IBM was once a symbol of corporate greatness, innovation, and elitism. But that changed rapidly in the mid-1980s when the economy began to lose steam. Big Blue’s legendary no-fire policy was reversed when the giant computer-maker’s market share began to drop. Thousands of employees who had believed they were set for life were either laid off or sentenced to early retirement packages. Imagine how shocked they were.

Then on April 1, 1993, IBM brought in 59-year-old Lou Gerstner for the company’s top job. The former Nabisco CEO wasn’t an obvious choice; he wasn’t a techie, and many IBMers didn’t care for him.

But within 36 months, he’d turned the company around, and his eight years at IBM have become an academic study in management.

Gerstner recently announced he’s transitioning toward retirement, ending a 10-year contract that began in April 1993. During that period, he’s been a valuable role model for IT managers. In this article, I’ll discuss what Gerstner faced and the lessons he taught us.

Overcoming IBM arrogance
Before Gerstner arrived, the once premier computer-maker, known for its superior product lines (remember IBM’s indestructible Selectric typewriter?), was overcome by competition that was faster and more agile than the dethroned market leader. Even though IBM helped define the technology industry through business machines and computers, it failed to keep pace with the changes that were coming.

“The company thought it was invincible,” observes Sorel Reisman, who was a product planner for IBM’s Canadian division from 1974 to 1982. (Now he is a professor of information systems and decisions at Cal State Fullerton.) Worse still, “it was arrogant and assumed it would remain the technology leader. But many of the executives didn’t have the background to move the company forward. It was incapable of making quick decisions. And no one knew it.”

Contrary to corporate myth, IBM was a hotbed of politics and internal bickering. “It was extremely competitive, and it was survival of the fittest if you intended on making your mark in its cutthroat culture,” adds Reisman. Its policy was to hire from within and only go outside when absolutely necessary. Reisman was one of the few exceptions.

IBM’s 1990 profits of $6 billion plummeted to losses of $8.1 billion by 1992. Powerful competitors like EMC and Hewlett-Packard began biting off large chunks of IBM’s mainframe and storage lines.

Even IBM’s blue-suited stuffed shirts knew the company was in big trouble. So they began looking outside for a new CEO.

Tightening the reins at IBM
Lou Gerstner was not IBM’s first choice. Its board of directors wanted a superstar like GE’s Jack Welch.

Ironically, in hiring Gerstner, they selected someone who didn’t know the first thing about technology, according to Doug Garr, author of IBM Redux, Lou Gerstner & The Business Turnaround of the Decade. Garr was a speechwriter for IBM from 1996 to1998.

In fact, “Gerstner disdained technology,” Garr said. “He didn’t know anything about Lotus Notes, for example, but he knew networking was a good concept.”

The fact that Gerstner wasn’t a techie worked to his advantage. IBM didn’t need someone who understood how mainframes or PCs worked; it needed an experienced and brilliant manager. Industry observers put their money on the former Nabisco CEO and predicted that he would turn the company around in five years. Gerstner exceeded all expectations by doing it in 36 months.

“Gerstner was a no-nonsense, terse guy who had no time for schmoozing, nor did he want to build close relationships with his top execs,” Garr explained. “Many IBMers thought he was arrogant and didn’t like him. By the same token, they marveled at his business acumen.” An experienced manager, he wasted no time pulling in the reins on a company that had lost its focus. He cut his workforce, tightened management ranks, cut budgets on marginally profitable lines (PCs) and concentrated on building an e-commerce presence.

What Gerstner taught us
For good reason. MBAs are already studying Gerstner’s management style. Here are some of the valuable lessons you can learn from his 10-year reign at IBM.

  • Admit your ignorance.From the onset, Gerstner knew he had to be a fast study and learn how a technology company worked (where the profit centers were and what each product contributed to the bottom line) before he could effectively run massive IBM. Relating to his small army of techies was irrelevant.
  • Hire exceptional people. “One of his brilliant moves was hiring Jerry York as CIO,” says Garr. “There was a lot of waste and extraneous people on the payroll. York didn’t have to look far to find them. He saved the company tens of millions of dollars within the first two years.” Instinctively, Gerstner knew he had to constantly hire new blood. His philosophy was simple: “If you don’t perform, you’re out”. This outlook ended the nepotism that was part of the company’s culture for 40 years.
  • Get to know your customers.Customers want to see that the CEO is real. Unlike former IBM top brass who hardly ever ventured from their corner offices, Gerstner spent half his time traveling around the globe speaking to IBM customers. His staff marveled at his energy. He figured the best way to learn about his company was by talking to his customers and finding out whether his company was delivering on its promise. “It’s hard to estimate its value,” says Garr. “He probably spent more time on the road than any other CEO.” Routinely Gerstner asked his customers, “How can I serve you better as a vendor?” How else could he know what the company was doing wrong?
  • Stay focused. Gerstner never got sidetracked. He kept to the business at hand, righting the sinking company and putting it back on course. That meant returning to profitability. He was also never swayed by negative criticism. Many veteran IBMers thought Gerstner was out of his mind. But he never gave it a thought.
  • Adjust products to changing markets. Gerstner helped create IBM’s large OEM business, which had been small when he took over, according to Garr. “He went into the labs and said, ‘Let’s get these items out there. If we don’t make them under our own faceplate, let’s make them under someone else’s,’” says Garr. “IBM became a big outsourcing company, an area in which it never before thought it would see profits. Prior to Gerstner, IBM avoided outsourcing because it didn’t think it was glamorous.”
  • Spend wisely. Don’t waste company time on unnecessary trappings, such as cars, homes and big offices. Gerstner even sold IBM’s art collection—reportedly worth $50 million—a drop in the bucket for the massive company.

Lessons learned

What lessons have you learned from leaders like Gerstner? Add your comments to the discussion by posting below.