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IBM, Still Going at 100 Years 4

More principles of successful businesses.

By Will Offensicht  |  June 30, 2011

This series discussed some of the ways in which IBM has managed to keep itself highly profitable for 100 years from its founding.  It's had some bad years, of course, but by and large it's stuck true to its core competence of helping customers solve technical problems.  IBM isn't really a technology company because they don't focus on selling any specific technology, they sell solutions.  The Economist listed a few technologies IBM abandoned when they no longer served customer needs:

The long passage that connects the two wings of IBM’s headquarters in Armonk gives a new meaning to the expression “a walk down memory lane”. From punch cards to magnetic tapes and disk drives to memory chips, every means of storing information since the advent of modern calculating machines is on display, either as an exhibit or as a photo. Other relics of computing can be found in the building, an hour’s drive north of New York City. Near the boardroom sits a desk-sized calculator with hundreds of knobs. Visitors can also wonder about a tangle of wires connected to a metal plate—an early form of software called a “control panel”.

Thomas J. Watson, who founded IBM in 1911 by drawing together three smaller companies, had no hesitation in abandoning technologies as soon as they failed to meet profit standards.  He drove his wisdom into the company's DNA.

IBM forgot this lesson over the years and became overly focused on mainframes.  This is understandable - they had 70% market share in the highly profitable business of leasing computers and became the first technology vendor to be called the "evil empire."

Being wedded to mainframes nearly killed them in the 1990's when mainframe demand dropped.  Revenue fell from $13 billion in 1990 to $7 billion in 1993 and $16 billion worth of losses piled up.

IBM came very close to running out of cash.  They were saved without government aid when a new president focused the business on reestablishing their customer focus, figuring out what customers needed, and selling it to them no matter who manufactured it.

Earlier articles introduced some of the customer-centered business strategies by which IBM has prospered.  This article outlines a few more.

Defend The Low End

When competitors start nibbling at the low end of the business, Americans tend to let it slide because there isn't much margin there but conceding part of the market is death on the installment plan.  Once competitors establish distribution channels and production volume, they move up-market.

IBM came out with the personal computer because they had to defend the low end, even if they lost mainframe business.  Twenty years later, they sold the PC business to the Chinese and stopped making PCs entirely.  If that had been their only business, they would have been gone.  That's the situation in which Dell finds itself - PCs aren't very profitable, so Dell is desperately trying to find other ways to make money.

GM tried to defend their low end with Saturn, but they lost the low end of the automobile market and would have lost it all without a government bailout.  The Japanese are losing low-end sales to the Koreans and moving up-market in response.  Nobody knows when Chinese cars will arrive on our shores, but we all know they will eventually.

Defending the low end is very difficult, but letting competitors come in below is death on the installment plan.  That's why IBM had to move out of hardware into consulting.  It's not clear how Dell will cope.

Manage The Business, Not The Numbers

Numbers manage themselves.  Numbers are how to measure outcome against plan.  Numbers are a result, not a cause; an output, not an input.  When a business pays more attention to shoving numbers around than to operating the business, or worries more about the stock price than about sales, that is asking for trouble.

Keep bean counters on tap, not on top.

 - Andrew Carnegie

Any accountant can make numbers jump through hoops.  Profit is a metaphysical concept defined by the IRS.  Nobody knows what anything really costs because there are so many ways to measure overhead.

As long as the business keeps customers happy and every employee puts in more than is taken out every day, the quarterly and yearly numbers look after themselves.  Happiness is positive cash flow.

The overall goal is to make customers happy.  If customers stay happy, profits come.  Profits are a by-product of a good business, and an essential overall goal; but if they are the only day-to-day practical goal on an operational basis, the business will be fundamentally unhealthy.

Any business that focuses on profits alone may gain in the short term, but in the medium term, they'll end up ripping off customers and employees.  That's death in the long term.

Change The Rules

If a business faces strong competition, it's better to change the rules than to play the other person's game.  Remember the slogan "You meet the nicest people on a Honda"?  Honda sold shiploads of small, quiet, white bikes, ignored Harley's big, black, noisy motorcycles, and put the profit into making cars.  Honda as a whole is now vastly larger and more profitable than Harley-Davidson ever has been.

Changing the rules enough forces the competition to change their game.  The home court advantage applies to business as well as sports.

The best way to stay ahead is to keep customers excited.  Selling a better product for less is the American way.  That means new products, added features, more bang for the buck all the time.  It's difficult to manage a volatile product line, but 3M is said to have more products than employees.  It would be very difficult for a competitor to compete against all of them at once; thus, at any given time, 3M will have an advantage somewhere.

If a business lets competitors attack, the war is fought on its home territory.  In that case, the business loses even when management thinks they won.  Toyota makes and sells cars in the US -but  does GM manufacture in Japan?  It barely even sells there.

Giving Toyota a secure home base means they'll never go away.  Never wait to be attacked!  The best defense is a strong offense, and in business, that means changing the rules with something unexpected.

Never wait for the Japanese to attack you.

