culture and leadership at ibm

7/25/2019 Culture and Leadership at IBM

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Culture and Leadershipat IBM

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This case was written by John Weeks, Assistant Professor, INSEAD, as a basis for class discussion rather

than to illustrate either effective or ineffective handling of an administrative situation.

Copyright 2004 INSEAD, Fontainebleau, France.

N.B. PLEASE NOTE THAT DETAILS OF ORDERING INSEAD CASES ARE FOUND ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUTPERMISSION.

This document is authorized for use byWiwik Istiyarini

Any unauthorized use or reproduction of this document is strictly prohibited.


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Copyright 2004 I NSEAD, Fontainebleau, France.

We shall not cease from exploration

And the end of all our exploring

Will be to arrive where we started

And know the place for the first time.

T. S. Eliot

Introduction

In 2003, Sam Palmisano succeeded Louis V. Gerstner, Jr., to become Chairman and CEO ofthe International Business Machines Corporation (IBM). He inherited a company withrevenues greater than Microsoft, Intel, and Accenture combined: IBM made $7.5 billion onsales of $89.1 billion in 2003, an increase of nearly 10% on the year before. The companyhad over 320,000 employees worldwide; it maintained a massive research operation that wasawarded more patents each year than any other company in any industry; it made more money

selling services than it did selling hardware or software products. It is remarkable to recallthat the idea that any of this would be true of IBM, or that the company would return to its old

practice of choosing a lifetime IBMer as CEO, had seemed wildly implausible only ten yearsbefore. IBM was long one of the most profitable companies in the world, but, by 1993, whenGerstner was recruited to lead the company, the prevailing wisdom was that the company wasa dinosaur headed for extinction. IBMs humiliation is already being viewed by some as adefeat for America, declared The Economist. IBM will fold in seven years, predicted BillGates.1 It was widely agreed that, to save itself, IBM needed to be broken up, it needed toabandon its traditional strategy of being a one-stop provider of solutions, and it needed toshed its insular culture and habit of promoting from within. In the span of ten years, though,Gerstner turned IBM around and turned that conventional wisdom on its head, by leading amassive transformation that left the company resembling nothing more than its old selfbut

successful once again.

Gerstner was the first outsider ever to lead the company, and he may be the last. He took overfrom John Akers, a man who had the dubious distinction of presiding over the companys firstloss in its sixty-seven year history, a stunning $2.8 billion loss in 1991. A year after that,IBM recorded what was then the biggest corporate loss in history: $4.9 billion. A year afterthat, Akers was gone. During Akers tenure, a company proud to be known for its lifetimeemployment policy had cut 107,000 jobs and had announced that 25,000 more people would

be let go in a continuing effort to control costs. IBMs share price had dropped, from a highunder Akers of $43, to under $13.2 A company once feared as the monopolist of the mostimportant industry in the world still had 300,000 employees and revenues of $65 billion at theend of 1992, but its market capitalization was then no higher than that of Microsoft, a

company of 12,000 employees and $2.8 billion in revenues.

Something had gone terribly wrong, and it didnt seem hard for analysts and commentators toidentify the root cause. The problem, it was agreed, went much deeper than John Akers.Trim, with a firm jaw, looking every bit the former Navy fighter pilot that he was, Akers hada regal aura about him; he exuded a confidence born of the total success he had achieved inevery job hed ever had. He was a forceful speaker, with a firm voice able to command theattention of an audience. Before Akers was named to the top job at IBM, a professor atHarvard Business School showed his MBA students videotapes of a half-dozen senior




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IBMers, and, almost unanimously, the students chose Akers as the man who would becomeChairman. He was the CEO from central casting, recalled Irving Shapiro, the formerchairman of Du Pont and an IBM director. There was never any question about whether hewould get the job.3 Akers was the shining example of the leaders the IBM culture could

produce. And so, it was said, the root problem was not the man but the culture of which hewas the exemplary product. It was the IBM culturethe culture once vaunted as thesustainable source of IBMs competitive advantagethat had brought the company to itsknees.

The argument went like this. The company was known for its cult-like culture that ledIBMers to dress the same, to act the same, to think the same and to partake of the samehubris. IBM employees wore blue suits and white shirts; they sang corny company songs butnever drank alcohol; they were pampered with expensive benefits; they believed they werethe best; and they believed they knew best. Myopic and inward-focused, they missed theimplications of the PC revolution and remained in collective denial about the death of their

beloved mainframes. IBMs strong culture had once been lauded by academics and

McKinsey consultants alike. In the early 1980s, best-selling books, such as In Search ofExcellence, held IBM up as Americas best-run company and attributed its success to itsculture.4 The culture boosted the morale of employees, so they worked harder, and itrepresented a shared mindset that eased coordination among the companys sprawling unitsand kept people focused, so they worked better. IBMers shared the same goals, the sameapproaches and the same language. As an influential study concluded:

By knowing what exactly is expected of them, employees waste little time in

deciding how to act in a given situation. In a weak culture, on the other hand,

employees waste a good deal of time just trying to figure out what they should do,

and how they should do it. The impact of a strong culture on productivity is

amazing. In the extreme, we estimate that a company can gain as much as one or

two hours of productive work per employee per day.5

But it was argued that, as the environment changed, this cognitive efficiency proveddangerously ineffective, blinding the company. By the early 1990s, the received wisdom wasthat, Neither IBMs colossal spending on R&D, some $55 billion over the past 10 years, norits gigantic marketing staff and sales force were enough to alert it to the technological andcommercial trends reshaping the industry.6 Moreover, the culture was a source of inertia andarrogance. Having prevented IBMs leaders from understanding the changes in themarketplace, it slowed their ability to change the company accordingly. The only solutionseemed to be to break up Big Blue, as IBM was known, into individual Baby Blues that, oncesold off, could become nimble and entrepreneurial, like the new competitors they faced.Akers started this process by decentralizing the organizations structure into thirteen

autonomous units that were supposed to deal with each other at arms length and at marketprices, but progress was slow. IBMs chief financial officer admitted, at the beginning of1993, that he still could not produce separate figures for many of these businesses.7

