16 IBM’S INITIAL RESPONSE, 1985–1993
As you know, the Board has also accepted my recommendation that the selection process begin for a new chief executive officer of IBM.
—JOHN AKERS, JANUARY 26, 19931
THE DAY AFTER Akers’s bombshell announcement, the New York Times reported that IBM “also cut its dividend payments to shareholders for the first time in IBM’s 79-year history, reducing the quarterly payout to 54 cents from $1.21.”2 Much happened along the way to that announcement. For decades, revenue came into IBM’s coffers, thanks to leases and the size of the firm. If one region of the world was in recession, then another enjoying good times picked up the slack. IBM management practiced a form of quasisocialism: if one part of IBM was prospering, then that prosperity was shared. If the company as a whole suffered financially, or some division’s results became a drag on IBM’s performance, then all divisions, or the most prosperous ones, received a tax either in the form of budget cuts or increased quotas. Financial adjustments were usually made on an annual basis, but during the 1980s they were made quarterly and in the early 1990s were made monthly. That way of managing financials was part of the combination of loose and tight management styles that had worked for decades.
When the financial strains proved too great in the early 1990s, managerial controls broke down. Too many parts of IBM no longer delivered sufficient revenue to support the structure of the firm. The dividend paid to “widows and orphans,” to large institutional investors, pension funds, employees, retirees, and individual investors, could no longer be sustained. The finance and planning (F&P) managers in Armonk brought their shocking analysis to John Akers with the recommendation that the board cut the size of the dividend. It was the hardest of blows, because there would be no hiding the extent of IBM’s problems. Now the board would be held accountable for IBM’s problems. If there had been any doubts before, Akers and his lieutenants now confronted a large fire burning down the company.
How IBM reacted to its failed strategy is about facing the reality that they had taken steps to rectify the situation too slowly and too late. Those steps were necessary, though painful. If the megastrategy launched by John Opel had been more humble, if there had not been so many new technological innovations in the 1980s, if competitors had not been so good, if customers had simply obeyed their IBMers, and if European governments had not picked on IBM so much with their “national champions” programs, maybe none of this would have happened. But none of those “ifs” happened. IBM operated in a world of multiple existential threats compounded by its own mistakes, and it believed its own hubris too much. To its credit, senior management accepted the need to respond to these threats, and how they did took over a decade to play out. The first half of that tale is the subject of this chapter, continuing the review of events from the previous one.
IBM could not hide its problems, as the extensive press coverage of the company’s difficulties demonstrated, but we can put some hard data to the matter. In the early 1990s, IBM ranked eighth in the world as measured by revenue, being beaten out in size only by such peers as General Motors, Shell, Exxon, and Ford, plus a few others. Using our measure of number of employees, IBM ranked fourth, exceeded in size only by General Motors, Siemens, and Daimler-Benz. Its footprint could be found in over 100 countries.3
To understand how Akers and his senior executives addressed IBM’s problems, we need to explore four issues: the steps they took; why they failed to provide effective leadership; the crucial role of the board of directors; and then the lessons to be drawn from their actions. The last point is important not only for informing business historians but because these lessons were being cataloged and presented to IBM’s executives in the years immediately following Akers’s departure. The subjects of this chapter are also of continuing interest to historians and experts in business management. These include the role of individual leaders, a topic discussed in greater detail in chapter 17; the role of corporate governance, specifically of the board of directors of this large multinational corporation; and how change unfolds in moments of crisis.
Culture and personal leadership continue to serve as contending themes in this chapter, perhaps not fully satisfying business historians focused on the social history of corporations or their continuing concerns about the role of individual leaders, but this chapter demonstrates that both are interrelated. When Roland Trempé studied nineteenth-century French coal mining, he made clear that contention and industry/work cultures were central issues to explore; his thinking still informs historians and my approach here.4 Alfred D. Chandler Jr. observed that organizations respond to market conditions and that large institutions could be discussed as nearly monolithic entities even though, in practice, they were collections of constituencies operating under a corporate banner, an approach continued in this chapter.5 While not purposefully replicating William G. Roy’s approach to examining the behavior of American corporations, the story unfolding here mirrored his concerns about the role of economic power, again institutional behavior, his sociological approach, prior history, and contingency. It is useful to keep in mind his observation that a corporation’s activities are “the work of specific individuals and groups acting within the context of constraints and facilitators, setting goals, mobilizing resources, and influencing others to act in concert” and “shape meanings,” because “the form of the modern industrial corporation abounds in contingency.”6 He could have been describing IBM in any decade. We also explore the role of IBM’s board, relying on the research of business management scholars and sociologists.7 Many of IBM’s board issues turn on roles and the scope of responsibilities, themes discussed in earlier chapters and increasingly in the remaining ones.
THE RESPONSE
When circumstances compelled Akers to dismantle Opel’s growth strategy, he began slowly and then took increasingly more drastic measures. Recall that IBM gave up its historic full-employment practice, decimated employee loyalty and morale, caused some 200,000 employees to leave, emptied out buildings all over the world, plunged Poughkeepsie and Endicott into recessions, irritated customers, made it possible for new rivals to thrive, and replaced a generation of management. IBM’s culture was riddled with holes. All three “Basic Beliefs” of respect for the individual, customer service, and excellence became barely recognizable. Akers’s successor crafted a replacement for these beliefs that was more suited to the realities of the 1990s.
Until late in 1986, Akers assured everyone that things were going well. Then came his new message: “1986 was a difficult year for IBM.” He acknowledged that “the information industry has achieved a remarkable record of growth. That record is not a line moving straight up, and it reflects several previous downturns.” The $100 billion chart vanished. “The past two years” in Akers’s words, “have been as difficult as any in our experience—a period of significant restructuring and retrenchment.” His response was to speed up new product introductions and move employees from staff jobs to sales and service positions while “streamlining our operations.” He spoke about a “stronger product line,” finally serving up a statement about “commitment to customer partnerships,” with a “leaner, more vigorous company.” He admitted getting rid of “unneeded capacity” but said, “We continued to maintain our tradition of full employment.”8 While his public messages represented a departure from his usually highly optimistic communications and demonstrate that the heavy lifting of unwinding had yet to start, nonetheless everything seemed large now at IBM. For example, redeployment of people “back to the field” involved 12,000 employees in 1987. Many of IBM’s competitors did not have anywhere near that number of workers.
IBM executives realized quickly that all divisions needed to shrink. In the process, the corporation spent billions of dollars. Just as it expended cash and took on debt to expand capacity, doing so incrementally as it sought to get to some equilibrium that would make possible $100 billion in revenue, it now incrementally shrank to “right size,” to be a company of the size needed to earn a profit on the volume of revenue it was making. Eliminating employees was the most important lever management could pull to lower costs. To even touch that lever required them to abandon IBM’s nearly hundred-year implied contract with its employees, releasing frightfully ugly and dangerous problems that the corporation still lives with. Right into the late 1980s, IBM had practiced the most thorough paternalism one could find in a large corporation. If a worker’s job went away, IBM found them another in the company rather than lay them off. That last commitment became the rubbing point in the 1980s, because it was the element of the implied bargain management had to break if IBM was to unwind its excess capacity in a timely fashion.
