Who Says Elephants Can't Dance?: Inside IBM's Historic Turnaroundby Louis V. Gerstner
Then Lou Gerstner was brought in to run IBM. Almost
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In 1990, IBM had its most profitable year ever. By 1993, the computer industry had changed so rapidly the company was on its way to losing $16 billion and IBM was on a watch list for extinction -- victimized by its own lumbering size, an insular corporate culture, and the PC era IBM had itself helped invent.
Then Lou Gerstner was brought in to run IBM. Almost everyone watching the rapid demise of this American icon presumed Gerstner had joined IBM to preside over its continued dissolution into a confederation of autonomous business units. This strategy, well underway when he arrived, would have effectively eliminated the corporation that had invented many of the industry's most important technologies.
Instead, Gerstner took hold of the company and demanded the managers work together to re-establish IBM's mission as a customer-focused provider of computing solutions. Moving ahead of his critics, Gerstner made the hold decision to keep the company together, slash prices on his core product to keep the company competitive, and almost defiantly announced, "The last thing IBM needs right now is a vision."
Who Says Elephants Can't Dance? tells the story of IBM's competitive and cultural transformation. In his own words, Gerstner offers a blow-by-blow account of his arrival at the company and his campaign to rebuild the leadership team and give the workforce a renewed sense of purpose. In the process, Gerstner defined a strategy for the computing giant and remade the ossified culture bred by the company's own success.
The first-hand story of an extraordinary turnaround, a unique case study in managing a crisis, and a thoughtful reflection on the computer industry and the principles of leadership, Who Says Elephants Can't Dance? sums up Lou Gerstner's historic business achievement. Taking readers deep into the world of IBM's CEO, Gerstner recounts the high-level meetings and explains the pressure-filled, no-turning-back decisions that had to be made. He also offers his hard-won conclusions about the essence of what makes a great company run.
In the history of modern business, many companies have gone from being industry leaders to the verge of extinction. Through the heroic efforts of a new management team, some of those companies have even succeeded in resuscitating themselves and living on in the shadow of their former stature. But only one company has been at the pinnacle of an industry, fallen to near collapse, and then, beyond anyone's expectations, returned to set the agenda. That company is IBM.
Lou Gerstener, Jr., served as chairman and chief executive officer of IBM from April 1993 to March 2002, when he retired as CEO. He remained chairman of the board through the end of 2002. Before joining IBM, Mr. Gerstner served for four years as chairman and CEO of RJR Nabisco, Inc. This was preceded by an eleven-year career at the American Express Company, where he was president of the parent company and chairman and CEO of its largest subsidiary. Prior to that, Mr. Gerstner was a director of the management consulting firm of McKinsey & Co., Inc. He received a bachelor's degree in engineering from Dartmouth College and an MBA from Harvard Business School.
Shortly after Lou Gerstner was introduced as IBM's CEO in the Spring of 1993, he met with the company's Corporate Management Board roughly the top 50 people in the company. He laid out for them a number of troublesome areas in the company:
- Loss of customer trust, supported by low customer ratings on quality.
- The mindless rush for decentralization.
- Slow response to cross-unit issue.
- Tension over control of the marketing and sales processes.
- A confusing and contentious performance measurement system, resulting in serious problems when closing sales with customers.
- A bewildering array of questionable, even senseless, alliances.
Gerstner announced a program called "Operation Bear Hug." Each of the 50 members of senior management would, within three months, pay a personal visit to a minimum of five of IBM's biggest customers, find out first-hand what their needs and concerns were, and report back to Gerstner. The Bear Hug meetings became the first step in reducing the customer perception that dealing with IBM was difficult.
After only 100 days on the job, and with major news outlets and analysts alike calling for some visible, tangible proof of a turnaround at IBM, Gerstner went public with four key strategic initiatives:
- Keep the Company Together. Gerstner decided very early on to keep IBM one unified enterprise, in the face of an increasingly diversified computer market. While IBM was slow to deliver distributed computing (delivering increased computing power to individual users), other companies moved in, supplementing IBM's basic systems with add-on applications and hardware that provided the powerful systems both business and home computer customers wanted and needed.
