Culture and Leadership at IBM
10/2004-5239
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
PERMISSION.
NOTE THAT DETAILS OF ORDERING
INSEAD
CASES ARE FOUND ON THE BACK COVER.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
COPIES
MAY NOT BE MADE WITHOUT
1
INSEAD
5239
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 of the International Business Machines Corporation (IBM). He inherited a company with revenues greater than Microsoft, Intel, and Accenture combined: IBM made $7.5 billion on sales of $89.1 billion in 2003, an increase of nearly 10% on the year before. The company had over 320,000 employees worldwide; it maintained a massive research operation that was awarded 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 recall that 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 years before. IBM was long one of the most profitable companies in the world, but, by 1993, when Gerstner was recruited to lead the company, the prevailing wisdom was that the company was a dinosaur headed for extinction. “IBM’s humiliation is already being viewed by some as a defeat for America,” declared The Economist. “IBM will fold in seven years,” predicted Bill Gates.1 It was widely agreed that, to save itself, IBM needed to be broken up, it needed to abandon its traditional strategy of being a one-stop provider of “solutions”, and it needed to shed 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 a massive transformation that left the company resembling nothing more than its old self—but successful once again. Gerstner was the first outsider ever to lead the company, and he may be the last. He took over from John Akers, a man who had the dubious distinction of presiding over the company’s first loss 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 after that, Akers was gone. During Akers’ tenure, a company proud to be known for its lifetime employment 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. IBM’s share price had dropped, from a high under Akers of $43, to under $13.2 A company once feared as the monopolist of the most important industry in the world still had 300,000 employees and revenues of $65 billion at the end 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 didn’t seem hard for analysts and commentators to identify 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 had a regal aura about him; he exuded a confidence born of the total success he had achieved in every job he’d ever had. He was a forceful speaker, with a firm voice able to command the attention of an audience. Before Akers was named to the top job at IBM, a professor at Harvard Business School showed his MBA students videotapes of a half-dozen senior Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
2
INSEAD
5239
IBMers, and, almost unanimously, the students chose Akers as the man who would become Chairman. “He was the CEO from central casting,” recalled Irving Shapiro, the former chairman of Du Pont and an IBM director. “There was never any question about whether he would 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 he was the exemplary product. It was the IBM culture—the culture once vaunted as the sustainable source of IBM’s competitive advantage—that had brought the company to its knees. The argument went like this. The company was known for its “cult-like” culture that led IBMers to dress the same, to act the same, to think the same and to partake of the same hubris. IBM employees wore blue suits and white shirts; they sang corny company songs but never drank alcohol; they were pampered with expensive benefits; they believed they were the best; and they believed they knew best. Myopic and inward-focused, they missed the implications of the PC revolution and remained in collective denial about the death of their beloved mainframes. IBM’s strong culture had once been lauded by academics and McKinsey consultants alike. In the early 1980s, best-selling books, such as In Search of Excellence, held IBM up as America’s best-run company and attributed its success to its culture.4 The culture boosted the morale of employees, so they worked harder, and it represented a shared mindset that eased coordination among the company’s sprawling units and kept people focused, so they worked better. IBMers shared the same goals, the same approaches 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 proved dangerously ineffective, blinding the company. By the early 1990s, the received wisdom was that, “Neither IBM’s colossal spending on R&D, some $55 billion over the past 10 years, nor its gigantic marketing staff and sales force were enough to alert it to the technological and commercial trends reshaping the industry.”6 Moreover, the culture was a source of inertia and arrogance. Having prevented IBM’s leaders from understanding the changes in the marketplace, it slowed their ability to change the company accordingly. The only solution seemed to be to break up