Tuesday, May 24, 2011


News that IBM has passed Microsoft's market cap is not really surprising.

IBM remains one of the great but misunderstood stories of corporate strategy. In the bad old days before the PC there used to be IBM and the BUNCH (Burroughs, UNIVAC, NCR, Control Data and Honeywell I think). IBM has maintained its position against all challenges while much of the rest disappeared through mergers.

The story of IBM and the PC is usually told as the story of an opportunity missed. They outsourced the operating system, they created a standard they couldn't dominate, they were out-performed by others in manufacturing.

These stories fail to recognise the huge challenge faced by a closed-system (SNA) mainframe manufacturer by the PC. The challenge is well described by Clayton Christensen's analysis of the related hard drive industry in "The Innovator's Dilemma". How do you invest in a technology that you think will cannibalise your existing business?

The answer is simple. Create the business unit separate from the main business, limit your investment as much as possible by outsourcing (e.g. the operating system), and create a self-supporting "eco-system" - part of the magic of the IBM PC was its very open architecture and the active encouragement of third-party add-on hardware, the complete opposite of Big Blue itself in those days. The outcome was that, in a field replete with various attempts at desktop systems, the IBM PC became the standard.

But the PC division's greatest impact was not in being a business unit on its own, but the ability it gave IBM to adapt. Most significantly because of the PC division IBM was prepared to embrace the new open access architectures, and its business adapted accordingly.

Meanwhile Microsoft really is a one-trick pony. In common with the rest of the software industry a lot of their capability is leveraging brand and distribution. Much of the core program content of large software firms comes from acquisition rather than cdevelopment.

And the large software companies are rapidly coming to the end of the cycle where their proprietary systems have unique advantages. It is really remarkable just how much you can achieve with reliable Open Source software these days.

The IBM PC story is not one of a failed investment in PCs and then a company made good, it is instead the story of the only mainframe provider who successfully navigated the technological transformation of the desktop.

Novae Meridianae Demetae Dexter delenda est

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