SYNOPSIS: IBM grew to become one of the most admired and successful corporations of the twentieth century under the leadership of Thomas J. Watson, Sr., and Thomas J. Watson, Jr.; they led IBM for a total of fifty-seven years (1914–1956 for Watson Sr. and 1956–1971 for Watson Jr.). IBM became a dominant force in computing, making huge leaps with programs like the IBM 360 project. From 1926 to 1972, IBM beat the general stock market by more than seventy times; a $1,000 investment in IBM in 1926 would have returned more than $5 million by 1972. In the mid-1980s, however, IBM began a steady slide and then plummeted in the early 1990s, posting its first losses in more than seven decades, losing more than $15 billion from 1991 to 1993. In 1993, the board hired Lou Gerstner as CEO, who turned IBM around and then set the foundations for IBM to become a great company once again.250
I’ve outlined IBM’s recovery through the lens of the good-to-great concepts below. (For an explanation of these concepts, see Appendix 7.)
LEVEL 5 LEADERSHIP: Gerstner came in as a savior CEO yet clearly had the discipline to make difficult decisions (and to resist making panicky decisions). While it is not entirely clear if Gerstner began his IBM tenure as a Level 5 leader, he grew to have a Level 5 passion for the company, noting at the end of his tenure that he “fell in love with IBM.” He dedicated his book, Who Says Elephants Can’t Dance? “to the thousands of IBMers who never gave up on their company, their colleagues, and themselves. They are the real heroes of the reinvention of IBM.” In the end, Gerstner was clearly ambitious for IBM first and foremost, beyond himself.251
FIRST WHO, THEN WHAT: Gerstner first focused on rebuilding his team, describing his focus on getting the right people in key seats as “my top priority during those first few weeks.” He retooled the compensation system so that he would not lose any key people. He rebuilt the team around himself with people he knew he could trust—a new communications executive, a new head of corporate marketing, a new CFO, a new general manager of the personal computer division—and removed executives who did not share his sense of urgency or who failed to deliver on their responsibilities.252
CONFRONT THE BRUTAL FACTS: Gerstner believed that assessing the brutal facts—where IBM was failing, where IBM couldn’t be excellent, why IBM was losing market share, how IBM’s cost structure had become bloated, what IBM’s critical customers really thought, how the competition had come to see IBM as irrelevant, and so forth—however hard that might be, preceded developing a vision. “If the last thing IBM needed in July 1993 was a vision, the second last thing it needed was for me [Gerstner] to stand up and say that IBM had basically everything right.” Gerstner and his team met with customers to get candid feedback, kicking off a transition to return IBM once again to being an externally focused, customer-driven enterprise. They confronted the fact that IBM had been milking the mainframe business by keeping prices high and losing market share. (The Gerstner team dramatically lowered the price per unit of mainframe processing power by 96 percent over the next seven years.) They confronted the fact that IBM had to cut $7 billion in costs in order to survive. They confronted the fact that OS/2 had failed and Windows had won. They confronted the fact that IBM faced competition more threatening than it had faced for most of its history.253
HEDGEHOG CONCEPT: The cornerstone of IBM’s transition rested on one central idea: an obsessive passion for the customer would be at the center of IBM’s universe. This shift then led to a crucial insight—customers desperately needed someone to integrate all the disparate pieces of information technology, individually tailored to solve their specific problems, into a single package, and this need would grow as technological change and the shift to networked computing accelerated. From this came the essence of IBM’s hedgehog concept: IBM could be the best in the world at technology-integration services. “The idea that all this complicated, difficult-to-integrate, proprietary collection of technologies was going to be purchased by customers who would be willing to be their own general contractors made no sense.”254
CULTURE OF DISCIPLINE: Gerstner exemplified the principle of turning a culture of bureaucracy into a culture of discipline, one in which people had freedom within a framework of demanding performance standards, values, and accountability. “‘Respect for the individual’ had devolved to . . . a culture of entitlement, where ‘the individual’ didn’t have to do anything to earn respect—he or she expected rich benefits and lifetime employment simply by virtue of having been hired.” He laid out a framework of eight principles of IBM performance, and any business leader who failed to deliver results consistent with this framework would no longer hold a position of significant responsibility. The Gerstner team maintained focus on the hedgehog concept, noting “a good portion of our success was due to all of the deals we didn’t do.”255
FLYWHEEL, NOT DOOM LOOP: Gerstner resisted reactive moves, taking time to rigorously analyze IBM’s problems. Despite the general view held by analysts, the press, and other experts that IBM needed to be broken into pieces, Gerstner chose to keep the company together. He unplugged activities that did not fit with the hedgehog concept: stopped OS/2, stopped developing applications software, and sold the Federal Systems division. He kept a low profile with the media, never allowing hype to precede results; he engaged in the disciplined practice of underpromising and overdelivering. He turned away big acquisitions that did not fit with the strategy or that would fail to deliver significant profit. As IBM’s integration-services concept gained traction, the Gerstner team capitalized on the rise of the Internet and shift to networked computing to launch IBM e-services.256
CLOCK BUILDING, NOT TIME TELLING: Gerstner wrote, “I came to see, in my time at IBM, that culture isn’t just one aspect of the game—it is the game.” To reinforce the idea that executives were responsible for creating value rather than simply being entitled to wealth, executives would no longer receive stock options unless they concurrently bought IBM stock with their own cash. Gerstner constructed a senior leadership group capped at 300 people. There was no year-to-year tenure on the group; every year, Gerstner reconstituted the group based on each member’s performance; only 71 of the original 300 remained in the senior leadership group in 2002. Gerstner engaged in rigorous succession planning for the next CEO.257
PRESERVE THE CORE/STIMULATE PROGRESS: Gerstner unraveled the mix-up between core values and operating practices. He overturned hidebound traditions and stupid rules, while simultaneously revitalizing IBM’s core values and semineurotic passion for excellence and success—“You’re IBM, damn it!” He set the audacious goal to build the largest, most influential information technology-services enterprise in the world, betting heavily on the insight that networked computing would replace distributed computing; from this, he launched e-business as IBM’s “moon shot” in the 1990s and early 2000s. The Gerstner team reengineered almost all aspects of business processes, removing more than $14 billion in inefficiencies from 1993 to 2002.258