Reportage

 

Risen from
the ruins

It is said that large corporations often fail because of change. The computer giant IBM has shown that this doesn’t have to be the case. A lesson about the right way to deal with setbacks and the energy that can be created from this type of new beginning.

Text Lars-Thorben Niggehoff 
Photos Jan Steinhauer (card), Fritz Beck (Osthues, IBM), Gene Clover (Schatilow)

Dne of the most difficult days in John Akers’s life was on Tuesday, January 19, 1993. Fifty-eight years old at the time, he appeared before the world and announced business figures that were shocking. International Business Machines — known worldwide under the acronym IBM — was reporting a loss of 8.1 billion US dollars in the 1992 business year. No other company in American history had ever lost so much money before.

The loss was shocking because, until that time, IBM was considered equal parts pioneer, flagship company and star player. In the 1970s, the company had invented the floppy disc, the dominant storage media of the time. In the 1980s, it dominated the early personal computer (PC) market even though competitors such as Apple had entered the market much earlier. And in the mid-1980s, according to insiders, the company had almost gotten into trouble with antitrust issues because its power on the market had continued to expand. That’s how large IBM was.Just a few years later, “Big Blue”— as the company was known — was a shambles. Its market power had disintegrated, sales were stagnating and the losses kept piling up. In a rapidly developing market, IBM seemed like a dinosaur, lost in time. The company had missed out on the emerging boom sectors of PCs and the internet.Many IBM employees lost their jobs during the crisis — and even CEO Akers was forced out. The search for his successor landed on Louis Gerstner. He’d never worked for a computer company before, but perhaps that would prove to be advantageous. When Gerstner started his job, the task before him seemed enormous, possibly impossible. He was to lead the dinosaur out of the crisis and breathe new life into this large, cumbersome behemoth.

 

SURVIVING CHANGE

Today, 26 years later, what is certain is that IBM is still around — not as an empty shell of a former great, but as a transformed organization. The company’s focus today isn’t on computers and mainframes, but instead on cloud computing, artificial intelligence and consulting services. The former hardware manufacturer has turned itself into a software and consultancy provider. Its unique selling point: being familiar with the technology and its implementation and having the necessary expertise to support its customers from start to finish. In 2018, the company generated a turnover of almost 80 billion dollars with 350,000 employees — almost as many as before the crisis.

IBM survived the massive disruption of its industry. And at the same time refuted the thesis that especially those huge corporations steeped in tradition falter on the radical changes in their industries. This makes IBM’s story a lesson about how companies can master forced change. How they best react to the power of digital disruption. And how they can cope with setbacks so that they eventually emerge stronger than before from the upheavals, structural adaptations and changes of direction that such a process inevitably triggers. The lessons from IBM’s history cannot be used as templates to be transferred one-to-one for every industry and every company. However, they can serve as a benchmark, as a collection of ideas about how change can be managed.

 

OLD WORLD. For decades, IBM’s success was based on its hardware business.

 

IBM hat die massive Disruption seiner Branche überlebt. Und zugleich die These widerlegt, wonach gerade große, traditionsreiche Konzerne an radikalen Veränderungen ihrer Branche scheitern. Die Geschichte von IBM ist so auch ein Lehrstück, wie Unternehmen erzwungenen Wandel meistern können. Wie sie am besten reagieren auf die Kraft der digitalen Disruption. Und wie sie mit Rückschlägen fertig werden, sodass sie am Ende gestärkt hervorgehen können aus den Umbrüchen, Strukturanpassungen und Richtungswechseln, die so ein Prozess zwangsläufig auslöst. Die Lehren aus der Geschichte von IBM sind keine Schablonen, die sich eins zu eins auf jede Branche und jedes Unternehmen übertragen lassen. Aber sie können als Fixpunkt dienen. Als Ideensammlung, wie sich Wandel bewältigen lässt.


NEW PRODUCTS, OLD BRANDS

To get a closer look at this change, a trip to the north of Munich is a good place to start, where two office towers over 100 meters tall rise up into the sky. IBM moved into these buildings, its new research center for artificial intelligence and applications for the Internet of Things (IoT), two years ago. More than one thousand specialists are working here with the goal of networking people, machines and artificial intelligence.

