Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change

by Louis V. Gerstner, Jr.

  I had sent you an audiotape on this topic (“Cultural Heresy: The Case Against Competition”) and a short description of the tape. Apparently the tape and letter were intercepted by an administrative assistant and never reached you. If you are interested in exploring this topic further, I can resend you the tape.

  You claimed that the most important measurement of our

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  success was the percentage of the information technology budget we had for each Customer. This seems to me to be a case of limited thinking. A percentage is finite and can never get larger than 100. Using this metric, any gains one company makes has to be at the expense of one or more other companies.

  If we think expansively, if we think about how we can make the pie bigger, then everyone could experience a win. For instance, if there is more money spent on information technology because of its increasing value, we could be losing percentage points while growing and making more money. (I suspect we were losing percentage points in the early ’80s when we were expanding and making $1 billion a quarter.) Conversely, how interested are we in achieving 100% of the market for card readers?

  Though I’ve focused on the “areas of improvement” in this note, I want to re-emphasize that I admire and respect you for the job you’ve already done and are doing. I’m looking forward to working with you.

  [Name deleted]

  P.S.—I don’t know if it’s true, but I heard that in preparation for your visit to the (Raleigh, North Carolina) site, the route you would take was planned and the halls you would walk down or see had their walls painted and new carpeting laid. I was wondering if you knew whether or not this was true and if it was true, what you thought about it.

  Sometimes I had to bite my tongue—almost in half. All I can say is, it was a good thing for some people that I was too busy to reply to all my e-mail!

  8

  Creating a Global

  Enterprise

  W hat we had done thus far was to put out the fire. Now we needed to rebuild the fundamental strategy of the company. That strategy, as I had been saying for six months, was going to revolve around my belief that the unique opportunity for IBM—our distinctive competence—was an ability to integrate all the parts for our customers.

  However, before I could integrate for our customers, I first had to integrate IBM! So, as our strategy people worked on fleshing out short- and long-term plans, I turned my attention to three areas that, if not fundamentally changed, would disable any hope of a strategy built around integration: organization, brand image, and compensation.

  Remaking the Organization

  IBM is arguably the most complex organization anywhere in the world outside government. It is not just its sheer size ($86 billion in

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  2001 sales), nor its far-flung reach (operating in 160-plus countries).

  What drives IBM’s unique complexity is twofold. First, every institution and almost every individual is an actual or potential customer of IBM. In my previous occupations, we could always identify a dozen or so key customers in one or two industries that really defined the marketplace. Not so at IBM. We had to be prepared to serve every institution, every industry, every type of government, large and small, around the globe.

  The second complexity factor is the rate and pace of the underlying technology. Again, in prior incarnations, my management team and I could identify four or five companies or organizations that had been our competitors for the past twenty years and would probably continue to be our competitors for the next twenty. In the information technology industry, literally thousands of new competitors sprang up every year—some in garages, some in universities, some in the hearts and minds of brilliant entrepreneurs. Product cycles that used to run for ten years dwindled to nine or ten months. New scientific discoveries overwhelmed planning and economic assumptions on a regular basis.

  It is not surprising, therefore, that in the face of this large global span and uniquely diverse set of customers and an ever-changing technological base, organizing IBM was a constant challenge.

  One other factor made it particularly interesting—the nature of the IBM employee base. We are not a company of management and workers. We are a company of 300,000-plus professionals, all of whom are bright, inquisitive, and (alas) opinionated. Everybody had his or her view of what the first priority should be and who should manage it.

  As IBM grappled with this recipe for cacophony, the company evolved over the years in two directions: powerful geographic units that dealt with IBM’s global reach, and powerful product divisions that dealt with the underlying technological forces. Missing from this structure was a customer view. The geographic regions, for the most

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  part, protected their turf and attempted to own everything that went on in their region. The technological divisions dealt with what they thought could be built, or what they wanted to build, with little concern about customer needs or priorities.

  I had experienced this firsthand at American Express and was determined to see it changed soon. There had been eleven different currencies in which the American Express Card was issued when I arrived; there were more than twenty-nine when I left. As we moved the Card around the world, we needed common systems from IBM, our primary information technology vendor, and we needed support in every major country in the world.

  I was always flabbergasted to find that when we arrived in a new country (Malaysia or Singapore or Spain), we had to reestablish our credentials with the local IBM management. The fact that American Express was one of IBM’s largest customers in the United States bore no value to IBM management in other countries. We had to start over each time, and their focus was on their own country profit and loss, not on any sense of IBM’s global relationship with American Express.

  The same was true of products. Products used in the United States were not necessarily available in other parts of the world. It was enormously frustrating, but IBM seemed to be incapable of taking a global customer view or a technology view driven by customer requirements.

