This is the fourth and last case study from my Leadership in Management course. It covers IBM and is set in the late eighties.

Situation Analysis

IBM, the model information technology company of the world, had 70% oft the industry’s profits in 1984. In 1990, they were the second most profitable company in the world. 8 years later, from 1991 to 1993, the company lost nearly $16 billion. John Akers and his executive team planned a recovery for the company, involving a breakup into 16 child corporations. But when the problems got worse in the fourth quarter of 1992 — the time Akers had claimed recovery would begin — the Board began its search for a new CEO outside the company. Lou Gerstner, formerly of RJR Nabisco, American Express, and McKinsey, must remake IBM into a profitable corporation however he can.

By the time John Akers became CEO in 1985, IBM had essentially stopped evolving as a company. Their business model was so successful that nobody felt a need to modify it; indeed there was fear that doing so would be bad for the company. As a result, the company failed to respond to several important developments in its field. First, computing moved away from the mainframe architecture (responsible for huge portions of IBM’s revenue and profits) to the client/server model. Second, computers became commodity hardware with interoperable parts running interoperable technologies. This interoperability pushed prices lower, but IBM’s managers could not break from their high-margin mainframe sales to compete in other areas.

Even worse, the company was thoroughly inefficient. As a worldwide operation with 24,000 product lines, it had many ways to hide redundant products and redundant parts that filled the same holes in different product lines. The customer sales teams, organized geographically, no longer understood all the software and hardware they were selling. And ironically, IBM had difficulty billing its customers correctly.

Akers was not blind to all of this, and began efforts to combat the problems in 1988 while the company was still profitable. He reorganized to better match resources to the market; made managers more accountable while decentralizing authority; and gradually decreased the number of employees. His efforts bore some fruit as financials got better, but in 1991 they suddenly plunged and the company lost money. IBM’s problems had caught up with it, not because they suddenly became worse but because people had stopped buying IBM mainframes, which had propped up the company’s financials in previous years.

Akers and his team instituted a new plan, deliberately removing workers, both through early retirement programs and firings, for the first time in the company’s history. And they quickly decided the way to save IBM was to break it up into child corporations.

Opportunities & Threats

As a company, IBM faces a number of threats. Its core business in mainframes has died as a serious computing arena, and IBM is organizationally unsuited to compete in the PC market. Nevertheless, IBM has its strengths too. The company is worldwide and competes in nearly every part of the information technology industry, so at least some portions of the organization can generate profit. Its global reach means that profitable areas of the company can be rapidly expanded and evangelized

Even better, because of IBM’s huge scale, it has all the expertise necessary to become a big player in providing network services and infrastructure if it can reorient its organization around this major new industry. And company weaknesses, like marketing, should give a high return for very basic reforms.

Decisions To Face

Lou Gerstner faces a number of important decisions. The most obvious is whether to accept Akers’ planned breakup of IBM or to keep the company whole, and this decision will frame the rest of the strategy. But there are other decisions as well. He must develop a coherent customer strategy to retain and develop clients, either for the new IBM or for its new child corporations. As a new CEO joining a partly-failed management team, he must decide who to keep and who to lose. And whether he breaks up IBM or keeps it whole, Gerstner must decide which employees to keep and which to fire, and how to do it.

Alternatives & Analysis

Gerstner’s first choice as CEO will be which managers to keep and which to let go. Such a decision cannot be made instantly, but it must be made quickly and based on performance. Choose carefully, but make sure executives know they are not immune to their own results.

The next decision Gerstner will face is whether or not to break up IBM into many smaller corporations. The plan, developed by Akers, has several potential benefits. Breaking up the company will allow the effective subgroups to flourish while letting the market kill off the inefficient players. Smaller groups will be more agile, and the dramatic change of a breakup will force people to adopt other changes — in customer communication, in product strategy, in employment guarantees —more easily. But there is evidence that doing so will deny IBM its greatest strength: IBM is a provider of everything, worldwide. And breaking up the company, while it could let business units sink or swim on their own, could also lump together profitable groups with dying ones, and simply break the problem down from one IBM-sized problem to 16 smaller problems that still sum to the same size. Similarly, the computing market is changing, and business units that have a bright future collaborating within IBM could end up in separate child groups, unable to benefit from their collective knowledge.

Finally, Gerstner must retain and develop IBM’s customer base through what may be a difficult process. He can either delegate the task to subordinates whose sole job is to interface with customers, or make customer satisfaction part of his own role in the company. By delegating, he ensures that customers will always know who to talk to; but by making satisfaction part of his own role he shows commitment to customers, which is valuable directly for its customer impact and for its influence on IBM’s workforce.

Recommendation

The only advantage of breaking up IBM seems to be that it passes the buck, making market forces — rather than the management team — responsible for any layoffs that occur. IBM should remain a single company, but it should either shut down or sell off the unprofitable business units that suck money and coherency out of the organization and reduce its workforce to remain competitive. This will maintain the company’s unique advantages as an expert in every area, letting it quickly take advantage of new fields in computing and continue to service customers as a one-stop shop around the world.

In customer support, Gerstner should rework the current troubled system. Each client should have a dedicated support person as a customer representative, but the customer representative should be an overseer and coordinator, responsible for bringing the appropriate product salespeople to the client and for tracking the status of orders and other processes. This stands in contrast to the current system where customer representatives are responsible for acquiring enough domain knowledge on anything to sell it to their client, and nobody is responsible for process management. This change in support structure should be matched by a stronger and simpler customer accounts system, so that customers can trust their IBM invoices and not have to reprocess them for accuracy.

Critique of Existing Recommendations

It is easy to endorse Gerstner’s recommendations with the benefit of hindsight, but even in his time they should have been an easy sell. His strategies forced the company and its executives to accept reality as a competitor in the market (rather than the only option), and his customer focus gave IBM the information it needed to survive. Even better, his focus on IBM as a worldwide company gave it uniformity in areas that had previously been highly fragmented and made communication and responsibility a part of the corporate culture. Assigning executives to individual clients helped to refocus management on customer service; its only downside is that executive time is valuable and such intense work on individual companies is probably not sustainable in the long run.

Comparison of Leadership Styles

John Akers and Lou Gerstner had very different leadership styles at IBM. Akers was a product of the company, having worked there for years. He tried to fix IBM without actively firing a man, and maintained management traditions focused around committees and agreement. He revealed himself to be a human-assets leader, encouraging regional autonomy and consensus.

Gerstner was very different. Brought in to fix an ailing company, he explicitly rejected many of the assumptions that Akers had continued to accept. Gerstner focused on clients, brought in other individuals to perform cost-cutting and efficiency measures, and formed strategy groups at multiple levels. He clearly revealed himself as a strategy CEO, which matches well with the role he was expected to play.

Bibliography

Farkas, Charles & Wetlaufer, Suzy. “The Ways Chief Executive Officers Lead.” Harvard Business Review on Leadership. Harvard Business School Publishing, Boston MA. Copyright 1998.

Austin, Robert. D & Nolan, Richard L. “IBM Corporation Turnaround.” Harvard Business School. Case 9-600-098. Harvard Business School Publishing, Boston MA. Copyright 2000.