COMMODORE INTL. 1 Running head: COMMODORE INTL.

Commodore International: The rise and fall of a major corporation -

How leadership failed

Hans Petter Flaaten

Hawai’i Pacific University

Summer 2007 COMMODORE INTL. 2 : The rise and fall of a major corporation

Introduction

Commodore International is the name of an American company that was a vital player in the field of personal in the and early 1990s. Commodore was the first to provide a low-cost to the masses, the first to sell one million computers, and the first to arrive with a real (Bagnall, 2005). They still hold the record for most units sold of a single model of computer in the Guinness Book of Records (Kotadia, 2003).

Commodore was extremely successful and their technology was way ahead of their competitors during their golden era. However, something happened and they fell as hard as they had once risen: In 1994, Commodore filed for bankruptcy (Bagnall, 2005). What had happened?

The need. Commodore International went from being the leader in the field of home computers to total bankruptcy. One of the reasons for this fall was bad management (Bagnall,

2005). The reason for this report is to investigate exactly what caused the company to crash, what faulty decisions were made by the management to cause the crash, and the useful lessons that can be learned from this experience.

Statement of research problem. What was the problem with the management and leadership of Commodore that resulted in their bankruptcy?

Beneficiaries. This executive report will benefit leaders, managers, and decision-makers.

The story of Commodore is an excellent example of how bad management can send a thriving, successful company, way ahead of its competitors, to fall heavily into bankruptcy.

Methods for investigation and analysis. The accuracy, meaningfulness, and credibility of the research will be based upon peer-reviewed articles and scholarly books, thus preserving the validity and reliability of the findings (Leedy, 2005). COMMODORE INTL. 3 History

The story of Commodore International, also known as Commodore Business Machines

(CBM) is a chapter in computer history that has been overlooked; Commodore has been largely discredited as a pioneer, leaving names like , IBM, and Apple, in the focus of early computer history (Halfhill, 1994; Bagnall, 2005). In his book, On the Edge, Brian Bagnall (2005) tells the true story of Commodore and its rise and fall.

The beginning. The story of Commodore starts with its founder, , an

Auschwitz’ survivor who later moved to New York to become a repairman in the

Bronx. He founded Commodore in 1958 and started manufacturing . A Canadian venture capitalist, , was made partner in order to save the company from going out of business when their funding company, Atlantic Acceptance Corporation, went bankrupt in

1965 (Loomis, 1998).

Silicon Valley. The electronics revolution was under way and setting up in Silicon Valley in the 1960s. Commodore started making electronic calculators with (TI) as supplier of semiconductor chips. The calculators were extremely popular, but also self- destructive for Commodore when TI back-stabbed them by producing the calculators themselves at much lower prices, thus pushing them out of business. Tramiel vowed to never again be at the mercy of a vital supplier (Loomis, 1998).

Commodore entered the microcomputer market in 1977 at the same time as Apple and

Tandy. Being at the forefront of the revolution, they almost entirely drove out the competition the next few years by combatively pushing down prices. This was all due to Tramiel's hard, but successful, leadership . His slogan “computers for the masses, not the classes” became famous at the time (Halfhill, 1994; Loomis, 1998; Bagnall, 2005). COMMODORE INTL. 4 Success. The share price that had been $2.50 at the startup in 1962 had climbed to $1.200 by 1983 (Loomis, 1998). The success was largely due to the “” (C64), which is also referred to as the “Model T Ford” of the movement, because it was, just like the T Ford, the first an average person on average income was able to afford buying because of its low price (Swenson, 1999).

The success of Commodore was significant, and also highly visible; Irving Gould ordered a jet-plane for the company, making them the first microcomputer company to own a corporate jet. However, he really purchased this jet for personal use, to accompany his very expensive lifestyle (Bagnall, 2005). Tramiel had his expensive addiction in classic cars, but still lived a more normal lifestyle compared to Gould (Loomis, 1998).

