ESWOT: An Econometrics Approach To SWOT Analysis On The Evaluation Of IBM's Strategy

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(1)CHAPTER I. INTRODUCTION Chapter Overview The first chapter gives the audience an introduction into the study. The background of the study, the problem statement, the purposes of the research, the research questions, the hypotheses, and the significance of the study, the delimitations and limitations, and finally a definition of the terms are all addressed, in order to introduce a thorough and comprehensive focus by the researcher.. Background of the Study The role of strategic management has never seemed more crucial than in the context of today’s world economic and financial crisis. In order to survive in this new environment, companies have to become more responsive to change. The fight for survival and grasp of market share is pushing companies to transform themselves for competition in which the ability to exploit information has become of greater importance than their capacity of managing physical resources. Therefore, performance can be viewed from the perspective of the interaction of the company’s business decisions with its internal and external environments. First of all, in contouring the baseline for effective strategic management, companies have to proceed to the identification and analysis of internal and external factors that can either stimulate or hinder its performance. In doing so, one of the most commonly used frameworks (Bernroider 2002; Yuksel & Dagdeviren 2007) in strategic management is the SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. SWOT analysis can be simply understood as the examination of an organization' s internal strengths and weaknesses and its environments’ opportunities and threats (Johnson et al. 1989; Bartol et al. 1991).. 1.

(2) As the final goal of a company’s strategic planning process is the development of a strategy comprising of an optimal fit between the internal and external factors, the role of a correct SWOT analysis is essential. Nevertheless, the sole use of a SWAT analysis is highly controversial (Dyson 2002; Kurttila, et al. 2003; Yuksel & Dagdeviren 2007), and criticism has been directed towards its lacking an analytical mean in determining the importance of the observed factors. Secondly, a company’s strategic decision making impacts and is affected at the same time by the different groups that contour its direct environment. According to Houben, Lenie and Vanhoof (1999), the direct environment includes those elements or groups which influence or are directly influenced by the actions of the company. The three most important ones are the shareholders, the organization’s employees represented by the trade unions, and the board of directors. Thirdly, the economic and industry analysis literature is characterized by an emphasis on a new knowledge intensive era of economic activity (OECD, 1999). Knowledge is the ‘driver of productivity and economic growth’ and ‘there is a new focus on the role of information, technology and learning in economic performance’ (OECD, 1996). The IT industry is a knowledge industry. Its major product is knowledge itself and its major output is research which translates into new products and services. The growing economic activity in knowledge- and technology-intensive sectors is already translating into rapidly expanding output and employment growth. The software industry growth market has created many opportunities for software companies. But globalization, the acceleration of technological change and innovation have also created threats. To survive in this new environment, many firms have had to become more responsive to change, which is the foundation of continued competitiveness in the dynamic environment of IT companies. Since we are dealing with, as aforementioned, an increase in the importance of information in assessing competitiveness, the present research will look at one of the. 2.

(3) champions of the knowledge-intensive era of economic activity, IBM. Shih and Plescan (2007) have identified three crucial issues in IBM’s evolution. The first one, in 1992, the company was going through a rough period, as the value of the company’s stock reached its lowest point, morale was very low, and the company' s products could not keep up with the changing market. In this context, Louis Gerstner entered the company and became the motor of IBM’s institutional change. The second crucial issue to be analyzed was in 2002, when the company sold its hardware business to Hitachi, decision based on the desire to reduce the PC and component businesses altogether, due to a downturn in both the semiconductor and disk drive business. The third major issue to debate is the vital role of a visionary CEO. During the years he spent in IBM, Gerstner revitalized the company, due to his ability to view the problems unemotionally, and, therefore, he could lay off employees when necessary and create new strategies. Consequently, the need arises for researching IBM’s evolution and strategic changes through the perspective of the three main groups that impact and is influenced by the company’s policies (the board, the stockholders and the employees). Also, the strengthening of the SWOT analysis through an econometrics model is required.. 3.

(4) Purposes of the Study The shifts throughout the last decades from an industrial to an information-based society and from a manufacturing to a service oriented economy have significantly impacted the IT industry. A key characteristic of the IT industry in general is its fast clock speed, fast innovation and short life cycles (Mendelson & Pillai 1998; Mendelson & Pillai 1999) hence responsiveness to change is critical. Therefore, in order to increase performance the companies must have a deeper, more exhaustive picture of the interaction of the company’s business decisions with its internal and external environment. In order to accomplish that, this research sets it primary main purpose as the evaluation of IBM’s strategy with respect to the following three dimensions: 1. The Board’s Perspective 2. The Stakeholders’ Perspective 3. The Unions’ Perspective The research will set its objectives as the following: 1. To examine the impact of regional variables on the board of directors, stockholders and employees of IBM. 2. To investigate the extent to which the board of directors, stockholders and employees are influenced by IBM’s strategic business units. 3. To investigate the impact of the human resource strategies of IBM on the board of directors and stockholders. 4. To understand and analyze the intensity to which the strategic changes in 1993 and 2002, as well as the impact of Louis Gartner’s policies on the board of directors, stockholders and employees of IBM In order to realize this, Shih and Moldovan have created a theoretical framework through the integration of econometrics and SWOT analysis: ESWOT.. 4.

(5) Questions of the Study Given all the above, 11 research questions have emerged: I.. The board’s perspective 1. Which region’s financial results (Europe / Middle East / Africa, Asia Pacific or the Americas) had a larger impact on the company’s Earnings and Revenue? 2. Which Strategic Business Units (Global Services, Hardware, Software and Global Financing) had a larger impact on the company’s Earnings and Revenue? 3. Did the human resource policies (Individuals benefiting from a retirement plan / Number of employees) influence the company’s Earnings and Revenue? 4. Did the strategy change in 1993 and 2002 have an impact on the company’s Earnings and Revenue?. II.. The stockholders’ perspective 5. Which region’s financial results (Europe / Middle East / Africa, Asia Pacific or the Americas) had a larger impact on the company’s EPS? 6. Which Strategic Business Units (Global Services, Hardware, Software and Global Financing) had a larger impact on the company’s EPS? 7. Did the human resource policies (Individuals benefiting from a retirement plan / Number of employees) influence the company’s EPS? 8. Did the strategy change in 1993 and 2002 have an impact on the company’s EPS? 5.

(6) III.. The unions’ perspective 9.. Which region’s financial results (Europe / Middle East / Africa, Asia Pacific or the Americas) had a larger impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees)?. 10. Which Strategic Business Units (Global Services, Hardware, Software and Global Financing) had a larger impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees)?. 11.. Did the strategy change in 1993 and 2002 have an impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees)?. Testing Hypotheses Based on the previously mentioned research questions, 11 hypotheses have emerged: I.. For the board’s dimension 1. Which region’s financial results (Europe / Middle East / Africa, Asia Pacific or the Americas) had a larger impact on the company’s Earnings and Revenue? Hypothesis 1: H0: There is no difference regarding the impact on the company’s Earnings and Revenue between the financial results from the geographical areas (Europe / Middle East / Africa, Asia Pacific and the Americas). 6.