  One of my first priorities was to shift the fundamental power bases inside IBM. In the United States alone, there was a national headquarters, eight regional headquarters, multiple area headquarters under the regions, and, finally, local units called “trading areas.”

  Each was run by a profit center boss who sought aggressively to increase his or her own resources and profits. Say a banking client in Atlanta wanted a solution involving retail banking. Never mind that the best banking experts were in New York City or Chicago.

  The local boss would often ignore those resources and use his or her own people. (One day I looked at the financial newswires and was shocked to see

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  that IBM’s trading area for Alabama and Mississippi had sent to the media its own earnings news release.)

  Staff units abounded at every level. Outside the United States, the structure was even more rigid, like in Europe, with its 23,000 support people. Other IBMers practically had to ask permission to enter the territory of a country manager. Each country had its own independent system. In Europe alone we had 142 different financial systems.

  Customer data could not be tracked across the company. Employees belonged to their geography first, while IBM took a distant second place.

  Breaking Up the Fiefdoms

  I declared war on the geographic fiefdoms. I decided we would organize the company around global industry teams. I had first encountered the power of this kind of structure when I had been a very young consultant at McKinsey. We’d conducted a seminal organization study for what was then Citibank. The result was to transform Citibank from a geographical organization to a global, customer-oriented organization, and it became the model for most financial institutions over the next decade.

  With this model in mind, I asked Ned Lautenbach, then head of all non-United States sales organizations, to
build a customer-oriented organization. It was a painful and sometimes tumultuous process to get the organization to embrace this new direction, but by mid-1995 we were ready to implement it. We broke our customer base into twelve groups: eleven industries (such as banking, government, insurance, distribution, and manufacturing) and a final category covering small- and medium-size businesses. We assigned all of the accounts to these industry groups and announced that the groups would be in charge of all budgets and personnel. The response from the country managers was swift and predictable: “It will never work.” And: “You will destroy the company!”

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  I’ll never forget one run-in with the head of the powerful Europe, Middle East, and Africa unit. During a visit to Europe I discovered, by accident, that European employees were not receiving all of my company-wide e-mails. After some investigation, we found that the head of Europe was intercepting messages at the central messaging node. When asked why, he replied simply, “These messages were inappropriate for my employees.” And: “They were hard to translate.”

  I summoned him to Armonk the next day. I explained that he had no employees, that all employees belonged to IBM, and that from that day on he would never interfere with messages sent from my office. He grimaced, nodded, and sulked as he walked out the door.

  He never did adapt to the new global organization, and a few months later he left the company.

  Although we implemented the new industry structure in mid-1995, it was never fully accepted until at least three years later. Regional heads clung to the old system, sometimes out of mutiny, but more often out of tradition.

  We needed to do a massive shift of resources, systems, and processes to make the new system work. Building an organizational plan was easy. It took three years of hard work to implement the plan, and implement it well.

  I’ll never forget one particularly stubborn—and inventive—country general manager in Europe. He simply refused to recognize that the vast majority of the people in his country had been reassigned to specialized units reporting to global leaders.

  Anytime one of these new worldwide leaders would pay a visit to meet with his or her new team, the country general manager, or GM, would round up a group loyal to the GM, herd them into a room, and tell them, “Okay, today you’re database specialists. Go talk about databases.” Or for the next visit: “Today you’re experts on the insurance industry.” We eventually caught on and ended the charade.

  9

  Reviving the Brand

  A ll of our efforts to save IBM—through right-sizing and reengineering and creating strategy and boosting morale and all the rest—would have been for naught if, while we were hard at work on the other things, the IBM brand fell apart. I have always believed a successful company must have a customer/marketplace orientation and a strong marketing organization. That’s why my second step in creating a global enterprise had to be to fix and focus IBM’s marketing efforts.

  IBM won numerous awards in the 1980s for its ingenious Charlie Chaplin commercials, which had introduced the IBM personal computer. By the early 1990s, however, the company’s advertising system had fallen into a state of chaos. As part of the drive toward decentralization, it seemed that every product manager in just about every part of the company was hiring his or her own advertising agency.

  IBM had more than seventy ad agencies in 1993, each working on its own, without any central coordination. It was like seventy tiny trumpets all tooting simultaneously for attention. A single issue of an industry trade magazine could have up to eighteen different IBM

  ads, with eighteen different designs, messages, and even logos.

  In June 1993 I hired Abby Kohnstamm as the head of Corporate

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  Marketing for IBM. She had worked with me for many years at American Express. What we had to do here was so important and urgent that I wanted someone who knew me and how I managed, and with whom I could speak in shorthand.

