A review of IBM’s restructuring under Louis Gerstner

IBM3

I recently read a book that proved to be a valuable business restructuring case: IBM under Louis Gerstner’s tenure. I believe it might be of interest to briefly outline of his achievements so as to draw some conclusions about sound management practices.

First of all, let me briefly introduce Louis Gerstner, for those who do not know him yet. He is an American citizen, who started his career in the strategic consulting company McKinsey, after he got his Master in Business Administration (MBA) from Harvard. He then became CEO of the card division of American Express and later, CEO of RJR Nabisco, the American conglomerate producing cookies and cigarettes, before being appointed CEO of IBM on the 1st of April 1993.

At that time, IBM was enjoying the success of its System/360 mainframe and had transformed into a bureaucratic monster, making an impressive 8-billion dollars loss. This gigantic company was actually not far from being short of cash. His restructuring plan, which took several years to implement, basically had 3 phases: improve the financial position, refocus the company’s strategy and change the corporate culture.

Simply observing that competitors had a lighter cost structure than IBM, he deduced that it could potentially leave them leeway to reduce their selling price, gain market share, while still being profitable. To tackle this threat, he first engaged a program of cost reduction, including personnel layoffs and jet fleet reduction, and non-core asset divestment among which IBM’s art collection. Doing so, he generated extra cash and restored financial health to the company within a 2-year period, as IBM reached a 4.2 billion net profit at the end of 1995.

Once the company’s finances were back afloat, Lou Gerstner started the second phase of his turnaround of “Big Blue”. He took the bold decision to refocus the company’s strategy on the services side of the business as well as on networks of computers and the emergence of the e-business. 
The external environment was shifting and tested the company’s ability to adapt. IBM was working in silos, with departments working against each other, with geographical fiefdoms that some managers were jealously defending. The third phase of the restructuring plan was dedicated to a cultural revamping of the company and the structure to foster it. IBM needed interdepartmental collaboration instead of internal competition, and focus on bringing value to the company instead of solely to the business unit level. Several key measures were taken, among which the following:

  • The introduction of 8 principles to follow, as Gerstner believes that principles matter more than processes. These principles mainly aimed at focusing on the customer’s needs, on creating value for the company and instill a sense of urgency in the employees’ execution. More importantly, IBM started promoting and rewarding managers and executives who were embracing this new culture, showing other employees that promotions were granted according to new criteria.
  • The alignment of employees’ compensation to the whole company’s performance, through share-based compensation schemes, and benchmarked to the competition, which forced employees to understand that the enemy was outside the company – not inside – and to create value for the company.
  • To break geographical fiefdoms, he decided to reorganize the business units by industry or lines of products and services, instead of by geographical areas. This also helped sharing best practices on a global basis.
  • The 3-phase plan that he implemented helped the company get together, focus on new strategic goals and according a defined set of values. The result in terms of financial metrics is impressive. When he left the company in 2002, revenues had grown from $ 62,7 billion to $ 85,9 billion, an increase of 37%, while net income reached $ 7,7 billion. The stock price experienced a tenfold growth through the period, increasing from $12,72 to $120,96 per share.

As Gerstner himself implied, IBM is unique. It will therefore be difficult for business leaders to find any readily transferable measure to their business among the changes that were implemented at IBM. However, I believe we could extract from his experience several sound reminders regarding management practices, strategic focus, the importance of a corporate culture aiming at performance and quality and the way it is promoted within a company.

This little review deliberately outlined specific topics that Gerstner described in his book. For those interested in having more insights about IBM’s restructuring, its corporate strategy and positioning at the dawn of Internet and e-business, or just more about Lou Gerstner, I highly recommend the reading of “Who Says Elephants Can’t Dance?”, by Louis Gerstner.

 

By Lionel Brouhier_Senior Consultant_ACCESO Corporate Partners