Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (15 page)

In each case, what I’ve included are the moves that were either such distinct departures from IBM’s prior direction that they can be considered “bet the company” changes; or those that were so diametrically opposed to the existing culture that they were at great risk of being brought down by internal resistance.

Also, I’ll point out that I leave my successor much unfinished business. A number of our strategies are not yet fully deployed; others remain to be defined. More important, the cultural transformation of IBM’s formerly successful and deeply entrenched culture—our single most critical and difficult task—will require constant reinforcement or the company could yet again succumb to the arrogance of success.

1See Appendix B for a statistical summary of IBM’s performance for 1992-2001.

PART II

Strategy

12

A Brief History of IBM

B
efore we talk about how the new IBM was built, I think it would be helpful to understand, in broad brush strokes, how IBM became the great company most of us revered up until the early 1990s, and what contributed, at least in my view, to its breathtaking decline.

The company’s origins go back to the early twentieth century, when Thomas J. Watson, Sr., combined several small companies to form the International Business Machines Corporation. For the first half of the century, IBM’s “business machines” embraced a broad and largely unrelated lineup of commercial products; everything from scales and cheese slicers to clocks and typewriters. Of prime importance was the fact that IBM was a pioneer in computation long before most people talked about computers. The company’s early electromechanical tabulation and punch-card devices introduced computation to business, academia, and government. For example, IBM scored a huge win when it was selected by the United States federal government to help start up and automate the Social Security System in the 1930s.

114 / LOUIS V. GERSTNER, JR.

Inventing the Mainframe

Like Henry Ford, John D. Rockefeller, and Andrew Carnegie, Thomas Watson was a powerful, patriarchal leader who left an im-print on every aspect of his company. His personal philosophies and values—hard work, decent working conditions, fairness, honesty, respect, impeccable customer service, jobs for life—defined the IBM culture. The paternalism engendered by Watson would come to be both an asset and, long past his lifetime, a challenge for the company. However, there’s no question that it made IBM highly appealing to a post-depression labor force yearning for job security and a fair deal.

The history that is much more relevant to IBM’s turnaround begins with Tom Watson, Jr., who succeeded his father as CEO in 1956 and who boldly brought IBM—and the world—into the digital computer age.

Much has been written about this period and how Tom “bet the company” on a revolutionary new product line called the System/360—the original name of IBM’s wildly successful mainframe family.

To grasp what System/360 did for IBM and its effect on the computing landscape, one needs to look no further than Microsoft, its Windows operating system, and the PC revolution. System/360 was the Windows of its era—an era that IBM led for nearly three decades.

In fact, the comparison between the IBM of the 1960s and 1970s and the Microsoft of the 1980s and 1990s is most appropriate. Both companies seized upon major technology shifts and brought to market an entirely new capability for customers. Both established commanding market positions and benefited greatly from that leadership.

In IBM’s case, the big technology shift came with the advent of the integrated circuit—what we now know as the semiconductor chip.

Of course, IBM did not invent the integrated circuit (not any WHO SAYS ELEPHANTS CAN’T DANCE? / 115

more than Microsoft invented the personal computer!), but Watson and his colleagues understood its significance. Before the integrated circuit, computers were giant, room-size machines, energy inefficient, highly unreliable, and costly to manufacture. Many of these problems could be solved by high-density integrated circuits. Instead of building computers with scores of specialized components, these functions could be miniaturized and packed onto chips.

The new capability that IBM brought to market was the first family of fully compatible computers and peripheral devices. While this hardly sounds revolutionary today, years ago it was a radical concept. Before System/360, IBM was just one of several companies that made and sold computers.

Each company’s computers were based on proprietary technology.

They didn’t work with any other computers, even from the same company, and each computer system had its own peripheral devices like printers and tape drives. This meant that if customers outgrew a computer or wanted the advantages of some new technology, they had to discard all of their hardware and software investments and start over. In today’s parlance, they had to “rip and replace”

everything.

System/360 represented an entirely new approach. First of all, it would be built with modern, high-performance integrated circuits.

This would make the machines simultaneously more powerful, more reliable, and less costly than anything on the market. It would consist of a family of computers—from very small to very large processors—so that customers could make easy upgrades as their needs grew. Software developed for one processor would run on any System/360 processor. All peripheral devices—printers, tape drives, punch-card readers—would work with any processor in the family.

For customers, System/360 would be a godsend. For IBM’s competitors, it would be a knockout blow.

Of course, envisioning System/360 was one thing. Making it a reality required the equivalent of a man-on-the-moon program. It 116 / LOUIS V. GERSTNER, JR.

cost nearly as much. Tom Watson’s memoir noted that the investment required—$5 billion (that’s 1960s dollars!)—was larger than what the Manhattan Project cost.

Growing Around the Mainframe

Aside from the risk and sheer size of the undertaking, System/360

forced IBM to launch itself into a whole new set of businesses and to develop entirely new sets of skills and capabilities—all of which, in one form or another, still existed by the time I arrived.

IBM had to get into the semiconductor business. Why? Because there was no semiconductor industry yet. IBM had to invest heavily in research and development to create entirely new technologies required for System/360. It’s not accidental that this was one of the most progressive periods for IBM research. During this era, IBM scientists and engineers invented the memory chip, the relational database, computer languages such as FORTRAN, and made huge advances in materials science, chip lithography, and magnetic recording.

How did we end up in 1990 with the world’s largest software business? Because there would be no usable System/360 without an operating system, or a database, or a transaction processing system, or software tools and programming languages.

