The Limits of Strategy: Lessons in Leadership from the Computer Industry

219 Pages·2010·1.504 MB·English

by  Ernest von Simson

The Limits of Strategy is a terrific book on two counts – first as a highly insightful romp through the history of the
transformative industry of our times, written by someone with a unique perspective on how events were actually
shaped; and second as a thought-provoking study of how strategic insight, management ability, corporate culture,
and industry dynamics interact to determine a company’s success or failure, with lessons to be drawn whether
your company is 170 days old or 170 years old.
Wick Moorman, CEO, Norfolk Southern Railroad
“An insightful analysis of all the key IT companies and individuals during the formative period of the industry.
This book explains the competitive interrelationships between the different companies and how the IT industry
evolved as a result. The lessons in the book are vital to any CEOs managing a business regularly disrupted by new
entrants, new technologies, and different business models regardless of industry.”
Larry Ellison, Founder and CEO, Oracle Corporation
Very few people get to witness from the inside a massive new economic sector as it is formed and evolves over a
quarter century while permeating all aspects of our lives. Ernie von Simson did just that, studying the computer
industry, interviewing its leaders, and shaping the thinking of those of us who implemented this technology during
these explosive years. But “The Limits of Strategy” goes way beyond a faithful reconstruction of the “what
happened” to discuss the many personality quirks that are often called corporate strategy and that often led to
unimaginable misfortune and disaster. Ernie has insight that was not captured by the public media. This is worth
reading as human nature does not change quickly.
Scott McNealy, Founder and retired CEO, Sun Microsystems
Ernie von Simson has written a tour de force in his revealing insights into the corporate strategies of the dominant
American and Japanese computer manufacturers during the explosion of the industry over a quarter century. From
his unique vantage point as principal investigator and master strategist behind the successful, and highly respected,
Research Board, Ernie offers fascinating perspective on the limits of strategy from the real life stories of the
leading participants…in essence, it’s the people, stupid! A great read in general for the lessons to be had, and for
the people like me who were involved, there is plenty to learn about the other guy to make this a real page turner.
George Conrades,
Chairman Akamai, Retired SVP, IBM Corporation
“Ernie von Simson’s “The Limits of Strategy” is a book that can be enjoyed at multiple levels. It is an excellent,
detailed history of the computer industry from the 1970s to 2000, a time when the industry grew explosively and
transitioned from backroom mainframes and supercomputers that few people cared about to the post-industrial,
information age of the personal computer and the World Wide Web. As co-head of the Research Board, Ernie had
a ringside seat to this history, as well as personal access to the people who made the history happen.
Then again “Limits of Strategy” is a superb business book on strategy, leadership and innovation. Each of its
twenty chapters stands alone as a case study of how a company and its leaders reacted to turbulent times, whether
it was coping with fast growth or trying to survive major technology and market changes. These case studies
stimulate the mind, and provide excellent material for quite a number of graduate and executive management
courses.
Finally, “Limits of Strategy” is a good read, a series of very interesting stories, full of real characters, - some of
them quite well known, - and the dramas they went through in trying to navigate the turbulent waters that their
companies and the IT industry in general lived through during the 25 years Ernie writes about. It is rare to find a
business book that is as well written and actually fun to read as “Limits of Strategy.”
Dr. Irving Wladawsky Berger,
Chairman Emeritus IBM Academy of Technology
THE LIMITS OF STRATEGY
Lessons in Leadership from the
Computer Industry
Ernest von Simson
To our next, next generation
Grace, Jad, Clare, Adam, Bernard and Isabelle Rose
iUniverse, Inc.
