IBM

9065 IBM8 - TWO JOHN'S

The next two chapters explore, in particular, the years from the mid 1980s, when everything started to fall apart for IBM, to 1993 when it finally became a case for turnaround!

As I have already said, perhaps the greatest success from the time when Frank Cary and John Opel jointly ran IBM was the transition from the Watson dynasty, which was so smoothly handled. Many great businesses have faltered when their founders have moved on. IBM didn't; indeed, it prospered. However, despite the fact that the era was generally one of great success, during the latter part of it John Opel (with the full support of Frank Cary it must be admitted) then introduced the change which was to cause the greatest damage to its future; even though its full effects were not to be observed for nearly a decade!

Competition

To put these changes in context, however, we should first look at some history, Thus, some of the earlier changes during the period after the end of the Watson dynasty were not of IBM's own design. They were forced upon it by outside developments.

Leasing…the first of these was a thorn in its flesh during the early 1970's; but ultimately did not pose any major threat to its future, and accordingly did not result in any enduring changes within IBM. This was the emergence of the computer leasing companies. These companies built their business on the principle of purchasing IBM equipment and then leasing it over a longer period, typically 7 years, than that used by IBM to calculate its own rental charges. IBM typically used a four year pay back period; though this later dropped to three years ‑ to persuade customers to purchase outright. The difference allowed the leasing companies to undercut IBM, to obtain the business and at the same time make a substantial profit. The main problem for IBM, though, was the loss of control over its customer base. The leasing companies clearly owed no loyalty to IBM and would just as happily sell anyone else's equipment; and some of them even started to market their own lines of hardware. The embarrassment for IBM was relatively short lived (at least in IBM terms), since the leasing companies pursuing the most aggressive pricing policies contained the seeds of their own destruction. When IBM announced its new range earlier than expected, the financial equation that was the foundation of their business disappeared and their empires crumbled. The moral for them (and also for Lloyds which foolishly underwrote much of their business) was that 'borrowing long' and 'lending short' can also be a gamble.

The 'seven dwarfs' (including Univac, Honeywell, Burroughs, and NCR) of the 1960's, and the later 'mini' vendors such as DEC and Hewlett Packard, had by then found their own special niches where they were not in direct competition with IBM. They typically offered, instead, expertise and products that IBM could not offer profitably. As such they were tolerated, and in some cases even welcomed, by IBM.

Luck Favors the Biggest Battalions…this lesson contradicts the still fashionable view that 'entrepreneurship' is all; whose promoters would have you believe that sheer genius will win the day. Regrettably, it is investment, albeit coupled with the ideas, which favors winners. Those with the deepest purses will almost always decide the outcome. Indeed, even after more than decade of poor performance, the IBM of the third millennium still has a healthy set of accounts! Management theory, especially that of the Product Life Cycle, would also have you believe that newcomers are always able to challenge the sitting tenants. This is rarely the case, for existing brand leaders mostly survive against all challenges.

Plug Compatible…the second, more important, problem was that of the 'plug compatible' manufacturers. In the 1970's these became IBM's most direct form of competition; on the principle if you can't beat IBM then look just like it (and charge a lower price). These plug took sales directly from where it hurt IBM most. Imitation may be the sincerest form of flattery, but where it cut into sales and profits IBM could not afford to be sanguine about it.

At first the competition was in the area of 'peripherals'. In particular companies such as Memorex and Telex challenged IBM's hold on storage products (disk, tape and memory). IBM's reaction, to shake off these gnats, was simply to let loose its most advanced technology and suck its competitors into a crushing race to produce ever more advanced equipment. It was a race that only IBM could win; which it well knew.

Punitive Defence…if you are a market leader you must defend that position against all challenges; and would be wise to punish such challengers, to discourage others. Conventional competitive theory looks only to the cost of opposing the current competition; and makes no allowance for the possibility of an investment in creating a (psychological) deterrence to future contenders.

This defense did, indeed, hold good for the best part of a decade. It was only when IBM started to lose its way in the second half of the 1980s that new competition was able to beat IBM in these areas; and it did it by IBM's own approach, offering better products!

The remaining problem, of plug compatible CPU's, was found to be much less susceptible to easy solution, and at the end of the 1970s became a major threat to IBM's dominance. Paradoxically the individual who was the catalyst for this was one of those most responsible for the success of the 360. After managing the technical side of the 360 launch, Gene Amdahl eventually left IBM. According to most reports this was because he was unhappy with the hybrid technology it was using; he wanted to move on immediately to LSI (Large Scale Integration). On the other hand, according to Taiyu Kobayashi[1]  it started with a conflict over the number of models in the 370 range and deepened when IBM closed his research facility. Whatever the reason, he then set out, in 1970, to beat IBM at its own game of leading edge CPU technology, and succeeded brilliantly. He chose, however, not to produce a new 'architecture'; but instead to duplicate the 360 architecture he knew so well (having designed large parts of it). The resulting plug compatible CPU's operated just like IBM's except that the hardware inside was more advanced; and cheaper. Worse, from IBM's point of view, was that having seemingly been in contact with Fujitsu since 1969 (before he left IBM), he finally (in 1972) allowed that company to take a 24% share of his new company. This was described by some as a 'bail-out', since at that time he was very short of funding. In return he gave Fujitsu access to some of the technology it needed to catch up with the IBM System/370 - which the Japanese had seen as a great competitive leap. In 1974 it was further agreed that Amdahl computers would be produced by Fujitsu in Japan, for sale in the US. In effect, still without adequate finances, he lost control to Fujitsu.

The Japanese…in addition, in the mid 1970's under the prodding of its government agency MITI, the Japanese IT vendors announced that - all competition in shipbuilding, automobiles and consumer electronics having been destroyed - they were now setting their sights on computers. Japan appeared unbeatable, for it had overwhelmed and destroyed the native industries in all the previous markets it had attacked. It was particularly adept at taking existing technology and developing it (and in the process producing it to a higher quality standard and at a lower cost). This had caused panic amongst the computer industry as a whole, but had been received with relative equanimity by IBM. Japan's previous inability to develop effective software, coupled with the fact that IBM had, at that time, yet to see any large scale successes by the Japanese mainframe manufacturers, had left IBM's senior management largely unworried. Indeed, IBM was still the clear market leader in Japan itself and its S/370 launch had, in fact, destabilised most of the Japanese computer industry.  However, the on-going MITI programme climaxed, in the late 1970s, following on its success with the VLSI memory chip programme (which eventually gave Japan a world-beating dominance in this field), with its announcement that it was funding a 'fifth generation' of computers.

Amdahl and Fujitsu…this announcement, unfortunately, occurred at a time when, in 1979, Fujitsu had - with the assistance of the technology acquired from Amdahl - at last overtaken IBM as leader of the Japanese market and had started to make profits on its range of computer products. The shock waves of this combination of events finally hit IBM; causing panic in much the same way that it had for the rest of the industry half a decade earlier. Japan now appeared potentially unbeatable to IBM's management as well as to the rest of the IT world. In association with Amdahl, Fujitsu had slowly built on its access to technology which was demonstrably in advance of IBM, and, at the time of the announcement of the fifth generation project, was at long last demonstrably capable of delivering this.

The word, therefore, went out from Armonk in the late 1970's that Japan was its most feared competitor. The message was clear and unambiguous. The other competitors could be tolerated but no mercy should be shown to any Japanese entries. The countries set up organisations under the somewhat confusing initials SSSO. This was confusing because there already was an SSO organisation supporting third parties; but perhaps the confusion was not unwelcome, where its sole function was to provide the muscle for competitive situations where plug compatible (i.e. Japanese) vendors were involved. As always, with the IBM of that time, such activities were to be kept spotlessly ethical. The grapevine, though, much appreciated the story of one middle manager (jokingly) suggesting at a key meeting that all competitors and prospects should be given a free copy of the 'Camp on Blood Island'; but it knew, as was indeed the case, that the campaigns had to be irreproachable. Nevertheless it was a mark of IBM's seriousness, and thus of its fear, that such campaigns were mounted at all.

