Former IBM CEO Lou Gerstner (born in 1942) is said to have been one of the best managers of his generation. Many people rank him alongside Jack Welch, Bill Gates, or Andy Grove. And a look at what Gerstner achieved at IBM, where he masterfully engineered one of the most stunning turnarounds in business history, more than justifies the claim that he genuinely earned his place in such illustrious company. The major lesson to learn from him is how important it is to focus a business totally on generating customer value.
In 1993, IBM was in a bad way—such a bad way, in fact, that Intel CEO Andy Grove struggled to find words to sum it up: “It’s hard to describe how beaten down that company was.”1 The computer giant, leader in its industry at the time, had previously reported what was at the time the biggest-ever annual loss posted by a company: $8.1 billion. Then, in April 1993, Lou Gerstner was appointed CEO of IBM. One of his first—and most important—decisions was not to implement the plan drawn up by his predecessor John Akers, which would have carved up IBM into smaller units. Instead, Gerstner opted to keep the giant intact and derive the greatest possible competitive advantage from the company’s wide range of products, services, and know-how. One of the biggest changes made by Gerstner at IBM was that from that time on, the company uncompromisingly focused on customers and customer value: As Gerstner himself explained: “In the spring of 1993, a big part of what I had to do was get the company refocused on the marketplace as the only valid measure of success. I started telling virtually every audience . . . that there was a customer running IBM, and that we were going to rebuild the company from the customer back.”2
Lou Gerstner’s decision to reintroduce such an uncompromising focus on customer orientation and make IBM once again concentrate on generating customer value proved vital to the company’s successful comeback. His extensive rationalization program, which initially entailed cutting costs, banked on a fundamental strategic change of tack, shifting the emphasis primarily onto service provision and concentrating on the Internet. His massive investments in research and development sent out an unmistakable message that IBM was really serious about meeting customers’ requirements. The path he chose to take to put the spotlight firmly back on customer value and meeting customers’ needs and requirements applied a principle that Thomas Watson, Sr., who for decades called the shots at IBM, would have been proud of. Watson had always made generating customer value his top priority. Consequently, Lou Gerstner’s biggest achievement may well have been that he reminded IBM that it was IBM, reiterating the true essence of what the company was actually all about. Gerstner’s highly readable book Who Says Elephants Can’t Dance? gloriously illustrates that some elephants can indeed dance.
As the highly influential management thinker Peter F. Drucker put it in his seminal 1954 book The Practice of Management: “There is only one valid definition of business purpose: to create a customer.”3 Ever since, this valuable nugget of knowledge has been available to everyone, yet most people are either unaware of it or simply allow it to slip their mind. Customers are the foundations on which everything has to be built because they secure the company’s existence and safeguard jobs. German billionaire manufacturer Reinhold Würth perfectly summed this up by saying: “It’s my customers, not me, who employ my staff.”4 If only more company bosses adopted this attitude toward their customers! And Würth speaks from experience, having turned the Würth Group into a global market leader with some 60,000 employees on its payroll.
So the question you need to begin with is this: What does your customer regard as value? This question is far too seldom asked, often because top executives believe the answer is clear, whereas in actual fact the conclusion reached inside a company is more often wrong than right. Instead of trying to guess the correct answer, managers should instead work out a viable response by regularly talking with their customers and at the same time closely monitoring what they actually buy. After all, customers will often say one thing, but actually go on to do something completely different. Lou Gerstner and other leading CEOs used to regularly spend substantial amounts of their time interacting directly with their customers. Gerstner led by example, which is why he chose not to delegate this task.
The only way Gerstner could see of fulfilling his aim of creating a company obsessed with generating customer value was, as he put it, to “look at technology through the eyes of the customer.”5 Doing that necessitates maintaining highly intensive relations with customers and dealing with their problems and wishes in the greatest possible depth. It was for this same reason that Alfred P. Sloan, the legendary CEO and chairman of the board of General Motors, used to serve as a lowly car salesman several times a year.
The above-mentioned Würth Group, too, sets standards around the world for its intensive contacts with customers and systematic dialogue with its target group. Essentially, customers never buy products or services, but rather the value they derive from them. It is crucial to understand this value, not only to target marketing effectively and systematically innovate, but also to decide which activities and product features can be dispensed with. Customers see no loss in doing without something that does not create value for them. It is important to understand this because saving these costs frees up resources that can then be deployed to deliver genuine value to customers.
In addition, it is becoming increasingly important to understand what noncustomers deem to be of value. Even when companies enjoy such a dominant position in their market, as IBM did in the mainframe and PC sectors, there are still vast swaths of the market that elude them (and let us not forget that the towering dominance of IBM was actually something pretty exceptional). For a company to acquire a 30 percent market share is a major entrepreneurial achievement, but it also means that 70 percent of customers are buying elsewhere. Why? What do noncustomers regard as value? You need to understand these non-customers, because it is always changes starting with them that have a lasting impact on your sector.
Lou Gerstner once brilliantly summed up the required approach by saying: “IBM is a solutions company. We start with a customer’s business problem, and work back to the right combination of technologies and expertise.”6 Is there any better way of living up to Peter F. Drucker’s definition of business purpose, as cited earlier in this chapter?
What does your customer regard as value? What can you do to gain a closer understanding of your customers and their views on perceived benefits?
What do noncustomers regard as value? What will you do to ensure that you understand your noncustomers better in the future?
What will you do to launch an intensive debate about these issues within your organization? And which results are to be achieved within the next three months?