Who Says Elephants Cant Dance 161

WHO SAYS
ELEPHANTS CAN’T
DANCE?
Inside IBM’s Historic Turnaround
LOUIS GERSTNER

LOUIS GERSTNER was chairman and CEO of International Business Machines Corporation (IBM) from April
1993 until March 2002. Before joining IBM, Mr. Gerstner (a graduate of Dartmouth College and Harvard
Business School) served for four years as chairman and CEO of RJR Nabisco, Inc. and eleven years as
chairman and CEO of the American Express Travel Related Services Group. Prior to that, Mr. Gerstner
worked for McKinsey & Company, a management consulting firm.

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Who Says Elephants Can’t Dance? - Page 1

MAIN IDEA
In nine years as the chairman and CEO of International Business Machine Corporation (IBM), Lou Gerstner brought about a dramatic
change in the company’s fortunes. When he took charge, IBM was on the verge of extinction as the victim of rapid changes in the
computer industry. However, instead of breaking up IBM as most analysts were suggesting, Gerstner and his management team
turned the company around and restored it to a position of a position of power and influence within the industry. By any metric of
success, this must rank as one of the most impressive turnaround stories in business history.

April 1, 1993 – Lou Gerstner appointed as chairman and CEO of IBM ––––––––––––– IBM – Year Ended Dec 31, 1993

Section 1 – Four Critical Decisions Revenue $62.7 billion
Œ To keep the company together rather than break it up. Income Loss of $8.1 billion
• To change and update IBM’s economic model. Earnings Per Share -$3.55
Ž To reengineer how IBM did business in general.
Stock Price $12.72
• To sell IBM’s nonproductive assets.

1995 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– IBM – Year Ended Dec 31, 1995

Section 2 – Two Big Bets on the Future Revenue $71.9 billion

Income $4.2 billion
Direction of the Company Direction of the Industry
The services side of the Networks would replace Earnings Per Share $1.76
business will grow the standalone computer
Stock Price $22.84
appreciably in the future. as the prevailing choice.


Revenue $78.5 billion
Section 3 – Setting the Strategy of the Business
Income $6.1 billion
Œ Expand the world’s largest software business.
Earnings Per Share $3.00
• Open the company’s technology store.
Ž Unstack the stack and focus IBM’s initiatives. Stock Price $52.31

• Harness the emergence of e-business.


Section 4 – Changing the Corporate Culture at IBM
Income $7.7 billion

Earnings Per Share $4.12
Corporate Corporate
Culture Performance Stock Price $107.87

March 2002 – Lou Gerstner steps down as CEO of IBM –––––––––––––––––––––– IBM – Year Ended Dec 31, 2001

Section 5 – Key Lessons Learned
Income $7.7 billion

Three fundamentals of Earnings Per Share $4.35
They They They
success for enterprises
and executives Focus Execute Lead Stock Price $120.96


Section 1. Four Critical Decisions • To sell IBM’s nonproductive assets.
To raise cash for working capital, Gerstner sold assets and
slashed IBM’s dividend payout to shareholders. The
company sold undeveloped land and buildings, including the
Four Critical Decisions corporate headquarters. IBM also slashed its corporate jet
Œ To keep the company together rather than break it up. fleet and sold its collection of fine art.
Lou Gerstner went public with many of these measures at a
• To change and update IBM’s economic model. press conference on July 27, 1993:
Ž To reengineer how IBM did business.
“There’s been a lot of speculation as to when I’m going to deliver
• To sell IBM’s nonproductive assets. a vision of IBM, and what I’d 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
When Lou Gerstner was appointed chairman and CEO of IBM as
strategies for each of its businesses – strategies that deliver
of April 1, 1993, he was under no illusions he faced a world-class
performance in the marketplace and shareholder value. And
challenge. Not only was he the first outsider ever to run the
that’s what we’re working on. Now the number-one priority is to
computer industry giant, he was also taking the helm at a time of
restore the company to profitability. The second priority for the
crisis. IBM was well on its way to announcing one of the biggest
company is to win the battle for the customer’s premises. Third,
losses in corporate history – $16 billion – and most industry
in the marketplace, we are moving to more aggressive in the
commentators questioned whether the company could continue
client/server arena. Fourth, we are going to continue to be, in
to exist in its current format. The general consensus was that
fact, the only full-service provider in the industry. And lastly,
IBM would need to be restructured or broken up into smaller
we’re doing a lot of things that I would just call ’customer
operating units.
responsiveness’ – just being more attentive to the customer,
Rather than feeling pressured into making quick decisions, faster cycle time, faster delivery time and a higher quality of
Gerstner took the first three months or so simply learning about service.”
what IBM did. The sheer scale of the company’s operations was – Lou Gerstner
impressive. There were around 300,000 people on the payroll
worldwide. IBM had geographic units and product divisions The initial reaction to this announcement was mixed, with most
which were huge businesses in their own right, each with people assuming Gerstner was simply planning on downsizing
multi-billion-dollar turnovers. The company’s research labs were the company rather than making any more fundamental
state-of-the-art, with several cutting edge technologies under changes. Away from the public glaze, however, Gerstner
development, each costing many hundreds of millions of dollars backed up this new approach by making some other tough
to develop. decisions like:
By the end of July 1993, Lou Gerstner made four key decisions: n Continuing to reinvest in the mainframe – when most people