Big Blue, as IBM was known, into individual Baby Blues that, once sold off, could become nimble and entrepreneurial, like the new competitors they faced. Akers started this process by decentralizing the organization’s structure into thirteen autonomous units that were supposed to deal with each other at arm’s length and at market prices, but progress was slow. IBM’s chief financial officer admitted, at the beginning of 1993, 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 formed to look inside and outside the company for a new leader. It took four months for them to find one. The media speculated on the desperation of the committee: Would any qualified person take the job? The man they found, Lou Gerstner, was a former McKinsey consultant and American Express executive and currently the CEO of RJR Nabisco. An outsider in a Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
3
INSEAD
5239
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 to transform the company, to save it, probably by breaking it up and selling pieces off, as he had done at RJR Nabisco. Nine years later, though, on the day of his retirement, he wrote to his fellow IBMers: But along the way, something happened—something 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 experience—and I’ve enjoyed every minute (well, maybe not every minute)! … I am an IBMer for life.8 Gerstner did not break up the company. He revived it. The company once mocked as a hasbeen in the very industry it had created had regained the respect of customers and competitors. The company that everyone said needed to be broken up was still together. The company 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 be profitable with so many employees and so much investment in basic research had more employees than ever and had cut its R&D budget by less than a quarter, while actually increasing the share allocated to basic and applied science from 78% to 87%. The company that everyone said had to ditch its outdated, outmoded, indulgent culture had performed a turnaround that centered around returning the company to its cultural roots. Analysts and commentators agreed that Lou Gerstner had created a revolution within IBM, but Gerstner himself mused, “On one level so much about IBM has changed. On another level very little is different.”
Lou Gerstner Lou Gerstner was not a technologist, and he did not pretend to be. On the day it was announced that he would take over IBM, he was asked by reporters what sort of computer he himself owned. He had a laptop, he said, but he honestly didn’t remember who made it.9 When he was approached by Jim Burke, on behalf of the board, Gerstner told Burke he was not qualified for the job. Burke replied that the board was not looking for a technologist, but rather a broad-based leader and change agent. If that was the desired profile, then Gerstner’s background fitted. He had gone straight from his undergraduate studies at Dartmouth to Harvard 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 Express’s Travel Related 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 by Kohlberg Kravis Roberts & Co., Gerstner sold $11 billion worth of assets in the first twelve months. 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 at American Express and so had seen the arrogant attitude the company could take towards its customers.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
4
INSEAD
5239
I’ll 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 IBM’s 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 IBM’s 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 the company’s second biggest customer at that time, Bethlehem Steel. The report listed 32 recommendations that Bethlehem demanded IBM make, or Bethlehem would take their business elsewhere. Watson’s reaction? To turn the threat around. Knowing that Bethlehem would grind to a halt without IBM’s machines, but that IBM would barely feel the loss, even of such a large customer, Watson wrote to Bethlehem to say that, if they were not satisfied with IBM’s machines, and if IBM was doing such a terrible job, well then IBM would come and 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 never resurfaced.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 the importance of culture. I have spent more than twenty-five years as a senior executive of three different corporations—and 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 organization’s makeup and success—along with vision, strategy, marketing, financials, and the like… I came to see, in my time at IBM, that culture isn’t just one aspect of the game—it is the game.12 There were tremendous strengths in the company’s culture, Gerstner came to recognize— characteristics that no one would want to lose.13 But much of what was wrong with IBM, he diagnosed, lay in its culture as well. And a company’s 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 the next fifteen years.
