Ibm Mgt Interview

IBM: DECLINE OR RESURRECTION?

Bruce Lloyd of South Bank University interviews Robert Heller, author of The Fate of IBM.

IBM: Decline or Resurrection? The Management Decision Interview Bruce Lloyd interviews Robert Heller

Management Decision, Vol. 32 No. 8, 1994, pp. 5-10 © MCB University Press Limited, 0025-1747

BL: What do you see as the core message of your recent book The Fate of IBM? RH: Essentially the answer is the gap between perception and reality, which has begun to concern me in a lot of my work. You can meet people who, when you talk to them, seem to understand about market needs, or company needs, perfectly well, but who are wholly unaware that in reality they are not fulfilling those needs at all. What happened with IBM was particularly marked because the company had been so phenomenally successful. As a result, it was impossible for people who had grown up in the system to understand that it didn’t work any more. In entirely new circumstances that were changing very rapidly, they attempted to follow the old policies that were no longer effective. For some time they hid that reality from themselves by failing to recognize it. In fact there were two IBMs. One, as perceived by its management, was still an example to the world on how you could do everything right; the other, that seen by those outside, was a company ill adapted to the new circumstances that were evolving. BL:. The central paradox and challenge of organizations in the world today? RH: That’s right.

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BL: How far do you consider this failing is inevitable in large organizations, as they have all become large because of their past success and it is precisely that success that generates the preconditions for those two cultures to develop and thrive? RH: It is another manifestation of the old phrase: “To see ourselves as others see us”. Curiously there was a speech in the mid-1960s by Peter McColough, one of the two real founders of Xerox, which posed exactly that question to senior managers: “Is it inevitable that a company like Xerox would inevitably decay after it has had its moment of great success?” He pointed to all the dangers you have just mentioned. As the company grows, it becomes more inward-looking; fails to reward initiative and innovation; doesn’t like change and so on. And, of course, it becomes larger and more bureaucratic as the system grows. Xerox tried to avoid that fate and did something very brave. McColough set up the Palo Alto Research Centre (PARC) and gave the technologists an incredibly free hand, a large budget, and told them to go away and invent something. Xerox had all these technologies, which needed bringing together so that it could create whatever it was the world was going to demand. PARC virtually invented the personal computer, but Xerox never put it on the market; which is incredible. IBM also kept doing this; kept on being late with getting new technology into the marketplace. For example, the RISC chip technology was developed by IBM in the 1970s, but by the time they produced a RISC product using it, they were three years behind the competition. BL: Are these delays inevitable? Do you find that the systems that are set up in an organization end up by being geared to managing history and, as you point out in your book, when new products are developed they invariably are in competition with the corporation’s history and, as a result, organizations find it incredibly difficult to manage that transition process? RH: It’s tempting to say that such delays are inevitable. But I’m an optimist by nature and I refuse to accept that organizations, like human beings, are bound to die. You can’t help the ultimate deterioration of the physical body but you can renew an organization, if you are aware that renewal is going to be required. But that means, among other things, being very tough on the people who get to the top. If you get people coming to the top of an organization who only know the organization’s old ways, it is very unlikely that they’re going to visualize an entirely new organizational form. In addition, there’s the school bully complex; people follow the behaviour patterns they went through themselves. Where managers have been used to a command-and-control system inside a large corporation, in which the top lays down what is going to happen and the privileges of large pay, etc. go to top people; rising managers will tend to repeat the patterns when they get to the top. If you want to have an

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innovative corporation you must have constant change, not only of the people at the top, but also in the way the people at the top manage. They must be able to say, we are going to run this business in a quite different way and maybe with quite different purposes. Only in very few cases can you actually be consistent from one generation to another and not require major adaptations. BL: That leads onto another dilemma. If you make that radical change you run the risk of generating chaos, if it is not very well managed. Also, if you do not evolve from your strengths and your roots, somehow, why are you there in the first place? RH: You are really starting a new company every year. BL: But can a large company ever effect radical change more effectively than the alternative of, in effect, shutting it down and starting a new company? RH: If in your mind you are shutting down a large company and in effect starting a new company, then you are less likely to compromise over what needs to be done. Compare this to sport; the rules may change from time to time, but the general principles of the game remain the same. People can come along in 50 years time and say: “You’re still playing a game which I can recognize”. But the way in which it’s played may be unrecognizable; and the way the players look may be unrecognizable. You always have to be on the lookout for the break with the past. The fascinating thing about IBM (the equivalent of what happened at Xerox) is that it did manage to break with the past with the PC, which was born in the early 1980s, in a way just as dramatic as Xerox bet on the Palo Alto Research Centre. A separate group of IBM people was deliberately set free of all the traditional culture of the organization. In this group of engineers, not one had any theoretical knowledge about management at all; they just found out what worked. They forced through a crash programme for a product entirely new to the company, using technology that had not been applied by IBM before. The management approach was a complete and utter break with the past. That involved a management discovery which was potentially far more valuable than even the PC, which now accounts for nearly as much sales value as mainframes. But instead of encouraging this new way of operating, IBM’s top management reimposed the traditional culture on the PC division once the product had been established, with extraordinarily bad results, like the lag of five years behind Toshiba in producing a laptop. BL: Large companies have got a capacity, if they wish to use it, to imitate in a big way and very fast. One of the real strengths that they can bring to the party is resources. But that doesn’t necessarily mean that they are innovating at the frontier of new product development.

