KEN OLSEN
Digital
Equipment Corporation (DEC)
Introduction
Ken Olsen co-founded the Digital Equipment Corporation
(DEC) in 1956. Under his leadership DEC invented
and the dominated the minicomputer industry for
over 30 years. DEC's success was an impressive technology
story and an impressive corporate culture story.
It was so impressive that in 1986 Fortune named
Olsen "America's most successful entrepreneur."
Five years later Olsen resigned under pressure,
the victim of DEC's sudden loss of competitiveness
due to changes in the market environment.
In spite of that unfortunate ending, Olsen's earlier
accomplishments earned him the continued respect
and admiration of those who worked for him and those
who followed DEC's history closely.
The
Founder's Background
Ken Olsen was born in Stratford,
Connecticut in 1926. His parents, Oswald and Elizabeth Olsen were second
generation Scandinavian immigrants (Norway and Sweden). Ken and his three siblings grew up in
a Norwegian working-class community. As an adult,
Ken came close to continuing the Scandinavian tradition
by marrying Eeva-Lisa Aulikki from Finland.
Ken's father was first a designer of machine tools
(He held several patents) and later a machine salesman
for Baird Machine Company in Stratford,
Connecticut. He had a shop in the basement at home where he taught
Ken and his two brothers the basic skills of the
trade. "Ken and Stan (Ken's
younger brother) spent hours down there, inventing
gadgets and repairing their neighbors' broken radios."
(Rifkin, p.27).
Ken's father was also, "a
fundamentalist by religion and a disciplinarian
by nature. He believed in puritan ethics, applied
to both life and work. He was known for advising
customers not to buy any machine from him that they
didn't really need. (Rifkin, p.27). At DEC many
years later, Ken insisted that the sales force not
try to sell customers a product that the customer
didn't really need.
Ken joined the United States Navy in 1944. He was
trained as an electronics technician. In 1947 he
left the Navy and enrolled in the engineering program
at the Massachusetts Institute of Technology ( MIT).
He received his bachelor's degree in electrical
engineering in 1950 and a master's degree in 1952.
(Baron, p. 269).
Ken joined the Park
Street Church after entering MIT. The minister,
Harold Ockenga, asked Olsen to take charge of the
Sunday School program. Olsen did so successfully
and in the process awakened a desire to manage.
Olsen had taken his Christianity seriously since
childhood. As an adult Christianity continued to
be Olsen's primary way of defining himself. That
showed up, among other ways, in his modest personal
lifestyle; in his active involvement in a Boston
area monthly prayer breakfast attended by 40 business
executives and in the focus of his charitable contributions
on Christian philanthropies (Petre,)
While studying fpr his master's degree Olsen was
one of 400 engineers hired to work on an MIT contract
with the U.S. government.
The MIT unit in charge was named Lincoln Laboratory.
MIT's task was to develop a core memory for the
proposed American air defense system called SAGE
(Semi-Automatic Ground Environment). Olsen was put
in charge of a 15 person team that designed a small
test computer. The team completed the job ahead
of time and Olsen gained recognition as an engineer
with management abilities.
The equipment designed by MIT under the SAGE contract
was to be manufactured by IBM. Olsen was assigned
the job of providing a smooth interface between
IBM and MIT. He operated out of an office at IBM.
Olsen found IBM to be frustratingly bureaucratic
in comparison with the entrepreneurial culture of
MIT's Lincoln Laboratory. And out of that frustration
came Olsen's inspirational vision of a business
opportunity.
The
Start-Up
It did not take long for Olsen to turn his vision
into a reality. He invited a Lincoln Laboratory
colleague, Harlan Anderson, to join him in starting
a new company. The plan was to produce for a new
niche in the computer industry - low cost, high
performance, interactive small computers for use
by scientists and engineers. The plan was presented
to a Boston
area venture capital company named American Research
and Development (ARD). ARD required Olsen and Anderson
to rework the business plan and then provided the
entrepreneurs with $70,000 in return for 70% of
the equity of the company. ARD recommended that
the word "computer"
not be used in the company's name because the impression
in the investment community at that time was that
nobody made money in the computer business. So the
founders chose the name Digital Equipment Corporation
(DEC).
ARD's decision to fund DEC came with the strong
support of General Georges Doriot, MIT management
professor and co-founder of ARD. As part of the
funding agreement Doriot assumed the responsibility
of advising Olsen during DEC's start-up period.
(Rifkin and Harrar, pp.32-34).
With start-up funds in hand Olsen and Anderson
leased office and manufacturing space in an old
textile mill in Maynard,
Massachusetts. They hired Olsen's
brother Stan as the third employee and officially
divided the work into three parts - Ken Olsen in
charge of design, Stan Olsen in charge of manufacturing
and Harlan Anderson in charge of administration.
But Ken Olsen was clearly the leader of the group
from the start and would soon come to be a dominant
leader.
DEC opened for business in 1957. That year they
made only printed circuit logic modules and memory
test equipment. The equipment was marketed to engineers
at universities and research labs. Olsen's first
love was engineering innovation and that would always
be the top priority at DEC while he was in charge.
But he also had an interest in and ability to produce
a profit. And so DEC made a small profit its very
first year.
Building components and equipment was no more than
preparation for the implementation of Olsen's primary
vision - creating a new niche in the computer industry.