(7) H0: βYXi = 0 Ha: The impact on the company’s Earnings and Revenue differs among the financial results from the geographical areas (Europe / Middle East / Africa, Asia Pacific and the Americas). Ha: βYxi ≠ 0 2. Which Strategic Business Units (Global Services, Hardware, Software and Global Financing) had a larger impact on the company’s Earnings and Revenue? Hypothesis 2: H0: There is no difference regarding the impact on the company’s Earnings and Revenue between Strategic Business Units (Global Services, Hardware, Software and Global Financing). H0: βYxi = 0 Ha: The impact on the company’s Earnings and Revenue differs among the Strategic Business Units (Global Services, Hardware, Software and Global Financing).. Ha: βYxi ≠ 0. 3. Did the human resource policies (Individuals benefiting from a retirement plan / Number of employees) influence the company’s Earnings and Revenue? Hypothesis 3: H0: There is no relationship between human resource policies (Individuals benefiting from a retirement plan / Number of employees) and the company’s Earnings and Revenue. H0: βYxi = 0 Ha: There is a relationship between the human resource policies (Individuals benefiting from a retirement plan / Number of employees) and the company’s Earnings and Revenue. Ha: βYxi ≠ 0. 7.

(8) 4. Did the strategy change in 1993 and 2002 have an impact on the company’s Earnings and Revenue?. Hypothesis 4: H0: There is no relationship between the strategy changes in 1993 and 2002 and the evolution of the company’s Earnings and Revenue. H0: βYxi = 0 Ha: There is a relationship between the strategy changes in 1993 and 2002 and the company’s Earnings and Revenue. Ha: βYxi ≠ 0 II.. For the stockholder’s dimension 5. Which region’s financial results (Europe / Middle East / Africa, Asia Pacific or the Americas) had a larger impact on the company’s EPS? Hypothesis 5: H0: There is no difference regarding the impact on the company’s EPS between the financial results from the geographical areas (Europe / Middle East / Africa, Asia Pacific and the Americas). H0: βYxi = 0 Ha: The impact on the company’s EPS differs among the financial results from the geographical areas (Europe / Middle East / Africa, Asia Pacific and the Americas). Ha: βYxi ≠ 0 6. Which Strategic Business Units (Global Services, Hardware, Software and Global Financing) had a larger impact on the company’s EPS?. 8.

(9) Hypothesis 6: H0: There is no difference regarding the impact on the company’s EPS between Strategic Business Units (Global Services, Hardware, Software and Global Financing). H0: βYxi = 0 Ha: The impact on the company’s EPS differs among the Strategic Business Units (Global Services, Hardware, Software and Global Financing) Ha: βYxi ≠ 0 7. Did the human resource policies (Individuals benefiting from a retirement plan / Number of employees) influence the company’s EPS? Hypothesis 7: H0: There is no relationship between human resource policies (Individuals benefiting from a retirement plan / Number of employees) and the company’s EPS.. H0: βYxi = 0. Ha: There is a relationship between the human resource policies (Individuals benefiting from a retirement plan / Number of employees) and the company’s EPS. Ha: βYxi ≠ 0. 8. Did the strategy change in 1993 and 2002 have an impact on the company’s EPS? Hypothesis 8: H0: There is no relationship between the strategy changes in 1993 and 2002 and the evolution of the company’s EPS. H0: βYxi = 0. 9.

(10) Ha: There is a relationship between the strategy changes in 1993 and 2002 and the company’s EPS. Ha: βYxi ≠ 0 III.. For the unions’ dimension 9.. Which region’s financial results (Europe / Middle East / Africa, Asia Pacific or the Americas) had the largest impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees)?. Hypothesis 9: H0: There is no difference regarding the impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees) between the financial results from the geographical areas (Europe / Middle East / Africa, Asia Pacific and the Americas). H0: βYjXi = 0 Ha: The impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees) differs among the financial results from the geographical areas (Europe / Middle East / Africa, Asia Pacific and the Americas).. Ha: βYjXi ≠ 0. 10.. Which Strategic Business Units (Global Services, Hardware, Software, and Global Financing) had a larger impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees)?. Hypothesis 10: H0: There is no difference regarding the impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees). 10.

(11) between Strategic Business Units (Global Services, Hardware, Software and Global Financing). H0: βYjXi = 0 Ha: The impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees) differs among the Strategic Business Units (Global Services, Hardware, Software and Global Financing). Ha: βYjXi ≠ 0. 11.. Did the strategy change in 1993 and 2002 have an impact on the company’s human resource policies (Individuals benefiting from a retirement plan / Number of employees)?. Hypothesis 11: H0: There is no relationship between the strategy change in 1993 and 2002 and the human resource policies (Individuals benefiting from a retirement plan / Number of employees).. H0: βYjXi = 0. Ha: There is a relationship between the strategy change in 1993 and 2002 and the human resource policies (Individuals benefiting from a retirement plan / Number of employees). Ha: βYjXi ≠ 0. 11.

(12) Significance of the Study The significance of this study derives from two major perspectives: First of all, if used correctly, SWOT can provide a good basis for successful strategy formulation (Kurttila, et al., 2000), nevertheless it could be used more efficiently. Criticism to employing the SWOT analysis in the formulation of a company’s strategy pinpoints the fact that the analysis lacks the possibility of comprehensively appraising the strategic decision-making situation; merely pinpointing the number of factors in strength, weakness, opportunity or threat groups does not emphasize the most significant group. In addition, SWOT includes no means of analytically determining the importance of factors or of assessing the fit between SWOT factors and decision alternatives. The further utilization of SWOT is, therefore mainly based on the qualitative analysis, capabilities and expertise of the persons participating in the planning process. In this respect, the theoretical framework that Shih and Moldovan have created through the integration of econometrics and SWOT analysis (ESWOT) will provide the quantifiable, measurable dimension to the classical strategic analysis tool. Secondly, besides the contribution to the general theoretical theory, the study’s value comes from the fact that an integrated econometrical framework has not yet been employed in analyzing IBM’s strategy. An econometrical approach to measure IBM’s profitability and human resource policies has been realized through a model was built by Shih & Plescan (2007), but the integration with the theoretical framework is yet to be achieved, which is what this study sets out to realize.. 12.

(13) Delimitations and Limitations The research’s primary limitation is the data time constraint. The 17 years of IBM’s financial reports, from 1990 to 2007, might restrict the results. Also, the financial data is provided via website, through IBM’s Corporate Archives Web, where the public financial statements can be found. It is stated that: “It is the intent of the IBM Corporate Archives to make selected information publicly available on this Web site in order to advance the study of science, information technology, and the IBM Corporation. The image and text files on the IBM Corporate Archives Web site are made available for noncommercial, educational, and personal use only.” (http://www.ibm.com/annualreport/). 13.

(14) Definition of Terms International Business Machines. Corporation, abbreviated IBM and. nicknamed "Big Blue" (for its official corporate color), is a multinational computer technology and consulting corporation headquartered in Armonk, New York, United States. The company is one of the few information technology companies with a continuous history dating back to the 19th century. IBM manufactures and sells computer hardware and software, and offers infrastructure services, hosting services, and consulting services in areas ranging from mainframe computers to nanotechnology. IBM has been known through most of its recent history as the world' s largest computer company. With over 388,000 employees worldwide, IBM holds more patents than any other U.S. based Technology Company and has eight research laboratories worldwide. Known for its highly talented workforce, the company has scientists, engineers, consultants, and sales professionals in over 170 countries. IBM employees have earned three Nobel Prizes, five National Medals of Technology, and five National Medals of Science. As a chip maker, IBM has been among the Worldwide Top 20 Semiconductor Sales Leaders in past years, and in 2007 IBM ranked second in the list of largest software companies in the world. (http://en.wikipedia.org/wiki/IBM) Information technology (IT), as defined by the Information Technology Association of America (ITAA), is "the study, design, development, implementation, support or management of computer-based information systems, particularly software applications and computer hardware." IT deals with the use of electronic computers and computer software to convert, store, protect, process, transmit and retrieve information securely. Today, the term information technology has broadened to encompass many aspects of computing and technology, and the term has become very recognizable. The information technology umbrella can be quite large, covering many fields. IT professionals perform a variety of duties that range from installing applications to designing complex computer networks and information databases. A few of the duties that IT professionals perform may include data management, networking, engineering 14.