Incrementally, Armonk approved dozens of actions that reduced the number of employees during the second half of the 1980s. With every new round of layoffs and voluntary separation programs, terms became less generous. Ever-larger groups in the United States and Europe were made eligible to participate; many did voluntarily. It would be difficult to underestimate the disruption to employee loyalty and focus on work that resulted from the possibility of being pushed out at any moment, the inability to plan based on some fixed separation package since these kept changing, and not knowing whether one was working in a part of the business safe from dismissal either because of their role, personal performance, or local labor laws protecting their jobs. In a company where such circumstances had not existed since the early 1920s—65 years earlier—the new work realities were unprecedented. Employees felt violated, cheated. Their new work atmosphere poisoned a great deal of Akers’s efforts to fix IBM’s problems. His second step involved reducing salary increases and then restructuring job classifications in order to lower salaries for specific categories of positions to drive down the cost per unit of work, regardless of merit. By the mid-1990s, IBM was differentiating salaries by location, allowing countries to set compensation based on what other firms paid locally. For example, someone working in Idaho would be paid less than a resident in New York City with the same job and rank. These otherwise normal steps had the effect of reinforcing employees’ inability to focus on their work.
“Pay for performance,” long an IBM mantra, evolved. Until the mid-1980s, the goodwill of loyal IBMers motivated them to do well what the company needed done. That involved personal commitment, acceptance of individual responsibility for excellence, solving problems, addressing wants of customers, and protecting IBM’s interests. Those who embraced such behavior were rewarded with job advancement and increased income, using annual performance reviews as the tool to assess behavior and performance. Supposedly, performance reviews allowed managers to weed out poor performers. In reality, it did not, because assessments were of the employee against his or her objectives for the year, not in comparison to other employees. So, it became nearly impossible to dismiss poor performers. By the 1980s, bloated staffs were the norm. The concept of “starve the turkeys to feed the eagles,” an aspiration, never came to fruition. Salaries flattened, even becoming uncompetitive. As severances began, self-motivation to do well deteriorated, with consequent erosion of labor productivity and quality of performance.
In the early 1990s, IBM introduced employee rankings, a practice already used by many corporations. Each manager ranked the effectiveness and value of every employee from best to worst. No level or rank was immune from the process. This ranking influenced appraisal ratings, the amount of bonuses, and salaries, and in its wake spun off extensive guidelines about how to tie together all three. Rankings made it easier to select who should be laid off. If a department had an outstanding staff, that is to say all its members were better performers than, say, others in similar levels in other parts of the company, someone still had to be ranked the lowest and hence subject to lower appraisals, income, and bonuses, and be exposed to being laid off. IBM’s adoption of employee rankings corroded teaming behavior, as employees now saw each other as potential rivals. It was a slow, subtle transformation. Morale dropped. It did not matter what one’s performance was, because it was what position they held that determined whether they were dismissed. For example, early targets for downsizing were headquarters and administrative staffs. If a specialist who was an expert in competing against mainframe rivals happened to be located in Atlanta in the National Marketing Division (NMD) while a similar expert was in the National Accounts Division (NAD) in White Plains, New York, the one in Atlanta lost his job in 1987, regardless of whether he was a better performer than his counterpart in White Plains. Both were in this role because they had been identified as better sales performers than their peers in branch offices.
So managers had fewer workers but were still required to do the same work as before. IBM slashed its billion dollar training budget, too. By the mid-1990s, one simply hired someone who already had a desired skill and dismissed IBMers who did not have it. That practice has continued to the present. It made sense if the company was no longer hiring for lifetime employment. The change quickly became obvious to Americans when IBM closed a facility in Greencastle, Indiana, forcing local IBMers to take what was then a generous severance package. It did not take employees long to realize that the IBM world beneath their feet was changing. Even European employees protected from such actions by national laws became concerned.
Akers sought to transform the culture of the company. Changes in salary and appraisal administration represented part of this effort, but Armonk also began tinkering with the centralized management structure it had found effective over many decades. The absolute authority over work activities managers had was now challenged by a new managerial transformation entering American, Asian, and European firms, called total quality management (TQM), which IBM referred to as market-driven quality (MDQ). These practices required that a company be willing to change its practices, that employees continuously be trained and learn about the effectiveness of the work they did, and that workers have the authority to change how they worked, hence transforming the notion of teaming from rhetoric to practice. That new philosophy struck a blow at the heart of management’s authority, indeed at the need for managers. Instead of executives running the business from the top down, they would be required to shift responsibility down the organization and facilitate practices up from the bottom. That last change alone was nothing less than a revolution at IBM. Some welcomed it, mostly nonmanagerial employees and highly self-motivated managers. Many shied away from the increased responsibility or, more often the case, resisted losing their authority. Beginning in the mid-1980s, MDQ became a company-wide campaign.9
Employees were encouraged to submit more suggestions for improvements than ever before. Teams across the company looked at how to streamline work processes, making both minor and significant progress, such as the first attempts at creating a global procurement process.10 However, some topics remained taboo. For example, if in the early 1990s an IBM sales organization experimented with a new peer appraisal process, its manager could be guaranteed a visit from divisional or corporate personnel management shutting down that innovation. Products still came to market late, despite the implementation of process redesign practices. Employees focused their attention on avoiding layoffs, participating and keeping up with the changes in processes and practices, and figuring out how they fit into the frequent organizational changes under way in all corners of the company. Customers saw their IBMers spending more time focusing on internal issues than on their needs.
Internally, consensus management bumped up against teaming that worked faster. So, senior management pushed implementation of MDQ in how work was done. They used every means to force the transformation, but they continued to operate a centralized management process while attempting to decentralize decision making. MDQ did not work well, despite a heroic effort across the firm from top to bottom. The most serious problem concerned the confusion over authority and continuous incremental cuts in budgets and staffing that played havoc with the initiative. Akers extolled individual leadership, while an employee read company publications cautioning them not to go too far, meaning not to spend too much money, because their organization had to live within its budget. The reason for concern about distributed authority is because quality management at its core called for companies to rely on teams of employees closest to a situation or with the greatest knowledge of a circumstance or process to manage their own work. That meant authorizing them to establish metrics of performance, judge their own work against those metrics, and modify processes as quantitative data led them to conclude that changes were needed. Those behaviors ran contrary to IBM’s way of doing things.11 However, that was the situation during Akers’s time. By the end of the 1990s, many MDQ practices were working in other multinational corporations, where they were no longer called MDQ but rather TQM.12
Meanwhile, IBM’s financial performance deteriorated. Akers pressed for further reductions in bureaucracy, a subject of interest to every CEO at IBM. The press began noting the changes he was pushing, some positively, such as when the Wall Street Journal reported in November 1988 that IBM was reducing its operating costs and increasing earnings.13 A year later, the same publication criticized IBM’s financial performance, reporting that Akers was going to lay off another 10,000 employees and cut more expenses. IBM’s efforts had addressed symptoms, not the root causes of the company’s problems.