were assuming the mainframe era was well past.
Œ To keep the company together rather than break it up.
When IBM had first started, it had sold a complete integrated n Remaining in the semiconductor business – by investing

package to its customers – the computer, the software, around $1 billion in the next-generation CMOS technology.
service and support bundled together. The personal n Protecting the R&D budget – allowing IBM to continue
computer market, however, was far more competitive. Firms developing cutting edge technologies.
specialized on just one segment of the market, leaving
n Turning IBM into a market-driven company – whereas in the
customers to integrate everything as required. Gerstner
past most IBM people were more concerned about internal
decided IBM would not go down that path, but would remain
processes rather than marketplace developments.
a systems integrator focusing on delivering complete
solutions to customers rather than becoming one more disk n Reducing the size of the board of directors – making it more
drive company, PC company or operating system company. accountable and more manageable.
He saw IBM’s size and breadth as a competitive advantage. n Breaking down IBM’s geographic fiefdoms – and organizing
the company around global industry teams instead.
• To change and update IBM’s fundamental economic model.
In 1993, IBM’s revenues and profits were dependent on n Reviving the IBM brand – by consolidating all IBM’s
mainframe computer sales. That was acceptable, but IBM’s advertising relationships to be managed by a single
expenses were much higher than those of its competitors. advertising agency.
For example, for every $1 of revenue, IBM’s expenses were n Resetting IBM’s corporate compensation approach –
42-cents whereas its competitors were 31-cents. That meant replacing salaries and benefits with stock ownership
they could cut prices and still be profitable while IBM could opportunities and the chance to earn bonuses based on
not. To address this, Gerstner launched a massive program IBM’s corporate performance.
to reduce expenses. Among other things, that meant firing
35,000 people and eliminating some of the mor obvious “Fixing IBM was all about execution. We had to stop looking for
excesses that had crept into IBM’s business practices. people to blame, stop tweaking the internal structure and
systems. I wanted no excuses. I wanted no long-term projects
Ž To reengineer how IBM did business.
that people could wait for that would somehow produce a magic
IBM’s legacy internal business systems were, by 1993,
cumbersome, expensive and less efficient that they should turnaround. I wanted – IBM needed – an enormous sense of
have been. Gerstner moved quickly to upgrade IBM’s own urgency.”
inventory systems, accounting systems, product fulfillment – Lou Gerstner
systems, supply chains and internal processes.


