INTB6212 Changes That Took Place in IBMs Market & Industry Question Response Read the case LOU GERSTNER AT IBM and the supporting docs (Attached )and anser

INTB6212 Changes That Took Place in IBMs Market & Industry Question Response Read the case LOU GERSTNER AT IBM and the supporting docs (Attached )and anser the follwoing to prepare the case analysis.

What important changes were taking place in IBM’s industry and market with competitors and customers?
How was IBM performing financially?
What was IBM’s old strategy? What did it change to?
What changes in structure were made?
How would you characterize the organizational culture of IBM at the time when Gerstner took over?
What specific task capabilities did IBM need to implement its new strategy?
Did IBM currently have these capabilities? If not, how did it acquire them?
Did the existing evaluation and compensation systems support the new strategy?
Did the existing budgeting system and resource allocation support the new strategy?
Who would (or could) resist the change to the new strategy and why?
What misalignments or “misfits” existed? LOU GERSTNER AT IBM
Professors Bert Spector and Henry Lane wrote this case based on published sources solely to provide material for class discussion. The authors do
not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of
Northeastern University.
© Copyright 2018, Northeastern University, D’Amore-McKim School of Business
Version: 2018-5-12
When Lou Gerstner became CEO of IBM in April 1993, the company’s annual net losses had
reached $8 billion.1 Despite huge investments in research and development, IBM was either
late to the game or fumbled its entry into most of the computer innovations of the 1980s.
Financial performance reflected the under-performing culture. Revenues softened, while
costs continued to increase.
Industry Changes
In the early days there were multiple competitors in the mainframe business in addition to
IBM such as Burroughs, Univac, NCR, Honeywell, Amdahl, and Hitachi. IBM began to face
increased competition on cost and machine speed. Then in the 1990s the client-server mode
of operating developed, led by companies like Sun, H-P and Compaq. The large companies
that had been IBM’s target market moved to client-server systems to run and integrate their
businesses. With the rise of the Internet, distributed computing and intranets, companies no
longer wanted the mainframes and their bundled software and started buying third party or
“off-the-shelf” software from companies like Oracle and SAP.
It was a “perfect storm” of competition. The technology, competitors and customers all
were changing. Along with IBM’s R & D capability, its legendary sales force with graduates
from top schools dressed in their conservative suits was one of the keys to the company’s
success. According to Meyer the sales force “covered up for its aging technology…and its
account management methods [were] probably the best ever developed in the computing
industry. IBM’s top salespeople literally became part of their customers’ decision-making
1
Chronological History of IBM, 1990’s, IBM Archives (https://www03.ibm.com/ibm/history/history/
decade_1990.html accessed May 15, 2017)
1
processes with respect to computers, software, and networking”.2 They focused on working
with technology oriented CIO’s who spoke the same language. However, the new breed of
CIO’s was different. They were “web-focused, e-business aware, [who] didn’t demonstrate
the vendor loyalty that characterized his or her predecessors – the “career customers” who
would buy equipment and software only from IBM.”3 And they wanted global integration
and a secure environment.4
There were numerous calls for the company to be broken up. However, Gerstner would not
accept that fate. Instead, he defied conventional wisdom and sought to return IBM to a path
of growth through a series of bold strategic decisions and operational changes.
Strategy
In the 1960’s and 1970’s, the computer technology industry was vertically integrated and
IBM’s core business was manufacturing and selling the hardware (mainframe computers),
and the software that ran on them, which was primarily for transaction processing: “For
most of that era, the applications of the technology were fairly limited – focused on the
automation of back-office processes like accounting and payroll, or desktop applications
such as word processing and e-mail.”5
By the time Gerstner arrived at IBM in 1993 the industry had experienced three revolutions.
The first was the arrival of mini-computers that used integrated circuits, which reduced the
size of computers and also made computing affordable for more companies. During this
period, Digital Equipment Corporation (DEC) rose to prominence and became the second
largest computer company after IBM. The second was the PC revolution that decentralized
computing and gave rise to the client-server computing model where mainframes were often
re-purposed as servers. The third was the rise of independent pure-play software companies
that provided software and services for all types of hardware, from PCs to mainframes.
Companies were buying hardware from one or more vendors and software from others.