Even the sales force had to change. System/360 required a very knowledgeable, consultative sales force that could help customers transform important business processes like accounting, payroll, and inventory management. Traditional order takers couldn’t do this job. The company had to create a product service and maintenance capability and a customer-training and educational arm.

Keep in mind that all of this—hardware, software, sales, services—was dedicated and tied to System/360. Despite the fact that IBM, then and now, was regarded as a complex company with thousands of products, I’d argue that, until the mid-1980s, IBM was a

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one-product company
—a mainframe company—with an array of multibillion-dollar businesses attached to that single franchise.

And the franchise was a gold mine. IBM’s share of the computing market skyrocketed. Competitors reeled; many disappeared. The company’s revenues grew at a compound growth rate of 14 percent from 1965 to 1985. Gross profit margins were amazing—consistently around 60 percent. Market share exceeded an astounding 30 percent, which eventually invited antitrust scrutiny.

How the Culture Evolved

This decades-long run of uninterrupted success ties in with the other closely related, and vitally important, aspect of IBM’s recent history. This is about its corporate culture—specifically, the kind of culture that arises in an environment without intense competitive pressure or threats. In IBM’s case, I never believed the problem was as simple as complacency or entitlement, though there were elements of both present when I arrived. It wasn’t about tens of thousands of people growing soft, risk-averse, and slow, though that’s been a convenient way to characterize the IBM of the early 1990s.

The IBM culture was the product of two predominant forces. One we’ve just discussed in detail—the runaway success of the System/360. When there’s little competitive threat, when high profit margins and a commanding market position are assumed, then the economic and market forces that other companies have to live or die by simply don’t apply. In that environment, what would you expect to happen? The company and its people lose touch with external realities, because what’s happening in the marketplace is essentially irrelevant to the success of the company.

What IBM forgot was that all the trappings of its culture—from behaviors that the company valued and rewarded, to how fast things happened, to the luxury of creating all kinds of pride-inducing em 118 / LOUIS V. GERSTNER, JR.

ployee benefits and programs—were a function of the franchise created by the System/360. It wasn’t really the product of enlightened management or world-class processes. IBM’s dominant position had created a self-contained, self-sustaining world for the company. IBM had ridden one horse, and ridden it well. But that horse could carry it only so far before it broke down.

The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration. The suit was ultimately dropped and classified “without merit” during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup. One has to imagine that years of that form of scrutiny changes business behavior in very real ways.

Just consider the effect on vocabulary—an important element of any culture, including corporate culture. While IBM was subject to the suit, terms like “market,” “marketplace,” “market share,”

“competitor,” “competition,” “dominate,” “lead,” “win,” and “beat”

were systematically excised from written materials and banned at internal meetings. Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor. After a while, it goes beyond what is said to what is thought.

Was the antitrust suit “the” pivotal event that caused the culture of IBM to break down? No. But did it contribute? Some of my long-term IBM colleagues believe it did. And if timing is everything, as the adage says, IBM’s was lousy. At virtually the same time that the suit was finally lifted in the early 1980s (and after years of having the fighting spirit drained from the company gene pool), the industry’s “next big thing” arrived. Whether the company fully understood it at the time, the downward spiral was about to begin.

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The Next Big Thing

That next big thing wasn’t the advent of personal computing, which is the popular view. The more imminent threat to the mainframe model started with the rise of UNIX, an “open” operating environment championed by companies like Sun and HP. UNIX offered customers the first viable, economically attractive alternative to IBM’s mainframe products and pricing.

In the open, plug-and-play world of UNIX, many, many companies could make parts of an overall solution—shattering IBM’s hold on architectural control. Almost overnight IBM was under attack by an army of the so-called “pure play” companies like Sun, HP, SGI, Digital, and all the makers of associated software and peripheral products.

Once you understand that, you begin to comprehend John Akers’s big bet on a loosely knit confederation of “Baby Blues.” He recognized that the vertically integrated industry was ending, and he believed this shift would ultimately take down his vertically integrated company. He was disaggregating IBM in order to embrace what he thought the new industry model was going to be. As I described earlier, I didn’t agree with that path and reversed that direction. But I can understand the thinking behind it.

After UNIX cracked the foundation, the PC makers came along swinging wrecking balls. While it’s a gross oversimplification to say that IBM’s biggest problems stemmed from the failure to lead in PCs, it’s clear that the company failed to understand fully two things about personal computing:

• PCs would eventually be used by businesses and enterprises, not just by hobbyists and students. Because of that, we failed to size up the market properly and did not make it a high corporate priority.

• Because we did not think PCs would ever challenge IBM’s core en 120 / LOUIS V. GERSTNER, JR.

terprise computing franchise, we surrendered control of the PC’s highest-value components: the operating system to Microsoft, and the microprocessor to Intel. By the time I arrived at IBM, those two companies had ridden this gift from IBM right to the top of the industry.

13

Making the Big Bets

I
f one were to reduce the story of IBM’s transformation over the past decade to the bare essentials, the saga would pivot on two big bets: one on the industry’s direction, and one on IBM’s own strategy. To understand what we did and why we did it, it’s helpful to dial back in time and rejoin the discussion of IBM history where it left off in the previous chapter.

Remember that the 1994 time frame I’m describing falls just prior to the Internet revolution. There was a growing confidence inside IBM that the industry was on the cusp of a fundamental shift—the kind of change to the underlying model of computing that comes along about every ten or fifteen years. When that kind of a shift occurs, the companies that seize the moment and lead the movement do exceptionally well—and everyone else dances to their tune.