Lessons in Longevity, From I.B.M.

Lloyd Miller

 

AS it turned 100 last week, I.B.M. was looking remarkably spry. Consumer technologies get all the attention these days, but the company has quietly thrived by selling to corporations and governments. Profits are strong, its portfolio of products and services looks robust, and its shares are near a record high. I.B.M.’s stock-market value passed Google’s earlier this year. Not bad for a corporate centenarian.

 

Yet, not so long ago, I.B.M.’s corporate survival was at stake. In the early 1990s, it nearly ran out of money. Its mainframe business was reeling under pressure from the lower-cost technology of personal computing.

New leadership was brought in, and thousands of workers were laid off. It was part of the company’s painful journey to what might be called “post-monopoly prosperity” — that is, a new path to corporate success once a dominant product is no longer the turbocharged engine of growth and profit it once was.

“I.B.M. faced the challenge that all great companies do sooner or later — they dominate, they lose it, and then they re-create themselves or not,” observes George F. Colony, the chief executive of Forrester Research.

I.B.M. met the challenge, moved beyond the mainframe and built a business increasingly based on software and services. So as it celebrates a milestone, the company holds lessons for others.

Evolving beyond past success is a daunting task for companies in all industries. But that problem is magnified in the technology arena, where companies can quickly rise to rule a market, seemingly invincible, until a shift in the technological landscape opens the door to a new generation of corporate dynamos.

That is certainly the test that Microsoft is struggling with today, as it seeks growth beyond its lucrative stronghold in personal computer software. If they are to prosper for the long haul, Google and Apple, too, must reach beyond their dominant businesses. Each of these companies, in its way, is trying.

So, then, what broader insights are to be drawn from the I.B.M. experience?

One central message, according to industry experts, is this: Don’t walk away from your past. Build on it. The crucial building blocks, they say, are skills, technology and marketing assets that can be transferred or modified to pursue new opportunities. Those are a company’s core assets, they say, far more so than any particular product or service.

In I.B.M.’s case, the prime assets included strong, long-term customer relationships, deep scientific and research capabilities and an unmatched breadth of technical skills in hardware, software and services.

Though once a mainframe company, I.B.M. has recast itself as the supplier that can best manage and stitch together diverse technologies in modern data centers. Mainframes still have a role, and I.B.M. has invested heavily in them — $5 billion in mainframe research in the last decade — so that different kinds of software can run on them and new kinds of processors can plug into them.

But it is the technology surrounding the mainframe that really pays off for I.B.M. today. Mainframe hardware alone accounts for less than 4 percent of its revenue. But when the software, storage and services contracts linked to mainframe computers are included, the figure rises to 25 percent — and as much as 45 percent of operating profit, estimates A. M. Sacconaghi, an analyst at Sanford C. Bernstein & Company.

I.B.M. has redirected its research labs and sales force to focus on services and software, retraining thousands of people, and supplementing in-house programs with acquisitions. In big, complex services contracts, from running smart-grid projects for utilities to traffic-management systems for cities, I.B.M. acts as a high-tech general contractor whose expertise spans research, software, hardware and services. These so-called Smarter Planet projects build on its legacy of broad technical skills and deep knowledge in fields like energy, transportation and health care.

AT the moment, Microsoft is the tech company that most squarely confronts the post-monopoly predicament, as I.B.M. once did. Some of the similarities are striking, right down to the long-running federal antitrust suits that both companies endured.

But unlike I.B.M. in the early 1990s, Microsoft is not a company in crisis. It is growing steadily and remains immensely profitable. It has nurtured new businesses beyond its lucrative stronghold in personal computer software: the Windows operating system and its Office programs for word processing, spreadsheets and presentations.

Microsoft has invested for nearly two decades to build up business database software and server operating systems that run larger data-serving computers in data centers. An I.B.M. executive once declared that Microsoft’s attempt to move into data center computing would be its “Vietnam,” a humbling setback. And many analysts predicted that Microsoft would be thwarted in data centers by competition from Linux, the free operating system. 

Linux has done well, but so has Microsoft. Today, Microsoft’s server software division is a comfortably profitable business, with $16 billion a year in revenue. If that unit were a separate company, it would be among the top five in the software industry.  

