Understand the strategic and operational importance of change in organisations

Department of Business & Management

Assignment Brief

Module Title:

Leading and Managing change  - Coursework 1
(Feb 21 Cohort)

MG625

Assignment No/Title:

IBM case study (See pp. 4 to 6) of the brief

Assessment Weighting:

50%

Submission Date:

Feedback Target Date:

3 weeks

Module Co-ordinator/

Tutor:

Course Area:

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This assignment tests the following Learning Outcomes for the module:Delete any that do not apply and ensure that alternative instructions are entered in the box above.

Understand the strategic and operational importance of change in organisations

Critically evaluate change management theory, strategies and tactical options

Critically assess the key areas of organisational and individual resistance to change

Understand change within the context of organisational leadership and business strategy

The Assignment Task:

Read the case study on the changes that have taken place at IBM and prepare a report (with references) to the company on how the company planned and implemented the change.

In doing this, include answers to the following two questions.  Each question carries equal marks.

Either (i) draw up a Cultural Web diagram for the organisation before and after Gestner took over and implemented change and describe the main differences and implications for change.

Or (ii) draw a change kaleidoscope for the organisation at the point at which Gestner took over.   Using this model (Balogun and Hope-Hailey), discuss the change options available to him at that point.

What theories are you aware of that would explain the steps Gestner might have taken to help to overcome resistance to change?

Do not exceed the word limit of 3000 words Understand the strategic and operational importance of change in organisations

Assessment Criteria

Change in IBM

IBM was originally formed as Computing Tabulating and Recording [CTR), a combination of three com­panies put together by Charles Flint, a former arms dealer. Flint recruited Thomas Watson, who became its chairman in 1924. Watson renamed the company International Business Machines in 1929. IBM has a long history of dominance: at this early stage it already had 95 per cent of the market in punched-card machines - a mechanical predecessor of the electronic computer.

Watson had previously worked for NCR and had a reputation for aggressive sales activity - to the extent that he had been indicted in an anti-trust suit From these inauspicious beginnings however Watson modelled a sales force on a highly ethical basis He required his staff to behave in an honest fair and square way. This sober behaviour was expected at home as well as work and included wearing the familiar dark suits and white shirts The company benefits included lifetime employment and IBM country clubs which developed a collective feeling Company songs and slogans (such as THINK) were encouraged and inculcated at company training schools. draw up a Cultural Web diagram for the organisation before and after Gestner took over and implemented change and describe the main differences and implications for change. Understand the strategic and operational importance of change in organisations

This approach was eventually transmitted to Japan. In the 1950s Japanese management style was deliber­ately modelled on IBM by the Ministry of International Trade and Industry IMITI) who found the IBM way eulo­gized in American business textbooks. Ironically the company resembled civil service organizations more than other industrial corporations. Its style was pater­nalist and hierarchical offering employment for life and excellent career paths for its brightest workers

Computing began in Britain and the USA in the 1940s and the first significant commercial product Remington Rand’s UNIVAC was launched in the early 1950s IBM entered the market soon afterwards and used its powerful resources to take a leading position Under Watson’s son Thomas J Watson Jr IBM and computing became virtually synonymous controlling 70 per cent of the world market in the 1960s Big Blue became one of the largest corporations in the world its international workforce reaching a peak of 405 000 in 1985.

IBM s overwhelming control of the computing indus­try was symbolic of the USA’s technological and eco­nomic dominance in the post—war world. This strength was based on an integrated product range of highly expensive mainframe computers, peripherals and soft­ware, which locked users into IBM once they had made their initial purchase. Gradually, however, cracks appeared in this dominance. Despite being an IBM invention, the personal computer liberated individual users from the mainframe PC ‘clones’ were supplied more cheaply by competitors with much lower over­heads. PC’s became more powerful, not just because of increasingly faster processing chips but also from the software this speed allowed. Profitability moved from the mainframe sector to the PC. and particularly to software producers such as Microsoft. Understand the strategic and operational importance of change in organisations