Akers was not alone in his frustration. Better performers left with every new severance package, managers resisted changes, and most employees did not feel empowered to fix problems. New deals with customers could not be put together in a timely or flexible fashion. For example, if a customer wanted a specialized PC, say 200 or 300 of them, the PC Division would refuse to build them, saying it could not afford to do that for quantities less than 1,000. But Compaq did.
To a great extent, what survived the 1980s and early 1990s was a set of attitudes and behaviors that Akers just could not break. These included notions of excellence not aligned with those held by customers. The endless stream of managerial meetings, which consumed as much as a third of someone’s time, distracted them from their intended work. Members of the corporate management committee were not the only ones trapped in conference rooms several times a week. There was insufficient urgency to get things done, with employees still seeking permission and instructions, all contrary to the operating principles of MDQ/TQM. Too many were being pushed out because they held jobs no longer considered relevant and were given no opportunity to transfer to more urgently needed positions. Staffs often were still too big. Akers knew about each of these failures, but he focused more on obtaining immediate results than on changing the culture of the firm. He was part of the problem, not fully understanding the change needed. He stated, “We are clearly putting competition into the IBM system,” meaning employees competing against each other, when what MDQ advocated and many other corporations were finding was not the way to operate. Rather, practitioners of TQM and their managements advocated increased collaboration and teaming.14
Akers decided to reorganize the firm to shake things up. He sold off units of IBM. One of his earliest and most visible was the printer and printer supply business, which IBM sold in 1991 to the investment firm of Clayton, Dubilier & Rice, Inc., in a leveraged buyout, creating Lexmark. IBM retained 10 percent ownership in the new company and allowed it to use the IBM logo. IBM occupied one seat on its board. To run Lexmark, IBM and the new owners turned to a 32-year veteran of IBM, Marvin L. Mann (b. 1932). Mann, now liberated from IBM’s management ways, turned Lexmark into a successful operation, going after H-P’s laser printers, building a state-of-the-art manufacturing business supporting a $2 billion line of revenue with 5,000 employees, a workforce Mann later trimmed to 3,000. This IBM veteran turned out to be highly entrepreneurial, perfect for this spin-off, which he ran for nine years.15 In time, industry observers questioned whether Lexmark had become the best at making and selling printing technologies that were rapidly becoming outdated. One reporter called its key PC printer a “Ferrari engine in a pickup truck body,” a bit clunky.16
Key to our story is the typewriter piece of Lexmark, considered the best in the world. These typewriters were also the most expensive, but secretaries and typing pools did not care, for the machines were “the Mercedes-Benz of the executive suite,” and without them, top secretaries could not be recruited.17 During the 1970s and 1980s, this business suffered from benign neglect because it was “only” a $2 billion business for IBM. The rest of the company thought it was a sideshow.18 Salesmen in DPD paid little attention to it, as their quotas were too large for them to waste time on typewriters. Neglect by management destroyed this wonderful business. When Akers began spinning off less profitable pieces of the company, typewriters were thrown on the pile of discards. The Lexmark transaction made it possible to package together printers, keyboards, printer supplies, and the old typewriter business. That worked for Lexmark but was, of course, more evidence that IBM was having difficulty managing what had been an important piece of its business.
Employees and customers were frustrated with Akers’s earlier moves: 15,000 semiforced departures in 1987 and then 21,000 staff sent back into sales branch offices. This cadence of reducing the number of employees continued in 1988 and 1989. At the dawn of the new decade, another 8,200 staff and 16,000 factory workers lost their jobs, and an additional 11,000 were transferred to branch offices; 7,700 programmers were redeployed. The sales organization had been reorganized three times in four years, and another “reorg” was pending. It seemed nobody in sales knew anyone anymore anywhere in the company. Telephone directories were out of date; Rolodex files were more useful if they listed home telephone numbers of colleagues.
IBM had rarely made broad reorganizations until Tom Watson Jr. began doing so in the late 1950s, again when the company grew in size and complexity, thanks to the S/360. Because of the increased number of reorganizations, it makes sense to explain their forms. Reorganizations of divisions involved creating new ones dedicated to specific markets or products, whereas smaller reorganizations involved departments within a division. To draw an academic analogy, think of a division like a college within an American university. IBM divisions could either be just within the United States or global. As the company grew, clusters of divisions were organized into “groups,” such as a combination of sales and product manufacturing divisions aligned to address a specific market, such as for large or small systems and customers. Senior vice presidents (later called general managers) managed groups, while presidents, ranked one level below them, ran divisions. This combination of divisions and groups came into use more frequently to align resources with IBM’s strategies.19 In Akers’s early years at the helm in the mid- to late 1980s, IBM’s slowness in bringing out new products and lowering costs proved nearly insurmountable. He had to try something else. For many executives in other companies, major reorganizations represented an almost nuclear option, and so it was at IBM. In IBM’s centralized managerial culture, such reorganizations were intended to diffuse responsibility and authority. While used frequently, they had less effect over time, because as they became too frequent, they disrupted networks of collaboration and focus.
In early 1988, IBM began implementing a new approach. To move decision making closer to customers and products, IBM created five independent business units (IBUs), each with its own general manager and range of authority. All reported to one general manager, Terry R. Lautenbach (1938–2004). He had the impossible task of running these IBUs plus all of the sales and service organizations located in the United States. One would have thought that at least he was now the number two executive at IBM. This was not so, because in addition to Akers (chairman), two vice chairmen and one executive vice president joined with the chairman to form a committee to which Lautenbach reported. The same group also oversaw all World Trade marketing and manufacturing.
“Cumbersome” was the polite word used by some employees close to Akers to describe this arrangement. Recall that the current iteration of the corporate management board dated to 1985, with 18 members who also oversaw operations, or at least broke up disputes and allocated resources. The smaller group quickly dominated decision making, marginalizing the larger committee. Earlier groups were now dissolved, including the Information Systems Group (ISG), which had concentrated authority over all of the company’s hardware and software decisions from typewriters to mainframes. The new, smaller committee met two or three times a week for meetings lasting all day. Akers had hoped to better integrate decision making using his reorganization with ISG, but that organization did not work, so he reversed course by decentralizing further. His new structure also failed, so in December 1991 he announced yet another new structure similar in form but now increased to nine organizations. At the same time, he created four non-U.S. (World Trade territory) marketing and services companies.
