The Cookie Salesman Who Revived IBM

Context

In 1993, technology giant IBM reported losses of US$8bn. This financial strain was reflected in the company’s stock price, which plummeted from $43 in 1987 to just $12 by then. There was a steep decline in investor confidence and market value.

The appointment of Lou Gerstner as CEO and chairman of IBM was ridiculed by many because of his lack of experience in the computer industry. Despite the criticism, he managed to turn IBM around.

What strategies did he employ to achieve this, and what lessons can be drawn from his leadership?

Real-Life Story

Market analysts and other tech giants were already predicting the end of IBM in the early 90s. Microsoft’s Bill Gates said IBM would fold within seven years, while Oracle’s Larry Ellison called IBM “irrelevant”.

With Lou Gerstner at the helm, critics wondered if IBM’s board of directors was hastening the company’s demise.

Gerstner previously led changes at American Express and RJR Nabisco and primarily had experience in consumer sales. At IBM, he had to steer major business-to-business relations.

Pricing Strategy

Most of IBM’s profits were derived from its mainframe sales, which were rapidly declining. The prevailing belief was that mainframes were becoming obsolete and overshadowed by personal computers.

Yet, Gerstner recognised how mainframes were still essential for managing large-scale operations such as global credit card transactions and airline systems. The real issue for IBM was not the relevance of its mainframes but its pricing.

He proposed a strategy to reduce prices for customers, which he believed was crucial for maintaining competitiveness in the mainframe market.

Moving as One

Gerstner also wanted IBM to move more cohesively as an organisation. Before he took over, IBM had plans to break up the enterprise into smaller units. He reversed that plan and kept IBM intact. “At the end of the day, in every industry, there’s an integrator,” he recounted in his memoir.

Another drastic change Gerstner introduced was around culture. He saw how business units competed aggressively with one another, leading to feelings of jealousy and a lack of transparency and collaboration.

As CEO, he regularly sent out emails to all employees to keep everyone on the same page, and overhauled compensation to reward teams based on the overall performance of the enterprise. He emphasised a culture of customer-centricity instead of competition.

PostScript: In 2002, when Gerstner stepped down as CEO, the market capitalisation of IBM grew to $168bn, more than 5x its market cap when he first took over.

Key Lessons

Lou Gerstner’s leadership and turnaround of IBM offer five lessons for WarTime CEOs:

• Recognise core strengths. Despite prevailing market trends, Gerstner saw the intrinsic value in IBM’s mainframes for large-scale operations. CEOs should identify and leverage their company’s core strengths, even if they seem out of step with current trends.

• Adapt pricing strategies. Gerstner’s approach to reducing prices to remain competitive highlights the importance of adapting pricing strategies to meet market demands and sustain growth.

• Maintain organisational unity. Gerstner chose to keep IBM intact rather than splitting it into smaller units, understanding the value of integration across the company. This demonstrates the significance of maintaining unity and coherence in achieving long-term success.

• Foster a collaborative culture. Changing the competitive culture within IBM to one of collaboration and transparency was crucial. CEOs must strive to create a workplace environment that encourages teamwork and open communication, aligning employee incentives with the overall success of the company.

• Stay customer-centric. Gerstner emphasised a shift towards customer-centricity, ensuring that all business decisions aligned with customer needs and values. CEOs should always prioritise understanding and meeting customers’ needs as a fundamental business strategy.

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Until next week, may the force be with you.

Kevin

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