Failure, as we pointed out last week, is the norm in business. Of the top 100 firms in the United States in 1912, by 1998, 29 had gone bankrupt, 48 had disappeared, and a mere 19 still occupied positions in the top 100. This is not a bad thing, per se – in fact it could be argued we need failure, in just the same way that biological evolution needs failure. Think of it this way, before evolution threw up the cat called the leopard, there was a myriad of different mutations, countless experiments – before natural selection finally came up with Africa’s spotted big cat. Without the failures there couldn’t have been successes.
The same idea applies to economics too. If Keynes has a rival to his epitaph of greatest economist of the 20th century – then his rival’s name is Joseph Schumpeter, who, among his many ideas, promoted the concept of creative destruction.
In fact, Mr Schumpeter went a little further – he coined the phrase “gales of creative destruction” – we need new ideas, new experiments – most of which will fail; we need new ideas that will lead to the failure of old and established ideas, in order to move forward.
But it seems reasonable to assume that companies operating in technology, will see a gale of creative destruction blow like no business wind has blown before. It will be even harder, one assumes, for the big technology giants to survive for more than a few decades, than it was for the corporate giants of yesteryear to survive the trials of the 20th century.
The most spectacular fall from grace was the East India company – the world’s largest business in the 18th century – yet in 1873, it went out of business.
Which mega companies operating today could go the way of the East India company? It seems certain the world of technology will see spectacular failures – the big question then, must be, will Microsoft be such a company?
Last week, Microsoft announced it was to open up the source code on some of its software. It was an important announcement. Of course, there is no shortage of cynics. For the boys and girls who develop in the arena of open source software, the Linux brigade, Microsoft is an evil empire – and anything it does will be met with derision.
And it is true to say that the Microsoft move doesn’t go that far. It will mean that third party developers will be able to view the source code that allows different Microsoft tools to communicate with each other – so, theoretically then, it will make it easier for third parties to ensure their products are compatible with Microsoft products.
Was this a Road to Damascus conversion – is Microsoft seeing the light and set to join the world of open source software – or was it merely trying to placate EU regulators?
Maybe the answer is that Microsoft was doing both – and is doing a lot more besides, because in order to survive moving forward, the company has to experiment. It has to ensure gales of creative destruction run through the business, all the way through, because if it doesn’t, the firm will go the way of the smilodon.
Just for a moment, consider how Microsoft came to dominate the world with its Windows applications.
In 1987 the company had a massive dilemma. It had enjoyed a good run, thanks to DOS, but the world was ready for change, and the industry was alive with competitors, many much larger than Microsoft, wanting a slice of the action.
Eric Beinhocker tells the story well in his book “the Origin of Wealth.” “We can imagine the options that Microsoft faced at this point,” he says. “Option one, Gates could make an enormous ‘bet the company’ gamble by building a new operating system called Windows and attempt to migrate his base of DOS users to the new standard, ideally before a competitor would reach critical mass with its own system. Option two, he could exit the operating system part of the market, cede that to his larger, better-funded competitors, and instead focus on applications for which Microsoft’s small size and nimbleness might be more of an advantage. Or option three, he could sell the company or otherwise team up with one of his many competitors.
“The conventional wisdom is Gates chose option one, and the big bet paid off…. But that is not what happened. What Gates and his team did was much more interesting – they simultaneously pursued six strategic experiments.”
In fact, Microsoft put more resources into DOS, it entered into a relationship with IBM for the development of OS/2, it held discussions with third parties for products aimed at the Unix market, it bought a big stake in a seller of Unix systems, created software for the Apple market, and of course invested in Windows.
At the time, the company was lambasted in the press for being inconsistent – for having no strategy – in reality it was just opening itself up to internal gales of creative destruction.
Now it faces a similar challenge. Should it continue to experiment? Windows was, for many people similar to the Apple system of that time – maybe, then, we should take a look at what Apple is doing now. The latest all-singing and dancing Apple product is called Leopard – maybe it needs to change the spots on the software a tad, and produce its own version.
Of maybe it should act like a venture capital firm – sitting there, with its huge pool of resources and user base, wait for the next big idea and dive in, use its muscle, and buy the idea?
One thing is for sure – more than one idea is required. Maybe Microsoft does need to change its habit of a lifetime and move out of proprietary software – to change, as it were, its spots.
Maybe, though, the answer is something else.
To survive, Microsoft must change its spots, keep them, grow a mane, a long neck, and learn to hunt in packs – all at the same time. One of those strategies will work, it is just not certain which one.