However, customers became disenchanted with what IBM referred to as “piece-part
technologies.”6 Instead, companies wanted comprehensive integrated solutions that worked
across their organizations, regardless of size or geographic location.7 In a way, they were
longing for the old mainframe days when a single company provided end-to-end hardware,
software, and service.
Meyer, Marc H., The Fast Path to Corporate Growth, Oxford University Press, 2007; p.17
Meyer, Marc H., Op. Cit., p.14
4 Meyer, Marc H., Op. Cit.,
5 “IBM Strategy: New Models for the Future”, excerpted from the Chairman’s Letter of IBM’s 2001 Annual
Report, (https://www-03.ibm.com/ibm/history/documents/pdf/strategy.pdf accessed May 15, 2017)
6 Piece-part referred to the sale of different pieces of software and hardware by various divisions within IBM
or third party vendors. The customer was then responsible for making these different products work together.
7 Palmisano, Samuel, Our Values at Work: On Being an IBMer, July 2003 (https://www.zurich.ibm.com/
pdf/hr/Our_Values_at_Work.pdf accessed July 27, 2017)
2
3
2
IBM had been organized to sell products (mainframes) developed on the strength of its
research and development. Gerstner made a strategic decision to offer customers more
comprehensive solutions focused on solving problems rather than just selling products. “All
the hard work IBM had done to catch up in the client/server field served the company well
in the network computing era,” he explained. “Once again, customers were focused on
integrated business solutions – a key IBM strength that combined the company’s expertise
in solutions, services, products and technologies… and would be the company’s overarching
strategy”8
It was a solution that depended largely on the rise of the Internet. In November 1995,
Gerstner addressed an industry trade show to offer his vision of a new computer paradigm:
network-centric computing.
When will network-centric computing arrive? Well, it’s already arriving – just
look at the Internet, the most powerful and important of all networks. People,
organizations, and networks are connecting at a rate no one expected, and that
pace will continue, if not accelerate… [but] technology is only an enabler of a
much more powerful force: a whole new way that institutions and companies
have conceptualized their strategic priorities. They’ve discovered a powerful
new form of leverage: the leverage of organizational knowledge as a means to
compete more effectively and to differentiate themselves in the marketplace.9
Gerstner had decided to align the resources of the entire company behind the next wave of
computing – distributed peer-to-peer (P2P) computing and the Internet as a medium for real
business. He declared that IBM “would seize the power of this global computing and
communications infrastructure” and use it to transform itself and its customers. “We found
our voice, our confidence, and our ability once again to drive the industry agenda.”10
In six years after Gerstner’s arrival, IBM had merged with or acquired companies that
provided network communications software (Lotus); systems management software for
distributed client-server networks (Tivoli Systems); advanced semi-conductors for wireless
communication applications (CommQuest Technologies); website development tools for
designers and developers (Net Objects Inc.); technology for moving, storing, protecting and
managing data in networked environments (Mylex Corp.); and social-networking, instant
messaging and VOIP software (Ubique).11
Chronological History of IBM, 1990’s, IBM Archives (https://www03.ibm.com/ibm/history/history/
decade_1990.html accessed May 15, 2017)
9 Quoted in Chesbrough, Henry, Managing IBM Research in Internet Time, Harvard Business School Publishing,
Boston, 2001, p. 1.
10 Gerstner, Louis V. Jr., Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, Harper Business,
New York 2002, pp. 86-87.
11 IBM Archives, Chronological History of IBM 1990’s (https://www03.ibm.com/ibm/history/history/decade_1990.html accessed May 12, 2018)
8
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In 1997 IBM announced it’s new e-business strategy with Gerstner predicting the
“Internet’s ability to challenge centuries-old business models and transform the nature of all
important transactions between individuals and institutions”.12
Structure
The organizational complexity of the company – 20 separate business units – rendered
coordination nearly impossible to achieve. Gerstner’s predecessor, John Akers, started to
remove costs and abandoned the company’s implicit no-layoff policy in 1991. IBM’s value of
“superior customer service” during a time of near monopoly control of the marketplace had
come to mean servicing IBM products for customers and had little to do with really
understanding or meeting customer needs. Likewise, the pursuit of “excellence in everything
we do” had come to mean a labyrinth system of checks and balances that slowed down new
product development and implementation to a crawl. “IBM’s organizational and product
changes,” said an industry observer, “were calculated, slow and methodical.” 13 Finally,
“respect for the individual” had become, in practice, a desire to protect employees from the
vagaries and uncertainties of the external markets and reluctance to take action against
under-performing employees.
