Manage-Wise

How Gerstner changed IBM’s culture

In the early 1990s, IBM had what even long-time insiders still call a “near-death experience.” With a reported record net loss of $8.1 billion in 1993, IBM appeared to be on its way to the corporate equivalent of the elephant graveyard. In 2001, just eight years later, IBM reported a net income of $7.7 billion, and its share price had increased nearly eight-fold.

What happened? Louis V Gerstner happened, and the story of the almost miraculous turnaround of the IT behemoth is legendary. That story has been told countless times in business magazines, academic journals, and business school case studies, but perhaps never with more authority than in Gerstner’s own 2002 book, Who Says Elephants Can’t Dance? Dance indeed. Having once been on its way to oblivion, IBM today seems well on its way to recapturing its former glory as “the world’s most admired company.”

While Gerstner certainly deserves all of the accolades he’s received for the turnaround, credit must also go to those who followed his leadership, took up his mantra, and executed his strategies. Credit for the continuation of IBM’s success since Gerstner’s retirement in 2002 must also go to Samue J Palmisano, IBM’s current CEO, and his vision for the company’s future, a vision unwavering in its focus on customers, research, and collaboration.

Those are the themes of the story that extends from Gerstner’s entrance to the passing of the torch to Palmisano: an intense focus on understanding and meeting customer needs, a strong reliance on research to enable product creation, and an uncanny sense of how to balance collaboration with competition. One unifying aspect of all these themes also stands out: they all have been consistently supported by leadership from the very top of the organization.

Although these themes—focus on the customer and emphasis on research and collaboration—appear to permeate the entire enterprise, this chapter will limit its discussion of them as they apply to and inform product creation within the company’s software group. But first a bit more background.

Bringing Big Blue out of the Red

Reinvention is not a new phenomenon at IBM. The company has had many transformations. In its 100-year history as an American corporate icon, IBM has developed and successfully marketed generation after generation of “business machines” that support the creation and management of business information. Over the century, the company’s products have evolved from computing scales to tabulators to super computers to personal computers to software and business services. In its evolution, however, none of the company’s transformations has been more dramatic in terms of sheer survival than the era of CEO Lou Gerstner.

After the company’s heyday in the 1960s and 1870s, and pre-Gerstner, IBM had begun struggling to keep pace with its rapidly changing marketing environment. The Internet had already made its presence known, personal computing was quickly becoming the order of the day, and the “.com” mentality was just beginning to take root.

IBM appeared to have lost its edge, its focus, and to a considerable degree its brand identity. Its business unit were siloed. Internal competition—for resources and business—sometimes seemed more intense than with external competitors. The company, far more often than not, displayed an extreme product focus, a lack of unity in direction, and an absence of a cohesive corporate strategy.

Team IBM

Upon his arrival in April 1993, Gerstner quickly set the company on a new course. In stark contrast to IBM’s then prevailing corporate culture and strategy, Gerstner based his approach on a belief that the whole of IBM was worth far more than the sum of its parts.

After only 30 days on the job, Gerstner introduced the concept of Team IBM and launched a reorganization and revitalization program that energized the employees enterprise wide. In some respects, his efforts have also had a lasting impact on the entire industry.

Prior to Gerstner’s arrival, IBM’s focus was highly product-centric, and product development was tightly confined within separate business units.

Very little effort went into cross-product collaboration, much less cross-functional synergies. Gerstner brought a strong, almost obsessive, focus on understanding and fulfilling customers’ needs.

He came to that task with considerable credentials having formerly been one of IBM’s biggest customers as CEO of RJR Nabisco, Inc. As Bob Biamonte, Vice-president of IBM’s Software Group World Wide Consumability and IBM User Technologies recalls, “Lou Gerstner challenged us to ensure that everything we did could be linked to creating value for the customer. His direction was clear, if you can’t make that connection, stop what you are doing and do something else.”

A cultural shift of major proportions. IBM’s transformation probably would never have happened without an incredibly strong leader like Gerstner. Biamonte notes, “He launched the reintegration of IBM and got us focused on working as a seamless worldwide team to deliver value to our customers. When we started collaborating, it created an energy and spirit among the troops, both a top-down and bottoms-up effect. At the end of the day, it’s all about culture, and shaping culture starts at the top.”

Bill Woodworth, Director of IBM Quality Software Engineering, says that another tenet that Gerstner instilled, and one that still rings true, within the company is that “research is the foundation for IBM’s competitive advantage.”

For Gerstner, R&D was a key enabler to future success for product innovation across the corporation.

Woodworth recalls, “Gerstner came up with a fundamental message, ‘Research is our future.’ Then he went to our colleagues in research with a clear charter to get their work accelerated and into products for our customers.” Like his emphasis on a single value proposition and corporate strategy, Gerstner believed that a single corporate R&D unit was the glue that would hold product creation together across the various business units.

Excerpt from ‘Strategic Product Creation’ by Ronald L Kerber and Timothy M Laseter. Reproduced with permission © 2007, Tata McGraw-Hill Publishing Company Limited. Price: Rs 395. E-mail: Vishwanath_Ghanekar@mcgraw-hill.com