CASE STUDY

Making the hard decisions: Olivetti re-invents itself

By Allan Bull, Macquarie University

John Chambers, the chief executive officer (CEO) of Cisco, recently warned that organisations must re-invent themselves every five or six years or risk becoming redundant. Chambers, who Time magazine rates as one of the 100 most influential people and Barron's magazine identifies as one of the world's best CEOs, points out that 87% of the Fortune 500 companies fall off that list over a 17-year period. Considering that Fortune 500 companies are the largest companies in the United States, you have to wonder why so many drop down to be replaced by others. Of course, even those that slip off the list remain largehowever, they are simply replaced by newer and more successful organisations.

Can you imagine the processes and decisions that need to be made in large organisations to fundamentally adjust their business model? Chambers' edict of the need for change every five or six years may sound like a short time frame and is, no doubt, informed by the rapid change in technology today. However, periodically altering an organisation's business model has always been a necessary process to enable success. One of the major reasons that companies lose momentum and are replaced by their competitors is poor decision

making: either the wrong decisions are made or there is a reticence to commit to the necessary decisions. How can this be, particularly when companies are supposed to be administered by professional managers whose primary job is to make decisions on behalf of major stakeholders? An excellent example of a very successful company that encountered business difficulties and narrowly escaped failure by re-inventing itself is Olivetti SpA. The company is headquartered in the small north-western Italian industrial town of Ivrea, located at the base of the Aosta Valley between Turin and Milan in the Piemonte region.

This remarkable Italian company was established in 1908 by Camillo Olivetti to manufacture the state-of-the-art technology of the day, e.g. typewriters. You may need to refer to Google to find out what a typewriter is, as not many have been manufactured since the advent of the PC and PC printer. Typewriters were essentially mechanical devices; the more elaborate and expensive models were driven by electrical motors. Olivetti engineers were masters of mechanical engineering and design. Using mechanical engineering techniques, for decades they designed and manufactured typewriters and a range of office equipment, including calculators and accounting machines. For instance, with levers, cogs and electric motors they developed calculators that could add, subtract, multiply and divide numbers up to 12 digits in length, all based on mechanical principles. By the early 1960s, Olivetti was at the top of its game, particularly in Europe, and, despite the fact that Camillo Olivetti had started life as an electrical engineer, the entire company in the 1960s was managed and controlled by mechanical engineers. The culture was mechanical, not electronic, and although some far-sighted executives did see the rising influence of an emerging digital future, it was the mechanical view that prevailed and the mechanical engineers who held most of the power.

From our vantage point in the 21st century, we can see that in the 1960s change was needed and that soon a tidal wave of digital technology would wash over an unprepared Olivetti, which relied entirely on mechanical techniques for its range of office machines. However, the senior management was not particularly aware of the need for change or the fact that urgent decisions might be required to alter direction from their current successful

business model. Any serious re-invention requires change, and most people and organisations dislike change. This is particularly evident when an organisation is successful, has a set of effective procedures and a winning, established business model. The old adage 'this is the way we have always done things' is a common refrain. As pointed out by John Chambers above, organisations need to change periodically in order to keep up with the

competition and employ the latest technology available. A good example of a successful industry that was blindsided by competition, after remaining too long with its tried and true business model, is the encyclopedia industry. Until the advent of the internet, every caring parent who could afford to made sure there was a copy of an encyclopedia available to their children. However, in a surprisingly short period, the encyclopedia business was virtually

demolished by free data sources on the internet, such as Wikipedia. In contrast, an example of a company that did keep re-inventing itself, over a period of 100 years, is Nokia, which started life as a paper milling company then moved into manufacturing rubber boots and eventually became one of the leading mobile phone suppliers in the world. In the 1960s, Olivetti needed to make decisions in order for it to survive. These needed to be made quickly as any major business change requires time and resources to implement. Here lies a major problem for decision makers, which was manifest within Olivetti at that time. Specifically, before decisions can be made it is necessary to identify the problems that need solving. Identification of problems is commonly obscured by barriers, including the