(15) computer hardware, database and software design, as well as the management and administration of entire systems. (http://en.wikipedia.org/wiki/Information_technology) The SWOT Analysis is a tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, straightforward model that assesses what an organization can and cannot do as well as its potential opportunities and threats. The method of SWOT analysis is to take the information from an environmental analysis and separate it into internal issues (strengths and weaknesses) and external issues (opportunities and threats). Once this is completed, SWOT analysis determines what may assist the firm in accomplishing its objectives, and what obstacles must be overcome or minimized to achieve desired results.. Figure 1.1 SWOT outline Source: http://www.investopedia.com/terms/s/swot.asp Econometrics is defined as the application of statistical theories to economic ones for the purpose of forecasting future trends. Econometrics takes economic models and tests them through statistical trials. The results are then compared and contrasted against real life examples. (http://www.investopedia.com/terms/e/econometrics.asp). 15.

(16) ESWOT is a strategic management tool developed by Shih and Moldovan, through the integration of the SWOT Analysis with an econometrics model developed on three dimensions: the board, the stockholders and the employees. A board of directors is a body of appointed persons who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board. It is often simply referred to as "the board.” A board' s activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization' s bylaws. The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet. (http://en.wikipedia.org/wiki/Board_of_directors) Earnings are defined as the amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings typically refer to after-tax net income. Ultimately, a business' s earnings are. the. main. determinant. of its share. price,. because earnings. and. the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. Earnings are perhaps the single most studied number in a company' s financial statements because they show a company' s profitability. A business' s quarterly and annual earnings are typically compared to analyst estimates and guidance provided by the business itself. In most situations, when earnings do not meet either of those estimates, a business' s stock price will tend to drop. On the other hand, when actual earnings beat estimates by a significant amount, the share price will likely surge. (http://www.investopedia.com/terms/e/earnings.asp) Revenue is defined by Investopedia as the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods 16.

(17) or services are sold by the number of units or amount sold. (http://www.investopedia.com/terms/r/revenue.asp) A stockholder or shareholder is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. A company' s shareholders collectively own that company. Thus, the typical goal of such companies is to enhance shareholder value. (http://en.wikipedia.org/wiki/Shareholder) Earn Per Share (EPS) is defined as the portion of a company' s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company' s profitability. It is calculated as:. In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. (http://www.investopedia.com/terms/e/eps.asp) A trade union or labor union is an organization of workers who have grouped together to achieve common goals in key areas and working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labor contracts with employers. This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies. (http://en.wikipedia.org/wiki/Trade_union) An employee is an individual who works part time or full time under a contract of employment, whether oral or written, express or implied, and has recognized rights and duties. (http://www.businessdictionary.com/definition/employee.html) 17.

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(19) CHAPTER II. LITERATURE REVIEW Chapter Overview This chapter provides the review of relevant literature that assists the researcher in addressing the purpose of the research. The chapter is designed twofold, pertaining to the two main research components: the theoretical and the econometrical framework. At first it provides an insight about the SWOT analysis, moving towards the development of the ESWOT. The chapter continues by focusing on IBM. The IBM timeline will illustrate the specific points in time when change occurred, followed by the profile of IBM’s influential CEO, Louis Gerstner. The chapter will conclude by exploring the three dimensions of IBM’s strategic analysis: the board of directors, the stockholders and the unions.. The SWOT Analysis Many companies are conducting a SWOT analysis as part of the strategic planning process to identify the organizations’ strengths, weaknesses, opportunities and threats before proceeding to the formulation of a corporate strategy. In this light, a general outlook on strategic planning is needed, prior to the detailed examination of the SWOT analysis. Strategic planning Today most business enterprises engage in strategic planning, although the degrees of sophistication and formality vary considerably. Conceptually strategic planning is deceptively simple: analyze the current and expected future situation, determine the direction of the firm, and develop means for achieving the mission. In reality, this is an extremely complex process, which demands a systematic approach for identifying and analyzing factors external to the organization and matching them with the firm' s capabilities (Weirich, 1982). 19.

(20) Strategic planning is a way of regenerating the organization, through continuous attention to a vision of what people who make up an organization wish to do (Eden & Ackermann, 2008). It is a pro-active process of seeking to change the organization, its stakeholders, and the environment, which seeks to attain its aspirations. Strategic planning can be considered as a collection of decisions and actions taken by the business management in consultation with all levels within the company to determine its long-term activities. The results primarily concern an improvement in the competitive position, the realization of profit growth in the long-term, having as a result the achievement of better returns from the capacity utilized. Strategic planning includes three basic elements, namely: • The formulation of a strategy. • The implementation of a strategy. • The control and evaluation of the strategy (Bernroider, 2002). The formulation of a strategy is a process for the development of long-term plans, to effectively respond to environmental opportunities and threats in the light of the strengths and weaknesses of the company. Points of departure here are the objectives of company management, which determine the long-term objectives to be achieved. The course to be taken by the company to realize this is called the company strategy or the company policy. In order to implement the strategy and lines of the policy chosen, action programs are devised and budgets and procedures are drawn up. A program can hereby be considered as a collection of actions and stages which are necessary for the execution of the plan. It translates the strategy into actions at an operational level. A budget, on the other hand, is the translation of this program into financial terms. It provides a prognosis of the detailed costs of each program for the subsequent control and evaluation of the aims. Finally, evaluation and control is the process of following up company activities and the execution results, so that the actual execution can be compared with that desired. 20.

(21) The business management then uses this information for corrective action or to solve problems. Despite the fact that evaluation and control forms the last important step of the strategic management process, it can also serve as a starting point for a new cycle by indicating weaknesses of the company in previously implemented strategic plans. We thus obtain a continuous process. Although specific steps in the formulation of the strategy may vary, the process can be built, at least conceptually, around the following framework (Weirich, 1982): (1) Recognition of the various organizational inputs, especially the goal inputs of the claimants to the enterprise. (2) Preparation of the enterprise profile. (3) Identification of the present external environment. (4) Preparation of a forecast with predictions of the future environment. (5) Preparation of a resource audit with emphasis on the company’s internal weaknesses and strengths. (6) Development of alternative strategies, tactics and other actions. (7) Evaluation and choice of strategies. (8) Consistency testing. (9) Preparation of contingency plans.. 21.