Know, Really Know, Your Competitors…your response to competitive activities can only be well-judged if you really understand the competitors undertaking them. It is too easy to either over- or under-react; unless you understand all the implications. Conventional theory, especially that promoted by Michael Porter[2], usually seeks to categorize competitors into groups; where it is their individual characteristics which really matter.

Overreaction

In the event I believe that IBM probably overreacted. Japan did not succeed. The fifth generation project, which eventually got under way in 1982, was a failure; and was finally buried in 1992. The computing market ultimately proved to be very different to those where its heavyweight tactics had previously been so successful. In particular it required software support that was still largely beyond the capabilities of a Japanese industry cut off behind a bamboo curtain of its own marvellous, but non‑western, calligraphy.

Challenges…in some respects it did still show that IBM was anything but complacent. It still ran scared, or at least welcomed the challenge. The IBM vocabulary no longer contained the word problem. Instead there were challenges; and (in the cynical atmosphere of the grapevine) those problems that were seen as being impossible were re-labelled as 'insuperable challenges' (or even more cynically as 'insuperable opportunities'!). In the case of Japan, though, it was almost as if IBM was looking for a fight, for a challenge, simply to tone up its flabby muscles.

In any case the ultimate outcome should have been indicated by the terminology. 'Plug compatible' indicates that there has in the first place to be a model, a standard, set by a dominant force in the industry; thus the very concept presumed the continuing dominance of IBM. The danger came much later when (especially in the PC market-place) the term was dropped!

Thus, even though the Japanese challenge wasn't successful, its impact on IBM was massive; in terms of the changes it stimulated within IBM itself! In the short-term the 3030x was announced at a price that stunned competition; but was still matched by Amdahl. Thereafter IBM was to set out its new, and very different, objective of becoming the lowest cost producer; quite simply so that it could not be undercut by Japan. Changing its decades long stance, production costs were to replace marketing strengths as IBM's competitive advantage. Over the following half decade, therefore, the investments in new plants put those of the 360 in the shade. Something like $5 billion to $10 billion per annum (an annual figure equal to the total investment in the S/360) was invested in this way; following the principle that - by building very sophisticated (and monumentally expensive) plants - the 'barriers to entry' for others would be prohibitive.

Speaking to investment analysts in November 1985 John Akers said "...our investments in research, development and engineering, plant property and equipment ‑ $32 billion over the past five years, an amount we expect to exceed in the next five years". The fruits of this investment were bitter for, with the fast-moving technology, it was IBM's plants, rather than the less sophisticated (but more flexible) ones of its competitors, which soon became obsolete.

If You Must Make Fundamental Changes then You Must Understand All the Implications…the, ultimately tragic, lesson of IBM's new objective, of becoming the 'lowest-cost producer', was its impact on the three philosophies which had long (and successfully) driven IBM. It fatally undermined the strength of these, and confused their previously very simple messages. If you, too, are about to make a fundamental change in how your organisation operates (and especially in its culture) think very hard - and long - about what might be the long-term implications of this. Management theory often tends to discuss strategy as if it is divorced from history; and suggests that you can choose your new objectives almost regardless of previous investments.

Lowest Cost Producer

This was the real damage caused to IBM. Over the next decade or more this one mistake sapped the strength of IBM. The importance of this new commitment  to be 'lowest cost producer', in terms of the later decline of IBM, cannot be overestimated.

Even IBM management eventually had to admit this was a mistake; when the policy was reversed in 1987. But by then it was too late. The strategic momentum even in production, where plants then took a number of years to commission, meant that the effects still remained with IBM for more than a decade after the original decision. In particular, the relative inflexibility that these new plants introduced put IBM in a very weak position when, over the decade, 'product life cycles' reduced to below three years, and then in some areas to below a year!  IBM's massive investments were designed to serve its older life-cycles, typically of more than 5 years for products and much longer in terms of the technology in the plants which made them. The result was, even under the capable management of John Opel, IBM was unable to match the speed with new 'fashions' emerged; and in John Akers less capable hands this became something of a rout!

The biggest casualty was one of IBM's most cherished beliefs. 'Lowest Cost Producer' was in almost direct conflict with 'Customer Service'; and this conflict (fatally) weakened IBM's responses, especially in its later dealings with 'Third Parties'. Indeed, it is arguable that the strength of the IBM's beliefs was best demonstrated by the problems which arose when IBM abandoned them.

Anti-Trust Ends…after John Opel succeeded to the position of CEO, at the beginning of 1981, this new found aggression was fuelled by the ending, in 1982, of the anti‑trust suit; to be followed in 1984 by the ending of the related suit brought by the EEC. The apparent result was that IBM's actions became more overtly aggressive. It started to talk rather more in the language, then popular in Western political circles, of overt capitalism. Competition, and indeed confrontation, were - in this language - admirable qualities, where for decades they had been carefully avoided.

John Opel

Paradoxically, though, John Opel should have been, according to any yardstick of management theory or practice, the most successful CEO in IBM's history. He had been groomed by the 'star' system to a far greater extent than any of his predecessors. Most important of all, with his Harvard MBA, he understood management theory and applied it! His predecessors (even including Frank Cary) had followed distinctly idiosyncratic approaches to management. Tom Watson Jr, the only one who even quoted theory, had just as idiosyncratically chosen the philosopher Kierkegard (rather than any management guru) as the source of his 'Wild Duck' theory! Opel, though, also understood that management in IBM was different. When a new management training programme used Harvard material, he said "...if our company is going to be really unique, we have to teach something unique...I want them to be educated in IBM management...You couldn't read that in anybody else's manual."

Beware Gurus Bearing Gifts…few management theories apply to all organisations. The corollary of this is that, if you find yourself agreeing with most of the theory currently in fashion, the odds are that you are in terrible trouble! Needless to say, management academics are loathe to criticise their peers (who are members of the same exclusive club) to the outside world - even when these make claims which cannot be substantiated.

INDEPENDENT BUSINESS UNITS - IBUs

In the 1970s and 1980s one of the suggestions for overcoming bureaucracy, especially in organisations such as IBM, was 'intrapreneurship. Indeed, this theme (often now with an external 'market' dimension added) is still in vogue. Accordingly, one especially interesting example - in this context - of how IBM worked was to be seen in the Independent Business Units; which were the legacy of John Opel. He used them as an attempt to introduce such 'intrapreneurship' (most popularly promoted later by Peters and Waterman). In the event - apart initially from the runaway success of the PC (which by itself might have justified the whole programme) - they were largely unsuccessful in this role. Their value, in the context of the picture of IBM presented in this book, is partly to highlight how different then was IBM in its management style. It also nicely sets the scene for the ultimate development in the early 1990s, the planned final solution - the 'break-up' of IBM into thirteen independent companies - which mirrored what was attempted by the launch of the IBU's, but didn't seem to learn any lessons from the experience!

In particular, the first Independent Business Unit ('Biomedical'), but ultimately the least important, is described in rather more detail; precisely because, being so far removed from IBM's normal business, it best illustrates - on a small scale which is more easily understandable - the most unique aspects of IBM's style.

Indeed, the main reason that I eventually persuaded IBM to close down this IBU, in 1984, after seven years of existence, was that there appeared to be no simple way that IBM could avoid the impact of the corporate bureaucracy; no matter how hard Armonk (and especially John Opel)  tried to isolate, and shield, them - as key developing businesses. The problem of the bureaucracy had to be faced squarely, and in the case of developing businesses this meant they were unlikely to be profitable on a gross revenue of less than $200 million per annum. IBM's investment organizational and investment strategies needed to take this into account. Though John Opel must have read my supporting case when he signed the IBU's death warrant, he showed no evidence of having understood the key message as he wrestled with the problem on the wider stage over the next months!

Through its earlier years IBM had not been averse to acquiring other companies; after all it was itself a 'conglomeration' of several companies. For example in the 1930's it bought Automatic Scale as well as National Scale (despite T J Watson's vision of a punched card future). In the tabulating field it bought the Ticketograph Company and Peirce Accounting Machine. It also bought Ellis, with its Electromatic typewriter, to become the basis of its Office Products Division.

