IBM's Leadership and Competitiveness

He Loves to Win. At I.B.M., He Did

The revival of I.B.M. over the last nine years is most tellingly measured not in numbers but by its return to pre-eminence as the industry leader. Once again, I.B.M. is the model others follow. Consider the strategic debate behind the fevered proxy fight at Hewlett-Packard. Its planned purchase of Compaq Computer makes sense, Hewlett-Packard says, because the merger will make it more like I.B.M. A dangerous delusion, reply the deal's opponents. Who, they ask, could possibly compete broadly with I.B.M.? Even the main question these days about I.B.M.'s future lends perspective. Sure, the skeptics say, I.B.M. is back with a vengeance, a powerhouse in the marketplace with strong profits. But, they ask, how much growth can be expected from a corporate giant with sales last year of $86 billion?

In 1993, when Louis V. Gerstner Jr. became chairman and chief executive, the question asked about I.B.M. was whether it would survive. And in choosing him, the I.B.M. board had taken a historic gamble on a professional manager with no experience in the computer industry.

Last Monday was Mr. Gerstner's first day at I.B.M. bearing just one title - chairman. He will keep it until year-end, then depart. On March 1, he was succeeded as chief executive by Samuel J. Palmisano, a 29-year I.B.M. veteran who built up the vital services business, which now represents about half of I.B.M.'s revenue and profits. The rearview mirror holds little interest for Mr. Gerstner, who is 60. Yet in a lengthy interview last Monday at the company's headquarters in Armonk, N.Y., he reflected on his worries in taking the job, the challenges he faced and the reasoning behind his crucial strategic, organizational and technical decisions there. He spoke of where he thought I.B.M. had been smart and when luck had helped a lot.

He spoke of matters beyond I.B.M. as well. He explained why he believes there is no new economy; a statement that prompted boos from the dot-com world when he first made it in 1998. He answered the criticism he received in the industry in 1993, when he said, 'The last thing I.B.M. needs now is a vision,' and explained why he was right. And, ever the outsider in the computer business, he discussed what he thought was special about the industry, what was ordinary and what still irritates, even amuses, him about it.

Mr. Gerstner also offered a bit of personal reflection. After leading three large corporations and achieving vast personal wealth, he said that the enduring thrill of being a chief executive and the part he would miss was really quite simple. 'I love winning,' he said, pausing briefly before answering the question emphatically, 'I love the process of leading an institution and being part of an institution that succeeds, that wins. I get excited by our success. I get very frustrated by our failures, too, but I enjoy the game.'

At I.B.M., the Gerstner record is mainly a success story. 'Lou Gerstner re-established the company's belief in itself,' observed Andrew S. Grove, the chairman of Intel, who has known I.B.M. as a partner and competitor for more than two decades. It's hard to describe how beaten down that company was.'

When he took the job, Mr. Gerstner, a former McKinsey consultant who went on to become president of American Express and then chief executive of RJR Nabisco Holdings, was far from the obvious choice for guiding Big Blue, the fallen icon of American technology, back from the brink. Among I.B.M. directors, there had been a sharp debate over whether to hire a technologist or a professional manager. In the end, the board bet that I.B.M. needed a leader, a strategist and a manager Mr. Gerstner's portfolio of skills not an executive with a deep understanding of computer technology.

He also had qualms. 'If the board had been wrong, and that was my big concern that underlying it all there was a technical problem in I.B.M. then it would have been a very short tenure for me,' he said, smiling and shrugging. Those misgivings are a distant memory. Even last week, it was clear that he does not plan to slow down until he leaves. Monday was his first day at the headquarters in two weeks. He had been on the road, going to Philadelphia, Boca Raton and Salt Lake City, and abroad in Stuttgart, Munich, London and Edinburgh, mostly meeting with I.B.M. customers.

