Examine Your Assets and See If, and Where, They Can Add Value

In Gerstner’s book, there is an intriguing passage in which he defends turning IBM into an integrated services firm.  As an aside, he says that it might not now have made sense to build up IBM’s diverse assets, but now, having them in existence, it made sense to use them.  And he points out that even in the age of modularity, many customers needed, and were willing to pay for, a company that was able and willing to put everything together for them.

At first glance, this comment might seem at odds with the economist’s dictum that "sunk costs are sunk."  But Gerstner was not advocating the integration of IBM services because IBM had historically invested a lot in building up the parts of the organization.  He was pointing out that diverse parts, if properly integrated, would provide substantial added-value to an important sub-group of customers.


Here is the relevant passage from Gerstner:

(p. 61)  Unfortunately, in 1993 IBM was rocketing down a path that would have made it a virtual mirror image of the rest of the industry.  The company was being splintered—you could say it was being destroyed.

Now, I must tell you, I am not sure that in 1993 I or anyone else would have started out to create an IBM.  But, given IBM’s scale and broad-based capabilities, and the trajectories of the information technology industry, it would have been insane to destroy its unique competitive advantage and turn IBM into a group of individual component suppliers—more minnows in an ocean. 


The reference to the book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

Good Management Takes Guts and Time

Gerstner recognizes that decentralization is sometimes a good thing, but thinks in some ways the trend has gone to far in business—some business functions may be efficient to centralize: 


(p. 246)  I’m thinking here of common customer databases, common fulfillment systems, common parts numbering systems, and common customer relationship management systems that permit your customer-service people to provide integrated information about everything a customer does with our company.

On the surface it would seem that these are logical and powerful things to do in an enterprise.  Nevertheless, they usually require profit-center managers to do something very hard—relinquish some of the control they have over how they run their business.  Staff executives, consultants, or reengineering teams cannot do this without active line management involvement.  The CEO and top management have got to be deeply involved, reach tough-minded conclusions, then ensure that those decisions are enforced and executed across the enterprise.  It takes guts, it takes time, and it takes superb execution.


Reference to the book:

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change.  New York:  HarperCollins, 2002.

For Major Changes, CEOs Need to Change Who “Calls the Shots”

Some of the best advice in Gerstner’s book concern ‘execution’ issues of rewards, incentives, and who has the power to make which decisions.  Consider:

(p. 249)  If a CEO thinks he or she is redirecting or reintegrating an enterprise but doesn’t distribute the basic levels of power (in effect, redefining who "calls the shots"), the CEO is trying to push string up a hill.  (p. 250)  The media companies are a good example.  If a CEO wants to build a truly integrated platform for digital services in the home, he or she cannot let the music division or movie division cling to its existing technology or industry structure—despite the fact that these traditional approaches maximize short-term profits.

. . .

I knew we could not get the integration we needed at IBM without introducing massive changes to the measurement and compensation system.  I’ve already explained that the group executives who ran IBM’s operating businesses were not paid bonuses based on the unit’s performance.  All their pay was derived from IBM’s total results.

When a CEO tells me that he or she is considering a major reintegration of his or her company, I try to say, politely, "If you are not pre-(p. 251)pared to manage your compensation this way, you probably should not proceed."


The reference for the book is:

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change.  New York:  HarperCollins, 2002.

(Note:  ellipsis added.)


Managers Get, Not What They Expect, But What They Inspect

Louis Gerstner is well-known for down-playing the ‘vision’ thing. he emphasizes that seemingly more mundane issues are often more important than the lofty ones. For example, one of Gerstner’s key insights is often ignored in business: most workers perform well, when management takes the time and effort to observe performance, and to reward it when it is good:

(p. 250)  I have already pointed out that people do what you inspect, not what you expect.  Leaders who are thinking about creating true integration in their institutions must change the measurement and reward systems to reinforce this new direction.

(Note: italics in original. Also, see related passages on pages 212, and 230-231.)


Reference for the book:

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change.  New York:  HarperCollins, 2002.

