While CEOs often justify megamergers by promising increased operating efficiencies, research suggests that the real benefits are less about economies of scale and more about oligopolistic advantage. A comprehensive study of the US economy by Jan De Loecker, Jan Eeckhout, and Gabriel Unger found that “markups,” a proxy for market power that measures firm-level difference between prices and marginal costs, have increased sharply over the last several decades. In 1980, the average firm charged 21 percent over marginal cost; by 2016, the average markup had grown to 61 percent. This trend has been observed not only in the United States, but in other developed economies as well.

The irony, of course, is that large organizations are open. Employees interact with thousands or millions of customers each day. Executives and managers talk constantly with suppliers, consultants, regulators, and other stakeholders. Why, then, hasn’t open innovation made a bigger difference? Why isn’t the typical corporation as resilient and innovative as a city or a university? Because, to put it bluntly, they’re often run by people whose minds are hermetically sealed against unconventional ideas.

What is perhaps most strange about the invocation of competition as the primary driver of our economies is that behind the masculine bluster of ruthlessness, most businesses and businesspeople operate in a manner far more similar to real ecosystems. This is why all big organizations, for instance, have ambitions to function with the cooperative efficiency of termite mounds; why most business leaders work to establish mutually beneficial, “win–win” relationships with their suppliers, service providers, and customers; and why, even in the countries that most enthusiastically embrace the theology of free markets, a whole battery of antitrust laws exist to prevent excessive cooperation in the form of collusion between businesses, the creation of cartels, and other “anti-competitive behaviors.

The implications of this kind of leap to a company’s economic model can be devastating. In IBM’s case it meant the collapse of gross profit margins and the attendant changes we had to engineer to lower our cost structure without compromising our effectiveness.

Yet the hardest part of these decisions was neither the technological nor economic transformations required. It was changing the culture—the mindset and instincts of hundreds of thousands of people who had grown up in an undeniably successful company, but one that had for decades been immune to normal competitive and economic forces.

PART 5: How It All Worked Out

“It is not a coincidence that the emphasis on financial metrics in business occurred at the same time as explosive growth in the size and remuneration of the financial sector. There were useful innovations, such as the emergence of venture capital as a means of financing start-up businesses. But the financial sector is primarily rewarded by fees from facilitating

transactions, not for the consequences of these transactions. Corporate executives engaged in a frenzy of dealmaking, buying and selling existing businesses; incentive plans encouraged actions that generated immediate revenues or cost savings, mostly with unmeasured consequences for the business in the long run. The result was the destruction of many of the great businesses which an earlier generation of less well-rewarded managers had created.