Time of struggle. Jack Tramiel got out of Commodore in 1984 after a clash with his partner, Irving Gould. By this time, the home computer market was struggling, and in order to make Commodore more profitable, Tramiel's replacement, Marshall Smith, took to downsizing and cutting the payroll by more than 45%. Another replacement CEO, Thomas Rattigan, further cut costs and closed three plants in order to stabilize Commodore's position. The company was just keeping afloat in the years 1985-1987 (Bagnall, 2005). CEO's were flying in and out, closing plants and cutting staff. It is highly likely that this led to a low morale among the employees (Bagnall, 2005).

The power of macroeconomics is always at work and push organizations to “reduce costs, improve the quality of products and services, locate new opportunities for growth, and increase productivity” (Kotter, 1996, p.3).

Commodore's market, largely run by third-party vendors, was starting to hurt during the mid-eighties due to the massive amount of piracy (Swenson, 1999). The piracy was, COMMODORE INTL. 5 undoubtedly, one of the reasons to a gradual decline of the Commodore software industry

(Swenson, 1999).

In the computer business, change is constant. This can be depicted through Moore's Law which states that the power of microprocessor technology doubles and the related costs of production are cut by half every 18 months (Moore, 1965).

As identified by Kotter (1996), one of the four major forces driving the need for a major change in a business is technological change. Technological change was prominent, but

Commodore failed to keep up (Bagnall, 2005).

Vision is essential because it simplifies thousands of more detailed decisions. It also helps to motivate people to move in the right direction and coordinate them in a remarkably fast and efficient way (Kotter, 1996). Commodore's leadership failed to have vision; they should have said “here we are now, but this is where we want to be”, and made the necessary adjustments in their business strategy. They lacked a vision, which is extremely essential when leading change:

Vision is essential because it simplifies thousands of more detailed decisions. It also helps to motivate people to move in the right direction and coordinate them in a remarkably fast and efficient way (Kotter, 1996). Instead, Commodore's board of members were rapidly firing and hiring new CEO's, trying to find someone who could make the company more profitable

(Bagnall, 2005). The final decision was Mehdi Ali, who came in and made some fatal decisions

(Bagnall, 2005).

What made Commodore fall. Poor marketing, poor support, poor management, lack of dominance in the business sector, competition from other gaming consoles, and a general growing competition, all led to Commodore's downfall (Swenson, 1999).

Near the end, the company executives took out disproportional large salaries. Gould's COMMODORE INTL. 6 yearly salary was $3.500.000, and Mehdi Ali's was $1.000.000. These ridiculously high salaries was a clear indication that the leaders did not care about the company, especially when this happened in a period where Commodore could not even come up with money to buy parts from their suppliers (Bagnall, 2005).

Commodore also failed to keep up with technology; they were not longer at the cutting edge, largely due to the fact that the management team, led by Mehdi Ali, demanded enormous cuts in research and development (R&D). R&D is at the very heart of a technology business' lifeline, and this fatal decision made Commodore lack behind the competition. Another sign that employees were discontent with their leadership was prominent in an exit-interview related to lay-offs: Many employees were asked what they disliked most about Commodore, and several invariably mentioned the CEO, Mehdi Ali (Bagnall, 2005).

Kotter identifies eight mistakes in his book Leading Change (1996). These eight mistakes are: (1) Allowing too much complacency. (2) Failing to create a sufficiently powerful guiding coalition. (3) Underestimating the power of vision. (4) Undercommunicating the vision. (5)

Permitting obstacles to block the new vision. (6) Failing to create short-term wins. (7) Declaring victory too soon. (8) Neglecting to anchor changes firmly in the corporate culture (Kotter, 1996).

The consequences following these eight mistakes include: (1) New strategies are not implemented well. (2) Acquisitions don't achieve expected synergies. (3) Reengineering takes too long and costs too much. (4) Downsizing doesn't get costs under control. (4) Quality programs don't deliver hoped-for results.