That niche came to be called the mini-computer segment
of the computer market. It consisted of low price,
high performance machines sold to knowledgeable
customers (engineers and scientists) who did not
need a lot of software and hand-holding. (Chandler,
104-105). DEC’s first family of such computers was
known as the PDP line, PDP standing for Programmed
Data Processor.
The
Financial Story
DEC's financial performance was outstanding into
the late 1980s. Total revenue rose to $783.3 million
in fiscal year 1976 (ended July 1,1976) and $ 6.686
billion in fiscal 1986 (The year Olsen was named
"America's most successful entrepreneur"
by Fortune). Earnings per share rose at an
annual rate of 30 percent from 1972 to 1982 and
at a more modest annual average of 19.5 percent
from 1983 to 1988. Cash flow per share grew at a
rate of 31.5 percent from 1972 to 1982 and 20.5
percent from 1983 to 1988. The stock price rose
from a low of $3.30 in 1967 to a high of $199.5
in 1987 with a 3 for 1 stock split in 1969 , a 3
for 2 stock split in 1976 and a 100 percent dividend
in 1986 (Value Line).
By the 1980s international sales represented a
significant part of DEC's total. Foreign revenue
was already 38 percent of the total in 1981 and
rose to 49 percent in 1988 (Value Line). DEC's foreign
operations included both sales and manufacturing
facilities. Olsen's strategy abroad was to rely
heavily on local managers who would be more in tune
with unique local conditions.
Growth in revenue slowed significantly in 1989
and DEC responded with a voluntary severance plan
for manufacturing employees. It was a modest plan
offered to 700 employees at a time when the company
employed 125,800 people. In reporting this development
The Wall Street Journal hinted at the deeper
significance of this move by stating, "Like
International Business Machines Corp., Digital has
a long history of avoiding layoffs ... As growth
has slowed, profit margins have shrunk and the company
has sought to cut costs... As part of its reallocation
program, the company disclosed in June a plan to
shift as many as 4,000 manufacturing and administrative
workers to customer service and sales jobs in the
year ending July 1990."
( Wilke, 1989).
The situation worsened markedly in fiscal year
1990 and the last quarter , ending in June, produced
DEC's first loss in the company's history. That
was due both to a revenue decline (from $3.37 billion
to $3.49 billion) and a $400 million charge to pay
for retraining redundant workers and providing severance
pay for some 5,000 to 6,000 workers. For the entire
1990 fiscal year revenue fell to $74.4 million compared
with a net of $1.07 billion in 1989 (Bulkely,1990).
DEC reported losses for the next two years with
restructuring and downsizing costs being a major
factor. In fiscal year 1991 DEC incurred restructuring
costs of $1.1 billion (Wilke, 1992). By July of 1992
DEC under Olsen had reduced employment to 113,800
with plans to cut another 15,000. That same month
Olsen, 66 years old, and at risk of being fired
by the board, announced his retirement (Wilke, 1992).
Robert Palmer was named to replace Olsen and after
two more years of losses the company eked out positive
net income of $122 million in fiscal 1995. By then
employment had been cut to 61,000 people and 25
of DEC's 35 manufacturing plants had been closed
(Simons, 1995)
After 1995 DEC's financial performance was spotty
- a loss in 1996 followed by a profit in 1997. The
basic problem was that DEC no longer had a product
line that put the company in a strong competitive
position. Then, in June of 1998 Compaq Computer
bought the company for $9 billion and DEC ceased
to exist (Baron, p.283).
The
Technology Story
DEC's history is a story of innovation in the computer
industry. The original vision underlying that story
was Olsen's. But from 1960 on an equally important
source of DEC's technological vision came from Gordon
Bell. Chester Gordon Bell was pursuing his doctorate
in engineering at MIT when he decided to join DEC
as its second computer engineer. He "masterminded
virtually all DEC computers including the PDP-4,PDP-5,PDP-6
and PDP-9 before leaving for a sabbatical at Carnegie-Mellon
in 1966. He returned as vice president of engineering
in 1972." (Rifkin, p321).
His was the vision behind the successful development
of the PDP-11, the VAX line of computers, and DEC's
leadership in networking. He left the company for
a second time in 1983 but maintained a consulting
relationship.
The PDP Era
Several authors present good, short summaries of
the PDP era (Baron, Chandler,
Ferguson
and Morris). Here is the Ferguson
and Morris synopsis ( p.102):
| "DEC's PDP line
of computers were low-cost, high-performance
machines targeted at the academic and sophisticated
industrial market - users who didn't need or
want to pay for extensive soft-ware and support
services that came bundled with IBM products.
The PDP-6, introduced in 1964, beat IBM to market
with time-sharing - a single main computer could
support multiple simulta- neous users. DEC followed
up with a steady stream of improved PDPs; their
relatively low cost - about a fifth of the cost
of an IBM mainframe - and the time-sharing features
made PDPs the almost universal choice for school
and university computing... Then, in the late
1970s DEC broke with its PDP architecture and
introduced its powerful VAX line of minicomputers,
which made serious inroads at the low end of
IBM's commercial mainframe business." |
Elements of the rest of the story included the
following highlights. DEC introduced its first mini-computer
in 1959. It was names the PDP 1 (PDP stood for Programmed
Data Processor). The PDP 5 wich was introduced in
1963 was the first of the DEC's small general purpose
computers. The PDP-6, introduced 1964, enabled DEC
to beat IBM in the race to introduce time - sharing.