This activity ceased, however, before the Second World War and, nearly four decades later in the 1970's, all these take-overs had long since been forgotten. IBM by then had concentrated on its main business. In a time of merger-mania in the business world as a whole, it had emphasized to outsiders, and in particular to its own staff, that its remarkable growth record was all internally generated; and would remain so for ever more. Unlike other companies showing dramatic growth by take-over, IBM really had achieved its position by the virtue of hard work. A single minded concentration on the business in hand was the watchword.

Thus the antics of Frank Cary, and particularly of John Opel, during the late 1970's, were quite shocking to some IBM'ers; exactly as they were intended to be! After the success of GSD as a gadfly, there was a twofold need; to create further such stimulants, and to explore the new branches of high‑tech business that lay outside the main highways that IBM was following.

The first vehicle for this new adventuring was eventually to be the creation of Independent Business Units (IBU's) away from IBM's normal bureaucracy; to flower as completely new and independent businesses, unadulterated by the rest of IBM.

With the one notable exception of the Personal Computer, which is the subject of the separate chapter, none of these IBU's had any real impact on IBM's overall business. Possibly their greatest importance in the context of this book, therefore, is the light they throw on the normal workings of IBM at the time, then, of its greatest success. On the other hand, they also give an important insight into the philosophies being embraced by John Opel, and later by John Akers, which ultimately - in the 1980s and 1990s - determined IBM's fate.

Biomedical Group…indeed, I will concentrate on the story of Biomedical Group, one of the smallest of the IBU's. This is partly because, as well as being the first IBU (both to be created and to die), it was furthest from IBM's business as usual and hence most clearly illustrates the differences inherent in IBM's normal mode of operation. It is partly because its life cycle, from birth to death, was separate from that of the rest of IBM and was completed while the remainder of IBM was still prospering. There is one further, personal, reason; and that is that this is the part of IBM that - whilst still in the organisation -  I researched in most depth. This was simply because, as part of my IBM mission to review the future options for the group - and in the event to recommend its demise - I had to look at its operations more critically than most such IBM operations had ever been examined.

For the record, the earliest roots of Biomedical lay in the personal tragedy of one of IBM's development engineers; George Judson. One of his children contracted Leukemia shortly before Judson was due for a sabbatical, funded by IBM, working on a research project of his own choice. The research project he chose was to develop a device (the IBM 2990) which could harvest white cells from donors, to support Leukemia patients; to keep them alive.

IBM is not the first company to run development laboratories where the programmes encompass activities well outside the normally reasonable scope! What this illustrated was the degree to which such a freedom to stray from the main path of IBM's research was not merely tolerated, but actively encouraged. From the time of Tom Watson JR, IBM put considerable effort into creating a research environment where even the most idiosyncratic academic could feel comfortable. The price was the many cul‑de‑sacs explored, but the benefit was the enviable record of innovation; though, as commentators such as Paul Carroll (Big Blues) and Robert Heller (The Fate of IBM) would argue IBM's problem was the failure to turn these research skills in to marketable products fast enough.

First Recognize Your Innovation…new ideas, be they products or concepts, are probably not as rare as is commonly imagined. What is rare is the ability of management to recognize the potential of such ideas. There is much academic discussion of new product innovation, but little of new product discovery (recognition).

Individual Impact…what it also illuminated was the role of particularly strongly motivated individuals in directing IBM into new paths. The route that George Judson chose was perhaps uniquely idiosyncratic; there was simply no other justification for IBM following it. Yet even here IBM was swayed by the force of argument, and personality, of an individual. Similar historical examples, in areas of more relevance to the mainstream of IBM's business, can be seen in the decisions stretching from the S/360 though to the PC. It was IBM's achievement that - before the 1980s - these individuals could still make their contributions.

At the same time, in the early 1970's, in another part of IBM yet another scientist was also working outside the normal scope of research; though in this case closer to conventional computing. Ray Bonner was developing one of the first artificial intelligence programs, designed to analyze ECG's (Electrocardiographs) to the same standards as a consultant cardiologist.

Thus, as with so many more conventional IBM products, the origins of Biomedical Group, which ultimately brought these two disparate developments together, lay with individual enthusiasts independently developing products outside IBM's mainstream product plan.

One of the plants considering the competitive tenders for some of these products was that of Systems Supplies Division (SSD), in Dayton (New Jersey). Not long before SSD had been at the heart of IBM, for it produced the millions of punched cards that had been IBM's cash cow. In the 1970's business was declining, as IBM's concentration increasingly turned to computing. In Europe the simple response was to shut down the whole business and absorb the personnel elsewhere. In the US the vice president in charge of SSD , 'Van' Hoesen, had a much larger problem (with far more workers to place) and chose an alternative solution. For most of the 1970's, with the support of the IBM main board, he avidly searched for any new business that could be slotted into SSD. So SSD, an otherwise dying division, became a hotbed of innovation.

Enthusiastic Innovation…it is possible to produce a climate of innovation. This task requires, however, both charisma and bravery - and unusual combination for modern managers. Management theory, in general, tends not to recognize the importance of enthusiasm - though that relating to creativity does.

Searching for these new products, Van started a campaign to win the first (2991) product 'mission'; though SSD did not have any significant history of machine production. One key factor, though, was that the products being tendered for also generated a substantial element of on‑going income from the related supplies. In the case of the blood products the annual supplies income could easily run at a rate approaching the capital value of the machine! It was a situation that was familiar to SSD, brought up on the similar philosophy inherent in the punched card business. Van won the mission, probably due to his enthusiasm; and assisted by the fact that the business was much less attractive to other plants.

It would appear that chance, being in the right place with the right proposition at the right time, aided by the inevitable enthusiasm of Van, eventually (after a number of years of small scale operation) swayed the Central Management Committee (CMC) into expanding this 'pilot' operation into the 'Biomedical Group'; though it was not to become the first Independent Business Unit (IBU) until later.

R&D…one of the first problems that IBM faced (and still faces) in diversifying, was encapsulated in the strange bundle of products Biomedical group inherited. IBM's inventive genius resulted in its laboratories holding a veritable cornucopia of new product ideas, to meet almost any possible requirements; the problem was the dearth of profitable marketing concepts to unite them. In the case of Biomedical Group, IBM persuaded itself (wrongly, as it turned out) that there was synergy to be obtained. All three products were, after all, in the medical market.

Unfortunately the (5880) ECG products were marketed to totally different users (cardiologists) than the blood products (whose users were haematologists). There was no synergy at all. Why, you may ask, was this lack of synergy not obvious? The answer is that, as in most companies, the developers (particularly those with abundant enthusiasm) are ultimately the worst people to advise on future prospects for their cherished offspring; as the Concorde airliner project in Europe amply demonstrated.

Elsewhere in IBM - apart from the PC - the product launch programme was firmly in the hands of marketing staffs; who were carefully divorced from the developers, and could consequently have a more dispassionate view of the product prospects.

Separation of Powers…may look arbitrary, but is essential in terms of limiting the exposures which might come about from over-enthusiastic developers in the labs launching unmarketable products. It is a check on the risks involved in radical new products.

In terms of incremental products, where the risk is much less, it can introduce unwelcome - and unprofitable - time penalties (as it later did for the PC). Bill Gates, has chosen the (high risk but fast delivery to market) method of a very close link between the developers and the delivery systems; and so far this has won hands down.

IBM was fortunate that its later PC Independent Business Unit initially developed 'single' products that were remarkably successful; since the other runners in the race would have probably been handicapped by their marketing approaches. But, when it appeared, the PC as a 'single product' surely would have been difficult to better! The first evidence of the real price to be paid was seen later when the PC Junior failed, and the follow-on product (the IBM PC AT) had widely reported disk problems. IBM PC Group, and Armonk, only then realized the difficulties inherent in single product development and sourcing; where the overall IBM system expected otherwise.

Product Life Cycle…it might seem that, as a result, there was a lack of control in IBM's product policy. This was not the case, as IBM very clearly tracked its products and concentrated its resources on those products which showed potentially high economic returns. Peter Drucker specifically identified a product life cycle that drove IBM. According to him (in 'Innovation and Entrepreneurship') the development period was then 5 years. IBM later had to move this closer to three years and found that even this was too long; where industry-wide figures are now measured in months. Eventually, even in the late 1980s, some IBM product developers were working to a one year development phase.

