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Who Says Elephants Can't Dance?
Louis V. Gerstner, Jr.
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Who Says Elephants Can't Dance?
Louis V. Gerstner, Jr.
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About This Book
In 1990, IBM had its most profitable year ever. By 1993, the computer industry had changed so rapidly the company was on its way to losing $16 billion and IBM was on a watch list for extinction -- victimized by its own lumbering size, an insular corporate culture, and the PC era IBM had itself helped invent.
Then Lou Gerstner was brought in to run IBM. Almost everyone watching the rapid demise of this American icon presumed Gerstner had joined IBM to preside over its continued dissolution into a confederation of autonomous business units. This strategy, well underway when he arrived, would have effectively eliminated the corporation that had invented many of the industry's most important technologies.
Instead, Gerstner took hold of the company and demanded the managers work together to re-establish IBM's mission as a customer-focused provider of computing solutions. Moving ahead of his critics, Gerstner made the hold decision to keep the company together, slash prices on his core product to keep the company competitive, and almost defiantly announced, "The last thing IBM needs right now is a vision."
Who Says Elephants Can't Dance? tells the story of IBM's competitive and cultural transformation. In his own words, Gerstner offers a blow-by-blow account of his arrival at the company and his campaign to rebuild the leadership team and give the workforce a renewed sense of purpose. In the process, Gerstner defined a strategy for the computing giant and remade the ossified culture bred by the company's own success.
The first-hand story of an extraordinary turnaround, a unique case study in managing a crisis, and a thoughtful reflection on the computer industry and the principles of leadership, Who Says Elephants Can't Dance? sums up Lou Gerstner's historic business achievement. Taking readers deep into the world of IBM's CEO, Gerstner recounts the high-level meetings and explains the pressure-filled, no-turning-back decisions that had to be made. He also offers his hard-won conclusions about the essence of what makes a great company run.
In the history of modern business, many companies have gone from being industry leaders to the verge of extinction. Through the heroic efforts of a new management team, some of those companies have even succeeded in resuscitating themselves and living on in the shadow of their former stature. But only one company has been at the pinnacle of an industry, fallen to near collapse, and then, beyond anyone's expectations, returned to set the agenda. That company is IBM.
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Topic
Negocios y empresaSubtopic
GestiónPART 1
Grabbing Hold
1
The Courtship
On December 14, 1992, I had just returned from one of those always well-intentioned but rarely stimulating charity dinners that are part of a New York City CEO’s life, including mine as CEO of RJR Nabisco. I had not been in my Fifth Avenue apartment more than five minutes when my phone rang with a call from the concierge desk downstairs. It was nearly 10 P.M. The concierge said, “Mr. Burke wants to see you as soon as possible this evening.”
Startled at such a request so late at night in a building in which neighbors don’t call neighbors, I asked which Mr. Burke, where is he now, and does he really want to see me face to face this evening?
The answers were: “Jim Burke. He lives upstairs in the building. And, yes, he wants very much to speak to you tonight.”
I didn’t know Jim Burke well, but I greatly admired his leadership at Johnson & Johnson, as well as at Partnership for a Drug-Free America. His handling of the Tylenol poisoning crisis years earlier had made him a business legend. I had no idea why he wanted to see me so urgently. When I called, he said he would come right down.
When he arrived he got straight to the point: “I’ve heard that you may go back to American Express as CEO, and I don’t want you to do that because I may have a much bigger challenge for you.” The reference to American Express was probably prompted by rumors that I was going to return to the company where I had worked for eleven years. In fact, in mid-November 1992, three members of the American Express board had met secretly with me at the Sky Club in New York City to ask that I come back. It’s hard to say if I was surprised—Wall Street and the media were humming with speculation that then CEO Jim Robinson was under board pressure to step down. However, I told the three directors politely that I had no interest in returning to American Express. I had loved my tenure there, but I was not going back to fix mistakes I had fought so hard to avoid. (Robinson left two months later.)
I told Burke I wasn’t returning to American Express. He told me that the top position at IBM might soon be open and he wanted me to consider taking the job. Needless to say, I was very surprised. While it was widely known and reported in the media that IBM was having serious problems, there had been no public signs of an impending change in CEOs. I told Burke that, given my lack of technical background, I couldn’t conceive of running IBM. He said, “I’m glad you’re not going back to American Express. And please, keep an open mind on IBM.” That was it. He went back upstairs, and I went to bed thinking about our conversation.
