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How IBM Learned To Love Open Technology

2015 July 29
Lou Gerstner

When Lou Gerstner first arrived at IBM as CEO in 1993, he brought a gripe with him from his time running American Express, one of Big Blue’s largest customers.  As he wrote in his memoir, Who Says Elephants Can’t Dance?, it became central to his transformation of the company.

What had happened was that an IBM executive had called one of his division managers and threatened to withdraw support from a major processing center.  The reason?  The division had installed a single computer from a competitor. Gerstner had been flabbergasted and vowed to change things when he got tot IBM.

Today, more than twenty years later, IBM’s commitment to open platforms is unsurpassed and last week the firm announced two initiatives—developerWorks Open and an academic initiative for the cloud—that will deepen its commitment further.  The story of how it all happened provides a useful model for how managers can adapt to the new age of platforms.

A New Business Model

Every business strategy is highly dependent on the context in which it arises and Gerstner’s transformation of IBM was no different.  While its business model had been based on proprietary products and systems, the technology industry was shifting towards the Internet and the Web, which nobody owned and were much better suited to open technologies.

This was a completely new way of thinking about business.  As Dr. Angel Diaz, a Vice President at IBM explains,“In the beginning, we needed to understand what open source actually meant.  The natural instincts of enterprises was to try to control it, so these instincts needed to change.  What we realized was that the more things opened up, the greater the opportunity would be.”

One early initiative was Linux, a new operating system built on open principles, where anyone could contribute code.  That not only helped the technology advance more quickly, but also markedly broadened compatibility.  That, in turn, greatly expanded the talent base of people who could work with the software and helped to expand the market further.

For IBM, this was a paradigm shift.  Rather than seeing its business as a “proprietary stack,” Gerstner built a new business model aimed at the customers’ “stack of business processes.” So while the base technologies would be open and free, IBM would create value through designing proprietary systems, software and applications to solve its customers’ problems.

That, in essence, became IBM’s e-business initiative, which transformed both the company and its fortunes.  In the six years between 1994 and 2000, the company’s business grew from $64 billion to more than US$88 billion, and net income had nearly tripled.

Integrated vs. Modular Organizations

For most people, the shift from proprietary to open technologies seems alien and counterintuitive, something that could only be conceived in the shadow of Haight-Ashbury where free love once reigned.  Yet when viewed through the context of integrated vs. modular business models, it becomes clear that the trend has ample historical precedent.

As Harvard Professor Clayton Christensen explained in The Innovator’s Solution, in the early stages of an industry, firms with wholly integrated, proprietary products have an advantage. However, as an industry matures and the technology becomes better understood, it inevitably becomes more modular, with different firms specializing in different parts of the value chain.

For example, when Henry Ford built his famous River Rouge plant in 1928, it was a wholly integrated facility that produced every aspect of the product.  For all intents and purposes, you sent iron and coal in one end and a car came out the other.  A Ford product was unique, with little to no overlap with competitors.

Yet today, the industry is highly modular, with major producers designing and assembling cars, but thousands of suppliers providing components.  The dependency on suppliers is now so complete that, during the recent financial crisis, Ford Motor Co. lobbied for bailouts of GM and Chrysler because, if they went down, so would the supplier network and so would Ford.

The shift from integrated to modular models is never a singular event, but a continuous process that is constantly being renewed.  Value naturally shifts from whole products to components and then back again as new solutions arise, which then must be tightly integrated until connections between components are better understood.

From The PC Revolution To The Cloud Disruption

When Gerstner arrived at IBM, the PC revolution was in full swing.  Computers, which had traditionally been solely relegated to the back office, were quickly making their way to executives’ desks.  The Internet would soon connect these into an entirely new ecosystem, creating new challenges and opportunities.

Many of IBM’s competitors, like DEC and Wang, couldn’t manage the shift and would not survive, while new players, such as Microsoft and Intel, rose to dominate the industry. Today, we’re seeing a similar shift to the cloud, which allows any device to access massive computing resources.  This time the change will be, if anything, faster and more pervasive.

That’s why open technology is moving so rapidly to the fore, because innovation requires greater standardization of basic resources in order to be deployed at scale.  As IBM’s Diaz puts it, “With the explosion of technology, including cloud, mobile data, etc., you need ever expanding centers of gravity that pull together standards into a more coherent ecosystem.”

It is these “centers of gravity,” such as the Linux and OpenStack foundations, that drive open technology forward.  IBM’s newly announced initiatives, continue in this vein. Developerworks Open, will open source 50 new technologies that aren’t yet part of any existing foundation.  The academic initiative will partner with 200 institutions in 36 countries to train new developers on cloud technology.

Perhaps most importantly, IBM’s commitment to open technologies is not wide-eyed altruism, but a clear eyed business strategy.  For example Watson, its advanced artificial intelligence platform, is highly dependent on open source technology.  However, while everybody can access those same open resources, only IBM can do Watson.

The New Era Of Platforms

IBM has embraced open technology and, in many ways, is uniquely positioned for it.  IBM Research discovers new computing paradigms.  Its engineers are adept at transforming those discoveries into solutions and its enterprise sales and consulting services are top notch.  Few, if any companies, can boast of that kind of strategic depth.

Yet today, everybody must manage the shift from corporations to platforms, where competitive advantage is achieved not  through control of resources, but access to ecosystems.  In IBM’s case, open technology platforms allow it to access ecosystems of software developers and it in turn offers those resources, along with its own proprietary capabilities, to customers.

It’s easy to dismiss this as a “technology strategy,” but in reality it is a result of the shift in power from nodes to networks and the same forces are beginning to transform every industry.  Although earlier generations of executives learned to developed vigorously protect their turf, today’s leaders must learn to effectively widen and deepen connections.

It’s been more than 20 years since Lou Gerstner first arrived at IBM and began its transformation.  The road has not always been a smooth one.  Some younger firms, such as Tesla, open source their technologies almost as a matter of instinct.  Yet still, the idea remains something most corporate executives are reluctant buy into.

Nevertheless, in an age of disruption, the only viable strategy is to adapt.  Proprietary solutions only confer advantage when they add value over and above that of base technologies.  Otherwise, they merely hold you back.

– Greg

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