“The skills required in managing services processes are very
Section 2. Two Big Bets on the Future different from those that drive successful product companies.
We had no experience building a labor-based business inside an
asset-intensive company. We were expert at managing factories
Two Big Bets on the Future and developing technologies. We understood cost of goods and
inventory turns and manufacturing. But a human-intensive
Direction of the Company Direction of the Industry services business is entirely different. In services, you don’t
make a product and then sell it. You sell a capability. You sell
The services side of the Networks would replace
knowledge. You create it at the same time as you deliver it. The
business will grow the standalone computer
business model is different. The economics are entirely different.
appreciably in the future. as the prevailing choice.
We had to bet that we could build the recruitment, training,
compensation and HR processes to bring in 1,000 or more
people a month – even though we’d never attempted anything
“If I were to reduce the story of IBM’s transformation over the remotely close to that. We had to learn how to be disciplined –
past decade to the bare essentials, the saga would pivot on two hot to negotiate profitable contracts, price our skills, assess risk,
big bets: one on the industry’s direction, and the one on IBM’s and walk away from bad contracts and bad deals. The bet you’re
own strategy.” really making is on your own commitment to invest both the
– Louis Gerstner years and the capital, then build the experience and discipline it
takes to succeed.”
IBM had really been built around the runaway success of the
– Lou Gerstner
System/360 mainframe computer family. To make that strategy
work, IBM had launched into a whole new set of businesses,
each of which had become multi-billion-dollar enterprises in their
• The direction of the industry.
In 1994, the Internet was being talked about as “the
own right. Therefore, IBM was, by the 1990s, already well information superhighway”. Since it had not yet reached
established in the semiconductor industry, hardware, software, mainstream consciousness, there was loads of debate
sales and support. And the company was used to dominating its within the IT industry as to whether stand-alone computers
industry. would dominate mainframes, or vice-versa. IBM decided
When the UNIX operating system arrived in the early 1990s, it computers networked together would replace the
suddenly became possible for companies to start making parts stand-alone computer as the best way to do data processing.
of an overall solution rather than needing to do everything With the arrival of the Internet, this may not seem like a risky
themselves. That meant companies like Sun, Hewlett-Packard, bet but in the context of the early-1990s, IBM was taking a
Silicon Graphics and Digital could now start attacking IBM’s huge bet. The company was saying that rather than building
mainframe computing franchise. At around the same time, the proprietary technologies with “choke points” which made all
PC makers also started suggesting that since they were now other products incompatible, IBM would build open products
being used on the desktops, it was logical to use PCs in the that would operate with the products developed by
back-office systems as well. Their aspirations were couched in competitors. And not only would PCs join the network but so
terms of a “client/server” relationship – where the client was the too would many other intelligent computing devices. IBM
desktop PC and the server was another computer which stored was betting the influx of additions to the network would
enormous amounts of data and did all the number crunching. generate a corresponding increase in computing workloads
Most of IBM’s customers decided the PC-model would work and which would translate into more demand for big computers.
threw in their lot with the PC makers. IBM under Gerstner’s
“There were further implications of a networked world. The PC
leadership, however, chartered a very different course.
would be pushed off center stage. Very fast, high-bandwidth
Specifically, IBM made two far-reaching bets on its future:
networks would allow many of the PC’s functions to be
Œ The direction of the company. performed by larger systems inside companies and the networks
IBM believed that customers would grow tired of trying to itself. The difficult task of managing all that free-flowing digital
integrate parts of their computer systems provided by information certainly was not going to be done on desktop
different suppliers. With that in mind, IBM was betting that computers. Those workloads would have to be handled by
ultimately, the information technology industry would be large-scale systems – meaning huge demand for computing
services-led rather than technology-led. Under that infrastructure products, in addition to networking gear. Finally,
perspective, the companies that could capture the greatest this new landscape would change who made the technology
amount of value would be those that offered complete decisions. The decision makers would once again be chief
end-to-end solutions which would be carefully integrated into technology officers and senior business leaders – people IBM
the processes of a business enterprise rather than provided knew and understood. All of this wasn’t so neat, tidy and clear to
bits and pieces on an ad-hoc basis. us at the time. But there were indications that the world of
For this services business to work, however, IBM had to be computing was indeed shifting in ways that, at least in theory,
able to recommend a competitor’s product if that genuinely played to IBM’s traditional strengths and assets. We would have
met the needs of the customer better than an IBM product. to do an enormous amount of work and take significant risks –
Developing that kind of mentality within an insular company from continuing to open up all our products, to building the
like IBM was a major challenge, but if that could be done, it services business. But even the chance that the game might be
would be a major benefit. Ultimately, however, the success thrown open to a new set of leaders was powerfully motivating.
of this strategy was impressive. In 1992, services generated We were going to take our fate into our own hands. We were
$7.4 billion for IBM. By 2001, revenues from services had going to play offense.”
risen to more than $30 billion. – Lou Gerstner


