Eiríks saga rauða (Saga of Eric the Red) Icelandic manuscript (17th century)
In Murder, Starvation and Catastrophe, I drew a line to connect the historical behavior of doomed societies with the business performance of large enterprises. One of the most compelling of Jared Diamond’s stories is the saga of Eric the Red, the 10th Century Viking who founded Greenland. The preposterously named colony was eventually home to 10,000 Norse settlers who were perhaps fooled by the name into thinking they were heading off to some sort of North Sea resort for Vikings. The story of Eric the Red is a parable for how the human factor in WWC promotes or stifles innovation.
Eric was a scoundrel. A suspected murderer, he fled Norway for Iceland around 980 AD. It was a short, but violent, stay. He was ejected from Iceland, and, sailing west, discovered an island of fjords, glaciers and grasslands. He returned to Iceland long enough to kill a few people and recruit an expedition of 25 ships to build a settlement on Greenland. Despite their violent beginnings, the Greenland settlers established a farming economy and a humane society, including a government that provided for the poor in times of scarce crop production. The Viking settlers had sporadic wars with the Inuit natives, but apparently flourished for hundreds of years until sometime in the early 1400’s when they just disappeared.
It was one of the great anthropological mysteries of all time: how could fierce competitors — apparently successful in a new environment that was not much different than the one they left behind – suddenly fail so catastrophically that their entire society was wiped out in only a few years? When archaeologists excavated the Greenland settlements, they found the usual trash of human civilization: tools, debris, the remains of livestock, and garbage from cooking. But they found no fish bones. The Norse Greenlanders were expert seafarers who lived in the world’s richest fishing waters and inexplicably starved to death because they did not eat fish.
The Vikings brought with them the culture and preferences from home. They brought food: pigs, cows, goats, and sheep. The Norse knew how to grow crops in cold climates, so they planted crops like barley, oats, wheat, rye, cabbage, onions and peas. They hunted seal for food and traded walrus ivory with Europe for material not available on the island.
By 1400, demand for ivory, polar bears, and other luxuries from Greenland fell. Black Plague had wiped out nearly half of Europe’s population. The Crusades opened new sources of ivory and spices to the now smaller market in Europe. The early 1400’s also marked the beginning of the Little Ice Age, blocking natural water inlets and delaying the arrival of migratory seals. Deforestation left Greenlanders short on lumber, fuel, and iron. Climate change and poor crop rotation led to crop failure, so the settlers consumed pigs, cows, and sheep to the point of extinction.
They had cultural inhibitions. They did not eat their pets, for example. They could have learned to hunt fish from and traded with the Inuits, but the Norse regarded the natives as pagans. Greenlanders were Norse, and they thought of themselves as dairy farmers. When Eric the Red founded Greenland, it was uncharacteristically temperate — a special time when their cultural preferences led to success. They relied on past behavior and — when the climate changed, relations with friends and enemies faltered, and their environment was damaged — they starved to death.
15th Century Greenland has something in common with IBM in 1980: a belief that historically successful behavior will succeed in the future. The Norse preference for pigs and cows required them to dedicate more time and grazing land to those animals than to the heartier goats and sheep. Their Euro-centrism prevented them from learning from and adopting the eating habits of “pagan savages.” The thinking appears to be that their lifestyle was successful in Norway, so there’s no reason it shouldn’t be successful in Greenland. On the other hand the Norse settlers were not great innovators.
Thomas Watson Sr, understood the role that innovation would play in the company’s future. He opened IBM’s first dedicated research center next to Columbia University in 1945 and the results were immediate, spectacular innovations including time sharing and magnetic core memories. Thomas Watson, thinking it was too risky to continue having its research done in the relative open environment of a joint university lab, and using Bell Labs as a model, established dedicated corporate research labs in New York and Zurich. This ushered in a golden age for IBM. By any measure of success—sales, market cap, profits, patents, R&D budget—IBM, and in many ways, defined the industry.
Then came the 1980’s and its disruptive changes to the computer industry. These changes were not kind to IBM and in 1992 the company reported the single largest annual loss in U.S. corporate history to that point: $4.96 billion after taxes.
How did this happen? Unlike the Greenlanders’ demise, this one isn’t a great mystery. The Watsons believed fervently that doing the things that had made IBM a great corporation would make it successful in the future. IBM knew how to profitably sell computers and to whom. After all, they defined the industry. There is a widely known internal 5-year forecast of worldwide PC sales that shows shipments peaking at less than 80,000 units in 1983 before settling into a comfortable rate of 40,000 per year by 1987. Less than 250,000 over the five year period. 5% to business customers who would continue to rely on IBM mainframes. In fact, over a million PC’s were sold by 1985. The industry was in the midst of explosive change and not only did IBM did not recognize it but they believed that past success was a predictor of future success.