Gerstner’s initial challenge was to integrate IBM’s U.S. and overseas operations. What IBM
internally referred to as a “religion of decentralization” had led to highly autonomous
country general managers who reported to powerful regional executives. For instance, IBMFrance was a largely independent organization.
IBM’s decentralized structure worked wonders for the company. Country managers could
focus on their own regions and grow the business based on local responsiveness, but at the
cost of collaboration. Employees in non-U.S. operations had come to think of themselves as
working in and for their own home country company. As such, the connection between the
country-based operations and the corporate entity was tenuous at best.
IBM’s global customers pushed for change. For example, American Express complained
about interacting with what seemed like different mini-IBMs in each country. They wanted
to deal with one face for IBM globally, they said, not many faces for each IBM national
operation.
Gerstner agreed that the lack of global interaction posed a problem: “Each country had its
own independent system,” he observed. “In Europe alone we had 142 different financial
systems.” The status quo simply did not allow for the seamless global responsiveness that
Gerstner’s new strategy and IBM’s global customers demanded. “Customer data could not be
tracked across the company. Employees belonged to their geography first, while IBM took a
distant second place.” Gerstner believed that this had to quickly change for his global
integration strategy to succeed.
12
13
IBM Archives, https://www-03.ibm.com/ibm/history/history/year_1997.html, accessed August 30, 2017.
Dzubeck, Frank, Assessing the Gerstner Era, Network World, Feb. 11, 2002, p. 33.
4
As a former partner at the global consulting firm McKinsey & Company, Gerstner experienced
what he believed to have been an effective approach to globalization. Customer-focused
global teams transcended national borders, allowing seamless responsiveness to global
customers. To help IBM achieve that same global seamlessness, Gerstner turned to Ned
Lautenbach, head of non-U.S. sales. Gerstner and Lautenbach would pursue their strategy to
transform IBM into a globally focused, customer-centered organization.
Shortly thereafter, Gerstner announced a new structure. Twelve customer groups (such as
banking, government, and insurance) and one small and medium-size company group would
take over all IBM accounts, including responsibility for budgets and personnel. The
restructuring reassigned most employees in non-U.S. operations to specific groups. They
would report to the global leaders of their industry group instead of their country general
manager.
The response from country general managers was overwhelmingly negative. “It will never
work” they protested. “You will destroy the company.” Some country general managers
responded by simply ignoring the new structure. One regional executive unilaterally decided
to block all communications between Gerstner and the field.
It took three years of what Gerstner called a “painful and sometimes tumultuous process”
before the new global strategy could be driven into IBM’s multinational structure. “Regional
heads clung to the old system,” Gerstner recalled, “sometimes out of mutiny, but more often
out of tradition.” Only after “massive” shifts in resources, systems, and processes–not to
mention the removal and replacement of numerous country managers who could not or
would not make the transition–did the new structure take hold.
A New Vision
When he joined IBM, Gerstner had no previous experience leading a high-tech
company. 14 Therefore, he sought advice and input from experts. One of his earliest
conversations was with Dennie Walsh, head of Integrated Systems Services Corporation, a
wholly owned IBM subsidiary. Walsh was running a small service operation largely out of
sight from the main corporate activities, but he presented Gerstner with a vision, not just for
his unit, but for IBM as a whole. “He envisioned a company, that would literally take over and
act on behalf of the customers in all aspects of information technology,” Gerstner explained,
“from building systems to defining architecture to actually managing the computers and
running them for the customers.”15
Gerstner previously held senior leadership positions at American Express and RJR Nabisco, and had worked
as a consultant with McKinsey. At the time, American Express was becoming more technology oriented and
relied heavily on IBM computers. This gave Gerstner a customer perspective.
15 Gerstner, Louis V., Jr., Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround (New York: Harper
Business, 2002), p. 129.