Microsoft’s other sizable business beyond PC software — also more than a decade in the making — is its Xbox video-game console, software and online gaming franchise. That division of Microsoft is a solidly profitable, $8 billion-a-year business.
But the long-term problem for Microsoft is that more than 80 percent of its operating profit still comes from its PC software franchise. “Microsoft has delivered some singles and doubles, but is there going to be another home run?” asks David B. Yoffie, a professor at Harvard Business School.
Because of such concerns, Microsoft’s stock price has stagnated for years. The anxiety has been magnified by the company’s trailing position in fast-growing new markets in search and online advertising, as well as smartphone and tablet software. Some big investors are uneasy — and one, David Einhorn, the hedge fund manager, last month publicly called for Microsoft’s chief executive, Steven A. Ballmer, to be replaced.
Whether Microsoft can find a new foundation for prosperity is uncertain. But like I.B.M., it has deep reservoirs of technical and research expertise. Kinect, its add-on device to the Xbox gaming console, suggests one promising path. The device, which went on sale last November, recognizes people’s faces, their gestures and simple voice commands.
Microsoft acquired some of the sensor technology used in Kinect, but designed the hit $150 product itself, helped by seven different groups in its research labs. To date, Kinect is a gaming device. Yet personal computers that can see you, hear you and respond would be a breakthrough, bringing artificial intelligence into the mainstream.
GOOGLE, meanwhile, has the purest engineering culture among the major technology companies. Its founders, Larry Page and Sergey Brin, former Stanford graduate students in computer science, set the tone. And the assets most prized at the company are brains and data.
“Google is all about information — searching, discovering and sharing information more intelligently,” says Peter Sondergaard, senior vice president for research at Gartner.
In essence, Google sees itself as an artificial-intelligence factory. Its programmers use machine learning and natural language techniques to mine vast troves of Web data to deliver smarter search results and more finely directed ads. Its offerings beyond search all scoop up more data and afford potential opportunities for serving up more ads. They include online e-mail, calendars, maps, shopping, word processing and spreadsheets, as well as videos on its YouTube service and photographs on Picasa. It’s all grist for Google’s data mavens.
Google’s natural habitat is the wide-open Web. But it is also moving into the more closed realm of software for devices, mainly for smartphones and tablets, with its Android operating system. The move is partly defensive. More and more searches are being started from these mobile devices, and it is easier to steer users to Google search and other services from its own operating system. Yet the move could also put it in a powerful position to shape the future of mobile devices, which are eclipsing PCs as the center of gravity in computing. In smartphones, at least, Google is doing well. Android, which Google distributes free, has rapidly become the leader, with 36 percent of the market for smartphone operating systems.
IN recent years Apple has been unmatched in applying its core assets to new markets. Its hallmark skills are the intuitive usability of its software and the inspired design of its hardware — talents long appreciated by loyal Mac users. Yet in the PC industry, Apple machines are still dwarfed by those running Microsoft’s Windows. Apple’s stunning success has come in taking its skills beyond PCs with pioneering new designs in markets that it has redefined or created: digital media players (the iPod), smartphones (the iPhone) and tablet computers (the iPad).
Apple looks to be riding a money train for some time. Its current model is focused on selling its stylish devices; the company’s online software and marketplace (for digital media and mobile apps) are mainly servants of the hardware, pleasing consumers so they are more apt to buy iPods, iPhones and iPads.
Yet Apple’s product designs, however impressive, will eventually be mimicked and come under price pressure, just as the mainframe did, predicts Michael A. Cusumano, professor at the Sloan School of Management at the Massachusetts Institute of Technology. In time, he says, Apple may want to borrow a page from I.B.M. and rely increasingly on software and services for its livelihood.
Apple, he suggests, can build a large business around offerings like its new iCloud online storage and syncing service for music, photos and software, announced two weeks ago, applying Apple’s usability magic to woo users.
Once millions of people use a service, Mr. Cusumano says, there will be ample money-making opportunities with advertising, marketing or charges for premium services. Those can produce steady revenues, quarter after quarter, year after year. “Becoming a platform for delivering digital services is the way Apple can make big money in future decades,” Mr. Cusumano says.
FOR the powerhouse companies of today, the I.B.M. story holds a cautionary lesson as well: the danger of delay. Mr. Yoffie of Harvard Business School recalls that in 1990 he had finished a case study on I.B.M. His research included extensive interviews with the company’s top executives, who spoke of the need to wean I.B.M. from its dependence on mainframes and to shift toward software and services.
But I.B.M., he notes, didn’t pursue that strategy until after the company was in peril, and an outsider, Louis V. Gerstner Jr., was installed as its leader in 1993. As Mr. Yoffie says, “It’s really hard to move a company when it’s doing well and not facing a crisis.”