IBM (LOU GERSTNER)

© 2010 IBM Corporation

Louis Gerstner – The Man who turned IBM around

Group Members

Ashish Popat – PG14039

Shweta Jaysingh - PG14070

Harikrishna Mehta – PG14072

Rohit Jethani – PG14081

Pratik Patil – PG14084

Yesha Bhatt – PG14104


INTRODUCTION Louis Gerstner Jr. arrived at IBM in 1993.

Company suffering from continuous depletion of resources, lost direction and unable

to compete.

2 key decision:-

a) reverse the plan to break up the company

b) shift the company away from its roots as a PC maker.

Big Blue’s turnaround under gerstner became a legend.


IBM (International Business Machines)

Began in 1914 as Computing-Tabulating-recoding Company

In 1924, adopted the name International Business Machines

Customer range from Individual considering a first computer to MNC’s

searching for solutions on a global scale.

Marketing approach often based on recycling and updating older systems

architectures.

Modest moves towards more industry-specific approaches to problem

solution in an effort to meet customers needs.


Decline in the Business of Mainframes Introduction of the personal computer in 1981 – A mixed blessing for IBM.

The company farmed out its operating system development process to Microsoft

Widespread availability of MS-DOS.

Customer desire for open system.

The Demand for mainframes declined as computing tasks moved to PC-based

networks.

IBM’s mainframe sales declined from 78% to 35% of total U.S computer hardware

sales.

Made major price cuts in mainframe to counter Competition.

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© 2010 IBM Corporation5


Contd.

The Open Systems had lower profit margins which led to lower earnings.

IBM personnel had worked with Mainframe in their entire carrier and it was hard

for them to work on Minicomputers.

Experienced delays in new product introduction due to its slow deliberate style.

Market research took 30 to 36 months to complete the process.

Slow pace of Product introduction along with high prices. E.g. IBM’s New laptop.

6


The Major Change

In November 1991, CEO J. F. Akers announced a major overhaul of IBM

Approximately 20000 employees scheduled to be laid off in 1992, in addition

to 20000 employees reduced in 1991.

The company expected saving of $1billion in 1992 followed by at least $2

billion in the coming years.

The breakdown would allow mangers to gain responsibility for controlling

costs and develop competitive product –marketing strategies.

The personal computer and workstation division of the personal systems unit

likely to benefit from the restructuring process.


• Develops and Manufacture processors and Related SoftwareApplication Business System

• Develops hardware, Software and services solutions for manufacturing ,finance, government and other

Application Solutions

• Enterprise solutions of large processorsEnterprise Systems

• Provide products, services, and management to internal usersNetworking Systems

• Manufacture Printer and Printing servicesPennant Systems

• Manufacture personal computers, workstation and operating systemsPersonal Systems

• Develop software for data management, office systems and application developmentProgramming Systems

• Direct access storage devices, tape drives and optical storage devicesStorage Products

• Manufacture Logic and Memory chipTechnology Products


PESTEL (1987- 1991) POLITICAL ECONOMIC

• Presidential Election • Persian Gulf War• Recession

SOCIOCULTURAL TECHNOLOGICAL

• Changes in lifestyle • WWW• Notebook computers

ENVIRONMENTAL LEGAL

• Increasing Taxes


SWOT (1987- 1991) STRENGTHS WEAKNESS

• Experts in Products and authorities in industry application.

• Company Controlled system design in companies.

• Strong brand recognition in the market

• High Cost products.• Slow pace of product

introduction• Time consuming Market research

OPPORTUNITY THREAT

• Introduction of Personal laptops• Open Systems

• Competition from Clone manufacturers.

• Introduction of MS-DOS program.

• Open Systems


Company’s Official Mission

“At IBM, we strive to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We translate these advanced technologies into value for our customers through our professional solutions, services and consulting businesses worldwide.”


Strategic Objectives To accelerate product deliveries

To grant individual business greater control over development strategies

including financial independence

To encourage third party relationship

To accomplish staff reduction

Financial Objectives 20% Profit Margin on Revenue

20% Return on Investment


Strategies Price Cuts to Counter Competition.

Lay-off of 10,000 and 20,000 employees in 1990 and 1991 respectively

Introduction of Notebooks

Breakdown of the company into different Business units.

