Adapt or Die: IBM’s Rebirth

It is hard to watch what many companies are going through today. Automakers, the news media, entertainment industry businesses, banks, and other financial institutions–they and others are being seriously challenged by market forces, technology shifts and the changing dynamics of a global economy. Some of them are fighting for their very survival.

IBM went through a similar process. If we go back about a quarter of a century, IBM was at the pinnacle of success. Over the previous two decades, IBM had practically invented general-purpose computing for business. They had helped put a man on the moon. Their researchers won Nobel Prizes. IBM’s revenue and market share skyrocketed as customers clamored for our latest products. By 1984 we were the toast of Wall Street.

Then things start to turn sour, as Bridget van Kralingen, general manager for IBM North America, explained:

Less than a decade later, we were toast. In 1993 we posted what at the time was the biggest loss in the history of corporate America, $8 billion. We had missed a number of key technology shifts. Customers who had previously said “no one ever got fired for buying IBM” were abandoning us for faster, more nimble competitors. One major business publication labeled us a dinosaur. Another said our era had passed. Finding our way back to growth and success was a difficult and painful process. But it illustrates that companies on the brink can turn things around if they do what is necessary.

In 1993, merely three weeks into his job, the newly installed chairman and CEO, Louis Gerstner Jr., had to preside his first meeting on strategy at the company.

Everyone in the room was actively sharing ideas. “After eight hours I didn’t understand a thing,” Gerstner recalled recently, in a talk for MBA students at HBS. “I was very depressed. Transformation of an enterprise begins with a sense of crisis or urgency,” he told the students. “No institution will go through fundamental change unless it believes it is in deep trouble and needs to do something different to survive.”

In his talk on November 20, titled “IBM’s Transformation,” Gerstner Jr. made clear that he did not see himself as the white knight in IBM’s subsequent transition and return to viability. He had the advantage of being an outsider when he joined the company after working at McKinsey & Co., American Express Company, and RJR Nabisco. Beyond that, however, change came to IBM in large part due to the pride and energy of the employees themselves, he said. His role was to kick-start the process: As an outsider, they let him.

Bridget sums up three lessons from IBM’s near-death experience and rebirth:

  1. Businesses must be genuinely global.
  2. Sometimes companies must fully transform their portfolios.
  3. Success comes from leadership, not mere survival.

Indeed, some firms might need a total overhaul, others need to reassess parts of their operation.

However, what Bridget did not mention explicitly was that IBM leadership had long ignored signals that customer demand had already shifted from having to acquire new hard- and software to needing to integrate complex multi-vendor IT infrastructures. Since leadership only incentivized people to sell more IBM products and services, management had simply ignored these signals. Now all Gerstner had to do was to listen to his employees. A few years later IBM shifted from a product manufacturer (product-centric) to a service powerhouse (resource-centric). Today, IBM Global Services is by far the largest division of IBM worldwide.

Focus goes where money flows, which is good. But by focusing too long on exploiting existing products and markets, and ignoring explorative opportunities, IBM turned a blind eye towards what’s around the corner. And it was almost fatal.

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