by Robert Heller.
Last Updated: 31 Aug 2010

The Fate of IBM.

Little Brown; 370 pp;


Review by Arthur Francis

For those who still believe that the '80s was the decade of corporate renewal, this fascinating study of IBM should serve as a warning. One implication of Robert Heller's book is that we have so far seen only the tip of the iceberg. It may be nearer the millennium before the full extent emerges of the corporate change needed to retain competitiveness in the West.

Productivity in US manufacturing is still about 30% higher than that of Europe or Japan. Nevertheless, doubts about national competitiveness surfaced in the US (and in Europe) in the mid-1980s, in the face of the growing challenge from the Far East. The need to improve industrial performance was recognised both at national level and, especially, by businesses themselves.

In 1982, IBM was one of Peters and Waterman's exemplars of Excellence. A decade later it reported a $2.8 billion loss, and the next year the doctors certified its death - as Heller colourfully puts it - when the chairman lost his job. In a step previously unthinkable at IBM, an outsider was called in to resurrect the company.

Heller's account of IBM's demise is presented in whodunnit style, but the chief fascination of the story lies not so much in spotting the murderer as in following the management's persistent misdiagnosis of the company's condition. The first symptoms appeared as early as 1984. Fortune's annual poll of nearly 6,000 business executives had for many years previously given IBM top place on a combined score across eight criteria. In 1984 the company was not placed top for innovation, and its score under this heading fell in each of the next three years. In 1987 it slipped from top place on the combined score and, by 1992, it was listed 206th out of a total of 311 companies.

The story of the PC has often served to illustrate IBM's approach to innovation. It came to the market later than many others and employed technology that was behind the leading edge. Nevertheless, it rapidly established a dominant position because of the sheer scale of its operations. It's not clear whether this was deliberate IBM strategy but, certainly, other late innovations were rather less successful. Heller draws attention not just to the four-year lag in PCs but to the 11-year lag in minicomputers and the five-year lag in both laptops, at one end of the scale, and engineering workstations at the other.

Yet the IBM management did not identify innovation failure as a source of its troubles. It attacked the wrong symptoms. The corporate response was to try to boost sales, to cut costs and improve customer responsiveness by internal housekeeping. IBM's old-fashioned, bureaucratic, centralised, consensus-cultured, command-and-control organisation could neither deliver innovation effectively nor accept that this failure was a fundamental problem.

But we should not be surprised at IBM's myopia. When you have three Nobel laureates in your research labs and your R and D spend is bigger than the turnover of some of the companies that are running you into the ground (Apple and Compaq, in those days), it's hard to admit that your efforts are nearly all wasted. Besides, there were too many people in the organisation with a vested interest in maintaining the status quo. And as components were all sourced internally, the company was exposed to few external stimuli in the area of technology.

In the end, Heller names the managers as murderers. He is right, of course. But this record leads one to ask: how many other IBMs are there? For the IBM pictured here is not one of the new generation soft-structured, organic, networking, entrepreneurial organisations that we thought were typical of the IT industry. Until 1992 it was an old-style vertically integrated dinosaur, a creation of the corporate America that was forged in the inter-war period. It was founded on a basis of market dominance rather than organisational efficiency. In this respect it was just like the motor manufacturers, whose inefficiencies have been cruelly exposed by their Japanese competitors.

True, IBM got its comeuppance from new companies within the US, which were freed to compete by changing technology. But these days the competition is not necessarily internal. The danger is that corporate America - and corporate Europe - could be better supplied with dinosaurs than we care to think.

Arthur Francis is professor of corporate strategy at Glasgow University Business School.

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