Lessons for Today’s Leaders From Yesterday’s Tech GiantsErnest von Simson
The information technology sector is at another turning point as mobile devices dampen the demand for PCs—just as PCs dampened and then buried the demand for minicomputers. At the same time, demand for corporate servers and software is being eroded by public cloud infrastructure and online software services. In sum, this transformation points to a new era of “creative destruction,” in the phrase coined by Austrian economist Joseph Schumpeter. As agile and often young firms produce creative new solutions, slow-footed companies will be destroyed.
These two prospects will require keen management skills for the new companies rising to these opportunities and the old companies threatened by impending change. What lessons can be learned from the rise and fall of tech titans during equally ferocious transformations of the past? Here are a few:
The Perils of Incumbency
Market leaders bear significant legacy burdens in navigating abrupt change in business models and technologies. Their perspective on new competitors can be deflected by their focus on traditional competitors. Digital Equipment, once the industry’s second-largest computer company, missed the rise of Sun Microsystems and the other Unix companies because management focused on Digital’s minicomputer rivals. A market leader’s cost structures can also block change: Minicomputer companies didn’t fail because they didn’t adopt microprocessors (they did), but because they couldn’t slash sales and R&D expenses to meet the new breed. Great sales organizations present another barrier: Often the crown jewels of successful companies, they too often retard change in products or distribution models. Finally, even strong cultures can be straightjackets. “More companies fail because of strong cultures than weak strategies,” pronounced Richard Foster, a McKinsey thought leader.
CEO Success Factors
For the leadership of new companies, the critical success factors include: first, a deep knowledge of the market, typically founded on firsthand experience with that sector; second, a clear appreciation of the technology’s current position and future trajectory; third, “steadfastness”—the CEO’s ability to hold the direction he’s selected even while pundits, customers, and especially direct lieutenants say he’s wrong. Former CEO Lou Gerstner ignored the advice of press and consultants to break up IBM and jettison the mainframe, which remains profitable today.
Replacing a CEO is the board’s most important and most conflicted responsibility. For mature companies, replacement often comes too late—sometimes delayed because directors have become captive to their board positions and/or a charismatic CEO. Wait too long and the company may go into a downdraft, causing a powerful CEO to insist on more time to right the business. But undue delay greatly increases the chance of a slipshod choice that will itself require rectification.
For startups, the replacement of a founder/CEO often comes too early. Venture capitalists routinely oust the founders of fledgling companies as soon as the employee count crosses some arbitrary number, like 100 or 1,000. But that abstraction ignores the countervailing truth: The most successful IT companies, with the greatest return to shareholders, were built by their founders—Steve Jobs, Jeff Bezos, Larry Ellison, Bill Gates, and Larry Page and Sergey Brin. In many cases these young founders were given early support by more experienced chairmen or coaches.
To achieve a sustainable strategic advantage, a new technology wave should represent a radical shift in both underlying technology and business model. The PC sector filled the bill and created substantial wealth for a few hardware leaders and dozens of software suppliers starting with Microsoft. The minicomputer sector did not, and its demise would be accompanied by major losses for the software firms (such as Cullinet, once the industry’s largest) that hitched their futures to quickly fading stars.
What made the difference? Minicomputers were simply low-end versions of the mainframe, with cheaper but proprietary circuit technology, operating systems, and distribution models. Conversely, personal computers were built on a “layered” approach, in which each manufacturer shared processors (typically Intel), operating systems (typically Microsoft), and basic applications like spreadsheets and word processing. Common components made two huge differences: lower costs and a much higher volume of users, which attracted even more software applications, attracting even more users; and so it went.
First Mover Disadvantage
The first entrants into a new market created by a disruptive technology will establish an unassailable competitive advantage and reap the lion’s share of benefits in terms of customers, markets, and profits. At least that’s the theory. Take the early bank ATMs, for example, or the recently introduced smartphone bank apps for categorizing small business expenses or remotely depositing checks through photography. Ultimately, other banks caught up, but the first movers held an advantage, as NationsBank’s former CEO Hugh McColl once observed to me: “IT innovation can help you gain market share, and customer inertia helps you keep it,” even when the technology becomes commonplace.
But that’s only half the story. First movers often enter the market before it’s been definitively reshaped by the disruptive technology. Too often they try to mold new technology around old business models, with disastrous results. Consider the three PC leaders of 1980: Apple, Commodore, and Tandy. None of them could succeed against the volume of companies adhering to the Wintel model (which contained Apple to a 5 percent market share until recently). Today there’s the example of Facebook and Google—both capsizing forerunners like Friendster, Myspace, and AltaVista. Tomorrow, the early “big data” engines could follow.
Waves of change roll through the information technology sector every 15 years or so. Each wave floats a few agile startups and sinks legacy-burdened incumbents. History never exactly repeats itself, but many phenomena reappear. It’s these that are worth observing for all companies—old and new alike.