At the end of the 20th century there is a rough consensus as to the fundamentals of organizational success. Books like Built to Last by James Collins and Jerry Porras and The Living Company by Arie de Geus have powerfully explored the characteristics of corporate longevity. Their messages can be crudely summarized: Long-lived companies are financially conservative, have strong cultures, nurture talent internally, treat people fairly and have bold, clearly delineated goals. The exemplar of these corporate characteristics throughout much of the century was the International Business Machines Corporation.
Then it unraveled. "Noxious arrogance," in Robert Slater's phrase, took over. The accepted wisdom is that I.B.M.'s arrogance was a creature of the 1980's. The company became aloof, out of touch. Yet Mr. Slater's pithy rendition of the company's history suggests that arrogance was deeply embedded in I.B.M. long before the 1980's. I.B.M.'s founder, Thomas Watson Sr., imbued the organization with a strong strand of self-importance from the very start — calling the company International Business Machines when its international operations were actually negligible is one instance of this. What made I.B.M. great was also its fatal flaw. Its strong culture became overbearing. The company's eventual fall was caused by a commercial misjudgment — I.B.M. backed mainframes — born of arrogance.
In January 1993, I.B.M. announced that it had lost $4.97 billion in the previous year. The chairman and chief executive, John Akers, departed. The company began looking for a miracle worker. In a bizarre move, the I.B.M. Selection Committee talked to more than 100 executives, seeking their views on what to do with the company.
Three months later, Louis V. Gerstner was appointed chairman and chief executive. Mr. Gerstner fares very well in this book. (It does lack a sense of the man behind the executive persona — Mr. Gerstner did not cooperate with the author.) Intelligently, simply and forcefully, he pricked the bubble of arrogance. He did so, in the classic style of a management consultant, by listening and asking questions. When Mr. Gerstner moved, his policies were considered, communicated to all and decisively implemented. A Gerstner mantra is "Communicate self-confidence. Demonstrate leadership." And this, in essence, is what he has done.
What is compelling about Mr. Gerstner is the very simplicity he brings to managing such a huge organization facing decline and laden with intractable problems. Early in his time at I.B.M., Mr. Gerstner, like a headmaster setting a homework assignment, asked the top dozen I.B.M. managers to answer five questions about their businesses: "What business are you in? Who are your customers? What's your marketplace? What are your strengths and weaknesses? Who are your main competitors?" The staggering thing is that the questions had not been asked or answered coherently before.
Mr. Gerstner is not the stereotypical turnaround expert. He eschews immediate drama for long-term renewal. He is not a brutal cost-cutter. Indeed, there is an element of sensitivity evident in his behavior — Mr. Gerstner knows what he is good at, works at what he is poor at and is aware of the full ramifications of his decisions. Comparisons can be made with Thomas Watson Sr. He was a forthright competitor who extolled customer service above all. To Mr. Watson and Mr. Gerstner, products are answers to customer problems. Nothing more.
When Mr. Gerstner was shown the Internet for the first time, his reaction was: "This is great, this is a new channel for business. How do we make it real for customers? How do we make money on it?" The order of these priorities — customers and then profit — is perhaps the vital lesson from Mr. Gerstner's business philosophy.
Unfettered by the company's past, Mr. Gerstner has clearly succeeded in returning I.B.M. to comparative health. Its 1998 revenues were a record $81.7 billion and profits were $6.3 billion. But Mr. Slater strikes a warning note: "The Gerstner miracle is not complete. He has made I.B.M. profitable again. But he has done so relying upon a set of business techniques that have little or nothing to do with spurring the company's growth." The suggestion is that saving a company and growing a company require different skills.
Yet, Lou Gerstner's time at I.B.M. provides potent proof that simple but robust management techniques lie at the heart of corporate success. Mr. Gerstner may or may not be the right person to take I.B.M. forward from where it is now, but his techniques undoubtedly are the right ones if the company is to avoid repeating its decline into arrogance.
Reprint No. 99413
Stuart Crainer (firstname.lastname@example.org) is a U.K.-based business journalist and a contributing editor to strategy+business. Mr. Crainer is author and editor of numerous management books, including the Financial Times Handbook of Management (Financial Times Prentice Hall, 2001) and The Management Century: A Critical Review of 20th Century Thought and Practice (Jossey-Bass, 2000).