Walls, Windmills & The Winds of Change: Part I

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Navigating Change

When the winds of change blow, some build walls, others windmills. What does this proverb mean for the modern organization? Are walls always bad? Are windmills always good? How can organizations navigate change? Read our analysis of IBM’s successful turnaround to find out more.

In a Nutshell

When the winds of change blow, some build walls, others windmills.

This proverb provides an ‘either/or’ view of the walls and windmills allegory for navigating change. However, our analysis of IBM’s successful turnaround in the 1990s suggests that organizations must follow the following Principles for Navigating Change

  • Build walls AND windmills — harness change on the back of a reliable core;
  • Build the RIGHT walls — identify your future-fit competencies; protect them;
  • Build the RIGHT windmills — distinguish discontinuities from fads to place bets

We have also identified archetypes of organizations that build walls and organizations that engineer windmills when faced with change. We will continue to develop these takeaways and archetypes into an actionable framework. Your builds and feedback are welcome!


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Principles for Navigating Change

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Big Blues

The future of IBM looked bleak.

The world was a little less than a decade away from the dawn of the new millennium. The doomsday prophets had declared that the company was finished for all intents and purposes. In their book, the Computer Wars, Charles R. Morris and Charles H. Ferguson had likened IBM to the brontosaurus, a gigantic dinosaur. They wrote of its situation —

The brontosaurus moved deeper into the swamps when the mammals took over the forests, but one day it ran out of swamps.

Charles R. Morris and Charles H. Ferguson, Computer Wars

IBM’s nimble competitors were rapidly drawing down the curtains on what was indeed an American icon. Here was a company that had invented or perfected some of the most revolutionary technologies powering the computing world. But, if the pundits were right, time was nigh for the brontosaurus to go extinct.

You couldn’t fault them for the prophecies. The computer industry was changing, and, to most observers, IBM looked ill-suited for the new age. Three shifts characterized this era —

ONE: From centralized, Mainframe Computing to distributed, Personal Computing (PC)

IBM was a Mainframe company in a PC world, and its core business was under attack from underpriced competitors like Hitachi and Amdahl. Its Mainframe revenues had halved between 1990 and 1993, and the company had racked up combined losses of $16 billion. Its perch atop the computing edifice was under threat.

Opposed to this, players like Apple and Microsoft had disrupted the industry with their focus on PC. Increasingly the industry experts and IBM insiders believed that the “Mainframe was dead” and it would be prudent for IBM to devote “its resources to winning the PC war” with these companies.

TWO: From Vertical Integration to Pure-Play Revolution
IBM had pioneered a business model based on vertical integration of hardware and software, and it had made a killing using this model in the preceding decades. More than anything, this strategy was borne out of necessity.

IBM had ushered in the digital age in the 1950s. The value chains critical to its cutting-edge products had to be developed from the ground up. It was a risky enterprise because these peripheral industries didn’t yet exist. Instead of relegating the task to someone else and risk slowing down innovation, IBM placed the bets itself. Then, for years, those investments paid off.

But in the late 1980s, as digital technologies became cheaper and more common, players like Sun and HP were challenging the Vertical Integration model. These companies focused on specific slices of the pie like Computer Hardware, Operating Systems, or Application Software — the links in the value chain where they had core competencies and scale. As a result, the industry was fragmenting, fast.

IBM’s leadership had devised a plan. They would save the company by killing it — sawing it off into small semi-autonomous chunks of growing businesses, dubbed the Baby Blues. It was an embrace of the pure-play model, an acknowledgment of the increasing fragmentation of the industry, and the ever-increasing complexity of managing a behemoth like IBM.

THREE: The Internet

A third force was in the mix. Tim Berners-Lee had invented the World Wide Web in 1989. After years, if not decades, of incubation in various laboratories and basements, The Internet had finally arrived.

It wasn’t mainstream yet, which explained the lack of a concrete commercial point of view on it within IBM. However, the signs of change were unmistakable. General-purpose websites were becoming increasingly available, breaking the phenomenon out of its academic walls. It was a matter of time before The Internet rained down upon the world with full force.

These three shifts landed IBM (and others) in the midst of a perfect storm. The winds of change were blowing, and IBM was faltering, fighting a two-front war in the brave new world of the internet.

Big Blue wasn’t ready.

Four Blue Walls

As late as January 1993, John Akers, IBM’s Chairman at the time, had emphasized a turnaround strategy focused on “reallocating resources to growth businesses, increasing the autonomy of our businesses, and reducing costs.” That’s corporate-speak for killing the Mainframe in favor of the PC and software, spinning off specialized chunks of IBM, and laying off people.

This strategy hit a brick wall in the form of Louis V. Gerstner Jr. — the man brought in to resuscitate IBM in April 1993.

