Apogee and Atrophy: Lessons From the Past for Today's Tech Titans

BusinessWeek1984Cover.jpgWhy do tech companies coined the "great ones" by the press so often falter within a year or two of such accolades? How often does the accolade signal apogee -- that the company has begun bumping downhill into strategic atrophy? Could insightful attention identify or even reverse this trend, especially as other business sectors move more rapidly through boom and bust?

The May 1983 issue of BusinessWeek carried a cover story on the "massive overhaul" of Digital Equipment Corporation, then the nation's second-largest computer company. Its CEO and founder, Ken Olsen, drew kudos on "three key pieces of this restructuring now falling into place." On management: "Olsen is streamlining an overgrown corporate bureaucracy and decentralizing decision making." On standardization of Digital's product lines: "They can communicate easily with each other," especially in contrast to the fragmented product lines of IBM, Wang, and Hewlett Packard. On marketing: Olsen "is working hard to develop closer ties with customers, organize new distribution channels, and launch more innovative promotions."   But within the year, third quarter sales took a dive, earnings sank 75 percent, and the stock price lost 20 percent one afternoon. Though the incident proved temporary, it portended the beginning of a bumpy downhill ride, culminating with Olsen's ouster in July 1992.

A similar pattern was forming at IBM in February 1983, as John Akers was named president and COO. A month later, he told a group of large customers he had few worries: IBM's factories were "sold out," the long-running antitrust suit "almost settled." This was a sunny time brightened by victories over plug-compatible mainframes, peripherals, minicomputers, leasing companies, and the Justice Department. Press stories mostly glowed when Akers became CEO two years later. But his first year was dimmed by weak profits; his second produced the worst showing in 40 years. In January 1987, a cautiously upbeat Fortune interview portrayed Akers as a "decisive, non bureaucratic executive" who spotlighted field sales for the shortfall: "IBM got out of touch with its customers. It persisted in trying to sell them products when what they wanted was solutions." But in fact, the problem was the product line as much as the sales reps. Absent decisiveness at the top, IBM's products (and pricing) grew increasingly uncompetitive until early 1993 when John followed Ken into exile.

In hindsight, both events occurred near the beginning of long-term decline. Why wasn't this moment identified as an apogee by press and pundits? Four factors recur: First, a focus on previously beaten competitors rather than the decisive winners of the future; Second, a cost structure and business model that couldn't compete against the newest firms; Third, undue faith in new technology that let management sidestep the difficult decision to upend their business model; Finally, sales forces morphed from greatest assets to heaviest anchors.

Competition: For Digital in 1983, management viewed its main competition as the other East Coast minicomputer companies, notably Data General, Wang, Prime and, of course, IBM. But most of them were doomed. Much more dangerous was the 1982 appearance of Sun Microsystems with Unix as its operating system and soon afterwards, a stripped-down computer architecture that quickly eclipsed the minicomputers. Sun doubled hardware throughput every two years -- twice as frequently as the seniors. Unix drew the developers of scientific and engineering software bought by the labs and universities where Digital once dominated.

For IBM executives, the competition was the minicomputer companies and the doddering old-line mainframers like Burroughs and Univac. A breakthrough in circuit and cooling technology helped Big Blue repel the newer mainframe "plug compatible" companies that used IBM's operating systems -- notably Amdahl and the Japanese -- at least temporarily. But flabby indecision halted momentum, reviving the competition. Mainframe revenues cratered from $13 billion in 1990 to a projected $7 billion for 1993 as Akers left the scene.

Business Model: Streamlining Digital's "overgrown bureaucracy" backfired. The subsequent revenue shortfall occurred when the newly disoriented product groups couldn't even coordinate the entry of new orders. That quirk was soon corrected, but organizational infighting continued, deflecting attention from Digital's outdated business model. Much more was spent on sales, marketing, and overhead than the new competitive environment allowed. Newcomers like Sun brought a ten percentage point cost advantage; the new personal computer companies enjoyed twenty points. The only recourse was massive downsizing. For Digital's Ken Olsen, the emotional burden proved too much, leaving the chore to his successor. IBM faced the same problem. But staff restructuring was delayed by the company's outdated "full employment policy." Akers's efforts, when finally exerted, were too little, too late. At the apogee, the press simply missed the existing necessity or cultural difficulty of fundamental business restructuring.

New Products: Digital had recently delivered its new VAX computer family and downplayed or discontinued the hardware designs and operating systems of its fragmented, older product line. Product standardization was one of the positives applauded by BusinessWeek, especially in contrast with the mid-range mess at arch competitors IBM, Wang, and Hewlett Packard. But this single-mindedness also helped convince Olsen and his lieutenants to dismiss Unix and Microsoft's software as "me too operating systems" with insufficient differentiation or profit potential -- ultimately a fatal error.

Meanwhile, IBM relished the public's receptivity to its new personal computer and the Microsoft relationship formed around OS/2. But consumer markets are won by snappy user interfaces and a close connection with the vast community of independent software vendors. IBM's focus on business computing left as little chance for success in that sphere as a tractor maker would have in Formula One racing. As the relationship with Microsoft fell apart, I was deluged with email from big company technical staffs expressing their outrage at the world's failure to acknowledge the superiority of IBM's OS/2. Maybe they were right, but it didn't matter. Kids wanted the PC with the most games. Their parents wanted the same systems in their offices that they used at home. End of story. Volume wins as Microsoft always understood and the press often missed.

Field Sales: A properly trained and motivated sales force can be a company's biggest asset. In 1983, IBM's sales force was its "crown jewel" and the source of all its CEOs. Digital's representatives were unsalaried engineers encouraged to spend time understanding the customer's problem without ever overselling the product. Both were signatures of company excellence. Both would soon be beaten by the hungrier field forces of Sun and the new breed. By the mid-1980s, surveys showed the complacent IBM representatives spent only 30 percent of their time with customers. No wonder, given IBM's ingrown and unproductive incentives, rewards, and metrics at the time. Half the people awarded trips to the annual sales bash in Hawaii didn't even have sales quotas. Over at Digital, a similar story emerged. The salaried reps went unpenalized for fruitless noodling with their old buddies in the engineering and laboratory cubicles even while that business was being lost to Unix. And even though they were now supposed to sell business systems to enterprise CIOs. So they were slaughtered by Sun's hungry hordes, never even engaged IBM in corporate offices. "Developing closer ties with customers"? Not the right customers. For the rest of the 1980s, most observers and perhaps even management didn't notice.

To rewind the film: Digital's sales downdraft a few months after the media's glowing report wasn't fatal in itself, but did signal the onset of an organizational paralysis that would retard the company's viability against new competitors, blur its view of new technologies and delay the restructuring of business model and sales force. Similarly, IBM's new CEO did not make the decisive corrections in product line, cost structure, and sales organization needed for company survival, whatever the journalist's impression.

"Prior success handicaps change," wrote an insightful McKinsey partner some years ago. Today's mantra would be "prior success strangles change," even while it repeatedly dupes press and pundits frozen in the past.