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Boston Capital

Innovator’s dilemma

By Steven Syre
Globe Columnist / February 15, 2011

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George Doriot, the father of venture capital, gave Ken Olsen a check for $70,000 and before long, offered the new high-tech executive a few words of advice.

“Remember, Ken, someone, somewhere is building technology that will make your technology obsolete,’’ Doriot said in 1957.

That’s the way the story goes, anyway. If Doriot didn’t actually say those words, he should have.

Olsen, who died last week at the age of 84, used Doriot’s money to cofound Digital Equipment Corp. and become the most important computer technology figure to ever work in the Greater Boston area later known to the world as Route 128. His own business story — equal parts epic and tragic — captured the core experience of technology development like no other I know.

It’s hard to grasp today just how important Olsen and Digital became over a period of 30 years. It was a very different world — practically the dawn of commercial computing — when Olsen left an MIT lab to start Digital with colleague Harlan Anderson.

Digital became a huge success because Olsen saw an alternative to the business computer of the day, an expensive mainframe operated by specialists in a data center. The Digital minicomputer was smaller, cheaper, and more flexible. The builders of mainframes scoffed, but minicomputer sales improved over time and boomed by the 1980s.

The minicomputer was revolutionary because it democratized the power of computing inside companies and institutions, where all computer activity took place in those days. Business units at most companies had been hostage to those centralized computer operations and the competing demands for their resources. Digital changed all that by ushering in a new generation of computers.

“Ken Olsen was the father of the second generation of computing,’’ said George Colony, chief executive of Forrester Research Inc. in Cambridge and a longtime industry follower.

“He took computing out of the data center and into the hands of businesspeople,’’ Colony said. “For the first time, the computer was right next to the business problem. People said, ‘I can use this in my laboratory, in my design center, in my remote banking facility.’ He brought a new business model to companies. He’s as much a business hero as a technology hero.’’

An entire minicomputer industry boomed, but no one in it was more important than Ken Olsen. DEC began the 1980s selling $2 billion worth of computer equipment per year, and ended the decade with annual sales of $12 billion. The true apex of the Digital age probably took place in 1987, when the company brought the Queen Elizabeth II and another ocean liner to Boston as floating hotels to supply some of the 5,000 rooms needed for its DECWorld trade show.

But that was also the beginning of the end. The personal computer was seizing upon many of the basic ideas that had made the minicomputer so popular. It took decentralization another step further. It democratized computing to an even greater degree.

Ken Olsen didn’t get it. He said he couldn’t see any reason for people to have computers in their homes. Digital executives resisted the very ideas that once made their company great. Eventually, Digital tried to compete in the personal computer market, but never found its footing.

The Digital experience in the age of the personal computer was not lost on Clayton Christensen. The Harvard Business School professor wrote a book in 1997 called “The Innovator’s Dilemma’’ about companies that create innovative ways of doing business but struggle to survive the next wave of progress. The Digital story was so emblematic, Christensen featured it on the third page of his introduction.

Christensen concluded that many companies caught in Digital’s dilemma face similar problems. A new competing technology offers small near-term sales potential and inferior profit margins. Product development requires capital and other resources. Companies are reluctant to divert resources to the new generation of products that offer less in the near term and could threaten the huge profits of their legacy equipment.

“This is the central story in technology,’’ says Colony. “Everyone is an innovator up to a point. The trick is to retain your current business, but at the same time become part of the new business, even if it destroys part of your old business. It’s easy to say but very hard to do, and Ken proved to be bad at it. He became very stuck in the past.’’

The bottom fell out of Digital very quickly. By 1992, Olsen left the company he created. Before long, Digital itself disappeared. An entrepreneur and his company that meant so much to an industry and a region seemed to leave no footprints.

This is a story that repeats itself endlessly in technology. But few entrepreneurs climbed so high or fell so hard as Ken Olsen.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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