One of these specialists is Stephan Osthues, a 54-year-old who has been working at IBM for 20 years. He’s currently an executive partner for digital strategy and IoT consulting. He and his team most recently optimized the HR processes for a large industrial group. “In many companies, there are a lot of questions that HR managers must answer time and again,” he explains. “And this is exactly where we can tap the potential of automation.” The client now has chatbots using IBM’s Watson technology to answer the most commonly asked questions. After a year of implementation, around 300,000 employees are now using the system.

Watson is probably the most famous result of IBM’s transformation. The technology platform uses machine learning to structure and analyze data. In 2011, IBM sent Watson and its artificial intelligence to compete against real people in the American gameshow Jeopardy. Watson won. Today the software is being used in medical diagnostics, for example. Other companies use its abilities in speech recognition to help increase efficiencies in call centers. TÜV SÜD also uses IBM’s consulting services. Like many companies, TÜV SÜD is faced with the challenge of bringing its existing services into the digital era while simultaneously developing new digital offerings to complement them. In the “blue2” cooperation project, IBM is supporting TÜV SÜD in this process as a transformation partner. “We’re creating a solution together with TÜV SÜD for automated inspection services based on image-recognition software,” Osthues says.


DIGITAL STRATEGIS
Stephan Osthues handles the automation of customer processes for IBM.
He most recently developed intelligent chatbots for a company with 300,000 employees.

 

 

 

RISE, FALL AND RESURGENCE

IBM did a lot right for a very long time. After the company was founded in 1911, it initially produced analog products such as time-stamp clocks and calculating machines and, after the Second World War, rose to become the pioneer of the early mainframe computer market. In the 1980s, the company established itself as the market leader in the recently emerging market for PCs. “IBM was everywhere at the time,” says business historian James Cortada. He researches at the Charles Babbage Institute at the University of Minnesota and recently published a book about the story of IBM. In it, Cortada also spills some beans about the company’s inner workings: he himself worked as a manager for the corporation for 38 years. Hanging on the walls in IBM offices around the world, he writes, were signs with the word “THINK” on them, the mantra of the company’s founder. The slogan was supposed to motivate employees to question everything. But at some point, as Cortada explains, IBM, like so many other companies in the world, began making fatal decisions. One of its biggest: IBM bid farewell to the idea of making all of the components for its products itself, outsourcing them in the case of PCs to Microsoft and Intel. The result: from then on, IBM lacked expertise in precisely those fields that would begin booming in the coming decades.

At the same time, the speed of technological change began rapidly increasing. Products such as electric typewriters — which had driven IBM’s sales in the golden years — suddenly became obsolete. For years, IBM’s success had been based on calling the shots across the entire segment of technology products. Now, specialized companies were suddenly taking the lead: Microsoft for operating systems, HP in the printer business, Seagate for storage drives. IBM was still a player everywhere but was no longer dominant anywhere.

NEW WORLD
 Today most of IBM’s earnings come from consulting, services and software development. IBM’s new research center for artificial intelligence and the Internet of Things in Munich is representative
of the new strategy. 

 

 

GERSTNER UND DIE WIEDERGEBURT

“Many leaders back then grew up in the Sixties and Seventies,” Cortada explains. “Those were comparatively quiet times in which technology wasn’t changing very quickly.” Then, in the 1980s, the people at IBM couldn’t keep up with the increasingly rapid pace of change. When Gerstner, a former management consultant, took over leadership at IBM, he tackled a number of issues simultaneously on his daring mission to save the company. First, he brought in new blood — lots of it. He hired a new chief financial officer and replaced the HR director. A total of 100,000 positions were eliminated between 1993 and 1995. At the same time, Gerstner stopped nearly every project involved in helping IBM regain control of the PC market. This marked the beginning of the end of the company’s PC business, which culminated in the sale of the division to Lenovo in 2002.

Yet Gerstner didn’t break up IBM. “Those responsible at IBM at the time learned that they had to play the long game instead of just thinking from quarter to quarter,” Cortada says. That’s exactly what Gerstner did. He transferred the best of the old IBM world into the new and transformed the company into a consulting firm that helps its clients with their own digital transformations. To achieve this, IBM expanded its specialized software and focused on profitable fields in hardware.

