Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (27 page)

Where do we go from here? One of two things will happen over the next five years:

• Perhaps we will fall once again into the trap of codification. Win, Execute, Team will become platitudes, the same fate that befell the Basic Beliefs. The SLG will become the IBM Management Committee of yore.

• Maybe, on the other hand, we’ll figure out a way to hold on to our new-found edge and agility. Maybe we can practice continual, restless self-renewal as a permanent feature of our corporate culture.

This is something that only a handful of institutions ever achieved over an extended period of time. IBM has forged ahead, through a combination of circumstances, heritage, hard work—and luck—to a position where it is now pioneering a new kind of business enterprise—the counterintuitive corporation. I noted some of its WHO SAYS ELEPHANTS CAN’T DANCE? / 215

characteristics in my final Letter to Shareholders in our 2001 Annual Report:

…big but fast; entrepreneurial and disciplined; at once scientific and market-driven; able to create intellectual capital on a worldwide scale, and to deliver it to a customer of one. This new breed continually learns, changes, and renews itself. It is tough and focused—but open to new ideas. It abhors bureaucracy, dissembling, and politicking. It rewards results. Above all, it covets talent and passion for everything it does.

Building on decades of experience, knowledge, maturity, and character, IBM over the past ten years has begun to develop the ability to handle a very high level of internal complexity and even apparent contradiction. Rather than hiding from conflict or suppress-ing it, we’re learning how to manage it, even benefit from it. This equilibrium can be achieved only when an enterprise has a very sure sense of self.

Sustaining that balance will be tough, but I am optimistic. Something has stirred inside this once sleeping giant. Its people have been reawakened to who they are, what they are, what they can do. Their pride has been reinstilled and their hope regenerated.

Besides, the marketplace we’re now living in—the most dynamic, competitive, global economy (not to mention political, cultural, and social environment) in recorded history—will help. As long as IBMers remain focused outward, the world will keep them on their toes.

PART IV

Lessons Learned

W
hat did I learn from my IBM experience? What lessons have I accumulated during the course of more than three decades in business? These are questions I get asked a lot these days. And I always preface my answer with the same concerns and hesitancy: I’ve never been certain that I can abstract from my experiences a handful of lessons that others can apply to their own situ-ations.

Beyond that highly pragmatic consideration, I have more than a sneaking suspicion that what I am prepared to offer here will not surprise, astonish, or delight the reader who has come in search of something resembling a secret formula, or a directory of timeless revelations.

The work-a-day world of business isn’t about fads or miracles.

There are fundamentals that characterize successful enterprises and successful executives.

• They are focused.

• They are superb at execution.

• They abound with personal leadership.

218 / LOUIS V. GERSTNER, JR.

If not immutable, these three are at least consistent, through the ups and downs of economic cycles, through changes in the leadership of any particular institution, and through technical revolutions, the likes of which we just experienced with the Internet. They apply to enterprises of all sizes and types: large and small companies, publicly traded and non-profit organizations, universities and, in part, governments. At the end of this part of the book, I will address a final issue that is unique to the largest and most complex institutions: how to strike the appropriate balance between integration and decentralization.

23

Focus—You Have to Know

(and Love) Your Business

F
ew people and few institutions would admit to a lack of focus, even in an exercise of honest self-evaluation.

However, I have learned that lack of focus is the most common cause of corporate mediocrity. It shows up in many forms, most notably in the items that follow.

“The grass is greener.”

This is the most pernicious example. In my thirty-five-year business career I have seen many companies, when the going gets tough in their base business, decide to try their luck in new industries. It’s a long list: Xerox going into financial services; Coca-Cola into movies; Kodak into pharmaceuticals.

I remember when I was a student at Harvard Business School forty years ago, a marketing professor argued that the problem with 220 / LOUIS V. GERSTNER, JR.

buggy-whip companies was they thought they were in the buggy-whip business, not the transportation business. The professor argued that companies often focus on too narrow a segment and fail to see important changes in their marketplaces. I cannot argue with the underlying premise here, but I
would
argue that it’s very, very hard for a buggy-whip company to become an airplane manufacturer.

Too many executives don’t want to fight the tough battles of re-surrecting, resuscitating, and strengthening their base business—or they simply give up on their base business too soon. As IBM made its bet on the kind of convergence I described in Chapter 18, it diver-ted its attention from what it always did well—building large-scale, powerful computers—and bought a telephone switching company (ROLM). When things got tough in the charge card and travel business in the 1980s, the chairman of American Express tried to get into the cable TV, entertainment, and book publishing businesses. Of course, American Express brought no skills to any of those businesses.

Nabisco, one of the great food companies in the world, bought a tobacco company in 1985. Fourteen years later it spun off the tobacco business, and the only true long-term result was a weakening of the food company.

That’s usually what happens when a company strays from its core competencies. Its competitors rejoice at, and prosper from, the lack of focus. And the company ultimately sinks into a deeper hole.

The fact is, in most cases a company has a set of competitive advantages in its base business. It may be hard—very hard—to redirect or reenergize an existing enterprise. Believe me, it’s a lot easier than throwing that enterprise over the fence into a totally new environment and succeeding. Age-old common sense: Stick to your knitting; dance with the partner who brought you. History shows that truly great and successful companies go through constant and sometimes difficult self-renewal of the base business. They don’t jump into new pools where they have no sense of the depth or temperature of the water.

WHO SAYS ELEPHANTS CAN’T DANCE? / 221

“We need to grow, so let’s go acquire somebody.”

