Leadership

The Limits of Strategy

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Potentially destructive change is a constant in business. Some changes are foreseeable and avoidable. Others are total surprises. And, in a third category, there are changes that are fully visible like a funnel cloud on the distant horizon but inevitably destroy even the most successful enterprises anyway.

Despite the endless care given to business forecasting and strategy formulation, these virulent changes have recently impacted automobiles, consumer products, pharmaceuticals, telephones, and, of course, the computer industry.

Technological changes can disrupt even the most sound business strategy. The key to success is exceptional leadership.

Microprocessors derail four Giants

The godfather of business velocity may be Joseph Schumpeter, who believed that the entrepreneur with something new and disruptive is always the engine of the economy.

“In capitalist reality, as distinguished from its textbook picture, it is not [price] competition that counts, but rather competition from new commodities, new technologies, new sources of supply, new types of organization – competition that commands a decisive cost or quality advantage and that strikes not at the margins of profits and outputs of existing firms, but at their foundations and very lives.”

The problem for the computer sector over the past 50 years is that dislocative change has too often come not from one source but from a spectruum. Innovation has created new technologies that have demanded new cost models, new distribution channels, and, by definition, new managerial skills and organizational forms.

None of this is gentle or gradual as Schumpeter implied by his seminal term “creative destruction.” The consequences of “change arising from within the system so displaces its equilibrium that the new equilibrium can’t be reached from the old by only infinitesimal steps. Add successively as many mail coaches as you please, you will never get a railway thereby.”

In our analysis, 1992 was a killing year for the four computer companies most important to business buyers. All four companies had been dominant suppliers of minicomputers for the past 15 or 20 years. But then came the microprocessor, portable databases, Microsoft, and the Unix operating system, which weakened the hold of computer companies on their existing customers and slashed their profit margins. On July 16, 1992, the CEOs of both Digital Equipment and Hewlett-Packard were pushed into retirement. On August 8, Wang Laboratories declared bankruptcy. In December, IBM halved its dividend for the first time ever, forcing the resignation of its CEO a month later.

How did this happen? Are the deadliest changes unavoidable because strategy is too easily thwarted by cluster bombs such as technological velocity, cultural inertia, obsolete business models, executive conflict, and investor expectations?

All four men were smart and experienced. Two were founders of their companies; the others, highly successful career executives. But all of them were simply overwhelmed by the profound changes in technology, cost structures, business models, and markets disrupting the computer industry. And, while I found no single explanation for what happened, I did see definite common themes including:

  • Vision alone isn’t enough. The chief executives of DEC, HP, IBM, and Wang fully understood the implications and possibilities of the microprocessor, but still couldn’t adapt to it.
  • Competition can blind you. IBM’s intense struggle over mainframes with Fujitsu and Hitachi distracted all three companies from identifying the new breed of competitors, including Compaq and Sun. So did DEC’s continuing preoccupation with Data General and Wang, its neighbors in Massachusetts.
  • Strong cultures can be a straitjacket. IBM didn’t fail because of Bill Gates’ negotiating skills or Microsoft’s brilliant programmers, but because the PC market was driven by consumers. IBM, totally focused on its large business customers, had no expertise in the consumer market and little interest in developing it.
  • Cost structures can block change. DEC and Wang didn’t fail because of disruptive technology, but because they couldn’t adjust their business model to cut the costs of sales and R&D by ten to 15 percent of revenues.
  • Great sales organizations are often the crown jewels of successful companies. But they can also become the most powerful barrier against changes in product innovations or distribution models, however necessary.
  • First movers can fail, too. The PC leaders in 1980 were Apple, Commodore, and Radio Shack. All used the microprocessor to pursue outdated business models and lost their lead positions to latecomers with better perspective.
  • Forcing the retirement of a CEO can become an especially thorny issue when the CEO is a founder who has led the company’s early success. But a failure to force a timely change can ruin a company, as we’ll see at DEC and Wang but notably not at IBM.

Navigating through the storms of dislocative change requires exceptional leadership, especially since even the most experienced CEOs can actually be handicapped by their past successes. As Richard Foster points out in his fascinating book, “Innovation: The Attacker’s Advantage,” leaders being challenged by disruptive competition tend to keep doing what previously made them successful.

In other words, almost any strategy an incumbent CEO can devise will be useless in the face of truly disruptive technology, because it begins a new game that demands a completely different business model and, equally, a different management discipline. That is where strategy meets its limit and leadership dominates. And that’s the message of my book, The Limits of Strategy: Lessons in Leadership from the Computer Industry.”

Consider the following excerpt from the book, on how Sun and Oracle overcame incumbent vendors to lead their markets.

The Perils of Incumbency

Choosing the moment to make the daring leap from one successful technology to something new and more competitive requires the keen timing of the trapeze artist choosing when to leave his trapeze, except there’s no nimble-handed catcher for the business leader. The more stable the old business model, the flimsier seems the new – making it all the easier to just “wait and see.” Success can be a killer once the wheels of change begin to turn. Two competitive pairings – Tandem Computer versus Sun Microsystems and Cullinet versus Oracle – illustrate the perils of incumbency.

Tandem was formed in 1974, eight years before Sun, as the last significant minicomputer company built on a proprietary operating system. And what a system it was. Designed never to fail or lose even a single transaction, Tandem’s NonStop computer met almost instant acceptance from an intensely demanding group of banking and brokerage clients, including the Securities Industry Automation Corporation (SIAC), which provided IT to both the New York and American Stock Exchanges. Over several years, NonStop became integral to the operation of the financial markets.

Sun appeared in 1982, one of the first and certainly most successful companies to start with Unix as its only operating system. For cofounder and CEO Scott McNealy, Unix’s “openness” provided at least three strategic advantages: (1) It drew engineering and scientific applications from third-party software suppliers; (2) it supported Sun’s sales proposition to customers by delivering lower switching costs than competitors’ “closed” proprietary systems offered; and, (3) Unix smoothed the transition for customers each time Sun upgraded its microprocessor, the SPARC (for Scalable Processor ARChitecture). In the early years, Sun doubled its price/performance ratio every year or two, versus every five years for DEC or IBM.

Meanwhile, Cullinet Software, which entered the database market in the early 1970s (seven years before Oracle), grew into the world’s second-largest software vendor (after Lotus) in just ten years. Central to Cullinet’s growth was the rampant success of the IBM 4300 minicomputer, which underpinned half the company’s revenues. Oracle was started around the new relational database but at first had difficulty gaining traction against well-entrenched competition. Up against Cullinet, Applied Data Research (ADR), and Cincom in the software segment, Oracle also faced hardware majors IBM, DEC, and HP that fielded their own databases.

But Oracle was not without its charms, the first being ease of use. Its relational structure allowed a user to retrieve information quickly and easily. The second advantage was portability across most mainstream minicomputers. Three years after Oracle reached volume shipments, Cullinet was crushed.

Read more from the book, “The Limits of Strategy: Lessons in Leadership from the Computer Industry” at www.limitsofstrategy.com.

Ernest von Simson is Senior Partner and cofounder of Ostriker von Simson, a consultancy that formulates IT strategies for the assessment, acquisition, monitoring, and management of emerging technologies and technology-related ventures. von Simson and his partners also chair the CIO Strategy Exchange, which brings together CIOs from the largest multinational enterprises.

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