technologies and products were lost in the shuffle when they were sprinkled across traditional business units. In addition, IBM put internal, experienced managers at the top of the new business units, a sharp departure from past practice. These managers had some key advantages that were crucial to success.  They knew their way around the company, they had internal credibility and they were proven leaders.  The logic of the earlier strategy was that younger leaders would be less imbued with the “IBM way” and more likely to try new approaches. More often than not, those leaders failed.  As well, IBM cycled top managers through the EBO, helping cross-pollinate new products, technologies and processes throughout the entire company.  This built internal awareness of EBO products, drove cross-selling and triggered new innovation.  Finally, IBM’s used its strong cash flows to put its money where its mouth was.  They properly invested in the EBO and its initiatives from R&D through to product commercialization.

These innovations have generated impressive results. Between 2000 and 2005, EBO projects added $15.2B to IBM’s top line. When compared to IBM’s M&A strategy at the time, EBOs added 19% to IBM’s top-line while M&A delivered 9%.

As the IBM case shows, scale and pedigree can be significant weapons to enabling change. Indeed, other companies such as P&G, J&J and Corning have successfully followed a similar approach to reinventing their business model or shifting product focus. When it comes to change, size does matter.

For more information on our services and work please visit the Quanta Consulting Inc. web site.


1 comment so far

  1. […] of the World’s most successful companies – IBM, Amazon, Apple and Google etc – have gained a sustainable competitive advantage and […]

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