In a past life, Gerstner had been the President of American Express. He was responsible for a 17% CAGR, for over a decade, at American Express’s largest subsidiary. Under him, the company had quadrupled the number of cards it issued and had built several new businesses. Then, he had moved on to RJR Nabisco, the well-chronicled offspring of a leveraged buyout, in 1989 as its CEO. Now he was tasked with saving IBM.

By the time IBM declared its second-quarter results in July 1993, he had decided on specific actions that were a near-complete reversal of Akers’ position from six months ago. I reproduce these actions verbatim from his memoir — the immensely readable Who Says Elephants Can’t Dance?

  1. Keep the company together and NOT spin off the pieces
  2. Reinvest in the Mainframe
  3. Remain in the core semiconductor technology business
  4. Protect the fundamental R&D budget

Organizational psychologists would have called these actions cognitive entrenchment, an escalation of commitment to what felt like losing causes. Pundits would have dismissed his strategy as more of the same even as the market evolved.

It seemed that instead of harnessing the winds of change by building windmills, Gerstner was locking IBM in by building walls.

Was IBM embracing rigidity under pressure? Was it regressing to what it knew best, even in the face of tectonic shifts in the technology sector? Was Gerstner burying his head in the sand, ignoring the unmistakable signals from the industry?

In reality, it all depends on what a wall represents, what a windmill means, and what you know. Context is king. Framing is everything. Let’s take an aside to understand what I mean before we follow IBM’s trail further.

Splitting Hairs

When the winds of change blow, some build walls, others windmills.

A Chinese proverb?

It is a powerful statement. Part of its power comes from the imagery we conjure as soon as we hear it and the associations that it triggers in our minds.

But a lot of its power comes from the way it is structured, framed as an ‘either/or’ choice. Some [people] build walls; others build windmills. So, based on the associations triggered, is it safety OR opportunity? Worse, is it a choice between ‘disconnect and isolation’ OR ’embrace and transformation’?

That colors the interpretation, especially in today’s climate. Memories of Donald Trump’s machinations about building walls in a world filled with them don’t help either.

I especially feel that the use of the analogy of windmills skews the meaning further. Experiences with winds, changes, and walls can be both positive and negative. However, land rights, accidents, and such notwithstanding, windmills have a primarily positive vibe, even without the inevitable association with sustainability. They are structures that use a force of nature instead of succumbing to it. What’s more, common wisdom suggests that the faster the wind, the more power a windmill generates.

Maybe you kept an open mind when you first came across this statement. When I first read this proverb, I was inclined to pick building windmills. I am an optimist and an adventurer, so that interpretation, harnessing change, made sense. Walls represented overprotection and loss of freedom. So I shunned them when I started thinking about the adage.

Then, as I dug deeper to understand the proverb’s claimed Chinese roots, I thought, what if the original ‘windmill’ was actually a prayer wheel, and it only came to be a windmill by way of translation?

Prayer Wheels

I am not privy to the source of this proverb, nor do I speak or understand any Chinese dialects. But if my prayer wheel theory were correct, that would completely invert the saying. When the winds of change blow, some take action to build walls to protect their [insert things worth preserving — e.g., values, virtues]. Others make prayer wheels, leaving their fate to the gods.

Context is king. Framing is everything.

At this point, if you are thinking I am nitpicking, you are right.

I AM splitting hairs. That is the stated purpose of this post. I believe words are important; not only do they codify knowledge, but they can also trigger actions. And words and actions shape our brains. What’s more, so many sound-bites, proverbs, and mantras get thrown around in management to shake organizations into action that it behooves us to set our analogies right.

Walls do not always stand for rigidity, division, and isolation. As we will see, they can also stand for preservation, for protecting your core and keeping what works. And windmills are not always about harnessing winds. They don’t keep on generating more power indefinitely as winds gather speed. In reality, windmills stop at a cut-out speed to avoid damage to equipment.

Arbitrary power curve of a 1 MW wind turbine compared to wind speed. Notice the cut out speed. Source

So, what type of walls was Gerstner building? And what about windmills? Let’s find out.

Of Walls & Windmills

It seemed like Gerstner was building walls with his strategic actions. Whether that’s a valid view depends on what a wall represents, what a windmill means, and what you know. Let me start with what you know and confess.

Gerstner had decided on five, not four, vital strategic actions. His fifth action, reproduced verbatim, was this —

  1. Drive all we did from the customer back and turn IBM into a market-driven rather than an internally focused, process-driven enterprise.

That’s quite a mouthful, but it is also a veritable manifesto for building windmills (not prayer wheels) in that it embraced the need to change IBM in two ways —

ONE: Listen to the customer

The company had forgotten to heed its customers over the years of its successful monopoly. Its systems had become apathetic at best and antagonistic at worst.