(22) Figure 2.1. Strategic planning process Source: Weirich, 1982 The strategic manager has to evaluate a multiplicity of possible strategies. Clearly, such a manager has to take into consideration both external realities and internal capabilities. Unfortunately, environments are not static, but are dynamic and subject to constant change. Thus, the strategist has to make predictions of changes about the future. SWOT overview Every company is confronted with a variety of internal and external forces which, on the one hand can comprise potential stimulants, and on the other hand, can comprise potential limitations with regards to the performance of the company or the objectives the company wishes to achieve. As a first step in the development of a strategic planning system, business managers should therefore commence with the identification and evaluation of these strategic factors which assist or hinder the company in reaching its full potential. Because every company is confronted with a dynamic environment, the relative importance of a strategic factor will change constantly, so this analysis is unlikely to be of a permanent nature. 22.

(23) Strengths relate to the competitive advantages and other distinguishing competencies which can be exploited by the company on the market. A distinguishing competence is something which can be done very capably by a company. Weaknesses, on the other hand, are limitations which hinder the progress of a company in a certain direction. A systematic schedule for the analysis of strengths and weaknesses is something constantly gaining popularity. Companies must undertake specific actions in order to distinguish their competitive strengths and weaknesses. History has shown this to be not particularly simple (Weirich, 1982). Many companies only have vague ideas of the source of certain competencies and the extent to which they possess them. The absence of a global company overview prevents a clear picture being obtained. Despite these problems the development of a competitive strategy depends on having a global overview as regards to the strengths and weaknesses. The strengths and weaknesses can be found in the functional company fields, or they may be a consequence of abnormal interaction between different fields. Furthermore, the strengths and the weaknesses of an aspect must be measured at different levels of the organization; this can be at group level, at individual company level, or at product or market level. The evaluation of the performances of the past may not be neglected with the measuring of strengths and weaknesses because it provides historic insight into the strategy of the company previously implemented as well as the successes accordingly achieved. Historic investigations may not only be limited to the pure analysis of the paths followed by the company in the past and the results achieved, they must also devote attention to the reasons for this success. The current strategic position forms a very important point of departure for the development of a future strategy. It is very difficult to understand the current strategy if a formal planning system was previously absent. The studying of the competition, the current strategic prospects, performances from the past, the market possibilities and the market environment provide us with insight concerning information required for the indication of strengths and weaknesses. Where possible these strengths and weaknesses are to be represented in objective terms. It must 23.

(24) be commented that most strengths concern the capabilities of certain personnel members or the resources at hand. A distinction can be made according to the present product/market combinations. It is therefore sensible to make a distinction to the extent to which these strengths and weaknesses are of a critical nature. As regards to the critical factors, an attempt must be made to sort them on the basis of strengths. SWOT in the context of strategic management It could be claimed that strategic planning in general and the SWOT analysis in particular, have their mutual origins in the work of business policy academics at Harvard Business School and other American business schools from the 1960’s onwards. The work of Kenneth Andrews has been especially influential in popularizing the idea that good strategy means ensuring a fit between the threats and opportunities as external situation faced by a firm, and its own strengths and weaknesses as internal qualities or characteristics. Subsequent approaches to strategy formation which urge different thinking have been developed, most importantly the work of Michael Porter (the five forces model) focusing on five forces that shape competition within an industry. The problem with the Porter model is the fact that the analysis of industries cannot be undertaken in isolation as industries are embedded in a wider macro-environment that needs to be accounted for in order to get a comprehensive picture. If used correctly, SWOT can provide a good basis for successful strategy formulation (Kurttila, et al., 2000) nevertheless it could be used more efficiently. Criticism to employing the SWOT analysis in the formulation of a company’s strategy pinpoints the fact that the analysis lacks the possibility of comprehensively appraising the strategic decision-making situation; merely pinpointing the number of factors in strength, weakness, opportunity or threat groups does not pinpoint the most significant group. In addition, SWOT includes no means of analytically determining the importance of factors or of assessing the fit between SWOT factors and decision alternatives. The further utilization of SWOT is, therefore mainly based on the qualitative analysis, capabilities and expertise of the persons participating in the planning process. 24.

(25) In their study, Hill and Westbrook (1997) found that none of the 20 companies prioritized individual SWOT factors, one grouped factors further into subcategories, and only three companies used SWOT analysis as an input for a new mission statement. In addition, the expression of individual factors was of a very general nature and brief. Thus, it can be concluded that the result of SWOT analysis is too often only a superficial and imprecise listing or an incomplete qualitative examination of internal and external factors. As planning processes are often complicated by numerous criteria and interdependencies, it may be that the utilization of SWOT is insufficient. Thus, it can be concluded that the result of SWOT analysis is too often only a superficial and imprecise listing or an incomplete qualitative examination of internal and external factors. Yet this SWOT-type analysis of internal and external assessment and seeking a fit between the two perspectives has remained popular. Modern textbooks on strategy still feel obliged to include SWOT, even if they have reservations about its application. Applications for gaining extra value from SWOT analysis in further strategic planning processes have been presented. Weirich (1982) presented the TOWS matrix, which helps to systematically identify relationships between threats, opportunities, weaknesses and strengths, and offers a structure for generating strategies on the basis of these relationships. Kotler (1988) (in Kurttila et al., 2000) presented that external factors could be classified according to their attractiveness and success probability (opportunities) and seriousness and probability of occurrence (threats). Internal factors could be rated by their performance and importance. In addition, he subdivided SWOT by business unit. Hemmi (1995) suggested weighting four SWOT groups and using these weights as additional multipliers for individual factors to assess their overall importance. However, none of these approaches presented a systematic technique for determining importance. With these shortcomings in mind, on one hand, there are still many companies conducting SWOT analysis as part of the strategic planning process (Bernroider, 2002) in order to identify the organizations’ strengths, weaknesses, opportunities and threats before proceeding to the formulation of a corporate strategy. Also, the specialty literature counts hundreds of studies on conducting SWOT analysis.. 25.

(26) Yet an integrative approach through the use of an econometrics model in order to quantitatively determine the importance of the factors has not been undertaken, thus underlining one of the two major contributions of this study to the strategic management domain, through the ESWOT analysis.. ESWOT Through the integration of the SWOT Analysis with an econometrics model developed on three dimensions: the board, the stockholders and the employees, Shih and Moldovan have constructed the ESWOT econometrics analysis. Model I: The board’s perspective A board of directors is a body of appointed persons who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board. It is often simply referred to as "the board” (Tombesi, 2006). A board' s activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. In a stock corporation, the board is elected by the stockholders and is the highest authority in the management of the corporation. Typical duties of boards of directors include: o Governing the organization by establishing broad policies and objectives o Selecting, appointing, supporting and reviewing the performance of, the chief executive o Ensuring the availability of adequate financial resources o Approving annual budgets o Accounting to the stakeholders for the organization' s performance. Another feature of boards of directors in large public companies is that the board tends to have more de facto power, as pointed out by Rashidah & Fairuzana (2006). The exercise by the board of directors of its powers usually occurs in meetings. Most legal 26.