RH: C.K. Prahalad asks executive audiences: “Which would you prefer to work for, a company which has low resources and high ambitions, or a company with low ambitions and large resources?” Almost everybody, after a moment’s thought, opted for the company with low resources and high ambitions, because that was where most progress would be made – i.e. Apple, rather than IBM. BL: But Steve Jobs had nearly as much trouble developing the Macintosh alongside the Apple II as IBM had with the PC. The problem of innovating within existing structures applies even within quite small companies. RH: The chaotic nature of Jobs’ management was the problem there. But he proved that in a market dominated by IBM, with the industry standard set by IBM, a company could survive and prosper, by being completely different. BL: Although, almost by definition, you could argue that is the only way a new entrant is going to be able to innovate effectively. In effect Apple was concerned with a new market which was dominated by IBM, although IBM could not recognize that they were solving essentially the same problems. RH: By accident, Apple stumbled on the same policy that Digital used – keep yourself away from IBM. The paradox now is that Apple and IBM are getting together to crack the quasi-monopoly of Intel in micro chips. The IBM PC operation proved that you can have a large organization that had both large resources and high ambitions. But IBM did not think the PC would be a big product. IBM expected it to be a small product, and its stunning success astonished everyone. It took off very fast, and they could barely cope with the demand. The unforgiveable error was not to see that the way the PC took off was a management model for other products both at IBM and other large companies. The key to success is the development of effective multidisciplinary product development teams that have the freedom to move ahead at full speed – for instance developing a marketing strategy before the product itself has actually been finalized.

Performance Indicators that Change Culture BL: Going back to the point you were making about what sport could learn from management. Perhaps there are things to be learned the other way round too? One fascinating influence in sport is that the performance indicators are usually very clear, immediate and conspicuous. Also, while there may well be large organizations behind teams and sporting activities, the activity itself is largely performed by individuals with very defined roles. Which brings us back to IBM and the

IBM: DECLINE OR RESURRECTION?

problems of large companies; their central challenge is how do you establish effective performance indicators for the massive number of people that manage the internal operation of those large organizations? RH: What indicators should they use? I have been stressing for a long time that physical indicators are more interesting than purely financial ones. Very early on I discovered how financial indicators can show a company to be in excellent health, when in reality the reverse was true. I actually discovered this the other way round when I first went into magazine publishing with Management Today. Early on we showed a loss but cash was piling up in the bank. We were selling subscriptions a year in advance, but only putting the income through the P&L account in installations as the issues were distributed. You must look behind the financial numbers to understand what they really mean before they can be used as any form of performance measure. Today we have learned all that. Total quality doesn’t look at the financial numbers; it is interested in the time an operation takes and how many defects there are; money is not mentioned. I have always treasured a remark Lord Weinstock made many years ago: “Profit is something you get because you are doing other things well”. So what would you be looking for inside IBM? Going back through the data of Fortune’s most admired companies I came across the fact that IBM had led the league since its start, then in one year it slipped on innovativeness. John Opel, their chief executive at the time, could not understand this. He said that IBM had the most wonderful products and its marketing people were doing innovative things every day. But that indicator proceeded to get worse and worse every year by significant amounts, until IBM was no longer the overall leader. What were these indicators saying? It was telling what IBM’s major customers thought about the company’s innovativeness and its ability to do things in new ways. That was a very important indicator and it is not one that many companies take any notice of. Had IBM paid proper attention to this finding they would have learned far earlier what cynical journalists had known for some time – that IBM really distrusted innovation. Which comes back to something mentioned earlier. Not only do operating managers distrust innovation because they don’t like change, but so do accountants and others affected by changing the rules of the game. Look what happened at Compaq Computers. Perhaps because it is a younger organization, it reacted to the crisis in its one product market (the PC), when prices fell by 50 per cent in a year, by turning itself upside down over nine months. Compaq was able to increase sales, reduce costs and boost productivity to the point where in only three years it could again announce record profits. That demonstrates what a company has to accept in any market, but particularly in IT, where change is taking place very fast. Where markets are changing rapidly a company’s ability to adapt becomes its greatest strength.