Thomas Watson, Sr. IBM was born on February 5, 1924. It was on that day that Thomas Watson, Sr. applied to the New York Stock Exchange to change the name of the Computing-Tabulating-Recording Company (C-T-R) to the International Business Machines Company (IBM). The life of Tom Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
5
INSEAD
5239
Watson, Sr. is a rags-to-riches story. He was born, in 1874, on the struggling family farm in rural New York state. Leaving school at 16, he took a series of jobs, including selling sewing machines door to door from a cart. Watson had an intensely superstitious learning style; he drew 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 the local saloon of whatever town he was visiting. According to family lore, one evening Watson came out of a bar having drunk until closing time and found that his horse and cart, and the sewing 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 an apprentice salesman, in 1896. He proved himself an excellent salesman and rose quickly in the company. In 1903, he was picked out by NCR’s notoriously visionary and tyrannical founder, John Patterson, for a special assignment. NCR had a virtual monopoly in the cash register business, and its machines were durable enough that the main competition it faced was from dealers selling older, used NCR machines. Watson’s assignment was to destroy the used cash register business. He went undercover and set up the phony Watson Second-Hand Cash Register Company, which was funded by NCR. The strategy was to move into a market and 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 in city after city.15 He was rewarded for his efforts with an executive post in NCR and became Patterson’s right-hand man. Watson would later say that, “Nearly everything I know about building a business comes from Mr. Patterson.”16 Hallmarks of the IBM culture like the Hundred Percent Club—an elaborate convention where salesmen, who had met their quota, were celebrated and pampered at the company’s expense, while forced to attend long inspirational lectures by their leaders—were 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 delivered results for him. Watson learned another lesson too from Patterson and NCR. In 1912, Patterson, Watson, and twenty-eight other officials and employees of NCR were indicted by a federal grand jury, on charges of criminal violation of the Sherman anti-trust law. The government showed a pattern of deception and intimidation by NCR, including Watson’s used cash register operation, 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 changed—when he decided that a squeaky-clean image and reputation were paramount in business and in life—this was that moment.”18 The relationship between Patterson and Watson soured during this time, and Watson was forced out of NCR by the end of 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 information recorded as punched holes on rectangular cards.19 There is no evidence that Watson saw the future of tabulating machines as information processors, and, indeed, he was no technological visionary. As Chairman of IBM, he would later famously turn down Chester Carlson, who Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
6
INSEAD
5239
tried to interest IBM in his xerography machine—Carlson would go on to found Xerox, and IBM would later spend millions trying to break into the copier business.20 It wasn’t technology that attracted Watson to C-T-R. Watson was a salesman, and he wanted to run his own sales company. C-T-R offered that opportunity. C-T-R was a loose confederation of very different businesses, none of them performing well financially. 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 in C-T-R, he made it clear that he believed, “If you are going to call on important people, you have to dress like them.” This meant dressing in conservative business suits, and the company 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 a small 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 terrible decision; the company boosted production and built up inventories just in time for the bottom to drop out of the economy. Watson resorted to layoffs and salary reductions to get by. Full employment was not part of the culture at that point and wouldn’t be until the company was on 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 the company—something he was intent on doing.23 Over the years, his views became increasingly progressive, as he recognized the importance of loyal, happy workers. Watson disliked the company name, Computing-Tabulating-Recording Company. It seemed to tie his hands, first of all, from selling one or more of the three divisions: computing, tabulating, or recording. He also complained that it wasn’t powerful-sounding, like General Electric or American Telephone and Telegraph, nor was it euphonious. He changed the name to IBM in 1924 and, in so doing, became IBM’s founder.24 Euphony would turn out to be important for the unexpected reason that the company would become known for its Songs of the IBM. In the early 20th century—a time before radio and a time when making music was a common and natural part of many social occasions—it was not unusual for people to sing songs at corporate functions. Watson liked singing, and sycophantic executives took note of this. In particular, Harry Evans proved to have a special talent for taking popular songs and making up his own words, sometimes humorous, more often obsequious, to go along with them. 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 started out 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/ you’re our leader fine/ the greatest in the land We sing your praises from our hearts/ we’re here to shake your hand You’re IBM’s bright guiding star/ you’re big and square and true No matter what the future brings/ we all will follow you. As IBM’s revenues soared, so did Watson’s sense of self-importance. He wanted IBM to be more than a company; he wanted it to be an institution. IBM almost exclusively hired young Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
