Posts Tagged ‘IBM’

The Saga of Eric the Red and the Anthropology of Innovation: A Parable

December 28, 2009
Eiríks saga rauða (Saga of Eric the Red) Icelandic manuscript (17th century)

Eiríks saga rauða (Saga of Eric the Red) Icelandic manuscript (17th century)

In Murder, Starvation and Catastrophe, I drew a line to connect the historical behavior of doomed societies with the business performance of large enterprises.  One of the most compelling of Jared Diamond’s stories is the saga of Eric the Red, the 10th Century Viking who founded Greenland.  The preposterously named colony was eventually home to 10,000 Norse settlers who were perhaps fooled by the name into thinking they were heading off to some sort of North Sea resort for Vikings. The story of Eric the Red is a parable for how the human factor in WWC  promotes or stifles innovation.

Eric was a scoundrel.  A suspected murderer, he fled Norway for Iceland around 980 AD.  It was a short, but violent, stay.  He was ejected from Iceland, and, sailing west, discovered an island of fjords, glaciers and grasslands. He returned to Iceland long enough to kill a few people and recruit an expedition of 25 ships to build a settlement on Greenland. Despite their violent beginnings,  the Greenland settlers established a farming economy and a humane society, including a government that provided for the poor in times of scarce crop production.  The Viking settlers had sporadic wars with the Inuit natives, but apparently flourished for hundreds of years until sometime in the early 1400’s when they just disappeared.

It was one of the great anthropological mysteries of all time:   how could fierce competitors — apparently successful  in a new environment that was not much different than the one they left behind – suddenly fail so catastrophically that their entire society was wiped out in only a few years? When archaeologists excavated the Greenland settlements, they found the usual trash of human civilization:  tools, debris, the remains of livestock,  and garbage from cooking.  But they found no fish bones.  The Norse Greenlanders were expert seafarers who lived in the world’s richest fishing waters and inexplicably starved to death because they did not eat fish.

The Vikings brought with them the culture and preferences from home. They brought food:  pigs, cows, goats,  and sheep.  The Norse knew how to grow crops in cold climates, so they planted crops like barley, oats, wheat, rye, cabbage, onions and peas. They hunted seal for food and  traded  walrus ivory with Europe  for material not available on the island.

By 1400,  demand for ivory, polar bears, and other luxuries from Greenland fell. Black Plague had wiped out nearly half of Europe’s population.  The Crusades opened new sources of ivory and spices to the now smaller market in Europe. The early 1400’s also marked the beginning of the Little Ice Age, blocking natural water inlets and delaying the arrival of migratory seals.  Deforestation left Greenlanders short on lumber, fuel, and iron.  Climate change and poor crop rotation led to crop failure, so the settlers consumed pigs, cows, and sheep to the point of extinction.

They had cultural inhibitions.  They did not eat their pets, for example.  They could have learned to hunt fish from and traded with the Inuits, but the Norse regarded the natives as pagans. Greenlanders were Norse, and they thought of themselves as dairy farmers.  When Eric the Red founded Greenland, it was uncharacteristically temperate —  a special time when their cultural preferences led to success.  They relied on past behavior and — when the climate changed, relations with friends and enemies faltered, and their environment was damaged —  they starved to death.

15th Century Greenland has something in common with IBM  in 1980:  a belief that historically successful behavior will succeed in the future. The Norse preference for pigs and cows required them to dedicate more time and grazing land to those animals than to the heartier goats and sheep.  Their Euro-centrism prevented them from learning from and adopting the eating habits of “pagan savages.” The thinking appears to be that their lifestyle was successful in Norway, so there’s no reason it shouldn’t be successful in Greenland. On the other hand the Norse settlers were not great innovators.

Thomas Watson Sr, understood the role that innovation would play in the company’s future. He opened IBM’s  first dedicated research center next to Columbia University in 1945 and the results were immediate, spectacular innovations including time sharing and  magnetic core memories.  Thomas Watson, thinking it was too risky to continue having its research done in the relative open environment of a joint university lab, and using Bell Labs as a model, established dedicated corporate research labs in New York and Zurich. This ushered in a golden age for IBM.  By any measure of success—sales, market cap, profits, patents, R&D budget—IBM,  and  in many ways,  defined the industry.