Akers resigned, and, on January 26, 1993, IBM announced that a committee had been formedto look inside and outside the company for a new leader. It took four months for them to findone. The media speculated on the desperation of the committee: Would any qualified persontake the job? The man they found, Lou Gerstner, was a former McKinsey consultant andAmerican Express executive and currently the CEO of RJR Nabisco. An outsider in a




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famously insular company, and a technological naif in a famously fast-moving industry,Gerstner was instantly dubbed The Cookie Monster within IBM. He was brought in totransform the company, to save it, probably by breaking it up and selling pieces off, as he haddone at RJR Nabisco. Nine years later, though, on the day of his retirement, he wrote to his

fellow IBMers:

But along the way, something happenedsomething that, quite frankly, surprised

me. I fell in love with IBM. I decided, like many of you, that this was the best

company in the world at which to spend my career. IBM is a fascinating,

important, frustrating, exhausting, and fulfilling experienceand Ive enjoyed

every minute (well, maybe not everyminute)! I am an IBMer for life.8

Gerstner did not break up the company. He revived it. The company once mocked as a has-been in the very industry it had created had regained the respect of customers andcompetitors. The company that everyone said needed to be broken up was still together. Thecompany that everyone said must stop relying on mainframe sales was selling more

mainframes than ever as internet servers. The company that everyone said could not beprofitable with so many employees and so much investment in basic research had moreemployees than ever and had cut its R&D budget by less than a quarter, while actuallyincreasing the share allocated to basic and applied science from 78% to 87%. The companythat everyone said had to ditch its outdated, outmoded, indulgent culture had performed aturnaround that centered around returning the company to its cultural roots. Analysts andcommentators agreed that Lou Gerstner had created a revolution within IBM, but Gerstnerhimself mused, On one level so much about IBM has changed. On another level very little isdifferent.

Lou Gerstner

Lou Gerstner was not a technologist, and he did not pretend to be. On the day it wasannounced that he would take over IBM, he was asked by reporters what sort of computer hehimself owned. He had a laptop, he said, but he honestly didnt remember who made it.9When he was approached by Jim Burke, on behalf of the board, Gerstner told Burke he wasnot qualified for the job. Burke replied that the board was not looking for a technologist, butrather a broad-based leader and change agent. If that was the desired profile, then Gerstners

background fitted. He had gone straight from his undergraduate studies at Dartmouth toHarvard Business School and from there to McKinsey & Company in New York City.He stayed at McKinsey for nine years, reaching the level of senior partner, before leaving to

join his largest client at the time, American Express. Gerstner ran American Expresss TravelRelated Services Group for eleven years and left in 1989, to become the chief executive of the

newly created RJR Nabisco. Finding the company deep in debt after its leveraged buyout byKohlberg Kravis Roberts & Co., Gerstner sold $11 billion worth of assets in the first twelvemonths. He earned a reputation as an aggressive cost-cutter and balance-sheet manager.

Gerstner knew something of IBM before he joined. He had been a customer of IBM atAmerican Express and so had seen the arrogant attitude the company could take towards itscustomers.




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Ill never forget the day one of my division managers called and said that he had

recently installed an Amdahl computer in a large data center that had historically

been 100-percent IBM equipped. He said that his IBM representative had arrived

that morning and told him that IBM was withdrawing all support for his massive

data processing center as a result of the Amdahl decision. I was flabbergasted.Given that American Express was at that time one of IBMs largest customers,

I could not believe that a vendor had reacted with this degree of arrogance.

I placed a call immediately to the office of the chief executive of IBM to ask if he

knew about and condoned this behavior. I was unable to reach him and was

shunted off to an AA (administrative assistant), who took my message and said he

would pass it on. Cooler (or, should I say, smarter) heads prevailed at IBM and

the incident passed. Nevertheless, it did not go out of memory.10

IBMs founder, Thomas Watson, Sr., had been the father of this attitude. His biographer,Kevin Maney, tells the story of how, in 1943, Watson grew furious at a report prepared by thecompanys second biggest customer at that time, Bethlehem Steel. The report listed

32 recommendations that Bethlehem demanded IBM make, or Bethlehem would take theirbusiness elsewhere. Watsons reaction? To turn the threat around. Knowing that Bethlehemwould grind to a halt without IBMs machines, but that IBM would barely feel the loss, evenof such a large customer, Watson wrote to Bethlehem to say that, if they were not satisfiedwith IBMs machines, and if IBM was doing such a terrible job, well then IBM would comeand take all the machines away. IBM, who rented rather than sold their machines at that time,could do it. Bethlehem had no choice but to back down, and the contents of the report neverresurfaced.11 Forty years later, IBM was pulling the same stunts but without the same power.

The key lesson Gerstner learned in his time with IBM, as he later reflected, was theimportance of culture.

I have spent more than twenty-five years as a senior executive of three differentcorporationsand I peeked into many more as a consultant in the years before

that. Until I came to IBM, I probably would have told you that culture was just

one among several important elements in any organizations makeup and

successalong with vision, strategy, marketing, financials, and the like I came

to see, in my time at IBM, that culture isnt just one aspect of the gameit isthegame.12

There were tremendous strengths in the companys culture, Gerstner came to recognizecharacteristics that no one would want to lose.13 But much of what was wrong with IBM, hediagnosed, lay in its culture as well. And a companys culture was first and foremost a

product of its history and the lasting influence of its founding leaders: Thomas Watson, Sr.,

who ran the company for forty-two years, and his son, Thomas Watson, Jr., who led it for thenext fifteen years.