Antitrust Cases Can Hurt (Even Those that Get Dropped)

The antitrust lawsuit against IBM was dropped, and that against Microsoft result in the imposition of only minor legal remedies.  So some may conclude that IBM and Microsoft bore little ill effects from the suits.  But such suits can reduce morale, result in loss of talent, and restrain the efficiency, innovativeness and competitiveness of the prosecuted companies. 

In the case of IBM, Lou Gerstner has made some strong, and plausible, comments on the deleterious effects of U.S. antitrust action:


(p. 118)  The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration.  The suit was ultimately dropped and classified "without merit" during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup.  One has to imagine that years of that form of scrutiny changes business behavior in very real ways.

Just consider the effect on vocabulary—an important element of any culture, including corporate culture.  While IBM was subject to the suit, terms like "market," "marketplace," "market share," "competitor," "competition," "dominate," "lead," "win," and "beat" were systematically excised from written materials and banned at internal meetings."  Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor.  After a while, it goes beyond what is said to what is thought.


The reference to the book, is: 

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York:  HarperCollins, 2002.


“Bet the Company”

When entrepreneurs, or innovative companies, take large risks, and succeed, we sometimes begrudge them their success.  But we should remember that sometimes they took great risks, and that they could have lost everything if they had lost the ‘bets’ they made.

One of the most famous examples of ‘betting the company’ is when Tom Watson, Jr. of IBM ‘bet the company’ on the development of the expensive, but pathbreaking, system 360.  

This episode is mentioned many places.  One that I ran across recently is in Gerstner’s memoir of his own time at IBM.  The following lines appear in Gerstner’s brief summary of some important periods in IBM’s earlier history:

Much has been written about this period and how Tom "bet the company" on a revolutionary new product line called the System/360—the original name of IBM’s wildly successful mainframe family.

To grasp what System/360 did for IBM and its effect on the computing landscape, one needs to look no further than Microsoft, its Windows operating system, and the PC revolution.  System/360 was the Windows of its era—an era that IBM led for nearly three decades.  (p. 114)


The reference to the Gerstner book, is: 

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York:  HarperCollins, 2002.

Gerstner’s Insights on Business

 Source of book image:  http://ec1.images-amazon.com/images/P/0060523794.01._SS500_SCLZZZZZZZ_V1122531345_.jpg


Gerstner is known for turning around IBM, when many business experts thought it was headed down the tubes.  His book is useful as a report on what happened at IBM during his time as CEO, and also has some more broadly applicable observations.  I’ll mention a few of these in this and a few other postings in the next couple of weeks. 

It is interesting how many successful and important business leaders and experts have spent some time associated with the McKinsey consulting group, where Gerstner started his career.  One major McKinsey figure, Richard Foster, is a strong advocate and elaborator of Schumpeter’s process of creative destruction. 

I wonder if perhaps some of the success of McKinsey is due to the firm’s embracing and applying Schumpeter’s ideas?

Those who oppose creative destruction emphasize the destructive effect that the process has on some workers.  In fact the effects on labor are seen by many (e.g., Thomas Friedman) who are otherwise sympathetic, to be the major drawback of the process.  As a result some of them (e.g., Thomas Friedman) propose paternalistic ‘safety net’ labor policies.

We usually think of government as the main implementer of such policies, but among firms, IBM’s labor policies were among the most paternalistic.  This is usually viewed as one of the positives about IBM.  But one of Gerstner’s insights is to suggest that some of those in the IBM work force were hurt by IBM’s paternalistic policies:

(p. 186)  . . . I came to feel that the real problem was not that employees felt they were entitled.  They had just become accustomed to immunity from things like recessions, price wars, and technology changes.  And for the most part, they didn’t even realize that this self-contained, insulated system also worked against them.  I was shocked, for instance, to discover the pay disparities—particularly in very important technical and sales professions—of IBM comployess when comapred to the competition and the industry in general.  Our best people weren’t getting what they deserved.

Maybe I should mention that I don’t endorse everything in the book.  For example, Gerstner seems to think that a desire to "win" is crucial to success in business.  But I think the analogy between business and competitive sports is usually taken too far.  Can’t one also succeed in business from a desire to innovate and to improve the world?


The reference on the book is: 

Gerstner, Louis V., Jr.  Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change.  New York:  HarperCollins, 2002.

(Note:  in the quote, the ellipsis was added, but the italics was in the original.)