(27) systems provide that sufficient notice has to be given to all directors of these meetings, and that a quorum must be present before any business may be conducted. Because directors exercise control and management over the company, but companies are run (in theory at least) for the benefit of the shareholders, the law imposes strict duties on directors in relation to the exercise of their duties. Puffer and Weintrop (1991) analyze corporate performance and CEO turnover by looking at the role of performance expectations that the board of directors has in judging a CEO’s performance. For measuring the board’s expectations on which the decision making process is based, the study uses profit and earnings, among other variables. Rashidah & Fairuzana (2006), in their research “Board, audit committee, culture and earnings management: Malaysian evidence”, as well as Tombesi (2006), employ the two variables in measuring the board’s perspective. In light of this research, in constructing Model I, Shih and Moldovan use IBM’s profit and revenue as dependent variables to reflect the board’s interests within the company. Model II: The stockholders’ perspective Looking at the second perspective, shareholders have, at a minimum, an interest in the activities of the corporation (Goodrich, Rossiter, 2009). A stockholder is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. A company' s stockholders collectively own that company. Thus, the typical goal of such companies is to enhance stockholder value. Stockholders are granted special privileges depending on the class of stock. These rights may include: o The right to vote on matters such as elections to the board of directors. Usually, stockholders have one vote per share owned, but sometimes this is not the case. o The right to propose shareholder resolutions. o The right to share in distributions of the company' s income. 27.

(28) o The right to purchase new shares issued by the company. o The right to a company' s assets during a liquidation of the company. However, stockholder' s rights to a company' s assets are subordinate to the rights of the company' s creditors. This means that stockholders typically receive nothing if a company is liquidated after bankruptcy (if the company had enough to pay its creditors, it would not have entered bankruptcy), although a stock may have value after a bankruptcy if there is the possibility that the debts of the company will be restructured. (http://en.wikipedia.org/wiki/Shareholder) Stockholders play an important role in raising capital for organizations. Companies typically provide all the necessary proofs to shareholders to show that they are investing at a right place (Copeland, 2002). Financial metrics to measure performance, guide decision making, and gauge whether shareholder value is created, are being used more today than at any other time in recent corporate history (Copeland, 2002). For example, fair and reliable audit figures from income statement and balance sheet are used as evidence of overall performance for the benefit of shareholders. Financial metrics such as earnings per share growth, economic value added or the percent increase in economic value added are used by Goodrich, Rossiter (2009) to see the total return to shareholders, in a study that investigates the roles of board independence and CEO duality on a firm' s performance relying on financial ratios, namely ROA, ROE, EPS and profit margin. In the early 1990’s, IBM’s EPS has reached an all time low, resulted in a loss in confidence in investing in the company, and emphasizing the need for change. This is the time when Gerstner came to IBM. In light of the stockholder’s importance within the company (Mello, 2006), Gerstner had to balance their interests and concerns with the ones of the board. The stockholders’ primary concern is the company’s profitability, quantified through earns per share, (Copeland, 2002; Goodrich, Rossiter, 2009) in order to measure the stockholders’ perspective, this study employs the EPS index, for the Model II of the study.. 28.

(29) Model III: The union’s perspective When facing globalization, companies needs efficiency in their HR policies in order to cut cost, as Dahl (1998) observes through a human resource cost and benefit analysis. The cost of human resources is of great importance to a company (Boyle, Balfour, 2009). The largest part of that cost is going on employees’ salaries and retirement plans, hence cost reduction policies call for efficient HR policies. As the market place turns increasingly global, it calls for a global union movement with global labor strategies (Anonymous, 2009). Over the last three hundred years, many trade unions have developed into a number of forms, influenced by differing political and economic regimes. As presented in “Self-evaluation and union interest: The empirical relevance of a mediated model”, (Mellor, 2009), the immediate objectives and activities of trade unions vary, but may include: Provision of benefits to members: Early trade unions, like Friendly Societies, often provided a range of benefits to insure members against unemployment, ill health, old age and funeral expenses. Collective bargaining: Where trade unions are able to operate openly and are recognized by employers, they may negotiate with employers over wages and working conditions. Industrial action: Trade unions may enforce strikes or resistance to lockouts in furtherance of particular goals. Political activity: Trade unions may promote legislation favorable to the interests of their members or workers as a whole. To this end they may pursue campaigns, undertake lobbying, or financially support individual candidates or parties (such as the Labor Party in Britain) for public office. All in all, the Unions’ primary concern is the welfare of the employees (Mello, 2006). Model III of this study makes use of employee numbers and retirement plan beneficiaries in measuring the union’s perspective, as previously done by Toulmin (1988) and Borland & Ouliaris (1994). 29.

(30) IBM profile International Business Machines Corporation (IBM) develops and manufactures information technologies, including computer systems, software, networking systems, storage devices, and microelectronics worldwide. The company was founded in 1911 as Computing-Tabulating-Recording Company and changed its name to International Business Machines Corporation in 1924. IBM is based in Armonk, New York. It was formed by Charles Flint, a noted trust organizer, who engineered the merger of Hollerith' s Tabulating Machine Company with two others - Computing Scale Company of America and International Time Recording Company. Based in New York City, the company had 1,300 employees and offices and plants in Endicott and Binghamton, NY; Dayton, OH; Detroit; Washington, D.C.; and Toronto. The combined company manufactured and sold machinery ranging from commercial scales and industrial time recorders to meat and cheese slicers, along with tabulators and punched cards. IBM would continue to grow over the next few decades and build new devices such as calculators and typewriters. This would lead the company to develop mainframe computers for use by companies and the military. In 1981, IBM developed its own personal computer (PC) using a processor from Intel and Disk Operating System (DOS) software from Microsoft. This would kick off a new era of technology by bringing computing to the masses. (http://nyjobsource.com/ibm.html).. 30.

(31) IBM Timeline 1911/06/15 - IBM incorporates in New York as the Computing-Tabulating-RecordingCompany. 1915/11/12 - IBM stock begins to sell publicly on NY Stock Exchange for $46 a share. 1924/02/14 – Computing – Tabulating – Recording - Company changes its name to International Business Machines. 1964/04/07 - IBM introduces System 360, first large family of computers. 1981/04/14 - Space Shuttle Columbia, aided by five onboard IBM computers, launched in first Shuttle flight. 1981/08/12 - IBM introduces the personal computer. 1984/05/05 - In Tokyo, IBM workers hold first international meeting. 1987/01/12 - IBM workers from around the world discuss union issues at London conference. 1991/01/31 - IBM announces 10% reduction in pension benefits 1991 (or 1992?) – Elimination of medical plan' s "coordination of benefits". 1993/04/01 - Louis V. Gerstner Jr. becomes IBM Chairman and CEO. 1994/02/17 - 320 employees laid off at IBM Endicott. 1994/07/27 - IBM announces Kingston, NY plant closing1996/02/11 - IBM' s "Big Blue" beats world chess champion, Gary Kasparov, marking a machine' s first victory over a world chess grandmaster. 1999/05/10 - IBM stock splits 2 for 1 (15th stock split). 1999/05/18 - IBM employees establish pension bulletin board at Yahoo.com. 1999/07/01 - Pension reductions for employees under 40 due to Cash Balance Plan conversion. 1999/09/17 - Bowing to protests by employees, IBM partially restores "pension choice" to employees. 2000/03/27 - California pension system announces decision to vote 9.2 million shares in favor of IBM employee stockholder resolution to restore pension and medical benefits.. 31.

