Introduction
This essay is the conclusive work for the course of the BSB Marketing. The objective of the essay is to analyse the organization using the tools and techniques discussed over the course of lectures on B2B Marketing. For the purpose of this document, the writer will focus on the IBM UK Ltd and the development of the company’s marketing strategy.
The structure of the essay will take the reader through the background of IBM and its United Kingdom subsidiary. Based on the Market analysis, prepared by the major consulting agency, Key Note, the document will look at the latest deals and tenders to identify the direction, in which the company is evolving. On the other side of the analysis, the writer will look at the market and business environment, prepare environment SWOT and look in depth in IBM Market strategy and its elements. When analysing IBM Marketing strategy, we will look at buyer behaviour and customer approach. The analysis will also cover strategic view on competitive advantage, three generic strategies as well as analyse IBM from the perspective of Red Ocean and Blue Ocean strategy.
One of the major distinguishing characteristics of the business buying and consumer buying is the decision-making process and the role of the of consumer insight and understanding of buyers’ behaviour in identification of the direction in which business marketing strategy will evolve. While B2C marketing is targeting individual customers, B2B marketing strategy is mostly based on complex buyer behaviour, determined by group decision. Marketing strategy in B2B businesses should take into account the roles within purchasing organizations and address, adjust and implement the strategy that would meet the requirements of “influencer”, buyer”, “user”, “specifier” and “authoriser” in the decision-making process (Olson & Peter, 2008, pp.13-25).
From marketing perspective in B2B Business Company’s position is determined by consideration customers’ expectations and needs as well as anticipated strategies of competition and prediction of the direction in which the market itself will evolve in a short and long run. The linchpin of adequate and successful marketing strategy is the ability of the organization to understand the environment in terms of market structure, internalization and dynamism and sales and manufacturing channels. Proactive marketing strategy will contribute to optimization of company’s position in terms of effectiveness and efficiency (E&E) of its operations and achieving maximum efficiency scale (MES) in regards to economies of scale and economies of scope (Nellis & Parker, 2002, pp.111-116)
According to Porter, one of the essential elements of the right strategy is not only to understand what organization should do, but what it should avoid doing (Porter, 1996). By looking at both sides of this equation market strategy will seek for compromise between primary capabilities that build the business and some of the customer proposition elements that can be sacrificed in order to maximize the profitability. This trade-off is, in practice, an equilibrium point of the successful market positioning.
The purpose of this essay is to analyse and examine the business-to-business markets and apply suitable theories and models on the example of a particular company. Looking at the company in retrospective analysis the writer will try to see what marketing and strategic models laid foundation to the development of Competitive Advantage Model of IBM strategy.
According to Porter, there are two major strategic models, Implicit Strategic Model and Sustainable Competitive Advantage Model. Both of them have their upsides and downsides and should not be considered mutually exclusive as choice of the marketing strategy will be to a great extent determined by industry sector, size of the company and market environment. In this essay I would like, however, to focus on the examples of building Sustainable Competitive Advantage strategy on the example of IBM, a major B2B organization and leader in Information Technologies (IT) sector.
It is not a secret that core business decision is made on the basic of in-house and transaction costs that determine not only general cost structure of the organization, but also marketing strategy in regards to competitive advantage through customer proposition. In case of IBM the majority of product lines have been developed in-house through strong R&D centre and strong competence based approach before IBM could actually outsource these services without substantial loss in terms of quality and effectiveness of the operations. This approach allowed the organization to build their competence and come to the market with solid customer proposition that includes high service standards in relations with suppliers and customers. IBM portfolio includes Business Consultancy, R&D, licensing, support and maintenance of their products (IBM Official Web Site, 2010).
The case of IBM can present an interesting study also due to fast and scaled market penetration and effective marketing strategy. The company managed to adapt to environment and develop sustainable competitive advantage in spite of high in-house production costs in attempt to avoid the risk of opportunistic behaviour in case of market purchase and related transaction costs. Additionally, IBM case allows us to understand the application of neo-classical assumptions and the effect of imperfect information on the business.