Commodore leadership decisions' can be seen in the perspective of Kotter's eight mistakes: They allowed for too much complacency and lacked a strategy, thus they failed to create a strong guiding coalition. Instead, CEO's were hired and fired rapidly (Bagnall, 2005). COMMODORE INTL. 7 They highly underestimated the power of vision, mostly due to the fact that they didn't even have a clear vision. Short-term wins failed, highly due to bad marketing decisions like selling old hardware in new wrapping, “same shit, different wrapping”. Last but not least, changes were not firmly anchored in the corporate culture,

Strategy

The Technology Adoption Life Cycle (TALC) is a model that displays how communities respond to discontinuous innovations (Moore, 2002). See also Figure 1 in the appendix for a visual explanation of the TALC.

A discontinuous innovation is a product or service requiring consumers and marketplace to drastically change their past behavior in order to gain new benefits (Moore, 2002). The platform is an excellent example of a discontinuous innovation, as it was not compatible back with the previous models, e.g. Vic 20, C64, or the C128. This was a brave attempt, as consumers needed to adapt to the new platform in order to draw the benefits from it. However, as shown in the SWOT analysis, the new product was way ahead of its time and also released only 6 months after the 128 (Bagnall, 2005), thus leading to slow sales in the early market. Commodore had already crossed the chasm and gained acceptance within the mainstream market with their successful Model T Ford, the C64. Value chains are created around herds, and this happens when a company makes a market where there was no market or value chain before (Moore, 2002).

Commodore definitely created a new market for home computers in the 1980s. and also crossed the chasm, which means to win a niche foothold in the mainstream as quickly as possible

(Moore, 2002). There was a clear evidence of a sustainable marketplace for the Amiga because of this persistent value chain. Commodore managed to cross the chasm again, with the Amiga platform. But failed to keep up with technology and lost the race due to faulty marketing and COMMODORE INTL. 8 management.

The Tornado. Looking at the successful sales of computers in the 1980s (Bagnall, 2005), it is obvious that Commodore wanted to place the Amiga inside the tornado, the third stage of the

TALC (Moore, 2000). The tornado is a brutal fight to capture as many customers as possible

(Moore, 2000), and it occurs when the pragmatists simultaneously adopts a new infrastructure, creating a huge increase in demand for a product (Moore, 2000). Taking advantage of the new technology wave is essential when entering the tornado phase (Moore, 2000). Mass-market adoption is a tremendous force that overruns old technology (Moore, 2000), elevating the product to the fourth stage, the Main Street.

However, in the computer industry it is vital to also keep R&D on the cutting edge, because change is constant and inevitable. This is where the management of Commodore failed; cutting the funds to R&D is basically the same as cutting ones own lifeline. Management instead decided to re-release old computers in a new wrapping, computers that no-one wanted because they were outdated (Bagnall, 2005). Several attempts were made doing this, all of which contributed to bigger debts and less sales (Bagnall, 2005). Another faulty decision made by the management was when approached and wanted to use the Amiga as a low-end

Unix solution. Management demanded a ridiculously huge amount of money in licensing fees, and Sun gave up (Bagnall, 2005).

Part Three: Conclusions and recommendations

Conclusions. It is clear that factors such as poor marketing, poor support, lack of dominance in the business sector, and competition in the market, all led to Commodore's fall

(Swenson, 1999; Bagnall, 2005). What is evident and emphasized in this executive report is the fact that management and leadership was poor. Management should have led the company COMMODORE INTL. 9 accordingly with market change but instead made too many wrong decisions. The most crucial identified in this report is the decision to dramatically cut funding to R&D (Bagnall, 2005).

Furthermore, the leadership did not establish direction by lacking a vision of both the future, and the distant future, and also strategies for producing the changes to achieve the vision. Leaders did not align the employees, nor motivate or inspire them. As Kotter (1996) states, in order to produce extremely useful change, for instance new products that customers want, it is vital to have leadership establish a direction (vision), to align the employees, and motivate and inspire them.

