Is IBM Becoming Extinct?

Change Forces Leaders to See Business Models Afresh and Imagine New Paradigms

The American venture capitalist Guy Kawasaki often tells the following story about the need for entrepreneurs to adapt themselves to emerging market settings and stay relevant.

In the latter part of the nineteenth century, a sizeable ice cutting and trade industry flourished in the US Northeast. Harvesters sawed off blocks of ice from frozen lakes and rivers, and transported and sold them for industrial and commercial consumption around the world. The biggest consignment of natural ice weighed some 200 tons; half of it thawed en route to India, but the remaining 100 tons of ice returned a profit.

In due course, the invention of icemaking machines caused the downfall of the natural ice harvesting industry. Anybody needing ice could purchase artificial ice during any season from ice factories. As a sign of the times, the trade publication Ice Trade Journal changed its name to Refrigerating World.

Subsequently, the emerging popularity of commercial and domestic refrigeration units put the ice factories out of business. Residences, stores, and businesses could make their own ice conveniently and maintain cold storage.

The Best Leaders Anticipate Change and Nurture Their Own Innovations

During the first of the aforementioned disruptions, according to Kawasaki, the ice harvesters did not recognize the benefits of industrial ice-making and did not adapt to the revolution in their industry. Instead, they chose to defend their existing trade—they continued to innovate sawing equipment, invest in efficient storage, and improve their rail- and ship-transportation systems.

Correspondingly, the industrial icemakers of the following generation never embraced or adapted to the emerging advent of consumer refrigeration.

The take away lesson is that many successful companies are so set in their ways that they don’t pivot themselves when they face disruption in their industries.

Successful Companies Can Become Victims of Their Own Success

Kawasaki’s anecdote illustrates how disruption drives many companies into stagnation. Every so often, entire industries vanish into oblivion.

Major economic disruptions can compel companies to question what they stand for. Sadly, many companies choose to defend their existing domains instead of raising their technological edge and reinventing their products, services, and brands.

When the fundamentals of a time-honored business drastically change, the most successful companies are often the slowest to recognize the shifts and pivot. Well-established in the comfort of routine and stability, they entrench deeper into their tried-and-true formulae. As described in Harvard strategy professor Clayton Christenson‘s well-known thesis The Innovator’s Dilemma, the strategic inertia often gets companies with at-risk, but established business models into a state of denial. Consequently, they refute the challenges posed by fiery startups.

Can IBM Beat the Odds?

IBM has fought off a technological and economic disruption once before. During the 1980s, IBM fell from glory, but got reborn as a vibrant corporation after Lou Gerstner became CEO in 1993. He redefined IBM’s businesses, fortified its value proposition, and changed the mindset of the company, its employees, and its customers. As Gerstner detailed in his bestselling biography about IBM’s reinvention, Who Says Elephants Can’t Dance?: Inside IBM’s Historic Turnaround (2002,) this was an astonishing achievement given how deeply-rooted IBM was in its existing, but increasingly irrelevant business model.

At present, IBM is struggling in the midst of yet another digital revolution—one that is exemplified by the commoditization of hardware and the enterprise-adoption of cloud computing. Shackled with legacy business models of older, less-differentiated products and services, IBM has struggled to catch-up with cloud platforms offered by Amazon, Microsoft, and Google.

Instead of reckoning honestly with the growing shift to cloud-based services, IBM has concentrated for far too long on its Wall Street-pleasing financial shenanigans (buying back shares to prop up earnings-per-share, cutting costs, firing employees, reducing tax rates, selling less-profitable operations, and the rest.)

The jury is still out on the long-term success of IBM’s much-ballyhooed Watson platform and its cloud computing initiatives. What makes this cycle of disruption worse is that IBM faces aggressive competitors who are pushing profit margins toward zero in a bid to dislodge IBM’s historical footing in the enterprise IT landscape and to establish dominance.