SPARK OF THE CORPORATE
The Corporate Epic of Turnaround........
“Who Says Elephants can’t Dance?”
Louis Gerstnertook charge as CEO of IBM in April 1993. After a long time of contradiction of thoughts, the only reason behind taking up the challenge of leading IBM was that “He owed to his country” and giant technology like IBM was nation’s treasure. There began an illustrated example of a non technical leader directing a technology giant.
When Gerstner took charge as CEO in 1993; IBM reported losses of $8.1bn against $62.7bn revenue. The stock price of IBM fell from highest $43 to $12.The company was running out of money at an alarming rate and the funds left in hand were sufficient to run IBM for only 100 days. Adding on to the financial crisis; were its peaking beaurocracy, aggravated and tough to change culture and cumbersome work processes. IBM was almost at the verge of collapse. What all was needed at that time was a strong leader who would initiate change.
Had there not been a company like IBM and a leader like Gerstner; we would not have got a chance to watch, live step by step execution of leadership and a real transformation of a company. Gerstner strongly believed that “Knowledge taken to grave yard is the knowledge lost”. He therefore shared his experiences at IBM through a memoir called “Who told elephants can’t dance?” This book tells Gerstner’s entry to exit story in IBM. I bet this book inspires all the leaders from the gut. This book about the dramatic turnaround of IBM by Gerstner; remained an all time epic in the corporate history.
Gerstner did thorough analysis of IBM, worked out different strategies, structural reengineering brought about required cultural changes and reformed the company;which resulted in dramatic turnaround of IBM.In 1994, IBM earned $2.9 billion on $64.1 bn in sales and this trend continued. In the first half of 2001 , IBM earned $3.8 bn on $42.6 bn in sales and IBM's stock rose 34 percent ;with stock price of$108.After a decade of Gerstner’s leadership; IBM emerged as leader and made its way into headlines.Gerstner left IBM in 2002 ,with Palmisano as his successor.
More about Gerstner
|Born||:||March 1, 1942 (age 69), Mineola, New York, USA|
|Occupation||:||Former CEO of IBM|
|Almamater||:||Dartmouth College; Electrical Engineering;1959, Harvard Business School, MBA;1960-1961|
|Gerstner was born in 1942, in a closely knit middle class family in Mineola, New York city. His father was a milk-truck driver and mother was an administrator at a community college. His parents were keen at educating him. He had three brothers; one elder and two younger. He did most of his schooling in Mineola. He had to leave Mineola to attain graduation in Electrical Engineering at Dartmouth College, which offered him a substantial scholarship. He did his MBA at Harvard Business School.|
After emerging out from Harvard in 1965 at a very tender age of 23 Gerstner started his career in Mckinsey & company at New York and took up his initial responsibility of conducting executive compensation study. He put forth his efforts in Mckinsey for 9yrs and advanced to the level of Sr.partner there. In Mckinsey he expanded his mind in “detailed process of understanding the underpinnings (deep analysis) of a company”. Gerstner was no more interested in being a person; who reports to another person. So, he wanted to sit in a chair of decision maker.
In 1977, he joined in American Express in Travel Related services; which dealt with American Express Cards, Traveler’s cheques and Travel related business. He stayed there eleven years. In American express he developed “a sense of the strategic value of information technology”.
In 1989 he left American Express to accept an offer at RJR Nabisco, a huge packaged- goods company. There he managed extraordinarily complex and over burdened balance sheet. He left the company after 4yrs with great experience and appreciation of “importance of cash in corporate performance. “free flow of cash” as the single most important measure of corporate soundness and performance”.
