Gerstner at IBM

In 1993, Lou Gerstner assumed the formidable challenge of reversing the decline of computer maker IBM. Boldly basing his turnaround plan on anecdotal evidence and intuition rather than exhaustive analytical data, he successfully refocused and reinvigorated the massive company in a mere four years .

IBM was stagnating in the early 1990s. Technology players and pundits alike dismissed the mainframe computer as irrelevant in the disaggregated world of networked computing, and IBM was falling behind in the desktop revolution. Competitors such as Compaq, Dell, and NEC took over market-share leadership in the personal computer (PC) market that IBM had created, while server vendors such as Sun, DEC, and Hewlett Packard cut deeply into IBM s once-indomitable server market. Similarly, competitors such as Microsoft, Computer Associates, and Oracle controlled the enormously profitable market for software that IBM had helped to build. Nothing IBM did, with its own hardware, software, operating system, or database query languages, seemed adequate to break through the commanding position that this new generation of PC makers and software vendors enjoyed.

Beyond these technology- related challenges, relationships with customers had deteriorated. Gerstner s predecessor had initiated efforts to reorganize the company into thirteen parts . The workforce needed to be reduced drastically. Owing to a high debt burden , the company s credit rating was declining. Gerstner himself even remarked, It just looked like it was going into a death spiral. I was not convinced it was solvable. ^[5]

Gerstner s original plan was to leverage IBM s services capabilities to sell more hardware and software. However, in discussions with customers, he kept hearing that large corporations still wanted a specialized outsider to formulate their technology strategies and build and operate their complex networked systems. Accordingly, he changed his plan on the fly. He abandoned efforts to turn around the company by competing directly against competitors strengths and, instead, bet IBM s future viability on the interaction between its mainframes and services businesses ”a decision that defied prevailing industry consensus.

Under Gerstner s watch, IBM invested heavily to overhaul and revive its line of mainframes, which he believed would still be necessary to tie networks together in much the same manner that servers did. And he leveraged IBM s customer relationships and well-recognized brand to expand the company s presence in higher-margin, value-added services. Both decisions were widely perceived as ill advised at the time, since industry experts believed that the demand for mainframe technology would never recover and that IBM could never compete in information technology (IT) services against established firms. Nonetheless, by late 1996, the sales of new mainframes were booming, IT services had become IBM s biggest growth business, and Gerstner was widely heralded as Big Blue s savior.

Leadership Lessons

Gerstner s confidence, decisiveness, and flexibility drove the turnaround of IBM. Owing to his conversations with key customers, Gerstner was not afraid to trust his intuition and defy the groupthink that pervaded IBM and the technology industry in general. As decisive as he was defiant, Gerstner made almost all of his most important decisions within ninety days of his arrival. Willing to deviate from his original plan, he listened to the insights of key customers and incorporated those insights thereby increasing the likelihood of a successful turnaround. Finally, the sum total of these efforts enabled Gerstner to unfreeze a static front: by reorienting IBM s strategic focus on mainframes and IT services, he was able to circumvent the entrenched positions of PC makers and software vendors that had stymied previous turnaround efforts.

^[5] Morris, Betsy, He s Smart. He s Not Nice. He s Saving Big Blue, Fortune , April 14, 1997, 68.