- Change the Company's Fundamental Economic Model. In simplest terms, if a company's revenue, gross profit, and expenses are all moving in the right relationship, the net effect is growing profits and positive cash flow the makings of a successful business. In 1993, those relationships at IBM were all wrong revenue was slowing (due to the company's reliance on declining mainframe sales); gross profit margin was sinking (due to the discounted prices it had resorted to in order to sell mainframes); the company's expenses were out of control.Expenses were, however, the first issue tackled $8.9 billion was slashed out of the budget. This required employment reduction of 35,000 people (in addition to the 45,000 jobs cut in 1992 the first such layoff in the company's history).
- Reengineer How the Company Did Business. Gerstner saw IBM's business processes as cumbersome and highly expensive, requiring a reengineering program of gargantuan proportions, a top-to-bottom overhaul of its basic operations. Gerstner focused on six core initiatives: hardware development, software development, fulfillment, integrated supply chain, customer relationship management, and services. These were the processes most visible to external customers, and they were soon joined in reengineering efforts by several internal processes, including human resources, procurement, real estate, and, oddly enough, information technology. From 1994 to 1998, the total savings from these reengineering projects was $9.5 billion.
- Sell Unproductive Assets to Raise Cash. Only a handful of people understand how close IBM came to bankruptcy in 1993. Gerstner noted then that there were a number of assets that could be sold to make the company solvent again, and, thus began a wholesale jettisoning of nonessential, unproductive assets:
A. The corporate airplane fleet was sold.
B. The corporate headquarters in New York City was put on the block.
C. The bulk of the company's fine art collection was auctioned off.
D. IBM's Federal Systems Company (which primarily handled government contracts) was sold to the Loral Corporation.
As the years went by, Gerstner continued streamlining the company, in an effort to achieve and maintain focus in essential operations.
Before Gerstner, IBM seemed to exist in the shadow of its founder, Thomas J. Watson, Sr., a self-made man who engendered a culture of respect, hard work, and ethical behavior at his company. Watson deliberately and systematically institutionalized three Basic Beliefs that had made IBM successful under his stewardship:
- Excellence in everything we do.
- Superior customer service.
- Respect for the individual.
In order to breath some fresh air into the organization, Gerstner did away with the Basic Beliefs, pointing instead to eight principles:
- The marketplace is the driving force behind everything we do. Gerstner recognized that IBM was guilty of producing confusing technology, then making it instantly obsolete. Under the first of Gerstner's principles, the company vowed to focus on serving customers and, in the process, beating the competition.
- At our core, we are a technology company with an overriding commitment to quality. Technology was always IBM's greatest strength. Under Gerstner, the company needed to funnel that knowledge into developing products that served customer needs above all else.
- Our primary measures of success are customer satisfaction and shareholder value. No company is a success, financially or otherwise, without satisfied customers.
- We operate as an entrepreneurial organization with a minimum of bureaucracy and a never-ending focus on productivity. The warp-speed marketplace demands that the company accept innovation, take risks, and pursue growth, both by expanding existing businesses and finding new ones.
- We never lose site of our strategic vision. Every business, if it is to succeed, must have a sense of direction and mission.
- We think and act with a sense of urgency. Planning and analysis should never be carried out to the extent that the job that needs to be done now does not get done.
- Outstanding, dedicated people make it all happen, particularly when they work together as a team. The best way to end turf wars is to cherish and reward teamwork, particularly teamwork that delivers customer value.
- We are sensitive to the needs of all employees and to the communities in which we operate. People must have the room and resources to grow, and the communities in which we do business must become greater because of our presence.
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On December 14, 1992, I had just returned from one of those always well-intentioned but rarely stimulating charity dinners that are part of a New York City CEO's life, including mine as CEO of RJR Nabisco. I had not been in my Fifth Avenue apartment more than five minutes when my phone rang with a call from the concierge desk downstairs. It was nearly 10 p.m. The concierge said, "Mr. Burke wants to see you as soon as possible this evening."
Startled at such a request so late at night in a building in which neighbors don't call neighbors, I asked which Mr. Burke, where is he now, and does he really want to see me face to face this evening?
The answers were: "Jim Burke. He lives upstairs in the building. And, yes, he wants very much to speak to you tonight."
I didn't know Jim Burke well, but I greatly admired his leadership at Johnson & Johnson, as well as at Partnership for a Drug-Free America. His handling of the Tylenol poisoning crisis years earlier had made him a business legend. I had no idea why he wanted to see me so urgently. When I called, he said he would come right down.