Bloomington
The Limits of Strategy
Lessons in Leadership from the Computer Industry
Copyright © 2009 by Ernest von Simson
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ISBN: 978-1-4401-9260-9 (sc)
ISBN: 978-1-4401-9258-6 (hc)
ISBN: 978-1-4401-9259-3 (e)
iUniverse rev. date: 01/15/2013
Contents
Preface
Introduction
1: A MAD DASH THROUGH HISTORY
2: THE STRATEGIC GOLD STANDARD:
The Watsons
3: REORGANIZING TO REARM:
Frank Cary at IBM
4: THE COMPETITIVE LIMITS OF TECHNOLOGY:
Amdahl versus IBM
5: TRANSIENT TECHNOLOGY:
Travails of the Mini Makers
6: FIRST MOVERS:
The Dawning of the Personal Computer
7: DEFEATED IN SUCCESSION:
An Wang at Wang Labs
8: RETROSPECTIVE STRATEGY:
John DeButts at AT&T
9: FOREIGN CULTURES:
AT&T’s Recruit from IBM
10: THE PERILS OF INCUMBENCY:
Sun and Oracle Take Over the Neighborhood
11: SELF-ACCELERATING ECONOMIES OF SCALE:
Apple, Microsoft, and Dell
12: CHOOSING THE WRONG WAR:
IBM Takes On Microsoft
13: POWERING TO THE APOGEE:
Ken Olsen at DEC
14: TUMBLING TO COLLAPSE:
The Palace Guard Ousts Olsen
15: Field Force And Counterforce:
DEC, HP, and IBM in Battle Mode
16: Distracted By Competition:
IBM Battles Fujitsu and Hitachi
17: Navigating The Waves At IBM:
Akers Runs Aground, and Gerstner Takes the Helm
18: Squandered Competitive Advantage:
IBM Mainframes and Minicomputers
19: Building A Great Business:
Paul Ely at Hewlett-Packard
20: CEO Tumbles:
Hewlett-Packard’s Horizontal Phase
21: Limits Of Strategy?
Epilogue Innovation
Preface
It took nearly three decades for computers to emerge from back-office accounting machines to take on the mantle
of IT—Information Technology. Today, they’re ubiquitous, affecting every aspect of our lives. There is more
computing capacity in my cell phone than in the mainframe that mechanized the insurance company where I first
learned to program.
The quarter-century from 1974 to 2000 was when this explosive change erupted; I had a ringside seat. With my
wife and life partner, Naomi Seligman, I ran the Research Board, a quietly powerful think tank that observed and
occasionally guided the computer industry. We were on stage at the entrance of today’s leaders and just before the
departure of yesterday’s pioneers. We got to know and admire the giants of those years—including Gene Amdahl,
John Chambers, Michael Dell, Larry Ellison, Paul Ely, Bill Gates, Lou Gerstner, Andy Grove, Grace Hopper,
Steve Jobs, David Liddle, Bill McGowan, Scott McNealy, Sam Palmisano, Lew Platt, Eric Schmidt, and many
more. We saw what factors determined the winners and losers. Above all we learned how disruptive technology
can work to destroy even those who understand it well. And why great leadership is required to escape massive
upheavals in markets, technologies, and business models. In essence, why there are limits of strategy. The story
holds powerful lessons for those facing potentially disruptive technologies today.
My own presence in the most important industry of our time was accidental. I went to Brown University, studied
International Relations, then served for three years on a Navy destroyer in charge of electronics and
communications. Upon my discharge, I had a few months free in New York before starting graduate school in
economics at the University of Chicago. To avoid feeling guilty about quitting in September, I looked for a short-
term job that required minimal training. A systems analyst, drawing magnetic tape layouts in the Electronic Data
Processing (EDP) department at U.S. Life Insurance, seemed perfect. And that career-bending accident determined
the course of my life. I jettisoned my plans for Chicago and received an MBA in economics from New York
University instead.
In those early days of computers, no one knew much; we were creating a discipline as we went along. After
three years at U.S. Life, I answered a classified ad from the Diebold Group under the impression that I was
applying to the safe-manufacturing company. It turned out to be a computer services and consulting firm founded by
John Diebold, a charismatic and often flamboyant entrepreneur who was himself creating a practice as he went
along—beginning with the term “automation,” which he claimed as his own. He had offices on Park Avenue
scented by money; all the women were beautiful, all the men were brilliant and, for a kid from an insurance
company, the atmosphere was heady.
I was anointed as a consultant and sent (without further training) to help a major paper company reorganize its
IT department. Fortunately, I went in tow of a more experienced man, and my instincts were good. After a few
assignments on my own, it turned out I was excellent at consulting, and I loved it. Eventually, John put me in
charge of an “Assignment Review Board,” assessing the work of the other consultants. I was just twenty-eight
years old.
Then I drew the short straw to rescue a badly fumbled project on how computing would change marketing
twenty-five years in the future. I hired legitimate market researchers and did several high-level interviews myself.
Even so, it was ultimately all back-of-the-napkin stuff: Who could possibly know what would happen over two
decades from then? But once the findings were massaged into a report, using my personal speculations as often as
the real (but spotty) data, John loved it.
That led to my being pushed, reluctantly, into full-time research. John had hired Naomi Seligman from IBM, a
feisty lady quickly dubbed “the dragon lady,” to head the Diebold Research Program. He wanted me to work for
her as Research Director. I wanted no part of it, but he wouldn’t take no for an answer. At the company Christmas
party that year, I again told him that I wanted to remain a consultant. Then I watched as, unperturbed, he announced
my “promotion” a few moments later.