The media drumbeat intensified in the following weeks. Business-Week ran a story titled “IBM’s Board Should Clean Out the Corner Office.” Fortune published a story, “King John [Akers, the chairman and CEO] Wears an Uneasy Crown.” It seemed that everyone had advice about what to do at IBM, and reading it, I was glad I wasn’t there. The media, at least, appeared convinced that IBM’s time had long passed.
The Search
On January 26, 1993, IBM announced that John Akers had decided to retire and that a search committee had been formed to consider outside and internal candidates. The committee was headed by Jim Burke. It didn’t take long for him to call.
I gave Jim the same answer in January as I had in December: I wasn’t qualified and I wasn’t interested. He urged me, again: “Keep an open mind.”
He and his committee then embarked on a rather public sweep of the top CEOs in America. Names like Jack Welch of General Electric, Larry Bossidy of Allied Signal, George Fisher of Motorola, and even Bill Gates of Microsoft surfaced fairly quickly in the press. So did the names of several IBM executives. The search committee also conducted a series of meetings with the heads of many technology companies, presumably seeking advice on who should lead their number one competitor! (Scott McNealy, CEO of Sun Microsystems, candidly told one reporter that IBM should hire “someone lousy.”) In what was believed to be a first-of-its-kind transaction, the search committee hired two recruiting firms in order to get the services of the two leading recruiters—Tom Neff of Spencer Stuart Management Consultants N.V., and Gerry Roche of Heidrick & Struggles International, Inc.
In February I met with Burke and his fellow search committee member, Tom Murphy, then CEO of Cap Cities/ABC. Jim made an emphatic, even passionate pitch that the board was not looking for a technologist, but rather a broad-based leader and change agent. In fact, Burke’s message was consistent throughout the whole process. At the time the search committee was established, he said, “The committee members and I are totally open-minded about who the new person will be and where he or she will come from. What is critically important is the person must be a proven, effective leader—one who is skilled at generating and managing change.”
Once again, I told Burke and Murphy that I really did not feel qualified for the position and that I did not want to proceed any further with the process. The discussion ended amicably and they went off, I presumed, to continue the wide sweep they were carrying out, simultaneously, with multiple candidates.
What the Experts Had to Say
I read what the press, Wall Street, and the Silicon Valley computer visionaries and pundits were saying about IBM at that time. All of it certainly fueled my skepticism and, I believe, that of many of the other candidates.
Most prominent were two guys who seemed to pop up everywhere you looked, in print and on TV—Charles Morris and Charles Ferguson. They had written a book, Computer Wars, that took a grim view of IBM’s prospects. They stated: “There is a serious possibility that IBM is finished as a force in the industry. Bill Gates, the software tycoon whom everybody in the industry loves to hate, denies having said in an unguarded moment that IBM ‘will fold in seven years.’ But Gates may be right. IBM is now an also-ran in almost every major computer technology introduced since 1980.…Traditional big computers are not going to disappear overnight, but they are old technology, and the realm in which they hold sway is steadily shrinking. The brontosaurus moved deeper into the swamps when the mammals took over the forests, but one day it ran out of swamps.”
Their book concluded that “the question for the present is whether IBM can survive. From our analysis thus far, it is clear that we think its prospects are very bleak.”
Morris and Ferguson wrote a longer, more technical, and even grimmer report on IBM and sold it to corporations and institutions for a few thousand dollars per copy. Among others, it frightened a number of commercial banks that were lenders to IBM.
Paul Carroll, IBM’s beat reporter at The Wall Street Journal, published a book that year chronicling IBM’s descent. In it, he said: “The world will look very different by the time IBM pulls itself together—assuming it can pull itself together—and IBM will never again hold sway over the computer industry.”
Even The Economist—understated and reliable—over the span of six weeks, published three major stories and one lengthy editorial on IBM’s problems. “Two questions still hang over the company,” its editors wrote. “In an industry driven by rapid technological change and swarming with smaller, nimbler firms, can a company of IBM’s size, however organized, react quickly enough to compete? And can IBM earn enough from expanding market segments such as computer services, software, and consulting to offset the horrifying decline in mainframe sales, from which it has always made most of its money?
“The answer to both questions may be no.”
And, said the usually sober Economist, “IBM’s humiliation is already being viewed by some as a defeat for America.”