The PDO8 was introduced in 1965 and was the company's
first mass-produced minicomputer. It sold for $18,000
and was so small that it could be used as part of
other companies' products. Thirty to fifty percent
of the PDP 8s sold were bought by companies wich
then added their own attachments and sold the resulting
products as their own branded equipment (Chandler.
p. 104).
In 1964 the IBM System/360 was introduced. It used
an 8-bit word (one byte) and, because of IBM's dominance
in the industry, multiples of 8 became the industry
standard. DEC was selling 12 and 18 bit computers
and was suddenly at risk of losing leadership in
its segment as competitors adopted the IBM standard.
DEC immediately recognized the problem and started
work on a 16 bit minicomputer called the PDP-X.
But Olsen eventually decided to kill that project
. The head of the PDP-X project, Edson de Castro,
then left DEC to start a rival company, Data General,
in 1968. Data General then beat DEC to the market
with a 16 bit minicomputer.By the end of 1969 Data
General was threatening to overtake DEC as the minicomputer
industry leader.
The subsequent rivalry between Data General and
DEC made for an interesting contrast with the two
companies contrasting markedly in a number of ways.
Here is a peek at the contrast as colorfully described
by Bro Uttal in a 1979 issue of Fortune:
| "It is hard to
imagine two companies in the same line of work
that take such different views of business
than Digital Equipment Corporation and
Data General. D.E.C. is the Gentleman Jim of
minicomputers. It tends to be more solicitous
of its customers than of its own stockholders,
and it takes pride in treating employees
well. By contrast, Data General is rough and
tough... Neither customers nor employees
count as much with Data General as its
own financial record - and by most measures
that record far outclasses D.E.C.'s ..
D.E.C. is devoted to stimulating growth
by creating and supporting myriad new applications
of minicomputer technology... Data General,
in contrast, is devoted to efficiency...
With a much simpler product line and more straight-forward
organization, Data General has been able to
maintain a sharper focus on financial
performance... 'Data General is usually
the last company to come out with a new product.
But they design their machines for ungodly manufacturing
profits and allow for incredibly tight
control over costs... " |
Uttal adds two additional contrasts. One is DEC's
practice of measuring product line managers "chiefly
on how happy they make customers..If a manager has
met his financial goals but screwed the customer,
he's a loser." The second
is, " D.E.C's decision
to buck industry practice by paying its salesmen
straight salaries without commissions - and without
bonuses for exceeding quotas. D.E.C., says one sales
manager, wants the salesman to think more about
the customer than about his next meal. Salesmen
are encouraged to meet both the reasonable and the
unreasonable demand of users, and their performance
is also measured by customer satisfaction (determined
through an annual survey)".
DEC regained its competitiveness when it announced
the 16 bit PDP 11 in 1970. The product itself was
an important story, "
one of the most significant technical products introduced
in 1970" according to
Industrial Research (Rifkin and Harrar, p.
104). What made the PDP 11 so special was its increased
memory and processing power, its low price, its
ease of use, its elegance and the fact that it
was designed to span a range of performance (Rifkin
and Harrar, p., 103). "It
was a breakthrough machine built on a technology
that would far outlive and outperform expectations.
The PDP-11's simplicity and elegance quickly made
it an industry standard, a model for a generation
of computer designers. These engineers felt that
DEC taught the world how to build small computers."
(Rifkin and Harrar, p. 103).
The history of the PDP-11's development is also
an important story. (Rifken, p.103). It's a story
of the resourceful way in which DEC regrouped after
Edson de Castro left DEC and took with him much
of DEC's organizational capital with respect to
producing a competitive 16-bit computer. Here, in
part, is how Rifkin and Harrar tell that story (pp.
100-104):
| 1. |
Olsen asked Tom
Mazzarese to take charge of DEC's effort to
develop a 16-bit mini-computer. |
| 2. |
Mazzarese concluded that the
expertise and commitment to get the job done
quickly could not be found in the company. The
best engineers working on the PDP-X had left
DEC to join de Castro. And, "The product
line managers were pushing their own 12-and
18-bit machines into the market place. What,
they asked, is the hurry if or products are
selling so well?" |
| 3. |
With Olsen's blessing Mazzarese
violated the company policy of promoting from
within and recruited an experienced project
manager from RCA, Andy Knowles. |
| 4. |
Knowles joined DEC in December,1969
as product line manager for the PDP-11. His
assignment was to get the product designed,
introduced and into production within nine months
to a year.He was given line responsibility for
engineering and marketing of the machine. He
was also given profit and loss responsibility. |
| 5. |
Mazzarese also recruited Gordon
Bell to redesign the machine. Bell
was a professor at Carnegie-Mellon University at the time. With the help of his graduate students he came
up with a design that was, "just good enough
to beat Data General." |
| 6. |
"Knowles marshaled the
resources and went at completing the PDP-11
with a zeal that only a fresh newcomer could
summon. Mazzarese ran interference with Olsen,
keeping his probing eye away from the engineers
so they could get the job done." |
| 7. |
"The
PDP-11 scored big… (B)y 1972, DEC was back in
control of the minicomputer market from top
to bottom." |
The reference to running interference with Olsen
points to a widely reported aspect of the relationship
between Olsen and DEC's managers. (Find a quotation
to go here).
