Friends starting off with a three part series of Turnaround Stories from Corporate World. These stories were part of eMagazine published by our bank/ circle.
Greatest Corporate Turnaround Stories (Part 1- The turnaround
at IBM)
It
is the law of nature that whatever goes up has to come down one day. Every
business has to go through the different phases of a business cycle. The way
the business composes itself through the difficult times makes its growth
story. In this series we will look at the stories of some of the greatest
corporate turnaround stories, the stories of grit and determination, the
stories of change, the stories of trust and belief, the stories that will
enable us to come out successful in the time of need.
Corporate
turnarounds are almost never engineered by a single person. A CEO who takes a
failing company and makes it successful again obviously has help from
management, a board, along with customers and shareholders. The vision for how
a company can change and the execution skills to put the vision to work begin
with the chief executive. In this part we look at how Louis Gertner and his
team at IBM helped it become one of the successful companies globally.
The Legacy
IBM
was one of the premier technology companies in the United States from the time
that the firm’s founder was replaced by his son Tom Watson, Jr. In 1952.
Government contracts and the company’s exploitation of early digital technology
allowed IBM to enter the mainframe business with the 700 series of computer
systems. The company became the premier provider of large computers and data
systems for governments and multinational corporations. IBM’s R&D prowess
allowed it to keep the position as the leading source of large computers for
nearly three decades. Its employee base rose from 56,000 in 1955 to 270,000 in
1970.
The Problem
Watson
had a heart attack in 1971, and the CEOs who followed him took the company
through a series of ill-advised moves for diversification. This included forays
into the office copier and PC industries. IBM kept its lead in the market for
mainframes, but it was reduced by competition from younger companies like
Digital Equipment. IBM’s major product lines lost share, and its new businesses
failed to create large markets. The company began to cut employees in the early
1990s to improve margins. John Akers, who became CEO in 1985, is widely
considered to be the man who nearly ruined IBM. His strategy was to move
down-market into businesses related to large computers and high-end software.
But, the products for these customers were generally low-priced with low
margins. IBM failed to stick to its success as a provider of the industry’s
most well-built and expensive machines. IBM also failed dismally to keep up
with the most rapidly growing areas of the tech market – PC operating systems
dominated by Microsoft and computer chips, a market controlled by Intel.
The Breakthrough
As
the market shares of IBM tumbled, it became desperate enough to hire someone
from outside the industry to turn the company around. Louis Gertner, Jr. had
run RJR Nabisco and had been in senior management at American Express. A Harvard Business School graduate, Gerstner was also one of the few McKinsey and
Company partners to leave the firm and successfully run several large
companies.
The Change
The first job Louis had to take up when he joined was to make the
company solvent. He embarked on a mission to cut billions of dollars of
expenses and also raised cash via selling assets. He had to do this as the
company was fast running out of cash to run its day to day expenses. However
the game-plan was not to break the company into smaller manageable units.
Instead he wanted to leverage all the 3 core parts of the business. He wanted
to leverage all the business to deliver the entire gamut of end to end services
to the customer. This strategy helped them then and is still working
wonderfully well for the company.
Once the company becomes too big each unit acts as a separate company on
its own and the company as a whole begins to suffer. Same was the case with IBM
with separate units competing with each other and causing harm to the
company. He broke this thinking and tied the rewards of the employees to
the performance of the entire company rather than to the unit which they were
working for. This ensured better integration and ensured cohesiveness among the
various units. So he wanted to break the fiefdom culture which was slowly
engulfing the company.
Being an outsider he was not particularly attached to one single
product. He had one mission and that was to turnaround the company and he was
willing to sacrifice a few non performing products which an insider would have
found it difficult to do. He also had to look upon the people management as in
IT industry skilled people are the biggest assets. He bought in a culture where
in the performance was the key to the success of the employee in the
organization. He also made the employees a partner in the turnaround
story by issuing liberally the stock options which till then was restricted
only to a few in the organization.
With this Lou Grestner had successfully made the Elephant dance to his
tunes. In his 9 years at the helm, the company had grown by around 40%
with the majority of the growth coming from the services and consulting
division. The market also responded positively. The stock price of the company
shares increased 8 times. He had laid a vision on what should be the focus
areas for the company in the future. So the services and consulting led growth
had now catapulted the company back to its glorious days. Lou Grestner will
always be remembered in the company and also across the world in the times to
come as the architect of one of the world’s most successful corporate
turnaround stories.
The Lessons Learnt
1. Identify your core competencies
2. Divest efficiently and work hard on your strengths
3. Never hesitate to take risky decisions
4. Consider your people the ultimate resource
5. Choose your people wisely &
6.
Last but not the least trust your instinct.
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