Thomas Watson, Sr.

IBM was born on February 5, 1924. It was on that day that Thomas Watson, Sr. applied tothe New York Stock Exchange to change the name of the Computing-Tabulating-RecordingCompany (C-T-R) to the International Business Machines Company (IBM). The life of Tom




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Watson, Sr. is a rags-to-riches story. He was born, in 1874, on the struggling family farm inrural New York state. Leaving school at 16, he took a series of jobs, including selling sewingmachines door to door from a cart. Watson had an intensely superstitious learning style; hedrew lifelong lessons from episodes that made an impression on him. Take, for example, his

attitude about alcohol. Like most traveling salesmen, Watson spent most of his evening at thelocal saloon of whatever town he was visiting. According to family lore, one evening Watsoncame out of a bar having drunk until closing time and found that his horse and cart, and thesewing machines on it, had been stolen. He decided then and there that alcohol could never

be mixed with business.14

Finding no real success in any of his ventures, he joined National Cash Register (NCR) as anapprentice salesman, in 1896. He proved himself an excellent salesman and rose quickly inthe company. In 1903, he was picked out by NCRs notoriously visionary and tyrannicalfounder, John Patterson, for a special assignment. NCR had a virtual monopoly in the cashregister business, and its machines were durable enough that the main competition it facedwas from dealers selling older, used NCR machines. Watsons assignment was to destroy the

used cash register business. He went undercover and set up the phony Watson Second-HandCash Register Company, which was funded by NCR. The strategy was to move into a marketand undercut all existing used cash register businesses, until they were driven out of business.Watson ran this business for nearly five years, devastating used cash register businesses incity after city.15 He was rewarded for his efforts with an executive post in NCR and becamePattersons right-hand man.

Watson would later say that, Nearly everything I know about building a business comesfrom Mr. Patterson.16 Hallmarks of the IBM culture like the Hundred Percent Clubanelaborate convention where salesmen, who had met their quota, were celebrated and

pampered at the companys expense, while forced to attend long inspirational lectures by theirleaderswere copied from NCR.17 Like Patterson, Watson ran his company as a dictator.

Like Patterson, Watson was addicted to flattery and would surround himself with sycophants.Yet, like Patterson, Watson inspired fierce loyalty among his salesmen, and they deliveredresults for him.

Watson learned another lesson too from Patterson and NCR. In 1912, Patterson, Watson, andtwenty-eight other officials and employees of NCR were indicted by a federal grand jury, oncharges of criminal violation of the Sherman anti-trust law. The government showed a

pattern of deception and intimidation by NCR, including Watsons used cash registeroperation, and, in February 1913, the defendants were convicted and sentenced to a year in

prison, pending appeal. If there was a single moment, biographer Kevin Maney writes,when Tom Watson changedwhen he decided that a squeaky-clean image and reputationwere paramount in business and in lifethis was that moment.18 The relationship between

Patterson and Watson soured during this time, and Watson was forced out of NCR by the endof 1913, before the appeal had even been heard. Watson would avoid jail, and, at age 40, with$50,000 in severance, he left for New York City to find a job.

He landed as head of C-T-R, a conglomeration of small companies that made time clocks,scales, and also Hollerith tabulating machines, which added up and sorted informationrecorded as punched holes on rectangular cards.19There is no evidence that Watson saw thefuture of tabulating machines as information processors, and, indeed, he was no technologicalvisionary. As Chairman of IBM, he would later famously turn down Chester Carlson, who




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tried to interest IBM in his xerography machineCarlson would go on to found Xerox, andIBM would later spend millions trying to break into the copier business.20 It wasnttechnology that attracted Watson to C-T-R. Watson was a salesman, and he wanted to run hisown sales company. C-T-R offered that opportunity.

C-T-R was a loose confederation of very different businesses, none of them performing wellfinancially. It had no single culture, except what Watson imposed on its various divisions,each of which had long done things differently. Watson was impressed with his own business

philosophy and was fond of giving advice and having those around him take it. Early on inC-T-R, he made it clear that he believed, If you are going to call on important people, youhave to dress like them. This meant dressing in conservative business suits, and thecompany quickly had an unwritten dress code. Similarly, Watson made clear his belief that

business and alcohol did not mix, and subordinates took note.21

The company faced it first major test during the recession of 1920-21. In 1920, C-T-R was asmall company with $14 million in revenues, $2 million in earnings and 2,731 employees, but

it was growing fast. Watson, who believed that the bold move was usually the right move,pushed his management team to double the size of the company in 1921. It was a terribledecision; the company boosted production and built up inventories just in time for the bottomto drop out of the economy. Watson resorted to layoffs and salary reductions to get by. Fullemployment was not part of the culture at that point and wouldnt be until the company wason much firmer footing.22 What Watson did believe, though, was that treating workers well,giving them security and superior benefits, was the best way of keeping the unions out of thecompanysomething he was intent on doing.23 Over the years, his views becameincreasingly progressive, as he recognized the importance of loyal, happy workers.