Section 3. Setting the Strategy of the Business • Open the company’s technology store.
IBM has always had a world-class Research Division. Until
1994, however, the only company which had access to the
products developed was IBM itself. Lou Gerstner changed all
Setting the Strategy of the Business that. Beginning in April 1994, IBM Research started selling
Œ Expand the world’s largest software business. its technology to competitors.
This move, although counterintuitive at first glance, was the
• Open the company’s technology store. right strategy because:
Ž Unstack the stack and focus IBM’s initiatives. n IBM Research turned out more products than IBM itself
• Harness the emergence of e-business. could commercialize. Thus, unless the extra technology
was sold, a great asset was being underutilized.
n By selling technology, IBM would increase its ability to set
Once IBM had made a decision as to which direction the
new standards and protocols.
company should move and how the industry would develop,
there were follow-up decisions which also needed to be made: n Selling technology would allow IBM to recoup
investments and open up a new revenue stream.
Œ Expand the world’s largest software business.
In 1993, IBM sold more software than any other company, n The more digital devices which got sold, the more
including Microsoft. All of this software, of course, was demand there would be for more computing power in the
IBM-specific and was usually sold as an add-on for IBM underlying network – which IBM could fill.
mainframe systems. Despite that success, IBM never n By selling technology to others, IBM would be positioned
thought of itself as a software developer. Instead, software to benefit from the growth of businesses outside the
was considered as something the company needed to do in computer industry – like game consoles for example.
order to sell its hardware. To get started, IBM began licensing its technology to third
In addition, IBM was also trying to unwind some of the parties. (By 2001, licensing alone would generate $1.5 billion
mistakes of the 1980s by developing a new PC operating in additional revenue for IBM.) The company also started
system called OS/2. This was a futile attempt to wrestle selling technology components and custom-designed
control of the PC operating system back from Microsoft. It microelectronics to third parties, such as Sony and Nintendo.
was entirely unsuccessful in the marketplace and it was
draining tens of millions of dollars from IBM and absorbing Ž Unstack the stack and focus IBM’s initiatives
Historically, IBM had attempted to make everything its
huge chunks of management time and attention. Lou mainframe customers needed – from the processors and
Gerstner moved quickly to end IBM’s attempt to develop a displays through to the software and support services
new operating system for PCs declaring that as being needed. That was fine during the mainframe era but it
“yesterday’s war” and of little consequence in the generated loads of enemies who were specializing in
client/server era of the future. specialized segments of the industry. Therefore, Gerstner
To focus and grow IBM’s software business, the company: decided IBM would be better off partnering with these people
n Consolidated all software development programs under rather than trying to compete against them.
the control of a single manager who would decide which For example, IBM had developed a data network in the
products to develop and which products to discontinue. 1970s and 1980s which allowed it to transfer data around the
(IBM had 4,000 software products being developed in globe. This was sold to AT&T for $5 billion, meaning that IBM
thirty different labs and marketed under sixty different could serve all the telecommunications companies rather
brand names prior to this rationalization effort). than compete against them. Similarly, IBM moved its PC
n Focused on developing “middleware” – databases, sales business to a third parties and direct sales channels.
systems management software and transaction IBM also divested its hard disk manufacturing business and
management software – rather than attempting to take on its memory chip business.
the operating system developers (like Microsoft) or the By doing this:
application developers (like SAP, PeopleSoft and JD n IBM cuts its losses – since its was no longer going
Edwards). By focusing on this niche, IBM was able to head-to-head against entrepreneurial companies who
grow its own software business very strongly. were focused on one small part of the industry
n Made some bold acquisitions – notably of Lotus exclusively.
Development Corporation for $3.2 billion. This acquisition n IBM could spend more time focusing on what customers
enabled IBM to acquire a product called Notes which is a wanted and less time worrying about developing better
key strategic component in enterprise-wide collaboration technology and hoping the customer would become
efforts. IBM also acquired Tivoli Systems for its interested.
distributed systems management software.
n IBM could partner with more companies and act as an
As a result of these efforts, IBM’s Software Group has impartial integrator for its customers.
experienced exceptional growth and is now one of the most
n IBM freed up resources which could be invested in those
powerful software companies in the world being number one
or number two in every segment of the market it competes in. areas where the company already had a strong
The IBM Software Group had revenues of $13 billion in 2001 competitive advantage or an opportunity to take a leading
role – like in storage systems, self-directing computers,
(second only to Microsoft) and contributed pre-tax profits of
$3 billion to IBM. bioinformatics and nanotechnology.