One time, during Gerstner’s stint at American Express, when one of his division managers installed a non-IBM computer in a data center previously equipped by IBM, the IBM sales representative threatened to withdraw all customer support. American Express was one of IBM’s biggest customers. Now, as customers had options, the company had to start listening or risk attrition.

TWO: Sense the market
It is self-explanatory but imperative. The ‘market-driven’ paradigm makes the four other strategic actions look like windmills in the making in that they represented an investment in IBM’s capability to build for the future. How? Let’s look back at the first four actions —

Keeping the company together and NOT spinning off the pieces allowed IBM to act as an integrator of disparate technologies emerging from different quarters under the pure-play model. Someone had to put things together for the customers in an increasingly fragmenting industry. IBM could use its expertise across the technology spectrum to do exactly that while also competing with the pure players.

Reinvesting in the Mainframe strengthened an IBM product line that accounted for 90% of its profit. That would provide stability to the rest of the company as it looked for ways to navigate the future. It would also ensure that IBM remained viable to support the IT infrastructure of the back offices across ALL industries — something that was unlikely to move entirely to the PCs.

Gerstner argued that the internet will come to dominate the industry. A connected world will drive increased computing workloads that would need support from large-scale systems, like the Mainframes.

Remaining in the core semiconductor technology business, created to supply IBM’s Mainframe business, allowed IBM to serve the other hardware manufacturers by supplying components or licensing technology. It opened a brand new revenue stream for the company, something Gerstner dubbed the ‘Company Store.’

IBM also bet that many tasks that the PCs were built to do will be performed within the network in a connected world. That would allow for all kinds of devices to connect to the internet, and the one thing common to all these devices would be their brains — semiconductor chips. It was incredibly prescient. Remember we are talking about the mid-1990s

Protecting the fundamental R&D budget helped the Company Store through licensing, bringing in revenues. However, it also served a more important purpose — inventing the future (arguably the best way to predict it). Akers, Gerstner’s predecessor, had told him that IBM’s R&D organization was not affordable, that it needed cuts. Gerstner had other ideas.

From the discussions above, a few things stand out about the turnaround strategy Gerstner deployed as the winds of change blew —

ONE: Build walls AND windmills
Gerstner built walls to preserve IBM’s core strengths. He then built windmills on the strength of those walls. Walls and Windmills are not either/or choices. You have got to consider them in tandem or risk becoming a leaf in the storm, or an uprooted tree. When I worked at Unilever, we roughly categorized our portfolio as Core and Future Core. It was the same future-based logic.

TWO: … but build the RIGHT walls and windmills
Gerstner and his team had considered the implications of the three tectonic shifts in the industry I mentioned earlier. The world they imagined armed them with a single powerful insight. In his book, Gerstner admits that his insight it wasn’t as crisp at the time as I state it here, but it was supported by solid evidence — IBM’s core was fit for the future [The Walls]. It helped them focus on how, and not if, this core will help them generate revenue [The Windmills].

It was a radically different take on IBM’s business. That is what happens when you are armed with insight. It fundamentally alters the way you look at the world and your situation in it. What’s more, an insight can fuel a thousand ideas. But that is the subject of a different pumpkingram, something we will tackle in a dedicated post in the coming weeks. Right now, let’s bring this IBM story to its fitting conclusion.

Gerstner succeeded in turning IBM around. By his own admission in 2002, after he stepped down from IBM leadership, the five strategic actions he determined, the walls and the windmills, “were extraordinarily significant in the turnaround of IBM.”

Gerstner joined as CEO in April 1993

I will leave the metrics measuring his success for you to deep-dive into. IBM’s 2001 Annual Report, the last one issued under Gerstner’s leadership, makes for a singularly interesting read. If you don’t read it cover to cover, you should at least read his letter to the shareholders.

A Model for Change

Naturally, at this stage, we all have questions.

What are the implications of the maxim of walls and windmills for the world at large? Build the RIGHT walls AND windmills sounds nifty and crisp, but it doesn’t provide anything specific beyond the example of IBM. What does it really mean? Are there other examples that fit this narrative or disprove it? And is this narrative really actionable?

We, at The Strategist, are actively exploring these questions. One of our six keystone exploration areas is Playbooks — frameworks, checklists, and resources to aid your thinking. Under this, we will keep building on an actionable framework for navigating change.

For now, I want to leave you with the lessons distilled from IBM and two things to think about until we return with builds on this in a few weeks —

First, the story of Apple’s turnaround once Steve Jobs returned in 1997 (yes, it has a wall and many windmills);

Second, the visuals below — the archetypes of wall builders and windmill engineers that draw upon the different interpretations of walls and windmills. Now you know why we were splitting hairs a while back.

See you soon!