Monday, November 22, 1999

Driving Success at New Blue

My article of choice this week was a great piece on Lou Gerstner as Technology Leader of the Year. I thought it appropriate for the discussion of IBM’s cultural issues, organizational changes and the impact upon employees.

Titled Driving Success At New Blue – Louis V. Gerstner Jr. Helps IBM’s Customers Use Technology, this article is first of all a tribute to Gerstner’s reign at IBM. Since joining IBM on April Fools’ Day of 1993, Gerstner has been credited as the architect of the vast turnaround IBM currently has underway. The stock price and profitability metrics do indeed indicate a high degree of successfulness in Gerstner’s plan. However, the company’s total transformation as it morphs into the e-business arena is what is setting the stage for the company’s continued success.

Gerstner states that upon his arrival in 1993, his vision for IBM was simply to “return to its former position of leadership.” However, Gerstner is not talking about leadership based on the proprietary standards propagation which IBM enjoyed in the past. Rather Gerstner wants IBM to be the company that customers turn to for technology innovation and an understanding of how to “explore technology for competitive advantage”.

The first step Gerstner took in this regard was one of dismantling the spin-off strategy that had just begun under the former CEO. Though the spin off strategy designed to create 10 separate IBM companies, akin to the Baby Bell creation AT&T went through, probably would have provided a temporary level of stock valuation increase which was sorely needed at the time, Gerstner instead “recognized the greater value in keeping it [IBM] whole.” This effort to leverage the organization into a vertically integrated solutions company is what set the stage for IBM’s comeback.

Gerstner chose this path in part because he joined IBM with what he called the “mindset of a customer.” As an example, in IBM Redux (1999, HarperBusiness) Doug Garr “recounts the tale of an IBM supplier that wanted to return an overpayment of $20,000.” Unfortunately, no one at IBM would accept the money because to do so “would have required someone to take responsibility for the error.” This form of denial was due in large part to “a culture that had been inbred for 40 years and sustained by success.” The fuel for this culture was an over-reliance on hiring candidates fresh out of school and promoting almost entirely from within such that the results was a “workforce with a very unique set of business practices.” To change such a system caused much consternation among many of IBM’s workforce but it was a necessary step in order to facilitate change.

Garr points out that the “paternalistic, cradle-to-grave employment model of post-war Japan” was really modeled after the “personnel practices of IBM founder Thomas J. Watson.” Gerstner reversed this “family” approach with a series of “tough love” initiatives designed to encourage the desired behaviors. In doing so, Gerstner initiated a 60% increase in variable pay (pay for performance) and substantially increased the number of employees eligible to participate in stock option programs. In 1996 he doubled the number of stock option eligible individuals, doubled it again in 1997, and tripled the number of participating employees in 1998. This most certainly forced a cultural revolution of sorts within the IBM workforce for better and worse almost simultaneously.

In this article, Gerstner picks at the hierarchical issues of organization structures and argues that any enterprise need only think about three things “strategy, decision-making, and processes.” Gerstner then states that Strategy should be centralized or common and decision-making and process development should be pushed as far out as possible toward the organizational person actually touching the customer. Quite a change from the IBM of old which Garr describes as a “Soviet-style bureaucracy.”

Lastly, Gerstner also set about to change the IBM culture in a myriad of more minor ways as well. For instance, the R&D Division’s motto changed from “Famous for its science and technology and vital to IBM” to “…vital to IBM’s future”. A small shift to forward looking from a rearview reverence, but telling in the change it sets up over time.

All in all, a well-done article on a success story that is not without its controversy.


Teresko, J. (1999, December 6). Driving success at new blue [Online].

Fatehi, Kamal. "International Management: A Cross-Cultural and Functional Perspective." Prentice Hall. 1996.

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