• Harness the emergence of e-business. Section 4. Changing the Corporate Culture at IBM
The arrival of the Internet meshed nicely with IBM’s bet that
networked computers would replace the preference for
standalone machines. It also tied in nicely with the concept of
“convergence” – that telecommunications, computing and Changing the Corporate Culture at IBM
consumer electronics would ultimately merge a number of
different industries. It was also significant that in an Internet
economy, the middleware which IBM specialized in was vital Corporate
Corporate Corporate
Corporate
Culture
Culture Performance
Performance
because it meshed everything together and became the
“integrating glue” as it were.
With this in mind, IBM:
n Rewrote all its software to incorporate Internet access.
n Started building a new services business providing Web “I came to see, in my time at IBM, that culture isn’t just one aspect
site hosting. of the game – it is the game. In the end, an organization is
nothing more than the collective capacity of its people to create
n Set up a new internal group to evangelize the Internet and
value. Vision, strategy, marketing, financial management – any
to encourage all IBM business units to reorient around the
use of the Internet. management system, in fact – can set you on the right path and
can carry you for a while. But no enterprise – whether in
n Started mentioning the concepts of e-business in keynote business, government, education, health care, or any area of
speeches and other presentations given by senior human endeavor – will succeed over the long haul if those
managers. (IBM executives first used the term elements aren’t part of its DNA.”
“e-business” during an analysts briefing in November – Lou Gerstner
1996. It didn’t get an overly enthusiastic reception as
nobody had any idea what the term meant). “I have a theory about how culture emerges and evolves in large
Despite all its enthusiasm for the promises of worldwide institutions: Successful institutions almost always develop
digital communications, IBM never bought into the dot-com strong cultures that reinforce those elements that make the
mania of the late 1990s. Instead, IBM concentrated on the institution great. They reflect the environment from which they
underlying promise of what was a once-in-a-generation emerged. When that environment shifts, it is very hard for a
opportunity to do things faster and more efficiently. It was culture to change. In fact, it becomes an enormous impediment
also seen as the chance to push the envelop and reengineer to the institution’s ability to adapt. This is doubly true when a
entire businesses. company is the creation of a visionary leader. A company’s initial
culture is usually determined by its founder’s mindset – the
“To date IBM has invested more than $5 billion in e-business person’s values, beliefs, preferences, and also idiosyncrasies.
marketing and communications. That’s a lot of money, but the It’s been said every institution is nothing more, but the extended
returns paid to our brand and our market positioning are shadow of one person. In IBM’s case, that was Thomas J.
incalculable. I consider the e-business campaign to be one of the Watson, Sr.”
finest jobs of brand positioning I’ve seen in my entire career.” – Lou Gerstner
– Lou Gerstner
In the early days of IBM, Thomas Watson Sr. systematically and
“What were the real lessons, after all the meteoric ascents and deliberately built the company around three basic beliefs:
equally rapid flameouts of the dot-come era? For customers, I 1. Excellence in everything we do.
think the overriding lesson was that those who didn’t get 2. Superior customer service.
distracted and were willing to do the hard work had a 3. Respect for the individual.
once-in-a-lifetime opportunity – not just to do things better and For many years, these institutionalized beliefs propelled IBM to
faster, but to do things that, in fact, they’d never been able to do the forefront of its industry. Everything about the company – from
before. For investors as well as customers, the lesson was: no its compensation scheme to its well-known dress code – flowed
shortcuts. I think for a lot of people, the ‘e’ in e-business came to from these beliefs and almost took on a life of their own. (When
stand for ‘easy’. Easy money. Easy success. Easy life. When Gerstner abolished IBM’s dress code of dark suits and white
you strip it down to bare metal, e-business is just business. And shirts in 1995, this generated an enormous amount of media
real business is serious work. For IBM the lesson was about attention and comment). The only problem was that over the
rediscovering something we’d lost. We found our voice, our years, as customer preferences changed and evolved, IBM’s
confidence, and our ability once again to drive the industry culture did not evolve in sync. Instead, a kind of corporate rigor
agenda. Our messaging allowed our customers to see benefits mortis set in. There were also some unintended consequences
and value that was not being articulated by our competitors. The which were becoming more apparent:
concept of e-business galvanized our workforce and created a
coherent context for our hundreds of products and services. The n “Excellence in everything we do” had become an obsession
with perfection which meant every decision had to be
vast new challenges of networked computing reenergized IBM
checked and approved by a vast bureaucratic machine.
research and triggered a new golden age of technical
achievement for the company. Most important, the investment n “Superior customer service” had come to mean IBM thought it
did what we wanted to do at the outset – reestablish IBM’s could dictate what customers needed rather than paying
leadership in the industry.” attention to their changing needs.
– Lou Gerstner n “Respect for the individual” had spawned a culture of
entitlement where the employees didn’t feel obligated to earn
respect through their performance.