7
INSEAD
5239
people straight out of college and sent them through up to twelve weeks of education and orientation at the IBM School House in Endicott. Lecturers taught IBM’s history and Watson’s 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 saying “THINK” could be found in every executive’s office, in meeting rooms, factories, cafeterias. The story was often retold of Watson, in one particular meeting, looking for the THINK sign to reinforce a point he was making, only to notice that there wasn’t one. “The THINK sign—where 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 in newspaper cartoons for their ubiquity.30 Watson relished the publicity, as he cultivated the idea 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 success with us.”31
Tom Watson, Jr. Tom Watson, Jr. hated the cult around his father—seeing his father’s mottoes pasted up everywhere, hearing songs about his father, smelling the deference among IBMers to his father.32 From the time Tom Jr. joined IBM in 1937, to the day his father died twenty years later, in 1956, the two fought bitterly. Watson Sr. cherished the idea of passing the company on to his two sons (Tom’s younger brother, Dick, was put in charge of IBM World Trade, the name 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 couldn’t, or wouldn’t, let go. He held onto control of the company, with executives falling over themselves to implement his increasingly idiosyncratic whims, until he became a self-parody, even telling the same stories over and over in meetings. Tom Jr., who had been named IBM’s president in 1952, became increasingly impatient with the interference of his father, who retained the titles of chief executive 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 customers would never trust their data to magnetic storage in place of real pieces of paper they could see and touch. Tom Jr., however, pushed the company into electronics, and everyone in IBM knew that it was his team that had developed the IBM 701—the first successful line of general purpose computers—and he earned the company’s respect as a leader in his own right because of it.33 IBM’s revenues exploded during the post-war economic boom, and that growth continued through the 1950s. In 1955, Tom Jr. appeared on the cover of Time magazine over the caption: IBM’s THOMAS J. WATSON, JR. CLINK. CLANK. THINK.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
8
INSEAD
5239
IBM had become synonymous with the computer, and Thomas Watson, Jr. (to the jealous annoyance 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 and decentralized, Tom Jr. felt it important to codify the philosophy that his dad had espoused in managing the company. He derived three basic beliefs and argued that the company had to be ready to change everything else, except those beliefs. They were: •
Respect for the Individual—Respect 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 them in a superior way.
Until 1993, all new employees were taught the importance of the Basic Beliefs; they were considered the cornerstone of IBM’s culture. “More than technological innovation … more than management and marketing skills … more than industry leadership,” reads a copy of the company’s employee handbook from the 1990s, “IBM’s Basic Beliefs define the company.” The 1960s saw IBM launch the hugely successful System/360 line of mainframe computers that would be the engine of the company’s profits for over twenty years. Fortune magazine called the project, “IBM’s $5,000,000,000 Gamble.” The company spent more money developing System/360 than was spent on the Manhattan Project to develop the atom bomb during World War II. It was the biggest privately financed commercial project ever undertaken, but the biggest risk to the company stemmed from the fact that System/360 would make all of IBM’s current machines obsolete and replace them with a new family of processors. It cannibalized the markets already dominated by IBM. What was revolutionary was that the new machines were all compatible with one another.35 When customers outgrew one machine, they could upgrade to a different System/360 model, without having to replace software or peripherals, such as tape and disk drives and printers. This was extremely popular with customers and helped to lock them into IBM, by making switching to a competitor expensive. For the next twenty years, IBM was essentially a one product-line company, and, on the back of that one product-line, the company grew at a compound rate of 14 percent a year from 1965 to 1985. Gross margins averaged 60 percent during that period, and IBM had a 30 percent share of the market. The company had leap-frogged its competitors and came to dominate 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 without merit” during the Reagan administration. Two things happened to the culture of the company during this period. The first was that the tremendous profitability led to an expansion of employee benefits and programs that made IBM one of the best employers in the world. The second was that the scrutiny from the Justice Department of IBM’s competitive practices led to 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
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
9
INSEAD
5239
John Akers In 1980, IBM had $40 billion in sales. CEO John Opel—a man who had cut his teeth solving manufacturing and logistics problems during the rollout of System/360—gambled the company in the same way that Watson pere and fils had each done again and again. He set a target for IBM to reach $100 billion in sales, by 1990. The company built factories and facilities and hired over 100,000 people through the 1980s, in pursuit of that goal.37 IBM was focused on Japanese competitors, such as Fujitsu, Hitachi and NEC—and also on AT&T which was moving into the computer business—and had decided that the strategy for beating them was to be the low cost provider, by leveraging economies of scale. By 1985, when Opel was replaced by Akers, it looked to be on track to meet its bold goal of $100 billion. Sales of mainframes and of IBM’s unexpectedly successful PCs were booming. The antitrust suit had been dropped. The company looked invincible. Within two years, however, it was clear to Akers and his team that the market had changed dramatically. The cost of computing power dropped dramatically, as chips became cheaper and more powerful much more quickly than anticipated. Computer-industry sales grew by less than 10% annually through the second-half of the 1980s. IBM’s sales didn’t grow at all. Suddenly the company had a massive overcapacity problem. Between 1987 and 1991, Akers slashed manufacturing capacity by 40% and made deep cuts in the workforce—while, technically, not breaking a pledge made by Watson after the Depression that the company would never lay anyone off. He decentralized the management of the company and shifted R&D spending from hardware to software and services. He changed IBM’s arrogant and aloof attitude towards competitors, signing alliances with hundreds of companies, including Apple, Toshiba and Siemens. He pushed forward the development of OS/2, as part of a strategy to take back control of the PC operating system from Microsoft. And he launched a culture change program inside the company, called Market Driven Quality, that was centered around the idea of empowerment and the reality of a new pay-for-performance incentive system. The old social contract, which had been based on expectations of lifetime employment, retraining (because people don’t become obsolete, only skills become obsolete) and equal pay for equal work, was labeled old-fashioned and marked for change. As The Economist wrote, ten days before Akers resigned, “Any defender of Mr. Akers—though it is hard to find one these days—can point out that, far from being content to pursue business as usual, he began to overhaul IBM’s management and operations soon after its sales and profits faltered in his first year.”38 Nevertheless, the company’s fortunes 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 the company; brought in to drive change, he said he dreaded learning the reasons why things were the way they were.39 Gerstner did not learn the IBM culture from reading about the company or asking colleagues about the company or from talking with his predecessor, John Akers. Gerstner did meet with Akers in his first days after taking over, and the two men talked about many subjects, but Gerstner noted later, “What’s striking from my notes is the absence of any mention of culture, teamwork, customers, or leadership—the elements that
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
10
INSEAD
5239
turned out to be the toughest challenges at IBM.”40 Gerstner learned the culture only by living in 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 IBM’s corporate jet from the company’s annual shareholders’ meeting in Tampa, Florida. He turned to the flight attendant and said, “This has been a really tough day. I think I’d like to have a drink.” She said, “You don’t 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 to serve alcohol.” Gerstner recalls saying, “Can you think of anyone who could change that rule?” “Well, perhaps you could, sir.” “It’s changed, effective immediately.”41 The vaunted corporate dress code was changed just as quickly. In his first meeting as Chairman, Gerstner wore a blue shirt with his dark suit and noticed immediately that all of the other men in the room—members of the Corporate Management Board, the top fifty people in the company—were wearing white shirts. The next time the Corporate Management Board met, Gerstner wore a white shirt and found everyone else wearing other colors.42 Lower down in the organization, especially in the research and development labs where customers were rarely seen, informal dress had long been the informal rule. Two years later, the change was made official, when Gerstner abolished the dress code altogether. He notes: When I abolished IBM’s 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 didn’t make; it wasn’t really a “decision.” We didn’t 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 top managers in the company had desks with fancy