In the original IBM model, development was followed by a 'matching' five year 'exploitation' phase (and again this was later reduced dramatically, sometimes - forced by competitive activities - down to only months!). According to Drucker the product was then expected to reach market leadership and profitability within a year. By early in its third year it should have achieved a payback (that is it should have recovered all the costs incurred in the development phase). In those golden years the remaining three years were pure profit; and it was IBM's genius for stretching the end of this period (squeezing the last ounce of profit) that was reflected in its financial results. In the more hectic times since, market leadership has to be gained almost immediately and payback and profit have to be completed inside a few months!

Product Life Cycles…such 'life-cycles' are often quoted as justification of a 'natural' cycle of life to death - forced by the environment - which all products must face. This is not true, since the life cycles of such products - including those of IBM - are almost exclusively determined by the suppliers themselves. Product Life Cycle (PLC) theory is an important, and widely taught, element of marketing. It is, unfortunately, wrong; research has shown that the brand leaders - at least - have lives far beyond that predicted by such theory.

Creativity?…in the same book Drucker rather surprisingly reported that he believed that "IBM [is] the world's foremost creative imitator" and draws the conclusion that "it is thus still doubtful that IBM can maintain leadership in the automated office"! Whilst this is largely true of Bill Gates, who is a genius at copying the best ideas of others and making large amounts of money from them, I suspect that this was a misreading of IBM's policy. Since the time of T J Watson it had deliberately lagged its product launches behind the more leading edge technological trailblazers; waiting until the market was ripe for development. In the labs there was generally little evidence of direct imitation, indeed the main problem was the NIH (Not Invented Here) syndrome which positively discouraged them from following such a route (even when it might be the most sensible approach). Of course, the policy of deliberately lagging products met its Waterloo with the PC. IBM's widely reported 'lags' here became one of its greatest weaknesses.

It may be due to intellectual arrogance that IBM developers adopted this insular approach, but I suspect it was more a search for intellectual 'elegance'. On the other hand, Microsoft thrives on bringing in outside ideas; indeed much of its business is now based on software developed by others and only bought in (or, failing that, copied) when it proved viable - as indeed did the original PCDOS! Along with others in the PC market, Bill Gates has turned 'reverse-engineering' (using legitimate methods to avoid copyright problems but still ending with a 'product' which offers the same benefits!) into high art.

NIH…various support functions, especially R&D, can become dangerously inward-looking - refusing to see anything which happens outside of their own walls. The first need, to combat this, is to recognize that such a problem - the Not-Invented-Here (NIH) syndrome - is present; and then, rather more questionably, consider reverse-engineering! Management theory does not normally describe this syndrome.

Insularity…the balance between the benefits, of not being constrained by the precedents of (probably poor) traditional design (based on incremental development), and disadvantages, of not learning the possibly valuable lessons of past experience, is a fine one. Overall IBM's developments whilst insular were sound. It might now be argued, though, that IBM could later have benefited from a much better appreciation of what was going on elsewhere!

This insularity also illustrates another problem which could beset some of the key developments within IBM. In much the same way that developers were isolated from, and indeed not particularly interested in, the outside world they were also uninvolved in other developments within IBM. As a result development 'architectures' diverged, and products developed in different parts of IBM could be inherently incompatible. This was perhaps most evident in the software products, where it was much more difficult to define common standards; particularly for a product, such as VM, which was developed outside the mainstream, and then grew (by force of popular demand) to become a strategic product. IBM has, more recently, had similar problems with the UNIX operating system, developed elsewhere and forced upon it by market demands; which may be one reason it is keen to promote Linux, which has rigorously controlled industry-wide standards for its 'kernel'. Despite its even more high-handed approach to customer needs, Microsoft also has major incompatibilities between its various versions of Windows. Though it promises to rectify these, in practice it has had little success; even though it does not appear to see any need to take account of the more complex issues of upward compatibility (that's the customer's problem!).

Over-Engineering…another feature of the search for ultimate intellectual elegance in Biomedical was that the follow‑on products were too late for a group that desperately needed volume selling products. The search for the perfect machine meant that, at least in one case, a whole two years of development was abandoned. Such 'wastefulness' was debilitating to a small development team, but was a way of life in the mainstream laboratories. It was an essential element of the ruthlessness that was necessary to allow resources ultimately to be concentrated on the winners; the Josephson junction work in IBM was finally cancelled after more than a decade's work and many millions of dollars invested. Producing workable products is one thing. Delaying the launch, until long after the competition have launched theirs, in order to produce a perfect one is an act of foolishness. IBM perpetrated this on the grand scale through the later 1980's; when Bill Gates was getting to market with much less than perfect products - in some key respects the first version of Windows was almost unworkable - but at least building a presence in the market.

Too Much of a Good Thing…you can give your customers too much of a good thing. Success comes from giving them exactly what they want. TQM (Total Quality Management) theory does emphasize that 'quality' can be too high as well as too low. Fashionable in the 1990s, it had some useful messages, though it is now going the way of most fads; and these messages are being thrown away in the process.

This over-engineering was, even in its heyday, a problem typical of IBM. It was a problem for IBM, but not for its customers; who, at the time, received just about the best engineered products in the world. Sometimes, though not often, it did mean the product really was more expensive (if, unnecessarily, better), and very occasionally the over-engineering resulted in the product failing to meet the customer needs; it put engineering elegance before market requirements. In the early days of GSD the applications (software) packages were in general designed to be so flexible as to be able to be all things to all men; a tremendous feat of software engineering. Unfortunately the subsequent research I then undertook for the division showed that the main requirement of the (targeted) unsophisticated customers was in reality to offer no choice. They simply didn't know what to choose, and were looking for someone to tell them what they should have. The competitive (and technically very inferior) software, which couldn't allow any choices, was thus much preferable! It was with the advent of the PC (and the other low end products, which were needed to service the ever expanding 'end-user' requirements) that these problems (essentially of an almost total divorce between the sophisticated developers and the increasingly unsophisticated users) became really important. These problems, coupled with the related delays in launching new products, became a millstone around IBM's neck. Even if IBM's mainframe business remained much the same, and could cope with this time-tested approach and still make large amounts of money, the image of IBM (first in the press, and then held by customers - even of the large mainframes) suffered badly.

Structure…the 'anomaly' of this was brought home to me eventually, during my review of the future options for the group. It came about as a result of a comparison with my previous company, BTR. Shortly before its demise Biomedical had a world-wide turnover of around $30 million, and a workforce approaching 500. Prior to joining IBM I myself had run a part of BTR, its Burton on Trent (Polymeric) Group, which coincidentally had been of very much the same size. Although BTR was even then a very sophisticated company, the comparison with IBM could not have shown greater differences. The structure at BTR was still that which would be recognizable to a manager in almost any other medium size company or division. It was a structure that was relatively autonomous, with its own separate identity. Indeed the 'hands‑off' management style developed by BTR head office at that time is believed to have been largely responsible for its subsequent success. The structure of communications within the division typically ran back from its periphery to its own center. Communication with the rest of BTR was in the main hierarchically via senior management; and typically through myself. For most of its employees the focus was the narrow confines of group itself, not BTR overall.

Biomedical Group on the other hand looked most like an IBM branch (or staff department,). It did not have a unique identity, with a clearly definable periphery. It was instead most obviously a part of a larger, relatively uniform, organisation. Communications did not lead from the periphery to the center, but covered the group in a matrix; which led outside, at all levels, to connect with company-wide systems. This is now recognized as a 'matrix' structure.

Matrix Structure…this form of structure can be much more effective in managing businesses which depend upon a series of fast developing projects. It does, however require considerable expertise to operate - and its peculiar needs must be recognized and catered for. Matrix structures are well described by (Organizational Design - OD) management theory.

IBUs and the Bureaucracy…at the end of the 1970's Armonk took the further decision to create Independent Business Units (IBU's) quite specifically to remove the bureaucratic load from the smaller 'venture' operations; the type of approach which was later to be, rather trendily, referred to as the 'intrapreneur' approach. Biomedical Group was chosen as the first of these new, IBU, experiments in minimal bureaucracy.