Watson disliked the company name, Computing-Tabulating-Recording Company. It seemedto tie his hands, first of all, from selling one or more of the three divisions: computing,

tabulating, or recording. He also complained that it wasnt powerful-sounding, like GeneralElectric or American Telephone and Telegraph, nor was it euphonious. He changed the nameto IBM in 1924 and, in so doing, became IBMs founder.24 Euphony would turn out to beimportant for the unexpected reason that the company would become known for its Songs ofthe IBM. In the early 20th centurya time before radio and a time when making music was acommon and natural part of many social occasionsit was not unusual for people to singsongs at corporate functions. Watson liked singing, and sycophantic executives took note ofthis. In particular, Harry Evans proved to have a special talent for taking popular songs andmaking up his own words, sometimes humorous, more often obsequious, to go along withthem. In 1925, Evans went to Watson to propose putting together a booklet of his IBM songs,so that people could sing them at company gatherings.25 Watson approved, and what startedout as a fun idea became a ritual and eventually an embarrassment to many, including Tom

Watson, Jr.26 Here is an example, this one sung to the tune of Auld Lang Syne:

T. J. Watson/ youre our leader fine/ the greatest in the land

We sing your praises from our hearts/ were here to shake your hand

Youre IBMs bright guiding star/ youre big and square and true

No matter what the future brings/ we all will follow you.

As IBMs revenues soared, so did Watsons sense of self-importance. He wanted IBM to bemore than a company; he wanted it to be an institution. IBM almost exclusively hired young




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people straight out of college and sent them through up to twelve weeks of education andorientation at the IBM School House in Endicott. Lecturers taught IBMs history andWatsons management philosophy, as well as sales techniques and product information.Watson visited each new class, passing on his wisdom and telling stories.27 The front door to

the School House had the motto THINK written over it in two-foot-high brass letters.28

THINK was a motto Watson brought from NCR, and, at IBM, rectangular signs sayingTHINK could be found in every executives office, in meeting rooms, factories, cafeterias.The story was often retold of Watson, in one particular meeting, looking for the THINK signto reinforce a point he was making, only to notice that there wasnt one. The THINKsignwhere is it? I guess somebody took it down. What do you know about that? Find out,Mr. Waters, when that was taken out of this room and have four put in.29

The company became famous for the THINK slogan and the signs and was even teased innewspaper cartoons for their ubiquity.30 Watson relished the publicity, as he cultivated theidea that IBM was special. We do a great many things in our business that strike outsiders as

being unusual, Watson said. Sometimes, young men disagree with our ideas or our

policies, because they believe they know better ways. Such young men never make a successwith us.31

Tom Watson, Jr.

Tom Watson, Jr. hated the cult around his fatherseeing his fathers mottoes pasted upeverywhere, hearing songs about his father, smelling the deference among IBMers to hisfather.32 From the time Tom Jr. joined IBM in 1937, to the day his father died twenty yearslater, in 1956, the two fought bitterly. Watson Sr. cherished the idea of passing the companyon to his two sons (Toms younger brother, Dick, was put in charge of IBM World Trade, thename the company gave to its international operations), but IBM was his life, and he enjoyed

his role as president of IBM more than anything else. He couldnt, or wouldnt, let go. Heheld onto control of the company, with executives falling over themselves to implement hisincreasingly idiosyncratic whims, until he became a self-parody, even telling the same storiesover and over in meetings. Tom Jr., who had been named IBMs president in 1952, becameincreasingly impatient with the interference of his father, who retained the titles of chiefexecutive and chairman.

Perhaps the most important issue over which Watson father and son fought was electronics.Tom Jr. believed that the future of the company lay in electronic computers. Tom Sr.

believed to his death that punch cards were the best means of data storage, and that customerswould never trust their data to magnetic storage in place of real pieces of paper they could seeand touch. Tom Jr., however, pushed the company into electronics, and everyone in IBM

knew that it was his team that had developed the IBM 701the first successful line ofgeneral purpose computersand he earned the companys respect as a leader in his own right

because of it.33 IBMs revenues exploded during the post-war economic boom, and thatgrowth continued through the 1950s. In 1955, Tom Jr. appeared on the cover of Timemagazine over the caption:

IBMs THOMAS J. WATSON, JR.

CLINK. CLANK. THINK.




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IBM had become synonymous with the computer, and Thomas Watson, Jr. (to the jealousannoyance of his father) had become synonymous with IBM.34 Watson Sr. died the next year,at the age of 82.

In the years after he took over the company, and as it became increasingly huge anddecentralized, Tom Jr. felt it important to codify the philosophy that his dad had espoused inmanaging the company. He derived three basic beliefs and argued that the company had to beready to change everything else, except those beliefs. They were:

Respect for the IndividualRespect for the dignity and the rights of each person in theorganization.

Customer ServiceTo give the best customer service of any company in the world.

ExcellenceThe conviction that an organization should pursue all tasks with theobjective of accomplishing them in a superior way.

Until 1993, all new employees were taught the importance of the Basic Beliefs; they wereconsidered the cornerstone of IBMs culture. More than technological innovation morethan management and marketing skills more than industry leadership, reads a copy of thecompanys employee handbook from the 1990s, IBMs Basic Beliefs define the company.

The 1960s saw IBM launch the hugely successful System/360 line of mainframe computersthat would be the engine of the companys profits for over twenty years. Fortunemagazinecalled the project, IBMs $5,000,000,000 Gamble. The company spent more moneydeveloping System/360 than was spent on the Manhattan Project to develop the atom bombduring World War II. It was the biggest privately financed commercial project everundertaken, but the biggest risk to the company stemmed from the fact that System/360 wouldmake all of IBMs current machines obsolete and replace them with a new family of

processors. It cannibalized the markets already dominated by IBM. What was revolutionarywas that the new machines were all compatible with one another. 35 When customers outgrewone machine, they could upgrade to a different System/360 model, without having to replacesoftware or peripherals, such as tape and disk drives and printers. This was extremely popularwith customers and helped to lock them into IBM, by making switching to a competitorexpensive.

