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.

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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).

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Image via Wikipedia

Nokia is one of the businesses I’m looking at in my book. Although, the way they’re currently announcing things at the moment, I’m keep having to add bits. A deal with Microsoft here. A new netbook there – it all adds up…

The reason I’m writing about them is a bit fiddly to explain, but they have been one of the great technology companies of the last couple of decades, and now they find themselves despite being the world’s biggest provider of handsets, they are having to play catch-up in the smartphone world with the recent upstarts Apple and RIM.

Their strategy has been to transform themselves from a handset manufacturer (an increasingly commoditised game) into a software and services business – initially announced in August 2007, resulting in a major restructure six months later (here is how the Economist covered it ).

This is a massive transformation programe – it’s interesting that even now, two years after initially telling everyone the chief exec Olli-Pekka Kallasvuo, still has to stress it in an interview with the FT on Monday .

When he says: ‘It is a big change, it’s very challenging’, you guess that just scrapes the surface of it.

The problem is that while they might be talking about services being the future, they know their smart phones have a fair bit of catching up to do if they want to be in the same usability league as the iPhone, Android and Blackberry (and I speak as an E71 owner who has used all of the others).

In other words, if they want to make it to a lovely software and services future, they’re going to have to deliver some kick-ass hardware to help them get there. Because we consumers love our gadgets.

I say ‘hardware’ rather than ‘handset’ because of the launch of their booklet (see the video below, if you haven’t already). With all that moody lighting, it looks gorgeous, but I wonder if it’ll feel quite so slick up close. It looks a bit solid if you ask me – and there’s a lot of netbooks out there. A lot of cheap netbooks from good brands.

Nokia’s history is well known – in particular the decision to focus on mobile in the 80s and the way they overtook pretty much everyone to become a global leader – a combination of great timing, and 15 years of great product development and (bar one horrific glitch in 1995) industry-leading supply chain management.

But the challenge they now face is of a different kind all together. They’ve gone from being the challenger and the rising star to being the incumbent.

And it is always harder for an incumbent to transform than a new entrant to innovate and grow.

Not only are they having to refocus a massive global organisation (and the services division is the result of a blitz of acquisitions over the last few years, which brings its own challenges), but they have to make sure that any software they launch works on dozens and dozens of different handsets.

And at the same time, they have to make sure that their core business doesn’t fall too far behind.

On every level, this is an oil-tanker-like turnaround. The big lesson so far is just how long it takes.

The obvious question is whether it will succeed – and I wouldn’t be so presumptuous to think I have the answer. But they have plenty on their side – and no shortage of ambition. This month’s Fast Company, gets all enthusiastic about their potential (a little too enthusiastic – but that’s what happense when business journalists meet rock stars).

But, I suspect ’success’ in the future is going to look very different to ’success’ in the past. At best, they will be one of a leading pack rather than an outright leader. Whether that gives them the growth and margins they have known in the past is another matter.

Judging on their current share price performance – it seems the market thinks not. But hey, what does the market know?

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