I had lunch with Naomi, and we drew up an organization chart of the new department. It was very Navy “chain
of command.” Everyone in Research reported to me; everyone in Client Services reported to Naomi. If the lines
were ever blurred, I’d quit. Obviously we were headed for a major collision.
We fell in love instead—the only alternative to all-out war for two such strong personalities. We worked
together and revived the program into a major business, with 140 client companies in the United States and
Europe. Naomi is very smart and incredibly intuitive about people and situations. I have more imagination, usually
for better—although sometimes for worse.
In 1970, we started our own company. My first three business ideas bumbled along with no hint of takeoff. So
we kept bouncing other ideas off a group of our friends who’d become legendary in the information technology
field: Ruth Block of Equitable Life, Jim Collins of Johnson & Johnson, Jack Jones of Southern Railway, Jack
Lanahan of Inland Steel, and Edward B. Matthews III of Sanders Associates. They judged the ideas we proposed
uniformly terrible. Finally in 1973, enough was enough, and they suggested that we set up what became the
Research Board to do research that their companies would fund.
Their prescription was that we should build a group of clients, major companies that needed to mesh their
strategies with the exploding world of computing. We would investigate what developments were coming, what
adjustments they should make, and how to integrate information technology into their operations. We’d scrutinize
all the major technology companies and advise our clients on what the IT leaders were doing, how good they
were, and who was ahead in which new fields.
For the next twenty-five years, we followed the exact model defined by the founding five. Membership was
limited to the top IT executives of the largest companies, and they had to make a serious commitment to the group
and its work. The members voted on the research to be done, and only they received our reports to safeguard
sensitive information confided by the suppliers. Further, they committed to read the reports before coming to the
meetings, where research findings were discussed; anyone who missed more than two was out. Finally,
membership was limited to companies that were users, but not suppliers, of IT, to avoid conflicts of interest,
We started out with nine clients—our five friends plus four other top IT people. In the 1980s, we began the
European Board, again with the help of three extraordinary IT leaders and visionaries: John Sacher of Britain’s
Marks & Spencer, Jean-Serge Bertoncini of France’s Peugeot, and Johan Friedrichs of Germany’s Hoechst.
From there we grew steadily, but kept the core group limited to fifty leading companies in the United States and
twenty-five in Europe; thirty-five smaller companies joined as associate members. We met once a year in plenary
session with all the clients, twice in smaller sectional meetings. The annual meetings were always in impressive
locations—among the most fun, 1994 at Disney World, where CIO Sharon Garrett orchestrated the most incredible
fandango ever and, at the other extreme, the awesome stage at Carnegie Hall in 1998.
Meanwhile, our visits to the computing and communications companies began slightly awkwardly in the early
years. But relations inevitably improved as they verified we didn’t work for IT vendors, didn’t leak sensitive
information, and almost never talked to the press. Moreover, we came to our two- or three-day visits to a given
company forearmed with position papers on everything written about our subjects for the past two years. We
developed a cadre of excellent researchers topped by Cathy Loup, Abby Kramer, Jim Roche and our clever
offspring, Ann Seligman and Charlie von Simson. Over time, the leading executives came to respect us because
we were fair, serious, and objective. Obviously, talking to us was also in their interest, because our clients were
their largest customers. “There is nowhere to get more sales points in the room than at Research Board meetings,”
a senior IBM executive once remarked.
By the time we sold the Research Board to Gartner Group in 1999, we had written nearly one hundred reports.
Every year, we would assess the overall condition of the industry—which companies were doing what, and how
well; what big breakthroughs seemed near. We also researched how the largest enterprises used new technologies
to the best advantages as well as demographics and the labor force and the relationship of IT departments to the
other activities in a company. What we learned, we recorded in thousands of written pages and in our memories.
The lessons learned over that entire period are distilled and related here.
Introduction
Potentially destructive change is a constant in business. Some changes are foreseeable and avoidable. Others are
total surprises. And in a third category 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.
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.”1 The problem for the computer sector over the past fifty years is that dislocative change has too
often come not from one source but from a spectrum. 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 displace its equilibrium that the new equilibrium can’t
be reached from the old only by infinitesimal steps. Add successively as many mail coaches as you please, you
will never get a railway thereby.”2
In our analysis, 1992 was a killing year for the four computer companies most important to business buyers. All
four had been dominant suppliers of minicomputers for the past fifteen or twenty 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. You will find them recurring again and again in the many
stories of this book, both in the chapters devoted to individual companies and in the chapters describing the
changing landscape and culture of the computer industry. The common threads are:
• 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’s 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