With his profound learning and long experience in various business environments for 24yrs; Gerstner walked in as CEO of giant technology IBM in 1993.At that time IBM was fully shattered and was at the verge of extinction. Gerstner used all his prior experiences; took various steps to bring about dramatic turnaround of IBM. He succeeded in making the big Elephant IBM to dance. The decade of his leadership ended in 2002. Finally he asked for a ten- page report from each business unit leader covering customer needs, product line, competitive analysis, technical outlook, economics, both short- term and long -term key issues and the 1993-1994 outlook. Change the Fundamental Economic Model Massive program of expense reduction of $8.9bn in total was undertaken. This led to reduction of workforce by 35,000 in addition to 45,000 laid off earlier in 1992.It was painful, but only way of survival. Reengineer how IBM did business Lessons Learned (Elephants can Dance)
Later he handed over his responsibilities to Sam Palmisano; whom he felt as an eminent person to lead IBM.
After IBM he took up position of chairman in Carlyle Group; an equity firm in Washington DC, from 2003-2008. Right now he remains SR. advisor of Carlyle Group.
Awards and Recognition
Everyone knows that Louis Gerstner personifies the values of corporate citizen. That is abundantly clear from the way he committed himself and the resources of IBM to…the reform of school education in US as well as internationally. For these efforts he was awarded the designation of honorary knight of the British Empire by Queen Elizabeth -2 in June 2002.
Louis Gerstner received a 2006 visionary award.
Gerstner is a lifetime advocate of importance of quality education. From 1996-2002,he co-chaired “Achieve”, an organization created by US Governors and business leaders to improve the quality of education in Public schools of United States.
The Great Turnaround Story
The transformation of IBM begins with an opening note:
Stop hemorrhaging cash. We are close to running out of money.
Make sure we would be profitable in 1994 to send a message to the world and to the IBM workforce; that we have stabilized the company.
Develop and implement a key customer strategy.
Finish right sizing by end of third quarter.
Develop an intermediate – term business strategy.
In IBM “culture isn’t just one part of the game-it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value.”
The culture of IBM was product of two predominant forces; runaway success of the system/360.There was little competitive threat. In such environment people lose touch with external realities; what is happening in market-place is essentially irrelevant to success of the company.
The basic beliefs of IBM at that time were:
Excellence in everything we do; which lead to delay in processing.
Superior customer service; which lead to customer second.
Respect for the individual; has developed into pervasive institutional support system for non action. (A culture of NO).
IBM’s cultural trends in 1993
Changing the attitude and behavior of hundreds of thousands of people was very, very hard to accomplish. What can be done was; create conditions for transformation. So management invites workforce itself to change the culture and it was accepted by the employees. Gestner himself spend thousands of hours of personal activity to initiate the change.
The culture in IBM was deeply inbred and ingrown, with own rules and conflicts, it has lost its robustness. This included a general disinterest in customer needs, accompanied by politics. There was a beaurocratic infrastructure that defended turf instead of promoting collaboration .IBM has its own language; which alienated it from the rest of the world. Way back in 1960’s and 1970,s self-absorption was productive, because customers didn’t have insight into what data processing was. As business people started understanding importance of IT. We need to get connected with outside world. We need to be customer centric.
In IBM the problem was not presence of beurocracy, but its size and how it was used. There was a multiphase conflict in which units competed with one another, hid things from one another, and wanted to control access to their territory from other IBMers. There was no trust between cross-unit colleuges. Instead of facilitating collaboration they manned fence to protect the borders.
The higher officials of management presided instead of acting. They just assigned work and watched it happening. They did not participate in day to day implementation.
Behavioral changes brought about by Gerstner:
Product centric to Customer Centric.
Do it my way to Do it customer’s way.
Manage by morale to manage by success.
Decisions made based on Anecdotes and Myths to Decisions made on facts and figures.
Relationship Driven to Performance Driven and measured.
Conformity to Diversity of ideas and opinions.
Attack the people to Attack the process.
Looking good is more important than doing good to Accountability.
United States dominance to Global Sharing.
Rule Driven to Principle Driven.
Value me to Value us.
Analysis to Make decisions and move forward with urgency.
Not invented here to Learning Organization.
Fund Everything to Prioritize.