IBM and the Computing Market
IBM is the fourth largest technology company in the world and the biggest IT Company on the market with turnover of over USD 103 billion in 2009. To understand and be able to analyse market strategy and positioning of IBM, it is essential to examine the market size and environment. For the purpose of this essay the writer decided to look specifically at the UK organization and IBM United Kingdom market strategy relative to the UK market in 2010. The example of the UK is a good representation of general IBM market penetration strategy as well as it covers major service and product portfolios. With that in mind, the writer believes that IBM UK Ltd. example will allow us to analyse typical for this company market strategy and tools (Walker, 2010, p.37). Another scale limitation for this essay is the timeline of four years 2006-2010 with prospects and forecasts for future development.
IBM UK Ltd. Company Structure and Finances:
IBM UK is a subsidiary with over 17,000 employees. IBM UK provided IT business consultancy service, IT services and customised solution development and after sales support of the products.
Based on the company’s annual public report, end of year turnover, based on December 2008, was USD 3.7 billion with the pre-tax profit of USD 184.1 million. This result is reflects slight profit growth comparing to 2007. It is also worth mentioning that end year results do not have any “blind spots” and the organization is profitable and efficient, as IBM market share have grown 5% over the last year (Walker, 2010, p. 37).
IBM Today and Tomorrow:
IBM is a strong brand on the UK market. One of IBM’s major targeting segments, though company’s customer portfolio is not limited to it, is governmental and financial services. There are several major projects signed with various customers during last four years that show the growing scale of IBM presence on the UK market.
Recent acquisition of Sterling Commerce in the US gave IBM access to some of the new opportunities on existing markets. By acquiring Sterling Commerce, IBM inherited new customer, John Lewis that has been using Sterling Commerce’s Order Management System and support services. John Lewis is one the largest department store chains in the UK, voted Britain’s favourite retailer in 2010 (Official John Lewis website, 2010). Partnership with this organization benefits IBM not only financially, but from the perspective of the brand strengthening on the local UK market.
Another visible achievement of IBM UK in isolation from the headquarters is the eight year contract with Essex County Council for management and provision of public services. The objective of IBM in this project is to review and reduce the costs for public sector by 20%.
QBE, one of the large insurance companies, granted IBM in mid 2009 with the contract for management of their IT infrastructure across the country and fourteen other countries. The scale of this contract is essential: management of IT desks, helpdesk service and data centre and disaster recovery.
There is a number of other large scale projects in the portfolio of IBM UK, such as running congestion and low-emission operations for Transport of London, development of Joint Venture with Somerset County Council and multi-million contract with Marks & Spencer’s (M&S) for upgrade of their in-store (Walker, 2010, pp.41-43).
Must Know about IBM:
In the decision-base portfolio for customer value IBM is primarily using internal engineering assessment, field value-in-use assessment and focus group assessment. These tools are the primary research methods on the consulting stage, where IBM is trying to analyse current processes in the organization. Moving forward on the supply chain proposition to the client, IT solutions development and maintenance, organization applies internal engineering assessment and benchmarking (internal). The choice is determined by ease of access to the information and supported by almost perfect internal information flow.
It is an interesting fact that during the last decade IBM have gone through a significant shift from in-house production to outsourcing strategy, especially in regards to its Research & Development capabilities (R&D). While five years ago, IBM had quite large R&D department, Today Company bares transaction costs from the outsourcing activities in India’s service centres.
Market Definition
In order to avoid confusion and clarify the criteria for market analysis and application of the tools for analysing IBM market strategy, the essay will take into consideration the following assumptions:
When analysing the market and IBM UK market strategy it was decided to define computing market as the B2B computer market that helps businesses to design, develop, implement and maintain Information Technology (IT) in their corporate and operational structure.
In terms of market segmentation, due to the large scale of industries that IBM is involved in, the report will look at the key clients, being large and leading companies in their respective industries. When providing examples, we will mainly rely on the experience with such companies, as A.P.Moller–Maersk Group, M&S and QBE that respectively represent leading businesses in maritime, retail and insurance sector.
