The Rise and Fall of Silicon Graphics

Whenever this topic comes up there are always comments saying that SGI was taken by surprise by cheap hardware and if only they had seen it coming they could have prepared for it and managed it.

I was there around 97 (?) and remember everyone in the company being asked to read the book "The Innovator's Dilemma", which described exactly this situation - a high end company being overtaken by worse but cheaper competitors that improved year by year until they take the entire market. The point being that the company was extremely aware of what was happening. It was not taken by surprise. But in spite of that, it was still unable to respond.

You highlight one of the most interesting (and perhaps less understood things) about the key Innovator's Dilemma insight. Even if the senior management have read the Innovator's Dilemma books, know they are being catastrophically disrupted and desperately trying to respond - it's still incredibly difficult to actually do.

Not only are virtually all organizational processes and incentives fundamentally aligned against effectively responding, the best practices, patterns and skill sets of most managers at virtually every level are also counter to what they must do to effectively respond. Having been a serial tech startup founder for a couple decades, I then sold one of my startups to a valley tech giant and ended up on the senior leadership team there for a decade. I'd read Innovator's Dilemma in the 90s and now I've now seen it play out from both sides, so I've thought about it a lot. My key takeaway is that an incumbent's lack of effective response to disruption isn't necessarily due to a lack of awareness, conviction or errors in execution. Sure, there are many examples where that's the case but the perverse thing about I.D. is that it can be nearly impossible for the incumbent to effectively respond - even if they recognize the challenge early, commit fully to responding and then do everything within their power perfectly.

I've even spent time sort of "theory crafting" how a big incumbent could try to "harden" themselves in advance against potential disruption. The fundamental challenge is that you end up having to devote resources and create structures which actually make the big incumbent less good at being a big incumbent far in advance of the disruptive threat appearing. It's hard enough to start hardcore, destructive chemo treatment when you actually have cancer. Starting chemo while you're still perfectly healthy and there's literally no evidence of the threat seems crazy. It looks like management incompetence and could arguably be illegal in a publicly traded company ("best efforts to maximize/preserve shareholder value" etc).

I think SGI failed to understand that there was a point where desktop PCs would be good enough to replace dedicated workstations. Continuing to make hardware that's much better than the best PCs wasn't going to save them after PCs crossed the good-enough line - whatever they had, would be relegated to increasingly rarefied niches - the same way IBM now only makes POWER and mainframes - there is no point of making PCs, or even POWER workstations anymore for them, as the margin would be too narrow.

SGI could double down on their servers and supercomputers, which they did for a while, but without entry-level options, their product lines becomes the domain of legacy clients who are too afraid (or too smart) to port to cheaper platforms. And being legacy in a highly dynamic segment like HPC is a recipe for disaster. IBM survived because their IBMi (the descendant of the AS/400) and mainframe lines are very well defended by systems that are too risky to move tied to hardware that's not that much more expensive than a similarly capable cluster of generic and less capable machines. As the market was being disrupted from under them, they retreated up and still defend their hill very effectively.

The other movement they could do was to shift downwards, towards the PC, and pull the rug from under their workstation line. By the time Microsoft acquired Softimage and had it ported to NT, it was already too late for SGI to even try that move, as NT was solidified as a viable competitor in the visual computing segment, running on good-enough machines much, much cheaper than anything SGI had.

I think your analysis of the shifting technology landscape is largely on target. However, I'm not convinced that the true root of SGI's failure was the technology. Clearly their tech did need to evolve significantly for them to remain competitive but that's a transition which many companies successfully make. Even though SGI chose not to evolve the tech soon enough, fast enough nor far enough, I suspect they still would have failed to survive that time period due to an even more fundamental root cause: their entire corporate structure wasn't suited to the new competitive environment. While the "desktop transition" was most obviously apparent in the technology, I think the worst part for SGI was that the desktop shift changed the fundamental economics to higher volumes at lower costs.

