Lenovo vs. IBM: Anticipating Stronger Business Simulations

One of the fascinating things to watch in the market over the last two decades is how Lenovo has taken failing IBM businesses and made them successful. In effect, Lenovo has now repetitively showcased how to take a failing IBM unit and make it successful. There is nothing Lenovo has done that IBM couldn’t have done more easily. IBM didn’t need to acquire a business and integrate it because they were already integrated into the company, so the fact that Lenovo has been able to, with a far higher degree of difficulty, turn IBM businesses (and Motorola Google businesses) that were failing into successful units is both a cautionary tale and a teachable moment.

Let me explain.

Background

I was a competitive analyst at IBM in the 1980s. Back then, I wrote a report on how to turn around one of IBM’s failing units, only to find that the executive in charge didn’t want to take the risk and sold the unit instead at a catastrophic loss to the company. This made little sense to me then or now, yet this was a common decision criterion, and not just at IBM. Since then, I’ve seen this same series of mistakes occur in company after company, though in most cases, the sold unit eventually failed anyway.

The exception has been Lenovo’s acquisition of the IBM PC Company, the IBM x86 server unit (which was a far harder acquisition to execute), and Motorola, which was all but dead when Lenovo acquired it. My belief is that had Lenovo acquired BlackBerry, we’d still be using smartphones with keyboards, and the iPhone would mostly just be a consumer phone. That was a sad road not traveled.

I could argue that Google should have never bought Motorola in the first place, so deciding to sell it was just correcting a prior error. But for IBM, the loss of IBM PC massively reduced IBM’s brand strength and visibility and broke IBM’s end-to-end solution capability, thereby allowing companies like Dell to eclipse it. At one time, IBM’s brand was on most desktops, but once PCs were gone, this visibility dropped off, and with it, the consideration people would have otherwise given IBM as a solutions provider.

Losing x86 servers dropped IBM out of the general server market, again lowering IBM’s visibility and its ability to provide the comprehensive solution that defined its prior success. So, each of these sales had two consequential damages: they weakened IBM’s image which reduced their consideration for winning comprehensive contracts that once defined the company, and they positioned competitors like Dell and Lenovo as stronger comprehensive partners.

A Quick Dell Lesson

Even though Dell is arguably the best at acquisitions of any tech company due to an approach it got from IBM and improved on when it went after the smartphone market, Dell didn’t acquire a company like Motorola but tried to do it in-house, a strategy that failed. Then, instead of realizing its mistake and then buying into the market, Dell decided smartphones were a bridge too far and ended up watching Lenovo succeed with an inferior acquisition process where Dell failed.

Causal Analysis

What fascinates me is that when there is a failing unit, little effort is put into understanding why the unit is failing. In both the IBM PC Company’s and IBM x86 server business, the problem was the lack of focus on trying to understand why they were failing before concluding they couldn’t be saved. Part of this was undoubtedly the desire of the then IBM CEO Sam Palmisano to get a quick success rather than recover the unit, and this is a common problem with CEO compensation. CEO compensation is based largely on short-term financial performance, and selling a part of the company will almost always provide a far larger short-term financial benefit than recovering that asset. This isn’t only an IBM problem. It’s a shortcoming that spans industries.

A funny story that I didn’t think was funny at the time is that right up until the IBM PC Company was sold, I argued with the head of the unit that it looked like the then IBM CEO was going to sell them. He disagreed, arguing that the CEO was a friend and was invested in the company. On the day he finally convinced me I was wrong, IBM announced they were selling the unit. That was probably one of the biggest WTF moments in my life. Fate has a sick sense of humor.

The IBM Server business was a Cinderella unit, and that was the core problem. A Cinderella unit has a great deal of potential but is being under-resourced because a competing unit has a stronger corporate position. This often happens in complex companies between units and people. Those that are better connected see the unit as a rival and work inside the firm to cripple it, turning what otherwise would have been a greater success into a failure. I personally consider this to be corporate crime caused by boards that simply don’t understand how compensation works and can’t think strategically to save their lives. IBM’s board and leadership are operating far better today, but the firm is clearly still weakened from those past decisions that are nearly impossible to reverse.

Both acquisitions and divestitures should be strategic because they have long-term impacts on the company, yet too often, they are treated as tactical and thus end up doing more long-term damage than good. Executives seem to forget or ignore that divestitures breach trust, and once you lose a customer’s trust, retaining that customer becomes problematic.

Wrapping Up

It is rare for a corporate decision to be evaluated against the alternative path. Lenovo has showcased that several of Sam Palmisano’s, the CEO who decided to divest, decisions were tactical in nature and crippled IBM’s image and made sure IBM could never grow to the same level of power and control that it once had. This isn’t just a lesson for IBM or Dell but for every company that hasn’t thought through executive compensation and doesn’t make critical decisions based on analysis and reviewing the potential consequential damages of the decision. One of those potential outcomes is the increasing potential for Lenovo to buy IBM, which, ironically, would almost instantly put Lenovo where IBM once was as the most dominant technology company in the world, though Lenovo is on a path that may result in that same outcome.

One final thought: so much of this surrounds the job of the CEO. Lenovo’s CEO Yang Yuanqing showcases how a CEO should behave and make decisions. Make them strategic and assure execution in contrast to how CEOs too often make decisions tactically and to optimize their compensation. It is easy to suggest too many CEOs are too focused on personal status and compensation, and too few are focused on the long-term success of the company, their employees, and customers. But that isn’t just a CEO problem. It is a board problem, and it showcases that too many boards aren’t doing their jobs in terms of selecting the right CEO and then building a compensation plan that rewards strategic thinking instead of tactical thinking. Too often, boards just rubber-stamp what their CEOs decide after picking the wrong CEO to run the company in the first place. Until that changes, companies like Lenovo will be the exception, and companies that strategically cripple themselves will be the rule. I’d like to recognize Lenovo’s board as a symbol of excellent corporate governance.

Stronger Simulations

Now, I’d have typically ended with the last paragraph, but we have a new toolset available to us in AI and advanced simulations. One of the reasons why tactical decisions are made at the expense of strategic imperatives is because the alternate path may never be visible, so the quality of the decision can’t be assessed. This comparison between Lenovo and IBM had it been seen prior to the divestiture decisions being made, might have driven the IBM board to block the decisions for IBM’s greater good and put resources into correcting rather than divesting the units.

With AI and simulation, we are approaching a time when we can look at alternative decisions and get an increasingly accurate view of the resulting outcomes. If boards look at CEO decisions and have them independently analyzed and then use that analysis to better direct the CEO, I think we can create more companies that enjoy Lenovo’s level of success.

We are creating technology that could allow boards to better protect and grow the companies they are supposed to manage and step up to do the job that Lenovo’s board appears to be doing. I expect the firms that figure out how to do this first will leave those that don’t in the dust rather quickly. Sadly, this isn’t where AI technology is now focused, but perhaps shifting that focus, particularly for companies that sell this technology, could better assure the long-term careers of their employees, their customer relationships, and the eventual success of their companies.

Given IBM has Watson x, the most powerful enterprise LLM (Large Language Model) in the world, wouldn’t it be ironic if they used that tool to assure the leadership concepts of employee care, customer focus, pragmatic leadership, and focus that Thomas Watson Jr. exemplified remained with the company forever? And offered to IBM customers, this kind of tool could be used to assure and help every CEO, particularly those who are out of their depth (another common problem), reach the level of excellence that Thomas Watson Jr. once enjoyed. Not only would that be good for IBM, but it would also make the world a better place. You talk about your killer app.