For customers, System/360 would be a godsend. For IBM’s competitors, it would be a knockout blow.
Of course, envisioning System/360 was one thing. Making it a reality required the equivalent of a man-on-the-moon program. It
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cost nearly as much. Tom Watson’s memoir noted that the investment required—$5 billion (that’s 1960s dollars!)—was larger than what the Manhattan Project cost.
Growing Around the Mainframe
Aside from the risk and sheer size of the undertaking, System/360
forced IBM to launch itself into a whole new set of businesses and to develop entirely new sets of skills and capabilities—all of which, in one form or another, still existed by the time I arrived.
IBM had to get into the semiconductor business. Why? Because there was no semiconductor industry yet. IBM had to invest heavily in research and development to create entirely new technologies required for System/360. It’s not accidental that this was one of the most progressive periods for IBM research. During this era, IBM scientists and engineers invented the memory chip, the relational database, computer languages such as FORTRAN, and made huge advances in materials science, chip lithography, and magnetic recording.
How did we end up in 1990 with the world’s largest software business? Because there would be no usable System/360 without an operating system, or a database, or a transaction processing system, or software tools and programming languages.
Even the sales force had to change. System/360 required a very knowledgeable, consultative sales force that could help customers transform important business processes like accounting, payroll, and inventory management. Traditional order takers couldn’t do this job. The company had to create a product service and maintenance capability and a customer-training and educational arm.
Keep in mind that all of this—hardware, software, sales, services—was dedicated and tied to System/360. Despite the fact that IBM, then and now, was regarded as a complex company with thousands of products, I’d argue that, until the mid-1980s, IBM was a
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one-product company—a mainframe company—with an array of multibillion-dollar businesses attached to that single franchise.
And the franchise was a gold mine. IBM’s share of the computing market skyrocketed. Competitors reeled; many disappeared. The company’s revenues grew at a compound growth rate of 14 percent from 1965 to 1985. Gross profit margins were amazing—consistently around 60 percent. Market share exceeded an astounding 30 percent, which eventually invited antitrust scrutiny.
How the Culture Evolved
This decades-long run of uninterrupted success ties in with the other closely related, and vitally important, aspect of IBM’s recent history. This is about its corporate culture—specifically, the kind of culture that arises in an environment without intense competitive pressure or threats. In IBM’s case, I never believed the problem was as simple as complacency or entitlement, though there were elements of both present when I arrived. It wasn’t about tens of thousands of people growing soft, risk-averse, and slow, though that’s been a convenient way to characterize the IBM of the early 1990s.
The IBM culture was the product of two predominant forces. One we’ve just discussed in detail—the runaway success of the System/360. When there’s little competitive threat, when high profit margins and a commanding market position are assumed, then the economic and market forces that other companies have to live or die by simply don’t apply. In that environment, what would you expect to happen? The company and its people lose touch with external realities, because what’s happening in the marketplace is essentially irrelevant to the success of the company.
What IBM forgot was that all the trappings of its culture—from behaviors that the company valued and rewarded, to how fast things happened, to the luxury of creating all kinds of pride-inducing em
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ployee benefits and programs—were a function of the franchise created by the System/360. It wasn’t really the product of enlightened management or world-class processes. IBM’s dominant position had created a self-contained, self-sustaining world for the company. IBM had ridden one horse, and ridden it well. But that horse could carry it only so far before it broke down.
The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration. The suit was ultimately dropped and classified “without merit” during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup. One has to imagine that years of that form of scrutiny changes business behavior in very real ways.
Just consider the effect on vocabulary—an important element of any culture, including corporate culture. While IBM was subject to the suit, terms like “market,” “marketplace,” “market share,”
“competitor,” “competition,” “dominate,” “lead,” “win,” and “beat”
were systematically excised from written materials and banned at internal meetings. Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor. After a while, it goes beyond what is said to what is thought.
Was the antitrust suit “the” pivotal event that caused the culture of IBM to break down? No. But did it contribute? Some of my long-term IBM colleagues believe it did. And if timing is everything, as the adage says, IBM’s was lousy. At virtually the same time that the suit was finally lifted in the early 1980s (and after years of having the fighting spirit drained from the company gene pool), the industry’s “next big thing” arrived. Whether the company fully understood it at the time, the downward spiral was about to begin.
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The Next Big Thing
That next big thing wasn’t the advent of personal computing, which is the popular view. The more imminent threat to the mainframe model started with the rise of UNIX, an “open” operating environment championed by companies like Sun and HP. UNIX offered customers the first viable, economically attractive alternative to IBM’s mainframe products and pricing.
In the open, plug-and-play world of UNIX, many, many companies could make parts of an overall solution—shattering IBM’s hold on architectural control. Almost overnight IBM was under attack by an army of the so-called “pure play” companies like Sun, HP, SGI, Digital, and all the makers of associated software and peripheral products.
Once you understand that, you begin to comprehend John Akers’s big bet on a loosely knit confederation of “Baby Blues.” He recognized that the vertically integrated industry was ending, and he believed this shift would ultimately take down his vertically integrated company. He was disaggregating IBM in order to embrace what he thought the new industry model was going to be. As I described earlier, I didn’t agree with that path and reversed that direction. But I can understand the thinking behind it.
After UNIX cracked the foundation, the PC makers came along swinging wrecking balls. While it’s a gross oversimplification to say that IBM’s biggest problems stemmed from the failure to lead in PCs, it’s clear that the company failed to understand fully two things about personal computing:
• PCs would eventually be used by businesses and enterprises, not just by hobbyists and students. Because of that, we failed to size up the market properly and did not make it a high corporate priority.
• Because we did not think PCs would ever challenge IBM’s core en
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terprise computing franchise, we surrendered control of the PC’s highest-value components: the operating system to Microsoft, and the microprocessor to Intel. By the time I arrived at IBM, those two companies had ridden this gift from IBM right to the top of the industry.
13
Making the Big
Bets
I f one were to reduce the story of IBM’s transformation over the past decade to the bare essentials, the saga would pivot on two big bets: one on the industry’s direction, and one on IBM’s own strategy. To understand what we did and why we did it, it’s helpful to dial back in time and rejoin the discussion of IBM history where it left off in the previous chapter.
Remember that the 1994 time frame I’m describing falls just prior to the Internet revolution. There was a growing confidence inside IBM that the industry was on the cusp of a fundamental shift—the kind of change to the underlying model of computing that comes along about every ten or fifteen years. When that kind of a shift occurs, the companies that seize the moment and lead the movement do exceptionally well—and everyone else dances to their tune.
In the early 1990s the fortunes of the lead horses, in one way or another, were all related to the PC. Of course, that included the PC
makers like Dell and Compaq. But without question the dominant leaders were Microsoft, which controlled the desktop operating system, Windows; and Intel, which made the microprocessors. To illustrate the influence these companies wielded, the tandem of Microsoft’s Windows and Intel’s chips became known as the “Wintel duopoly.”
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So there was IBM, the company that had led the prior phase of computing and had invented many of the industry’s most important technologies, crawling out of bed every morning to find its relevance marginalized by the darlings of desktop computing. The people who had built the systems used by multinational corporations, universities, and world governments were now following the lead of purvey-ors of word processors and computer games. The situation was embarrassing and frustrating. However, no matter how miserable the present seemed, the future looked even worse.
Their Real Motive
No one believed the PC companies would be content to be king-pins of the desktop. Their aspirations reached right to the heart of IBM’s franchise—the large servers, enterprise software and storage systems that anchored the business computing infrastructure. The very name of the new computing model they envisioned—“client/server” computing—revealed their worldview and bias. The
“client” referred not to a person, but to the PC. The “server” described mainframes and other business systems that would be in service of the client—providing applications, processing, and storage support for hundreds of millions of PCs each day.
The PC leaders’ pitch to business customers was simple and compelling: “You want your employees to make productive use of your business data, applications, and knowledge, which are tied up on old back-office systems. Right now those systems and your PCs don’t work together. Since all of your PCs are already Microsoft and Intel machines, you should put in back-office systems that use the same technology.”
It was easy to play out the scenario. The PC leaders would march relentlessly up from the PC into business computing and displace IBM
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products, along with those of vendors like Sun, HP, Digital Equipment, and Oracle. Many of IBM’s traditional competitors threw in the towel and joined the duopoly team. It would have been easy to follow HP and UNISYS and all the rest down this path. All of the pundits who followed the industry saw the dominance of this model as inevitable.
It would also have been easy simply to be stubborn and say that the changeover wasn’t going to happen, then fight a rear-guard action based on our historical view of a centralized computing model.
What happened, however, is that we did neither. We saw two forces emerging in the industry that allowed us to chart a very different course. At the time, it was fraught with risk. But perhaps because the other alternatives were so unpalatable, we decided to stake the company’s future on a totally different view of the industry.