14
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However, Walsh also warned Gerstner of a pervasive IBM culture that would reject a service
business much like a body’s immune system rejects a virus. When Gerstner asked him to
explain, Walsh laid out his concerns:
1. a service operation, to be truly aligned with the needs of customer, would have to be
willing to recommend the products of IBM competitors like Microsoft, HP, and Sun; not
to mention servicing those products. IBM sales people would never do that (IBM was a
company that assumed it always had the best products).
2. the IBM sales force would never allow a service person to become part of their team if
that service provider was willing to recommend competitive products.
3. major service contracts could well last for over a decade and not even generate profit
for the first several years. Compensation and performance measurement systems
would work against that requirement.16
Gerstner left this meeting with Walsh convinced that a service-led model could be a strategy
uniquely aligned with IBM’s competitive advantage – size, scope, complexity, and multiplicity
of offerings – but he was also concerned that, in his own words, “the culture of IBM would
fight it.”17
IBM Culture
“Culture isn’t just one aspect of the game. It is the game… What does the culture
reward and punish – individual achievement or team play, risk taking or
consensus building?”
Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround
—Lou Gerstner
IBM has often been thought of as the prototype for the strong company culture. “As far back
as the mid-1930s, IBM employees had the reputation of being loyal and highly motivated.
There was a surprising amount of consensus concerning how to conduct business,” 18 As
Gerstner learned more about the culture and values of IBM and its employees, he came to
understand that respect, hard work, and ethical behavior were the all-encompassing
cornerstones shared by virtually all employees. Those values derived from IBM’s founder,
Thomas Watson, Sr. along with a strict and formal dress code (dark suits and white shirts),
an exemplar of the Organization Man ethos.19 That was what Gerstner came to see as the
Lundquist, Eric, Gerstner’s Vision Got IBM On Course, eWeek, Feb. 4, 2002, p. 5.
Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround (New York: Harper
Business, 2002), p.130.
18 Kotter, John and Heskett, James, Corporate Culture and Performance, Free Press, New York, 1992, p. 17.
19 The Organization Man Ethos was coined by William Whyte in his 1956 book titled, “The Organization Man.”
“Whyte saw good in both what he called the Protestant Ethic, the idea that the ‘pursuit of individual salvation
through hard work, thrift, and competitive struggle is the heart of American achievement,’ and a Social Ethic:
‘of himself, [man] is isolated, meaningless; only as he collaborates with others does he become worthwhile,
for by sublimating himself in the group, he helps produce a whole that is greater than the sum of its parts.’”
Sernovitz, Gary, What The Organization Man Can Tell Us About Inequality Today, The New Yorker, December
29, 2016
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“company’s DNA – from the paternalism to the stingy stock option program; from the nodrinking at corporate gathering policy to the preference that employees be married.”20
Gerstner felt that many of the values on which IBM had been founded had ossified into hard
and fast rules that, in fact, failed to represent Watson’s real views. For instance, the dress
code was established because Watson wanted his sales force to dress how customers dressed
at the time. In 1995, Gerstner announced the abolition of the dress code, while still adhering
to what he believed was Watson’s original intent. “Dress according to the circumstances of
your day,” he told employees, “and recognize who you will be with (customers, government
leaders, or just your colleagues in the lab).”21
Gerstner was even more dismayed that company units were so internally focused. “Units
competed with each other, hid things from each other. Huge staffs spent countless hours
debating and managing transfer pricing terms between IBM units instead of facilitating a
seamless transfer of products to customers.”22 He swiftly moved the company away from a
compensation system that was based on individual performance toward one that
compensated employees based on the overall performance of IBM instead of division, unit
or geography. “Gerstner also upped the amount of executive compensation given as stock
and options, set quotas for how many customer calls each executive had to make, and
relentlessly pushed coordination among IBM’s many divisions.”23
Gerstner, of course, realized that IBM’s culture presented more serious problems than
changing dress style.
Changing the attitude and behavior of thousands of people is very, very hard to
accomplish. You can’t simply give a couple of speeches or write a new credo for
the company and declare that a new culture has taken hold. You can’t mandate
it, can’t engineer it. What you can do is create the conditions for transformation,
provide incentives.24
(http://www.newyorker.com/business/currency/whatthe-organization-…
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