But by 1982 it was all over. If IBM had recognized the value of the PC, they would have kept it proprietary and the computer industry would have developed very differently. Without its IBM licensing deal, Microsoft would have withered early. Intel would be a niche player.
IBM, Xerox, AT&T, and Nortel were all innovative companies. They hired the best and brightest – and there was low employer mobility since after all how many places were there for a computer science PhD to work? The IBM Research Lab in Yorktown Heights developed and incubated products in the historically successful vertical way. The barriers to entry for IBM’s competitors (especially the small ones like Compaq and DEC) were huge. How could a small competitor build a direct sales network to rival the famed Xerox sales force? What did an academic startup like Cisco, aimed at the tiny data network market, have to do with the output Bell Labs or the market clout of Nortel?
This is how innovation looked at the end of the last century. It is too easy to draw conclusions about why old models stumble. An apparently obvious lesson from the story of Erick the Red is that the Little Ice Age caused the Vikings to die off in Greenland. Current conventional wisdom is that the technology giants stumbled because they were too old or rigid or bloated to compete smaller, nimbler competitors who were themselves innovating although in very different ways. Actually neither is really true.
It is simply built into the fabric of innovation that the marketplace is an environment – you have to adapt to it to survive. If people want low-cost computers then drive cost out of the manufacturing process and learn to prosper on thinner margins. There are occasionally companies that try to change the environment. Hewlett-Packard grew for 60 years on a simple business model: innovate to create a product category and ride market growth until the margins shrink. Then exit. The ink jet printer is such a product — and there is much discussion in HP about exit strategies for ink jet printing. So was the hand-held calculator. Most companies cannot imitate those successes. HP eventually faltered when it tried large scale environmental engineering with its failed acquisition of PWC and the gut-wrenching merger with Compaq.
So, if adjusting to the environment is the answer, why didn’t the Greenlanders just start eating fish? The Greenlanders damaged their environment through poor livestock selection, clear-cutting forests and poor crop-rotation. There was significant climate change brought on by the Little Ice Age. The Inuit qualify as hostile neighbors. They had friendly trade partners for many years, but eventually lost them. But above all, the Norse Greenlanders’ response to these factors was culturally based. They didn’t eat fish because it was not viewed as a reasonable option in their culture.
Innovation is frittered away because it is not viewed as a reasonable option in a company’s culture. The structure of leadership accounts for a lot in determining the role that culture plays. Distant, authoritarian, decision-making tends to rely excessively on the past as a predictor of the future. Microsoft’s Steve Ballmer said as much in a 2008 speech at the Stanford Graduate School of Business:
One of the biggest mistakes I’ve made over time…is not wanting to nurture innovations where I either didn’t get the business model or we didn’t have it.
Examples abound. The HP Jornada™ pocket PC could play MP3 music files before the iPod™ hit the market. But there was no HP music store. Running an online music store was not an HP competency. There is a certain — sometimes irrational — optimism that past success engenders in leaders at the precipice. When Mike Zafirovsky took over as CEO of Nortel Networks in late 2005, it was a company on the brink of failure. Massive layoffs had decimated the iconic Canadian company. In early 2006, I was escorted for the last time through its cavernous Toronto facility — a building laid out as a city with streets and parks — just before it was shut down. All you could hear was the click of heels reverberating down the empty faux boulevards. Mike Zafirovsky wanted to communicate his energy and sense of the future to the demoralized employees who remained. His first email in December 2005 to Nortel employees defined the tone of his administration and sent the company down a path that emphasized execution of a plan that emphasized ideas that had worked before:
To Nortel employees,
Last Friday night, as I was flying back from a very productive trip to Europe following several customer and employee visits, I came across a newspaper article entitled “Optimism Puts Rose-Colored Tint in Glasses of Top Execs.” Included in the article were quotes like:
“99% of CEOs thought they could lead their companies from crisis;”
“Optimism is all about possibilities, change, hope…without those qualities, how can any leader succeed?;” and,
· “By definition, leaders are slightly delusional.”
My first reaction was to take exception to the word “slightly” . . . .
Seriously, the question of our confidence in ourselves—and as members of Team Nortel—is something I will begin discussing today and a topic I will continue to raise in the coming weeks and months. Confidence in ourselves and each other will be critical factors in how far and how fast we take this 110-year-old company..