People management

Understand the strategic and operational importance of change in organisations

IBM was traditionally a non-unionized organization. In fact the corporation was accused of being anti-union — but most of its staff seemed to like it that way. An ACAS survey in 1977 showed that only 49 per cent of the company’s British employees wanted a union, with 91 per cent saying they would refuse to join if there were one. For half a century its culture was strongly based on lifetime employment and excellent working condi­tions. The company did not possess a formal system of employee relations as such: the nature of the employ­ment relationship was implicit in the corporation’s human resource policies. Need e (1994 p332) des­cribes these as taking the form of:

• A sophisticated system of human resource planning, recruitment and training.

• A system of lifetime employment in which staff changed their jobs as and when required by the organization.

• Equal status for all IBM employees in terms of fringe benefits, staff restaurants and other

facilities, although company cars were restricted to senior management and some sales staff.

• Centrally determined salaries, geared to bettering hose of competitors and reviewed annually; increases based on a performance objective system

• Considerable emphasis on training, particularly related to people management and averaging 40 days a year for managers.

• An audit of staff opinion held every two years, focused on attitudes towards work methods, HR practices, pay and conditions.

• A model HRM approach with decision making and people management delegated to line managers at the lowest possible level.

• Formal communication procedures designed to encourage debate of business problems and to allow aggrieved staff to appeal against local management decisions.

By the early 1990s, however, IBM was in serious trouble. draw up a Cultural Web diagram for the organisation before and after Gestner took over and implemented change and describe the main differences and implications for change. The company had been cutting costs for six years under the chairmanship of John Akers, a life­long IBM man in his late 50s. A former navy pilot, he joined IBM as a sales representative and was soon identified as senior management material. Silver-haired and youthful, he was the image of the IBM cor­porate employee. The severity of the problem and Akers’ bleak assessment of sales performance and poor productivity came to light in 1991. A middle-manager who attended a confidential briefing inadver­tently distributed his summary of the meeting through IBM’s internal electronic mail network. This soon brought the media spotlight on the corporation, pub­licizing Akers’ attempts to correct the situation. One failure was the recruitment of 5000 additional sales representatives, to boost the existing 20 000, which increased revenues by less than 4 per cent. He then announced 14000 job cuts, increased this 17000 shortly afterwards. In IBM-speak these were referred to as ‘management-initiated-separation’ (MIS). Some 47000 IBM employees had already had an MIS experience over the previous five years but the latest announce­ments would still leave the company with a worldwide workforce of over 350 000.

The media and industry analysts increasingly crit­icized the momentum of change. Forecasts of reduced profits and static turnover led to calls for more radical action. IBM’s strong points, its culture and structure, had apparently become its major weaknesses. The company was described as insular and complacent, slow to react to the move away from large expensive mainframe computers to powerful PCs and workstations.

IBM’s bureaucratic decision-making structure dragged down its ability to react at a time when the industry was becoming increasingly fast moving. Whereas a local office in Europe, for example, had to refer to its regional head office and possibly to New York, competitors could take the initiative immediately. Procedures which functioned adequately when product development had a four-year cycle, were hopelessly ineffective when the lead time had shrunk to a year. IBM had a tradition of producing virtually everything in-house, further increasing its insularity and inability to react quickly to market changes.

A loss of over US$4 billion in 1992 led to Akers’ replacement by the first outsider, Louis Vincent Gestner, destined to take the serious decisions, which Wall Street analysts had demanded. Despite making IBM’s first-ever job cuts the conclusion had been that Akers was too imbued in the IBM culture to be able to take sufficiently drastic measures. Understand the strategic and operational importance of change in organisations

New broom sweeps….