IBM Capabilities on the Market
IBM is the global company, which possesses the advantage of economies of scale provide it with an advantage of worldwide coverage of its international customers. Expertise and local knowledge as well as centralized control are the main competitive and sustainable advantage of IBM and its brand. IBM is a strong organization in regards to developing its Bull’s Eye Model around Unique Competence and Core Competences. These aspects of IBM market strategies are represented in the approach to market driving and market driven elements of their model (Peter & Olson, 2008, 113).
According to the Hakansson, the majority of businesses are very much concentrated on the effectiveness of the company from material and the tools to control and monitor operational processes in companies. Management and human resource capabilities are very often left without appropriate attention. This trend is especially noticeable in IT industry. IBM is, however, one of the exceptions in its industry. Recent restructuring and extensive promotion of leadership and management programs aimed to develop and retain talent and management skills in the organization that clearly shows strong IBM focus on HRM issues. These transformable capabilities built on the overall customer value of the organization (Hakansson & Snehot, 2006, p. 266).
Based on the analysis of the organizational capabilities presented in the below graph, the writer has identified that IBM has IT Consultancy as the strongest in-house capability and, consequently, can build on its unique value proposition to the client.
This element in overall offer of IBM creates great competitive advantage. On the other hand, IT consultancy in isolation will not make IBM more than service provider. In order to meet the basic customers’ demand IBM provides standard system solutions. In transition point between market driven requirement for system provision, IBM positions another core value – customised system solutions. All the above elements of IBM’s portfolio are on the General side. Sustainable business and stable market leader position on the market is a part of R&D that is positions in the right top box in the diagram. The writer believes that in spite of the fact that IBM R&D department is majorly outsourced; R&D is still specific and market driving force. This is mainly determined by the fact that IBM has developed a healthy combination of governance and competence approach to its partnership with India’s service desks. And the last element on IBM Capability diagram is product support. While this service does not bring additional opportunities, it does play its role in attracting customers as the value qualifier, while the rest of the elements and especially those in top left and top right boxes are the value creators.
One of the aspects that the writer was looking at is the risk of opportunistic behaviour and high transaction costs created by outsourcing of one of the major competences of IBM, R&D. The analysis, however, showed that the decision on outsourcing was actual attempt to reduce the costs of in-house production due to high specificity of the product. According to the economic market logic in a short run the value for in-house production can justify the decision to keep the costs in own operations. IBM, however, reached the level, when high customer demand for product specificity made it more profitable to outsource the operations. This horizontal structure is a common practice for companies, operating on a global level (Nellis & Parker, 2002, p.201).
SWOT Analysis
SWOT Analysis
Strength
Weaknesses
S1 – IBM Is a strong International Brand.
S2 – All range of services, starting from consultancy to customized solution development and product support.
S3 – Outsourcing and in-house capabilities are strong.
W1 – A lot of contracts on the market are short-term.
W2 – Large portion of the contracts are in public sector and therefore low risk diversification.
Opportunities
O1 - Computer Services is a highly growing market in the UK
O2 - Outsourcing of Computer services is becoming more common practice among large and medium size companies
O3 – All the Computer Service providers are “foreigners” with only accepting of the UK company Logica.
O4- UK market comprised major international organization with global IT solutions.
S1O1O3- On the growing market, IBM gets new opportunities for large scale projects including governmental projects that significantly boost reputation of the company on local and international arena. Apart from that local market is dominated by international brand and competition from local organizations is not strong (Walker, 2010, pp.47-49).
S2O2 – IBM capabilities include all range of services and developing outsourcing mentality can become a great opportunity for market penetration and increase in market share.
S3O4 – Unique competence and core competences of IBM are based on in-house knowledge. It is only possible with the economies of scale achieved by IBM. For major international brands, global capabilities and local knowledge in combination with flexibility offered by outsourcing are the core for contract fixture.
W1O1O4 – the UK market in mid size segment is relatively small and in order to secure profitability long term contracts are required. To avoid this weakness, IBM should focus on major international brands.