But, despite all the brave intents, the IBM culture rapidly reasserted itself at the Armonk 'cabinet' office; the opposite of what was intended. To meet the stipulated new 'non‑bureaucratic' procedures a whole raft of new procedures had to be created, while - to play safe - the original procedures were still retained! Thus at a stroke the bureaucratic load had been doubled (not halved, as intended). Previously key decisions had been approved at the relevant monthly meetings of the CMC. With the change they had to be held back for the three‑monthly meeting of the special CMC sub‑committee; thus trebling the timescales!

Even within the supposedly 'untainted' Biomedical IBU the bureaucracy in fact predominated. The highly distinctive IBM functions, such as Business Practices/Legal and Pricing, which are prominent in the rest of IBM to keep the various operations in line with Armonk policy (but are generally non‑existent as separate functions in most other organisations) had their exact counterparts in Biomedical Group. Unfortunately the group was simply not big enough to carry this overhead, either in terms of its direct costs or its indirect time and resource penalties. Shortly before the group's demise, I counted 13 workers on the production lines (which, in view of the commitment to an assembly only philosophy, was not unreasonable). At the same time, however, there were 6 people working just on pricing decisions that in other companies of similar size would have taken a small part of the time of one senior manager.

Bureaucratic Bind…it can be a perverse fact of corporate life that attempts to break the hold of any bureaucracy are typically counter-productive. A strong bureaucracy soon finds a way of turning any such changes to its advantage, and regaining control - and often adds to its numbers in order to do this! This problem is rarely addressed by mainstream management theory.

My interpretation of the comparison with BTR, and other companies, was quite simply that - at that time anyway - IBM could not easily, if at all, avoid its bureaucratic structure. No matter how much it wished otherwise, the structure and the culture were far too strong. The bureaucracy would strike back.

Minimum Revenue Levels…at the time I calculated that, as a very approximate rule of thumb, a revenue of $200 million per annum was the minimum required for any IBM group to be able to carry the overheads of the bureaucracy. In the case of PC group, which quickly followed as an IBU, it was indeed fortunate that even within the honeymoon period it easily surpassed the $200 million barrier; and became a tremendous success, despite the overheads.

It was clear to me that Biomedical Group would not reach this $200 million level before the weight of the bureaucracy pulled it under; so I accordingly recommended, for this reason alone, that the group be discontinued. It is to the credit of EHQ (European Headquarters) that, after some initial reservations, senior management there backed this recommendation. But most of all my admiration goes to John Opel who, presented with this recommendation in competition with one from the US for further investment, took the decision to close down the IBU. This was a brave decision. Biomedical was, after all, the first of his IBU's; launched in a fanfare of publicity. To kill it could be seen as an admission of defeat; just before he was due to retire. It was a measure of his, and Armonk's, maturity at that time that there was no hesitation. It is my observation that the quality, and courage (or security), of senior management is best shown by how it handles its failures. How it handles the close down of such a venture says more than how it copes with success. The pity is that John Akers later did not seem to have the same sort of courage.

The conclusion that, at the time, I drew from this experience was that IBM was locked into its existing business, except where new ventures could be rapidly grown past the $200 million limit; not necessarily that onerous a condition for a company with IBM's financial muscle at the time. Even then the success of the new venture was likely to be very dependent upon having a critical mass of enthusiasts who could 'manage' the traditional IBM bureaucracy to the new group's advantage. Small inexperienced groups, such as Biomedical Group, might be very successful in relation to other companies in their chosen marketplaces but within the IBM framework they simply could not be profitable.

Some of the possible difficulties were later illustrated by the high profile launch of the Business Development Division, which was to become the home of the IBU's. It was also the home for something of a rag‑bag of IBM's other ventures, including typewriters and bureau services, which were declining businesses rather than growth potential. For me it was most graphically illustrated at the management 'kick‑off' meeting in the UK. As a succession of speakers extolled the glowing future for the growth business (the PC in particular), I looked around and noted that less than 5% of the management present belonged to these new 'growth' groups; 95% were concerned instead with halting the decline in the other, dying, businesses!

It was my optimistic belief, at the time, that Armonk would learn a great deal from Biomedical Group and the other IBU's. However, Buck Rodgers later, in his book, still reported that "[IBU's] are not subject to the company's strategic planning and review processes. No five year plans for them. No rigid rules or inflexible policies. A freewheeling management style is encouraged, and their autonomous boards are free to make decisions beyond what is typically permitted by the company. In short all organizational roadblocks have been eliminated". This is still an attractive theory - as indeed it was in 1980 when it was first spelled out to the staffs of the IBU's - and the evidence is that it continued to attract IBM's senior management through the rest of the 1980s even after the demise of Biomedical Group should have disproved it for them. Armonk did not, after the plethora of new IBU's in the early 1980s, create any totally new IBU's. It subsequently switched to acquisition of outside ventures, which were not staffed by IBM'ers and were - initially at least -  kept well away from any contamination by the bureaucracy.

It may possibly have learnt one further lesson. Some months after we promoted the need for a clear product based organisation in Biomedical, Armonk introduced such Business Area Marketing as a key organizational structure in the main 'Big Blue' business. It is tempting to think that it derived some part of this particular lesson from the Biomedical documents that had so recently been through its offices.

The limit on IBM, constraining it to its main markets, is not as problematical as it may appear. It may be a one product company, but that product (information processing) accounts for nearly two thirds of all business activity!

COMMS…moving on, to look at IBM's other diversification activities, the 1980s saw it looking to buy in answers to its problems. Thus, the various communications oriented groups, acquired later in the 1980s, were at least in part intended to be IBM's answer to A T & T. By the late 1970's it had become obvious that the future of information processing lay in two increasingly inter-linked and interwoven disciplines; computing and communication. In the US the latter was dominated by A T & T; though it did not have the advantage of a world-wide strength as did IBM. It was forecast then that there would be a battle of the giants; as IBM moved into A T & T territory, and vice versa. Certainly a battle of sorts was joined. A T & T tried to move into computing, buying into Olivetti for example. However, despite the fact that it was the owner of the key operating system, UNIX ‑ which was though in the public domain - it was unsuccessful in its computing ambitions.

IBM for its part bought into Satellite Business Systems (SBS), as a  'vehicle' for future developments. The original, ultimately unrealized, intention apparently was that larger customers would install their own dish aerials, at their main locations, to pump vast quantities of networked data via IBM's satellites. To reinforce this service IBM attempted, outside the US, to go into partnership with the local PTT's (the local telephone operators; mainly government owned) to create VANs (Value Added Networks). The idea was that suppliers of these, such as IBM and its partners, did not just supply the 'wires' to connect the various pieces of a customer's data network but went further to 'add value'; in the form, for example, of programs for manipulating data or, in particular, information held on databases. To add some weight to these claims IBM's bureau service was rolled into this group. Its successor, IBM's Global Network, was finally sold off (for $4.9 billion) in 1999.

Indeed, in the late 1970's and early 1980's, after its abstinence of nearly half a century, IBM went on a discrete buying spree. Apart from Satellite Business Systems it bought, and sold again, a stake in Discovision; the laser disk system for the home market; and bought some instrument companies which it grouped into III (IBM Instruments Inc.).  At more or less the same time IBM was buying a minority stake in Intel, the supplier of the 8088 chip (and subsequently the 80186, 80286 and 80386) which were the basis for IBM's PC ranges, and later selling it again (but for as fraction of what it later was worth!)!

ROLM…perhaps most significantly of all, after a brief affair with Mitel, it bought Rolm, one of the main suppliers of switchboard equipment to the US market. IBM itself had dallied with such equipment in Europe (in the form of the 2750, 3750 and 1750 computerized  exchanges) but never in the US. Rolm was one of the archetypal successes of the Silicon Valley culture. Its technology in voice communications was already very sophisticated; and it was starting to link this to data transmission as well. In the US it supplied a terminal device that linked both voice and data into the switchboard; offering a much cheaper form of 'local area network' (LAN). It was apparently the answer to IBM's need for a vehicle to take on A T & T, as well as possibly posing a future threat as a serious contender for the LAN market.