“Changing the attitude and behavior of hundreds of thousands of who exemplified and embraced the new culture. That sent the
people is very, very hard to accomplish. Business schools don’t message to all the up-and-comers within IBM that the path to the
teach you how to do it. You can’t lead the revolution from the top now wound through a different route than that which was
splendid isolation of corporate headquarters. You can’t simply used previously.
give a few speeches or write a new credo for the company and All these initiatives generated some interest, but most IBM
declare that the new culture has taken hold. You can’t mandate employees started to view the new culture as an intellectual
it, can’t engineer it. What you can do is create the conditions for rather than a practical exercise. It became clear the eight
the transformation. You can provide incentives. You can define principles were too many for them to keep in mind. Therefore,
marketplace realities and goals. But then you have to trust. In the new culture was reduced down to three words:
fact, in the end, management doesn’t change culture.
Management invites the workforce itself to change the culture.” Win – Execute – Team
– Lou Gerstner
This began as a mantra that people could use to specify what the
To start the process moving and to encourage IBM staff to use
new IBM stood for and then eventually this became part of the
their initiative more rather than waiting for their boss to tell them
company’s performance management system. Every year, each
what to do, Gerstner and his management team decreed there
IBM employee would list all the actions they were committed to
would be few rule books, codes or books of procedures. In their
taking to fulfill the three commitments. Their merit pay and
place were put eight basic principles which defined the priorities
variable pay would then be determined by how well they
of the new IBM:
performed against those commitments.
1. The marketplace is the driving force for everything we do.
To further encourage action, Gerstner also instilled a sense of
Instead of trying to specify how the world should work,
urgency. In just the same way as Thomas Watson had bet the
success as a company for IBM comes solely from helping
company’s future on the development of the System/360,
customers themselves succeed. Nothing else matters.
Gerstner declared that e-business was of equal importance.
2. We are a technology company with a commitment to quality.
Great technology has always been IBM’s strength. IBM will “We infused e-business into everything – not just our
succeed if it channels this strength into developing products advertising, product planning, research agendas, and customer
customers actually want and need. meetings, but throughout our communications and operations –
from my e-mails, broadcasts, and town hall visits to the way in
3. We measure success by customer satisfaction and
which we measured our internal transformation. It provided a
shareholder value.
powerful context for all of our businesses. It gave us both a
No company is a success unless it has satisfied customers
marketplace-based mission and a new ground for our own
and increasing shareholder value. Everything else is only a
behaviors and operating practices – in other words, culture.
stepping stone to these two key objectives.
Most important, it was outward facing. We were no longer
4. We operate as an entrepreneurial organization – with focused on turning ourselves around. We were focused on
minimum bureaucracy and a focus on productivity. setting the industry agenda again. We shifted the internal
Entrepreneurs take risks, accept innovation readily and discussion from ‘What do we want to be?’ to ‘What do we want to
pursue growth by expanding their markets. Those are do?’”
exactly the kind of traits IBM staff should possess. – Lou Gerstner
5. We never lose sight of our strategic vision.
What IBM does is important. Everyone in the organization “Why principles? Because I believe all high-performance
needs to feel engaged, to know where their skills and companies are led and managed by principles, not by
competencies fit in. processes. Decisions need to be made by leaders who
understand the key drivers of success in the enterprise and then
6. We think and act with a sense of urgency at all times. apply those principles to any given situation with practical
Most often, it’s better to be fast rather than insightful. wisdom, skill and a sense of relevancy to the current
Planning and analysis are worthwhile but never at the environment.”
expense of getting the job done right away. Generate some – Lou Gerstner
“constructive impatience”.
7. We always work as a team. “Building on decades of experience, knowledge, maturity and
Teamwork which is focused on delivering value to the character, IBM over the past ten years has begun to develop the
customer will be applauded and rewarded within IBM. Turf ability to handle a high level of internal complexity and even
wars and bureaucracy will not. apparent contradiction. Rather than hiding from conflict or
suppressing it, we’re learning how to manage it, even benefit
8. We are sensitive to the needs of our employees and the
from it. Sustaining that balance will be tough, but I am optimistic.
needs of the communities in which we operate.
The marketplace we’re now living in – the most dynamic,
IBM genuinely wants its people to have the resources and competitive, global economy in recorded history – will help. As
the room they need to be able to grow personally. In a similar
long as IBMers remain focused outward, the world will keep
vein, IBM also wants the communities within which we do them on their toes. As I write this the battle is not over. IBM has,
business to become a little better thanks to our efforts. in effect, undergone vast cultural change. The ‘new blue’ – tied to
As well as these eight principles, Gerstner also formed a Senior our e-business strategy and focused on the market’s most
Leadership Group who were to focus the attention of the promising growth opportunities – is beginning to take off. IBMers
company’s employees on the need for leadership and change. are energized, motivated and stimulated as they haven’t been in
He also started talking about what changes were needed with a long time.”
the senior management of the company. And, most importantly, – Lou Gerstner
the company started promoting and rewarding those executives