If the reader is becoming confused, so were thousands of employees, customers, and industry watchers. In mid-1992, Fortune acknowledged Akers’s promising intention but asked, “But is he pressing the message hard enough? Probably not.”20 In fairness to him, the same article acknowledged, “Think your company has troubles? IBM faces practically every challenge known to management.”21 By now, much of the business press had turned against Akers. In a thorough analysis, Fortune concluded that the reorganization would not foster more autonomy across IBM, nor would it replace the culture of complacency, but the magazine liked that he was keeping a unified sales force, which would have no effect on the working style of manufacturing divisions. Fortune’s reporters admired the company’s increasing shift from products to services, embedded in the reorganization, and IBM’s renewed focus on customer issues. They most appreciated that the reorganization promised to reduce staff by possibly100,000.
Each of the nine organizations was large. Enterprise Systems generated $22 billion in mainframe and related product sales, essentially twice the size of any other “Baby Blue.” Akers created Adstar for storage and tape drives and some software largely for sale to mainframe users. Personal Systems became responsible for PC sales and $11.5 billion in revenues. To manage the minicomputer business, largely the AS/400, Akers created Applications Business Systems (ABS).22 He formed four smaller organizations, each with its own branding and name: Pennant Systems to sell printers and related software, Applications Solutions for services and software, Technology Products to make microelectronics, and Networking Systems, which derived most of its business from mainframe customers. Each was treated as if it were an independent company. Did that mean the “PC Company,” as it was called (in practice, still a division), could compete against ABS with its RS/6000, asked one observer?23 The answer was not clear. However, Akers shared his thinking about the broader reorganization: “The role of corporate management will be to oversee our portfolio of businesses” and “disengage from declining or less profitable businesses to maximize IBM’s financial returns.”24
Customers were already being visited by representatives of most of these divisions and now had to deal with the little IBM companies, too. Large-account salesmen were now serving as gatekeepers, while everyone wanted the right to come in and see their customers. From 1991 to 1993, increasing numbers of new sales personnel, all on incentive compensation plans designed to have them sell only their organization’s products, were banging on doors at IBM’s large customers while scrambling to find a second tier of smaller customer enterprises. Morale kept dropping, as did customers’ confidence in their ability to do business with IBM. IBM’s costs remained too high, while sales and profits kept dropping. By now, it was widely believed inside the company and elsewhere that Akers had latched onto a strategy for breaking up IBM in the belief that the various components would collectively operate less expensively and generate more revenue, and that IBM Corporate was evolving into a holding company. It seemed the only people pleased were the heads of these new lines of business (LOBs). They were the tiniest minority at IBM. Akers’s organizational changes between 1988 and 1992 were the most unpopular with employees in IBM’s history.
Corporate turmoil also plagued these organizations. For example, out of the five organizations created in 1988, by 1992 four of their leaders had left those organizations: one retired, two became senior VPs, and Conrades had been pushed out of the company; the fifth (Ellen Hancock, IBM’s highest-ranking female executive at the time) would soon leave as well. Terry Lautenbach departed in 1992. Other departures included Kaspar V. Cassani, who retired, and Allen J. Krowe, who went over to Texaco. Only Akers and a handful of the old guard remained. Employees scratched their collective heads wondering at all the turnover in the groups and at Corporate. Every week or two, a major leadership change was posted on bulletin boards and communicated via e-mail.
It was difficult to find sufficient constancy of leadership to make possible any meaningful reforms. By then, the industry press was in the groove of criticizing Akers and IBM’s actions. These included Computer Industry Report, Datamation, and Computerworld, and such business journals as Fortune, Business Week, The Economist, and the Wall Street Journal. The press and customers complained that almost all the reorganizations seemed to be on the sales side, while product divisions still were not delivering new cost-effective offerings quickly enough to satisfy users’ needs. IBM’s status kept dropping from frequently being ranked first, to seventh, and then tenth by 1992. Industry reporters still acknowledged IBM’s technical prowess but harshly criticized its inability to convert lab wizardry into products. IBM’s growing list of patents did not seem to matter anymore. It appeared that “everyone” was waiting for these problems to be solved. Who could do it? Not Akers. Where was the board of directors? Why was IBM not fixing its problems?
At the October 1992 board meeting in Tokyo, Akers got the word that it was time for him to leave. The facts are shrouded in mystery, but his close colleague Sam Palmisano intimated that such a conversation occurred.25 The scenario made sense, as the board had chief executive officers who would have understood when a corporate crisis had broken out that required their attention. IBM’s mainframe revenues had dropped almost in half since 1990, putting IBM on a path to destruction. In his memoirs, Lou Gerstner confirmed the fear inside the board.26 Members of any board can be counted on to become agitated when stock values drop precipitously. IBM’s stock had lost $77 billion in value since 1987. Shares dropped in value from $43 in the spring of 1987 to $12 in early 1993, with their value dropping by half just in the previous year. After a long board meeting on January 25, 1993, Akers resigned. Frank A. Metz Jr. (b. 1934), IBM’s “nice guy” CFO, left, having “retired.” The board believed he was in over his head with IBM’s financial issues. Jack Kuehler, at the time president under Akers, became vice chairman, with essentially no responsibilities, while Paul J. Rizzo (b. 1928) came out of retirement to keep things running until a replacement for Akers could be appointed.
After the arrival of a new chairman, Louis V. Gerstner Jr., from outside IBM on April 1, other senior executives left, most in the same year or in early 1994. Akers completely disappeared from the business world. He died of a stroke on August 22, 2014, four months before his eightieth birthday. Gerstner and Burke did not invite him to join the board, as was customary with former heads of IBM, although Opel still served, along with Paul Rizzo. It had been a bad first quarter for IBM’s senior U.S. executives. The week Akers announced his resignation, a bloodbath of a reorganization occurred at the large U.S. retailer Sears, Roebuck and Co. Problems had recently plagued General Motors as well.
In 1994, Opel retired from the board, leaving Gerstner (chairman) and the new CFO, Jerome B. York (1938–2010), as members. Akers’s resignation was by any measure a sad day for the company, but for employees and IBM watchers his departure held out the hope that the end of the worst chapter in IBM’s history was near. It seemed that all employees blamed this one man for everything that had gone wrong. The media did, too. A quarter century later, what do we know?
THE FAILURE OF LEADERSHIP
Much debate has taken place over who, or what, to blame for IBM’s troubles in the 1980s and early 1990s. Many events stand out:
- IBM’s increasingly slow ability to respond to market needs with newer, better-priced products, such as the late arrival of the PS/2 and the reluctance to embrace the Linux operating system.
- Elimination of IBM’s social contract of lifetime employment, which destroyed loyalty and productivity.
- The continuous dribbling flow of layoffs in what Gerstner later characterized as “Chinese water torture,” brought about by incremental responses to IBM’s ongoing declining fortunes.
- A performance appraisal process that had eroded so far that dismissing incompetent people proved nearly impossible, dismissals amounting to about 1 percent of all employees per year.