The culture at Rolm was reportedly as strong as that of IBM itself, but markedly different. It apparently subscribed to the Silicon Valley tattered jeans and unkempt beards image - more like that of Microsoft  and especially AOL - which did not sit easily with that of IBM. Its Silicon Valley headquarters were one of the marvels of the valley, beautifully landscaped with a swimming pool and patios for its fortunate employees to relax on. Perhaps as a result of the mismatch of cultures, or perhaps of lessons learnt from the earlier IBU's, Rolm initially kept at arm's length, if not even in quarantine. Its contact with IBM was only at the level of the management committee. At the time I commented that: "There is no contact at lower levels; at least not yet. It will be interesting to see how this approach works; certainly it avoids some of the bureaucratic pitfalls of the earlier experiments." The experiment did not work out. It found it had to step in,. It had bought Rolm at the peak of its success, just about as its performance was to turn down. IBM eventually had to step into sort out the mess, and as my original comments suggested, this only made things worse! It became a division of IBM in 1987. The division predictably became a running sore, whose problems the new IBM managers failed to understand, and was eventually made a joint venture with Siemens (which was a giant in the telephone business) and finally was sold to that company in 1992 (at a loss of $1.35 billion).

Diversification…moves outside of the known world, away from existing products/services and existing markets, are the riskiest of all for any organisation to make. This was recognized by Igor Ansoff when he created his famous matrix - though few of the modern users of this seem to recognize that risk element.

Retail…there remains to chronicle just one more of IBM's brave new ventures at that time - the much more important purchase of Lotus came later - that of the Retail Shops. Recognizing the need to find new channels, to market the new higher volume but lower price products, IBM's initial attempt was to enter retailing itself. In 1981 it set up the first retail shops. Initially these sold typewriters and supplies; to be followed by the PC. Unfortunately they were never a great success. By the end of 1985 they were in effect discontinued. At least IBM did not make the mistake of some of its competitors and promote these stores heavily, against the interests of its other (Third Party) channels.

As always - at that time - IBM learnt from the lesson. The requirements it later laid on its PC Dealers, for example, were clearly derived from its own experiences. It also meant that in negotiating with such prospective dealers it was talking from strength, knowing as much about their business as they did.

While there was evidence of a great deal of activity in all of these ventures, this was generally to little effect. IBM could, however, claim that it paid for the whole programme many times over, with the stunning success of one IBU, its PC group. The downside of that was to be seen later!

MICROSOFT AND ITS PURCHASES

Whilst Microsoft's overall success has largely come from good luck, mainly the gift of IBM, and its manipulation of the resulting monopoly, its ongoing development has come from Bill Gates' brilliant gift for inspired opportunism. In many respects it has behaved more like a system integrator than a creative software innovator. Even its original piece of luck, sourcing IBM's DOS system, depended on it buying this 'off the shelf' from the (small) Seattle Computer Products. For much of the time since then, its key developments had been on the back of software developed by other organisations, His next main breakthrough, Windows, was reportedly inspired by the graphical interface shown at the 1982 COMDEX by VisiCorp; and the icon approach was obtained by reverse engineering a Xerox PARC Star system. The development of Windows was led by a leading developer hired from Xerox; but his key success was in getting the software and hardware vendors to develop the interfaces needed for it. Even so, according to Martin Eller[3], it was almost useless until Microsoft found a clone of IBM's TopView windowing system: Mondrian, developed by Dynamical Systems Research - yet another small company! Even then, the problem of running in protect mode needed software, Scroll Screen Tracer, developed from that developed by an individual professor at the University of Arizona; which was then developed as a personal project by Dave Weise unauthorized by Bill Gates. The real genius of Bill Gates was then demonstrated when he subsequently recognized its potential and formally approved the project - and a workable Windows 3.0 was finally launched in 1990, five years after the first version was launched.

Having found himself with a real 'new-product' winner on his hands, for the first time, Bill Gates moved development into 'IBM mode'; with a team of 500 programmers charged with upgrading the new software. His genius here was the discovery of 'beta-mode' testing. The bane of IBM's life had always been debugging, on the very large scale, its programmes - and this often took more than two thirds of the effort. Bill Gates simply put much of this, at least of the very large scale testing, out to its customers. It shipped literally hundreds of thousands of 'beta-test' copies of its programmes for them to find the bugs - and even made them pay for the privilege. The 'reward' for them was that, supposedly, they gained advantage over their competitors by being able to use the new product as soon as it was officially released.

The most important successes for Microsoft's own development teams came, however, from developing the much simpler application programmes - based on well known and tried approaches - especially Word and Excel. It was the profit from these that really made Bill Gates rich.

Even so, he continued to buy his offerings in the market. In this vein, according to Janet Lowe[4], by late 1997 Microsoft had made about 60 acquisitions, investments or alliances; with smaller positions taken in dozens of other companies. These were worth more than $2.5 billion, but that was small change in the context of the overall value of the corporation. They do, however, show it to be a very purposeful, and even more aggressive, company; and, where its growth often comes from growing such minnows into whales, one with a very good eye for a bargain! Dearlove[5] records that "…in some cases Gates will simply buy a software company lock, stock and barrel if he believes it has a significant technological lead on his own company with an important application. In doing so, he ensure that Microsoft will dominate that market from the onset. At the same time, he is able to acquire the technological know-how by bringing the brains behind it into the Microsoft fold" - and in this way he steam-rollers everything in his way. The trick, which he manages better than anyone else, is recognizing these minnows before anyone else. Faced with a need to compete with Borland's database product, Gates simply went out and spent $170 million on the software from another company[6].

Bill Gates genius, in this context, can therefore be seen as that of a very discerning buyer of ideas. This is in no way to denigrate him, since - no matter how obvious the ideas may be in retrospect - very few other business leaders have this gift.

Creative Awareness - most 'giant steps' in new ideas and products come about not because someone puts in all the inspiration needed to invent them, but because some visionary leader is able to recognize their importance and invest their development. This is why the open mind of a genuine entrepreneur is usually worth so much more than the obsessed one of the dedicated inventor.

In the 1990s one of the ideas in vogue was that of the virtual business, where a small head-office subcontracted all its operations - from production through to admin - to other organisations. All the management had to do was to develop the ideas behind the business. This was a nice idea, but has yet to work well. Amazon, for instance, started out by subcontracting all its operations (including book stocks and processing) to others who were already in this business. It rapidly found out that, to get the degree of control it needed, it had to do all the key operations itself. The billions of dollars it cost to set up its own warehouses to provide the required level of service nearly bankrupted it! Bill Gates has neatly turned the idea on its head. He does all the production, and in effect subcontracts the ideas and development! IBM did something approaching this, when it let others test the market with their new products before it came in and used its muscle to take over the market when it proved worthwhile - but IBM used its own products which it had ready on the shelf in its laboratories. Bill Gates did not have the products ready, So, he first tried to buy the new product in its entirety; lock, stock and (most important) key staff. If he couldn't do this he bought a competitor - where most such new moves now spark off copies of one form or another. Then, like IBM, he used his marketing muscle - and in particular the links to the industry standard Windows - to take the market over.

Proprietary Systems Integrators - this is a new form of business, where by the 'integrator' with a dominant place in the market not merely offers its customers other suppliers' complementary products but buys out those suppliers to offer them itself and gain an ever more powerful, and ever more profitable, monopoly. As such, this new approach is not described in any theory.

THE IDEAL MBA

Returning to our main historical theme, although Frank Cary had held an MBA, John Opel was the first of IBM's CEOs to manage in the style which was recommended by the best business schools. What is more, his decisions reflected the best ideas in management being brought forward at the time. Even his emphasis on cost-cutting, described earlier (and which was so damaging to the long-term interests of IBM)  was in line with the central theme of management theory in the 1980s. His creation of IBUs (Independent Business Units, from which the PC emerged) was also fully in line with the concept of 'intrapreneurship' which was in vogue at the time (and, indeed, the PC was later hailed as one of the great successes of the concept). If you wanted to look for the ideal CEO, doing exactly what the business schools said should be done, then John Opel was the obvious choice.