The PDP architecture had a long life. The PDP-8
and PDP-11 continued to sell briskly through the
1970s. But by the mid-1970s DEC was en route to
embracing a new architecture and strategy and the
VAX era could be clearly perceived by insiders.
The VAX Era
In 1977 DEC introduced the VAX 11/780 superminicomputer
. The first prototype rolled off the assembly line
on October 25,1977 (Rifkin, p. 175). This computer
was as powerful as the IBM 370 at one-fourth the
price (Baron). The VAX or Virtual Address Extension
represented a new computer architecture and a new
vision of the direction in which the computer industry
was going and a new strategy whereby DEC could lead
the industry in the new direction The new vision,
which came from Gordon Bell, was that of networking.
The new strategy, which also came from Bell,
was to focus on VAXes rather than continue to offer
a variety of computer platforms.
Bell had no problem selling Olsen on the VAX architecture.
"To the outside world
the VAX 11/780 was reestablishing DEC's supremacy
in the minicomputer market. Rivals who were making
strides against DEC's fleet of aging machines suddenly
faced a younger, heavyweight contender, and it had
the look of a champion."
(Rifkin, p.176).
Bell also found ready philosophical acceptance
of his vision of networking. It was the obvious
way to challenge IBM. While IBM continued to produce
a range of computers that were incompatible, DEC
would produce a range of computers that were compatible
and could work together in networks.
Bell did, however, have a problem convincing top
management, including Olsen, to adopt the new strategy
of focusing future marketing and development on
VAX machines. Bell's plans allowed for continued
production of existing products for which a significant
customer base already existed. But there would be
little or no new funds for enhancements of those
products and any new machine would have to be a
VAX. The VAX strategy involved the risks associated
with getting into areas where DEC did not have much
experience - manufacturing its own microprocessors,
building large disk storage units, and writing software
to run on networks (Rifkin). So Olsen let top management
debate the pros and cons. The debate over this strategy
lasted from September to December of 1978. The board
approved the strategy in 1978 . Olsen did not play
an active role in the debate. But once the decision
had been made, he assumed responsibility for getting
everyone to endorse it and make it succeed.
The original operating system for the VAX computers
was proprietary DEC software. There existed a competing
product, UNIX, which was developed by AT&T which
gave licenses to universities almost for free. UNIX
became popular in the scientific and university
communities. DEC responded by offering a VAX line
that used UNIX.By the early 1980s almost all university
VAXes ran on UNIX rather than VMS.
The so-called VAX strategy produced both positive
result and possibly one negative result. One positive
result was a surge in revenues, profit and stock
price. While IBM's sales and profits stumbled, DEC's
financial performance was so impressive that Computerworld
declared 1986 to be the "Year
of DEC." (Rifkin, p.286).
Another seemingly positive result was that DEC began
to take business away from IBM at the lower end
of IBM's offerings. But that success may have been
a pyrrhic victory. It caused IBM to get serious
about counterattacking. And it caused DEC to decide
to launch a serious attempt to wrench much more
of the market from IBM.
The VAX strategy worked well for a number of years.
But DEC made a strategic error in sticking with
it too long. As Chandler
puts it ( p.226-227):
| "DEC and NCR
were victims of their own misguided strategies.
DEC's loss resulted from remaining committed
too long to a successful strategy. During
the 1980s it perfected its VAX minicomputer
product line, which shared a single operating
system and had replaced its earlier PDP line.
Its commitment to the VAX architecture
led DEC to enter the work-station market
with its VAX technology, rather than embracing
RISC/UNIX technology. Management concentrated
on bringing out its VAX9000 as a rival
to IBM's major mainframe offerings. The VAX9000
appeared in 1990 just as that market was collapsing...
Its income had already plummeted from
$1.1 billion in the year 1989 to $74
million in 1990, followed by... losses..." |
Personal Computers and Workstations
In the 1980s DEC failed to achieve leadership
in two of the most dynamic segments of the computer
industry. In both cases the segments capitalized
on a vision that had been an early strength of DEC.
The two segments were personal computers and workstations.
Personal Computers. In the late 1970s DEC
faced an opportunity to be a pioneer in the development
of personal computers. "The
enormous potential of these low-priced machines
dazzled DEC's young engineers. It was a matter of
enormous pride to them that DEC be on the leading
edge of this new wave. Didn’t DEC, after all, pioneer
the concept of interactive computing, the very basis
of personal computers? Wouldn't a desktop machine
for the individual be the culmination of Olsen's
dream?" (Rifkin, p.198).
In fact, Olsen did not think so. He doubted the
existence of a profitable home market (Baron, p.276;
Schein, p. 39); saw DEC's customer as the professional,
commercial and industrial user for whom DEC was
already providing everything relevant that the home
computer would offer (Baron, p.276). Furthermore,
he viewed an effort to enter the new personal or
home computer market segment as a violation of the
VAX strategy because "the technology to make
a VAX-based personal computer did not exist at the
time." (Rifkin, p.199).
Nevertheless, in 1980 Olsen decided to endorse
a personal computer project at DEC. This was to
be a superior product and was named the Professional.After
IBM brought out its personal computer in August
of 1981 Olsen decided that DEC should develop a
second personal computer that was smaller, cheaper
and ran on the same operating system as the IBM
personal computer.This machine was named Rainbow.