For the next twenty years, IBM was essentially a one product-line company, and, on the backof that one product-line, the company grew at a compound rate of 14 percent a year from1965 to 1985. Gross margins averaged 60 percent during that period, and IBM had a30 percent share of the market. The company had leap-frogged its competitors and came todominate the market, to such an extent that the Johnson administration would file a massive

antitrust suit against the company, in 1969, that would drag on until it was dismissed withoutmerit during the Reagan administration. Two things happened to the culture of the companyduring this period. The first was that the tremendous profitability led to an expansion ofemployee benefits and programs that made IBM one of the best employers in the world. Thesecond was that the scrutiny from the Justice Department of IBMs competitive practices ledto a cautiousness that was reflected even in the vocabulary used within the company. Words,such as market, marketplace, market share, competitor, competition, dominate,lead, win and beat, were banned from written materials and internal meetings.36




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John Akers

In 1980, IBM had $40 billion in sales. CEO John Opela man who had cut his teeth solvingmanufacturing and logistics problems during the rollout of System/360gambled the

company in the same way that Watsonpereandfilshad each done again and again. He set atarget for IBM to reach $100 billion in sales, by 1990. The company built factories andfacilities and hired over 100,000 people through the 1980s, in pursuit of that goal. 37 IBM wasfocused on Japanese competitors, such as Fujitsu, Hitachi and NECand also on AT&Twhich was moving into the computer businessand had decided that the strategy for beatingthem was to be the low cost provider, by leveraging economies of scale. By 1985, when Opelwas replaced by Akers, it looked to be on track to meet its bold goal of $100 billion. Sales ofmainframes and of IBMs unexpectedly successful PCs were booming. The antitrust suit had

been dropped. The company looked invincible. Within two years, however, it was clear toAkers and his team that the market had changed dramatically. The cost of computing powerdropped dramatically, as chips became cheaper and more powerful much more quickly thananticipated. Computer-industry sales grew by less than 10% annually through the second-half

of the 1980s. IBMs sales didnt grow at all. Suddenly the company had a massiveovercapacity problem.

Between 1987 and 1991, Akers slashed manufacturing capacity by 40% and made deep cutsin the workforcewhile, technically, not breaking a pledge made by Watson after theDepression that the company would never lay anyone off. He decentralized the managementof the company and shifted R&D spending from hardware to software and services. Hechanged IBMs arrogant and aloof attitude towards competitors, signing alliances withhundreds of companies, including Apple, Toshiba and Siemens. He pushed forward thedevelopment of OS/2, as part of a strategy to take back control of the PC operating systemfrom Microsoft. And he launched a culture change program inside the company, calledMarket Driven Quality, that was centered around the idea of empowerment and the reality ofa new pay-for-performance incentive system. The old social contract, which had been basedon expectations of lifetime employment, retraining (because people dont become obsolete,only skills become obsolete) and equal pay for equal work, was labeled old-fashioned andmarked for change. As The Economistwrote, ten days before Akers resigned, Any defenderof Mr. Akersthough it is hard to find one these dayscan point out that, far from beingcontent to pursue business as usual, he began to overhaul IBMs management and operationssoon after its sales and profits faltered in his first year.38 Nevertheless, the companysfortunes continued to deteriorate, and Akers was pushed out.

The Culture of IBM

During his time at IBM, Gerstner consciously avoided learning much about the history of thecompany; brought in to drive change, he said he dreaded learning the reasons why thingswere the way they were.39 Gerstner did not learn the IBM culture from reading about thecompany or asking colleagues about the company or from talking with his predecessor, JohnAkers. Gerstner did meet with Akers in his first days after taking over, and the two mentalked about many subjects, but Gerstner noted later, Whats striking from my notes is theabsence of any mention of culture, teamwork, customers, or leadershipthe elements that




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turned out to be the toughest challenges at IBM.40 Gerstner learned the culture only by livingin it, experiencing what it meant and seeing the reaction when he imposed his will on it.

Artifacts: Alcohol, Dress Code, Foils

Three weeks into the job, Gerstner was flying back to New York on IBMs corporate jet fromthe companys annual shareholders meeting in Tampa, Florida. He turned to the flightattendant and said, This has been a really tough day. I think Id like to have a drink.She said, You dont mean an alcoholic drink, do you? I certainly do! Gerstner replied.What kind of vodka do you have? We have no alcohol on IBM planes. It is prohibited toserve alcohol. Gerstner recalls saying, Can you think of anyone who could change thatrule? Well, perhaps you could, sir. Its changed, effective immediately.41

The vaunted corporate dress code was changed just as quickly. In his first meeting asChairman, Gerstner wore a blue shirt with his dark suit and noticed immediately that all of theother men in the roommembers of the Corporate Management Board, the top fifty people in

the companywere wearing white shirts. The next time the Corporate Management Boardmet, Gerstner wore a white shirt and found everyone else wearing other colors.42 Lower downin the organization, especially in the research and development labs where customers wererarely seen, informal dress had long been the informal rule. Two years later, the change wasmade official, when Gerstner abolished the dress code altogether. He notes:

When I abolished IBMs dress code in 1995, it got an extraordinary amount of

attention in the press. Some thought it was an action of great portent. In fact, it

was one of the easiest decisions I made--or, rather, I didnt make; it wasnt really

a decision. We didnt replace one dress code with another. I simply returned

to the wisdom of Mr. Watson and decided: Dress according to the circumstances

of your day and recognize who you will be with (customers, government leaders,

or just your colleagues in the labs).43

No presentation or meeting in IBM was complete without the use of overhead transparencies,called foils within the company. The use of foils in meetings was so ubiquitous that topmanagers in the company had desks with fancy overhead projectors built into them. A fewdays after joining IBM, Gerstner called for a meeting with Nick Donofrio, who was thenrunning the System/390 business, to understand the state of the business. Naturally, Donofriohad prepared a stack of foils.