The day was the equivalent of a corporate pit stop; he was headed out again on Tuesday, adding to the more than 1.1 million air miles he has logged since 1993. His travel regimen reflects his management philosophy: getting out of the office to deal with customers and dwell in the marketplace is an antidote to the corporate insularity that was nearly I.B.M.'s downfall.

He began traveling to meet customers and to visit I.B.M. outposts as soon as he took over, and what he heard guided his action. He also read. As a former McKinsey consultant, he asked first for the I.B.M. strategic plans, current and recent. There were plans aplenty; he found strategic blueprints for each division, even down to the product level. By the end of his first month, Mr. Gerstner, who always carries two briefcases of reading material when he travels, had read thousands of pages of strategic documents.

The reading left him enlightened and appalled. I.B.M., he said, was filled with smart people who had recognized the industry's major technological and economic shifts. Yet I.B.M. had repeatedly failed to respond. 'Part of the culture was a tendency to debate and argue and raise every issue to the highest level of abstraction,' Mr. Gerstner said. 'The process almost became one of the elegance of the definition of the problem rather than the actual execution of an action plan.'

So, a few months after arriving at I.B.M., when he said the last thing it needed was a vision, he was declaring a break with the old culture of introspection and foot-dragging. Had he spoken of vision at I.B.M., he said, he knew it would have started 'a yearlong debate.

'And we didn't need the vision,' he added. 'We needed to save the company economically.'
Instead, he gave marching orders to the I.B.M. troops. 'We were going to build this company from the customer back, not the from the company out,' he said. 'That was the big message from my first six months in the company that the company was going to be driven from the marketplace.'

As one symbolic step, he abolished the ritual of the I.B.M. organization chart. These fold-out charts were minor masterpieces of draftsmanship and printing, an intricate latticework of lines, color-coded boxes and asterisks. Lovely to behold, they recalled the engineering drawings of Leonardo da Vinci, according to one executive. Producing them was a cottage industry within I.B.M., and thousands of them were pinned on the office walls of its workers. When asked about how to revise the organization chart under his management, Mr. Gerstner declared there would be no more organization charts that anyone asking for one was focusing on the wrong thing.

Early on, he also changed incentives to put I.B.M. and its people more in step with the marketplace. When he came to the company, only 300 employees received stock options. Today, more than 60,000 do. He told his top 100 executives soon after he arrived that he expected them to own I.B.M. stock equal to one to four times their yearly compensation. Mr. Gerstner argues that strategy and corporate culture are intimately linked. 'You can't talk a culture into changing,' he said. 'You can't just exhort people to be different. You've got to point to fundamental strategic changes you're going to implement in a company and then drive the execution of that strategy. And it is in the execution of the strategy that the culture begins to change.'

The first major decision Mr. Gerstner made was to decide to keep the company together, not split it up into 13 loosely linked 'Baby Blues.' Under that plan, put forward by his predecessor, John F. Akers, in December 1992, some would be spun off as separate companies with their own names, like AdStar, for the disk storage unit. This so-called federation plan was moving ahead briskly when Mr. Gerstner arrived. 'It was an extraordinary Balkanization of the company under way when I walked in,' he said. 'There were investment bankers sticking their flag on every piece of I.B.M. they could'

Auditors had been hired, costing millions of dollars, to create stand-alone financial statements for the spinoff candidates. 'Every unit had run for the hills,' Mr. Gerstner recalled, 'creating their own human resources policies, their own communications policies.' In theory, the federation plan addressed I.B.M.'s fundamental trouble - that as an integrated company it was not quick and nimble. It would be better off aping the personal computer industry, where fast-moving technology specialists like Microsoft and Intel prevailed. 'That was the industry model that I.B.M. was responding to,' Mr. Gerstner said. 'And I looked at that and I said, ?Wait a minute, as a customer of I.B.M.'s, I'm not terribly drawn to that as a model for I.B.M.'