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IBM thought it was very adaptable but it wasn’t. It was set in cement. BL: Perhaps Compaq had an advantage because it was able to innovate within existing structures? RH: No. In Compaq’s moment of crisis it changed its chief executive. Other founding managers went too. The company set up an Independent Business Unit (Project Ruby) to produce a low-price PC. Economically the test was very demanding, as it had to be produced within tight cost constraints; this was the first time that Compaq had operated under those conditions. Culturally it was as big a change as when IBM decided to produce a small computer, with no IBM components.

Learning BL: So it is certainly possible to undertake that regeneration exercise if you know what it is that you are doing? RH: That phrase is vital. One of the key people in the Compaq turnaround actually said: “If you know what you are doing it is amazing what you can achieve”. But how do you change your culture? That is very difficult, especially as few organizations know what their culture actually is. What is revealing is for the organization to become outcome driven. If it is only interested in the outcomes, not how they are achieved, that produces radical – and beneficial – cultural change. Just looking for the key tasks and the important outcomes, and managing these effectively, produces enormous benefits for most organizations. That is essentially what enabled Compaq to produce its results. You don’t need courses or lectures. You just have to make sure you are managing the right outcomes. Now, of course, training programmes and gurus can be very useful, but never forget that for every 100 managers who listen to either in-house, or public, seminars there is only one who actually puts into practice what is being preached. BL: Yet one point I was particularly interested to see in your book was your enthusiasm for Peter Senge’s Fifth Discipl ine and his Learning Organization concepts. Where does the learning come from, if it does not come from the collective wisdom that exists outside the organization? RH: Learning comes from “doing”. I was speaking to Peter Senge recently. He quoted the example of a company which for many many years had relied on unbelievable skills in promotion to maintain sales – but this was becoming progressively more difficult. The company had become geared to this very high level of promotion activity. But when managers examined what was really happening, they discovered that their real

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problem was a shortage of new products. They were overcoming this problem by their promotion efforts. It took some time to work out why this was happening, but the answer was essentially very simple. The people who got to the top in the past had all come through the “promotion” route, and knew little or nothing about developing “new products”. Determining a quite new, or different priority, changes the nature of the company. Ask a company: “What are the life cycles of your products?” IT might say five years. Well, that means that the company has to completely reinvent itself every five years just to stand still. It must get 20 per cent of sales every year from new products. That is the kind of target figure that needs to be given to key departments. Without doing anything else, if you say that no one gets a bonus unless that new product sales target is met, you will change the culture. There is only one ultimate cultural change agent; the will to change. BL: But if you work on the assumption that “learning comes by doing” then surely IBM were all right? They were certainly doing things. They were just not doing the right things? Were they just not effectively learning from others outside the organization? RH: They were not “doing” my meaning. They said they were geared to innovation but all the reward systems were geared to selling.

You get this all too often. People resist change, even when they can see the benefits under their noses. There is an analogy here with total quality. When you launch a total quality programme you have to decide on the parameters you are aiming for. You cannot, like a large organization I was working with recently, just say we want to be the “best” in Britain by 1997 in its chosen line. I asked the obvious question: “How will you know?” And they literally had no answer! One person from the management group did chip in to say: “Well, the chief executive will tell us”. A company must decide what parameters it is aiming at before it does anything. Every company has to take over control of its own destiny. In total quality, for example, eventually there will be no consultants on the premises, perhaps even no quality department worth speaking of, because everyone has become so involved in the new way of working. The new way of working means that everything is up for grabs. Nobody can ever say again that this is the one best way to do things, or this is the way we will always do it. Everything is open to be challenged, using non-financial numbers. The interesting thing about total quality companies is that you get this pull, even conflict, between the new doctrine of quality measured by non-financial parameters, of which customer and employee satisfaction are the most important, and the more traditional quarterly profits.

