Sep 6, 2021
IBM is the company with nine lives. They began out of the era of mechanical and electro-mechanical punch card computing. They helped bring the mainframe era to the commercial market. They played their part during World War II. They helped make the transistorized computer mainstream with the S360. They helped bring the PC into the home. We’ve covered a number of lost decades - and moving into the 90s, IBM was in one.
One that was largely created by an influx of revenues with the personal computer business. That revenue gave IBM a shot in the arm. But one that was temporary.
By the early 90s the computer business was under assault by the clone makers. They had been out-maneuvered by Microsoft and the writing was on the wall that Big Blue was in trouble. The CEO who presided during the fall of the hardware empire was John Akers. At the time, IBM had their fingers in every cookie jar. They were involved with instigating the Internet. They made mainframes. They made PCs. They made CPUs. They made printers. They provided services. How could they be in financial trouble? Because their core business, making computers, was becoming a commodity and quickly becoming obsolete.
IBM loves to own an industry. But they didn’t own PCs any more. They never owned PCs in the home after the PC Jr flopped. And mainframes were quickly going out of style. John Akers had been a lifer at IBM and by then there was generations of mature culture and its byproduct bureaucracy to contend with. Akers simply couldn’t move the company fast enough.
The answer was to get rid of John Akers and bring in a visionary. The visionaries in the computing field didn’t want IBM. CEOs like John Sculley at Apple and Bill Gates at Microsoft turned them down. That’s when someone at a big customer came up. Louis Gerstner. He had been the CEO of American Express and Nabisco. He had connections to IBM, with his brother having run the PC division for a time. And he was the first person brought in from the outside to run the now-nearly 100 year old company. And the first of a wave of CEOs paid big money. Commonplace today.
Starting in 1993, he moved from an IBM incapable of making decisions because of competing visions to one where execution and simplification was key. He made few changes in the beginning. At the time, competitor CDC was being split up into smaller companies and lines of business were being spun down as they faced huge financial losses. John Akers had let each division run itself - Gerstner saw the need for services given all this off-the-shelf tech being deployed in the 90s. The industry was standardizing, making it ripe for re-usable code that could run on this standardized hardware but then sold with a lot of services to customize it for each customer. In other words, it was time for IBM to become an integrator. One that could deliver a full stack of solutions.
This meant keeping the company as one powerhouse rather than breaking it up. You see, buy IBM kit, have IBM supply a service, and then IBM could use that as a wedge to sell more and more automation services into the companies. Each aspect on its own wasn’t hugely profitable, but combined - much larger deal sizes. And given IBMs piece of the internet, it was time for e-commerce. Let that Gates kid have the operating system market and the clone makers have the personal computing market in their races to the bottom. He’d take the enterprise - where IBM was known and trusted and in many sectors loved.
And he’d take what he called e-business, which we’d call eCommerce today. He brought in Irving Wladowsky-Berger and they spent six years pivoting one of the biggest companies in the world into this new strategy. The strategy also meant streamlining various operations. Each division previously had the autonomy to pick their own agency. He centralized with Ogilvy & Mather. One brand. One message.
Unlike Akers he didn’t have much loyalty to the old ways. Yes, OS/2 was made at IBM but by the time Windows 3.11 shipped, IBM was outmaneuvered and in so one of his first moves was to stop development of OS/2 in 1994. They didn’t own the operating system market so they let it go.
Cutting divisions meant there were a lot of people who didn’t fit in with the new IBM any longer. IBM had always hired people for life. Not any more. Over the course of his tenure over 100,000 people were laid off. According to Gerstner they’d grown lazy because performance didn’t really matter. And the high performers complained about the complacency. So those first two years came as a shock. But he managed to stop hemorrhaging cash and start the company back on a growth track.
Let’s put this perspective. His 9 years saw the companies market cap nearly quintuple. This in a company that was founded in 1911 so by then 72 years old. Microsoft, Dell, and so many others grew as well. But a rising tide lifts all boats. Gerstner brought ibm back. But withdrew from categories that would take over the internet. He was paid hundreds of millions of dollars for his work.
There were innovative new products in his tenure. The Simon Personal Communicator in 1994. This was one of the earliest mobile devices. Batteries and cellular technology weren’t where they needed to be just yet but it certainly represented a harbinger of things to come.
IBM introduced the PC Jr all the way back in 1983 and killed it off within two years. But they’d been selling into retail the whole time. So he killed that off and by 2005 IBM pulled out of PCs entirely, selling the division off to Lenovo.
A point I don’t think I’ve ever seen made is that Akers inherited a company embroiled in an anti-trust case. The Justice Department filed the case in 1975 and it ran until 1982 eating up thousands of hours of testimony across nearly a thousand witnesses. Akers took over in 1985 and by then IBM was putting clauses in every contract that allowed companies like Microsoft, Sierra Online, and everyone else involved with PCs to sell their software, services, and hardware to other vendors. This opened the door for the clone makers to take the market away after IBM had effectively built the ecosystem and standardized the hardware and form factors that would be used for decades.
Unlike Akers, Gerstner inherited an IBM in turmoil - and yet with some of the brightest minds in the world. They had their fingers in everything from the emerging public internet to mobile devices to mainframes to personal computers. He gave management bonuses when they did well and wasn’t afraid to cut divisions, which in his book he says that only an outsider could do. This formalized into three “personal business commitments” that contributed to IBM strategies.
He represented a shift not only at IBM but across the industry. The computer business didn’t require PhD CEOs as the previous generations had. Companies could manage the market and change cultures. Companies could focus on doing less and sell assets (like lines of business) off to raise cash to focus. Companies didn’t have to break up, as CDC had done - but instead could re-orient around a full stack of solutions for a unified enterprise. An enterprise that has been good to IBM and others who understand what they need ever since.
The IBM turnaround out of yet another lost decade showed us options for large megalith organizations that maybe previously thought different divisions had to run with more independence. Some should - not all. Most importantly though, the turnaround showed us that a culture can change. It’s one of the hardest things to do. Part of that was getting rid of the dress code and anti-alcohol policy. Part of that was performance-based comp. Part of that was to show leaders that consensus was slow and decisions needed to be made. Leaders couldn’t be perfect but a fast decision was better than one that held up business.
As with the turnaround after Apple’s lost decade, the turnaround was largely attributable to one powerful personality.
Gerstner often shied away from the media. Yet he wrote a book about his experiences called Who Says Elephants Can’t Dance. Following his time at IBM he became the chairman of the private equity firm The Carlyle Group, where he helped grow them into a powerhouse in leveraged buyouts, bringing in Hertz, Kinder Morgan, Freescale Semiconductor, Nielson Corporation, and so many others. One of the only personal tidbits you get about him in his book is that he really hates to lose. We’re all lucky he turned the company around as since he got there IBM has filed more patents than any other company for 28 consecutive years. These help push the collective conscious forward from 2,300 AI patents to 3,000 cloud patents to 1,400 security patents to laser eye surgery to quantum computing and beyond. 150,000 patents in the storied history of the company.
That’s a lot of work to bring computing into companies and increase productivity at scale. Not at the hardware level, with the constant downward pricing pressures - but at the software + services layer. The enduring legacy of the changes Gerstner made at IBM.