Section 5. Key Lessons Learned • Successful leaders and great businesses execute well.
In most industries, there are usually only five or six factors
which drive success. Great companies execute on those
factors better than their competitors. That is, they get the job
Key Lessons Learned done better than everyone else. Generally speaking, the
market leaders out-execute their competitors day-in and
day-out rather than coming up with anything new and
Three fundamentals of
They They They startling.
success for enterprises
Focus Execute Lead With that in mind, effective execution is built around four
and executives
basic attributes:
n People respect what you inspect much more than what
you expect – meaning unless you actually demand
The three key lessons which emerged from Lou Gerstner’s IBM accountability and make changes when the results do not
experience are: eventuate, things will slide rather than getting done. This
Œ Successful leaders and successful businesses are focused. is one of those situations where more credit should be
In business, there is always a temptation to try something given for building arks than for predicting rain.
new, especially when the economic conditions get tough in n World-class processes are required – because if you’re
your own specific field. Invariably, however, all that ends up trying to go up against a best-in-class competitor with
doing is sinking the company into an even deeper hole antiquated processes, there can be only one outcome.
because its focus strays from what it does best. It is always The great companies have superb processes in the areas
difficult to develop world-class competencies in a second that count the most.
area of business.
n Strategic clarity is needed – as conflicting goals only
Closely akin to this “the grass is greener on the other side of cause confusion, not achievement. Great companies
the fence” phenomena is acquisition fever. Most executives spell things out so clearly what needs to be done to
would rather try and grow their way out of trouble rather than execute well is crystal-clear. By communicating clear
make the hard decisions needed to fix their traditional strategies and values well, you can then allow people the
businesses. freedom they need to make good decisions which will be
The bottom line, however, is that any business enterprise consistent with those values.
which succeeds does so on the basis of a deep n A high-performance culture allows everyone to do the
understanding of its customer needs and the economic right things faster and more often – by removing all the
realities involved in meeting those needs. Truly great impediments to action that may exist elsewhere. When
companies have a clear view of the five or six critical things you succeed in creating this type of culture, everyone
they must do to succeed. They also know how to allocate takes quality personally. Mediocrity is not tolerated.
resources effectively. Transferring those skills to another line Everyone is committed to doing whatever it takes to excel.
of business is not as simple as it may appear at first glance.
“Execution – getting the task done, making it happen – is the
Therefore, the best companies always have and always will
most unappreciated skill of an effective business leader.”
“stick to their knitting”. They remain tightly and obsessively
– Lou Gerstner
focused on what they know best and resist the temptation to
dilute their focus by moving off into additional fields of “Execution is really the critical part of a successful strategy.
business. Getting it done, getting it done right, getting it done better than
the next person is far more important than dreaming up new
“Good strategies are long on detail and short on vision. They lay
visions of the future.”
out multi-year plans in great qualitative detail: the market
– Lou Gerstner
segments the company will pursue, market share numbers that
must be achieved, expense levels that must be managed, and “Execution is all about translating strategies into action
resources that must be applied. These plans are then reviewed programs and measuring their results. It’s detailed, it’s
regularly, and become, in a sense, the driving force behind complicated, and it requires a deep understanding of where the
everything the company does.” institution is today and how far it is from where it needs to go.
– Lou Gerstner Proper execution involves building measurable targets and
holding people accountable for them. But, most of all, it usually
“Vision statements can create a sense of confidence – a sense
requires that the organization do something different, value
of comfort – that is truly dangerous. Vision statements are for the
something more than it has in the past, acquire skills it doesn’t
most part aspirational, and they play a role in creating
have, and move more quickly and effectively in day-to-day
commitment and excitement among an institution’s employees.
relationships with customers, suppliers and distributors. All of
But in and of themselves, they are useless in terms of pointing
this spells change, and companies don’t like to change because
out how the institution is going to turn an aspirational goal into a
individuals don’t like to change.”
reality. Good strategies start with massive amounts of qualitative
– Lou Gerstner
analysis – hard, difficult analysis that is blended with wisdom,
insight and risk taking.” “If you want to out-execute your competitors, you must
– Lou Gerstner communicate clear strategies and values, reinforce those
values and allow people the freedom to act.”
– Lou Gerstner


