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

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Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change Page 11

by Louis V. Gerstner, Jr.


  As I sat in my pew at his memorial service, I couldn’t help but wonder what he might have thought about the massive changes we had made in only nine months, and the reactions—both positive and negative—to these changes expressed by employees and outsiders.

  I found myself wishing that Tom and I had had a chance to have lunch or dinner to talk about the “new Blue” that was beginning to emerge but still had so very far to go. I felt strongly that like most other great people who built great things, Tom Watson was at heart an agent of change.

  Exhausted but encouraged, I flew to Florida for my annual Christmas vacation on the beach. I had a lot to think about.

  11

  Back on the Beach

  O n a gray morning ten months after I had taken that walk on the beach in Florida, thinking about my conversations with Jim Burke and deciding whether or not to parachute into IBM, I found myself back on the same beach, mulling over the extraordinary events that had transpired since that time.

  I had to admit, I felt pretty good. Few had given us any chance of saving IBM, but I knew now that the company was going to make it. We’d stopped the bleeding, reversed the breakup plan, and clari-fied IBM’s basic mission. The holes in the hull had been patched. This ship was not going to sink.

  My thoughts turned to what lay ahead. What would Act II look like? Logic and my own experience dictated a straightforward set of priorities: Invest in new sources of growth, build a strong cash position, and do a more rigorous assessment of our competitive position.

  However, doing all of that wasn’t enough. Even if we restored growth, even if we built up some momentum with customers, and even if we made the company more efficient and less bureaucratic—that wouldn’t truly bring IBM back. For IBM’s turnaround to be successful, this company would have to regain its former position of

  104 / LOUIS V. GERSTNER, JR.

  leadership in the computer industry and in the broader world of business.

  I can’t remember whether I smiled, laughed, or shook my head.

  But that question—Could IBM lead again?—gave me pause. Certainly it would be easy, and expected, for the CEO to declare that the company would lead again. But as I thought about what it would actually take for that to happen, all of my original doubts about accepting this job came flooding back.

  First of all, the track record of IT companies that had been pulled back from the brink was dismal. I thought of Wang, Data General, Sperry-Burroughs (today’s Unisys), DEC. Even when companies were rescued, they usually survived as also-rans or found another partner to merge with or put themselves up for sale.

  Most troubling was the computer industry’s trajectory. Basically, it was moving away from IBM’s traditional strengths. The PC wasn’t an endgame, and the mainframe wasn’t dead. But it was obvious that in the emerging computing model—of which the PC had been a harbinger—power was migrating rapidly away from centralized computing systems and traditional IT. And this was, in turn, changing the mix of IT customers. IBM sold to large businesses, governments, and other institutions. But more and more, IT was being bought by consumers, small businesses, and department heads inside big companies.

  The emerging computer model was also changing what those customers were buying. We built industrial-strength, behind-the-scenes computers and software while the world, it seemed, was moving to desktop, laptop, and palmtop. All of our research and development, engineering, and rigorous testing ensured that our product never went down. Reliability, dependability, and security—these were the bedrock of IBM’s brand. But people didn’t seem to mind rebooting their PCs three times a day.

  We sold through a direct sales force—the vaunted, blue-suited IBM customer representative; part salesperson, part business and tech

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  nology consultant. A tremendous asset, but also the most expensive way to sell any product or service. The market was abandoning that model and going to retailers and toll-free numbers.

  Overall, the tasks we were being asked to take on were spreading beyond the domain of the CIO and into every corner of business operations—places where IBM had not, in general, ventured and where we lacked strong customer relationships. And, most omin-ously, value and profit margins were shifting away from hardware, which was becoming more commoditized, and toward software (and, it was beginning to appear, toward services).

  Then, look at who we were up against! The people running our competition were, without doubt, the next generation of hyper-capitalists: Bill Gates, Steve Jobs, Larry Ellison, and Scott McNealy.

  These guys were hungry, and they stayed hungry no matter how much wealth they accumulated. And it was awe-inspiring the way they ran their companies, the people they attracted, how they paid them, their work ethic—young, aggressive, flexible, willing to work around the clock. The whole Silicon Valley ethos—lightning speed to market with just-good-enough products—wasn’t simply foreign to IBM, it was an entirely new game.

  Even without considering this formidable competition, our own strategy raised some daunting implications. What we had done so far to unify IBM—reorganizing around industries rather than countries, consolidating our marketing, and changing our compensation plans—had been relatively easy to accomplish. What lay ahead—devising a strategy for a fundamentally new world and reinventing an encrusted culture from the DNA out—that was a challenge of a vastly different order.

  I asked myself: “How did I get into this? Is it an impossible task?”

  It would be hard to say no with a straight face, even to my closest colleagues. I could see clearly what the remaining four years of my contract would look like. We had a chance to grow. Maybe we could

  106 / LOUIS V. GERSTNER, JR.

  take on and displace a few competitors in some segments. But lead the industry? That mountain looked too high to climb. And if I set that task as the goal, I stood a very good chance of failing—very visibly.

