Creative Disruption

I’ve spent a lot of time this week digging up the history of Lou Gerstner’s turnaround at IBM.

The move from mainframe to PC is pretty much the definitive technical disruption – and the fact that IBM exists at all is pretty remarkable if you consier the state it was in back in 1993, when it declared the biggest loss in US corporate history ($8bn – which is admittedly rather tiddly by recent standards).

The shorthand version is, of course, that he found a mainframe business, and created a services business. Ta Da. Looking at the process in more detail, however

First of all, he invested in the mainframe

Everyone said the mainframe was dead and the PC was taking over. It was true, IBM had completely underestimated how important the PC was, but Gerstner saw there was life in the mainframe business yet. In his first couple of weeks, he agreed to invest $1bn to revamp the mainframe technically, which allowed them to sell them at a massively reduced price. ‘This decision saved IBM’ he later said.

The year of biggest loss, was a great year for patents

In 1993, as well as that $8bn loss, they also were awarded more patents than any other business in the US. The first time a US company had done that in ages. There was no shortage of smart people and innovation there; but it wasn’t enough.

Anything but a vision

Gerstner famously said of his turnaround “The last thing IBM needs right now is a vision”, pointing out that the business had draws full vision statements but needed decisions and execution.

The services business started inside the sales business – and they scrapped

The services business was teeny when he joined. You would normally set it up as its own business. Initially he put it inside the sales organisation, and as it was the role of the services business to recommend ‘competitors’ products, the sales team weren’t entirely happy (that is a euphemism, I suspect). It was only when the services business reached a certain scale that it became its own division.

He ‘did what he did best and linked to the rest’

They decided to get out of the business applications business (proprietary business software running on their machines) as all it was doing was making them enemies with often superior software providers. Instead they went into partnership with the likes of Siebel etc.

He invested in the brand

When he took over, IBM had 70 ad agencies in the US alone. He consolidated everything into Ogilvy, and started to celebrate the IBM brand.

There’s a whole host of good stuff in this story – and plenty of echoes with some of the other businesses I’ve looked at (especially HMV, rather strangely).

Then again – maybe I’ve got it all wrong. If so – please feel free to put me right.

Related articles by Zemanta

• Charts: IBM’s Software-Led Margin Expansion (techcrunch.com)
• IBM’s new CIO may already be its most powerful (computerworld.com)
• IBM cost cutting, software/services lead to Q2 profit while hardware tanks (insidehpc.com)
• IBM’s Venture Capital Group (RWS Interview) (readwriteweb.com)

Tweet This Post

Image via Wikipedia

HMV Group is one of the businesses I’m focussing on in the book. A few years ago, I thought there were destined for nothing but failure, a traditional business that had simply failed to make the leap into the 21st century.

They faced a perfect storm of Amazon; Apple; illegal downloading; and supermarkets selling books, CDs and DVDs at cheaper than cheap prices. You could forgive them for going the same way Tower Records had gone before them.

A friend in retail, however, told me when Simon Fox took over that he was a class act, and I shouldn’t dismiss them quite yet. And sure enough, he was right – to the point that Fox of course was said to be top of the list to transform that other digitally challenged UK institution: ITV. In the end, to HMV’s good fortune (and I suspect to his as well) he decided to stay.

Waterstones is still a long way from out of trouble – despite store closures and the savings from the launch of their distribution hub, like-for-likes continue to fall. But the transformation at the HMV business (where Fox is managing director in addition to his Group CEO role) is genuinely impressive.

The lesson here is that the real transformation was achieved by sorting out the core, traditional business. New mix of products (including Apple stuff and iPod accessories – Apple previously wasn’t allowed in the store, because it was seen as the enemy), and a focus on smarter promotion and presentation have all helped.

With that underway, and with financial targets being met, it allows them to expand into new areas, and develop their online business at a more reasonable pace.

The joint venture with Mama Group; the launch of digital cinemas in store in partnership with Curzon; and pushing Sony e-readers at Waterstones – all of these provide a good narrative and glimmers of future growth, but won’t be making a meaningful contribution to the bottom line in the near future.

I doubt they  not going to meaningfully challenge either Apple or Amazon in the online space. In fact, they still have their work cut out to take on Play.com, but the mix of a strong high street presence (at their core, HMV has always been a really well run retailer), a decent online offering and diversification into live music – helped by the decline of Woolworths and Zavvi is a pretty healthy platform for the future.

Today’s news that they’ve bought 50% of 7digital is another nudge in the right direction. A relatively small deal (£7.7m) that will give them a more meaningful digital footprint, and will bring some serious digital expertise into the business. The only thing I’m surprised about is that is that they’ve only bought half the business (not to mention a trading relationship with Spotify).

Why not go the whole hog, I wonder? Or was it just that the VC’s wanted out and everyone else wanted to stay in?

The heft of the still very credible HMV brand is also just what 7 needs if it wants to raise its game. Frankly, in this market, the chances of them creating a viable consumer brand is pretty minimal (they haven’t done it so far), better to team up with someone who already has one.

But, to go back to my point about the importance of the core business – this deal would be largely irrelevant if it wasn’t for the other announcement today that HMV UK like-for-like sales are up 1.7%, with total sales up 12.9% thanks to the integration of the stores they acquired from Zavvi.

They aren’t truly out of the water yet. Given the market the fact that they are high street retailers in a world that is ever faster becoming online and digital, you suspect they never really will be. The fact that their share price is down by 13% this year, despite everyone widely acknowledging that Fox has done an excellent transformation job shows the market is still luke warm about prospects for genuine growth. But, right now, things could be a lot, lot worse for them.

Tweet This Post

If there is one lesson to be learned from the DVD rental market – it is to be very careful about your predictions.

Way back in 2001 when I was briefly at INSEAD, Blockbuster was already a case history in how a sector will be disrupted. The narrative, of course, was that it would be nailed by Video On Demand etc.

What no clever clogs at business school of course anticipated was that an entrepreneur Reed Hastings would one day get a $50 fine for taking back Apollo 13, and realise there had to be a better way of doing things. The result, of course was Netflix; and in Europe, the myriad of start ups that now operate under the LoveFilm banner.

What could threaten these businesses? Well the logical narrative, of course, is downloads and streaming – digital distribution. And yes, it’s coming. Or perhaps another disruptive innnovation from a hot shot entrepreneur like Hastings.

Errr no – it’s a vending machine that originally (I think) came from some R&D work at McDonalds…(yes, McDonalds) and run by a vending machine company – Redbox.

The business says ‘no thanks’ to the long tail. And a big ‘hasta la vista’ to the online world – and instead offers top titles for $1 rentals.

The truth is – new entrants and entrepreneurs shape markets – not just technology.

Great write up on Redbox/Netflix here on CNN Money (with a Reed Hastings video interview also embedded).

Related articles by Zemanta

• Redbox sues 20th Century Fox in DVD dispute (ctv.ca)
• Half a Billion Reasons Why Studios Are Threatened by Redbox (cinematical.com)
• Redbox’s Vending Machines Are Giving Netflix Competition (nytimes.com)
• Redbox delivers a social experience (superhypeblog.com)
• Blockbuster Deploying Vending Machines, May Expedite Store Closings (shoppingblog.com)
• Redbox: Media’s public enemy No. 1 (money.cnn.com)
• Sony Pictures-Redbox deal underscores value of bargain DVD rentals (latimesblogs.latimes.com)
• Earnings: Netflix Grows Subscribers, Revenues; Invests In Streaming (paidcontent.org)

Tweet This Post