Repositioning Computer Companies

September 1994

Teaching Dinosaurs How to Dance

The Wall Street Journal recently devoted nearly half a page to telling the interesting tale of Tandem Computers' near demise and recent recovery. It is a cautionary tale, interesting to the Journal largely because it is an example of how a company can reinvent itself successfully and adapt to the changing rules of the marketplace. It also gave the Journal (1) a fine place to point out all the ways in which Tandem could have done it better and (2) a great chance to point out that Digital and IBM are suffering from exactly the same problems, but don't appear to have yet taken the cure (or perhaps we should say taken it far enough).

Since both customers and vendors have high stakes in keeping major vendors healthy, you may be interested in some of the findings and their possible application.

Tandem was doing exactly what every purveyor of a new, highly desirable technology tries to do for as long as possible -- to sell it at a premium price, while protecting it from competition by making it hard to access or copy the technology or lure away the customers.

This is exactly what IBM and Digital have done in the mainframe and minicomputer businesses, but it is also what Apple tried to do in the PC business and what Intel tried to do in each succeeding generation of the processor business.

There is nothing wrong with trying to pull off this trick. The trouble is not recognizing the moment when you need to change strategies. The WSJ calls this the need to cannibalize your old product line (that is, to eat your old product and its fat profits, to make way for the new). You may want to note which vendors do this successfully over and over again and which ones seem to hang onto strategies until the strategy is dead, the customers are disgusted, and the company suffers significant loss of business before it changes course.

There is always advance information that a change needs to be made. In Tandem's case, that was big customers telling Tandem they wanted to be able to run Unix on Tandem systems and customers eventually deserting Tandem for Unix-compatible vendors like HP.

In IBM's late rush to embrace the Client/Server business, for instance, there is the missed opportunity to have been an early leader in that business, the position that HP won by paying more attention to what was possible -- and by having less of a vested interest in the high premium prices still available from selling mainframe computers. It's hard to eat your children when you see them as your future. (Every time the CEO of IBM makes yet another statement about how well the mainframe business is holding up, IBM falls deeper into this trap.)

Tandem tried to hold onto its premium prices for part of its product line by putting Unix on only lower-priced products. By this partial strategy, it fooled itself into thinking it was taking appropriate action, but it simply lost more time and market share.

Vendors, particularly vendors who control markets through technology or other temporary monopolies, often mistakenly believe they can divide the market into areas in which they behave competitively and areas in which they remain monopolists. This never works. It's been tried in markets as old as electronic typewriters and as new as the personal computer. It's the sign of a vendor who's trying to extract an unwarranted premium price and of customers who have become smart enough to look for other suppliers.

Tandem has, at least for now, changed its strategy and won the right to play the game again. But no one has the right to play just because they have always played or because of installed base (look what happened to Wang) or superior technology. New technologies will continue to arise and who will own or control them is not predictable. Software has become more important than hardware to many customers and the ability to innovate software can be done anywhere, with scant resources; later, unlikely partners can bring that innovation to the market.

The lesson is that he who watches the market carefully, looking for the need to make strategic changes, and who does not hesitate to make them swiftly yet carefully, will always have the best chance of winning. The customers' job is to try to find such vendors, because they will always be the best partners.

Comments or Questions: Send Email to opinions@wohl.com

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Entire contents © 1994 by Amy D. Wohl. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden.