One of a series of case studies about companies over the last century that have transformed impossibilities into “repossibilities”. They attained greater success because of – not despite – the crisis they faced.
This case study examines the lessons from one corporate whale that emerged victorious from what seemed to be a certain road to business failure. Specifically, it offers the reader useful lessons in:
- How company culture can make a significant difference to innovation and growth
- How to bring about a much-needed change in culture and employee mindset
- How to drive employees towards creating customer-focused solutions
Lou Gerstner looked out at the audience from the podium at the front of the large conference room. Seated before him were around 50 of IBM’s most important employees – the executives in charge of on-the-ground operations for the company’s headquarters around the world. While there were many impressive individuals in the room, what he saw was a sea of white shirts – making him stand out even more in his blue button-down.
Yes, there was definitely a kind of old-fashioned, uniform insularity about them all. And now that the polite applause was tapering off, they were even all sitting there staring up at him with the same facial expression, which could only be described as something akin to collective shell shock.
Gerstner certainly couldn’t fault them for that though. The meeting had been convened to officially elect him as IBM’s new CEO and, undoubtedly, they had expected him to do little more than offer a token word about commitment to their success. His forty-five minute speech that laid out a radical course of action designed to completely transform the corporate culture must have come as quite a shock.
But that was exactly what IBM needed and he had just unapologetically said as much. In fact, since he was in the business of shaking up the whole system, he might just go ahead and eliminate the dress code . . .
Hard times for Hardware
Gerstner did, in fact, get rid of the company dress code shortly after that first executive meeting in early 1993. A minor issue in the larger scheme of things, IBM’s white-shirt-and-tie dress code nevertheless said something about how the company had become obsessed with doing things the way “things had always been done.” Gerstner, on the other hand, was an outsider more interested in finding new ways that actually got things done. And given the crisis at hand when he arrived, it meant finding new ways to do just about everything.
When Gerstner took over, the company was in serious trouble. IBM had made its name as the leader in mainframe technology and hardware manufacturing, which had dominated the business world since the 1950s. For decades, the three letters IBM were the symbol of excellence in the US and around the world. A career at IBM was a highly-sought prize by the best and the brightest. A perennial leader in patents and Nobel Prize laureates, IBM was not just a company – it was a veritable institution and model citizen. Its products were even featured in movies and its competitors were simply known merely as “IBM clones.”
Beginning in the 1980s, however, the market began to move away from the larger data processing machines like IBM’s System 360 to smaller personal computers. As this happened, IBM’s primary revenue source began to drop like a stone. In the first three years of the 1990s, hardware sales dropped 50% leading to a loss of over $14 million. Meanwhile, though the company had begun to explore production of smaller microprocessors, it was far from enough to offset the sinking profits. In 1991 the company had to report that it was $1 billion in the red. And by the following year, they announced a loss of $8.1 billion – at the time the largest annual loss in corporate history.
It became clear that IBM would have to cut tens of thousands of jobs for survival, and some industry analysts even thought IBM was headed for bankruptcy. With the company in utter disarray, in 1993 John Aker stepped down as CEO, and Louis Gerstner left his position as CEO of Nabisco to bring the company back from the brink.
The CEO who was a customer first
As an outsider who had cut his teeth at McKinsey before heading American Express and most recently served as the “Cookie Man,” or CEO of Nabisco, Gerstner had a unique vantage point that proved to be the exact corrective needed to turn IBM around. After all, as he liked to say, he was a longstanding IBM customer himself. At American Express, he had seen the arrogance with which IBM treated its customers.
What Gerstner could see that those on the inside could not, was that it wasn’t simply the company’s inability to keep up with the external crisis of a changing market. After all, IBM had been at the vanguard of the PC revolution. Nor were mainframes finished – they were critical for every large company. The problems were far more deep-seated than that – the real threat was coming from within.
One of the issues was structural – IBM had effectively become a “parts” manufacturer. Under Aker, there had been a major organizational shift underway towards horizontal integration that led to outsourcing and atomized departments who operated independently and with little accountability. This resulted in a fatal lack of communication and coordinated efforts within the company. Even more problematic than the fragmented production line, however, was a bad habit of departmental competition. Rather than worrying about rival companies, the different divisions were more worried about outdoing each other.
The other real problem pertained to corporate culture – the company had grown arrogant and inward-looking. Or as Gerstner put it, IBM had become “inbred and ingrown.” Despite the falling profits, the company continued to look at itself as the leader in cutting edge technology. For instance, all its software worked only with IBM hardware, although Microsoft, the acknowledged leader in the software space by then, had already changed the rules of the game.
Rather than being receptive to outside ideas, the various departments were effectively only drawing from within – borrowing ideas from competing divisions and rehashing old IBM concepts. It was like the company culture of white shirts and IBM-specific jargon – everything looked vaguely similar, was slightly out of date, and strictly geared for internal-use.
The confluence of this general attitude of insular arrogance with the tendency towards internal competition made for a deadly mix. In the IBM world, the customer had been effectively eliminated from the equation. And that, above all, was what Gerstner could see as an outsider.
From this perspective, he could see that there much work to be done on IBM’s product lines and services before a customer would check-off the “highly satisfied” box. But, for this to happen, IBM needed to go from compartmentalized units to a cohesive, integrated whole that was working together towards a common goal — satisfying the end-customer. In short, IBM had to go from ego-centric to customer-centric.
Taking a horse to water AND making it drink
The primary tasks at hand for Gerstner were to put a stop to the infighting and refocus attention on the customer. There was no way they could be competitive on the market if they were too busy shooting themselves in the foot all the time. This was of course easier said than done. It wasn’t as if earlier management had never discussed the need for teamwork. He could take the horse to the water, but how was he to make it drink?
Part of the solution was fairly obvious; he needed to put the brakes on Aker’s plan, which had already broken up much of the company into multifarious parts and was continuing to split the company into independent operating units. Gerstner realized that there would always be place for a top-tier consulting firm that could help customers get the best use from their technology purchases. IBM was best placed to do that, with its wide range of products and services. But, the company units had to stop thinking of themselves as selling individuals offerings and adopt a more holistic approach that leveraged all of the pieces of IBM – hardware, services and software – to deliver top-to-bottom technology solutions.
To incentivize the process, Gerstner implemented programs that rewarded teamwork over individual accomplishments. For instance, he mandated that every employee would make three “personal business commitments,” or actions to fulfill broader IBM commitments. Performance against those commitments was directly tied to salary. He also created bonuses that were linked to the performance of the whole company rather than to the success of specific departments. Previously, there had been a lot of talk about ‘the need to change’, but these tough measures led employees to realize that their company was really going to be different, and that they had to change, if they wanted to reap the benefits.
To get employees’ acceptance of the new plan, Gerstner began rolling out regular e-mails keeping them updated on the changes that he was bringing out. This kind of open communication with employees across divisions was itself something of a first for IBM. (Gerstner’s book on the turnaround, ‘Who says Elephant’s can’t dance?’, talks about a European manager who actually blocked some of these mails because he thought they were ‘inappropriate’ for his staff!)
He also unified IBM’s voice by consolidating its many advertising agencies down to one, Ogilvy & Mather. This reduced the competing confusion and mixed branding that IBM had profligately overwhelmed its customers with. Along with offering a unified service to customers, the company was going to offer one common brand message for all IBM products and services around the world.
Finally, it also meant making customer-driven financial decisions, like cutting products such as OS/2, the proprietary software system which had been a longstanding company favorite but a flop on the market. Large corporate software packages that were considered tried and true, but in actuality were cash-drains, also got the axe. The new IBM wasn’t creating products for itself or out of respect for corporate custom; it was creating products for the customers. This in turn led to strategic choices about which divisions to downsize.
Turning the Supertanker
Gerstner’s plans revolutionized every aspect of IBM corporate culture – from dress codes to attitude and orientation. Blue and other color button-downs even became the norm as employees traded in their stodgy whites for a more relaxed look.
However, the new IBM wasn’t just different in look and feel. It was also back in the black and once again a leader in the industry. By 1994, IBM was again solvent. IBM had achieved what was arguably the impossible, going from $8 billion in the hole to $3 billion in profit. And by the end of the decade, not only was IBM seeing year after year of increased growth, but was even being hailed as the leader of the newly emergent ‘e-business’ market, a term that the company had coined.
Undoubtedly, much of this success derived from Gerstner’s role as an outsider — in fact the first outsider with to head IBM in eight decades. As he had no history with IBM, he was not afraid to make decisions that were radically different – and in some cases unpopular. It also enabled him to approach the crisis without undue attachment to company canon. This gave him room to revamp management, lay off employees when necessary, and carve out new strategies. Most importantly, he re-introduced the customer perspective, moving IBM away from its inward looking attitude.
In so doing, he engineered a complete turnaround for the company and led it from being a hardware manufacturer to a complete IT services corporation. Cut to 15 years later – despite the economic slowdown and the pressure on IT spending, IBM is among the handful of companies that is able to predict a positive outlook for itself this year. Fifteen years since it was in the red, “Big Blue” is one of the tech industry’s biggest success stories.
Lessons For Your Business
So why was IBM successful and what can we learn from it?
Rejuvenation Begins with a Customer Perspective. The enemy is not always on the outside. Companies that ignore customers for years can suddenly find themselves in a crisis, when the debt from years of neglect and mismanagement comes due. Companies need to remain customer-responsive.
Continue to build. Sitting on your laurels is a sure sign of decline, as Jim Collins identifies as one of the five stages of irrelevance in “How the Mighty Fall“. Even the most exalted companies are subject to the same cycle of organizational entropy that besets “mortals.”
Even restructuring must have a customer bias. Restructuring is not just about cost cutting or financial alignment. In the long term, restructuring brings positive results only when it is based on changing customer trends and industry movement.
Enabling change needs objectivity. Sometimes, company policy or thought is so entrenched that change becomes purely a buzzword. When change is not possible from inside, it must be driven from an objective outsider with no existing alliances or biases.
Making change customer-relevant. Change is not important for its own sake. Businesses must change because consumers change and competition changes. The only way to drive effective change is to do so from the perspective of the customer the company serves.
Taking the team along. Without employee commitment, change is impossible. Even during bad times, a fully-committed workforce can equip the company to do things otherwise not possible. However, employee commitment is not there for the asking. It must be built and nurtured.
From Navel-gazing Mainframe Maker
To Customer-centric Information Leader
How to Get There
What does it take to achieve gains like these?
We introduced this case with a bold claim that companies can actually become exceptionally successful by learning how to transform impossibilities into “repossibilities”. But the opportunity to do this is not the same as actually doing it. There needs to be a process and a catalyst to actually make this happen. Of course, a challenge does not need to be life-threatening for a company to become remarkably more successful from overcoming it.
Based on learning from this and other companies, we have created a 90-day process for identifying and implementing the kind of change that is right for your company. We call this Repossibility™ Planning:
- Repossibility Assessment: This one-day overview of your company’s marketscape helps your leadership team think about its existing challenges in new ways, finding several areas for exploration into new ways to grow revenue.
- ProspectScan: Our creative exploratory research with both your “near” customers and “next” prospects identifies revenue opportunities by finding new ways of connecting with them. We distill and communicate this in Prospect Personas powered by the Key Buying Insight.
- Repossibility Workshop: We bring intelligence from your customers and their customers to identify directions that will enable your company to exploit the opportunities turned up by the downturn. The workshop infuses your team with opportunistic energy and vision, building momentum to take action.
- Direction Selection: Based on your target’s reactions to your potential directions, we refine and select with you the strongest single direction for re-engaging direct and end customers so you drive a greater share of your industry value chain.
- Market Activation Plan (M.A.P.): Using our unique web-powered CollaborAction™ process, the MAP engages employees in your company to embrace an exciting new way of engaging direct and end customers in a way that overcomes fear, builds buy-in, generates energy, and taps employee passion that overcomes the traditional barriers to implementing success.
Of course, a company can accomplish all these changes on its own. In fact, no amount or quality of consultants can change a company. But an outside catalyst can accelerate and enhance the adoption of a new revenue-generating customer strategy. These five characteristics are indicators that working with an independent, focused, and experienced partner would help:
- You believe that what worked for your company in the past is not necessarily the best path for you now. Many companies continue to do what worked in the past, even though those strategies have little chance of success in the current environment, simply because inertia makes a change too risky for internal employees to recommend.
- You believe the infusion of fresh, independent, outside perspective could have a catalytic impact on your entire company.
- You believe the smart, experienced employees already in place are the best to help form and implement the vision that will take your company from where it is to where it needs to go.
- But you are busy running your company as it is. You don’t have internal people sitting around who can take your management team through a proven process.
- You want to get started in the right direction now, before more of your resources, time, and energy are depleted and give yourself the most time to reap the benefit of your turnaround effort.