Nick was on his second foil when I stepped to the table and, as politely as I could

in front of his team, switched off the projector. After a long moment of awkward

silence, I simply said, Lets just talk about your business.44

The news of this action spread by email across the company, worldwide. Talk aboutconsternation! Gerstner says with obvious amusement. It was as if the President of theUnited States had banned the use of English at White House meetings. Still, when he triedto hold a meeting of his most senior managers without foils two months later, they insistedthey couldnt do it. As instructed, they prepared only brief presentations, but theynevertheless also had their staff come up with the standard stack of foils: ten for the

presentation, ten to back up each those ten, in case Gerstner had a question, and ten to back upeach of those hundred.45




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The Value of Non-Concurrence

Other cultural patterns were also made evident to Gerstner in those early meetings. Importantmanagement meetings at IBM were held around long conference tables, with two rows of

chairs behind the principals filled with young executives. These backbenchers were theadministrative assistants (AAs) to the senior executives. They took notes, organized things,watched and learned. They provided a back channel of communication between seniorexecutives, through which compromises were hammered out. The career path to the top ofIBM typically involved several AA assignments. Gerstner disliked the fact that being an AAtaught you more about managing internal politics than about serving the customer or leadingsubordinates.

He disliked even more IBMs famous contention system, which was supposed to encouragedebate and a multiplicity of views and reduce the danger of groupthink. The idea of non-concurrence was that people could agree to disagree, and therefore arguments could bedebated passionately without fear of threatening the underlying relationships or the

commitment of everyone to work together afterwards. As Buck Rodgers, a vice-president ofmarketing, who left the company in 1984 to become a public speaker, enthusiasticallydescribed it, non-concurrence was a key element of IBMs successful culture. Happily, a lotof arguing is done at IBMabout new products, changes in pricing, revisions of terms andconditions, restructuring of the organization and overall long-term objectives.46 Twentyyears after Rogers was writing, Gerstner found that non-concurrence had degenerated into aCulture of No, where no one wouldsay yes, but everyone couldsay no. Gerstner lamented:

The situation got even worse, because at least a public nonconsent has to be

defended among ones peers. More often than not, the nonconcur was silent. It

would appear that a decision had been made, but individual units, used to the

nonconsent philosophy, would simply go back to their labs or offices and do

whatever in the world they pleased!47

Gerstner experienced this himself when, during a visit to Europe, he discovered by accidentthat European employees where not receiving all of his company-wide emails. It turned outthat the head of the EMEA (Europe, Middle East, and Africa) unit was intercepting themessages. When Gerstner confronted him and asked why, the manager replied, Thesemessages were inappropriate for myemployees. And, They were hard to translate.

I summoned him to Armonk the next day. I explained that he had no employees,

that all employees belonged to IBM, and that from that day on he would never

interfere with messages sent from my office. He grimaced, nodded, and sulked as

he walked out the door. He never did adapt to the new global organization, and a

few months later he left the company.48

Leading Culture Change

Gerstner found himself in charge of what he had discovered to be arguably the most complexorganization anywhere in the world outside government, and he quickly came to see that thelevers of power in IBM had uncertain effect. The problem was the culture, and Gerstner hadlearned that he couldnt change the culture directly.




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Changing the attitude and behavior of hundreds of thousands of people is very,

very hard to accomplish. Business schools dont teach you how to do it. You

cant lead the revolution from the splendid isolation of corporate headquarters.

You cant simply give a couple of speeches or write a new credo for the company

and declare that the new culture has taken hold. You cant mandate it, cantengineer it.

What you cando is to create the conditions for transformation. You can provideincentives. You can define the marketplace realities and goals. But then you have

to trust. In fact, in the end, management doesnt change culture. Management

invites the workforce itself to change the culture.49

Gerstner figured it would take at least five years to change the culture, and he later admittedthat was an understatement by half. Creating the conditions for that change would meanchanging the structure and the strategy and the incentives of the company, while always being

blunt about the cultural implications of what was being done.50 What changing the culture

didnt mean, for Gerstner, was preparing a vision statement. He was widely quoted for astatement he made at a press conference shortly after his 100th day as head of IBM.Announcing 35,000 layoffs, he said:

What Id like to do now is put these announcements in some sort of perspective for

you. Theres been a lot of speculation as to when Im going to deliver a vision of

IBM, and what Id like to say to all of you is that the last thing IBM needs right

now is a vision.

What IBM needs right now is a series of very tough-minded, market-driven, highly

effective strategies for each of its businessesstrategies that deliver performance

in the marketplace and shareholder value. And thats what were working on.

The press seized on this, especially given his record with RJR Nabisco, as evidence thatGerstner was a mindless cost-cutter. Gerstner felt misunderstood, however. First, the presstended to omit his caveat that right now the company didnt need a vision. His view wasthe company needed an enormous sense of urgency, and that any long-term project, that

people could wait for to produce a magical turnaround, would blunt the day-to-day needsimply to do a better job serving customers.51 Second, he felt sure the press and IBMscompetitors would laugh if they heard what he really had in mind for the company. Gerstnerhad, in fact, already made the bold strategic decisions that would shape his ten year tenure atIBM:

Keep the company together and not spin off the pieces

Reinvest in the mainframe

Remain in the core semiconductor business

Protect the fundamental R&D budget

Drive all we did from the customer back and turn IBM into a market-driven rather than aninternally focused, process-driven enterprise52




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He intended, in other words, to return IBM to Watsons roots. But he could not say that inJuly 1993.