overhead projectors built into them. A few days after joining IBM, Gerstner called for a meeting with Nick Donofrio, who was then running the System/390 business, to understand the state of the business. Naturally, Donofrio had 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, “Let’s just talk about your business.”44 The news of this action spread by email across the company, worldwide. “Talk about consternation!” Gerstner says with obvious amusement. “It was as if the President of the United States had banned the use of English at White House meetings.” Still, when he tried to hold a meeting of his most senior managers without foils two months later, they insisted they couldn’t do it. As instructed, they prepared only brief presentations, but they nevertheless 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 up each of those hundred.45
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
11
INSEAD
5239
The Value of Non-Concurrence Other cultural patterns were also made evident to Gerstner in those early meetings. Important management meetings at IBM were held around long conference tables, with two rows of chairs behind the principals filled with young executives. These backbenchers were the administrative assistants (AAs) to the senior executives. They took notes, organized things, watched and learned. They provided a back channel of communication between senior executives, through which compromises were hammered out. The career path to the top of IBM typically involved several AA assignments. Gerstner disliked the fact that being an AA taught you more about managing internal politics than about serving the customer or leading subordinates. He disliked even more IBM’s famous “contention system”, which was supposed to encourage debate and a multiplicity of views and reduce the danger of groupthink. The idea of nonconcurrence was that people could agree to disagree, and therefore arguments could be debated passionately without fear of threatening the underlying relationships or the commitment of everyone to work together afterwards. As Buck Rodgers, a vice-president of marketing, who left the company in 1984 to become a public speaker, enthusiastically described it, non-concurrence was a key element of IBM’s successful culture. “Happily, a lot of arguing is done at IBM—about new products, changes in pricing, revisions of terms and conditions, restructuring of the organization and overall long-term objectives.”46 Twenty years after Rogers was writing, Gerstner found that non-concurrence had degenerated into a Culture of No, where “no one would say yes, but everyone could say no.” Gerstner lamented: The situation got even worse, because at least a public nonconsent has to be defended among one’s 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 accident that European employees where not receiving all of his company-wide emails. It turned out that the head of the EMEA (Europe, Middle East, and Africa) unit was intercepting the messages. When Gerstner confronted him and asked why, the manager replied, “These messages were inappropriate for my employees.” 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 complex organization anywhere in the world outside government,” and he quickly came to see that the levers of power in IBM had uncertain effect. The problem was the culture, and Gerstner had learned that he couldn’t change the culture directly. Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
12
INSEAD
5239
Changing the attitude and behavior of hundreds of thousands of people is very, very hard to accomplish. Business schools don’t teach you how to do it. You can’t lead the revolution from the splendid isolation of corporate headquarters. You can’t simply give a couple of speeches or write a new credo for the company and declare that the new culture has taken hold. You can’t mandate it, can’t engineer it. What you can do is to create the conditions for transformation. You can provide incentives. You can define the marketplace realities and goals. But then you have to trust. In fact, in the end, management doesn’t 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 admitted that was an understatement by half. Creating the conditions for that change would mean changing 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 didn’t mean, for Gerstner, was preparing a vision statement. He was widely quoted for a statement he made at a press conference shortly after his 100th day as head of IBM. Announcing 35,000 layoffs, he said: What I’d like to do now is put these announcements in some sort of perspective for you. There’s been a lot of speculation as to when I’m going to deliver 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 strategies for each of its businesses—strategies that deliver performance in the marketplace and shareholder value. And that’s what we’re working on. The press seized on this, especially given his record with RJR Nabisco, as evidence that Gerstner was a mindless cost-cutter. Gerstner felt misunderstood, however. First, the press tended to omit his caveat that “right now” the company didn’t need a vision. His view was the 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 need simply to do a better job serving customers.51 Second, he felt sure the press and IBM’s competitors would laugh if they heard what he really had in mind for the company. Gerstner had, in fact, already made the bold strategic decisions that would shape his ten year tenure at IBM: •
