In 1980, IBM owned about three-quarters of the computer market. They were huge, and the CEO, John Opel, had plans for more growth in the future. He challenged the company to grow to create $100 billion in revenue per year by 1990, up from $40 billion when he made the challenge. But this plan changed the behaviors of IBM's employees. With their director's grand vision in mind, they set about business strategies that maximized profit in predictable ways. The business increased output of existing technologies and neglected new markets. IBM's profits increased in the next few years. But with technology changing every year, other companies like Compaq grew faster by embracing new technology. Because of this mistake, IBM lost it's place as a major player in the PC marketplace.
IBM's business strategy is similar to the Soviet Union's central control strategy in the 20th century. Like IBM, the Soviet Union tried to attain growth by allocating resources to the areas where they already knew they would succeed, and by trying to motivate workers with incentives. Both grew rapidly at first, and then fell apart later. Both institutions ultimately lost their power because they did not have incentives for innovation and new technology.
http://www.devilsadvocategroup.com/ibm-beware-of-bhags/
This is a remarkably accurate parallel to the success and failure of the Soviet Union. I think a really important part of the article is where it describes the demanding goals of the CEO, and that therefore "people will do things to satisfy the CEO even if they aren’t in the best interests of the business." Similarities with the ideas of Acemoglu and Robinson are very apparent here. Much like the Soviet Union, IBM focused on maximizing production using current technological venues, rather than trying to innovate and pursue creative new ideas. As a result, there was explosive short-term growth which peaked and ultimately culminated in long-term failure. A major idea in Why Nations Fail is that, while extractive institutions can produce considerable and significant growth, long-term interests can really only be met by inclusive institutions. The article even notes that "people can be very creative when trying to earn compensation.” IBM and the Soviet Union failed because they did not embrace these vital understandings.
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