When he arrived he got straight to the point: "I've heard that you may go back to American Express as CEO, and I don't want you to do that because I may have a much bigger challenge for you." The reference to American Express was probably prompted by rumors that I was going to return to the company where I had worked for eleven years. In fact, in mid-November 1992, three members of the American Express board had met secretly with me at the Sky Club in New York City to ask that I come back. It's hard to say if I was surprised -- Wall Street and the media were humming with speculation that then CEO Jim Robinson was under board pressure to step down. However, I told the three directors politely that I had no interest in returning to American Express. I had loved my tenure there, but I was not going back to fix mistakes I had fought so hard to avoid. (Robinson left two months later.)
I told Burke I wasn't returning to American Express. He told me that the top position at ibm might soon be open and he wanted me to consider taking the job. Needless to say, I was very surprised. While it was widely known and reported in the media that ibm was having serious problems, there had been no public signs of an impending change in CEOs. I told Burke that, given my lack of technical background, I couldn't conceive of running ibm. He said, "I'm glad you're not going back to American Express. And please, keep an open mind on IBM." That was it. He went back upstairs, and I went to bed thinking about our conversation.
The media drumbeat intensified in the following weeks. Business Week ran a story titled "IBM's Board Should Clean Out the Corner Office." Fortune published a story, "King John [Akers, the chairman and ceo] Wears an Uneasy Crown." It seemed that everyone had advice about what to do at ibm, and reading it, I was glad I wasn't there. The media, at least, appeared convinced that ibm's time had long passed.
On January 26, 1993, ibm announced that John Akers had decided to retire and that a search committee had been formed to consider outside and internal candidates. The committee was headed by Jim Burke. It didn't take long for him to call.
I gave Jim the same answer in January as I had in December: I wasn't qualified and I wasn't interested. He urged me, again: "Keep an open mind."
He and his committee then embarked on a rather public sweep of the top CEOs in America. Names like Jack Welch of General Electric, Larry Bossidy of Allied Signal, George Fisher of Motorola, and even Bill Gates of Microsoft surfaced fairly quickly in the press. So did the names of several IBM executives. The search committee also conducted a series of meetings with the heads of many technology companies, presumably seeking advice on who should lead their number one competitor! (Scott McNealy, CEO of Sun Microsystems, candidly told one reporter that IBM should hire "someone lousy.") In what was believed to be a first-of-its-kind transaction, the search committee hired two recruiting firms in order to get the services of the two leading recruiters -- Tom Neff of Spencer Stuart Management Consultants N.V., and Gerry Roche of Heidrick & Struggles International, Inc.
In February I met with Burke and his fellow search committee member, Tom Murphy, then CEO of Cap Cities/abc. Jim made an emphatic, even passionate pitch that the board was not looking for a technologist, but rather a broad-based leader and change agent. In fact, Burke's message was consistent throughout the whole process. At the time the search committee was established, he said, "The committee members and I are totally open-minded about who the new person will be and where he or she will come from. What is critically important is the person must be a proven, effective leader -- one who is skilled at generating and managing change."
Once again, I told Burke and Murphy that I really did not feel qualified for the position and that I did not want to proceed any further with the process. The discussion ended amicably and they went off, I presumed, to continue the wide sweep they were carrying out, simultaneously, with multiple candidates.
What the Experts Had to Say
I read what the press, Wall Street, and the Silicon Valley computer visionaries and pundits were saying about ibm at that time. All of it certainly fueled my skepticism and, I believe, that of many of the other candidates.
The foregoing is excerpted from Who Says Elephants Can't Dance? by Louis V. Gerstner. All rights reserved. No part of this book may be used or reproduced without written permission from HarperCollins Publishers, 10 East 53rd Street, New York, NY 10022
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Lou Gerstner, Jr., served as chairman and chief executive officer of IBM from April 1993 until March 2002, when he retired as CEO. He remained chairman of the board through the end of 2002. Before joining IBM, Mr. Gerstner served for four years as chairman and CEO of RJR Nabisco, Inc. This was preceded by an eleven-year career at the American Express Company, where he was president of the parent company and chairman and CEO of its largest subsidiary. Prior to that, Mr. Gerstner was a director of the management consulting firm of McKinsey & Co., Inc. He received a bachelor's degree in engineering from Dartmouth College and an MBA from Harvard Business School.
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