Louis Vincent Gestner Jr, 51, was appointed chairman in April 1993 with no experience of running a computer business. Gestner, a devout Catholic, was the son of a truck dispatcher from Long Island. He started his career with management consultants McKinsey after Harvard Law School and later became head of RJR Nabisco. ‘There will be no pussyfooting, no more salami-slicing,’ he told shareholders a month later. He quickly hired two experienced cost-cutters as aides: draw up a Cultural Web diagram for the organisation before and after Gestner took over and implemented change and describe the main differences and implications for change. Jerome York, former chief financial officer of Chrysler; and Gerald Czarnecki, who had implemented re­ductions in staff at Honolulu’s HonFed bank. Gestner listed four immediate priorities:

• major staff reductions, reducing IBM’s workforce worldwide to about 250 000 and including the first compulsory redundancies in the company’s history
• defining IBM’s core areas
• improving customer relations
• decentralization.

In 1993 Gestner announced a record quarterly loss of US$8 billion that included an US$8.9 billion charge for laying off 50000 employees that year — double the previous estimates. Gestner said: ‘Getting IBM’s costs and expense structure in line with the revenue realities of our industry — right-sizing the company — is my high­est near-term priority’. But he declined to break up IBM’s eight product groups and disappointed stock market analysts who were looking for more radical surgery.

One key element of cost was, of course, the company payroll. Gerstner’s team made significant changes to IBM’s compensation [pay] plan:

• Look to the marketplace. The single salary structure [for non-sales employees] was changed to different salary structures with merit budgets for different job families. This allowed IBM to pay employees in different job families according to market-oriented rates.

• Fewer, faster jobs in a flatter organization. The traditional salary grades were scrapped in the USA, and the number of separate job titles cut from over 5000 to less than 1200.

• Reward for performance. The old compensation plan based pay raises on a complex formula linking

performance assessments to salary increases measured in tenths of 1 per cent. Under the new system, managers were given a budget and told to differentiate between the pay given to ‘stars’ and ‘acceptable performers’ on the grounds that otherwise the stars would not stay too long.

According to Czarnecki: ‘IBM did deliberately foster paternalism with a social contract between employer and employee. But economic realities forced us to rethink the relationship. Now we’re no longer asking people for total commitment to us. They’re eager to stay but prepared to leave’ [Sampson, 1995: p. 228]. draw up a Cultural Web diagram for the organisation before and after Gestner took over and implemented change and describe the main differences and implications for change. Understand the strategic and operational importance of change in organisations

The company still refrained from using terms such as ‘layoff’, but employees soon got the message. At the original IBM site, Endicott in New York State, the process was called ETOP — the Endicott Transition Opportunity Program. Cynical staff translated this as ‘Eliminate the Older People’. Local mental health ser­vices reported a massive increase in requests for stress counselling. ‘Surplused’ staff felt stigmatized and rejected by the firm. For the company itself, how­ever, the picture was looking better. By 1995 the corpo­ration returned to profitability.

Restructuring HR

When the business units were given autonomy in the early 1 99Ds, the HR department had to react without an expansion of staff [Shugrue, Berland, Gonzales and Duke’, 1997). HR was turned into a separate business with a national benefits call centre. Separate human resource functions were consolidated into a number of geographical regions where experts were relocated. Their expertise was offered to other companies on a commercial basis. Small teams of HR advisers were left at individual IBM locations. The business made a saving of more than US$100 million from these changes in just 2 years.

Following this event, IBM’s new CEO re-centralized the autonomous business units and indicated to the HR department that its costs should be cut by 50 per cent. Taking the national benefits centre as its model, the company then consolidated the remaining regional HR units within the National Human Resource Service Centre in Raleigh. North Carolina, so that all human resource functions were under one roof, draw up a Cultural Web diagram for the organisation before and after Gestner took over and implemented change and describe the main differences and implications for change.

In recent years IBM’s 2500 HR specialists around the world have focused on reducing the paper load of deal­ing with the company’s huge workforce, with some 500 pieces of data on each employee. Much of this information is required by other departments, making fast and accurate communication a priority. A number of electronic HR initiatives have transferred paper­ driven processes on to human resource management systems accessible through web technology. Understand the strategic and operational importance of change in organisations