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This chapter is from the book

This chapter is from the book

IBM

Digital was not the only giant computer company that found itself struggling in the early 1990s. Big Blue, IBM itself, was also on the ropes. What happened there makes for an interesting contrast. But first let's back up.

IBM's roots go back to 1911, when two small companies specializing in measuring scales, time clocks, and tabulating machines for clerks and accountants merged to form the Computing, Tabulating, and Recording Company. The new company floundered for three years, and its board seriously discussed liquidation. Instead, they hired Tom Watson Sr. away from National Cash Register in 1914. Under Watson's leadership, the company's health gradually improved, and by 1930 it had become the market leader in tabulating machines. Watson's far-reaching vision for the company was in evidence when in 1925 he changed the company's name to International Business Machines.

Watson Sr.'s success, and that of his company, is often attributed to his fierce adherence to what he called his "three basic beliefs": give full consideration to the individual employee, spend a lot of time making customers happy, and go the last mile to do things right and seek superiority in all that we undertake. Watson Sr. also consciously created a culture to embody and promulgate these beliefs—"an organization of dedicated zealots," as Jim Collins and Jerry Porras called it in Built to Last. IBM's process of institutionalization and indoctrination encompassed appearance (dark suits), behavior (no drinking), and attitudes (high and mighty). In the words of Watson Sr., "You cannot be a success in any business without believing that it is the greatest business in the world."6

Guided by its core beliefs and proud of its unique culture, IBM evolved from the leader in tabulating machines to the dominant player in the computer industry, a position it has held for decades. Not surprisingly, IBM was not only hailed as one of the 15 "exemplars" in In Search of Excellence; it was also one of the 18 "visionary" companies profiled in Collins and Porras's influential study, published in 1994.

To attain "visionary" status, say Collins and Porras, a company must be willing to take the big risk (much as Digital did by developing the minicomputer). A company must be willing to pursue what the authors call a "Big Hairy Ambitious Goal." In IBM's case, the BHAG was to reshape the computer industry in the early 1960s with an all-or-nothing investment in a new computer—the IBM 360. According to the authors, when IBM rolled the dice on the 360, it was the largest privately financed commercial project ever attempted, and it used more resources than the United States did to develop the first atomic bomb. Tom Watson Jr., who succeeded his father as CEO, described it as the biggest and riskiest decision he had ever made.7

The gamble paid off, to say the least. The company soared on the success of the 360, and its position of industry leader was further solidified—that is, until the company began to slip in the late 1980s and early 1990s. In 1992 IBM suffered its worst year in history, posting a nearly $5 billion net loss. Its stock was down 70 percent from its all-time high, wiping out more than $70 billion in shareholder value. What had happened?

In the case of Digital, Ken Olsen was in denial; he refused to change. In contrast, IBM knew it needed to change but simply couldn't. Presiding CEO John Akers was no Ken Olsen, and he lamented his inability to bring about the necessary transformation. He couldn't make the ocean liner change direction. IBM's culture was too ingrained, and its DNA seemed inalterable. The company was trapped by its own competency, victimized by what I call the "expertise paradox." Plus, it had been doing so well for so long that it had become complacent. Ironically, IBM had originated the concept of the home computer in the early 1980s. But its position in mainframes was so dominant and so secure that it continued to set the company's direction while the PC market was inundated by less-expensive IBM clones. Lou Gerstner, former CEO at IBM, hit on an appropriate metaphor in the title of his autobiography: Who Says Elephants Can't Dance?

Collins and Porras say that IBM began to lose its stature as a visionary company in the late '80s and early '90s because it lost sight of Watson Sr.'s core beliefs. There was too much emphasis on the trappings of its vaunted culture—blue suits, white shirts, and even computers—and not enough on real core values. "IBM should have much more vigorously changed everything about itself except its core values," write the authors. "Instead, it stuck too long to strategic and operating practices and cultural manifestations of the core values."8

Collins and Porras go on to say that visionary companies have an extraordinary resiliency and the ability to rebound from adversity. But, interestingly, they looked with disapproval at IBM's overtures toward Lou Gerstner, who was being offered IBM's top post even as they were writing. "What should one make of IBM's 1993 decision to replace its internally grown CEO with Gerstner—an outsider from R.J. Reynolds with no industry experience? How does this massive anomaly fit with what we've seen in our other visionary companies? It doesn't fit. IBM's decision simply doesn't make any sense to us—at least not in the context of the seventeen hundred cumulative years of history we examined in the visionary companies."

If the IBM board was looking for drastic change, the authors write, "With Mr. Gerstner, they'll probably get it. But the real question for IBM—indeed, the pivotal issue over the next decade—is: Can Gerstner preserve the core ideals of IBM while simultaneously bringing about this momentous change?"9

They were not the only ones asking such questions in 1993. Before Gerstner's ascension, IBM had had only six chief executives in its long history—all career Big Blue men. The new chief would not only have to master a new industry, he would somehow have to transform an entrenched corporate culture. At the same time, he had to tackle the fundamental task of rebuilding shareholder value and reenergizing IBM's huge workforce. Frankly, there weren't many believers. As soon as word of Gerstner's selection got out, the company's stock fell more than three dollars.

But within just a few months, the doomsayers were recanting. Gerstner was being widely praised for listening to and acting on the recommendations of his 200 top customers, rather than on the advice of his internal management team. It seemed he had stifled the turf wars among competing functions and product lines by going straight to customers and finding out what their needs were. Collins and Porras, no doubt, would have also applauded because in so doing Gerstner was surely getting back to Watson Sr.'s basic beliefs—particularly number 2: "Spend a lot of time making customers happy."

In two short years, the Gerstner turnaround was well under way. He had cut the workforce; sold assets, including real estate and a 300-piece art collection; and cut the dividend on the company's common stock. Costs were down, and profit margins were rising. The company was already back in the black by 1994; then it reported record profits in the first quarter of 1995, far exceeding analyst forecasts. Shares were back up to $90, more than double their 1993 low. The company even began to act like its old "imperial" self again—moving to acquire Lotus Corp. for $3.5 billion.

By 1998, Gerstner's work was complete. As the San Francisco Chronicle rhapsodized, "Given up for dead by many people just five years ago, Big Blue has enjoyed under Lou Gerstner one of the great turnarounds in the annals of U.S. business." IBM's record sales and profits in 1997 and soaring stock price were signs that IBM had regained its throne atop the computing world.

But it's not enough to say that IBM had returned to its old self; more accurately, the company, under Gerstner, had managed to reinvent itself. The Chronicle noted that what had really driven IBM's prosperity was its ability to help businesses enter the Internet age by working with them to develop, implement, and maintain their computer systems. This included their networks, intranets, and electronic commerce Web sites. IBM not only supplied the equipment—whether its own or other companies'—it also serviced the systems. Such services now account for more than 50 percent of IBM's sales.

The transformation has been quite remarkable. Golf fans watching the 2005 Masters Tournament, for example, saw dozens of commercials touting "IBM Global Services," which basically continues the "Solutions for a Small Planet" and "e-business" campaigns that began back in 1997 and 1998. With the help of those ads, IBM was trying to acquire a reputation as the company that others turn to for their technology needs. It was much more successful in promoting that image than its nearest competitor, Hewlett-Packard (HP).10

In the last analysis, Gerstner not only changed the fortunes of IBM; he changed its image. The focus on services and the advertising supporting it gave the company a new personality. "Five years ago, people would say that IBM has an incredible brain, but not a heart," says Ogilvy Mather's Shelly Lazarus, whose company created the "Solutions" campaign. "Today, it...also has a heart and a soul and a sense of humor."11

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