I discussed with you in a previous letter our plans for the BIG initiative (Business Transformation, Integrity Renewal and Growth Imperatives), our new leadership values, and our focus on people that will be rolled out as part of Session I in the first quarter. In my first few weeks, I have also spent time evaluating our relative strengths and weaknesses and pinpointing areas for improvement.
…My strong take-aways and beliefs are that our positives are significant and difficult to replicate. At the same time, our challenges are also significant but, I would argue, very fixable. I don’t believe I am looking through rose-colored glasses, but rather have adopted what I describe as an attitude of “forceful optimism.” This is a mindset, a belief and an attitude that I expect from everyone at Nortel—a combination of positive anticipation for the future combined with a determined approach to maximize positive impact.
Forceful optimism is one of the 30 action attributes supporting our recently-defined Nortel leadership values. And as promised in my last letter to you, I worked with select members of the Leadership Edge program and cabinet members to finalize these attributes before year-end.
As a positive heads-up to the many people who were hoping to be on the Business Transformation teams, we will be kicking off the Six Sigma Quality Program in the first quarter, and there will be opportunities for involvement and leadership. We will be looking for Six Sigma champions and master black belt, black belt, and green-belt candidates (much more on this early next year).
The combination of the Business Transformation initiative and the Six Sigma Quality Program will improve the basic equation of our business, including higher customer satisfaction, simplified processes, lower cost-of-rework, fewer quality issues and lower costs for our products and business structure. And we’ll see teamwork inside the company improving as a result. We will continue the focus on forceful optimism, leadership and our people agenda by launching our Session I program in the first quarter. The programs and initiatives we deliver as part of Session I will ensure we are building strong leadership capability and bench strength across Nortel.
Lastly, and arguably most important for the long-term health of the business, here are my thoughts on customers and the Growth Imperatives, which you will be hearing much more on throughout 2006. I am meeting and speaking with an increasing number of our customers (e.g. the four largest European customers last week) and our go-to-market and product management teams, and I can’t wait to attend our global sales conferences in January. In my straightforward view, good, profitable growth is to a business as air and water are to flowers. We have much to build on and also much work to do, including how we develop meaningful value propositions for our customers. To this end, I am excited to report that we will be introducing our new business mission at the sales meetings. It will guide much of our behavior externally and internally, and keep the focus where it belongs—on our customers.
Let me wrap it up by saying how privileged and proud I am to be leading Nortel and to be working with all of you. I wish you and your loved ones a relaxing holiday and warm wishes for a healthy, happy, and prosperous 2006.
Thank you for all you are doing for Nortel.
Mike Zafirovsky is a capable senior executive, an alumnus of Jack Welch’s CEO boot camp at GE. He was part of a long string of strong leaders that Nortel recruited to put the company back on track. He could not have anticipated the Little Ice Age of late 2008, but by New Year 2006, Nortel was already hurtling toward disaster. Its stock was delisted and the company was shrinking. I asked Mike about industry changes, but he did not react. There was no sense of urgency at Nortel. There was a sense that the telecom equipment market was not an environment at all and that what really mattered was the company’s belief that its current direction would take them back from the edge: “a combination of positive anticipation for the future combined with a determined approach to maximize positive impact.”
In January 2009, Nortel filed for protection from its creditors. Its main businesses are being sold. When that is complete, it will cease operations. Zafirovsky stepped down as CEO in late 2009.
One of my first projects at Bellcore was to redefine its core software business for the emerging ISP and Cable markets. The climate was changing in the early 90’s. Bellcore sold operations support systems – a sort of ERP for telcos. A typical sale was in the $25-30M range and $100M deals were not unheard of. So we rolled up all the functions that we could think of – customer acquisition, provisioning, engineering, support – and came up with a product that we thought we could sell for $15M. When we showed the requirements to cable operators, they just shrugged. They were using Excel spreadsheets which cost them essentially nothing. Today, Bellcore — operating under the name Telcordia — leads in none of the operations support or business support markets that defined its core business in the 1990’s and is not even in the top ten in cable and ISP markets. What they really wanted help with were the services that they could sell to their customers. One of those services was search. Another was customer aggregation. Both were areas in which Bellcore had fundamental patents. One for the “seed” that underlies virtually all search engines today. The other for “recommender” technology that underlies all social networking. The search technology was given away to Excite. The recommender technology was assigned to MIT’s Media Lab and eventually became part of Amazon’s recommendation engine. We were not in the lightweight database business – although there were many smaller competitors who were. We were not in the search engine or social networking businesses, although we had friendly relations with companies that were and had many university collaborations. We were in the software business.