Business Revitalization

In recent weeks, pundits and press have expressed concern about flat results at long-term winners including Cisco, HP, and Microsoft. None are remotely in extremis. Nevertheless, it’s an interesting moment to examine instances when IT firms have been revitalized following profound changes in technology and/or their industry’s business model.

To start, pathetically few firms recover after their previous assets have degraded into anchors. One reason is the speed of visible technological change. I say “visible” because too often a new technology like Unix, the PC, or the Internet percolates over several years, gradually building adherents among customers and independent software developers until it suddenly crushes the incumbents.

It took three years before Unix visibly overwhelmed Digital’s proprietary operating system and business model even though its gathering strength had been recognized by top management as early as 1983. And, as for DEC’s inability to weather the new cost model inaugurated by Unix: “Our SG&A burden alone is 35 percent and our R&D is at 12 percent,” recounted the company’s newly appointed COO a year after the founder had been ousted. “The best we could hope for was a permanent 10 percent loss.”

The outdated cost structure benchmarked well against incumbent minicomputer companies like Wang and Data General, but it was too far outside the new norm to thwart any rescue effort. The corollary today is the new breeds’ ability to gather revenues from multiple sources: Apple’s commissions on apps could compensate for lower margins on devices, for example.

Conversely, Gerstner’s success at revitalizing IBM was remarkable on many counts. The company was given up for dead by pundits and the press, who doubted anyone could be found to head the carcass. And once Gerstner was named, pundits doubted whether his experience was relevant to managing America’s largest computer company and thus felt empowered to offer a flood of largely gratuitous advice like break up the company, fire the executives, and kill the mainframe considered superfluous in an era of client servers. To his credit, Gerstner ignored this advice in rapidly reaching several strategic decisions: First, keep the company intact, while also retaining many Akers-era executives critical to the company’s turnaround. Second, save the mainframe business by instantly cutting prices and then authorizing a billion-dollar conversion to a far less costly circuit technology.

“When I retire, someone should give me a plaque with an inscription commemorating my decision to invest heavily in S/390, not milk it as I was advised,” he told us in 1997.

And finally, emphasize growth from two sectors where IBM was commercially weak–services and software–which today represent eighty percent of IBM’s revenues.

At least three lessons can be drawn from Gerstner’s transformation of IBM’s product mix and business model:

1) An outsider can best provide the blend of unbiased judgment and rapid decisiveness on which businesses to jettison and which to develop.

2) Once decided, the CEO must be steadfast in executing the chosen strategy, ignoring the cacophony of contrary advice from outside advisors and pundits.

3) Culture change is often more productive when existing career executives are selectively retained and steadily managed by the new CEO. Conversely, wholesale management transitions can draw too many mercenaries with inadequate perspectives and interest.

Ernie von Simson is the senior partner in the CIO Strategy Exchange and the author of The Limits of Strategy an inside analysis of the success and failure of IT companies over the past 30 years.

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