BL: But is there not a need for a bigger role for a broader sense of learning?

BL: But what is the currency that you use between one group of quality performance figures and another? You must need a costed bottom line?

RH: My definition of “doing” would include three elements: Knowing what to do. Knowing how to do it. And actually doing it. “Knowing what to do” might require some outside help. And you may need to learn “How to do it”. But in the end you actually have to “Do it”; only doing it actually produces results. And only through the “doing” process can you establish what really works.

RH: That is easy. Time is by far the most useful, common measure. And it is very unlikely that you can reduce the time elements without reducing costs. All the reengineering books emphasize the role of time, as well as materials and people.

BL: There are organizations, particularly large ones, that seem to think that the process of re-organizing is, of itself, a way of manifesting that “doing”, or activity, culture. RH: That is a dangerous nonsense. You can have very protracted and interesting conversations with very intelligent corporate people which don’t lead to anyone doing anything. One company I know has two operations making the same products, one in America and the other in Britain. The American company operates very differently from the British one. The Americans are very action oriented; all their systems are geared to performing; forcing all the managers to operate according to clear and focused objectives for the whole, not just their individual bits of it. As a result it is a much leaner, tighter, more dynamic organization. The company in England will not use these methods, although that would quite plainly improve its operational performance.

BL: If we focus on the customer satisfaction point for a minute. Companies often find that 80/20 rule applies and they then need to cut out the 20 per cent of their customers that take up 80 per cent of your time, and the bottom line tells you that is important, not the customer satisfaction figures. RH: Certainly you must measure whether the activities, or products, you have are actually making profits. It is quite horrifying, but many companies do not know the profitability of their products or customers. There are certainly cases where companies feel wrongly that the need is to satisfy their customers at all costs. The spirit of TQM is the spirit of intelligent enquiry. That spirit of enquiry may lead to financial numbers, but they are only part of the picture. What is essential is that you should not be wasting effort. Pareto’s 80/20 rule is one of the key tools for TQM – but you have to use your intelligence in how you apply it.

IBM: DECLINE OR RESURRECTION?

BL: There is a quotation of Levitt from many years ago that might be relevant here, namely: “There is nothing worse for a company than to do to very high quality something that does not need to be done”. RH: Absolutely correct. Top management must always be addressing this issue, both for itself and others in the organization. If something does not need to be done, is not adding value, then stop it. That is another key question for all organizations today: Does the company know what it can really do well? It should. And it should concentrate on those areas. All good TQM programmes start with the board. What is the board doing? How is it managing its own operations? Unless the agenda is properly established from the top, it is unlikely that there will be real effects elsewhere in the organization. TQM began as a programme to eliminate defects in manufacturing processes quality and remarkable changes were achieved. People then asked: “What is the point of making the product defect free if the customers don’t want it?” That led on to the definition of quality as: “Making products perfectly that customers actually want”. The next stage is the discovery that unless everyone in the company agrees with what you are doing and how it should be done, you are extremely unlikely to achieve total quality. BL: That brings us back to the theme earlier on. How difficult is it to manage radical change and get everyone to agree to a new agenda? RH: I have written another book, after the IBM one, called The Quality Makers. I looked at 20 organizations in Europe, with the largest contingent in Britain. Roughly half had achieved some meaningful corporate transformation. It can take a long time. Rank Xerox is in its tenth year. But the one that stuck in my mind was British Airways Engineering. After a strike, the management recognized that it had to do things differently in future. Consultants investigated what happened when defects were discovered, and found that they were not transferred – and so nothing was done to rectify them. Management then went down to the shop floor and asked people: “What are we doing that is stopping you from doing a proper job and what do we need to do in order to ensure that the job gets done properly?” The first year after the start of this programme BA reduced costs by 9 per cent, not the budgeted 2 per cent – an extra £38m in cost saving. But that represented a massive change in the culture. Managers were no longer giving orders, they were involving the whole workforce. There are many other examples to show that “doing” changes the culture. It can happen surprisingly quickly; especially if there is no alternative, if you want to survive. Everything has to be geared to ends that everyone understands and is committed to. That approach also needs to cover producing financial information. It is no good giving

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everyone a copy of the annual report if it does not identify the key issues of the company’s operational performance. I remain an optimist. I believe human beings are capable of an enormous amount. At the recent launching of the CBI competitiveness forum I was struck how two of the speakers from large companies were not talking about competitiveness at all – they were talking about management. To get extraordinary results out of an organization, you have to involve everyone. But that cannot be achieved through amorphous task forces that can’t focus on meaningful outputs. For example, if absenteeism is a problem, a task force could be given the brief to come up with ideas to reduce it by 50 per cent. That is a measurable objective. If you go back to IBM, you can see that they were asking themselves the wrong questions. They were not really interested in what the competition was doing. If you don’t start by asking the right questions, it is most unlikely that you will ever get the right answers.