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Year 1986 1987 1988 1989 1990 1991

US GDP (Billion $) 1791 1853 1930.9 2002 2040.4 2038.9

% Growth 3.5 4.2 3.7 1.9 -0.074

Year 1986 1987 1988 1989 1990 1991

Revenue (Billion $) 51.30 54.20 58.60 62.70 67.00 65.00

% Growth 5.65 8.12 7.00 6.86 -2.99

Earnings (Billion $) 4.70 5.20 5.80 3.70 6.20 -2.80

% Growth 10.64 11.54 -36.21 67.57 -145.16


1987 1988 1989 1990 1991

-4

-2

0

2

4

6

8

5.255.8

3.7

6.02

-2.86

Net Income

Net Income (In Billion $)


1992 to 1996

Louis V. Gerstner - Appointed as CEO in April 1993

Born on March 1, 1942 in Minolta, NY

Worked with McKinsey, American Express and

RJR Nabisco

Gerstner’s immediate task was to make the company profitable.

Made crucial decision to reverse plan to split IBM into 11 entities.


Four Critical Decisions

To keep the company together rather than break it up.To change and update IBM’s economic model.To reengineer how IBM did business in general.To sell IBM’s nonproductive assets.


PESTEL (1992- 1996) POLITICAL ECONOMIC

• Breakdown of International Trade barriers

• Presidential Election

• Decade of longest economic expansion


• Increase in the users of internet • Heavy Investments of Government in Technological R&D

• Commercialization of Internet

ENVIRONMENTAL LEGAL

NA NA



• Gerstner’s strong focus on being close to clients

• IBM focused on customer based product.

• No Marketing Strategy• Difficult to monitor the

functioning

OPPORTUNITY THREAT

• Network Computing • Competition from companies such as Dell, HP and Compaq


OBJECTIVES

Strategic Objective Paring IBM to a more efficient size Taking more care of IBM’s customers Decentralizing decision making Developing a strategy that would make clear which business the company

would focus on

Financial Objectives To achieve a positive net profit in the first year followed by at least 10% profit

of the revenues in the subsequent years


Year 1991 1992 1993 1994 1995 1996

US GDP (Billion $) 2038.9 2111.4 2169.3 2256.9 2318.3 2406.3

% Growth 3.6 2.7 4 2.7 3.8

Year 1991 1992 1993 1994 1995 1996

Revenue (Billion $) 65 64.5 62.7 64 71.9 75.9

% Growth -0.77% -2.79% 2.07% 12.34% 5.56%

Earnings (Billion $) -2.8 -4.97 -8.1 3.0 4.2 5.4

% Growth 77.50% 62.98% -137.04% 40.00% 28.57%


1992 1993 1994 1995 1996

-10

-8

-6

-4

-2

0

2

4

6

8

-4.97

-8.1

34.2

5.4

Net Income



1997 to 2000

Network-centered computing strategy evolved into full-fledged “e-business” strategy for IBM.

Launched huge marketing campaign to promote IBM as a company offering world class e-business solutions

Complete Solutions to client

Mid 1998 – Seven computer service deal

Win Execute and Team – Three words that defined IBM’s new culture


PESTEL (1997- 2000)

POLITICAL ECONOMIC

NA • Global recession in IT industry• Asian Financial crisis


• The advent of E-commerce

• 150 million users worldwide

• Y2K• Dot com bubble

ENVIRONMENTAL LEGAL

NA • Data security management and protection law



• Leading vendor in the field of high performance computing

• Coined the term e-business • Most patents held by any IT

company(R&D)

• Lack of planned distribution network

• Lack of unified s/w strategy

OPPORTUNITY THREAT

• Continue global expansion. Become more globally integrated.

• OEM Market

• Changing marketplace


OBJECTIVES

Strategic Objective e-business strategy Focus on individual units Customer orientation & client servicing

Financial Objectives Profit to be at least 10% of the revenues


Year 1996 1997 1998 1999 2000

US GDP (Billion $) 2406.3 2514.3 2626.2 2749.2 2861.7

% Growth 4.5 4.5 4.7 4.1

Year 1996 1997 1998 1999 2000

Revenue (Billion $) 75.9 78.5 81.7 87.5 88.4

% Growth 3.43% 4.08% 7.10% 1.03%

Earnings (Billion $) 5.4 6.1 6.3 7.7 8.1

% Growth 12.96% 3.28% 22.22% 5.19%


1997 1998 1999 20000

1

2

3

4

5

6

7

8

9

6.1 6.3

7.78.1

Net Income



What is your assessment of Lou Gerstner as Chief Strategist? What has he done

well? What has he done poorly?


Assessment of Lou Gerstner

Mission of IBM “At IBM, we strive to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We translate these advanced technologies into value for our customers through our professional solutions, services and consulting businesses worldwide.”


Strategic objectives:a) Focus on individual units

b) Customer orientation & client servicing

c) Restructuring exercise

d) Establishing leadership in the emerging network-centric computing world e-business strategy

•Financial objectivesa) Profit to be at least 10% of the revenues

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Evaluation of LG’S performance

(dollars in mns)

1994 1995 1996 1997 1998 1999 2000 2001

Revenue

64052 71940 75947 78508 81667 87548 88396 85866Cost

38768 41573 45408 47899 50795 55619 55972 54084Pat

3021 4178 5429 6093 6328 7712 8093 7723

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What has he done well?