Threats
T1 – Scarcity of skilled stuff on the UK market
T2 – Government recently announced major cut backs on public sector spending.
T2 – Small vendors operate in regional and specialist areas.
S1S2T1 – Scarcity of labour could potentially become a threat should IBM localize some of the R&D operations. In consultancy the situation is not critical and does not represent actual threat for the time being (Walker, 2010, p. 49).
S1S3T2- strong brand and capabilities can be used to identify target market segment, by targeting international retailers and governmental services organization will be able to minimize competition from small businesses.
W2T2 – Major share of IBM long-term contracts are with public sector and governmental institutions. In order to diversify the risk, the company should prioritize international brads across the UK.
IBM SWOT analysis in the context of the UK market shows that the company has significant competitive advantage due to its unique customer proposition of one-stop-shopping, from consultation to product support. Additionally, the company can offer global coverage and local knowledge to the UK market that is “invaded” by international brands and recognized for its high potential due to the growing trend of IT management outsourcing among local businesses. Major threat is seen in the company orientation on public sector contract, while in line with the new government initiative this sector will most probably shrink in the nearest future.
IBM Market Strategy
What is IBM today and what is the main strategic direction that was adopted by the organization? To answer this questions the writer would like to analyse IBM’s market strategy from Red and Blue Ocean Strategy perspective, introduced by Kim and Mauborgne.
IBM is a strong brand that entered the UK market with full and unique customer proposition mainly through the demand of international corporations for IBM IT solutions in other countries, further transferred to the UK market. While the retail market was in place, IBM started to promote and develop the concept IT management outsourcing in the country.
Competition on the UK market is created mainly by international companies, such as Computer Sciences, HP, Logica, BT Group, The Capita Group and the others. Among these companies only Logica is the UK brand, and, therefore, competition is mainly created from other international organizations on the UK markets, rather than local brands.
IBM is the first company on the UK market that started to penetrate government and financial sectors. It could be argued, but taking into account growth figures for these sectors in regards to the IT outsourcing and market share that IBM has in this industry, the writer believes that IBM market strategy is oriented on capturing new market.
One of the brightest examples, as already was discussed, is IBM’s change of direction in regards to transaction and own production cost trade-off. While being very much capability and competence driven organization IBM found it profitable and optimal to completely outsource its R&D department. It is a good example of the cost trade-off breakage from market strategy perspective.
IBM is the Resource Based View organization and gives a lot of attention to quality, innovation and dependability. Differentiation of product portfolio is moderate, but the company is actively promotes cost-optimization initiatives, such as Process Excellence and Six Sigma initiatives in corporate and operational structure and outsourcing. By simultaneous focus on both, differentiation (to a moderate level) and high focus on lowering of fix and variable costs through Six Sigma methodologies, IBM re-invigorated its approach to the business.
Based on the above it is reasonable to conclude that IBM is an example of the blue Ocean Strategy. By consistent focus on Effectiveness & Efficiency model and strong attention to innovation in the unique capabilities segment, IBM managed to give a new spin to its brand value and overall customer value creation.
IBM and Approach to Understanding and Determining Buyer Behaviour
Understanding buyers’ behaviour always was the key for IBM market strategy. When entering the market and further re-evaluating feasibility of existing strategy, IBM was looking at the customer profiles in the following way: buyer, decider, user, influencer and gatekeeper. But for the purpose of this exercise, we will show the example of the deal settlement with Maersk Line UK Ltd (ML), a subsidiary of the global maritime company A.P.Moller-Maersk Group (APMM). The reason why the writer decided to take the example of Maersk Line Ltd is the fact that maritime was a new sphere for IBM and the project was approached in a new way, basically adopting bottom up approach.
