Why Technology Giants Fail

IBM, Microsoft, AOL, Nokia, HP -- the list goes on of dominating companies that got whacked upside the mainsail by technology rogue waves. Why is it so difficult for industry-leading incumbents to see and catch the next wave?

Most researchers offer up two reasons:

1. Protecting the existing business. When the new business threatens to cannibalize sales of the successful existing one -- think IBM's PCs taking business away from much more profitable IBM minicomputers -- the organizational impetus is to stay with the proven winner.

2. Organizational blindness. Executives have a difficult time looking beyond their own experiences, and beyond what their happy customers are telling them, to see threats on the horizon. Did Blockbuster's top brass lose much sleep when some start-up called Netflix announced a crazy a DVD-by-mail rental scheme?

But here's the funny thing. Even when incumbents do manage to see a threat in time and react with their own successful product, they still manage to get clobbered eventually. For years, IBM led the world in PC sales. And Netscape's IE browser is even today the most popular. But IBM eventually exited the PC biz in failure, and Microsoft is a marginal player in many areas of the online world including e-commerce, search and social media.

What happens? A new research paper from professors at Harvard, Stanford and Northwestern explains why, and carries important lessons for strategy executives responsible for keeping winning companies at the forefront of their industries.

What IBM and Microsoft did right from the beginning was to create almost independent business-within- the-business entities that were free to innovate, break the rules, and not worry about disrupting sacred cows. The IBM team was even located in Boca Raton, far, far away from White Plains, New York.

The trouble started when these pirate IBM and Microsoft operations started to be successful, and wished to take advantage of additional corporate resources. At IBM, for example, the PC business created channel conflicts for established Big Blue business managers. And when the IBM PC Jr. ran into reliability problems -- a not uncommon occurrence for a new product -- other units squawked about IBM losing its reputation for reliability. More of the same at Microsoft, where the IE group butted heads with the Big Dog Windows team.

Then came the moves that severely crippled-killed both operations. To solve the mounting internal conflicts and turf wars, IBM and Microsoft decided to bring the new businesses back under the corporate tent, to be run as integral pieces of the legacy businesses. Suddenly key decisions were being made by managers who really didn't understand the new opportunities, slowing momentum and eventually causing top talent to flee.

The researchers point out the implication for managers:

"On the managerial front it highlights the subtle nature of the interaction between strategic and organizational conflict, suggesting that organizational conflict is often as much symptom as cause, and should be managed as such. Certainly the suggestion that an established firm should simply seek to duplicate the structure and behavior of entrants should be treated with skepticism."

For more, read the working paper Schumpeterian Competition and Diseconomies of Scope; Illustrations from the Histories of Microsoft and IBM, by Timothy Bresnahan (Stanford), Shabe Greenstein (Northwestern) and Rebecca Henderson (Harvard Business School).

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