(32) Louis Gerstner Louis Gerstner, Jr., served as chairman and chief executive officer of IBM from April 1993 to March 2002, when he retired as CEO. He remained chairman of the board through the end of 2002. Before joining IBM, Mr. Gerstner served for four years as chairman and CEO of RJR Nabisco, Inc. This was preceded by an eleven-year career at the American Express Company, where he was president of the parent company and chairman and CEO of its largest subsidiary. Gerstner is credited with saving IBM from going out of business in the early 1990s. In his memoir, “Who Says Elephants Can' t Dance?” he describes his arrival at the company in April 1993, when an active plan was in place to disaggregate the company. The prevailing wisdom of the time held that IBM' s core mainframe business was headed for obsolescence. The company' s own management was in the process of allowing its various divisions to rebrand and manage themselves — the so-called "Baby Blues." Gerstner reversed this plan, and the subsequent refocusing on the IT services business (which grew to nearly 50% of the IBM' s revenues), the embrace of the Internet as a business phenomenon, and a broad effort to revive the company' s culture are widely seen as having resulted in one of the most remarkable turnarounds in business history. In his memoir, Gerstner described the turnaround as difficult and often wrenching for an IBM culture that had become insular and balkanized. Before he arrived, over 100,000 employees had been laid off from a company that had maintained a lifetime employment policy from its inception. Layoffs and other tough management measures continued in the first two years of Gerstner' s tenure, but the company was saved, and business success has continued to grow steadily since then. Upon his departure from IBM, Gerstner received a 10-year consultancy contract worth up to $2 million annually, plus expenses and full use of IBM facilities and services, such as office, cars, aircraft and financial planning. He is only required to work one month out of the year.. 32.

(33) Lou Gerstner personifies the new global corporate leader: a change agent whose vision, strategy and determination tamed shifting economic and marketplace realities and reinvented IBM in the process. Setting the Vision: Direct and intensely focused, Lou Gerstner is the quintessential global corporate leader: a swift-acting change agent who sets the vision for the new reality. He created IBM’s future by moving it from product manufacturer to service provider, opening up totally new opportunities in the process. Managing Risk-Reward: Pursuing growth and maintaining profitability is a matter of setting strategy, aligning resources, solid execution and dealing with an increasingly complex global marketplace in a competitive industry. Gerstner weighs in on the challenges of today’s business environment and offers advice based on his experience. A Life of Purpose: Gerstner is a champion of quality education and created the Commission on Teaching, in order to help solve America’s growing education crisis. His best-selling book, “Who Says Elephants Can’t Dance?”, chronicles IBM’s incredible rebound and provides a thoughtful look at leadership in action. IBM’s Board of Directors IBM’s Board of Directors consists of 10 members, and it is responsible for supervision of the overall affairs of the Company. The Board held 10 meetings during 2007. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Overall attendance at Board and committee meetings was 92%. Attendance was at least 75% for each director. Directors are expected to attend the Annual Meeting of Stockholders, and all directors attended the 2007 Annual Meeting. Following the Annual Meeting in 2008, the Board will consist of 11 directors. In the interim between Annual Meetings, the Board has the authority under the by-laws to increase or decrease the size of the Board and to fill vacancies. (ftp://ftp.software.ibm.com/annualreport/2007/2008_ibm_proxy.pdf) 33.

(34) IBM’s Employees IBM employees have earned three Nobel Prizes, four Turing Awards, five National Medals of Technology, and five National Medals of Science. Hence, the men and women around the world employed by IBM have been a priority. For example, IBM’s founder, Thomas J. Watson, told employees in October 1926 “They say a man is known for the company he keeps. We say in our business that a company is known by the men it keeps”. IBM is committed to a diversified workforce and actively seeks qualified candidates who reflect the various markets served, including women, minorities, people with disabilities and gays and lesbians. Each year, IBM recruiters attend more than 40 diversity focused conferences and career fairs to recruit from these constituencies. Its Project View, a national university recruitment program targets graduating seniors of diverse backgrounds for employment in a variety of technical fields. In 1999, for the second year, WE Magazine recognized IBM as the best employer in America for people with disabilities. The value placed on IBM employees was codified in one of IBM’s three fundamental principles. In 1969, IBM chairman wrote to his management team: “Our basic belief is respect for the individual, for his rights and dignity. It follows from this principle that IBM should help each employee to develop his potential and make the best use of his abilities; pay and promote on merit, and maintain two-ways communications between manager and employee, with an opportunity for a fair hearing and equitable settlement of disagreements”. The company and its US subsidiaries have defined benefit postretirement plans that provide medical, dental and life insurance for retirees and eligible dependents. It is the company’s practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefit and tax laws, and such additional amounts as the company may determine to be appropriate from time to time. The assets of the various plans include corporate equities, government securities, corporate debt securities and income producing real estate. 34.

(35) CHAPTER III. METHODOLOGY Chapter Overview This chapter contains the research framework, research model, the research procedure, as well as the research methods. The integration of the theoretical model with the econometrics model is resulting in ESWOT. The chapter explains the approach to the econometrics model through using the three dimensions (Board, Stockholders and Unions) as dependent variables. The researcher provides definitions for each independent variable in relation to the purpose of the study. The framework shows how the variables are being tested and the research process explains the steps taken. Details of the method, procedure and instrumentation are given.. Research Framework A research framework has been developed, in order to acquire a better understanding of the appropriate research approaches conducive to the design of new strategies. The framework integrates the theoretical with the econometric model. The different categories of variables are introduced and defined, in order to provide a clear picture of the research outputs. This framework was developed as a clear representation of the variables of study.. 35.

(36) ESWOT IBM’s Strategy. Model I The Board. Earnings. Model III The Unions. Model II The Stockholders. Revenue. EPS. Individuals benefiting from retirement plans. Number of employees. Regional Variables. Regional Variables. Regional Variables. Regional Variables. Regional Variables. Strategic Business Units. Strategic Business Units. Strategic Business Units. Strategic Business Units. Strategic Business Units. Human Resource Strategy. Human Resource Strategy. Human Resource Strategy. Strategy Change. Strategy Change. Strategy Change. Strategy Change. Strategy Change. Figure 3.1. Research framework. 36.

(37) The present study is dimensioned on the integration of the SWOT Analysis with the 3 econometrics models, which will be explained in depth in the following paragraphs. In constructing Model I, Shih and Moldovan use IBM’s profit and revenue to reflect the board’s interests within the company, as employed by Tombesi (2006). Puffer and Weintrop (1991) analyze corporate performance and CEO turnover by looking at the role of performance expectations that the board of directors has in judging a CEO’s performance. For measuring the board’s expectations on which the decision making process is based, the study uses profit and earnings, among other variables. In light of this research, in constructing Model I, Shih and Moldovan use IBM’s profit and revenue as dependent variables to reflect the board’s interests within the company. Model I is designed in order to understand the Board’s perspective, through Profit and Earnings, as functions of 4 independent variables, for the time period between the years 1990 and 2007. Yi = f(xi) = a0 +b1*x1 + b2*x2 + b 3* x 3 + b4*x4 + ε The independent variables are categorized into 4 groups: 1. Regional variables . Revenues for Europe/Middle East/ Africa geographical area Revenues for Asia Pacific geographical area Revenues for Americas geographical area. 2. Strategic Business Units . Strategic Business Unit – Global Service Strategic Business Unit – Hardware Strategic Business Unit – Software Strategic Business Unit – Global Financing, other Investments. 3. Human Resource Strategy . Employee number evolution Individuals benefiting from a Retirement Plan 37.