Focus on immediate problems and evolve strategies to solve them. Continuing to reinvest in mainframe Compensation strategies – Stock Options and Bonus Revive the brand


What has he done Poorly?

Employee Benefits – Medical Coverage and Retirement pay. Change in the Corporate Culture.


What are attributes of LG which appear to have made him successful

at IBM?


Leadership

Focused

Foresight

Strategic Clarity


What have been the key elements of IBM’s strategy under previous CEOs?

Why was it fine for IBM to fundamentally change direction?


IBM CEO’s

Thomas J.

Watson(1914–1956)

Thomas J.

Watson Jr

(1956–1971)

T. Vincent Learson

(1971–1973)

Frank T. Cary (1973–1981)

John R. Opel (1981–1985)

John F. Akers(1985-1993)


Key elements of IBM’s Strategy

IBM’s Marketing Approach based on Recycling and updating Older

systems.

IBM’s Preference towards Proprietary solutions

Extensive research

Product expertise


Time for Fundamentally changing direction

Introduction of personal laptops and MS DOS system

Industry Switch from mainframes to Micro Computers

Price Cuts due to Increase in the competition

Customers preference towards Open Systems

Slow pace of Product introduction along with high prices

Inability to compete against smaller, more flexible firms

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Case does not say anything about John Patrick – it appears that the successful strategy was developed at different level than CEO. Comment.What is the role of John Patrick as chief strategist


Patrick joined IBM in 1967 and spent the first half of his employment there in various sales, marketing and management positions.

A business executive, author and innovative leader in the information technology industry

A part of strategy task force with Irwing Wladawsky-Berger

A gadget freak Head of Marketing for the ThinkPad laptop

computer An influential force behind IBM’s early

adoption of the Internet and World Wide Web


Goal: To help IBM become the Internet Business Machine company

Strategic Objectives:Catch the internet waveInfiltrate IBM with Internet thinkingMake use of the internet limitless possibilities Showcase IBM’s Global Network as the world’s largest Internet service provider

and a Web browser


How did it start?

An important initiative to help IBM catch the Internet wave was undertaken by John Patrick, along with David Grossman

Was among the first one to recognize the importance of the Internet A few visionary individuals at IBM who discovered the Internet as a potential

source of future revenues and developed an Internet strategy for the corporation as a whole

Their initiatives helped IBM transform into an e-business powerhouse


Implementation

Patrick became David Grossman’s mentor and go-between

Building of a primitive corporate intranet and manifesto under Patrick

Patrick became IBM’s semi-official Internet Czar

Mock up of IBM home page

May 11, 1994 – First mass contact with senior management of IBM


Signing up for the biggest display space at one of the first Internet World Trade conventions

Relentless campaigner

Louis Gerstner’s strong belief in networked computing fitted together with Patrick’s logic of Internet

Louis Gerstner acknowledges that the Internet is really for business


Patrick became the chief technical officer of the Internet group set up by IBM

Patrick started making business for IBM using the Internet – Olympics would have an official website for the first time

Basic Internet technology prototyped made its way into industrial-strength products


A success

Grossman’s vision and tenacity resulted in IBM transforming itself from a company that was in decline into an Internet Services firm that rode the wave of e-commerce opportunities

Grossman, a midlevel programmer, and Patrick, a corporate strategy staffer, brought IBM around through a combination of scheming and indefatigable campaigning.


IBM’s Performance till date


Journey of IBM post Grestner

Sam Palmisano ceo IBM (2002-2011)

Business Model of IBM in 2002

IBM

Hardware Software Services Personal Computers


“Offering complete solutions tailored to customers’ needs” – Strength of IBM

Highlights of Palmisano’s career at IBM -

Purchasing of PricewaterhouseCoopers.

Acquired 25 software companies specializing in data mining and analytics

Development of Global Integrated Supply chain.

Selling of PC business to Lenovo.

Prepared company for cloud computing

Launch of Smarter Planet Initiative.


Revenue Composition (In Mn $)


Virginia Rometty ceo (2011 till present)

Joined IBM in 1981 – Championed the purchase of the big business consulting firm, PricewaterhouseCoopers.

Highlights of Rometty’s career at IBM Attempt in 2012 to shore up IBM’s cloud computing business

- IBM V/s Amazon


Rometty’s Strategy for IBM

IBM’s three pillar strategy –

- Cloud

- Data

- Engagement

The triangle of cloud, data, and engagement is a way to think about corporate strategy. It’s also a relevant prism through which to see emerging market growth.


Thank you

Education

IBM (LOU GERSTNER)