- Increasing internal emphasis by IBMers at all levels, but particularly by middle management on up, on their careers and the interests of their corner of IBM rather than what was happening outside of IBM with customers and rivals.
- Expanding bureaucratic sclerosis that made it difficult for well-meaning IBMers or concerned customers to get things done within IBM relevant to those concerns.
- Rising independence of customers increasingly willing to make hardware and software acquisitions from IBM’s competitors and also to align with technical standards out of sync with IBM’s Systems Application Architecture (SAA).
- Continuing high cost of IBM’s goods and services relative to that of its more agile rivals.
The list is long. Eventually historians may boil the list down to a shorter one, but at the time, these eight themes captured the attention of those concerned about IBM. Most commentators spoke of IBM’s corporate culture as a major source of the company’s problems because it proved insufficiently flexible in accommodating technological and market changes. Employees paid more attention to the lingering effects of the antitrust suit, yet historical evidence demonstrates that the company exploded forward with new initiatives after the litigation ended: global expansion, the PC product line, and initiatives to add new customers in ever-smaller companies.
But at its core, we come back to IBM’s central problem of a flawed strategy that called for the company to expand massively in the 1980s within the context of a mainframe world. The notion that the market would remain centered on the mainframe was simply wrong. That is why it was possible to accuse senior managers at IBM of being “out of touch.”
What about the stock market or the media? What credit, or blame, can be laid at their feet? As IBM’s financial performance declined after Akers took the top job in 1985, their recommendations were superficial: cut costs, lay off employees. These prescriptions stood in contrast to those from customers: better products, more networking to all vendors’ machines and software, improved price/performance. Neither the stock market nor the media focused on structural problems with IBM’s processes—its way of working—or on challenging its strategy of expanding the company to become the low-cost provider to fight Japanese rivals. In fairness to them, it seemed many industries in the West were obsessed with Japanese competition in the 1980s and had yet to realize that the post–World War II economic Golden Age had essentially ended. By the early 1990s, it did not help that all of IBM’s global and product markets had simultaneously entered a period of economic stagnation, or recession. As a national economy’s fortunes rose or fell, so did IBM’s. In the past, one or more markets might have done that, but not this time. Too many industries and national economies were linked together—globalization’s fundamental feature.
For a better answer, we need to search inside IBM. Its key strategic decision makers came up in a homogeneous sales culture. They took for granted IBM’s strong technological prowess but viewed the world as a place to inject their products, particularly as the company shifted to a strategy of being a low-cost producer and away from leasing and toward purchase. That mentality broke Watson’s cardinal rule: they dismantled IBM’s close ties to its customers. Periodically, management realized it, as when Akers declared 1988 as the “Year of the Customer.”
But it was too late. As explained in the previous chapter, the relationship with customers had evolved into a more transaction-centered one, away from the service- and solution-oriented one of the past, reinforced by computers now becoming commodities to be purchased at the lowest cost, which were interchangeable across brands and no longer customized. In a survey of 1,000 customers conducted in 1994, 37 percent reported that IBM had “lost touch with the marketplace.” This finding represented a massive departure from the past. One customer reported that IBM “got too far removed from the day-to-day issues facing customers.” Another customer argued that “IBM got into trouble because of greed and stupidity. They thought about themselves and not the customer.”27 IBM entered the 1990s with distraught customers and a demoralized workforce. However, there was plenty of business to be had; it was just that IBM was no longer winning it. Interestingly, in the same survey, only 6 percent stopped buying from IBM because of its high prices; instead, nearly twice as many complained about Big Blue’s arrogance.28 A few IBM executives in the early 1990s reacted privately, with such comments as, “Employee morale will increase when the revenues rise” and “Customers need to get back in line with IBM.” IBM’s system of doing business had unraveled.29
Customers had more specific issues. Large-company chief information officers (CIOs) complained that IBM did not defend the relevance of mainframes, letting PC apologists dominate the narrative. It did not help that IBM’s mainframes sometimes were as much as 40 percent more expensive than Japanese ones. Within his first 90 days on the job, Louis Gerstner lowered the cost of many products, including mainframes (largely the S/390 at the time), and launched a public relations campaign to defend the importance of the mainframe. Along with significant changes in the base technology, those actions dramatically improved price/performance, and mainframe sales turned around in 1994.
We are left with the conclusion that in IBM’s highly centralized, top-down way of doing business—its culture—as reflected in the behavior of its most senior managers, lay the source of the company’s central problems. They developed the failed strategy of the 1980s. They were unable to sustain, or enhance, a more customer-focused or agile approach, although they tried. They failed to protect employees from layoffs. It is difficult to change a large company’s course. At about the same time, Charlie Brown, chairman of AT&T, famously said that transforming his company was like turning the course of an oil tanker. Lee Iacocca at Chrysler and later Jack Welch at GE made similar comments.
IBM’s homogenous senior managers were both prisoners of their experiences of an earlier but now different market and of decisions made by earlier CEOs. Decisions made by Cary affected Opel’s realities; Opel’s realities affected Akers’s circumstances. Akers’s decisions shaped what IBM looked like on the day he retired. Their sales-centric heritage embedded in a sales culture either made it impossible for them to understand the culture they needed to change or, more to the point, that IBM’s problems were more than issues with competitors and markets. Looking back, Walter E. Burdick, a group executive at IBM in the early 1990s, may have captured the essence of how the company’s executives looked at the situation:
I felt that the previous CEOs [Cary, Opel] had made three major mistakes in the technical and financial areas. They had let Microsoft dominate the software field, while IBM still focused on the shrinking hardware business. They had helped the Intel Corporation survive against the Japanese competition in the 1980s and had actually owned nineteen percent of that firm, only to sell their interest in what would become worth tens of billions of dollars. Finally, they allowed Apple Computer and Compaq Computer to dominate the personal computer business before IBM seriously entered the field.30
On Akers, Burdick admitted to his family, “It was a very difficult time for the chairman, and I was his personal confidant during that troublesome time.”31
All lived in a world of management by committee, the results of the Watsonian contention/consensus system that allowed various divisions to escalate issues. Akers followed the examples of Cary and Opel in promoting consensus, because as the center of a complex company each had to avoid the serious problem of unintentionally making a decision that could harm the company or its customers, that for some reason could not be implemented, or that employees would not carry out.32 They wanted to avoid someone becoming an autocrat, running an imperial chairmanship. Tom Watson Jr. had taught them to be collegial, and his lesson worked during the 1960s and early 1970s. Consequently, successes and failures could be laid at the feet of a small team of senior executives.