At the same time DEC's word processing group was
developing a personal computer aimed at the word
processing market. DEC had tried and failed to succeed
in this market segment in the 1970s with a word
processing machine based on the PDP-8 technology
and named DECmate (Rifkin, p.146). This next attempt
was named DECmate II.
DEC introduced the trio of personal computers in
May of 1982. Olsen made the introduction himself
at a press conference in Boston. That was the high point. None of the machines was ultimately successful. Various
reasons have been given for that failure - IBM's
first mover advantage, inadequate software offerings,
lack of IBM-PC compatibility for two of the three,
insufficient resources provided for marketing; and
others. But, as Baron points out, "(I)t
is doubtful if Digital Equipment Corporation, with
its high internal expenses, could ever have competed
with Apple, Dell, Compaq and other personal computer
companies." (Baron, p.
276).
Workstations. This opportunity emerged in
the mid-1980s. Chandler summarizes its emergence as follows (p.148):
| "The emergence
of the workstation path differed sharply from
that of the path of the IBM PC and its
clones. Here there was no sudden unanticipated
opening of a new market. Instead the story provides
another example of the successful application
of a new technology, in this case the
microprocessor, to an existing segment, that
of engineering and scientific computers,
much as IBM had used the new electronic
technology to move from tabulating punched cards
to digital computers. The workstation
was developed to provide engineers and
software developers with powerful graphics and
processing capabilities. But it soon
came to be used as a 'server' in the
networks that were being developed both inside
single departments... or institutions
as well as across institutions. For these
new workstations, the minicomputer companies
created their own operating systems based
on their own chips. After 1985 they turned
to a new chip technology, reduced instruction
set computing (RISC) and used variations
of UNIX for their operating software." |
Chandler observes that Apollo and Sun Microsystems
were the first movers in this new market segment
and that IBM, Hewlett - Packard and DEC were followers.
But of the followers, DEC was the slowest. On the
surface that claim seems questionable. Sun produced
its first workstations in 1984 and DEC came out
with a workstation the same year. However, DEC’s
workstation was based on its VAX technology. DEC
did not produce a RISC/UNIX workstation until 1988.
By then the competition had established an insurmountable
lead (Chandler, pp. 151-152).
The Technology of the 1990s
As DEC entered the 1990s technology was dramatically
reshaping the computer industry. New opportunities
were there for those with the right strategy and
business model. DEC seemed to be in a position to
seize one or more of those opportunities. For example,
in the words of Gordon Bell (Bell, 2003, pp. 293,
301):
"Internet products
were perfect for DEC - it had all the piecesincluding
servers, software, and networking. However,
DEC didn't understand how to organize
to engage in a new market... "
"DEC led all
computer companies in the transition from other
technologies to custom CMOS microprocessors,
where the company maintained a lead (
including over Intel) extending beyond
2003! In a similar vein, DEC's pre-PC terminal
businessincluded introducing one of the
first laser printers - a business that
HP ultimately claimed and that sustained profits
well into the early 2000s. With the introduction
of the Ethernet, a communications products
and services division could have exploited
Digital's lead in distributed computing. DEC
could have exploited its position with
UNIX, as HP did in parallel with VMS
instead of being ambivalent and somewhat hostile." |
Ferguson and Morris put DEC's strategic failure
in yet a different perspective. They suggest that
DEC made a common mistake by thinking that it's
VAX technology had locked in enough customers and
potential business that DEC should stay with that
line for a time and reap the profits from the "lock-in."
In their words (p. 165-166):
| "The happy result
of lock-in is that the successful player can
finally begin to harvest the fruit of
its long term efforts... A fatal mistake
is to shift to a harvest mode when it is time
for a major architectural break. DEC
is the clearest example. Its VMS/VAX minicomputer
standard was superb but vulnerable to attack
from RISC-UNIX machines moving up from
the low end. Instead of attacking its
own franchise with its outstanding RISC-UNIX
technology, DEC chose to sit tight with
its current technology, counting on continued
profits from its strong established p position,
with disastrous results. When a company
has a large installed base, as DEC did,
continued earnings from service and support
can mask a sudden loss of market leadership.
The turndown at DEC appeared to hit very
quickly, but the rot started years before. It
is also clear that the IBM mainframe division
has been content for much too long with
its extraordinarily successful, but
now superannuated, 370 architecture." |
The
Management and Culture Story
When Olsen founded DEC he had both a technological
vision and a management culture vision. The technological
vision was the introduction of interactive computing
and the creation of the mini-computer market segment.
Included in this vision was a clear idea of who
the customers were (scientists and engineers) and
how to market to them (salaried sales persons who
were also engineers and who created customer awareness
of what DEC had to offer).
Edgar Schein is certainly one of the best qualified
individuals to explain DEC's culture. Schein was
consultant to DEC for most of Olsen's tenure; Schein's
academic specialty as a business school professor
at MIT gives him the specialized tools needed for
the job; and Schein has reported his findings in
arguably the best publication on the subject through
2006. Schein's summary of DEC's culture is (pp.
81-82):
- Five features (or , in his words, genes) made
working at DEC a "magical"
experience. The five were:
- "Innovation: We
can and will revolutionize computing".
- "Rugged individualism:
The individual is ultimately the source of original
ideas."