Gerstner’s way to financial stability
After 100days of Gerstner’s tenure as CEO; IBM’s stock was down by 6 percent. The financial position was at rock bottom. Revenue declined by 7 percent. Gross profit margin sinks from 50percent to 39.5 percent. Loss before taxes was $40mn for the first quarter. Internal financial systems and budgeting were inefficient; because each element of IBM’s organizational matrix insisted on its own budget. Allocations were constantly debated and changed. Accountability was difficult to determine.
The critical steps that Gerstner took to save the company financially were:
Change the Fundamental Economic Model.
Reengineer how IBM did business.
Sell unproductive assets in order to raise cash.
IBM was spending 42cents to produce $1 revenue; whereas its competitors spend 31cents to produce $1 revenue. When total revenue was multiplied by the inefficiencies; it accounted almost to $7bn expense problem. So, mainframe prices were to be reduced and thus attain gross profit; was the only way to at least save the company for short term. This would slash uncompetitive level of expense.
Fundamental change was to be carried put in almost every process at IBM. All the business processes at IBM were cumbersome and highly expensive. Reengineering processes were taken up on large scale throughout the organization, and it showed a cut of$2.8bn expenses.The IT systems were highly inefficient. The expense was $4bn, to just have the basic information to run the company. Later 155 data centers were consolidated to 16 and 31 internal communication networks were consolidated into a single one. This nearly saved $2bn.Most of the IBM properties were underused or being rented out. 8000 acers of undeveloped land was sold. The corporate headquarters; New York was consolidated 21 locations to 5.
The total savings from these reengineering projects was $9.5bn and the overall savings from 1994-1998 was $14bn. The hardware development time was reduced from 4yrs to 16months. Improvement in product delivery dates was reduced by 30 percent in 1995, 95 percent in 2001.Invendtory carrying costs were reduced by $80mn, write offs reduced by $600mn, delivery costs were reduced by $27mn and material costs were reduced by $15bn.
Sell unproductive assets to raise cash
In 1993, cash flow shrinked and the creditors no more stood by IBM. Annual dividend of share holders was reduced from $2.26 to $1 per share. Corporate head quarters at New York City were sold. Most of the corporate airplane fleet was sold. The most expensive and unproductive assets were sold for$31mn in 1995.Streamlining of the company continued.
Ever Best Strategies for IBM by Louis Gerstner
“Good strategies start with massive amounts of quantitative analysis, hard, difficult analysis that is blended with wisdom, insight and risk taking. Truly great companies lay out strategies that are believable and executable. Good strategies are long on detail and short on vision”
Hold the Vision
Gerstner felt what IBM needed at that time was a series of very tough-minded, market –driven, highly effective strategies for each of its business –strategies to deliver performance in the market place and share holder value.
Number one priority was to restore company’s profitability.
The second priority was to win the battle at the customer’s premises.
Third priority was, to be more aggressive in Client/Server arena than anybody in the world.IBM was type casted as a “main frame company”
Fourth priority was, IBM was to continue as full service provider in the industry. Customers needed IBM to be a full-fledged solution provider.IBM was building skills to get it done.
Lastly, IBM was doing lots of things which were called “Customer Responsiveness”, just being attentive to the customers, fast cycle time etc… Keep the company together
In 1960’s to 80’s IBM delivered its customers a total integrated package. When a computer was bought, it came with all basic technologies like microprocessors and storage incorporated into a system, all the software loaded on to the hardware, all the services to install and maintain the systems were bundled into pricing.
IBM was very slow in delivering distributed computing, and many small companies cropped up to fill the gap. These companies were in no position to deliver an integrated solution, so they offered add-ons to the basic IBM system and built around IBM’s central processing hub. This clearly was done by Microsoft and Intel, when IBM moved into PC business.There was an undesirable outcome in the computer industry. The customer had to be integrator of technology into usable solution to meet their business requirements. This was all complicated and created absence of uniform standards in computer industry. Therefore, Gerstner made a decision to integrate all the pieces and deliver a working solution. He announced to the employees and customers that IBM would remain as one unified enterprise. This was the best decision that Gerstner would have ever made, pushing the technology Giant into profits.