What should have been done. Instead of releasing old computers in new wrapping,

Commodore's management should not have prioritized funding to R&D. Even though this was before Kotter's model of successful change, Commodore management should have implemented some sort of change strategy. Kotter's eight steps to successfully lead change include: (1)

Establish a sense of urgency: Examining the market and competitive realities, identifying and discussing crises and opportunities. (2) Form a powerful guiding coalition: Assemble a group with enough power to lead the change effort, and encourage the group to work as a team. (3)

Create a vision: Create a vision to help direct the change effort, and develop strategies for achieving that vision. (4) Communicate the vision: Use everything possible to communicate the new vision, strategies, and use the guiding coalition as example when teaching new behaviors.

(5) Empower others to act on vision: Remove obstacles and structures that undermine the vision and change. (6) Plan for and create short-term wins: Make a plan for visible improvements in performance, create those performances, and recognize and reward involved employees. (7)

Consolidate improvements and produce even more change: Use the increased credibility to change systems, structures, and policies, to make them fit the vision. Hire, promote, and develop COMMODORE INTL. 10 employees capable of implementing the vision. Renew the process with new projects. (8)

Institutionalize new approaches: Define connections between new behaviors and organizational success. Develop the means to ensure leadership development and succession (Kotter, 1998).

The lessons learned. Companies in the field of computers have quite a few lessons to learn from Commodore's mistakes. First of course, the company should always stay on the cutting edge of technology; the always evolving and changing technology is depicted through

Moore's law (Moore, 1965). Thus, in order to stay ahead in the business it is vital to have a prospering R&D department, and not, as Commodore's leaders did, cut the funding to its lifeline.

Another huge mistake made by Commodore's leadership was the fact that they did not have a vision, plan, or goal, for the future. Nor were the leaders motivating or inspiring. Kotter's eight steps is an excellent model which can be utilized to successfully lead change and prevent a company from committing the same mistakes Commodore did. Other really apparent mistakes were the low morale and poorly qualified leaders. Trust is extremely important in a leader and employee relationship, and when the credibility of the leadership is low due to a number of bad decisions, it is not difficult to grasp why Commodore fell as hard as it did. COMMODORE INTL. 11 Appendix

Numbers and figures

Year Model Comments

1981 VIC-20 The first color computer that cost under $300

1982 C64 Also referred to as the Model T Ford of the home computer movement

Guinness Book of Records: “Most unit sold of a single model of

computer”

The first computer with a synthesizer chip. It is the best selling computer

model of all time. Total sales estimated between 17 and 22 million units,

more than all 's put together, and also way more than IBM's top-

selling systems, the PC and the AT (Halfhill, 1994).

1985 C128 Not successful because of incompatibility with C64, and launched only 6

months before the .

1985 Amiga 1000 The first multimedia-computer ever, way ahead of its time (Halfhill,

1994).

Not compatible with the C128 or C64.

1987 The first multimedia computer to hit the masses.

1987 A larger Amiga with more expansion possibilities.

1990 A larger and more powerful Amiga.

1991 CDTV Commodore's attempt to win acceptance in the mainstream market of TV

and multimedia; CDTV was the first ever computer with a CD-ROM drive COMMODORE INTL. 12 to connect to the TV.

1991 Amiga 500+ One of the mistakes Commodore made; a relaunch of old hardware.

1992 Another mistake, relaunch of old hardware in new wrapping.

1992 Successful, more powerful.

1992 The flagship, launched only 2 years before it all ended.

1993 CD32 The first ever 32-bit gaming-console.

1994 Commodore files for bankruptcy

Table 1. Numbers and figures, Commodore (Bagnall, 2005).

Figure 1. Technology Adoption Life Cycle (TALC), adopted from Moore (2002). COMMODORE INTL. 13 References

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