- "Truth through conflict:
No one individual is smart enough to evaluate
his or her own ideas; therefore, to arrive at
validity or truth, one must debate ideas to
see which one can survive critical debate or
empirical test where that is possible."
- "Personal responsibility:
Individuals are not only capable of taking responsibility
and doing the right thing but must do so at
all times"
- "Family paternalism:
Once in the family, one cannot be ejected; failure
is the result of a mismatch between person and
job and is not the fault of the person; hence,
every member of the family' can feel secure
in his or her membership."
- Five additional features (or genes) helped make
DEC successful in its first thirty- five years
of existence. Those five were:
- " Engineering arrogance:
A good product will sell itself, and the initial
judgment of what is a good product can be made
by the designer himself or herself."
- "Moral commitment
to customers: The ultimate role of business
is to identify and solve the customer's problem
and to deal with customers in a completely open
and honest way."
- "The market as arbiter:
The best way to determine priorities is to let
products compete with one another internally
and let the market decide which products and
services should survive"
- "Organizational
idealism: Individuals of goodwill can and will
work together to successfully coordinate their
activities in the interests of the company."
- "General control:
No matter how much freedom employees and managers
had, Ken Olsen always kept some degree of central
control, and the organization always maintained
some respect for the founder- father figure,
which gave Olsen a degree of power and influence
even when things were going out of control."
Schein seems confident in stating that this culture
truly permeated the entire organization. His confidence
stems in part from a series of surveys with employees
that Olsen asked him to design and conduct. The
surveys were taken in 1966-67. Engineers were surveyed
first. Then other areas such as manufacturing and
sales were surveyed. Olsen's expressed purpose in
having the interviews done was to motivate employees
to look point out problems and look for better ways
of doing things. So Olsen instructed Schein to not
show the results to Olsen. Instead employees were
told to try to solve the problems and implement
the improvements on their own. Only if the desired
changes required top management action should the
problem or opportunity be called to Olsen's attention.
The results of the surveys confirmed the cultural
traits listed by Schein. With respect to Olsen,
Schein found (pp.121-122):
| "Everyone respected
Ken's overall ability, business judgment, and
general leadership. He was seen as absolutely
indispensable to the company, and most
people respected his technical ability, but
there were differences of opinion about
which areas Ken really understood... Ken’s
emotional outbursts and criticisms of his subordinates
in front of others created some resentment,
but most people felt that he was an excellent
judge of people's abilities and built his organization
around what certain people could or could
not do. It was recognized that he was
exceedingly ethical, moral, and concerned about
his people and was always trying to do
his best for them, often to the point
of doing too much" |
Olsen envisioned a culture of individual empowerment.
That applied particularly to engineers, of course,
for DEC was an engineers' company. But employees
in all positions were encouraged to think of themselves
as entrepreneurs and admonished to always "do
the right thing."
Once the company became large enough to have sizeable
product lines Olsen began tinkering with the organizational
structure. As once described by Schein, who had
an inside view (p. 51):
| "The company
was organized primarily by several product lines
and by several centralized functions such as
sales, service, finance and manufacturing, but
there was a sense of perpetual reorganization
and a constant search for a structure that would
'work better.' The central functions were services
to be 'bought' by the product lines, and engineering
was in perpetual flux. This created what many
have called one of the first versions of a matrix
but this term was rejected and structure was
viewed as something to tinker with until one
got it right." |
The story of how the matrix approach came into
being is colorfully told by Rifkin and Harrar. Here
is an excerpt from their version of the story (pp.
56-57):
"After lying
awake one night struggling with the issue,
Olsen hit upon his own version of the
concept that would change DEC dramatically
and fuel its stunning growth. The idea was
deceptively simple: a senior executive
would take ownership of each productline.
The manager would have to develop it, market
it, nurture it, and turn a profit…He
would essentially become an entrepreneur within
Digital.".
"The product-line
manager would stand before the Works Committee
with his plan and budget. If they were accepted,
he assumed the obligation for carrying
them out... "
"Divisional
structures, such as at Hewlett-Packard, built
iron fences between divisions. Olsen's
product-line arrangement purposely
avoided barriers between groups. DEC built
bridgesamong product and functional
managers. Line managers would share
such resources as sales, manufacturing, and
marketing, negotiating to buy these
services from the central functions... "
"Olsen declared
to his managers, 'Now we're a new company.
Nobody tells anybody else what to do.
Each of you has the responsibility
for your part of the company. You, you, you
andyou are now entrepreneurs and everybody
else is a service."
|
The new management approach was instituted in 1965.
There were four product lines - The PDP-5, the modules
business, the memory test products and the PDP-6.
Co-founder Harlan Anderson was put in charge of
the PDP-6 product line. When that line failed, Anderson decided to leave DEC (1966). It was not a pleasant departure
for either Anderson or Olsen and, perhaps for that
reason Olsen formed an Operations Committee in 1966.
The original committee consisted of 3 product line
managers, the sales manager, the manufacturing manager,
the financial manager and Olsen (Rifkin, p.63).
This committee then became the place where issues
were discussed and decisions made when the matter
could not be handled by the product line or functional
area manager.