Then came the 1980’s and its disruptive changes to the computer industry. These  changes were not kind to IBM and in 1992 the company reported the single largest annual loss in U.S. corporate history to that point: $4.96 billion after taxes.

How did this happen?  Unlike the Greenlanders’ demise, this one isn’t a great mystery.  The Watsons believed fervently that doing the things that had made IBM a great corporation would make it successful in the future.  IBM knew how to profitably sell computers and to whom.  After all, they defined the industry.  There is a widely known internal 5-year forecast of worldwide PC sales that shows shipments peaking  at less than 80,000 units in 1983 before settling into a comfortable rate of 40,000 per year by 1987.  Less than 250,000 over the five year period.  5% to business customers who would continue to rely on IBM mainframes.  In fact, over a million PC’s were sold by 1985.  The industry was in the midst of explosive change and not only did IBM did not recognize it but they believed that past success was a predictor of future success.

But by 1982 it was all over. If IBM had recognized the value of the PC, they would have kept it proprietary and the computer industry would have developed very differently.  Without its IBM  licensing deal, Microsoft would have withered early.  Intel would be a niche player.

IBM, Xerox,  AT&T, and Nortel were all  innovative companies.  They hired the best and brightest – and there was low employer mobility since after all how many places were there for a computer science PhD to work?  The IBM Research Lab in Yorktown Heights developed and incubated products in the historically successful vertical way.  The barriers to entry for IBM’s  competitors (especially the small ones like Compaq and DEC) were huge. How could a small competitor build a direct sales network to rival the famed Xerox sales force?  What did an academic startup like Cisco,  aimed at the tiny data network market, have to do with the output Bell Labs or the market clout of Nortel?

This is how innovation looked at the end of the last century. It is too easy to draw conclusions about why old models stumble.  An apparently obvious lesson from the story of Erick the Red is that  the Little Ice Age caused the Vikings to die off in Greenland. Current conventional wisdom is that the technology giants stumbled  because they were too old or rigid or bloated to compete smaller, nimbler competitors who were themselves innovating although in very different ways.  Actually neither is really true.

It is simply built into the fabric of innovation that the marketplace is an environment – you have to adapt to it to survive.  If people want low-cost computers then drive cost out of the manufacturing process and learn to prosper on thinner margins. There are occasionally companies that try to change the environment.  Hewlett-Packard grew for 60 years on a simple business model:  innovate to create a product category and ride market growth until the margins shrink.  Then exit.  The ink jet printer is such a product — and there is much discussion in HP about exit strategies for ink jet printing. So was the hand-held calculator.  Most companies cannot imitate those successes. HP eventually faltered when it tried large scale environmental engineering with its failed acquisition of PWC and the gut-wrenching merger with Compaq.

So, if adjusting to the environment is the answer, why didn’t the Greenlanders just start eating fish?  The Greenlanders damaged their environment through poor livestock selection, clear-cutting forests and poor crop-rotation. There was significant climate change brought on by the Little Ice Age. The Inuit qualify as hostile neighbors.  They had friendly trade partners for many years, but eventually lost them.  But above all,  the Norse Greenlanders’ response to these factors was culturally based.  They didn’t eat fish  because it was not viewed as a reasonable option in their culture.

Innovation is frittered away because it is not viewed as a reasonable option in a company’s culture.  The structure of leadership accounts for a lot in determining the role that culture plays.   Distant, authoritarian, decision-making tends to rely excessively on the past as a predictor of the future.  Microsoft’s Steve Ballmer said as much  in a 2008 speech at the Stanford Graduate School of Business:

One of the biggest mistakes I’ve made over time…is not wanting to nurture innovations where I either didn’t get the business model or we didn’t have it.