(38) 4. Strategy variables . dummy variable – measuring the impact of a new CEO in 1993 dummy variable – measuring the impact of selling the Hardware department in 2002. Model II is designed in order to understand the Stockholder’s perspective. In light of the stockholder’s importance within the company (Mello, 2006), Gerstner had to balance their interests and concerns with the ones of the board. The stockholders’ primary concern is the company’s profitability, quantified through earns per share, (Copeland, 2002, Goodrich, Rossiter, 2009) in order to measure the stockholders’ perspective, as functions of 4 independent variables, for the time period between the years 1990 and 2007, this study employs the EPS index, for the Model II of the study. Y = f(xi) = a0 +b 1*x1 + b2*x 2 + b3* x3 + b4*x 4 + ε The independent variables are categorized into 4 groups: 1. Regional variables . Revenues for Europe/Middle East/ Africa geographical area Revenues for Asia Pacific geographical area Revenues for Americas geographical area. 2. Strategic Business Units . Strategic Business Unit – Global Service Strategic Business Unit – Hardware Strategic Business Unit – Software Strategic Business Unit – Global Financing, other Investments. 3. Human Resource Strategy . Employee number evolution Individuals benefiting from a Retirement Plan. 4. Strategy variables 38.

(39) . dummy variable – measuring the impact of a new CEO in 1993 dummy variable – measuring the impact of selling the Hardware department in 2002. Model III – is designed in order to understand the Unions’ perspective. All in all, the Unions’ primary concern is the welfare of the employees (Mello, 2006). Model III of this study makes use of employee numbers and retirement plan beneficiaries, as a function of 3 independent variables, for the time period between the years 1990 and 2007, in measuring the union’s perspective, as previously done by Toulmin, (1988) and Borland & Ouliaris (1994). Yi = f(xi) = a0 +b1*x1 + b2*x2 + b 3* x 3 + ε The independent variables can be categorized into 3 groups: 2. Regional variables . Revenues for Europe/Middle East/ Africa geographical area Revenues for Asia Pacific geographical area Revenues for Americas geographical area. 3. Strategic Business Units . Strategic Business Unit – Global Service Strategic Business Unit – Hardware Strategic Business Unit – Software Strategic Business Unit – Global Financing, other Investments. 4. Strategy variable . dummy variable – measuring the impact of a new CEO in 1993 dummy variable – measuring the impact of selling the Hardware department in 2002.. The 3 models are integrated with the SWOT analysis on its 4 dimensions (Strengths, Weaknesses, Opportunities, Threats), thus encompassing the ESWOT. 39.

(40) Research Model The current study aims to provide a tool for the development of strategies through the underlining of the actions that have had an impact on IBM’s financial position by focusing on a longitudinal time series study, between 1990 and 2007, with special focus at the times that changes have taken place, in 1993 and 2002. The merger between the SWOT analysis and a statistical analysis will provide a clear understanding of IBM’s evolution, as well as the sectors, areas, and strategies to be exploited. Three research models, related to three variables measuring domestic contribution, international contribution and institutional contribution. The econometrical model is established on the three research models, pertaining to the three independent variables measuring the Board’s Perspective (Earnings and Revenue), the Stockholder’s Perspective (EPS) and the Unions’ Perspective (employee number and number of employees benefitting from a retirement plan). Model I:. Yi = f(xi) = a0 +b1*x1 + b2*x2 + b 3* x 3 + b4* x4 + ε. Where: Y = The Board’s Perspective, measured by a) Earnings b) Revenue x1 = Region variable (Europe/Middle East/Africa, Asia Pacific, America) x2 = Product variable (Global Service, Hardware, Software, Global Financing) x3 = Human resource policy x4 = Strategy variable (dummy variables related to the 1993 and 2002 strategic periods) 40.

(41) Model II:. Y = f(xi) = a0 +b 1*x1 + b2*x 2 + b3* x3 + b4* x4 + ε Where: Y = The Stockholder’s Perspective, measured by EPS x1 = Region variable (Europe/Middle East/Africa, Asia Pacific, America). x2 = Product variable (Global Service, Hardware, Software, Global Financing) x3 = Human resource policy x4 = Strategy variable (dummy variables related to the 1993 and 2002 strategic periods) Model III:. Yi = f(xi) = a0 +b1*x1 + b2*x2 + b 3* x 3 + ε Where: Y = The Unions’ Perspective, measured by c) the number of individuals benefiting from a retirement plan d) the number of employees x1 = Region variable (Europe/Middle East/Africa, Asia Pacific, America). x2 = Product variable (Global Service, Hardware, Software, Global Financing) x3 = Strategy variable (dummy variables related to the 1993 and 2002 strategic periods). 41.

(42) Research Procedure In order for the study to develop in a clear and structured manner towards the achievement of the outcomes proposed by the purpose of the study, the following research process has been outlined.. Figure 3.2. Research process. 42.

(43) Research Methods In order for the study to attain its desired outcome, there will be a quantitative method approach for data analysis. The researcher will use the SPSS software. A first step will be the use of descriptive statistics. This statistical procedure allows the researcher to present the relevance and importance of the study. The descriptive statistics helped the researcher to arrange the data into a more interpretable form by forming the frequency distributions and generating graphical displays. All this data can be summarized easily or can be examined on their interrelation. The statistical tool employed in order to attain the purpose of the present study and to summarize the relationship between the variables, when one variable helps predict or explain the other (Moore et al., 2003), is the linear regression. This method also permits the researcher to estimate the magnitude of the effect of the predictor variables on the outcome variable. Therefore, regression methods seem to be superior in studying the relationship between the predictor and outcome variables. In order to examine the extent to which a variable is a good indicator of a factor extracted, for the data analysis, a stepwise variable selection will be used, namely the backward elimination process. In this process there are formulas designed to fit measures of resultant models when one variable is removed successively from x1 to xn in the current model, starting with the full model and then eliminating at each step the one variable whose deletion will cause the residual sum of squares to increase the least (Shih, Plescan, 2007). In the backwards elimination procedure, we proceed as follows: fit the maximum model, examine the p-values and eliminate the variable with the highest p-value if it is greater than a pre-specified level, and recompute the regression equation for the reduced model. The process is repeated until the variable with the highest p-value is below the criterion value.. 43.

(44) All in all, this method is chosen because instead of focusing on individual variables, it is important to study the relationship or interaction of these variables designated to be important, as in reality the variables do not exist or exert their influence independently. Source of data The study will employ financial data retrieved from IBM’s website. The Corporate Archives provide public financial statements from 1990 until 2007. (http://www.ibm.com/annualreport/). The financial statements are formal records of a business'financial activities, which provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. There are four basic financial statements: The Income Statement reports on a company' s income, expenses, and profits over a period of time. Basically, the income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period. The Balance Sheet reports on a company' s assets, liabilities, and net equity as of a given point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The Cash Flow Statements reports on a company' s cash flow activities, particularly its operating, investing and financing activities, thus showing the net increase or decrease in cash for the period under investigation. The Statement of Retained Earnings explains the changes in a company' s retained earnings over the reporting period. It breaks down changes affecting the account, such as profits or losses from operations, dividends paid, and any other items charged or credited to retained earnings. 44.

(45) CHAPTER IV. FINDINGS AND DISCUSSION Chapter Overview In this chapter two major dimensions will be discussed: the descriptive statistics and the empirical results. The empirical result section is further subdivided into three parts, each pertaining to one of the three dimensions of the research model.. Descriptive Statistics In order to gain an overview picture of the evolution of the regional variables, strategic business units, human resource strategies, institutional change variables and the EPS, descriptive statistics will be employed.. Figure 4.1. Time sequence evolution for EPS 45.