Acquisitions BL: Going back to another point about IBM. Illustrating the difference between “activity” and “progress” was IBM’s acquisition programme. The start of this programme coincided with the period when they were beginning to recognize that they might need to do things differently. But there was little evidence to suggest that they really understood what acquisitions were all about. RH: None at all. The acquisition strategy was based on an attempt to achieve world dominance in telecommunications. Why did they need to make acquisitions in this area when they were developing the necessary products themselves? With all their research effort, why could they not produce world class products internally? They never asked that question. In addition, they never asked themselves whether they knew how to make successful acquisitions. And of course they didn’t. Their intention was to run the acquisition in a hands-off style, but they were incapable of doing that. As an example, IBM then wanted all the major pricing decisions to be referred to Head Office at Armoak. This ruined the flexibility which was the key to success in a rapidly changing market. BL: Successful companies have usually developed powerful central services, who are also keen to preserve their power base. RH: But centralization and central command structures can be overcome, as a number of organizations have shown. You get better results from Theory Y than Theory X, especially now with a more educated workforce and operations that are becoming more and more capital intensive. Manufacturing is following a similar pattern to

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agriculture, but we must not forget that although the number of people producing food in the field has fallen dramatically, there has not been a corresponding reduction in those involved in the whole food chain, including processing, retailing, and even marketing. In the old days that was all done by the farmer.

IBM had to become number two or three in its traditional markets. It let other companies take advantage of its weaknesses. Coming back to the question you have raised several times. Could it have been avoided? Yes, I believe, it could. But not by the people who had become the cause of the problem.

In a similar way there may be a rapid decline in the number of people on the factory floor, but increasing numbers of people are involved in the whole business system. The Toyota production system gave the workforce real responsibility for the production process and that was what changed the culture, from the previous command culture. IBM never really understood that total quality goes beyond stage 1, which is reducing defects on the production line, and stage 2, which is pleasing the customer more than anyone else, to stage 3, having employees who enthusiastically contribute everything that they possibly can to improving the organization’s performance. At IBM layer after layer of hierarchy had been built up, slowing down the decision-making process, especially since it had to be unanimous. In a slow-moving world that might work but in fast-moving times it is a luxury that organizations cannot afford.

BL: There are important messages in your book, not only for IBM who still have to learn them fast in order to survive and flourish in the years ahead; but, perhaps even more importantly, there are vital lessons from the IBM experience that need to be passed on to all organizations, particularly those who have grown large on the back of a successful past.

BL: So what to you are the key lessons for the future? RH: If a company as large and successful, and as well armed with resources of all kinds as IBM, can be so humiliated, it can happen to anybody, large and small. Size not only gives no protection, it can easily be a liability rather than an asset. The damage that was done to IBM was due to its own inadequacies. Their new chief executive has said as much. IBM’s problems might have been market driven, but its failures were not due to factors outside management’s control. No law said that

RH: The lessons begin and end with organizations spending much more time focusing on the future, rather than indulging in reflecting on their past glories and managing history. Organizations need to take and keep control of their own destiny. But the particular challenge for IBM – and this occurs in other cases too – is that a market which was a virtual monopoly has now fragmented to such an extent that it now has to compete against many companies where it is no longer the market leader. That requires a different kind of managerial approach and corporate structure. You have to say to many top managements: “Work out how you can abolish yourselves before someone else does it for you.” BL: Unfortunately for IBM and other companies facing these challenges it is much easier to discuss the issues than produce the required results in practice. But it would certainly improve any organization’s chances of being successful in both the short and long run if the top management read and act on some of the messages in your book. Thank you.

Bruce Lloyd is Head of Strategic and International Management, South Bank University, London, and author of The Fate of IBM, Little, Brown and Co., 1994.

Application Questions (1) Can managers of a failed enterprise ever be exonerated from blame? (2) Summarize the key issues which led to IBM’s fall. (3) Robert Heller discusses a three-layered approach to quality: reducing defects, pleasing the customer, continuous improvement. Do you agree? Where is your organization on these three vectors of quality?