Indeed, if we look at his manifesto, as fully set out in the final (1983) version of  IBM's new objectives, it represented almost an idealized version of what was then being proposed for the whole of Western industry:

1. To grow with the industry.

2. To exhibit product leadership across the entire product line - to excel in technology, value and quality.

3. To be the most efficient in everything we do, to be the low-cost producer, the low-cost seller, the low-cost-administrator.

4. To sustain our profitability, which funds our growth.

Once more, the real driver amongst this list - and the one whose implications ran so counter to IBM's history (and to its three philosophies, which - in theory at least -  still remained in place) - was the third one; that of lowest cost producer (by then extended, just as fatally, to IBM's other operational areas).

Fashions Fade…the worst management theory is typically that which is currently most fashionable. Bitter experience shows that such theory is rarely soundly-based and, before long - and before any proof is forthcoming - it disappears from view. Either place your faith in that theory which has stood the test of time or recognise the risks inherent in following fashion. Management academics seem to have no defence against those (from their peer group) who - from time to time - hi-jack popular opinion.

False Dawn

On the other hand, IBM's initial results seemed to clearly support his claims. During his period in office IBM reached the peak of its power, and the peak of its performance. IBM grew to become, by the mid 1980s when he retired, the most successful corporation the world has ever seen. What is more, it recruited another 100,000 of the best people in the world to power its progress ever onwards - to the target of being the first corporation to earn  $100 billion per annum, by 1990, which Opel had set for the company. Inside IBM even I had no doubts about his capabilities, and neither did my colleagues. In an interesting aside, even Tom Jr commented (in his autobiography) that "...[T V Learson] favoured executives like John Opel who knew how to take shortcuts across organisational lines."

It was only later when I had left IBM that I found my own beliefs being challenged, and even then I found it impossible to put down on paper my increasing belief that his decisions had been so flawed. I did at least voice some of my reservations, suggesting that IBM might face problems in future, when nobody else did at the time. Thomas DeLamarter, writing at the same time in his book 'Big Blue', was merely voicing the general opinion when he said that not merely was IBM the most profitable company in the world and that IBM dominated the computer business (both factual views I echoed), but it faced no significant competition that could ever threaten this dominance.

Success Guarantees Success - Except When It Doesn't…success is most likely to come to those who are already successful. On the other hand, this is not always guaranteed to happen, and the seeds of ultimate failure may be much harder to detect amidst the hurly-burly of success. It is at times like this that management's scrutiny of itself must be most rigorous. Management theory is rather thin on the subject of what makes success turn into failure. The most prevalent opinion seems to be that it is caused by a failure to meet changes in the external environment. Unfortunately, the IBM example, along with many others, indicates that failure is more likely to result from self-inflicted wounds.

DeLamarter may actually have been right, for the seeds of destruction of IBM lay inside, not with its competitors; and I have now come to the unwelcome conclusion that, if the finger can be pointed at any individual, it was my original 'hero' - John Opel - who (unwittingly) destroyed the IBM I knew!

The first of these decisions had been taken, as we have seen, when he was second in command to Frank Cary. Both the creation of the IBUs, with their new values, and the new 'objectives'  - which reinforced these new values - were necessarily going to have major long-term implications whatever he might have done, but in many respects they only represented the tip of the iceberg of the new management style he was about to introduce. Much as Tom Watson Jr had reacted against his father's style, John Opel introduced IBM to the new world of (Harvard) management theory; or at least to the ideas which were fashionable at the time.

Buying-In

In particular, he introduced many of the ideas which in the academic world came under the grand title of the 'make or buy' decision in management theory, and under the even grander title of 'transaction cost analysis' in economic theory. IBM had always 'bought-in' the products and services which other organisations produced more effectively and efficiently - though its purchasing system still set very high (IBM) standards for them to meet. In the 1980s this was boosted by the use of contract and temporary staff wherever possible. In particular, though, the (apparently) very successful example of the PC Group in buying in 'products' (most notably the Intel processors and Microsoft's operating system) was extended to other areas - especially to software.

Third Parties…most important of all was the infatuation with 'Third Parties' as the solution to one of IBM's remaining cost problems; that of the 'channels of distribution'. Although I had by then signally failed in my attempts to explain the principles of mass marketing to IBM's UK board, they had at least recognised that the number of customers it needed to contact was about to expand dramatically; and were even more aware of the cost of the IBM sales-force in this context. Their thinking then went along the lines of 'if this can be passed to small businesses, which are not crippled by IBM's pay scales and, in particular, its very high overheads, the cost problem can be resolved'; and IBM would become the lowest cost producer in this area too. This distracted IBM's attention from the potential problems in its existing sales operation; and especially from the problem of extending coverage of the IBM customer service umbrella to much wider groups of end-users. The future of IBM, with its confident prediction of $100 billion by 1990, was to be in the hands of these cheap and efficient third parties - who were expected to account for more than half of IBM's sales in 1990!

The Switch to Outright Sale

Hiding many of the emerging problems were the other supposedly sound management practices which were introduced at the same time. Rental of machines, which was the previous basis of IBM's customer relationship, meant that the customer could easily return them and switch to a competitive offering, Traditionally the answer had been that the sales-force held them in place by superb relationship marketing. John Opel, though, found a much simpler expedient; that of selling the machines outright. This was easily achieved - from 1982 on - by weighting the pricing structure in favour of this and having the ever faithful IBM sales-force reverse their previous practice; to remove the 'danger' of competitors replacing rental machines.

Unfortunately, in turn, this introduced a number of less obvious dangers. The first of these was that the 'selling campaign', which had previously been almost continuous since the sales personnel had to defend their exposed rental machines almost daily, was now reduced to a short burst of activity once every two or three years. The wise sales professionals still continued to maintain the relationships through these periods of 'non-activity'. The unwise  - of whom there proved to be not a few - used the time for the more traditional sales activity of unproductively chasing new prospects. Indeed, in research conducted by Andersen Consulting[7] in 1993, the most frequent and significant complaint made by IBM customers (37%) was that IBM had lost touch with the market-place; though this was closely followed by the 35% that said it had failed to keep up with its more nimble competitors. IBM's arrogance as also seen (by 11%) as a major cause of IBM's decline.

Although it might have seemed almost a change in 'accounting practices', this break with the hidden factor which had previously driven IBM's selling practices was to ultimately prove a central factor in IBM's later downfall. As Mills & Friesen[8] pointed out, "Put bluntly, customers in the past had bought solutions and reliability from IBM; then IBM moved them down to buying boxes. Soon many customers concluded that they could get cheaper boxes elsewhere." 'Solutions' was not to feature again in IBM's strategy until the end of the 1990s!

Tom Watson Jr., in his 1990 autobiography[9], was also critical of this change "In spite of Frank's [Cary] success, he made a few decisions that caused me to wish I was still running the show. In particular I was alarmed when he and his eventual successor John Opel rapidly phased out the rental system, shifting billions of  dollars worth of business to outright sales. They did this partly to free up capital that would otherwise have been tied up in rental machines. But it bothered me because rentals had been crucial to IBM's success. Rental contracts wedded us to our customers, gave us a powerful incentive to keep service top-notch, and made IBM stable and essentially depression proof."

It is interesting that, with some inside information, he adds Cary to the list of guilty men; at least in this case.

Understand, Yet Again, The Implications of Any Fundamental Changes You Make…it really is worth repeating this advice, since it has led to the downfall of so many successful organisations; including Enron and Marconi in very different businesses. If you do not understand all the implications of fundamental changes you are making then you may be putting your whole business at risk. Management theory tends to discuss strategy isolated from history.

The Cost of Customer Service…more insidiously, but as might have been predicted from its undermining by the new 'objectives', IBM's philosophy of  'customer service' now began to be subject to cost constraints, and was even charged for. The systems engineers, who had in practice been IBM's most powerful sales personnel, were withdrawn and 'sold' as a service; so that, in the 1990s, branches no longer had any staff undertaking this key role. The net result was that customer service deteriorated, even when IBM was providing it face to face. Of course, it became little more than a joke when 'IBM' dealer personnel were involved. Senior management began to talk of selling commodities (especially in terms of the PC), where the only deciding factor was to be the price. This was something that IBM had never considered in its three quarters of a century of history. It had always sold customer service, so that price alone was never a deciding factor. Even when price could not be avoided it had talked about 'price performance' (where the IBM service was a key element of the 'performance'). By the late 1980s, however, it was mostly talking just about price!