If the last thing IBM needed in July 1993 was a vision, the second to last thing it

needed was for me to stand up and say that IBM had basically everything rightand we would stand pat but work harder.53

In essence, Gerstner made two huge gambles. He gambled that, as a unified company, IBMcould act as an integrator of technologies, and his experience as a customerat Amex and atRJRsuggested that people would pay for that. And he gambled that standalone computingwould give way to networks, and that mainframes would play a key role in a networkedworld. These gambles meant keeping Watsons company intact and reinforcing its keyelements. Gerstner calls the decision to keep IBM together, the most important decision Iever madenot just at IBM, but in my entire business career.54

Competitive Focus

During the painful internal reengineering and rightsizing of the company that he initiated,55Gerstner sought to focus management attention on competitors. Competitionwinning,

beating the other guyswas everything for Gerstner. I hate, hate, hate losing, he said.56 Hedidnt see the same hatred in the eyes of the IBMers around him. In the spring of 1994, hecalled a senior management meeting, to be attended by the top 420 managers in the company.He showed charts tracking the companys poor performance over the past decade; he showed

photographs of the CEOs of their main competitors, such as Bill Gates, Scott McNealy, andLarry Ellison, and read aloud the dismissive things they had said over the years about IBM.

You know, I have received literally thousands and thousands of e-mail messages

since Ive been in this company, and Ive read every one. I want you to know that

I cannotI cannotremember a single one that talked with passion about acompetitor. Many thousands of them talked with passion about other parts of

IBM. Weve got to generate some collective anger here about what our

competitors say about us, about what theyre doing to us in the marketplace. This

competitive focus has to be visceral, not cerebral. Its got to be in our guts, not

our heads. Theyre coming in to our house and taking our childrens and

grandchildrens college money. Thats what theyre doing.57

To help spread this message, Gerstner wrote out eight principles that he thought should be theunderpinnings of the new culture at IBM. The first was:

The marketplace is the driving force behind everything we do.

IBM has to focus on serving our customers and, in the process, beating thecompetition. Success in a company comes foremost from success with the

customer, nothing else.

Is this similar to Tom Watson, Jr.s Basic Belief in Customer Service? Some thought so, but,in Gerstners estimation, the Basic Beliefs had lost their power and become empty homilies.Their meaning and interpretation were endlessly debated in the company, sometimes with thesophistication of constitutional lawyers arguing over the doctrine of original intent. In otherwords, they werent so much wrong, rather they had become useless. Gerstner tore up the




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Basic Beliefs and replaced them with his Eight Principles (see Appendix). They werentmeant to move the company away from the Basic Beliefs; their intent was to breathe life backinto the underlying principles that had established the success of the company and give themnormative force again.58 A three-day leadership course was developed to instill these

principles and provide the skills needed to exercise them, and all executives were required toattend.59

To ensure that the principles of the new culture would become more than just words on apage, Gerstner felt that the measurement and rewards systems must be changed, to match thedesired behaviors in the new culture. Thus, every year, each IBM employee listed the actionshe or she was going to take in the upcoming year to fulfill his or her commitment to the key

principles, and performance against these commitments was a key determinant of merit payand variable pay. This coincided with a move, started during the leadership of John Akers,away from the old cultural norm of little differentiation in compensation and generousemployee benefits, to one of much greater differentiation in pay, based on performance, fewer

benefits, and the use of stock options, to ensure that the interests of the employee was aligned

with that of the company.60

Moon Shot

The early years of Gerstners tenure at IBM were painful ones for the company. Theyinvolved massive layoffs, reengineering, centralization of authority, abandonment of beloved

projects. As the companys fortunes improved, and the sense of urgency receded, what wouldmotivate further change and prevent the company from backsliding?

The companys golden agemuch of it reality, but at least part of it illusionhad

such a powerful hold on the imaginations and hearts of some IBMers, that every

change was perceived as a change for the worse. They wanted to stop time,

despite the realities of the marketplace and societal change.61

What was needed, Gerstner believed, was something akin to System/360, or John F.Kennedys promise to put a man on the moon. A grand project to focus attention andgenerate enthusiasm. A moon shot. It would come in the form of e-business, a term IBMcredits itself with having coined and made real. The company has spent more than $5 billionin e-business marketing and communications, to explain the concept and position itself tocustomers (and employees) as uniquely able to provide solutions to any e-business problem.

Looking Back and Ahead

Gerstner had originally forecast that it might take five years to change IBMs culture. In the

end, it took ten years, and still we might ask whether culture change had actually beenachieved and, if so, was it permanent? Gerstner was the first to say that constantreinforcement would be necessary, if the company was to avoid falling back into thearrogance of success.62 The change is fragile, and it is ongoing. The key, Gerstner says, isthat his successor continues to communicate clear strategies and values, reinforces thosevalues in everything the company does and allows people the freedom to act, trusting theywill execute, consistent with those values.63




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If you ask me today what single accomplishment I am most proud of in all my

years at IBM, I would tell you thisthat as I retire, my successor is a long-time

IBMer, and so are the heads of all our major business units.64

The consummate outsider, brought in to shake up IBM, did so and, along the way, fell in lovewith the company and returned it to its roots. He held the CEO job longer than any otherman, except Watson father and son, and he retired feeling in his heart like a True Blue IBMer

but knowing that, compared to the people around him, most of whom had spent their entirecareers in the company, he would always be an outsider. Unlike his successor, SamPalmisano, Lou Gerstner didnt bleed blue.