When that managerial inner circle became overconfident as a result of their personal and corporate successes of the 1960s and 1970s, they stretched too far to sustain their paradigm of mainframe products and customers. As late as 2000, one member of the corporate management board, elected to that committee in 1990 when the company was in serious trouble, still waxed almost nostalgically about the role: “It was a significant honor to be added to the top management board in the company.”33 Complex issues became increasingly intractable, leading to “kicking the can down the road” behavior on some issues and avoidance of possibly different strategy options. By the mid-1980s, these behaviors had fostered complacency in dealing with the erosion in IBM’s ability to respond to new customer needs and changing markets. Executives became too cautious when entertaining innovations. Recall how they backed off supporting Future Systems’s plan to replace the S/370 with a new platform. They still felt the pain of their experiences in bringing out the S/360. The same happened with RISC, which was developed in the 1970s but did not make it out of the lab until the late 1980s to early 1990s. There would be no more “bet your company” decisions coming out of this generation of executives.
The company remained unable to transform its way of operating, despite its efforts to do so. It remained a command-and-control world of centralized authority from on high. Paris and Tokyo were interesting places to work, with large staffs responsible for directing the work of IBM in large geographic spaces, but as Jacques Maisonrouge reminded us, the key decisions were made in Armonk by a small cadre of executives who lived in Connecticut and spent time at IBM HQ down the road in Westchester County, New York. This occurred as the computer industry was segmenting into smaller, more specialized forms. Its physical footprint had moved to new localities: Silicon Valley in California, increasingly Texas, London, Taiwan, parts of Japan, and the outskirts of large European cities. By the early 1990s, Akers had concluded that in response to these new circumstances the company had to be broken up. His vision called for fracturing the singleness of IBM’s one common face to the customer, pointing IBM toward a future as a holding company. He began implementing his new approach in the face of almost universal hostility below the senior ranks of the corporation, division and group management, and IBM’s customers.
Meanwhile, several hundred thousand employees worried about losing their jobs or working with a vast collection of operating processes, some the by-product of MDQ but most the result of a much longer process of product development. Everyone’s attention to longer-term strategies diminished. One set of informed observers noted that “no one on IBM’s top management team was watching the strategic development of technology; they were too busy managing a process.”34 Those IBMers who noticed were either not heard or ignored, as happened to those involved with Future Systems and RISC technologies. When Akers and his colleagues did pay attention to strategy, they focused too much on mainframe threats when industry observers and IBMers should have focused on Apple, Intel, and Microsoft and, if necessary, less on Amdahl, Fujitsu, and Hitachi. Gerstner’s take on this behavior was that IBMers had developed a “foxhole mentality” and that senior management did not have a company-wide strategy.
As these senior executives witnessed IBM’s deteriorating stock price and financial performance, it appeared they paid more attention to the advice of Wall Street and less to that of their customers. They were unable to ignore the likes of Fortune, Business Week, or the Wall Street Journal, which called for layoffs and lower operating costs, even at the risk of altering the positive aspects of the company’s culture. One Harvard Business School professor close to many of IBM’s issues at the time declared that its “executives lost confidence in their long-term strategy and bowed to Wall Street’s wishes, accepting record restructuring charges to make rapid short term changes,” with the media able to break “the concentration of IBM’s management on the technology cycle—something it [media] had been unable to do in 1950, when the tabulator technology was dying.”35 The Watsons may have read these publications, but they did not take advice from journalists on how to run IBM.
The massive write-offs in the early 1990s shocked customers into asking whether it still made sense to use IBM products if the company was running the real danger of going out of business, which would mean no new releases of software and no maintenance for hardware or its operating system. The write-offs caused both IBM’s employees and its senior executives to lose confidence and to get out of sync with the natural ebb and flow of technological innovations. For the first time in IBM’s history, senior executives paid attention to the wants of capital markets. Until the early 1990s, IBM had steadfastly done the opposite—ignored them—and instead paid attention to the cadence of technological transformations and economic opportunities these presented to customers and the company. For that reason, we can conclude that many if not all of IBM’s most senior executives in the early 1990s were just as complicit as John Akers in making strategic errors of judgment. They, too, proved too slow to respond to market conditions and, given the speed with which they evolved, too late.
THE ROLE OF IBM’S BOARD OF DIRECTORS
Like all publicly traded companies, IBM belonged to its board of directors, which had legal responsibility for managing the investment made by stockholders in the firm. It hired the CEO to run the company on its behalf. Directors had the obligation to inspect operations of the firm and to approve major strategic initiatives. Their loyalty lay with the stockholders, not with employees of the firm, unless, of course, the workers also owned stock, which many did. During periods of crisis, when employees asked why the board did not act, they often did not understand the directors’ loyalties and priorities. It did not help that a board’s priorities were not clearly communicated or simple to describe. Taking care of employees and thinking of the long-term interests of a corporation and its customers often represented solid and appropriate concerns for board members, in alignment with their legal responsibilities. It was normal practice to have as members current or previous senior officers of the company, such as retired CEOs. In IBM’s case, these included Cary and Opel, and Akers before his retirement.
What role did the board have in IBM’s troubles? IBM’s board has a history of operating in the background, drawing almost no attention. IBM’s acted like almost every other board of a large multinational corporation, but that began to change in the late 1980s, as both employees and Wall Street asked what the board was doing to fix IBM’s problems and to replace its leadership, most notably Akers. In the early 1990s, blogs were still a thing of the future, so there is no massive trail of employee missives complaining about their CEO, unlike in the 2010s concerning the performance of another IBM CEO under siege, Ginni Rometty. But the hue and cry for the board to act existed.36
In 1988, IBM’s board consisted of 18 members, 6 of whom were active or retired IBMers (CEOs, senior vice presidents, vice chairmen), 6 CEOs from other companies (two were in the health industry and two from media), 2 outside lawyers, and 4 from higher education. None came out of the computer industry external to IBM, and all were on the older side (50s–60s). All had been handpicked by IBM CEOs who followed the tradition set by Thomas Watson Sr., where the head of the company populated the board with like-minded people who could be counted on not to interfere too much. With so many decades of continuous profitable financial results by IBM, there seemed to be no urgent need for its members to act independently. IBM’s CEOs held meetings in interesting places and nurtured collegiality with its board members. The board’s lack of expertise in an industry undergoing enormous changes contributed to its hands-off style.
By late 1991, the media was pressing IBM’s board to do something. Its membership remained remarkably the same as in 1988, consisting of 18 members, of whom 5 were IBMers, 1 was a lawyer, 2 were from higher education, 2 were European CEOs, and the others were U.S. CEOs, even some of the same people as in 1988. The Executive Compensation Committee, made up of CEOs, had the same members as before. Importantly, James E. Burke (now retired CEO of Johnson & Johnson) chaired that committee. He would come to play a crucial role in replacing Akers. So again IBM’s board was a stable, cozy group.
Figure 16.1
James E. Burke, member of the IBM board of directors, who negotiated the resignation of John Akers and recruited IBM’s next CEO, Louis V. Gerstner Jr. Photo courtesy of IBM Corporate Archives.