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 an internally focused, process-driven enterprise52
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
13
INSEAD
5239
He intended, in other words, to return IBM to Watson’s roots. But he could not say that in July 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 right and we would stand pat but work harder.53 In essence, Gerstner made two huge gambles. He gambled that, as a unified company, IBM could act as an integrator of technologies, and his experience as a customer—at Amex and at RJR—suggested that people would pay for that. And he gambled that standalone computing would give way to networks, and that mainframes would play a key role in a networked world. These gambles meant keeping Watson’s company intact and reinforcing its key elements. Gerstner calls the decision to keep IBM together, “the most important decision I ever made—not 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,55 Gerstner sought to focus management attention on competitors. Competition—winning, beating the other guys—was everything for Gerstner. “I hate, hate, hate losing,” he said.56 He didn’t see the same hatred in the eyes of the IBMers around him. In the spring of 1994, he called a senior management meeting, to be attended by the top 420 managers in the company. He showed charts tracking the company’s poor performance over the past decade; he showed photographs of the CEOs of their main competitors, such as Bill Gates, Scott McNealy, and Larry 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 I’ve been in this company, and I’ve read every one. I want you to know that I cannot—I cannot—remember a single one that talked with passion about a competitor. Many thousands of them talked with passion about other parts of IBM. We’ve got to generate some collective anger here about what our competitors say about us, about what they’re doing to us in the marketplace. This competitive focus has to be visceral, not cerebral. It’s got to be in our guts, not our heads. They’re coming in to our house and taking our children’s and grandchildren’s college money. That’s what they’re doing.57 To help spread this message, Gerstner wrote out eight principles that he thought should be the underpinnings 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 the competition. 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 Gerstner’s estimation, the Basic Beliefs had lost their power and become empty homilies. Their meaning and interpretation were endlessly debated in the company, sometimes with the sophistication of constitutional lawyers arguing over the doctrine of original intent. In other words, they weren’t so much wrong, rather they had become useless. Gerstner tore up the
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
14
INSEAD
5239
Basic Beliefs and replaced them with his Eight Principles (see Appendix). They weren’t meant to move the company away from the Basic Beliefs; their intent was to breathe life back into the underlying principles that had established the success of the company and give them normative 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 to attend.59 To ensure that the principles of the new culture would become more than just words on a page, Gerstner felt that the measurement and rewards systems must be changed, to match the desired behaviors in the new culture. Thus, every year, each IBM employee listed the actions he 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 pay and 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 generous employee 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 Gerstner’s tenure at IBM were painful ones for the company. They involved massive layoffs, reengineering, centralization of authority, abandonment of beloved projects. As the company’s fortunes improved, and the sense of urgency receded, what would motivate further change and prevent the company from backsliding? The company’s golden age—much of it reality, but at least part of it illusion—had 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. Kennedy’s promise to put a man on the moon. A grand project to focus attention and generate enthusiasm. A moon shot. It would come in the form of “e-business”, a term IBM credits itself with having coined and made real. The company has spent more than $5 billion in e-business marketing and communications, to explain the concept and position itself to customers (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 IBM’s culture. In the end, it took ten years, and still we might ask whether culture change had actually been achieved and, if so, was it permanent? Gerstner was the first to say that constant reinforcement would be necessary, if the company was to avoid falling back into the arrogance of success.62 The change is fragile, and it is ongoing. The key, Gerstner says, is that his successor continues to communicate clear strategies and values, reinforces those values in everything the company does and allows people the freedom to act, trusting they will execute, consistent with those values.63
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
15
INSEAD
5239