Examples abound. The HP Jornada™ pocket PC could play MP3 music files before the  iPod™  hit the market.  But there was no HP music store. Running an online music store was not an HP competency.  There is a certain — sometimes irrational —  optimism that past success engenders in leaders at the precipice.  When Mike Zafirovsky took over as CEO of Nortel Networks in late 2005, it was a company on the brink of failure.  Massive layoffs had decimated the iconic Canadian company.  In early 2006, I was escorted for the last time through its cavernous Toronto facility — a building laid out as a city with streets and parks — just before it was shut down.  All you could hear was the click of heels reverberating down the empty faux boulevards. Mike Zafirovsky wanted to communicate his energy and sense of the future to the demoralized employees who remained.  His first email  in December 2005 to Nortel employees defined the tone of his administration and sent the company down a path that emphasized execution of a plan that emphasized ideas that had worked before:

To Nortel employees,

Last Friday night, as I was flying back from a very productive trip to Europe following several customer and employee visits, I came across a newspaper article entitled “Optimism Puts Rose-Colored Tint in Glasses of Top Execs.” Included in the article were quotes like:

“99% of CEOs thought they could lead their companies from crisis;”
“Optimism is all about possibilities, change, hope…without those qualities, how can any leader succeed?;” and,
· “By definition, leaders are slightly delusional.”

My first reaction was to take exception to the word “slightly” . . . .

Seriously, the question of our confidence in ourselves—and as members of Team Nortel—is something I will begin discussing today and a topic I will continue to raise in the coming weeks and months. Confidence in ourselves and each other will be critical factors in how far and how fast we take this 110-year-old company..

I discussed with you in a previous letter our plans for the BIG initiative (Business Transformation, Integrity Renewal and Growth Imperatives), our new leadership values, and our focus on people that will be rolled out as part of Session I in the first quarter. In my first few weeks, I have also spent time evaluating our relative strengths and weaknesses and pinpointing areas for improvement.

My strong take-aways and beliefs are that our positives are significant and difficult to replicate. At the same time, our challenges are also significant but, I would argue, very fixable. I don’t believe I am looking through rose-colored glasses, but rather have adopted what I describe as an attitude of “forceful optimism.” This is a mindset, a belief and an attitude that I expect from everyone at Nortel—a combination of positive anticipation for the future combined with a determined approach to maximize positive impact.

Forceful optimism is one of the 30 action attributes supporting our recently-defined Nortel leadership values. And as promised in my last letter to you, I worked with select members of the Leadership Edge program and cabinet members to finalize these attributes before year-end.
[…]

As a positive heads-up to the many people who were hoping to be on the Business Transformation teams, we will be kicking off the Six Sigma Quality Program in the first quarter, and there will be opportunities for involvement and leadership. We will be looking for Six Sigma champions and master black belt, black belt, and green-belt candidates (much more on this early next year).

The combination of the Business Transformation initiative and the Six Sigma Quality Program will improve the basic equation of our business, including higher customer satisfaction, simplified processes, lower cost-of-rework, fewer quality issues and lower costs for our products and business structure. And we’ll see teamwork inside the company improving as a result. We will continue the focus on forceful optimism, leadership and our people agenda by launching our Session I program in the first quarter. The programs and initiatives we deliver as part of Session I will ensure we are building strong leadership capability and bench strength across Nortel.

Lastly, and arguably most important for the long-term health of the business, here are my thoughts on customers and the Growth Imperatives, which you will be hearing much more on throughout 2006. I am meeting and speaking with an increasing number of our customers (e.g. the four largest European customers last week) and our go-to-market and product management teams, and I can’t wait to attend our global sales conferences in January. In my straightforward view, good, profitable growth is to a business as air and water are to flowers. We have much to build on and also much work to do, including how we develop meaningful value propositions for our customers. To this end, I am excited to report that we will be introducing our new business mission at the sales meetings. It will guide much of our behavior externally and internally, and keep the focus where it belongs—on our customers.

Let me wrap it up by saying how privileged and proud I am to be leading Nortel and to be working with all of you. I wish you and your loved ones a relaxing holiday and warm wishes for a healthy, happy, and prosperous 2006.

Thank you for all you are doing for Nortel.