SGI had invested in building significant strengths and competency in its sales and distribution structure. This was one of their key competitive moats. Unfortunately, not only did the shift in economics make this strength irrelevant, it turned it into a fundamental weakness. All that workstation-centric sales, distribution, service and support infrastructure dramatically weighed down their payroll and opex. This was fine as long as they could count on the higher margins of their existing business. While it's easy to say they should "just layoff all those people and relaunch as a desktop company" that can't be done in one quarter or even one year. It requires fundamentally different structures, processes, systems and skill sets. Hiring, training and integrating all that while paying for massive layoffs and shutting down offices, warehouses etc takes time and costs a lot of money.

Worse, once their existing workstation customers saw them shutting down the SGI the customers had bought workstations and service contracts from to become a different kind of company entirely, sales revenue would have taken an overnight nosedive. SGI's stock would also have tanked far more immediately than it did as the fickle stock market investors sold stock they'd bought because SGI offered a specific risk/return expectation which just became much more "risk" and much less "return" (at least in the near-term). In making such a dramatic move SGI would have effectively dumped much of their current quarterly revenue and the value of one of their core strengths - all at the same moment. Thus turning them into one of their emerging startup competitors with all of a startup's disadvantages (no big ongoing revenue streams, no big cash pile (or high stock valuation to leverage for cash)) yet none of a startup's strengths (nimble, lower-paid staff and more patient venture investors).

The point of my earlier post was mainly that a true disruptive market shift is nearly impossible for a large, established incumbent to successfully survive because they basically have to rapidly turn into someone else almost overnight. How can a champion sumo wrestler survive a shift so dramatic that their sport quickly turns into a track meet? Even seeing it coming doesn't help. How does one even prepare for such a shift since losing mass turns you into a bad sumo wrestler long before you even start being a viable sprinter? As Christiansen observed, such disruptions are often enabled by technology but the actual cause of incumbent death is often due to the shift turning an incumbent's own strengths into weaknesses almost overnight.

I don't think you need to shut down that distribution. Because fundamentally, existing costumers often continue to buy existing product at existing prices, as long as they get a faster product. This was something that Gordon Bell pointed out. Existing costumers are design to work at that level of expense. Expensive graphics workstations and rendering servers and so on still exist. Sure it would go down eventually as all business does in the long run.

The real failure is not picking up new business along the way. With the N64 they showed they could design a consumer product. But outside of that they were in no future consoles. 3dfx and ArtX both came from former SGI. You don't need to stop selling workstations just because you make chips for consoles and other such devices. Nvidia barely survived and might not have if not for consoles. There are other markets where their expertise could have been applied.

Surviving changes like that often requires finding other markets. And then when it comes to making hard choices you need to cut part of the thing that is unprofitable. But this is really hard to do and in some ways it goes against the 90s US corporate philosophy of focusing only on the 'Core' business. DEC for example sold profitable business units that might have been helpful to have. DEC had a printer business and had the potential for a Database business. Oracle calls RDB one of the best acquisitions.

> the N64 they showed they could design a consumer product. But outside of that they were in no future consoles. 3dfx and ArtX both came from former SGI. You don't need to stop selling workstations just because you make chips for consoles and other such devices.

Commodore tried for a play where their - still much lower end - newest generation chipset would have scaled (with the same chips) from being a full low end computer, console, or set-top box, computer (it had a PA RISC core on chip, so could run standalone), a high end graphics card for PCs, and the chipset for a higher end Amiga at the same time.

They ran out of money - short maybe a few million - before being able to test if that would have worked as a way to widen their market.

I wish we'd have gotten to see how that'd unfolded, though Commodore's deep management dysfunction probably still would have made it fail.

Legend says Commodore was at some point approached by Sun willing to OEM their Amiga 3000/UX machines as entry-level Unix workstations and sell them through their distribution channels. The same accounts say Commodore management refused (maybe because the deal had a non-compete part).

They also missed an (earlier) boat with the Commodore 900 workstation, which would run Mark Williams' Coherent OS (a Unix-like system).

Many Amiga engineers were UNIX heads, and even Amiga DOS /Workbench started as what might be another take into UNIX like systems with multimedia hardware, when they pivoted away from a games machine.

There are some vintage computer club talks where they dive into this.