  I walked more, thought more, and the clouds began to clear. Yes, those were daunting obstacles, but wasn’t that why I’d come here?

  Didn’t this make the challenge that much more intriguing?

  And wasn’t it worth the risk? If we didn’t aspire to leadership, one thing was clear: The company would never really come together, never really achieve its potential. And that would be a shame.

  I recalled the comment Jim Burke had made about IBM’s being a national treasure. In fact, Burke was just one of several people who had expressed that phrase to me. Shortly after the announcement of my appointment, I had run into Joshua Lederberg, a research ge-neticist and Nobel laureate on the street in Manhattan. I knew him from the board of Memorial Sloan-Kettering Cancer Center. “You’re going to IBM,” he’d said to me. I’d said I was. “It’s a national treasure,” he’d said. “Don’t screw it up.”

  At the time, I thought this reverence was a bit over the top. Up to that point in my career, I had dealt mostly with businesspeople who were motivated by basically two things: money and power. And we were in the midst of one of the most swashbuckling eras in the history of commerce. In contrast, when I got to IBM, I felt as though I had entered a time warp and gone back to the 1950s.

  The fact was, IBM had grown on me. I had come to understand what Jim Burke and Dr. Lederberg meant. The corporation was important—not only in what it did for customers and governments and universities, and not only for what it invented, impressive and meaningful as those accomplishments were. It was also important for the kind of corporate behavior to which it aspired. IBMers were battered, bruised, and confused. Many had retreated into a self-protective shell. But underneath that, they were still motivated by a genuine love of their company and of doing the right thing.

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  You could make fun of IBM all you liked. (Our competitors certainly did.) But for issues that really mattered—when it was a question of national defense, or our children’s health, or serious scientific discovery—IBM was ess
ential. Forgive my hyperbole, but in an industry increasingly run by mad scientists and pied pipers, we needed to succeed.

  I hadn’t left consulting and gone into management just to be Mr.

  Fix-It or simply for the pleasure of getting into the game. More than anything, I like to win. But the issue here went beyond winning. For the first time in my career, I was in a position to make a different kind of mark, to help something truly important live and thrive. I wasn’t going to walk away from that. As I headed back to our family’s beach house, I began to feel intense excitement. I told myself:

  “You know, we could actually pull this off!”

  So the die was cast. I’d concluded it was insufficient—for me personally and for the institution—to call it a day after battling back from IBM’s near-death experience. We were going to take our best shot at making the long climb back to industry leadership.

  Heading into IBM, I would have bet large sums of money that these frenetic early months of decision making and action taking to stabilize the patient would be the hardest work of my professional career. I would have bet wrong. It had been difficult, even painful.

  The issues, however, were reasonably obvious, the problems were easy to parse, and the remedial actions were straightforward.

  Now, after nearly a decade of subsequent work—and with the benefit of a little distance from the day-to-day existence of the CEO—I can say without hesitation that what came next was far more difficult.

  If nothing else, those first twelve to eighteen months at least had the benefit of adrenaline-stoked intensity—many highs, an equal number of lows, but never time to celebrate one or dwell on the other because we were literally in a situation in which every minute counted.

  What I’d come to realize during this second walk on the beach

  108 / LOUIS V. GERSTNER, JR.

  was that after all that initial work had been completed, we’d gotten ourselves only to the starting line. The sprint was over. Our marathon was about to begin.

  While the issue was no longer as stark as the demise or survival of IBM, the ultimate fate of this “national treasure” was far from settled. What would happen through the second half of the 1990s would determine whether IBM was merely going to be one more pleasant, safe, comfortable—but fairly innocuous—participant in the information technology industry, or whether we were once again going to be a company that mattered.

  The outcome of that race has been abundantly documented. By 1997 we’d declared the IBM turnaround complete. Inside the company we were talking openly about getting back on top and once again setting the agenda for our industry—aspirations that, when we began, would have seemed excessively ambitious at best, delusional at worst.

  Before I stepped away in March 2002, we were number one in the world in IT services, hardware, enterprise software (excluding PCs), and custom-designed, high-performance computer chips (see Chapter 16). The IBM team had staged comebacks in multiple markets where we’d previously been getting sand kicked in our faces. We’d revamped and reinvigorated traditional product lines, launched new growth businesses, and jettisoned several others that were vestiges of the earlier era.

  At a higher level, we had articulated and then led the future direction of the industry—a future in which business and technology would not be separate tracks but intertwined; and a future in which the industry—in a remarkable about-face—would be driven by services, rather than hardware or software products. We’d coined the term “e-business” and played a leadership role in defining what was going to matter—and what wasn’t—in a networked world.

  The IBM workforce increased in size by about 100,000 people. Our stock split twice and increased in value by 800 percent. Our tech

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  nical community ushered in a new golden age of IBM research and development and earned more United States patent awards than any company for nine years running. We even connected supercom-puting with pop culture when a machine named Deep Blue defeated chess grandmaster Garry Kasparov.