Mike Z

Mike Zafirovsky is a capable senior executive, an alumnus of Jack Welch’s CEO boot camp at GE.  He was part of a long string of strong leaders that Nortel recruited to put the company back on track.   He could not have anticipated the Little Ice Age of late 2008, but by New Year 2006, Nortel was already hurtling toward disaster.  Its stock was delisted and the company was shrinking.   I asked Mike about industry changes, but he did not react.  There was no sense of urgency at Nortel. There was a sense that the telecom equipment market was not an environment at all and that what really mattered was the company’s belief that its current direction would take them back from the edge: “a combination of positive anticipation for the future combined with a determined approach to maximize positive impact.”

In January 2009, Nortel filed for protection from its creditors. Its main businesses are being sold. When that is complete,  it will cease operations. Zafirovsky stepped down as CEO in late 2009.

One of my first projects at Bellcore  was to redefine its core software business for the emerging ISP and Cable markets.  The climate was changing in the early 90’s.  Bellcore sold  operations support systems – a sort of ERP for telcos.  A typical sale was in the $25-30M range and $100M deals were not unheard of. So we rolled up all the functions that we could think of – customer acquisition, provisioning, engineering, support – and came up with a product that we thought we could sell for $15M.  When we showed the requirements to cable operators, they just shrugged.  They were using Excel spreadsheets which cost them essentially nothing.  Today, Bellcore — operating under the name Telcordia — leads in none of the operations support or business support markets that defined its core business in the 1990’s and is not even in the top ten in cable and ISP markets.  What they really wanted help with were the services that they could sell to their customers.  One of those services was search.  Another was customer aggregation.  Both were areas in which Bellcore had fundamental patents.  One for the “seed” that underlies virtually all search engines today.  The other for “recommender” technology that underlies all social networking. The search technology was given away to Excite.  The recommender technology was assigned to MIT’s Media Lab and eventually became part of Amazon’s recommendation engine.  We were not in the lightweight database business – although there were many smaller competitors who were.  We were not in the search engine or social networking  businesses, although we had friendly relations with companies that were and had many university collaborations.  We were in the software business.

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“Dear Mr. Watson, My employment with IBM has been terminated” (More Loose Cannons)

November 3, 2009

Dilbert.com

There was a birthday celebration of sorts last week.  From the October 29th edition of  ABC News Science & Technology:

While the actual date of the Internet’s birthday is somewhat debated, many say that the Internet was born 40 years ago today at the University of California, Los Angeles, when a computer to computer message was sent for the first time from the UCLA campus to Stanford.

At the time, Leonard Kleinrock and his colleagues were charged with developing the Advanced Research Projects Agency Network (or ARPANET), a government-funded research project in global computer communications that eventually grew into the Internet.

I thought it would be a good occasion to  reflect on how easy it is for Loose Cannons to get smashed by colliding worlds.

In the days before ARPANET, computer-to-computer communications were homogeneous, and computer manufacturers liked it that way. The very idea of not owning every aspect of a technology stack seemed to be ridiculous.  Where’s the value if you can get critical components from anywhere?  What if competitors start using the same suppliers?  Heads of business units hated the idea, but Loose Cannons kept proposing technical architectures that looked, well, open.  The idea was playing out in many ways in many companies.

At IBM, two architectural revolutions were simultaneously  underway. We now know that they were related. In the summer of  1980, IBM executive Bill Lowe prepared to brief  the company’s Management Committee on development plans  for a personal computer:

It was a dangerous place to be.  The Management Committee — or, given IBMers’ fondness for acronyms, the MC — ruled on issues that couldn’t be resolved at lower corporate levels, so going before the committee was, to IBMers, like going before the Supreme Court.  It was actually rougher because the top IBM executives who sat in judgment were known to be brutal, especially if they thought someone was wasting their time.[1]

Bill Lowe had been beaten up by the MC before, but this time Lowes’ plan to use outside suppliers drew polite questions from MC members who expressed some concern about turning over even partial control of any of their businesses to “outsiders.” What Lowe and the vast majority of IBM engineers didn’t know was that earlier in the year the MC had received a  forecast for global PC sales that showed a peak market of 80,000 units in that began to rapidly decline in 1984 as the specialized customer  need for computers was satiated:

