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Since Digital Equipment Corp. founder (and MIT alumnus) Ken Olsen died earlier this month at 84, much has been written about him and the computer company he cofounded.
The story of Digital Equipment Corp. (DEC) was one of a dramatic rise and fall: DEC was an entrepreneurial computer company that grew to $14 billion in sales and employed an estimated 130,000 people worldwide at one point. But Digital failed to adapt successfully after the personal computer eroded its minicomputer market.
Eventually, Compaq Computer bought DEC in 1998, and then Hewlett-Packard later acquired Compaq.
What have we learned from Digital Equipment Corp.’s experience? Here are three management lessons from DEC’s rise and fall:
1. Watch out for disruptive innovations. DEC’s troubles helped inspire Harvard Business School professor Clayton Christensen to develop his now well-known ideas about disruptive innovation. According to an article in Strategy+Business, watching the problems of Digital and other minicomputer companies in the late 1980s got Christensen thinking about disruptive technology.
Today, Christensen’s ideas are well-known –and managers in established companies as a result have a much better awareness of the potential for disruptive innovation to affect their businesses. Here’s how Christensen put it in a 2009 interview in MIT Sloan Management Review :
“Every disruption has three components to it: a technological enabler, a business model innovation and a new commercial ecosystem. In computing, the technological enabler of disruption in computing was the microprocessor. It so simplified the design of a computer that Steve Wozniak and Steve Jobs could just slap one together in a garage. It transformed the industry’s fundamental technological problem—the design of a computer—from a problem that took hundreds of people several years to solve into one that was much simpler.
Then that simplifying technology had to be married with a business model that could take the technology into the market in a cost-effective and convenient way. Digital Equipment Corp. had microprocessor technology, but its business model could not profitably sell a computer for less than $50,000. The technology trapped in a high-cost business model had no impact on the world, and in fact, the world ultimately killed Digital. But IBM Corp., with the very same processors at its disposal, set up a different business model in Florida that could make money at a $2,000 price point and 20% gross margins—and changed the world. It’s a combination of the technology and business model that makes formerly complicated, expensive, inaccessible things affordable and accessible.”
2. Even a “culture of innovation” can become dysfunctional as markets change. Edgar Schein, a professor emeritus at the MIT Sloan School of Management and an expert on organizational culture, analyzed DEC’s rise and fall throught the lens of corporate culture in a book he coauthored in 2003 called “DEC is Dead, Long Live DEC: The Lasting Legacy of Digital Equipment Corp.” As I wrote in a book review of “DEC is Dead, Long Live DEC” that was published in The Boston Globe in 2003 :
“Schein credits Olsen with creating a ‘culture of innovation’ that empowered employees and was characterized by expressly stated values such as ‘Do the right thing,’ an oft-cited maxim. But, Schein argues, as DEC grew bigger, the values and culture that helped it thrive as a younger, smaller organization led to an environment that ‘felt more and more chaotic and out of control.’
What’s more, DEC’s culture, which had flourished during the heyday of minicomputers, had a hard time accomodating the computer industry’s paradigm shift to the personal computer….
Schein argues that a corporation’s founding values, if they lead to success, tend to ossify as a set of tacit assumptions about successful strategy. When the business environment shifts, the organization may not be able to adapt, rejecting plans or ideas that don’t fit its preconceived notions. ‘The illusion that organizations can control their own fate stems from the failure to understand how technology and culture limit what is possible,’ he writes.”
Also, Paul Kampas, who was one of the coauthors of “DEC is Dead, Long Live DEC,” wrote a 2003 MIT Sloan Management Review article, based on his research about DEC and the computer industry, that argued that technology-driven companies need to shift from a product-innovation culture to a process-innovation culture as their markets mature.
3. In an age when companies come and go, one of an executive’s most lasting legacies may be how he treats people.
Despite Digital’s decline, many former employees remember Olsen fondly. As one former DEC employee told the Worcester Telegram & Gazette in a recent article on Olsen’s influence: “I feel indebted because it was the golden era of corporate culture done right, and this was all Ken Olsen’s values.”
“Ken Olsen…was certainly a titan in the computer industry. But he was also a personal titan to most of the employees at the company he co-founded in Maynard, Digital Equipment Corp. They knew Olsen for his humility and the culture of fun and excitement he created.”
It kind of makes you wonder: How many current Fortune 500 executives will be remembered fondly by their former employees?