If you ask me today what single accomplishment I am most proud of in all my years at IBM, I would tell you this—that 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 love with the company and returned it to its roots. He held the CEO job longer than any other man, 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 entire careers in the company, he would always be an outsider. Unlike his successor, Sam Palmisano, Lou Gerstner didn’t bleed blue.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
16
INSEAD
5239
Appendix Thomas Watson, Jr.’s Basic Beliefs Respect for the Individual Respect 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 them in 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 should work. In fact, the entire industry faces this problem. We are all guilty of producing confusing technology and then making it instantly obsolete. IBM has to focus on serving our customers and, in the process, beating the competition. Success in a company comes foremost from success with the customer, 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 the answer is easy: Technology has always been our greatest strength. We just need to funnel that knowledge into developing products that serve our customers’ needs above all else. The benefits will flow 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 IBM’s success going forward—operating margins, revenue growth, something else. The best measure I know is increased shareholder value. And no company is a success, financially or otherwise, without satisfied customers. 4. We operate as an entrepreneurial organization with a minimum of bureaucracy and a neverending focus on productivity This will be hard for us, but the new, warp-speed marketplace demands that we change our ways. The best entrepreneurial companies accept innovation, take prudent risks, and pursue growth, by both expanding old businesses and finding new ones. That’s exactly the mindset we need. IBM has to move 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 who you 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, and debates. But in this industry, at this time, it’s often better to be fast than insightful. Not that planning and analysis are wrong—just not at the expense of getting the job done now.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
17
INSEAD
5239
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 cherish—and will reward—teamwork, 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 isn’t 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.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
18
INSEAD
5239
Notes 1
2 3 4
5
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
38 39 40 41
Gerstner, Louis. 2002. Who Says Elephants Can’t Dance: Inside IBM’s Historic Turnaround. New York: HaperCollins. Pages 10-13. Adjusted for subsequent stock splits. Carroll, Paul. 1993. Big Blues: The Unmaking of IBM. New York: Crown. Page 153. Peters, Tom and Robert Waterman. 1982. In Search of Excellence: Lessons from America’s Best-Run Companies. New York: Warner Books. Deal, Terrence and Allen Kennedy. 1982. Corporate Cultures: The Rites and Rituals of Corporate Life. London: Penguin. Page 15. The Economist. “What went wrong at IBM?” January 16, 2003. Page 23. Ibid. Gerstner. Page 279. Carroll. Page 355. Gerstner. Page 4. Maney, Kevin. 2003. The Maverick and His Machine. New York: Wiley. Page xxiv. Gerstner. Page 181-182. Gerstner. Page 214. Maney. Page 17. Maney. Pages 6-9. Watson, Thomas, Jr. 1990. Father Son & Co. New York: Bantam. Page 13. Maney. Page 11. Maney. Page 25. Maney. Page 43. Maney. Page 331. Maney. Pages 71-4. Maney. Page 87. Maney. Page 107. Maney. Page 89. Maney. Page 118. Watson. Page 68-9. Maney. Page 241. Watson. Page 68. Maney. Page 192. Maney. Page 147-48. Maney. Page 150. Maney. Page 273. Maney. Page 361-63. Watson. Page 240-41. Watson. Page 346-52. Gerstner. Page 116-18. 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. The Economist. “What went wrong at IBM?” January 16, 2003. Page 23. Gerstner. Page 282. Gerstner. Page 26-27. Gerstner. Pages 39-40.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
19
INSEAD
42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
Gerstner. Pages 21-22. Gerstner. Pages 104-105. Gerstner. Page 43. Carroll. Page 355. Rogers, Buck. 1986. The IBM Way. New York: Harper and Row. Page 137. Gerstner. Page 193. Gerstner. Page 87. Gerstner. Page 187. Gerstner. Page 188. Gerstner. Page 71. Gerstner. Page 72. Gerstner. Page 72. Gerstner. Page 61. See Changing the Culture at IBM case for more details of these initiatives. Gerstner. Page 207. Gerstner. Page 204. Gerstner. Pages 200-202. Gerstner. Page 209. Gerstner. Page 97-100. Gerstner. Page 212. Gerstner. Page 109. Gerstner. Page 234 Gerstner. Page 73.
Copyright © 2004 INSEAD, Fontainebleau, France.
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
5239
To order INSEAD case studies please contact one of the three distributors below: The European Case Clearing House (ECCH)
www.ecch.cranfield.ac.uk Tel: 44 (0) 1234 750 903 Fax: 44 (0) 1234 751 125 E-mail:
[email protected]
www.ecch.cranfield.ac.uk Tel: 1 781 239 5884 Fax: 1 781 239 5885 E-mail:
[email protected]
Boulevard de Constance, 77305 Fontainebleau Cedex, France. Tel: 33 (0)1 60 72 40 00 Fax: 33 (0)1 60 74 55 00/01 www.insead.edu
Centrale des Cas et de Médias Pédagogiques
www.ccip.fr/ccmp/ Tel: 33 (0) 1.55.65.65.97 Fax: 33 (0) 1.40.54.06.93 E-mail:
[email protected]
1 Ayer Rajah Avenue, Singapore 138676 Tel: 65 6799 5388 Fax: 65 6799 5399
Printed by INSEAD
This document is authorized for use by Wiwik Istiyarini Any unauthorized use or reproduction of this document is strictly prohibited.