At the end of turnaround
Under the great leadership of Louis Gerstner, the company mounted up from an $8.1 billion loss in 1993 to a $7.7 billion profit in 2001. The stock price rose nearly tenfold, but the revenues rose only 37 percent. Gerstner quotes, "The best companies grow profits faster than revenue. They manage margins and expenses brilliantly."
“Heading into IBM, I would have bet large sums of money that these frenetic early months would be the hardest work of my professional career. I would have bet wrong. What happen through the second half of 1990’s would determine whether IBM was merely going to be one more pleasant, safe, comfortable-but fairly innocuous-participant in the information technology industry, or whether we are once again going to be a company that mattered”.
Too Expensive, Too Slow
In today’s highly competitive, rapidly changing world, any large enterprises can pursue a strategy of total decentralization. It is simply too expensive too slow when significant changes have to be made in the enterprise.
A Step Too Far
Decentralization had gone too far in many institutions. This is most difficult area of common activities, involving a shared approach to winning a market-place, usually a new or redefined market place.
Shift the Power
One of the most surprising things Gerstner learnt about large organizations is the extent to which individual parts of the enterprise behave in an unsupportive and competitive way towards other parts of the organization. Leaders should virtually rip off power from some hands and give it to others.
Measure (and Reward) the Future-Not the Past
Generally people do what we inspect, not what we expect. Leaders who think of creating real integration in their institutions must change the measurement and reward systems to reinforce this new direction
Walk to Talk
Leadership is mandatory before changes become systemic and sustainable. They require real involvement.
Gerstner’s Management Philosophy and Practice.
“I manage by principle, not procedure. The marketplace dictates everything we should do. I’m a big believer in quality, strong competitive strategies and plans, teamwork, payoff for performance and ethical responsibility. I look for people who look to solve problems and help colleagues. I sack politicians’. I am heavily involved in strategy; the rest is yours to implement. Just keep me informed in an informal way. Don’t hide bad information – I hate surprises. Don’t try to blow things by me. Solve problems laterally; don’t keep bringing them up the line. Move fast. If we make mistakes, let them be because we are too fast rather than too slow. Hierarchy means very little to me. Let’s put together in meetings the people who can help solve the problem, regardless of position. Reduce committees and meetings to a minimum. No committee decision making. Let’s have lots of candid, straightforward communications. I don’t completely understand the technology. I’ll need to learn it, but don’t expect me to master it. The unit leaders must be the translators into business terms for me. “I would say a few things. First, don’t be afraid to make mistakes. That’s how you learn, so I believe a lot in trial and error and course corrections. Often companies are unwilling to admit when they’ve made a mistake. We tend to question things more in our business.”
Leading By Principles
The market is the driving force behind everything we do. At our core, we are a technology company with an overriding commitment to quality. Our primary measures of success are customer satisfaction and share holder value. We operate as an entrepreneurial organization with a minimum of beurocracy and a never- ending focus on productivity. We never lose our sight of our strategic vision. We think and act with sense of urgency. Outstanding, dedicated people make it all happen, particularly when they work as a team. We are sensitive to the needs of all employees and to the communities in which we operate.
Few quotes by Louis Gerstner
Computers are magnificent tools for the realization of our dreams, but no machine can replace the human spark of spirit, compassion, love, and understanding.”
“You have to be fast on your feet and adaptive or else a strategy is useless.”
“You can never be comfortable with your success, you've got to be paranoid you're going to lose it.”
"Everything starts with the customer”.
Hope Viewers caught up spark……
Finally he asked for a ten- page report from each business unit leader covering customer needs, product line, competitive analysis, technical outlook, economics, both short- term and long -term key issues and the 1993-1994 outlook.
Change the Fundamental Economic Model
Massive program of expense reduction of $8.9bn in total was undertaken. This led to reduction of workforce by 35,000 in addition to 45,000 laid off earlier in 1992.It was painful, but only way of survival.
Reengineer how IBM did business
Lessons Learned (Elephants can Dance)