fixed mindset of the decision maker. It is particularly evident when an organisation is successful because success breeds complacency. This was the situation within Olivetti; fortunately, Olivetti had made some moves into mainframe computing (large expensive machines at that time, suitable only for big corporations) and had hired some electrical engineers to work in that area. Due to financial pressures, Olivetti sold its fledgling mainframe computer division to GE in the mid-1960s, but providentially kept a small group of electrical engineers on its staff. One of these people was Pier Giorgio Perotto. Pier was a very bright young teenager living in Northern Italy in the late 1950s. His best subjects at school were maths and science and he followed them with a passion. Pier probably inherited his interest in all things technical from his father, an electrical engineer working at the time for an electrical distribution organisation in Milan. Although quite popular at school, Pier's intense interest in science had the effect of considerably reducing his circle of close friends, as most of his age cohort was more interested in football and non-technical subjects. Pier and a small group of like-minded friends were affectionately known by

students and teachers alike as the 'science geeks'. During school lunch breaks, instead of participating in activities such as football you would find them in the library, devouring technical magazines. No one was surprised when Pier followed his father's profession by enrolling in a university electrical engineering degree. Three of Pier's schoolfriends also joined him in the same degree at the Polytechnic University of Turin. The early 1960s was a time when digital technology was in its infancy, primarily aided by newly available transistor

technology, which had replaced expensive valves. Although trained in classical electrical engineering subjects, Pier and his friends constituted a subculture within the engineering faculty, with their special interest in the latest digital field of knowledge. Upon graduation, Pier and two of his closest friends considered themselves very fortunate to be accepted as trainee engineers in Olivetti SpA, one of the four largest office equipment manufacturers at that time in the world. What an opportunity for three bright, enthusiastic and ambitious engineers. As well as performing the duties they had been hired to carry out, Pier and his friends continued the habit they had acquired at school: that is, they following the digital technology they were passionate about. They did the work they were required to do; however, at every opportunity they pestered management with their requests to work on digital projects. One of the characteristics of creative people is their passionate persistence, and Pier had this quality in abundance. He and his friends could see the potential to change Olivetti's entire mechanical product line from mechanical to digital, but in a company composed of successful mechanical engineers, who could they convince to make such a large and company changing decision? Before judging Olivetti's managers at that time too quickly, consider yourself in the shoes of one of these senior people; let's call him Antonio. At 50 years old, Antonio was at the peak of his career in terms of power, status and earning ability. He had joined Olivetti as a young engineer and was considered to be a mechanical genius when it came to solving the problem, with mechanics, of how to calculate the square root of a number. His design allowed Olivetti to be the first mechanical calculator on the market to perform this function and now he was constantly being

pestered by these young electrical engineers to make decisions that went against his life's work, involving a technology that he did not fully understand. One of the major barriers in decision making, even after a problem has been identified, is the emotional state of the decision maker. Emotions are a necessary dimension in decision making and by shaping our preferences they can have both a positive and negative effect on the decision-making

process. In this case Antonio, who was emotionally attached to his mechanical culture, had a clear unwillingness to explore digital options. Fortunately, a number of factors intervened that allowed the decision required to change Olivetti from a primarily mechanical manufacturer to a leading digital equipment organisation. The catalyst was an almost secret project that Pier and his small group of digital experts were allowed to work on, supported by a sympathetic manager. This occurred after Pier and his friends had escaped being transferred to GE when Olivetti sold its mainframe computer division. They developed a prototype device called the Programma 101, which became the world's first desktop PC.

Through demonstrations they were able to secure the support of powerful executives, who finally recognized the practical application of Pier's creativity and made the rational decision to allow the Programma 101 to be manufactured in commercial quantities. Since that critical decision to re-invent itself, Olivetti has undergone a series of transformations, displaying an

ability to adapt to technological and marketing pressures. Although it no longer has an independent existence, the name of Olivetti still appears on equipment manufactured by others.

Discussion questions

1. Olivetti eventually identified the predicament it was in regarding the need to change its business model. Can you identify the impediments that slowed the progress of problem identification?

2.Most people work on the assumption that managers operate, think and behave rationally when making decisions.Research has uncovered evidence that this does not accord with reality and that managers and decision makers routinely employ non-rational processes when making decisions. From the case study, see if you can identify some of these issues.

3. Creativity is useful throughout the decision-making process. How was creativity applied in the 're-invention' of Olivetti's business model?