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IBM’s Message to CEOs: Don’t Freeze Up. Seize the Moment.
MARCH 23, 2009--No stranger to industry transformations and economic cycles, IBM has recently conducted research to help determine what separates winning companies from the rest of the pack in times of great upheaval such as these. As part of this study, IBM examined large U.S. publicly listed companies whose share prices appreciated in 2008 at a time when the Standard & Poor’s index declined by 37 percent. The company also surveyed firms in Europe and Asia. In all, more than 60 companies emerged as winners. Saul Berman, global leader for IBM’s Strategy & Change practice, discussed the findings and why IBM is pushing its concept of a “smarter planet.” Here are excerpts from a conversation:
Q. What have you found that distinguishes companies that are managing well versus those who are not?
A. In the S&P 500 in 2008, most companies lost a lot of value, but these top performers actually gained 24 percent in value. We found three major themes. One is that you need to focus on value. Secondly, you need look at ways to exploit new opportunities. Thirdly, you need to act with speed. The underlying concept is that we think we’re in a different kind of downturn, a downturn that’s different than what any of us have seen in our lifetimes. Traditional responses are probably not going to be satisfactory. Traditional cost management is not going to be adequate. The world is smaller and flatter and more globally integrated. The world has become riskier because of this interconnectivity. We have greater amplitude in the variability around the trend line.
Q. It seems like the natural instinct at the moment for a chief executive officer is to cut back on capital spending, conserve cash and lay off people to ride out the storm. Is that the right way or not?
A. We think they need to be more judicious in how they conserve capital and use it in a way that will benefit them in the long term. We see this downturn as an opportunity to grow share, to acquire capabilities and to position oneself for the future. Yes, you may redeploy your capital from things you’ve done in the past to things that are going to help your business as we move out of the downturn. It’s what we’re doing at IBM--deciding which things you’re not going to do anymore and taking capital away from those things, and then making that capital available to the things that are going to be advantageous in the future.
Q. So the tendency of some CEOs to simply freeze up in this environment is a bad thing?
A. Well, we think it creates a lot of opportunity. We have some clients, which you’ve been reading about in newspapers carrying out cost reductions, come to us and say, “We want to be looking at opportunities for acquisitions of these types of skills that we don’t have and we know we’ll need in the future.” They’re doing what they need to do in the short term but they’re also doing what they need to do for the long term.
Q. But the tendency to go into a bunker and freeze decision-making is wrong in your view?
A. I think that’s very wrong. You really need to create strong leadership and align your team, bring them together, around a future vision and see your way through.
Q. Of your three themes, what does it mean to “focus on value?” That seems obvious, doesn’t it?
A. It means do more with less. Cut your costs, but do it strategically. Preserve your working capital and protect your cash reserves, but increase your flexibility, agility and responsiveness. It’s not about doing less. It’s about the effectiveness of what you do. When you look at your investments, are they strategic for the future and are they necessary to grow the business?
The second is focus on opportunities at the core of your business. Look for the things that create value for your customers or your clients. Remove non-core costs. Wherever possible, shift from fixed to variable costs. How much of your cost can you get off your books and into a more variable type of environment? Understand your customers and target your value-oriented customers. You may want to lose some customers and focus on the ones that are going to drive your business in the longer term.
Q. Haven’t businesses been doing these things for years?
A. To varying degrees. There’s always a tendency in an upturn not to face some of these challenges, to allow things to drag on, to not be as responsive, to not change the environment. One of the opportunities of an economically challenging period like this is that it enables us to change models, to change more quickly and radically than we otherwise would be able to do. We can build culture change and build a management team around the changes that are necessary.
Q. What are examples of companies doing what you suggest?
A. Companies like McDonald’s and Wal-Mart are focused on the value sensitive customer. That’s obviously the right place to be in today’s marketplace--finding ways to make your product offering of more interest to the value-oriented customer. There are other people trying to do that. Denny’s, for example, ran a free breakfast program. What they’re trying to do is bring in a customer who normally wouldn’t have thought about Denny’s and get them to understand the value proposition that Denny’s offers. Some banks have focused less on high-profile, high-risk offerings such as sub-prime mortgages and concentrated on low-risk, traditional lending. Some of them did well during this time frame.
Q. Are there new analytical tools or software tools help CEOs make these kinds of decisions?
A. Absolutely. A lot of this is about being smarter with information--aggregating information from multiple sources on a real time basis and being able to make real time decisions, which relates to our third theme of acting with speed. An example is some of the work we have done at utilities and power plants. Rather than continuing to invest in new assets and facilities, can you get better deployment from the facilities you have? Can you be smarter about how to use that capacity? Can you spread it out during the day? Can you manage the load better? Can you get your consumers to shift their demands? The tools are out there and IBM has worked with people in that space. Take a city like London, where they have put in toll charging. Can you use sensors to change the pricing or to change the traffic flows? Rather than building more bridges and roads, can you create incentives for people to move the traffic to different places at different times?
Q. Are these tools integrated into an ERP environment or are they part of so-called information dashboards?
A. It’s about using analytics and its using sensors and actuators, and putting them together in a smart environment, what IBM calls a smarter planet. An example of what insurance companies have been doing in Europe, and it’s starting in the United States, is putting a sensor in your car. If the car gets into an accident, they know it immediately. They help you manage that and they send somebody out there in shuttle with you to be the man on the spot. By the way, when they do that, you tend to settle for less rather than waiting and hiring a lawyer. There are lots of things you can do with real-time information as opposed to an ERP report that sits on the shelf and somebody reads a week or two later. What we need is smarter day-to-day decision-making—what products do you send to your stores? How do you fill your supply chain or don’t fill your supply chain?
Q. So the IBM solution isn’t purely about technology. It’s about putting processes in place?
A. It’s about systems, about processes and about business models. A lot of people talk about strategy. We like to say that strategy is only as good as your business model.
Q. In your study, you looked at U.S. companies versus non-U.S. companies. Did you see any differences? Are American companies better and faster or slower and dumber?
A. We didn’t do a detailed analysis of the companies by geography, but they do represent different industries. We looked at everything from medical equipment companies to banks and railroads, and from oil companies to biotechnologies and restaurants.
Q. Did you find that CEOs are driving the decision-making at these companies or have they ceded ground to chief financial officers or others?
A. The CEO needs to drive it from the top. We did a CEO study last year in which we met with 1,200 CEOs in person. We’re going to revisit them in the coming year. And we also did a study on what we call the “change gap.” We found there are some companies that manage change very well just like there are some companies that do mergers and acquisitions very well. We looked for characteristics that made companies more successful than the others. Clearly, assigning dedicated change managers and empowering employees to act comes from the top. You need strong and alive leadership and we think that comes from the CEO.