Ž Successful leaders and organizations have loads of good So can elephants dance? That is, can a big company be nimble
leadership available to them. enough to compete against fast, entrepreneurial companies?
In the final analysis, truly great business organizations are
never managed or administered. Instead, they are driven to “I have never seen a small company that did not want to become
ever greater accomplishments by leaders who are a big company. I have never seen a small company that didn’t
passionate about winning. Leadership is, at its heart, very look with envy on the research and marketing budgets of larger
personal and demanding. competitors or on the size and reach of their sales forces. Big
matters. Size can be leveraged. Breadth and depth allow for
Great business leaders create a high-performance culture greater investment, greater risk taking, and longer patience for
because they are: future payoff. It isn’t a question of whether elephants can prevail
n Passionate – about what they do and how their over ants. It’s a question of whether a particular elephant can
organization fares. dance. If it can, the ants must leave the dance floor.”
n Knowledgeable – able to understand in depth the – Lou Gerstner
strategic, operational and financial issues which underpin The key question in getting any organization to dance
their organization.
successfully lies in the centralization-vs.-decentralization
n Highly visible – leading from the front by interacting daily equation. In the 1960s and 1970s, everyone preached
with customers, suppliers and business partners. decentralization. That meant it was carried to the extreme in
n Hands-on – being more interested in rolling up their most corporations in the 1980s and 1990s, but quite often every
sleeves and going to work than they are in presiding over decentralized business unit had its own data processing center,
the work of others. HR group, financial analysis team, strategic planning group and
so forth. This, in turn, meant a large organization actually ended
n Driven – and motivated to help the organization achieve
up becoming slower and having higher costs.
ever-increasing levels of accomplishment.
n Change agents – constantly encouraging their The more important question for a large enterprise is which
activities should be shared enterprise-wide and which activities
organizations to adapt to evolving market conditions
should be managed locally. Shared activities tend to come in
faster than their competitors do.
three levels:
n Good communicators – who can speak openly and
1. Those that leverage the size of the enterprise to yield
honestly with the people involved at every level of the
organization. economies of scale – data processing, data networks,
purchasing, basic HR and real estate management.
n Even-handed – treating all employees as people who
2. Business processes more closely linked to the marketplace
deserve to understand what’s going on in the enterprise.
and the customer – customer databases, product fulfillment
n Tough-minded but fair – avoiding playing favorites. systems, customer relationship management systems.
n Unwilling to make exceptions when it comes to values – 3. Those activities which involve a shared approach to winning
demanding fairness in applying principles and policies. a marketplace – where the assets of one part of the
“Most of all, personal leadership is about passion. When I think organization are leveraged in another completely different
about all the great CEOs I have known – among them Sam context.
Walton of Wal-Mart, Jack Welch of General Electric, Jurgen For most organizations, level one activities work much better if
Schrempp of DaimlerChrysler, and Andy Grove of Intel – I know they are centralized. So too will level two activities if the
that the common thread among them is that they were or are all integration is executed superbly. But centralization of the level
passionate about winning. They want to win every day, every three activities will only produce genuine benefits if the
hour. They urge their colleagues to win. They loathe losing. And marketplace is undergoing a significant upheaval and a new
they demand corrections when they don’t win. It’s not a cold, integrated business model is needed. Deciding to make level
silent, intellectual exercise. It’s personal. They care a lot about three activities centralized should never be attempted lightly,
what they do, what they represent, and how they compare.” because this will literally be a bet-the-company decision. In
– Lou Gerstner many ways, getting the elephant to dance successfully depends
on hitting the precisely correct balance in the
“All great business executives – CEOs and their subordinates – centralization-vs.-decentralization equation.
have passion and show it, live it, love it. Now, don’t get me
wrong. I’m not talking about superficial rah-rah optimism or “Much of the press coverage of IBM over the past decades was
backslapping and glad-handling. Personal leadership starts with focused on our strategic restructuring – as well it should have
the hard work of strategy, culture and communications. It been since without that restructuring there would be no IBM
includes measurement, accountability, visibility and active today. However, our current strategies will – and should –
participation in all aspects of the enterprise. Without that, change as the industry continues to evolve very rapidly. History
passion is simply a cheerleader doing flips on the sideline while determines legacies, but if I had a vote, the most significant
the team gets crushed, 63-0. The passion exhibited by true legacy of my tenure at IBM would be the truly integrated entity
leaders is not a substitute for good thinking or good people or that has been created. It certainly was the most difficult and risky
good execution. Rather, it is the electricity that courses through a change I made.”
well-made machine that makes it run, makes it hum, makes it – Lou Gerstner
want to run harder and harder.”
– Lou Gerstner

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