Invisible Forces – Modern Strategy Principles from the Aerie of IBM

Stag

This book is scheduled for publication in August 2019.  The book tells the inside stories behind IBM’s late 1990’s transformation, the resurrection of the mainframe, building enormous businesses in India and China, turning Watson into a business, and the creation of our open source strategies as well as countless others.  Those stories are interwoven with insights from our real-world experiences applying leading-edge strategy and management concepts.  Adam Smith famously used the metaphor of an “invisible hand” to describe the market forces that shaped industrial economies.  In our modern world, that invisible hand is joined by other invisible forces like global standards, collaborative innovation, and the exploding digital commons.  It is these forces that cause trucks sold in Texas to be shaped by policies in Beijing; that cause the largest patent holders to license those patents to everybody; and that enable digital strategies to leap from the shoulders of giants.  This book reveals those forces and many more through the successes and failures of IBM’s strategies over the last 30 years

Invisible Forces

Table of Contents

Introduction

IBM – The Gerstner Years

Introduction

Corporate Transformation

Towards a Shared Vision

Revitalizing the Culture

Emergence of Services as a Business

The Middleware Strategy

Reality of “Co-opetition”

Cleaning up the Hardware Portfolio

Resurrecting the Mainframe

Gerstner Summary

Strategy – The Basics

What Comes First – Control vs Value

Understanding Markets

Strategic Business Design: Strategy

Strategic Business Design: Execution

Strategic Decisions

IBM – The Palmisano years

Introduction

Managing the Legacy Core

The Server Business

Intellectual Property and Technology Strategies

Realigning Technology to the Server strategy

Linux – an Unlikely Strategic Gift

PCs and Consumer Markets

Assembling the Solutions Strategy

Price Waterhouse Coopers (PwC) Acquisition

The Application Software Conundrum

Outsourcing – We’ll Run it For You

Solution Strategy Results

Reviving the Belief in Values

Innovation that Matters

Emerging Markets

India – The Sleeping Elephant Awakes

China – The Central Pillar of the 21st Century Market

The EPS Roadmap Denouement

Palmisano Summary

Strategy – Things that go Wrong

Adapting when Value Shifts

Building a Systemic Innovation Program

Maintaining the Core

IBM – The Rometty Years

Introduction

Depth of the Challenge – Value Shifts

(mis) Managing the Core

The Growth Markets Collapse

The New Imperatives

Cloud – Innovators Dilemma Returns

Mobile – Next Generation Business Shift

Analytics and Data – Next Generation of Value

Cognitive/AI – Dr. Watson, I Presume

Broken Pillars of the Temple

Rometty Summary

Strategy – The Modern Frontiers

IP – Building on the Shoulders of Giants

Data – A Primary Strategic Asset

Artificial Intelligence – Machines that Learn

Experience Based strategies – Shifting Consumer Value

Global Markets – 21st Century Realities

The Post WWII era

Washington Consensus

China Enters the Stage

Global Markets in the 21st Century

New Invisible Forces

Conclusions

Introduction 

The year was 1997. I had been in IBM just over 16 years. I had been a developer, systems engineer, sales rep, marketing manager, offering manager, and strategist. I had led sales teams and had been in charge of several software and hardware offerings. I was now just under a year into my first assignment in Corporate.

It was late on a Friday evening. My colleague and I were sitting in the office of Larry Ricciardi, officially the head of legal, but in reality, the consigliore for the recently arrived CEO, Lou Gerstner. We were in IBM’s Corporate headquarters. The office was unlike any other in that mid-century modern building. The furniture was old world European, probably Italian. There were no overhead lights, nothing even vaguely fluorescent, just a desk lamp and a pair of floor lamps that cast the kind of subtle golden light that proclaimed this was not a regular corporate office. Almost a year earlier we had been charged by Gerstner to write a strategy for IBM that would be, “hard hitting, fact based and an in-your-face declaration of what the company needed to do.” We had submitted our first draft that past Monday. The summons to Mr. Ricciardi’s office had been curt and abrupt.

When we arrived in his office that Friday evening he was equally succinct. He said, “This is too controversial to be useful. You are dangerously close to the fatal flaw of any strategist – the destruction of your own credibility.” And then, “I’ll give you until Monday to come up with a plan, and ten days to get it done. If that doesn’t work, feel free to find a job elsewhere.” He turned his back. We were dismissed.

So, began what would eventually lead to over 20 years of work on strategies at the top of IBM. In the course of those years I investigated, customized, developed and attempted to apply strategy concepts, methods, and doctrines from the most traditional to the highly avant-garde. While there were lots of theoretical discussions in that process, at the end of the day every concept had to undergo the acid test of practical usability. It had to survive skeptical colleagues. It had to work in the real world.  It had to be supportable and understandable to clients, partners and investors. And, it had to be repeatable. One-time flukes were of little interest. The IBM portfolio ranges from capital and IP intensive semi-conductors to labor and skill intensive services and operates in geographies ranging from North America, to China, India and beyond. It also encompasses the management of both maturing businesses and the introduction of whole new business areas and models. This real-world laboratory provided a unique crucible to examine and test the best strategic thinking from all over the world.  Through those decades I learned a lot about what works and what doesn’t. This book embodies those lessons.

In addition to exploring the best strategic concepts of the last half century I had the opportunity to watch the world evolve through a series of remarkable changes. I worked alongside technologists charting the future of semiconductors. I helped clients explore what seemed at the time like risky excursions onto the web. I worked with flamboyant and radical true believers from the open source community. I rubbed shoulders with “white hat” security experts as they out-maneuvered the frauds and swindlers of the world. I led the early business incubation work on Watson. I traveled the world working with clients and negotiating deals in Europe, India and China. None of these experiences, nor the countless others, were in a passive or academic role. In every instance, there was some urgently pressing business issue or opportunity. It was a remarkable perch from which to observe an incredible period in business history.