IBM had already been embarrassed by early missteps in the PC market but the corporate culture was focused on mainframes and services.  Problems might be created by opening up the hardware and software architecture of personal computers, but

The general attitude…was that you don’t have big problems in small markets, and we thought the personal computer was a very small market.[1]

The MC might have been more inclined to turn its attention to a market that had real legs.  Like, say, networking.  Ed Hendricks was an engineer at IBM’s Federal Systems Division in San Diego.  Hendricks had helped design VNET, at that time the largest computer network in the world.  VNET was  IBM’s internal corporate network, linking IBM mainframes at scientific data centers.  By 1980, VNET was a global asset with hundreds of  hosts in North America, Europe and Asia.

Meanwhile, ARPANET was growing into the Internet, and Ed Hendricks was interested in how IBM’s technology would continue to prosper when the world started connecting IBM mainframes to large UNIVAC computers, HP mini-computers,  PC’s, and supercomputers from Cray or Control Data.  Hendricks became an industry player in this arena, collaborating with my colleague Larry Landweber at the University of Wisconsin as the expansion of the ARPANET began in earnest. Ed  Hendrick’s IBM Internet Gateway Project was aimed squarely at insuring that IBM mainframes would not be stranded in a world in which they could only talk to each other:

The objective of this project is to begin to bridge the gap between IBM computer systems and network technology predominant among government agencies, conractors and universities.  More specifically, we are working to develop according to DOD standards the technical capacity to interconect networks of IBM computers and systems to similar but different computer networks used by government agencies and their affiliates.

Hendrick’s website preserves the sometimes heated but  thoughtful and deep technical discussions — involving Hendricks,  the legendary Jim Gray, and MIT’s Jerry Saltzer, among others —  that took place througout 1980 about the relative merits of ARPANET and IBM’s networking strategy. For reasons that are still unclear, IBM decided to move the Internet Gateway Project to IBM Research in Yorktown Heights, New York, an effort that Hendricks calls “screwy.”   Hendricks along with team members Gerot “Mike” Engel and Dale Johnson planned to spend a week at Yorktown Heights, getting comfortable with IBM Research’s Systems Laboratory, their proposed  new home:

…the Systems Laboratory was created to focus more directly on perceived business needs. Consequently, Systems Laboratory projects are evaluated and prioritized on the basis “leverage” they exert on the software product line…by design, ninety-five percent of the work carried out in the Systems Laboratory is so closely related to strategic product development that it cannot be discussed outside IBM.

Shocked, the Internet Gateway team concluded:

…a project such as ours which is intended to establish internet communication compatible across differing systems…could not be carried out under such guidelines.  Our overall reaction…was that the ARPANet Internet Gateway project could not have been started within the Systems Laboratory.

They concluded that if the project was to have any chance at all of success, there would need to be a formal review of management decisions, what  IBM called the “Open Door” process.

March 14, 1981

John R. Opel, President IBM Corporation

Dear Mr. Opel,

This letter is intended to invoke the IBM Open Door Policy.  My purpose in requesting this Open Door is to seek clarification of the decisions which led to a situation where a project which is clearly critical to IBM’s future posture in the data communications industry cannot be pursued…Bureaucratic accomodation for only that which is in the strategic plan is a very dangerous posture to be in while the data processing and communication industry is rapidly evolving.

[My team and I] have been working to carry out a project to establish a capacity…to cooperate with the U.S. Government and University Computer Science departments in the evolution of techniques to interconnect dissimilar computer networks…There is essentially unanimous agreement that this activity promises important advances for IBM and for computer technology in general.

In September 0f 1980 we were notified by our management that this work could not be carried out…On each occasion when this qustion [of where the work could be carried out in IBM] was being escalated to the proper level, my management would insist that I leave the management issue to them and to concentrate my own efforts of the technical work.

