IBM's Rebirth -- Big Blue's Chairman Reprograms The Company With Customer Service
ARMONK, N.Y. - Soon after Louis Gerstner took the helm at IBM in April 1993, he told each of the money-losing computer maker's 12 product managers to write a one-page summary of their business and be ready to discuss it.
At meetings the next day, the new chairman demanded details on product sales plans and what customers wanted. Ill-prepared managers received a tongue-lashing, and some later joined the 35,000 employees cut from payroll, said executives who attended the meetings.
"Lou said, `The business gets competitive or it gets new leaders,' " said Rick Thoman, who joined IBM from RJR in 1994 and became chief financial officer last year.
The meetings drove Gerstner - the first chairman from outside International Business Machines - to a decision that increased sales 15 percent since 1993 and nearly tripled the stock to about $115. IBM would spend more time selling computers, software and services that customers asked for and less on internal debates about technology.
"If the problems at IBM had been technical," said the 54-year-old executive. "I wouldn't be here today."
Gerstner, who eliminated the position of president, still oversees day-to-day operations. Today at IBM, the biggest challenges he faces are unchanged from when he arrived - determining what products customers want and getting them to market faster than the competition, analysts said.
"IBM needs an architect, a visionary, who does not have to know the bits and bytes of the business," said analyst Bob Djurdjevic of Annex Research in Phoenix.
Gerstner, a former RJR Nabisco Holdings chairman, in control of arguably the most powerful high-technology company in the world, says he relies on in-house experts for judgments on software, computers and new businesses.
What Gerstner knows how to do is sell - cookies and cigarettes at RJR, travel services during an 11-year career at American Express and computers and software at IBM.
Weeks after taking over, he invited information officers of IBM's top 100 customers to a retreat. Gerstner asked them what IBM was doing right - and wrong. It was the first time a chairman of the 72-year-old company ever polled its customers.
Customers said IBM was difficult to work with and unresponsive to their needs. For example, customers who needed IBM's famed mainframe computers were told that the machines were dinosaurs and the company would have to consider dropping them.
Gerstner said IBM was in mainframes to stay, would cut prices and would focus on helping customers set up, manage and link the systems together. IBM's so-called hardware sales rose 10 percent last year to $35.6 billion after dropping to as low as $30.6 billion in 1993.
Salomon Brothers recently raised its rating on IBM shares because of strong demand for the company's new storage systems, mainframes and minicomputers, boosting the stock by $3.25.
The mainframe decision shows how Gerstner made his managers think about company profits, not just products. He also tied executive pay and stock options to company-wide performance, stopping managers from passing off weaker businesses to other units. Managers were told they must hold IBM stock purchased with their own money, and Gerstner led the way by buying $3.18 million of shares.
"Suddenly there was a sense of urgency," said one former IBM executive. "The tone was: `Get with me or get out.' "
The most-publicized Gerstner change was his elimination of a dress code that once kept IBM salespeople in blue suits and white shirts - a 1960s image out of step with the laid-back, Silicon Valley-dominated industry of the 1990s. (Gerstner still favors finely tailored business suits.)
The change had a message behind it, IBM executives said. Salespeople should forget their former trappings of power - the suit, the slide presentation - and find out what their customers wanted.
IBM had lost $7.83 billion in two years when the company's board convinced Gerstner to succeed former Chairman John Akers, after Gerstner had twice turned them down. The new chief quickly made personnel changes, a precursor to $7 billion in cost cuts.
Gerstner said IBM's expansion will come from several businesses. He rejected an idea, considered by his predecessor Akers, to break up the company.
For example, the computer maker's biggest business someday will be computer services, now its No. 2 operation behind computers with $6.93 billion in revenue for the first half of 1996, Gerstner said.
Software, the company's third-largest operation, also is on the rise. IBM purchased Lotus Development a year ago for $3.52 billion in a bid to improve its networked software products. IBM will buy more software and computer-service companies to stay competitive, he said.
Meantime, IBM PC reported its best performance in years in the second quarter, returning to profitability after reducing its products and being quicker to market.
And of course, there's the Internet. While IBM sold its stake in Prodigy, a money-losing online service company, it also created a new consumer unit to develop Internet software and equipment.
For the chairman, IBM's renewed sales effort in all these areas paid off in many ways. Remember that IBM stock he purchased? It more than doubled to $6.61 million.