Mr. Gerstner, an I.B.M. customer at American Express and RJR, liked the concept of 'integrated solutions' that I.B.M. could distill the complexity of computing to solve business problems for companies. In his early travels for I.B.M., he heard similar sentiments from customers. Aside from its breadth, in Mr. Gerstner's view, I.B.M. had another unique feature: its research prowess. 'Now, I walk in and they're atomizing the company,' he said.' I see both of I.B.M.'s distinctive competencies being destroyed.' Within 90 days of his arrival, Mr. Gerstner irrevocably decided to keep the company together. 'I knew it was a big risk, but I never doubted that it was the right thing to do at I.B.M.,' he said. 'What scared me,' he added was the need to do three things at once: change I.B.M.'s economic model, its strategy and its culture.

First, though, Mr. Gerstner had to cut costs. Work force cutbacks and plant closings were already under way, but he went deeper. In July 1993, he announced the company would eliminate an additional 35,000 jobs, bringing the declared total for the year to 50,000 and bringing the charge against earnings to $8.9 billion. As a result, I.B.M. reported a record loss of $8.1 billion in 1993, and the next year, its worldwide employment fell to a low point of 220,000, from 302,000 in December 1992. Looking back, Mr. Gerstner pointed to three strategic decisions that were 'the fundamental underpinnings of building an integrated company.' First, he created a broad computer services unit that sold bundles of hardware, software, consulting and maintenance to manage business processes like manufacturing, purchasing or marketing.

I.B.M. had a services arm before, but it merely kept the company's machines up and running for customers. To be a real computer services company, Mr. Gerstner noted, 'I had to be product agnostic.' 'The customer would not accept a services company if all it did was flogs I.B.M. products,' he said. His decision to move into services set off 'an incredible bomb in the company,' Mr. Gerstner recalled, adding, 'Here was a part of I.B.M. that was going to work closely with Oracle, Sun Micro- systems and, God forbid, Microsoft.' Yet IBM Global Services became the company's biggest business, the corporate vehicle that would, as Mr. Gerstner observed, 'look at technology through the eyes of the customer.' His second crucial decision struck at another I.B.M. heritage, that of relying almost exclusively on its own homegrown technology. Before, when the company had gone outside when it plunged into the personal computer business in 1981 using Intel's microprocessor and Microsoft's operating system the move had been regarded as a grave mistake.

But by early 1994, Mr. Gerstner had decided that I.B.M. would move to 'open systems.' In other words, Mr. Gerstner said, 'All of I.B.M.'s software would run on major competitive hardware, and all of I.B.M.'s hardware would support competitive software.' To do that, the company would have to adopt standard software protocols that allowed different hardware and software products to talk to each other. To Mr. Gerstner, the move toward openness was a technical manifestation of his broader strategy. 'There's no way that you can get a company built around proprietary control to accept the open model unless they start with the customer and realize this is what the customer wants,' he explained. His third decision, made in 1995, was to fully embrace the Internet and what I.B.M. calls the 'net- worked world' model of computing. Moving to open systems made it easier for the company to adapt to the Internet early. But the networked model of computing suited I.B.M.'s strengths - big data- serving computers are the equivalent of power plants on the network, and the Internet shift moved the center of computing away from the personal computer.

As the Internet moved into the mainstream in the mid-1990's, it brought an explosion of computing complexity, as all kinds of hardware and software had to be able to connect to the global network. I.B.M.'s breadth and its services group were big advantages in this new environment. 'Here was a chance for I.B.M. to lead again,' Mr. Gerstner declared. 'We were able to articulate a role for I.B.M. in the networked world that spoke of the value of all we did.'

