The Dilemma of Lotus 1-2-3

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By: Glenn Rifkin

When Mitchell Kapor, a 32-year-old tech entrepreneur, founded Lotus Development Corporation in 1982, he introduced Lotus 1-2-3, an electronic spreadsheet that became the best-selling personal-computer software of its day. Designed to run on the recently introduced IBM PC, Lotus 1-2-3 helped birth the personal-computer revolution of the early 1980s by giving users a versatile program that was easy to use and addressed a key business need. It was the industry’s dominant “killer app” at the time.

The Cambridge, Massachusetts-based startup exploded on the high-tech scene, recording $53 million in sales in 1983, the first year 1-2-3 was on the market, making it larger than Microsoft at the time. It went public and continued to grow even after Kapor, disinterested in running a big company, left in 1986 to pursue other interests. Jim Manzi, a former McKinsey consultant with no deep technology background, became the firm’s CEO. 

Lotus continued to thrive on the back of 1-2-3 throughout the decade, with the product controlling an astounding 70 percent of the $500 million spreadsheet market in 1988. But trouble was looming.

1-2-3 would become a classic example of the “innovator’s dilemma,” a theory formulated by the late Harvard Business School professor Clayton Christensen. In his thinking, innovative companies were so focused on sustaining the products that took them to the top that they were unprepared for the disruptive new technologies coming from competitors, usually startups like they had once been.

In this case, Lotus would be blindsided by the introduction of Microsoft’s Windows operating system and its suite of office-productivity software, including Excel, a spreadsheet application that would eventually decimate Lotus 1-2-3.

New versions of 1-2-3 were repeatedly delayed, eroding market share. The company also focused all of Lotus’s efforts on supporting OS/2, a new operating system developed jointly by IBM and Microsoft, rather than investing in making 1-2-3 compatible with Windows. But Microsoft promptly switched to Windows 3.0, which became the dominant operating system in the world, and Lotus’ products found themselves on an old character-based interface. “It was a head fake by Microsoft,” says John Landry, an angel investor who was chief technology officer at Lotus in the 90s. It was a misstep others made too, but missing such key inflection points in the technology whirlwind can be fatal for a product line.

In the 90s, Lotus would rebound some with Notes, a transformative software platform that by 1993, more than 2,000 companies and a half-million people were using. That attracted IBM, which in 1995, acquired Lotus in a hostile takeover for $3.5 billion.

The merger appeared to be successful in the short run, but in the end, Lotus 1-2-3 was overtaken by Excel, which remains the world’s most popular spreadsheet program to this day. Subsumed by IBM, Lotus Development faded into high-tech oblivion.