Strategic discontinuities: when being good may not be enough - strategic business planning

Business Horizons, July-August, 1990 by Henry H. Beam

Like Sears, IBM had perfected a strategy for a market that is rapidly disappearing. IBM's natural competitive position was in the middle of the matrix in Figure 1, selling medium volumes of brand name computers at medium margins. But years ago IBM perceived it could improve its profitability by moving above the diagonal line. Unlike Sears, which moved to the right, IBM moved upward as shown in Figure 2. IBM used its reputation for reliability and outstanding service to sell its products to corporate executives who felt secure with IBM equipment, even if it came at a premium price and was not always on the leading edge of technology. Its large customer base provided a ready source of prospects for each new generation of computing equipment.

IBM's strategy was sound and its implementation was virtually flawless. It routinely fended off all who tried to compete head-on with it. (General Electric and RCA are two firms that tried and failed.) As with Sears, the strategic discontinuity that IBM faces today was not the result of a traditional competitor's action. It started in 1977 in a California garage 2,500 miles from IBM's Armonk, New York headquarters when college dropouts Steve Jobs and Steve Wosniak started Apple Computer. Even though IBM introduced its own personal computer in 1981 and soon set the standard for the industry, the PC did not fit easily into its traditional line of high-margin mainframe computing systems sold by its legendary sales force. The personal computer didn't change what a computer could do, but it did change who would use it (professionals, not data processing experts), where they would use it (on their desk or at home, not in the data processing center), and where they would buy it (from the local computer store or at a discount through a purchase plan where they worked, not from an IBM sales representative).

This came as a major shock to the stable world of IBM, especially since the performance of the PC improved so quickly that it was soon able to do jobs that hitherto could only be done on a mainframe. The strategic discontinuity that caused IBM's crisis arose from how the increasingly popular PCs would be sold. Once it became apparent that all PCs contained virtually the same components regardless of brand name, price, not service, became the primary selling point.

Today the personal computer sells like a commodity - on the basis of price. Brand loyalty is minimal in the face of substantially lower prices offered by a competitor. Like Sears, IBM does not like its present strategic choices. If it continues to emphasize larger mainframe systems, it is competing in the industry's slowest growth segment. If it moves its strategic position to selling high volumes of low-priced computers with low margins, it would lose much of the value of the IBM brand name. It would also be abandoning the strategy that had worked so well in the past. Yet PCs are the future of the computer industry, accounting for more than 90 percent of unit sales and over one-third of dollar sales in 1988. Since Apple, Compaq, and other firms have already staked out significant positions in the high-volume/low-margin field, IBM will have difficulty dominating the PC market the way it dominates the mainframe market.