 -General Douglas MacArthur

No matter how small a business is, proper focus means that it can be better at something than anyone else in the entire world.  Finding a nice, narrow market niche and serving it wonderfully well raises entry costs so high that no one will try to take it away.  Protecting turf at all costs is the secret of Swiss neutrality - many countries could conquer Switzerland, but it would cost.

Being the expert in a given area makes it easier both to defend and to attack - if you know a given area better than anyone else, you can more easily come up with something new in that area.

Go For Market Share, But Not To Obsession

Owning the market means that competitors have to attack strong points; businesses with small market shares tend to get stomped over time.  US Steel was formed in 1901 with 98% of the American market.  Big Steel lost share in drips and drabs ever since and finally sued for peace.  Declining market share is death, even if sales are going up.  Any business that's too much smaller than competitors gets pushed around.

People who enjoy being muscled around should compete with IBM.  People who enjoy making money should sell something which makes IBM products worth more to IBM's customers.  IBM rewards vendors for doing that.

Larry Ellison's company invented the Oracle database.  For every dollar customers spent on Oracle software, they spent many dollars buying bigger IBM computers.  IBM made more money off Oracle than Mr. Ellison ever did, but he became a billionaire nonetheless.  Making IBM big bucks isn't a terrible path to success.

There is an incomprehensible amount of new technology out there.  No matter how well a product sells, sooner or later, someone will bring out something that wipes it out.  A business makes more money by obsoleting its own product than if by leaving the job to someone else.

RCA developed the world's first transistor radio and sat on it.  Management was afraid it would hurt the tube radio business.  They were right - it did.  Sony brought out a portable shirt-pocket radio, the precursor to the Walkman, and blew them out of the market.

RCA had the leading market share in the tube-radio market in the days when that's all there was.  It kept its leading market share in that market right on down the tubes, because RCA executives misunderstood what their market really was.  They thought it was the tube-radio market, or the radio-receiver market, or some such.

Sony realized that radio as a whole was part of a much larger market, the non-live-entertainment market.  By creating a highly portable radio, Sony both expanded that market and took a commanding lead.  That gave Sony the resources to introduce products in every area of this market; Sony now is one of the leaders of the consumer-electronics world and RCA is a merely a trademark owned by and licensed to others, including Sony.

No product lasts forever.  A business has to earn its market all over again, every single day.

Be thou diligent to know the state of thy flocks, and look well to thy herds.  For riches are not forever, and doth the crown endure to every generation?

 - Proverbs 27:23-24

There is a one-to-one relationship between sales and salaries, between customers and cash flow, between sound products and sound payroll.  Employees all depend on sales for our daily bread, even the boss:

The king himself is served by the field.

- Ecclesiastes 5:9

Sitting on the same product year after year gives time for competitors to get set and blow the market away.  That's how the Japanese got into our automobile market - Americans bent the tin and called it new, Japanese offered new cars.

Japanese are nowhere in the American personal computer market because Dell and HP moved too fast.  As Uncle Remus said to Br'er Rabbit, "When ol' Mr. Eagle's flying up there in the sky, keep a-movin', keep a-movin', keep a movin' mighty spry."

Rules For Revolutionary Products

Everybody knows know how to improve old products, but market leaders often forget how to handle something the world has never seen before:

There are two ways to sell - wait for customers to say "We want" and bid the job, or identify their needs, go to them, and say "We got!"  Its more work to figure out what they want than to wait for them to explain, but if they figure it out, they tell everybody in sight and a business gets lost in the crowd.  If a business tell them a credible story, it's possible to make money quietly for a year or two before anybody else catches on.  Making dust is more profitable than eating dust.

Competitors hunger to eat any established market.  Ignore trivia like quarterly earnings.  Concentrate on new products and grab market share.  Get the business!  That feeds employees.  Establish a market first, then cut costs and make a buck, but market comes first.  Earnings follow.

Never Quit

How many projects are abandoned because projected margins don't look good enough?  How many would have turned into worthwhile markets if only someone had tried?

Who could have predicted the Cabbage Patch Doll?  Or the pocket calculator?  Or the personal computer?  Or Twitter?  IBM thought they would sell maybe 14 or 15 of their first computer, they sold 70,000 and made a few bucks.

By Japanese standards, Americans are crybaby quitters.  The last Japanese soldier came out of the Philippine jungles in 1974.  He was at war for 29 years, all by himself.

Some years back, a Japanese bicycle salesman died in the Peruvian Andes.  They found his car stuck in the snow, but he did not turn back.  They found him frozen to death in a snowdrift, clutching his sample case, headed toward the customer, trying to complete his sales call.

That got a lot of ink in Japan, but the tenor of the editorials was "That, folks, is what we mean by a real Japanese.  We expect that each and every one of you would do the same if it were necessary."  What scares those of us who compete with the Japanese is knowing that a lot of them would.  What should scare us even more is that the Japanese are scared of the Chinese.

Go for it! Competitors are taking American markets even as we sit here.  Americans can't tax or borrow ourselves to prosperity. we have to earn it.  Our lifestyle is at stake!

So far, we have discussed various tactical paths to prosperity through the lens of IBM's successful first century.  The last article backs up and discusses some long-term strategic ways that businesses can stick around for centuries at a time.