In 1992, the board finally had to begin wrestling with leadership and strategic issues facing IBM. As one observer put it, “The board was far too large for an effective committee; it was headed by a chairman who was also chief executive; it was stuffed with retirees; and it was short on relevant business experience.”37 Ten members each owned fewer than 10,000 shares of IBM stock. One could reasonably have expected them to have had larger investments in IBM. Their economic ties to IBM were the $55,000 retainer paid to each of them for serving on the board. In short, few had economic incentives to rock the boat.
Then came the fateful year of 1993, when, in the first quarter, the board dismissed Akers and searched for a new leader from outside of IBM. That board ended the year smaller, with 14 members, one of whom was the new chairman, Louis V. Gerstner Jr. Opel and Rizzo were the only IBMers remaining. One lawyer and three members from higher education were still on the board. But the action required from the board came from the seven CEOs. All already had served more than one year, most for many years. The long-term members included James E. Burke of Johnson & Johnson, Thomas F. Frist Jr., then chairman of the Columbia/HCA Healthcare Corporation, and others with two or more years of service. Again, with the possible exception of Gerstner, who had managed IT projects and had run American Express, and therefore knew something about IT credit card operations, the others still had no experience with computing. Their knowledge of IBM’s operations still came largely from IBM’s CEOs and staff.
Boards do not like to fire CEOs. When they do, they come to the decision after a protracted period of observing the stock price dropping, as complaints from Wall Street or the media become increasingly critical, or if a scandal envelops a senior official. In the case of IBM, Akers had compounded the problem because he pushed out potential rivals, so no heir was obviously waiting in the wings. This was a rare situation at IBM, which always prided itself on having succession plans at all levels of the firm. Akers was 59 years old when the board acted, just one year away from IBM’s customary retirement age, which further aggravated the succession problem. So what finally pushed the board to act? Akers’s failures were simply too obvious and too public. It did not help that the stock’s value continued to drop by nearly 10 percent between 1987 and 1991, and even further in 1992 and 1993. Publicly and behind the scenes, the board collectively and its members individually continued to voice support for Akers. So month after month he endured public criticisms and declining support from IBM’s employees and customers, but his board stuck with him. It acted, just later than it should have. That it failed to fix IBM’s problems or help Akers suggests that collectively the board proved unwilling, complicit, or simply incompetent to carry out its fiduciary and ethical responsibilities until forced to by circumstances. When a company operates well, a benign board is a useful one, as during the Watson Sr. years, but when IBM entered a turbulent era, it needed to be more activist and be populated with individuals familiar with the technologies and operational considerations relevant to the company.
Did the board understand how dysfunctional IBM had become by, say, 1991? Obvious signals that should have been familiar to the CEOs on the board were ignored, such as the exits of 30 corporate officers between 1986 and 1992. That does not even include the well-known technical stars, notably Gene Amdahl, who built a successful company to sell a rival to the S/370. The list of senior leaders leaving was publicly known and routinely reported by the press. It included Allen Krowe (executive vice president), Ed Lucente38 (president of World Trade, Asia), Mike Armstrong (chairman of IBM World Trade), and George Conrades (who at the time of his departure led corporate marketing). Other large corporations benefited by acquiring these and other IBMers: Krowe by Texaco, Armstrong by Hughes Aircraft (where he had an excellent career), and others by Northern Telecom and even Microsoft.
Large reorganizations at any major corporation are normally subject to review by a board. It is unclear how IBM’s board reacted to the many reorganizations Akers introduced, which the other sitting CEOs would have understood levy a short-term cost in employee productivity and so are done cautiously and as infrequently as possible. The “musical chairs” nature of his reorganizations was, as one observer put it, “clumsy” at best. When Akers migrated toward making IBM a holding company of a portfolio of firms, not divisions, it took his board over a year to grasp the strategic implications of that transformation. If accepted by the board, that strategy should have led it to insist Akers staff his senior positions with people more skilled in running such an organization. It did not. More of the same kinds of executives as had always worked at the highest levels kept occupying top positions, while potential heirs to Akers kept leaving. One can blame the board for allowing that to happen. Over the eight years of Akers’s rule, it seemed complacent.39
In the year before the board deposed Akers, past and present members kept putting out statements supporting him. Irving Shapiro said, “I applaud what IBM is doing.” Richard Lyman declared Akers had “the full confidence of the board.” Yet by then the stock had dropped in value by 25 percent. In December 1992, Jim Burke, considered the most influential board member, praised Akers also.40 In the days and weeks before Akers’s ouster in late January 1993, board members kept making supportive statements despite the fact that, as reported by the New York Times, “the pressure on Mr. Akers had been mounting for months, with large institutional shareholders” becoming “increasingly outspoken as they watched I.B.M.’s share price drop … in the summer.”41
When the board finally acted, to its credit, it did so quickly. It kept the planning surrounding Akers’s departure secret, a remarkable feat given the number of people who watched every move made by anyone associated with IBM Corporate. Burke, known best for how his company deftly handled the tainted Tylenol crisis in 1982, led the effort to end Akers’s chairmanship. Less than a board coup, the effort appeared more a collaborative process with the CEO, according to Burke. It is possible that many of the supportive comments made about Akers by board members in the 60 days before his ouster might have been made to provide cover for what Burke and others were doing behind the scenes. We may never know, as most of the board members either are now deceased or did not leave a public record of their roles. Ultimately, everyone on the board wanted Akers to resign, and in the end that result was achieved. The way it was done mirrored the manner in which U.S. multinational boards normally dealt with such issues. With a set of experienced CEOs on the board, they were capable of shepherding the process to a logical, clean conclusion.
In sum, however, many employees felt the board had behaved badly, from being too complacent since the late 1980s to making complimentary comments about Akers’s rule in the weeks leading up to his announced “retirement.” It did not help that employees were also grousing about all the changes under way at IBM. They felt disenfranchised, left out of decisions, suffering the consequences of actions taken by others. The press and students of IBM’s behavior agreed.42 IBM’s centralized operation made it clear that Akers and a small cadre of executives were to blame for IBM’s failures.43 Akers, the board, and his senior executives proved unable to change IBM’s way of doing business or update its corporate culture. The next CEO went directly after those two problems in a forceful manner that left no doubt about what he was going to do, discussed in detail in chapter 17.
SOME FINAL LESSONS
An analysis of IBM’s experience conducted at the Harvard Business School soon after Akers’s departure is a useful guide on how to think about events at the company.44 IBM was accused of ignoring its customers, focusing too much on internal debates and issues. Competitors paid a great deal of attention to their customers; IBM did not. To prioritize customers before all others was Watson Sr.’s mantra and that of CEOs right through Cary, but decreasingly thereafter. All decisions should take into account customers’ wishes, not be purely financial, as occurred when IBM switched from lease to purchase of its products. That action diminished the relationship between IBM and its customers, as it evolved from service and partnership to transaction based. A quarter century later, it has not recovered from that transition. Understanding one’s customers required a deep knowledge of how their business worked. Not appreciating that customers really wanted a partnership with IBM damaged the company Watson Sr. and his sons built and caused Gerstner endless angst as he worked to rebuild it.