I learned a great many things, one of which is how little most of us really know about how the world works. I’m not referring here to political maneuvering, graft or any other cynical behavior – though I’ve certainly witnessed my share. I’m referring to the world of global business. The basic concepts of what a business is and what it does are often rooted in an economic model that dates from the industrial era of the 19th century. Adam Smith used the metaphor of an “Invisible Hand” to describe how market forces guide resource allocations in unplanned and unexpected ways. In our modern world, that Invisible Hand is joined by other invisible forces like global standards and the necessity of collaboration across firms and around the world. It is these forces that cause trucks sold in Texas to be shaped by policies in Beijing, and that cause the largest patent holders to license those patents to all.

The original Invisible Hand is still an important force in the world. However, the economic value that guides that hand is increasingly embedded in services, and those are increasingly rooted in the digital domain. Digital assets are non-rivalrous, have zero marginal costs, and enjoy near instantaneous global reach. As a result, Smith’s Invisible Hand has also been joined by the invisible forces around network effects, viral adoption, and the vitality of the digital commons. The most valuable raw materials in the modern economy do not come out of the ground, they come from cell phones, sensors, and the digital exhaust of businesses. And, they come from people.

In fact, probably the greatest collection of invisible forces are those that are rooted in people – what they know, what they believe, what they invent and, most of all, what they value. Those factors are eternal. What’s new is that the people that matter – and therefore the knowledge, beliefs, inventions and values that matter – come from every corner of the globe. The 19th century model was at least partially real and does still exist, but it’s a very poor conceptual foundation for modern businesses and economies.  

I had the good fortune to work with three successive CEO’s – Lou Gerstner, Sam Palmisano, and Ginni Rometty. Each brought to IBM their own particular skills, beliefs and styles. Each had their signature impacts on IBM’s business and culture. Each also presided over a particular combination of challenges and opportunities for IBM. Gerstner famously took over an extremely troubled company on the verge of being broken up and dismembered. He reversed those plans, righted the ship, and set it on a course for success. Palmisano brought an intense focus on profitability and led IBM’s aggressive embrace of China, India and other emerging geographies. Rometty faced a portfolio where everything of any size was eroding and everything that was growing was too small to lift the company. Each era brought new issues and opportunities and new lessons.

I have organized this book into those three eras. Each section begins with the actual history of what happened in IBM. These are the real-world decisions we confronted, what we did, why we chose that path and how well it worked (or didn’t.)  Those stories aren’t organized in any sort of academic theory or structure. They reflect all the messiness and wrong-footed thinking that always happens in the real world. From the outside it may have appeared as though we were making systematic progress towards a clear goal. In reality, we were far more often groping our way forward in darkness that ranged from dim outlines to total blindness. While not well formed in the academic sense, there are still countless strategic lessons in those stories. I will spell those out as they arise.

Each section then proceeds to a set of chapters on strategic principles, concepts and methods. Many of these were informed by some of the leading strategic thinkers of the last 20-30 years. Those concepts were tested and adapted to the specific issues at hand in IBM. Some concepts fared well, and their influence can be readily seen in IBM. Others did not hold up. These chapters will spell out those learnings. Most of my focus is on the things we found that worked. With a few exceptions, I have spared the reader the details of the many dead-ends we explored in our journeys. The strategy chapters in the Gerstner section focus on basic fundamentals and introduce IBM’s Business Leadership Model. The chapters in the Palmisano section build from those fundamentals by reviewing the three most common causes of strategic derailment and how to avoid or manage them. The final collection of strategy chapters focus on the modern frontiers of business strategy. Most of these final topics also raise complex implications for public policies. This book does not attempt to resolve those policy issues. My objective is simply to highlight them and to frame them in the context of what contemporary businesses need.

I obviously survived my early encounter with Larry Ricciardi. The remainder of that story, along with dozens of others, are spelled out in the pages that follow.

NOTE: The scope of the term “business strategy” warrants a short side bar. One of my early mentors in strategy, Bruce Harreld, used to say, “the difference between military strategy and business strategy is the existence of the customer.” It’s never good business strategy for your customers to be caught in the “crossfire” between rivals. Despite our best intentions, this did happen to us on at least one occasion as you’ll see later in this book. Nonetheless, the central aspect of customers and what they value is an important principle for business. In fact, as this book unfolds it will become clear that I see this as the vital heart of business strategy.

Business strategies also exist across multiple levels. There are strategies for individual businesses, strategies for portfolios, and strategies for investing. Individual businesses come in many different flavors and stages of evolution. Portfolios can be optimized for financial results, risk mitigation, or operational dimensions like common go to market or delivery infrastructures. Investing strategies can focus on solid revenue, cost and expense fundamentals or on stock market measures where PE ratios dominate or on “exit strategies” for startups which may focus on suitability for strategic acquisitions. We will touch on many of these dimensions in the course of this book. Over the course of my career in strategy I have benefitted from the thinking and ideas of numerous contributors to the library of business strategy. Many of these individuals worked with myself and my team at various points in our journey. All of them faced a challenging, testing audience looking for immediate and practical advice on specific issues. I would particularly like to acknowledge Adrian Slywotsky, Michael Tushman, Charles O’Reilly, Thomas Friedman, Rita McGrath, Clayton Christensen, Geoffrey Moore, Gary Hamel, Michael Treacy, Stephen Coley, Michael Porter, Lawrence Lessig, Brian Arthur, Hal Varian, Charles Ferguson and Joseph Pine. The specifics of what each of those thinkers brought us will become apparent.