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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.