  In short, once we got back on our feet, shook off the stigma of squandering a seemingly unassailable leadership position, and decided that just maybe our best days were yet to come, the IBM team responded magnificently—just as it had through even the darkest days early in the transformation.1

  What follows in the next part of this book—the Strategy section—is a change of pace. I could not provide (nor would you want to read) an event-by-event or month-by-month recounting of all that was done to effect the strategic redirection of IBM. My intent is to provide a summary description of the most important strategic changes.

  Some can be declared successes; others remain works in progress.

  In each case, what I’ve included are the moves that were either such distinct departures from IBM’s prior direction that they can be considered “bet the company” changes; or those that were so diametrically opposed to the existing culture that they were at great risk of being brought down by internal resistance.

  Also, I’ll point out that I leave my successor much unfinished business. A number of our strategies are not yet fully deployed; others remain to be defined. More important, the cultural transformation of IBM’s formerly successful and deeply entrenched culture—our single most critical and difficult task—will require constant reinforcement or the company could yet again succumb to the arrogance of success.

  1See Appendix B for a statistical summary of IBM’s performance for 1992-2001.

  PART II

  Strategy

  12

  A Brief History of IBM

  B efore we talk about how the new IBM was built, I think it would be helpful to understand, in broad brush strokes, how IBM became the great company most of us revered up until the early 1990s, and what contributed, at least in my view, to its breathtaking decline.

  The company’s origins go back to the early twentieth century, when Thomas J. Watson, Sr., combined several small companies to form the International Business Machines Corporation. For the first half of the century, IBM’s “business machines” embraced a broad and largely unrelated lineup of commercial products; everything from scales and cheese slicers to clocks and typewriters. Of prime importance was the fact that IBM was a pioneer in computation long before most people talked about computers. The company’s early electromechanical tabulation and punch-card devices introduced computation to business, academia, and government. For example, IBM scored a huge win when it was selected by the United States federal government to help start up and automate the Social Security System in the 1930s.

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  Inventing the Mainframe

  Like Henry Ford, John D. Rockefeller, and Andrew Carnegie, Thomas Watson was a powerful, patriarchal leader who left an im-print on every aspect of his company. His personal philosophies and values—hard work, decent working conditions, fairness, honesty, respect, impeccable customer service, jobs for life—defined the IBM culture. The paternalism engendered by Watson would come to be both an asset and, long past his lifetime, a challenge for the company. However, there’s no question that it made IBM highly appealing to a post-depression labor force yearning for job security and a fair deal.

  The history that is much more relevant to IBM’s turnaround begins with Tom Watson, Jr., who succeeded his father as CEO in 1956 and who boldly brought IBM—and the world—into the digital computer age.

  Much has been written about this period and how Tom “bet the company” on a revolutionary new product line called the System/360—the original name of IBM’s wildly successful mainframe family.

  To grasp what System/360 did for IBM and its effect on the computing landscape, one needs to look no further than Microsoft, its Windows operating system, and the PC revolution. System/360 was the Windows of its era—an era that IBM led for nearly three decades.

  In fact, the comparison between the IBM of the 1960s and 1970s and the Microsoft of the 1980s and 1990s is most appropria
te. Both companies seized upon major technology shifts and brought to market an entirely new capability for customers. Both established commanding market positions and benefited greatly from that leadership.

  In IBM’s case, the big technology shift came with the advent of the integrated circuit—what we now know as the semiconductor chip.

  Of course, IBM did not invent the integrated circuit (not any

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  more than Microsoft invented the personal computer!), but Watson and his colleagues understood its significance. Before the integrated circuit, computers were giant, room-size machines, energy inefficient, highly unreliable, and costly to manufacture. Many of these problems could be solved by high-density integrated circuits. Instead of building computers with scores of specialized components, these functions could be miniaturized and packed onto chips.

  The new capability that IBM brought to market was the first family of fully compatible computers and peripheral devices. While this hardly sounds revolutionary today, years ago it was a radical concept. Before System/360, IBM was just one of several companies that made and sold computers.

  Each company’s computers were based on proprietary technology.

  They didn’t work with any other computers, even from the same company, and each computer system had its own peripheral devices like printers and tape drives. This meant that if customers outgrew a computer or wanted the advantages of some new technology, they had to discard all of their hardware and software investments and start over. In today’s parlance, they had to “rip and replace”

  everything.

  System/360 represented an entirely new approach. First of all, it would be built with modern, high-performance integrated circuits.

  This would make the machines simultaneously more powerful, more reliable, and less costly than anything on the market. It would consist of a family of computers—from very small to very large processors—so that customers could make easy upgrades as their needs grew. Software developed for one processor would run on any System/360 processor. All peripheral devices—printers, tape drives, punch-card readers—would work with any processor in the family.

 

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