I.B.M. welcomed the sudden spread of Internet-style computing as a gift, Mr. Gerstner admit- ted. 'The company was extraordinarily lucky that the networked model of computing arrived in the mid-90's,' he said. 'And let me tell you, having worked in industries where the cycle of change is measured in decades, if not centuries, one of the things that is extraordinary about this industry is that if you miss a turn of the wheel you have a chance to get back in the game' every 10 years or so. Still, it was his earlier decisions that put I.B.M. in a position to ride the Internet wave. Given the company's size, that strategy evolved quite rapidly. In late 1995, it formed an Internet division, which was not a product group, but more a corporate SWAT team to make sure the entire company was marching toward the Internet. Then, it carved out its niche, trumpeted in a massive advertising and marketing campaign, beginning in 1997, to push 'e-business'. Competitors scoffed and advertising experts scratched their heads, but the message resonated with corporate customers. The message helping companies do 'e-business,' documented in ads by examples remained consistent, as did the strategy. Amid the dot-com mania in 1999, Mr. Gerstner told Wall Street analysts that he regarded the hot Internet start-ups as 'fireflies before the storm,' suggesting that the big impact of e-business would be in the old economy. At the time, that was hardly conventional wisdom.

At the conclusion of Mr. Gerstner's tenure, his three strategic pillars have come together in what could be mistaken for the very word he avoided, a vision. And that strategy shift actually executed, insured a real change in the corporate culture. The company's sheer number of recent hires is a clear sign of that and the buildup of the ser- vices business is a big reason IBM Global Services employs 150,000 people, up from 7,600 in 1992. All told more than half of I.B.M.'s employees have worked for the company for five years or less. In 1992, the figure was 14 percent. Having succeeded in an industry skeptical of outsiders, Mr. Gerstner feels free to assess it. The computer industry tends to go astray, he said, when it 'tends to reach to promise value in utopian schemes' the paperless office, the cashless society, the notion that shopping Web sites would bring the demise of bricks-and-mortar stores.

'The payoff from information technology is going to be in making transactions and processes more effective and efficient' he asserted. 'So it's not about creating a new economy, it's not about creating new models of behavior or new models of industry. It's about taking a tool, a powerful tool, and saying. 'How can I make my supply chain more effective and efficient, how can I make any purchasing process more efficient, how can I make my internal employee communications more effective and efficient, how can I as a government deliver services to constituents more efficiently and more effectively?'

'So the computer,' he continued, 'is in a sense like the electric motor 120 years earlier. It's an invention that in and of itself is kind of interesting, but doesn't have a lot of value unless you like hitting the alt, control, and delete keys, and all the other things you can do on a keyboard. Its value is in the application to other processes.' His reference to alt, control, delete the keys users strike to try to reanimate a personal computer, running Windows, that has crashed was a slap at Microsoft. Like many people, Mr. Gerstner, who travels everywhere with an I.B.M. ThinkPad notebook computer, finds PC's too hard to use. He believes the problem reflects the technical parochialism of the industry.

'There's an absence of concern about ease of use and almost a pride in technical complexity,' he said. 'What other industry would give you a product that, to turn it off, you first have to press a button labeled start? And you tell me one other industry where somebody could sell a product that you have to reboot on average five or six times a day to get it to work?' Yet, unlike so many in the software business, Mr. Gerstner did not let his critique of Microsoft drive his business decisions.

In 1996, he decided that I.B.M.'s OS/2 operating system could not compete with Microsoft's Windows. 'Most of the big technical decisions we made were half as much business as they were technical,' Mr. Gerstner explained. 'I mean, the decision to basically stop fighting Microsoft with OS/2 was hardly a technical decision. It was a decision on my part that it looked like we had lost, so why don't we get on with doing something else?'

That kind of unsentimental pragmatism has served I.B.M. pretty well for the last nine years.

Questions

1. How did IBM, under the leadership of Louis Gerstner, improve its technological leadership in the global marketplace?

2. What role did the Internet play in improving the strategic competitiveness of IBM?

3. How did Mr. Gerstner combine the various processes of structure, technology, and people to make IBM a more competitive global company?

4. What lessons have you learned from this case that is useful for analyzing the situation of a similar company, like Apple Computer?