(46) By observing the evolution of EPS in Figure 4.1, we can state that the lowest values are reached in 1993 and 2002, the two years considered as turning points in IBM’s history. The decreasing EPS values in the period prior to 1993, when Gerstner came to IBM, is suggestive for the crisis underwent by the company. The increase in EPS values following Gesner’s policies implementation show a positive impact. There is also an observable low point in 2002, followed by a growth after the selling of the Hardware department. The evolution of Global Service, Hardware and Software strategic business units is presented through the following time series and table.. Figure 4.2. Time sequence evolution for Revenues from Europe/ Africa/ Middle East, Asia and America regions. 46.

(47) The 1993 and 2002 key points are also observable in the evolutions for the Europe, Asia and America regions, with an exception for America. America region’s evolution in 2002 shows a later effect of Gerstner’s policy change.. Table 4.1. Evolution of EPS and Revenue from the Regional Variables Revenue US$ million Revenue US$ million Year EPS Europe/ Africa/ Asia Middle East 1990 0.18 22749 12077 1991 1.00 23219 12544 1992 0.62 26125 11547 1993 -0.02 22850 11472 1994 1.24 24821 13241 1995 2.55 27768 16590 1996 2.71 27735 17533 1997 3.00 26432 18721 1998 3.29 26000 13800 1999 4.12 25700 15200 2000 4.44 24300 17700 2001 4.35 24000 17200 2002 2.06 24260 17153 2003 3.76 29102 19317 2004 4.38 32068 21276 2005 4.91 30428 18618 2006 6.06 30491 17566 2007 7.18 34699 19501. Revenue US$ million America 24914 26207 26851 28394 25990 27582 30679 33355 41867 42434 43089 41867 39773 40712 42949 42088 43367 44587. The following time series and table present the evolution of Global Service, Hardware and Software strategic business units.. 47.

(48) Figure 4.3. Time evolution for Global Service, Hardware and Software strategic business units The evolution in time of the three strategic business units shows the following patterns, with respect to the two turning points, 1993 and 2002. There is an observable improvement in the Hardware department following Gerstner’s joining IBM. The selling of the department appears justified by the low point attained in 2002. The Software SBU had a relatively constant evolution, but with a visible improvement after 2002, after selling the Hardware SBU. The Global Service SBU shows an improvement in its evolution after Gerstner came into the company, and following the 2002 sale of the Hardware department, a period of exponential growth is noticeable.. 48.

(49) Table 4.2. Evolution of Revenue from the SBU Year Global Service US$ million 1990 7729 1991 10343 1992 14987 1993 17006 1994 16937 1995 20123 1996 22854 1997 25166 1998 28916 1999 32172 2000 33152 2001 34971. Hardware US$ million 38785 38002 33755 30591 32344 35600 36316 36630 35419 36083 34476 32313. Software US$ million 8828 9328 11103 10953 11346 12657 13052 11164 11863 12662 12598 12958. 2002 2003 2004 2005 2006. 36360 42635 46283 47407 48277. 27456 28239 31193 24343 22499. 13074 14311 16141 16830 18204. 2007. 54144. 21317. 19982. In the following time series and table, the evolution of the number of employees and retirement plan beneficiaries is observable.. 49.

(50) Figure 4.4. Time sequence evolution for number of employees and retirement plan beneficiaries. In respect to the strategic change turning points, the number of employees is seen decreasing in the years following Gerstner’s arrival, due to his company reshaping strategies, only to increase in the years after that. The 2002 selling of the Hardware department does not appear to have drastically impacted the employees’ number, mainly due to good human resources policies that allowed keeping a relatively constant number of employees. As far as the number of individuals benefiting from a retirement is concerned, apart from a constant growth, no fluctuations can be observed.. 50.

(51) Table 4.3. Evolution of HR policies Year Employees 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005. 374000 344000 302000 256000 220000 225000 241000 269000 291000 307000 316000 320000 316000 319000 329000 329000. Retirement Plan Beneficiaries 68600 73900 79300 78000 85000 92000 101000 108000 117000 124000 129000 131000 136000 136000 140000 137000. 2006. 356000. 154000. 2007. 387000. 159000. 51.

(52) Empirical Results Empirical results for Model 1.1 In constructing Model 1, Shih and Moldovan use IBM’s profit and revenue to reflect the board’s interests within the company, as employed by Tombesi (2006). Table 4.4. Multiple regression analysis of Earnings and Regional Variables, Strategic Business Units, Human Resource Policy and Institutional Change y1=Earnings Eq1. xi. Regional Variables Strategic Business Units. Eq3. Eq4. β value (t-value) 0.228 (0.073) 0.812 (0.725). β value (t-value). β value (t-value). β value (t-value). 0.805 (0.766). 0.695 (0.690). 1.606 (0.886) -2.126 (-1.217) -1.541 (-0.547). 1.682 (1.208) -2.027* (-0.953) -1.344 (-1.827). 2.018 (1.607) -2.165* (-2.196) -1.228 (-1.773). 2.339* (2.056) -1.679** (-2.496) -1.140 (-1.716). x2. Europe/ Middle East/ Africa Asia. x3. America. x4. Global Services. x5. Hardware. x6. Software. x7. Global Finances. -0.283 (-0.547). -0.260 (-0.650). x8. Employee. x9. Individuals Benefiting from Retirement plan Gerstner’s Policy Changes. 5.226** (4.859) -5.223 (-1.561). 5.234*** (5.189) -5.400** (-2.496). 5.314*** (5.467) -5.979 (-3.123). 5.254*** (5.562) -6.215* (-3.381). 2.524** (2.297). 2.537*** (5.455). 2.621*** (6.041). 2.707*** (6.675). -0.409 (-1.602). -0.0401* (-1.841). 0.955. 0.955. x1. Institutional Human Change Resource. Eq2. x10 x11. Selling Hardware. R2 *p < 0.1 **p < 0.05 ***p < 0.01. 52. -0.428* (-2.060). -0.362* (-2.011). 0.953. 0.951.

(53) The empirical results for the first component of Model 1 of the study are shown in Table 4.4 By using the backward elimination process, after examining the p-values for the 11 independent variables, the highest not significant one is eliminated. The parameter for each variable represents the percent change in the Earnings due to a 1% change in the independent variable. Looking at Eq4, the regression reveals that 6 of the variables became significant (Table 4.5.) at least at 10% level. Of the significant variables, 3 have a negative parameter, 3 are significant at 10% level, 1 at 5% level and 2 at 1% level. The R² stands at 0.951; therefore, the model can explain 95.1% of the variance in Earnings. Table 4.5.. Institutiona HR l Change Strategy (H4) (H3). SBU (H1). Significant variables for Earnings y1=Earnings. x4. Global Services. x5. Hardware. x8. Employee. x9. Individuals Benefiting from Retirement plan Gerstner’s Policy Changes. x10 x11. Eq 4 β value (t-value) 2.339* (2.056) -1.679** (-2.496) 5.254*** (5.562) -6.215* (-3.381) 2.707*** (6.675). Selling Hardware. -0.362* (-2.011) 0.951. R2 *p < 0.1 **p < 0.05 ***p < 0.01. Results for hypothesis 1.1 For the regional variables, the parameter for Europe/ Middle East/ Africa (x1), as well as the ones for Asia (x2) and America (x3) are not significant at a 10% level, and are hence eliminated. This means that, from the board’s perspective, the regional variables do not have an impact on the strategy formulations. Accept the null hypothesis 53.