Related very much to the ongoing commitment to building a core business is the ability to say no to acquisition fever. This is a conta-gious disease that infects too many executives. When given a choice of working hard to fix a base business or, instead, completing a glamorous acquisition and crowing about its promise on the financial TV stations, too many executives opt for the latter. As I look back on my IBM life, there is no question that a good portion of our success was due to all of the deals we
didn’t
do. A partial list of the companies that were proposed as acquisition candidates includes: MCI, Nortel, Compaq, SGI, and Novell and Telecoms galore. Investment bankers with thick, blue books were always ready to describe a yellow brick road leading to the wonderful city of Oz. Not one of these deals would have worked.

I could tell a lot of investment-banker stories, but perhaps the one that stands out in my mind the most was the proposal from one bank that IBM acquire Compaq Computer. The summary of the transaction that was included in the front of the ever-present blue book showed IBM’s stock price going up forever after completing the transaction. Surprised at how this tree would grow to heaven, I rummaged through the appendix and found that IBM’s profits for the next five years (roughly $50 billion after taxes) would be wiped out by this transaction and we would show huge losses over that entire period. When I told my CFO to question the banker about how this could be viewed as positive by the investment community, the answer came back: “Oh, investors would all see right through this.

It wouldn’t matter.” Ah, if only the elixir peddled by investment bankers worked, then CEOs would never have to worry or even work. Hello, golf!

Back in the real world, however, there have been numerous, em-pirical studies conducted over the past twenty years showing that the likelihood of an acquisition’s proving to be a failure far outweighs the chances of success. That doesn’t mean I think acquisitions have no

222 / LOUIS V. GERSTNER, JR.

place in good corporate strategy. IBM made ninety acquisitions during my tenure as CEO. The most successful were those that fit neatly into an organic growth plan. IBM’s purchase of Informix is a great example. We were neck-and-neck with Oracle in the database business, and Informix, another database company, had lost its momentum and market leadership. We didn’t need to buy Informix to get into the database business or to shore up a weak position.

However, we did acquire a set of customers more quickly and more efficiently than we could have following a go-it-alone strategy.

The same was true with a number of other acquisitions in which we basically bought technology that we were going to have to develop ourselves but were able to accelerate our control of that technology through a highly focused acquisition. In other words, acquisitions that fit within an existing strategy have the most likely probab-ility of success. Those that represent attempts to buy new positions in new marketplaces or that involve smashing together two very similar companies are fraught with risk.

Steely-Eyed Strategies

Bottom line: At the end of the day a successful, focused enterprise is one that has developed a deep understanding of its customers’

needs, its competitive environment, and its economic realities. This comprehensive analysis must then form the basis for specific strategies that are translated into day-to-day execution.

Sounds simple, doesn’t it? Yet, in my experience, not enough companies really do the analytical work in a truly objective way (hope usually prevails over reality); even fewer can then translate the analysis into precise action programs that are tracked month by month.

As I mentioned earlier, perhaps my most infamous quote dealt with the subject of vision. During my years at McKinsey, seeing many different companies, I was always amazed at how many executives

WHO SAYS ELEPHANTS CAN’T DANCE? / 223

thought that “vision” was the same as “strategy.” It’s very easy to develop visions. It’s the same thing as Babe Ruth pointing to the fences. How many Babe Ruths do you think have pointed to the fences in the last twenty years? How many do you think hit a home run within the next minute?

Vision statements can create a sense of confidence—a sense of comfort—that is truly dangerous. Vision statements are for the most part aspirational, and they play a role in creating commitment and excitement among an institution’s employees. But in and of themselves they are useless in terms of pointing out how the institution is going to turn an aspirational goal into a reality.

Again, good strategies start with massive amounts of quantitative analysis—hard, difficult analysis that is blended with wisdom, insight, and risk taking. When I first arrived at IBM I asked, “What do our customers think about us? Let me see our customer satisfaction data.” I got back reports that were amazingly positive. Basically, customers loved us.

It was all statistical; it all seemed thorough and accurate. However, it just didn’t make sense, given that we were losing share in almost every one of our product lines. It took me a while, but I finally discovered that the way we measured customer satisfaction was to ask our sales force to pick some of their customers and ask them to complete a survey. IBM does not hire dumb salespeople. They obviously picked their best and happiest customers, and we were getting lots of positive data and absolutely fooling ourselves every day.

Moreover, every part of IBM was doing its own thing: We were conducting 339 different satisfaction surveys. Disparate methodologies made it impossible to get a single view—even if the sample wasn’t biased by the sales force.

Today we conduct fourteen comprehensive customer surveys, administered by an independent research firm. Names are sourced from external lists (not the sales force) and we interview almost 100,000 customers and noncustomers every year. Surveys are con 224 / LOUIS V. GERSTNER, JR.

ducted in thirty languages in fifty-five countries, and they compare our performance against those of all our major competitors. Most important, the data are incorporated into our tactical and strategic plans on a semiweekly basis.

Intelligence Wins Wars

Perhaps the most difficult part of good strategy is hard-nosed competitive analysis. Almost every institution develops a pride in itself; it wants to believe it’s the best. And a lot of what we as managers do is encourage that sense of loyalty and pride. However, this family feeling often gets in the way of really deep competitive insight.

We want to believe our products are better than our competitors’

products. We want to believe customers value us more than they do our competitors.

Product managers want their bosses to believe the manager has created the best products in the industry. But facts are facts, and they’ve got to be assembled on a continuous, unbiased basis.

Products have to be torn down and examined for cost, features, and functionality. Each element of the income statement and balance sheet has to be examined with total objectivity vis-à-vis competitors.

What are their distribution costs? How many salespeople do they have? How are their salespeople paid? What do distributors think about them v. us? There are hundreds of questions that need analytical examination and which then must be pulled together in comprehensive, deep competitive assessments.