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Appendix

Thomas Watson, Jr.s Basic Beliefs

Respect for the IndividualRespect for the dignity and the rights of each person in the organization.

Customer Service

To give the best customer service of any company in the world.

Excellence

The conviction that an organization should pursue all tasks with the objective of accomplishing themin a superior way.

Louis Gerstner Jr.s Eight Principles

1. The marketplace is the driving force behind everything we do

IBM is too preoccupied with our own notions of what businesses we should be in and how they shouldwork. In fact, the entire industry faces this problem. We are all guilty of producing confusingtechnology and then making it instantly obsolete. IBM has to focus on serving our customers and, inthe process, beating the competition. Success in a company comes foremost from success with thecustomer, nothing else.

2. At our core, we are a technology company with an overriding commitment to quality

There is a lot of debate about what kind of company we are and should be. No need, because theanswer is easy: Technology has always been our greatest strength. We just need to funnel thatknowledge into developing products that serve our customers needs above all else. The benefits willflow into all other areas of the company, including hardware, software, and services.

3. Our primary measures of success are customer satisfaction and shareholder value

This is another way to emphasize that we need to look outside the company. During my first year,many people, especially Wall Street analysts, asked me how they could measure IBMs success goingforwardoperating margins, revenue growth, something else. The best measure I know is increasedshareholder value. And no company is a success, financially or otherwise, without satisfiedcustomers.

4. We operate as an entrepreneurial organization with a minimum of bureaucracy and a never-

ending focus on productivity

This will be hard for us, but the new, warp-speed marketplace demands that we change our ways. Thebest entrepreneurial companies accept innovation, take prudent risks, and pursue growth, by bothexpanding old businesses and finding new ones. Thats exactly the mindset we need. IBM has tomove faster, work more efficiently, and spend wisely.

5. We never lose sight of our strategic vision

Every business, if it is to succeed, must have a sense of direction and mission, so that no matter whoyou are and what you are doing, you know how you fit in and that what you are doing is important.

6. We think and act with a sense of urgency

I like to call this constructive impatience. We are good at research, studies, committees, anddebates. But in this industry, at this time, its often better to be fast than insightful. Not that planningand analysis are wrongjust not at the expense of getting the job done now.




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7. Outstanding, dedicated people make it all happen, particularly when they work together as a

team

The best way to put an end to bureaucracy and turf wars is to let everyone know that we cherishandwill rewardteamwork, especially teamwork focused on delivering value to our customers.

8. We are sensitive to the needs of all employees and to the communities in which we operate

This isnt just a warm statement. We want our people to have the room and the resources to grow.And we want the communities in which we do business to become better because of our presence.




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Notes

1 Gerstner, Louis. 2002. Who Says Elephants Cant Dance: Inside IBMs HistoricTurnaround. New York: HaperCollins. Pages 10-13.

2 Adjusted for subsequent stock splits.3 Carroll, Paul. 1993. Big Blues: The Unmaking of IBM. New York: Crown. Page 153.4 Peters, Tom and Robert Waterman. 1982. In Search of Excellence: Lessons from

Americas Best-Run Companies. New York: Warner Books.5 Deal, Terrence and Allen Kennedy. 1982. Corporate Cultures: The Rites and Rituals of

Corporate Life. London: Penguin. Page 15.6 The Economist. What went wrong at IBM? January 16, 2003. Page 23.7 Ibid.8 Gerstner. Page 279.9 Carroll. Page 355.10

Gerstner. Page 4.11 Maney, Kevin. 2003. The Maverick and His Machine. New York: Wiley. Pagexxiv.12 Gerstner. Page 181-182.13 Gerstner. Page 214.14 Maney. Page 17.15 Maney. Pages 6-9.16 Watson, Thomas, Jr. 1990. Father Son & Co. New York: Bantam. Page 13.17 Maney. Page 11.18 Maney. Page 25.19 Maney. Page 43.20 Maney. Page 331.21 Maney. Pages 71-4.22

Maney. Page 87.23 Maney. Page 107.24 Maney. Page 89.25 Maney. Page 118.26 Watson. Page 68-9.27 Maney. Page 241.28 Watson. Page 68.29 Maney. Page 192.30 Maney. Page 147-48.31 Maney. Page 150.32 Maney. Page 273.33 Maney. Page 361-63.34 Watson. Page 240-41.35 Watson. Page 346-52.36 Gerstner. Page 116-18.37 Mills, D. Quinn and G. Bruce Friesen. 1996. Broken Promises: An Unconventional View

of What Went Wrong at IBM. Boston: Harvard Business School Press. Pages 12-13.38 The Economist. What went wrong at IBM? January 16, 2003. Page 23.39 Gerstner. Page 282.40 Gerstner. Page 26-27.41 Gerstner. Pages 39-40.




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42 Gerstner. Pages 21-22.43 Gerstner. Pages 104-105.44 Gerstner. Page 43.45

Carroll. Page 355.46 Rogers, Buck. 1986. The IBM Way. New York: Harper and Row. Page 137.47 Gerstner. Page 193.48 Gerstner. Page 87.49 Gerstner. Page 187.50 Gerstner. Page 188.51 Gerstner. Page 71.52 Gerstner. Page 72.53 Gerstner. Page 72.54 Gerstner. Page 61.55 See Changing the Culture at IBM case for more details of these initiatives.56 Gerstner. Page 207.57 Gerstner. Page 204.58 Gerstner. Pages 200-202.59 Gerstner. Page 209.60 Gerstner. Page 97-100.61 Gerstner. Page 212.62 Gerstner. Page 109.63 Gerstner. Page 23464 Gerstner. Page 73.




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