Failures and breakthroughs – exposed, reflected, considered

On Louis Gerstner and IBM

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A bit of historical perspective is here.

Year 1993, a once-mighty behemoth IBM, a former pacesetter in its field with a sterling reputation that was slowly fading into history, was considered a “state in a state” with 300,000 employees, billions dollar budget and its unique culture and myriad of rules and regulations.

However, IBM was then losing ground and money to likes of Apple, Intel and Microsoft. IBM offered early-retirement buyouts to employees shortly before Mr. Gerstner arrived. The company expected 25,000 people to take the offer, but about twice as many did. As employees headed for the exits, predictions of IBM’s demise were commonplace in magazine articles and books. The mainframe computer, IBM.’s lifeblood, was said to be dead. The future belonged to the fleet-footed leaders of the personal computer industry, Microsoft and Intel. To compete, IBM was pursuing a plan to break up the company into a collection of smaller ones.

Enter Louis V. Gerstner Jr., an outsider to the technology industry with a reputation as a leader and strategist, a management gun-for-hire whose résumé included RJR Nabisco, American Express, McKinsey & Company and Harvard Business School (graduated in 1965).

The IBM he saw he later described (in his book and subsequent seminars) in evocative metaphors and equally astounding ways. He likened the company to an elephant, the late Roman Empire, the Kremlin, the Titanic and an animal raised in captivity that is suddenly returned to the jungle. Still, most persuasive is IBM as the sick patient. When Gerstner arrived, the company was sclerotic, senile and hemorrhaging. It lost $5 billion in 1992 and $8 billion in 1993. Its market share had dropped 50%; 45,000 employees had just been laid off.

A few weeks after Mr. Gerstner joined IBM, a chauffeured car, as usual, arrived at his Connecticut home one morning to pick him up. As the car drove up, he was surprised to see someone already in the back seat. It was Thomas J. Watson Jr., the then 79-year-old former chief executive and son of the company’s founder. He told Mr. Gerstner that he was angry about what had happened to ”my company” and urged Mr. Gerstner to shake it ”from top to bottom.”

Mr. Gerstner, no stranger to big companies and bureaucracy, was stunned by what he calls ”the extraordinary insularity of IBM” That resulted in a pathological focus on internal process at IBM instead of on customers and the marketplace. Three weeks into his job as the newly installed chairman and CEO in 1993, Gerstner was presiding over his first meeting at the company on the topic of strategy. Everyone in the room was actively sharing ideas. “After eight hours I didn’t understand a thing,” Gerstner recalled. Too much terminology, too many abbreviations, too many insider-oriented information pieces and references.

At one of his first meetings, Gerstner was the only attendee not in a white shirt (he wore blue); the next time he faced a sea of colors, and he soon rescinded IBM’s famously rigid dress code.  Discussion at that IBM meeting, he said, seemed to be conducted in almost a private company code, like another language. Gerstner was not hearing the dispassionate, cost-driven analysis that he had been hoping for. The meeting, however, was a pivotal one for him at IBM, because it made him realize what he was up against in his charge to restore the once-great company to health.

The corporate culture could be described only as feudal. As one example, Mr. Gerstner reprints what he terms ”one of the most remarkable documents I have ever seen”: a 60-page memo from a human resources director to an aide of a senior IBM executive. It told the aide, among other things, to reset the three clocks in the executive’s office each day and included detailed instructions on how and when to buy and resupply the executive with his preferred chewing gum (Carefree Spearmint sugarless). Mr. Gerstner cited this as an instance of the ”suffocating extremes one could find all too easily in the IBM culture,” and he named the executive, who voluntarily retired just after Mr. Gerstner took over.

Within the first 100 days, he made the important decisions to keep the company together, reduce costs sharply and change the way IBM did business, overhauling sales, marketing, procurement and internal systems. He didn’t break up the company, as many were advising in response to his smaller, nimbler competition. He didn’t try to divert attention by acquiring new revenue streams, as many investment bankers were urging. Instead, he slashed prices to get badly needed cash and regain market share. He held a fire sale of unproductive assets. And he laid off 35,000 more employees (but he put so much human touch in this difficult decision: compassion and care).

He writes that the choice to keep the company together, reversing the course set by his predecessor and endorsed by the board, was ”the most important decision I ever made – not just at IBM, but in my entire career.” He based it on strategic analysis and instinct – and listening to customers. His bet was that IBM’s competitive advantage would be as the ”foremost integrator of technologies” to solve business problems for corporate customers. So much of what IBM did since then flowed from the one-company decision – the changes in sales, marketing, organization and compensation.

Before long, Mr. Gerstner also realized that trying to recapture control of the personal computer business from Microsoft was quixotic – costly, time-consuming and yesterday’s war. By the mid-1990’s, IBM’s technical leadership had noticed the Internet, and took the view that the coming ”networked world” would lead the way to the post-PC era, undermining Microsoft’s grip on the industry. ”Desktop leadership might have been nice to have,” Mr. Gerstner writes, ”but it was no longer strategically vital.”

Perhaps most important, though, Gerstner, the nontechie generalist, listened to those who anticipated that the PC revolution was entering a new stage. Few in the business then foresaw the big-system foundations of today’s networked world, in which corporate customers need soup-to-nuts services provided by a global information technologist. The now common phrase ”e-business” was coined by IBM.

He kept the company together, cut payroll and other costs, reduced IBM’s dependence on hardware and built up the services business. Under his leadership, IBM deftly caught the Internet wave, grasping its significance and translating it for baffled corporate customers. Such nimble exploitation of a fast-moving market opportunity was foreign to the old IBM.

After ten years into his job, in 2002, Gerstner left IBM with 65,000 more employees than when he arrived. The 2001 profit of nearly $8 billion marked the eighth straight year of black ink (though the company is carrying heavy debt). IBM was again an industry leader. Its culture and management were completely overhauled and put again onto the cutting edge.

He then wrote a memoir where he documente his years at IBM. ”Who Says Elephants Can’t Dance?” is not about IBM’s Lou Gerstner; it’s about Lou Gerstner’s IBM – and, by extension, that of his predecessors, since that is what he inherited in 1993. The book can seemingly serve a good case in point for current crisis-stricken GM, which is also predicted to file Chapter 11 if not rescued by the American government.

The book has no photographs, and its first sentence is, ”This is not my autobiography.”

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  1. […] The currently prevalent and rather dogmatic approach of avoiding filing for Chapter 11 is mostly due to misconception. It is commonly thought that a company or an organization filing for the bankruptcy (immediately) ceases its activities and (virtually) its existence. This is wrong. While under Chapter 11, the company/organization continuous its operations.  the difference mainly comes in guise of added supervision and control. The debtor usually remains in possession of the company’s assets, and operates the businesses under the supervision and control of the court and for the benefit of creditors. The debtor in possession is a fiduciary for the creditors.  If the debtor’s management is ineffective or less than honest, a trustee may be appointed. Although admittedly the rate of successful Chapter 11 reorganizations is low (estimated at 10% or less), it is still a better solution and is not only considered by small and medium but by large multinational corporations such as GM (which follows the same path of peering into the public money instead of doing an internal restructuring, refocusing and cost cutting as historically was done to save IBM). […]


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