This allowed IBM to provide its new customers with comprehensive consulting and customized services from a single source. The old idea of wanting to dominate every centimeter of a market and to be a player everywhere, which had failed in the hardware business, suddenly began working for the company as a services provider. Sloughing off unprofitable business fields, focusing on promising new ideas for the future and returning to old strengths ended up being decisive, in retrospect. Many large companies today operate according to the principle of divesting from unprofitable business areas.

 

 

NEVER FINISHED
Lars Schatilow heads IBM’s digital transformation in the German-speaking world.
A job with a future. “We will always continue changing,” Schatilow says with conviction.

 

 

AFTER CHANGE IS BEFORE CHANGE

At IBM, there was one particular lesson that was learned from the turbulent times of the past: “We will always continue changing,” says Transformation Manager Lars Schatilow. In order not to fall behind, he thinks constant learning on the job is indispensable — a tool that, paradoxically, was already part of the IBM culture before the crisis. “We had regular trainings for our employees in the Eighties,” Schatilow says. Today, they’ve further developed this approach and have introduced a design-thinking approach. “The change from product to data business is still taking place with us.” This is about making data available in such a way that the constantly changing needs of customers can continuously be met. “It’s something completely new,” he says.

People observing the company complain that its growth remains relatively unimpressive. The current CEO, Ginni Rometty, has regularly been forced to explain declining earnings since 2012. One reason is that the revenues from the remaining hardware business were sinking faster than the new areas’ turnover was increasing. Yet analysts confirm that the shift to cloud computing and artificial intelligence is inevitable and the right way to go. “I don’t know when IBM’s transformation will be over,” Cortada says, “but overall the company is well positioned today.”

Despite all the professional training and precautionary measures, disruption will continue to remain unpredictable in the future. “It always comes from a direction that you didn’t expect,” Cortada says. Even the great disruptors of today such as Facebook and Google won’t remain immune to it forever. “Every company has the risk of becoming bloated, stupid and lazy at some point.” To prevent this, companies must build a corporate culture that allows and promotes change. At the same time, change cannot be forced with a sledgehammer. “In the end, each company must keep working and can’t just shut down to practice new processes.”

Because every environment is constantly changing, as Cortada explains, it’s more important than ever to be able to react flexibly to change. What’s most important for managers is to keep an open ear for both customers and employees. “Even during times in which technology and the digital are becoming increasingly important, customers and employees are still the crucial assets for every company.”

 

 

 


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4 Questions for …

Larry Downes,

 
analyst and author. His topic: business strategies for technological change. He most recently published the book Pivot to the Future: Discovering Value and Creating Growth in a Disrupted World with co-authors Omar Abbosh and Paul Nunes.

 


Mr. Downes, why do some companies survive disruption - and others don't?
As is the case everywhere, there is no magic formula. But one thing is clear: the companies that are most likely to be disturbed by big changes in their industries are those that constantly tell themselves it won’t happen to them; that their customers won’t change their requirements; and that the new technologies are too fragile or too innovative. In short, companies that are denying the future certainly won’t be ready for it when the future comes.
 
How can companies survive disruption? 
The best insurance against unpredictable change is a balanced portfolio of investments. A company must invest as much in mature and current business fields as it does in future business areas. The first two areas ultimately only serve to earn enough money to finance the future. Those future investments, in turn, must be balanced among internal projects, partnerships, direct investments and possibly to acquire disruptors, their technology, and especially their employees. 

 

How do companies recognize that they are in a state of disruption?
The strongest warning signal is a series of failed experiments by entrepreneurs who radically question old industrial practi­ces, technologies or customer groups. Experiments can be quite inexpensive and quickly show when something is not working. Entrepreneurs can then refine their ideas until one of them finds what we call a "big-bang disruption." Established companies often misinterpret the failed experiments as proof of an idea’s unsuitability. But when disruption then takes hold, it's far too late to react.
 
Which is better equipped for change: small startups or huge corporations?

Both groups have advantages and disadvantages. But it is a misconception that only startups appear as disruptors or survive disruption. Established companies, in particular, ones that have been leading in their industries for years, are often the ones who master disruptions quite well. They can best utilize their knowledge of their customers, their relationships with other ecosystem participants, and their intellectual capital for change – if they try.