Selling the Family Silver

A less obvious effect of the outright sales policy, and one which - amazingly - IBM management did not see, was that IBM's revenue (and especially its profits) were artificially inflated in the short term. It was inevitably a one-time source of income which would be exhausted in two or three years, but IBM's management seemingly overlooked this key fact! At around the same time, IBM had changed its very conservative accounting practices, to adopt more conventional ones. In particular, investment in R & D was no longer paid as part of current costs, but was depreciated over future years. More controversially, the long-term 'capital value' of the leases (which IBM was now selling to replace the previous rental it had offered), were shown as income in the year in which the sale was made. Again, this inflated current income at the expense of the future.

These inflated figures set up unrealistic expectations of the future for the outside world; especially for IBM's stockholders, but also for all its other stakeholders. In particular, it gave IBM staff the warm feeling that they were invincible. I too was part of this happy band while I was inside IBM. When I worked out the figures later, and realized what was happening, I was genuinely shocked. Even then I couldn't believe the obvious and, after much soul-searching, played down the feature with the comment, "This rosy picture may have fooled outside observers, but Armonk, as astute as ever, uses future projections which discount this short-term effect".

Myopia…once again I was wrong! This rosy picture was believed by IBM's management. It seems incredible now, but nobody in senior management was willing to recognize what was happening; a classic case of 'groupthink' - since I cannot imagine that all of IBM's accountants failed to notice it. The figures which IBM senior management worked to showed annual growth rates of 20 - 30%; and IBM's sales-force was accordingly targeted with these growth rates year upon year. Unfortunately, the underlying figure (excluding the one-off, outright-sales, boom), was actually below 10%. Though this was still a good performance, not dramatically different to IBM's historical record over previous years, it did not unfortunately justify the 100,000 extra staff who were then being hired!

This myopia had two dramatic consequences. The first was that it distorted the strategy which IBM management was setting. IBM's board really did believe that the growth was totally sustainable; and actually would lead to their dream of IBM becoming the first $100 billion per annum corporation. At the time this was central to IBM's strategy, and coloured everything it did. Not least it justified recruiting the extra 100,000 staff which it would, a decade later, have to lay off again (in the process abandoning IBM's core belief in lifetime employment). The second important consequence was that the IBM incorporated the figures as a basic premise for its success. Anything less than 20%, let alone an unthinkably low 10%, growth per annum was seen to be an unacceptable failure. The reality was that, after the one-off effect ran out, IBM's growth rate fell to normal. Indeed, as one might expect of such processes involving mortgaging the future, it actually fell to zero - and even showed a slight decline. This was not seen as 'business as usual', as it might have been in any other organization, but was deemed to be a dismal failure; by the markets and especially by the frantic IBM senior management. The fact that this 'failure' (even when the figures returned to 10% growth in 1987) still represented a dramatic success in terms of other organisation's results was ignored, and the culture suffered its first (massive) loss of confidence - and began its long slide into oblivion!

Effective Control Demands Accurate Performance Measures…management control is only as good as the information behind it. If performance measures are wrong - as they may well be where accounting is 'creative' rather than accurate - or if they are simply inappropriate - the decisions are likely to be just as inappropriate. Financial measures - which are the backbone of much of theory - form just one set of the measures available. As the IBM experience showed, they may not always be the most relevant ones.

A More Normal Culture

On the other hand, John Opel's attempts to split IBM into more manageable units (the creation of the IBU's was just the most obvious of these) were not unreasonable, and had they succeeded in reducing the overheads of the bureaucracy the pain involved might have been worthwhile. But, as those of us then trying to find ways round the problem realised, the only practical short-term solution was that of growing the business faster than the overheads. For the first half of the 1980s this was achieved. This observation also helps to explain why IBM management were so obsessed with growth, even when it should have been obvious that their targets would not be met, since it was the solution (the only one) to their administrative cost problems.

In terms of some of his more radical impacts, which did succeed, I suspect that John Opel did not actually set out to undermine the IBM culture. Certainly he would not have done so in the almost gratuitous way that John Akers would do later, but the more 'aggressive' public statements made by him and his senior management began to have their impact. Accordingly, there was undoubtedly a degree of nervousness, even then, that IBM's lifetime employment policy might not last for ever. More directly, the 'wild ducks', of which I was one, began to see that their time probably had come. I was not alone in leaving IBM at that time. Many of my peers, amongst the best of IBM's managers (and, more importantly, a high proportion of its 'dissenters') also left.

Thus it was that John Opel fatally undermined the three core competences of IBM; enshrined in its three beliefs:

Respect for the Individual - although he would not have admitted it, probably not even to himself, John Opel's reign started the downward slide in its relations with its employees. Although they still remained in theory, many of the cherished personnel policies were discretely circumnavigated in practice. Since the time of Thomas J Watson the 'relationship with its employees' had always been its greatest strength. In the years running up to the 1980s this had, in particular, been reflected in the great flexibility, and indeed desire for change, which had enabled IBM to survive in such a turbulent industry. That flexibility was to be needed even more over the next decade, and yet IBM was having to rely upon an increasingly demoralised and alienated workforce.

Customer Service - again without any clear intent - but following the policy of 'lowest cost producer' - IBM's management had been seduced away from providing the highest levels of service to its customers. Worst of all, its most visible customer service, that provided to its millions of PC customers, had been sub-contracted to dealers most of whom were - correctly - seen by their (and hence IBM's) customers to be little more than charlatans.

Pursuit of Excellence - this was a more insidious process. The PC Independent Business Unit - then minuscule in IBM terms - had no choice, if it was to meet its very tight deadlines, but to source its hardware and software outside of IBM. This in effect gave Intel and Microsoft, in particular, their 'patents' on IBM's most visible developments. That the original managers in PC group negotiated such damaging agreements (especially with Microsoft which actually bought the operating system, 'on behalf of IBM', for only $75,000 and then made literally billions of dollars from it) is perhaps understandable. What is incredible is that over the following years (and indeed nearly a decade) no one in IBM developed a successful policy to counter the threat.

Many commentators would argue that IBM's problems were a result of the changes in the market - which the successful IBM of old was not able to handle (though it had by then been handling such changes, often against far greater odds, for the best part of three quarters of a century). The irony is that in reality it was IBM itself, very clearly led by John Opel, which had initiated (and then strongly promoted) these changes.

Still the Ideal MBA

The paradox is that, judged by the standards set by business schools during the period, John Opel's performance had been almost flawless - even in terms of handling the changes. If he had been taking the decisions as part of a case study at Harvard, say, he might even have received an 'excellent' rating (especially for his awareness of current management thinking). In his reign, indeed, by almost superhuman efforts he had pushed IBM (at least in the public image - and that of his customers) from being a high-margin, quality supplier of a relatively small number of mainframes (to an even smaller number of customers), who were cosseted by IBM's legendary 'customer service', to being a volume producer of PCs where price cutting (based, above all upon IBM being the 'lowest cost' producer') was all that mattered, since the dealers who now handled most of IBM's customers could be expected to give almost no service at all. As an example of massive change successfully accomplished in a short period of time it has to rank as a historical achievement - and one of which the business schools, who at the time were promoting the idea of such radical change, would have been (and indeed were) proud. John Opel had stamped his mark indelibly on IBM in a way that few others (save the Watsons) had ever achieved with such a large organisation.

Akers Takes up the Reins

Unfortunately, the reality was soon to be seen to be rather different; as the facts replaced the hype. In any case, the question which has to be asked is 'was change on such a scale, with such a move away from the corporation's traditional core competences, wise or even necessary (especially where the old IBM had been such a success)?' Thus, it was only at the beginning of 1985 when John Opel handed over the guardianship to his successor, another bureaucrat in the same mould (John Akers), that it began to look - to both IBM'ers and outsiders -  as if IBM might after all be a rather sickly child. For the first time in a number of years IBM was facing a drop in earnings. This was all the more unfortunate because the year had started with some very bullish speeches by John Akers. The legacy of these was all the more embarrassing when, in the second half of the year, with commendable honesty (which perhaps o