The Decision
The turning point in my thinking occurred over Presidents’ Day weekend in February 1993. I was at my house in Florida, where I love to walk the beach, clearing and settling my mind. It’s very therapeutic for me. During an hour’s walk each day that weekend, I realized that I had to think differently about the IBM situation. What prompted my change of heart was what was happening at RJR Nabisco. As I noted in the Introduction, it had become clear that KKR had given up on making its leveraged buyout work as planned. There were two reasons for this. First, as discussed in Bryan Burroughs and John Helyar’s book Barbarians at the Gate, in the fury and madness of the bidding process in 1988, KKR overpaid for RJR Nabisco. This meant that despite achieving all of the restructuring objectives of the LBO, there simply wasn’t enough operating leverage to produce the projected returns. Second, the operating returns from the tobacco business were under pressure as a result of a price war started by Philip Morris soon after the RJR Nabisco buy out. Philip Morris was simply following the advice of Ray Kroc, founder of McDonald’s, who’d once said, “When you see your competitor drowning, grab a fire hose and put it in his mouth.”
KKR obviously was working on an exit strategy. As I walked the beach that February, I decided I should be doing the same thing. And so, as much as anything else, the view that I would not be at RJR Nabisco too much longer was what got me thinking more about the IBM proposal.
I called Vernon Jordan, the Washington attorney who was a longtime friend as well as a director of RJR Nabisco, and asked his advice. He confirmed my feeling that KKR was ready to move out of RJR Nabisco and that this phase of the company’s tumultuous life was coming to an end. Also, it was clear that Jim Burke had already talked with Vernon, because Vernon knew I was on the IBM list. His advice was, as usual, to the point. He said, “IBM is the job you have been in training for since you left Harvard Business School. Go for it!”
I suppose there was a second reason I changed my mind. I have always been drawn to a challenge. The IBM proposition was daunting and almost frightening, but it was also intriguing. The same was true of RJR Nabisco when I’d joined it in 1989. I think it is fair to say that from February 15 on, I was prepared to consider taking on IBM and its problems. Vernon got word to Jim Burke that I might be in play after all. I began to organize my questions and concerns for Burke and his committee.
When Burke called later that week, I told him that I would take a look at the IBM job. I told him I would need a lot more information, particularly about the company’s short- and intermediate-term prospects. The dire predictions of the media and the pundits had me worried. I had learned a hard lesson at RJR Nabisco: A company facing too many challenges can run out of cash very quickly.
I told Burke that I wanted to meet with Paul Rizzo. Paul had been an executive at IBM in the 1980s. I had met him on several occasions and admired him greatly. He had retired from IBM in 1987 but had been called back by the IBM Board of Directors in December 1992 to work with John Akers to stem the decline of the company. I told Burke during that February phone call that I wanted to go over the budget and plans for 1993 and 1994 with Rizzo.
Jim moved quickly, and on February 24, at the Park Hyatt hotel in Washington, D.C., where I was attending a meeting of The Business Council, I broke away for an hour and a half to meet secretly with Paul in my hotel room. He had brought me the current financials and budgets for the company.
The discussion that ensued was very sobering. IBM’s sales and profits were declining at an alarming rate. More important, its cash position was getting scary. We went over each product line. A lot of the information was difficult to evaluate. However, Paul clearly underscored the make-or-break issue for the company: He said that mainframe revenue had dropped from $13 billion in 1990 to a projection of less than $7 billion in 1993, and if it did not level off in the next year or so, all would be lost. He also confirmed that the reports in the press about IBM pursuing a strategy of breaking up the company into independent operating units was true. I thanked Paul for his honesty and insight and promised to treat the material with total confidentiality.
When he left the room, I was convinced that, on the basis of those documents, the odds were no better than one in five that IBM could be saved and that I should never take the position. A consumer products company has long-term brands that go on forever. However, that was clearly not the case in a technology company in the 1990s. There, a product could be born, rise, succeed wildly, crash, disappear, and be forgotten all within a few years. When I woke up the next morning, I was convinced IBM was not in my future. The company was slipping rapidly, and whether that decline could be arrested in time—by anyone—was at issue.
Still, Jim Burke would not give up. His persistence may have had more to do with a growing desperation to get anyone to take this job than it did with a particular conviction that I was the right candidate. I wondered at this point if he was just trying to keep a warm body in play.
Two weeks later I was back in Florida for a brief vacation. Burke and Murphy insisted on a meeting to pursue the issue one last time. We met in a new house that headhunter Gerry Roche and his wife had just built in a community near my own. Roche only played the role of host. In his new living room, it was Burke, Murphy, and me alone. I remember that it was a long afternoon.
Bu...