IBM started with approaching the company with separate and localized solutions to optimize the systems already existing in the company. APMM is very conservative organization with strict Standard Operation Procedures (SOP) used for a long time without significant modifications. Based on that, any new integrated solution met a lot criticism from the APMM stakeholders for its costs and doubtful value. It was a strategic approach to gain reputation and develop customized solution for the organization on a later stage (Peter & Olson, 2008, pp.45-61). IBM adopted Trial and Repeat Buying (ATR approach). IBM started with identification of the roles in the overall customer purchase and decision-making team. Based on their assumption, by approaching ML with the solution for financial module that were not a part of core business, IBM managed to get support from the core influencer (ML headquarters and final users). On a later stage, IBM came to the steering committee and the line management with already proven track record of effectiveness and efficiency of the operations in finance modules and got a contract for the development of supportive modules to existing applications. This approach developed individual milestones in dealing with values that each of the stakeholder in ML was looking in the product. As a result of understanding buyers’ behaviour IBM gained 80% of the outsourced IT budget of ML and its subsidiaries (Donaldson & O'Toole, 2002, pp.141-146).
Findings and Conclusions
IBM Market strategy is based on three main pillars of the strategy development, proposed by P. Kotler, segmentation, targeting and positioning (STP) on the market. Now, when we looked at the specific elements of IBM in regards to the market approach and analysis, we can drive the following conclusions (Kotler, 2009, p.15-21):
Segmentation: specific for the UK market, IBM for the last two years IBM has shifted the focus to the government and financial services. It is evidenced from the last large contracts and tenders that IBM was participating, such as Transport Department of London and various IT solution contract for the UK counties.
Targeting: based on the environmental SWOT and market information we can see that IBM is a definite market leader for B2B business, seeking for one-stop-shopping solution. There is a certain competition from Logica and smaller international companies, offering standardized and customized solutions, but main unique competence of IBM ( IT consultancy) remains the strongest differentiator in regards to the customer proposition in large governmental and retail sector (Transport Department of London, Essex County contract and M&S business through acquisition of Sterling Commerce).
Positioning: based on the unique and core competences, being IT consultancy and customized IT solutions), IBM has chosen to position themselves as the best IT solution provider with the full range of in-house solutions for the supply chain, corporate and operational processes.
Based on the STP definitions, we can conclude that IBM is focusing on price-differentiation strategy in line with the economies of scale that it can offer to international and large scale governmental institutions through extensive agency network and on field knowledge. IBM has optimised its cost portfolio by optimizing the combination of the own and transaction cost that allowed the organization to offer cheaper solutions for public services. For the retail sector main strategy component is the scale of operation and level of customization for unified integrated system solutions.
Major differentiator of the IBM market strategy in the UK is high level of information transparency within complex company structure that allowed them to develop capabilities through tacit knowledge and almost perfect information flow. The company has gone through the process of transformation from resource controlling mentality on the management level to resource allocation mentality (Michael J.C., 2001, p.37).
IBM at some point of time faces with the competition from small vendors that operate on niche markets and provide specialist services. At this point company re-defined its market segmentation as a part of the overall market strategy and focused on large international companies, where niche operators could not become a real threat. As sustainability on the market required specialist technological knowledge, IBM was focusing on IT consultancy as the main unique capability and lowering the costs by outsourcing of R&D activities. This allowed the company to create sustainable competitive advantage on the market.
IBM is one of many examples of the outsourcing of R&D activities to India service centres. On the global IT market outsourcing and off shoring policies are becoming common practices to manage transaction and in-house production costs. Example of IBM provides significant argument in favour of managing transaction costs and tacit knowledge through right combination of in-house and market purchased activities even in the core capabilities field.
Cost leadership strategy that IBM was always putting in the foundation of its market strategy goes along with the differentiation. This strategy is strongly supported by the significant capital investments in resource management and unique combination of skills within IBM structure and its partners. IBM has achieved efficiency through effective coordination of its operational and marketing strategy that is reflected in its cost-leadership outsourcing initiatives as well as strong knowledge and segmentation of the market (Betz, 2001, p.269).
Overall, IBM is one of the leading companies in terms of innovation and cost-leadership, in spite of several downfalls, organization for already ten years remains an absolute leader on the market and keeps challenging its major international competitors, such as HP, that have to start re-assessing the role of innovation and develop stronger tools to achieve effectiveness of their market strategy and planning.
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