One other way in which Olsen "democratized"
DEC was his policy of giving engineers a career
path option. As Schien explains (p. 51):
| "DEC was one
of the few companies at that time that had a
clearly defined dual career ladder. The
ladder was supported by strong statements
from Olsen that it was all right to try to be
a manager and, even more important, all
right to return to the technical ladder if
the management job did not work out. The strong
engineering bias made the technical ladder
work successfully in the sense that people valued
remaining on, or returning to the technical
ladder. Engineers could rise to the high
rank of consulting engineer and be well compensated
at that rank." |
Schien, it will be recalled, was hired as a consultant
by Olsen in 1966 and remained in that position into
1992 when Olsen resigned. Schien later conducted
a post mortem of the Olsen years and published his
findings in 2003 (Schien, 2003). In that post mortem
he had this to say about the DEC culture created
by Olsen (pp. 1-2 ):
"That culture
was an almost pure model of what we can think
of as a 'culture of innovation.' It
created the minicomputer revolution
and laid the groundwork for the interactive
computing that today is taken for granted.
The managerial values and processes
that were at the heart of that culture produced
an almost uniformly positive response
in DEC employees throughout its history."
"The DEC culture
emphasized - to an extraordinary degree- creativity,
freedom, responsibility, openness, commitment
to truth, and having fun. Not only
were these values central in its early
formative years but even when it was an organization
of 100,000 people and over $ 10 billion
in sales, these values held firm. DEC's
management model empowered people who worked
there, and most of the employees internalized
these values and expressed them in
their careers with other companies."Schien
went on to argue (p. 3-4):
"One of the
key values in the DEC culture was 'Do the
right thing. 'In emphasizing 'Doing
the right thing, 'the DEC culture created
a unique climate that stimulated leadership
at all levels... In DEC 'Do the right
thing’' was a license to both insubordination
and to leadership. As we shall see,
DEC, more than any other company of
its size and scale that I am aware of, created
leaders at every level of its organization.
And as we will also see, a culture
built around leaders creates its own turmoil
and difficulties."
"The DEC story is
about leadership not only in technical innovationbut
also in management practice, manufacturing,
community relations, affirmative action,
sales and service practices, and perhaps
most important, human development. Ken Olsen,
DEC's founder, articulated values that
are frequently touted as being the
essence of what a good organization should
be, and it maintained those values
for thirty-five years. Those same values
created in the end an economic problem that
led to disaster for the company."
|
The culture of empowerment was very attractive
to employees in general and talented engineers in
particular. But it did generate arguments and conflicts.When
communicating with top level executives, Olsen was
perceived as living up to his ethical commitment
to "do the right thing."
But the other executives also experienced occasional
outbursts of anger as noted above.
Occasional anger and omnipresent confrontation
were particularly evident at high level committee
meetings. Again, we turn to the inside view from
Edgar Schein (pp. 50-51):
"Ken was obviously
the boss, but his behavior implied that he did
not take his position of power all that
seriously. Group members argued as much
with him as with one another and even interrupted
him from time to time. His status did
show up, however, in the occasional 'lectures'
he delivered to the group when he felt that
members were not understanding something
or were wrong about something... "
"I was made quite
nervous by the level of confrontation I observed
... I learned from further observation
that this style of running meetings was
typical ." |
Following the adoption of the VAX strategy, Olsen
became convinced that the matrix system had outlived
its usefulness. And so he threw himself into an
effort to change the organizational structure while
maintaining the core competencies of the DEC culture.
Here is how Fortune described that effort
in an article where Olsen was named "America's most successful entrepreneur"
(October 27,1986 pp.30-31):
| "The new (VAX)
plan was risky. To succeed, DEC had to master
exotic engineering disciplines in which
it had little experience... To win customers
DEC would have to mount a massive corporate
selling effort, much like IBM's. Olsen
decided that DEC's opportunistic, scatter-shot
style of product development and marketing
was ill-equipped to handle the situation...
Olsen set out to transform DEC into a
unified marketing organization that would be
worthy of the new products. Olsen reshaped DEC
by teasing, goading, and teaching employees,
by sermonizing - and by remorsely pillorying
those who stood in his way. |
In 1983 DEC's operating committee formally voted
to shift profit and loss responsibility away from
the product managers.Again, Fortune provides
a succinct summary of what followed (October 27,1986,
p. 31):
| "The
move, which should have been a triumph for Olsen,
at first seemed a catastrophe. Accounting snafus
triggered an embarrassing 72% plunge in earnings
in a quarter the company predicted would hold
steady... A year later, however, DEC's new VAXes
began rolling out. The computers leapfrogged
the competition." |
The
Community Development Story
Olsen had a strong sense of social responsibility.
This was reflected in a number of ways ranging from
affirmative action programs to the placing of factories
in blighted or low income areas. Here's a peek at
this aspect of the story as retold by Schein (pp.
259-260):
| "Ken's management
philosophy stimulated innovations in affirmative
action, education and community development...
Managers... responded not only by developing
specific programs to hire talented minorities
but also by building factories in... neighborhoods
that were almost exclusively African American...
Support groups of all kinds were encouraged
for women employees and for gays and lesbians,
thus sending a strong message that no form of
discrimination would be tolerated... closely
connected to the emphasis on affirmative action
was a support for education. Through the efforts
of Ken Olsen's wife and the Olsen Foundation...
a junior college technical program, the first
of its kind, was established for computer technologists.