Then as now, a fundamental structural problem existed with senior leadership. Akers had been the CEO and the chairman of the board but also an operational manager within IBM’s management structure. A CEO should push a company in a direction but retain sufficient distance from its daily operations to be able to judge how well the firm is accomplishing his or her wishes. At IBM, all these positions were consolidated into one, a situation that was essential when an imperial leader needed to move quickly, as in the cases of Thomas Watson Sr. and Tom Jr., and later with Gerstner, but not in most periods. All modern CEOs at IBM were, to quote Ginni Rometty’s title(s), “Chairwoman, President and CEO of IBM.” A decade earlier, the Harvard team concluded that “delegating many decisions to divisional or subsidiary executives can help to achieve the proper balance.”45 Gerstner’s successor, Sam Palmisano, took steps to foster delegation, in much the same manner as Watson Jr. Overreaching with strategy seemed a temptation hard to resist. In IBM’s case, the S/360 stretch worked, but not expansion in the 1980s. Overreaching remained an internally created habit—threat—in large corporations that are financially strong and whose leaders have a history of success, others would say arrogance, but may not be fully in touch with current realities.
Another lesson from IBM’s experience is that reorganizations do not fix bad strategies. IBM has had a penchant for reorganizing to fix problems, especially since the 1980s. Some of that activity, of course, was required as circumstances changed, but did IBM need to reorganize sales operations four times in the 1980s and again repeatedly in the early 1990s? Reorganizations should be conducted to implement strategy. They are no substitute for a good strategy. IBM forgot, or never knew, that lesson; nor did its board of directors, which should have paid more attention to Akers’s growing use of this managerial tool. When it did, as he was marching forward with the breakup of the company, it did the right thing, but barely in time. To the credit of every CEO in IBM’s history, they all fought growing tides of bureaucracy, some more successfully than others. Opel could have done more but did not. By the time Akers took charge of the company, it was vast, powerful, and unstoppable. He may have just dealt with it halfheartedly; it is difficult to tell because the historical record is inconclusive and he had so many fires to extinguish from the first day of his tenure.
Opportunities were wasted or cast aside. Future Systems and RISC are the two examples IBMers of the period always cite, as do business professors and members of the computer industry. But we can add IBM’s struggle with OS/2, chipping away at its functions to drive down its selling price, and overstaffing programming projects.
Circumstances compelled Akers, more than any previous CEO, to discard employees. To his credit, he did so reluctantly, as he knew the value of having dedicated lifetime employees, but incrementally disposing of them killed morale. One could trace this process by noting the declining support for IBM in opinion surveys conducted every year all over the world. Management had a long-standing practice of sharing results with employees, but now sharing information about declining morale and operational challenges reinforced negative employee views of the company. Dealing with a financial issue by laying off employees, while problematic, does not leave behind long-lasting negative consequences if it is a one-time event and effectively executed. In IBM’s case, Akers’s ever-expanding layoffs broke IBM’s implied contract with its employees. Executives kept telling employees at all levels that this is “the last one,” only to be ordered to implement another two months later, so management lost credibility. The next three CEOs increasingly continued layoffs.46
Finally, we come back to Akers himself. Ernest von Simson, a seasoned strategist knowledgeable about the computer industry, argued that the biggest mistake that can be laid at the feet of John Akers was his failure to force the changes in mainframe pricing and technology that his successor embraced. Simson also asked, “Why hadn’t Akers replaced his subpar executives, especially when the company was clearly in trouble?”47 Ultimately, Akers, a prisoner of IBM’s culture, could not sufficiently distance himself from the problems to take appropriate actions. Walter E. Burdick, one of his eight senior vice presidents, may have inadvertently reinforced this conclusion in his memoirs, intended only for family reading: “While it was apparent the problem we encountered in the 1980s had been created by Akers’ predecessors, he inherited the total burden of transformation. He and I were both proud of the way we handled the transformation because it preserved the values and principles of the corporation.”48 Akers fought a losing battle with his employees, and more so with the market. Simson’s list of problems Akers could not overcome included lack of a creative ideology for the business; what he called “the burden of assets,” meaning decisions and actions he inherited from Opel; resistance to change from within the company all through the many layers of IBM; distractions caused by competition, especially Akers’s fixation with Japanese mainframe vendors who ultimately were deposed, while other rivals in the PC world should have attracted more attention; and failure to create an effective succession plan for the top positions, especially his own.
Historians will debate whether Akers exhibited a steadiness of leadership, what others called a “constancy of purpose,” undistracted by Wall Street pundits giving bad advice. Watson Jr. displayed that concentrated focus when he fixated on getting S/360 done. Gerstner had it when he was determined to keep IBM intact and to rebuild relations with customers, regardless of advice that might have distracted him. But toward the end of his tenure, Akers did not exercise constancy of purpose. He inherited Opel’s faulty strategy, even if he, too, had been one of its architects. Hardly anyone at IBM understood the degree of change required to reverse the strategy during Akers’s first two years at the helm, only that change was needed quickly. Likewise, industry watchers, customers, the media, and stock analysts failed to appreciate the extent of the changes required or the consequences that resulted. All the criticisms heaped on Akers came after he had been in charge for well over a year, and they increased over time, rightfully so since with the passage of time, the ineffectiveness of the response could be laid at his feet.
Finally, as we will see in chapter 17, some of the remedial steps taken by Gerstner to turn the company around had been launched during Akers’s time, such as the move into services and outsourcing. Personally, I liken it to what happened with President Franklin D. Roosevelt and the New Deal of the 1930s, when FDR implemented reforms to mitigate the Great Depression by taking some steps worked out by the previous administration of President Herbert Hoover. Roosevelt moved more quickly than Hoover and received credit for the results. Gerstner moved more quickly than Akers and likewise won credit for his efforts. In both cases, the successful leader made decisions that led to positive results, while the failed leader made strategic mistakes: Hoover in thinking that the U.S. economy would rebound with only a modicum of federal assistance, Akers in thinking IBM would rebound with only a few actions required by Corporate. The key difference in these cases is that Akers had more time to deal with his problems than Hoover did. Nevertheless, both were complicit in not being able to contain the causes of their crises: Hoover the onset of the Great Depression, Akers the rapid decline of IBM.49
So IBM tumbled onto hard times. After Gerstner came to IBM on April 1, 1993, the company remained in its dismal state because, as Charlie Brown said, a large corporation can only turn as fast as a large oil tanker. It would take Gerstner time, too, to turn Big Blue around. How he did that has become a mythical tale of success. With the passage of time, we can more dispassionately explore his achievements, the topic of chapter 17.