01 Jan 2005
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Louis V. Gerstner, Jr., MBA 1965

2005 Alumni Achievement Award Recipient
Re: Lou Gerstner (MBA 1965)
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Chairman, The Carlyle Group
Former Chairman & CEO, IBM

In any survey of great American corporations that have left their mark on business history, IBM would always hold a special place. Its origins date back to the late 1880s, when mechanical time recorders and tabulators were the leading technology of the day. Since then, IBM's influence has become increasingly international, with approximately 329,000 employees working in 75 countries. Now the world's largest information technology company, it recorded revenues of more than $96 billion in 2004.

While IBM's reputation was built on the strength of its technology, some twenty years ago the company was unprepared for changes in the marketplace as competitors emerged that offered clients individual pieces of the technology package, such as a database program or storage device. This brought about increased options and lower prices for customers even as it saddled them with the burden of integrating their new systems. Then, in the early 1990s, the rise of desktop computing saw IBM lose the PC race to a raft of new competitors.

By 1992, IBM was feeling the effect of its sluggish reaction to these changes. "Big Blue" was bleeding red, with losses of $5 billion. Critics harped that an "elephant" like IBM couldn't dance the quick steps of the new technology. A search was under way for a new CEO, but few—including Lou Gerstner himself—were eager to take on the very public, very risky assignment of rescuing and transforming this icon of big business. "I didn't believe I had the skills to turn around a troubled technology company," says the Long Island native, who had worked at McKinsey and American Express before becoming chairman and CEO of RJR Nabisco. "Over time, the IBM board members leading the search convinced me that this was a leadership challenge, not a technical one." On April 1, 1993, he became the first CEO of IBM hired from outside company ranks.

When Gerstner arrived, he found an organization that was, in some respects, a victim of its own success. Thanks to its longtime dominance of the mainframe computing market, IBM had enjoyed an unchallenged position in the marketplace until Japanese firms such as Hitachi and Fujitsu flooded the market with less expensive alternatives. In a bold opening move, Gerstner slashed the price of mainframe systems and pushed the development of a more efficient technical architecture that would ensure the company's long-term viability. The strategy paid off, with sales jumping well over 50 percent in the first year alone.

Under intense scrutiny, Gerstner then reversed a plan to split IBM into independently operated "Baby Blues," choosing instead to initiate a seismic shift in the company's focus by having it deliver to customers integrated technology services that would build and manage all aspects of their IT strategy-even if it meant incorporating products made by IBM's competitors.

In an expanding technology market that offered a dizzying array of options and a scarcity of trained professionals to implement them, companies were eager to embrace an end-to-end service delivery partner providing open, nonproprietary solutions that simultaneously cut costs and increased efficiency. "We found that customers were more interested in translating technology into value and less interested in the raw bits and bytes," remarks Gerstner. A second strategy was built on the future of networked computing, a prescient decision made well before it became a prevalent business model with the rise of the Internet.

Despite the significance of these moves, one of Gerstner's biggest challenges was reforming a hierarchical, bureaucratic culture that fostered competing fiefdoms in the corporation. In addition, IBM's reputation as a paternal organization that guaranteed lifetime employment and benefits ignored economic realities. As part of a cost-reduction program, Gerstner centralized the company's basic business operations, reduced payroll by 35,000 employees, and updated and consolidated its inefficient IT systems.

To refocus and reenergize employees, he also implemented a number of policy changes. Bonuses and variable pay, for example, were tied to overall company performance (rather than an individual's operating unit) to emphasize the importance of integration and cooperation. "Many of the strategic changes we made were well known and discussed at IBM before I arrived," he notes. "The capacity to embrace those changes and execute them throughout the organization with the help and cooperation of all our employees made the difference."

Although he stepped down from IBM in 2002, Gerstner has not slowed his pace. In addition to serving as chairman of The Carlyle Group, a global private equity firm with nearly $30 billion under management, Gerstner is founder and chairman of The Teaching Commission, a nonprofit organization that seeks to change how public school teachers are trained and compensated. A longtime activist for education reform, Gerstner is passionate when discussing this issue. "The leaders in our country need to wake up to the fact that we're in the middle of a huge skills battle," he says, adding that the global workforce is steadily gaining ground on the United States. "The war on terrorism is a very real and important fight, but whether or not we win the skills battle will determine more about our future than anything else."

Gerstner's worldview remains far-reaching, with an especially intense interest in China. "What I find extraordinarily interesting about the Chinese is their history of technical and social innovation over the centuries," observes Gerstner, who has visited the country frequently and who hosted former president Jiang Zemin on his first visit to the United States in 1995. "Even more breathtaking is the economic change that the Chinese have produced in their country since 1980. It speaks to an energy and entrepreneurial zeal that I find exciting." As an agent of dramatic change himself, Gerstner clearly recognizes the focus and drive it requires.

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Class of MBA 1965, Section C

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