  Abby had an especially tough challenge. There had never been a true head of marketing in IBM. Few people in the business units understood or accepted her role, and at first they tried to ignore her.

  IBM was built on technology and sales. And, in IBM at that time, the term “marketing” really meant “sales.” Using the broadest definition, sales is about fulfilling the demand that marketing generates. When it’s done well, marketing is a multi-disciplinary function that involves market segmentation and analysis of both competitors and customer preferences, corporate and product brand management, advertising, and direct mail. That’s only a partial listing. While IBM clearly had to sell more of what it made, it also had to recast its image and reestablish its relevance to the marketplace. When I arrived at IBM, marketing was not considered a distinct professional discipline, and it was not being managed as such. I told Abby to take sixty days to do a situation analysis.

  Her research found that despite our well-chronicled problems, the overall IBM brand was still strong. Customers believed that if they bought an IBM product, it would be a good one. As I had expected, our biggest strength was as a unified brand, and not as each of our parts. Consequently, the marketing mission would be to articulate why customers would want to do business with an integrated IBM.

  Abby knew she had to end the dissonance. We got there in stages because, while you can force anything down the throat of an organization, if people don’t buy into the logic, the change won’t stick.

  Stage one was weaning IBM executives off the luxury of having their own advertising budgets, their personal agencies, and the discretion to order up an ad anytime they wanted to do so. One month there’d be no IBM advertising in important industry magazines; the next month we’d have so many pages that it seemed as if we were sponsoring a

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  special issue. The latter was especially true in November and December, when marketing departments wanted to spend leftover dollars in their budgets.

  Abby’s job was to get control of the spending and the messages.

  I asked her to present a plan to the newly formed Worldwide Management Council at our conference center in Palisades, New York.

  It was a tough meeting, but she did a very smart thing. When the thirty-five WMC members walked into the room, they found every wall adorned with the advertising, packaging, and marketing collat-eral of all our agencies. It was a train wreck of brand and product positioning.

  After her presentation, I posed one question: “Does anyone doubt we can do this better?” There was no discussion.

  One Voice, One Agency

  Abby decided to consolidate all of IBM’s advertising relationships into a single agency—not just in the United States, but around the world. At the time, it was the largest advertising consolidation in history. Few people knew about her plan at first—a handful of people inside IBM, and only the chief executives of the agencies under consideration. There was no formal advertising review process. No creative development. No presentations. Abby narrowed down the list to four agencies, including just one that was then handling any of the IBM accounts. Over four weeks, she held a series of two-day meetings in hotels (with people on both sides using aliases) to gauge chemistry, thinking, and how each would approach a challenge this big.

  She and her small team of IBMers unanimously settled on Ogilvy

  & Mather, which had solid worldwide expertise and experience.

  That was exactly what IBM needed, since the agency would manage advertising for all of our products and services, as well as our overall brand, around the world.

  Before we signed off on the deal, I asked Abby to bring the top

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  three people at O&M to our corporate headquarters. We were about to bet the IBM brand on these people, so I wanted to make sure we were all clear about the stakes we were playing for—to look them in the eye and hear them commit to the success of this effort, no mat
ter what it was going to take. Interestingly, the meeting revealed that they had a parallel objective. They were betting a big part of their future on IBM—and resigning from several of their existing accounts. So, in fact, we were looking each other in the eye.

  Abby had my complete support, but others were a tougher sell, both inside and outside the company. Many of the product and geographic units adopted a “this too shall pass” approach—up until the time when we centralized most of the advertising spending and the media buying and went to global contracts. The ad community itself was in absolute shock. Not only was this not done in the advertising world—but by stodgy, trouble-plagued IBM?

  The New York Times covered the consolidation on page one. Advertising Age called it the “marketing shot heard ’round the world.” But it was a mostly positive shot. Ad Age went on to say: “Because computer products, brands, and publications have few geographic boundaries, a world approach makes sense.…A single agency meshed neatly with Mr. Gerstner’s strategy to centralize controls and bring independent units like the PC division back into the fold.”

  Always critical, The Wall Street Journal called the decision “auda-cious” and “fraught with risk.” The paper warned: “If the agency doesn’t devise an instantly winning campaign, it could set IBM’s re-covery back for months.”

  Far from it. Despite the fierce kicking and screaming of many local managers, the first campaign debuted in 1994 under the theme

  “Solutions for a Small Planet.” The innovative TV spots—featuring an international cast, from Czech nuns to old Parisians speaking in their native language with all the dialogue subtitled—were highly acclaimed.

  The campaign reaffirmed important messages: IBM was global,