The first force emanated from the customers. I believed very strongly that customers would grow increasingly impatient with an industry structure that required them to integrate piece parts from many different suppliers. This was an integral part of the client/server model as it emerged in the 1980s. So we made a bet—one that, had we articulated it loudly at the time, would have left our colleagues in the industry rolling in the aisles.
Our bet was this: Over the next decade, customers would increasingly value companies that could provide solutions—solutions that integrated technology from various suppliers and, more important, integrated technology into the processes of an enterprise. We bet that the historical preoccupations with chip speeds, software ver-sions, proprietary systems, and the like would wane, and that over time the information technology industry would be services-led, not technology-led.
The second force we bet on was the emergence of a networked model of computing that would replace the PC-dominated world of 1994.
Let me briefly describe our thinking at the time.
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A Services-Led Model
As I stated earlier, I believed that the industry’s disaggregation into thousands of niche players would make IT services a huge growth segment of the industry overall. All of the industry growth analyses and projections, from our own staffs and from third-party firms, supported this. For IBM, this clearly suggested that we should grow our services business, which was a promising part of our portfolio, but which was still seen as a second-class citizen next to IBM’s hardware business. Services, it was pretty clear, could be a huge revenue growth engine for IBM.
However, the more we thought about the long-term implications of this trend, an even more compelling motivation came into view.
If customers were going to look to an integrator to help them envision, design, and build end-to-end solutions, then the companies playing that role would exert tremendous influence over the full range of technology decisions—from architecture and applications to hardware and software choices.
This would be a historic shift in customer buying behavior. For the first time, services companies, not technology firms, would be the tail wagging the dog. Suddenly, a decision that seemed rational and straightforward—pursue a growth opportunity—became a strategic imperative for the entire company. That was our first big bet—to build not just the largest but the most influential services business in the industry.
A Networked Model
The second big bet we placed was that stand-alone computing would give way to networks.
That may not sound like a very big or risky bet today. But, again,
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this was in the context of the 1994 time frame, well before the Internet became mainstream. The first rumblings of change were there. You could find certain industries, particularly telecommunications, that were buzzing about the “information superhighway,” a dazzling future of high-speed broadband connections to the workplace, home, and school. If this kind of “wired world” came about, it would change the way business and society functioned.
It would also change the course of computing in profound ways.
For one thing, it was virtually certain that world would be built on open industry standards. There would be no other way to fulfill the promise of ubiquitous connections among all the businesses, users, devices, and systems that would participate in a truly networked world. If that standards-based world came to pass, it would represent a major shift in the prevailing competitive landscape.
In any other industry, we assume the existence of common standards. We take it for granted that unleaded gas will work in all gasol-ine-powered cars. We don’t think about plugging in appliances or screwing in lightbulbs or turning on faucets. Everything of this nature works because the various manufacturers and service providers in those industries agreed to common standards long ago.
Believe it or not, that’s not how things have worked in the IT industry. Based on my experience, it was the only industry on earth where suppliers built products to be compatible with their own gear but not with anyone
else’s. Once you bought one part of a manufacturer’s product line, you were locked in to everything else they made.
Imagine, for example, buying a car and discovering you could purchase new tires, spark plugs, filters, accessories, and even the gasol-ine only from that car’s manufacturer.
Of course, I learned that this proprietary model was rooted in IBM’s runaway success of the 1960s and 1970s. Other companies—most notably Microsoft—later emulated and perfected this approach and then doggedly refused to abandon it, for precisely the same reason that IBM initially resisted the tug of the UNIX marketplace. Open com
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puting represented a gigantic competitive threat to any company whose business model depended on its ability to control customers based on “choke points” in the architecture.
Fortunately, by the 1980s there were pockets of radical thought inside IBM that were already agitating for the company to join the open movement. And by the mid-1990s, we’d mounted the massive technical and cultural effort required to repudiate closed computing at IBM and open up our products to interoperate with other industry-leading platforms.
Then along came the networked world. If that interconnected, standards-based world took hold, Microsoft would be the most vulnerable. Its insatiable ambitions notwithstanding, not every piece of digital equipment in the world could be part of one architecture, controlled by one company.
Implications of a Post-PC World
There were further implications of a networked world. The PC
would be pushed off center stage. Very fast, high-bandwidth networks would allow many of the PC’s functions to be performed by larger systems inside companies and the network itself. This system would allow an untold number of new kinds of devices to attach to networks—intelligent TVs, game consoles, handheld devices, cell phones, even household appliances and cars. The PC would be one—but only one—of many network access devices. And if the world was going to be populated by billions of different kinds of computing devices, there would be huge demand for customized chips to power each of these unique devices.
Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change Page 12