This program linked forty-two junior colleges,
which were asked to recruit minorities and females
to make up at least 50 percent of their classes." |
Olsen's
Resignation and the Demise of DEC
Between 1987 and 1992 DEC stumbled. The computer
industry was changed in ways that put the company
at risk and DEC failed to make the required changes.
In 1991 DEC suffered its first loss, followed by
losses in 1992 and 1993. Olsen resigned in late
1992. The business press said Olsen had been "deposed"
as DEC's president (Bulkeley). The head of the semiconductor
division, Robert Palmer, was named CEO. The company
showed a small loss in 1993 and a large loss in
1994. DEC returned to profitability 1995 largely
due to massive downsizing. The workforce was reduced
from 110,000 employees to close to 61,000; 25 manufacturing
plants were sold, leaving DEC with 10; and 140 business
units were reduced to 3 (USNWR, DEC. 18,1995). In
1998 DEC was purchased by Compaq Computer .Then,
in 2002 Compaq and Hewlett-Packard merged. While
DEC as a company had disappeared, it can be argued
that the seeds of the DEC culture lived on, first
at Compaq and then at Hewlett-Packard .
CONCLUSION
Gordon Bell was one
of several ex-DEC leaders to respond when Edgar
Schein asked DEC alums to share their opinions regarding
DEC's demise. Bell
was quite critical of Olsen. He claimed that Olsen
had been a superior CEO in the beginning but had
lost touch with the market and his own principals
by the 1980s.
While Bell
criticized Olsen for his leadership in the 1980s,
he also expressed the view that DEC was in a position
to make a recovery when Olsen was replaced by Palmer.
So, in Bell's
view Palmer and his board of directors bear the
ultimate responsibility for DEC's demise.
Bob Baron, a company
outsider but industry insider, also raises this
possibility when he says, "One
wonders what might have happened if Olsen and his
successors had been given a chance to continue their
innovation." And then
Baron adds, "Companies
are measured by the service they provide to customers,
growth in employment, and return to shareholders.
For thirty-five years, under the leadership of Ken
Olsen, Digital Equipment had been a success. Since
its acquisition by Compaq and the Compaq's acquisition
by Hewlett-Packard, the company has been a failure
in all three areas." (Baron,
p.284).
As far as Edgar Schein
is concerned focusing on DEC's demise misses the
larger point. After extensive interviews with ex-DEC
employees, he tell us that (Schein, p 256).
| "Not
only are people nostalgic about their days at
DEC, but they carry forward the model of management,
particularly,' Do the right thing,' that Ken
Olsen created as a model to be emu- lated and
reproduced wherever they go. I believe that
the essence of this model is that Olsen treated
people as responsible adults, something that
most organizations fail to do. Giving people
freedom and responsibility and meaning it
if the abuse it is the critical ingredient." |
And then Schein adds
(p.268),:
| "DEC lives on
- in the (very positive) lives and memories
of its alumni , in its customers who still use
its equipment, and in organization and management
theory - as one of the prime examples of what
is possible in the human and technical arena.
Many people we have talked to feel that DEC
was a company ahead of its time in how it organized. |
Perhaps a final quotation from Rifkin and Harrar
is appropriate since they both covered the computer
industry as reporters and conducted extensivc interviews
for their 1989 book on Olsen. Here's a final word
from them (pp.4-5):
| "Olsen describes
himself as the Christian and the scientist,
searching for truth and humility in both
his personal and business lives. He manages
to be simultaneously flexible and unwavering
- flexible in the smaller areas of decision-making,
unwavering in setting direction, policy
and tradition. He is the democrat who has given
up great personal control of his sprawling
organization of 12,000 employees. But
he is also the autocrat who has maintained his
power as the final word and has never
named a clear second-in-command... The picture
of the man is painted from stories here,
observations there... Consensus comes
on a list of adjectives: he is honest, decent,
religious, paternal, stubborn, intuitive,
commanding, charismatic." |
Finally, here is one last assessment from the MIT
professor who worked closely with Olsen for most
of DEC's history, Edgar Schein (pp.3-4):
"Ken
Olsen... articulated values that are frequently
touted as being the essence of what a good organization
should be, and... maintained those values for
thirty-five years. Those values created in the
end an economic problem that led to disaster
for the company. But the DECstory leaves us
with two huge questions. Would it have been
possible to save the economic entity without
giving up those values, that is without destroying
the culture? And, in the end, what is more valuable
- the culture or the company?"
"Fundamental questions
also arise as to whether DEC's ultimate Contribution
was to technology or to management practice...
Was it Ken Olsen's technical vision that created
DEC's successes, or was it his organizational
genius that fostered what came to be known as
a world-class engineering organization under
the leadership of Gordon Bell?" |
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Baron, Robert C. Pioneers and Plodders: The
American Entrepreneurial Spirit. Golden,
Colorado:
Fulcrum Publishing, 2004.
Bell,
Gordon, "What Happened?
A Postscript," in Edgar
Schein, Dec Is Dead, Long Live DEC," 2003,
pp. 292-301
Bulkeley, William M., "Digital
Reports First Net Loss In Its History,"
The Wall Street Journal, July 26,1990, p.A4.
Chandler,
Alfred D. Inventing the Electronic Century: The
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Industries. Cambridge, MA: Harvard University Press, 2005.
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"Digital Equip,"
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Charles H. and Charles R. Morris. Computer Wars:
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