Last week I was informed verbally that no sponsorship for this project could be found.  My manager asked where hie should look to find me a job. My position was…that inability to find organizational sponsorship for the project is not equivalent to a decision that IBM should not be involved in developing the capacity to interconnect IBM networks to government and university networks…to look for other professional opportunities now and give up attempts to pursue this technology…would be to let the company down….

Sincerely yours,

Gernot Engel

19 March 1981

Mr. Thomas J. Watson, Jr., Chairman Emeritus

Dear Mr. Watson,

My employment with IBM has been terminated as a consequence of recent management decision which are incompatible with my professional goals…I believe I am justified in requesting more thorough and explicit responses to the following questions:

  1. What “business needs required the termination of our ARPANET Interconnection Gatweway Project and the abandonment of the…professionals we had been dealing with?
  2. What factors prevented alternative organizational arrangements that would have allowed our group to continue its work within IBM?
  3. What is IBM’s posture regarding professional cooperation with the computer scientists working in association with DARPA…to establish mutual techniques for interconnection of dissimilar computer networks?…

Sincerely yours,

Gernot Engel

May 15, 1981

John R. Opel, President IBM Corp.

Dear Mr. Opel,

On March 4, 1981 I sent a letter to your office requesting clarification of a decision which cancelled the internet gateway project…Your office’s attempt to analyze the internet decision appears to be stalled because it was handed back to middle management….I can only conclude in this instance the Open Door Policy has failed. My recommendation to salvage the situation is that you give fifteen minutes of your time to receive a presentation on the internet project and attempt to evaluation for yourself the value of this project to IBM’s future.”

Sincerely yours,

Gernot Engel

May 19, 1981

Dear Mr. Engel,

I have reviewed the results of [the] investigation into your concerns.  Your disappointment with the decision to terminate the VNET/ARPANET project is understandable; however, I conclude the decision was properly based on the need to fund other Ad Tech projects with greater business potential…

I understand you are currently considering a return to IBM, and I hope you choose to do so.

Siuncerely,

John R. Opel

Number 1-81: September 11, 1981 MANAGEMENT BRIEFING

TO ALL IBM MANAGERS:

Organizations seem to have an irresistable tendency to codify successful practices in rules, instructions and controls which soon begin to take the place of judgement. When that happens, the result is bureaucracy.

IBM is not immune.  Earlier this year, reports from many sources indicated to me that a growing bureaucracy is affecting the performance of our business…corporate staff heads, group executives, and the division presidents are exploring ways to reduce unnecessary controls, rules and approvals in their areas of responsibility…We will succeed in that effort only if you managers, at every level of the business,k are willing to stand up and fight bureaucracy wherever you find it…If you have all the information to make a decision, make it…

[signed by John Opel, president]

John Opel stepped down as IBM president in January 1985 and chairman in May 1986.  He was succeed by John Akers, and he was succeeded by Lou Gerstner in 1993. Gerstner, the former CEO of RJR Nabisco, described his transformation of IBM in “Who Says Elephants Can’t Dance?”[2].  Most observers agree that critical to IBM’s turnaround that took it from a free fall in the early 1980’s to unquestioned market  leadership in computers, software and services was the dismantling of a remote, hierarchical management culture that squeezed innovation in political pincers.  By the time I took over the computing research directorship at the National Science Foundation in the late 1980’s, IBM had become a major player in the growth of the Internet [3]:

In the mid-1980s, NSF decided the time was right to try to link its regional university networks and its supercomputer centers together. This initial effort was called NSFNET.
By 1987, participation in the new NSFNET project grew so rapidly that NSF knew it had to expand the capacity of this new network. In November of that year, it awarded a grant to a consortium of IBM, MCI, and a center at the University of Michigan called Merit to create a network of networks—or inter-net—capable of carrying data at speeds up to 56 kilobits a second. By July, 1987, this new system was up and running. The modern Internet was born.

REFERENCES

1. Paul Carroll, Big Blues: The Unmaking of IBM, Crown Trade Paperbacks, 1994

2. Louis V. Gerstner, Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, Collins, 2002

3. National Science Foundation, NSF and the Birth of the Internet, http://www.nsf.gov/news/special_reports/nsf-net/textonly/index.jsp