UK: Heller on Management - Monopolists beware upstarts.

UK: Heller on Management - Monopolists beware upstarts. - Giants such as Compaq and Microsoft should remember IBM, says Robert Heller, and be ready to seize tomorrow's chances before the upstarts who are waiting in the wings.

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Last Updated: 31 Aug 2010

Giants such as Compaq and Microsoft should remember IBM, says Robert Heller, and be ready to seize tomorrow's chances before the upstarts who are waiting in the wings.

Microsoft, Compaq (now plus Digital) et al are powering into IBM's heartland, the big-time corporate market. IBM can only lose share to the attackers. It cannot fight back by subverting Microsoft's monopoly of PC operating systems (achieved courtesy of IBM) or reversing Compaq's expansion over the entire hardware landscape. This no-win situation must be especially galling for a formerly all-victorious champion such as IBM, but monopolies and quasi-monopolies are highly vulnerable to the no-win trap. Their all-but-total market shares are fair game: they can't retaliate in kind.

In this fix, you can fight the good fight with all your might - and still lose. Take IBM's forceful drive for a leading share of internet commerce, which has been spearheaded by its successful e-business ad campaign. The battle has been on equal terms: IBM has the biggest brand but it can't pre-empt the networking market or deny the competition by a shut-out.

That form of competition, while highly effective, is actually non-competitive.

Using and abusing market power, you make it impossible for anybody else to compete, yet your own competitive prowess gets dulled in the process.

Shielded by truly gross margins, direct and indirect costs soar. You may complacently dismiss any rivals who win a foothold as unimportant - until that foothold becomes a beachhead.

A high-cost Compaq selling only PCs was simply a minor threat. A low-cost Compaq that also offers servers, services and mini-computers, condemns IBM to a series of rearguard actions. Some will be won, some lost, but the victories can only preserve the status quo. Defeat means yet another retreat and that's why IBM's new growth has barely offset the dramatic impact on its mainframe revenues of PC-based technology literally decimating prices.

Overall growth has been sluggish despite some brilliant performances.

In seven years, IBM's services income, for example, has mushroomed from $2 billion to $19 billion. IBM software is another gigantic business, managing some 70% of all corporate data and, with a hammer-lock on blue-chips, handling 20 billion transactions daily. But every new edifice that Microsoft's Bill Gates erects on the operating systems monopoly is another weight in the scales against its enemy.

Gates is actually using the same strategy that served the ex-champ so well. In the past, if you bought an IBM mainframe, you were locked in forever. Renegades could purchase peripheral equipment from plug-compatible suppliers but the bulk of customers bought extra hardware, upgrades and software from the proprietary king at proprietary prices.

In the same way, those selling Windows-compatible programs are at a crippling disadvantage against Microsoft, which can wrap its rival products inside the Windows bundle.

Once again, that's competing without competition. Like Gillette with its razors or John D Rockefeller with his pipelines, you seek to make the market an offer that it can't refuse. But nature abhors a monopoly as much as a vacuum. The legal proceedings against Microsoft, like the earlier assaults on IBM, are a symptom of that abhorrence. But, short of the law, what can break such strangleholds?

Decisive shifts in technology provide the most potent weapon. If the microprocessor and the PC had never been invented, IBM might still have the world in thrall. Yet today, Gates should beware. Java software, which can work on any platform, could conceivably undermine Windows. Significantly, IBM has more people working on Java than its inventor, Sun Microsystems.

The complex PC may be vulnerable to today's simpler technology, let alone tomorrow's unforeseeable breakthroughs. But will today's giants seize tomorrow's chances?

Past experience suggests that major discontinuities will be exploited first and best by arrant upstarts, waiting in the wings for the next great leap forward. Giants such as Microsoft, Compaq and IBM are unlikely to take that leap because they are organised around existing technology.

Gates gets 75% of his revenues from desktop software, for example, and that represents potential weakness as well as strength.

The morals for quasi-monopolists are of general application: be hungry for profits but not greedy; react to every challenge but respond with better value and better methods - not with the abuse of muscle. Effective response almost certainly means more working through in-house, with more independent start-ups and less going via the established organisation.

Finally, don't try to preserve your hold on the old customers at the cost of missing out on the new.

The paradox is that, if IBM had been greedier towards Microsoft and the once part-owned Intel, instead of allowing them carte blanche to sell to all and sundry, its avaricious, monopolistic ways might not have been undermined. Those gross errors arose because, living off the past, managers sadly misread the future. The new IBM is far less likely to make the old mistakes. But then, it's no longer a meaningful monopoly.

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