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Dodge Retort
IBM 'Decided Not to Die'

By John Dodge

May 7, 2002 | The IBM Corp. annual report should be required reading for anyone in business. What makes the 2001 version special is the goodbye letter from John Dodge IBM CEO Louis V. Gerstner Jr., who retired March 1 after nine years with the company. He is serving out his term as chairman for the balance of this year.

The report also runs down 16 decisions that "transformed" IBM or, more accurately, saved the company from its "near-death experience" almost a decade ago. The tough-minded Gerstner even gets a bit emotional in his farewell letter and, of course, is trying to establish his legacy, which will easily stand on its merits as time passes. He and his team did a remarkable job.

The overarching message, which is well-supported by his success at Big Blue, is: Trust your own instincts. Don't be swayed by wisdom of the moment or what the press horde (me included) is writing or babbling when the chips are down.

The first in his Sweet Sixteen decisions — "We decided not to die" — examines Gerstner's opting to keep the company whole when disenchanted investors were screaming for dismemberment. Unwieldy Big Blue, they argued, was saddled with unprofitable businesses, with aging overlapping products, and shouldn't go forward as an independent entity.

Nonsense, said Gerstner, who scorned the notion put forth in the Sept. 10, 1992, Wall Street Journal that IBM might be "worth more dead than alive." The feedback loop told him customers liked IBM, but found it was just damned hard to do business with it. Gerstner's IBM made it easier

Early in his tenure, he was also criticized for lacking the "vision thing" that rivals, such as Bill Gates at Microsoft and Larry Ellison at Oracle, had in such abundance. He shunned the "vision thing" and didn't pal around much in the tech venues like the annual Comdex show in Las Vegas. Coming from RJR Nabisco, the tech outsider was labeled "biscuit salesman" and "tobacco vendor."

His vision, as it turned out, was to match IBM's core competencies against promising markets. (His one Comdex keynote speech, as I recall, did not go over well.)

Another decision that resonated with me was the reaffirmation of IBM's "technical heritage." Again, he took heat when he slashed IBM Research's budget from $6 billion to $5 billion, emphasizing commercialization over Big Blue's longstanding tradition of conducting pure research. (R&D expenditures in 2001 were $5.29 billion, down from $5.5 billion in 1999.)

First in Patents 
Gerstner wanted innovation that mattered. Another 2001 milestone: IBM says it became the first company to receive more than 3,000 patents in a year, a record that may next be broken by a biopharma drug discovery company.

Decision No. 5 examines IBM's reversal on the very stratagem that made it a 30-year powerhouse — proprietary computing. Many mistrusted its early initiatives in open standards such as supporting Linux. IBM also did the unthinkable and made a business out of selling components and chips to other companies, rivals included. The open orientation was real, all right.

IBM takes a not-so-subtle swipe at archrival Microsoft, proclaiming that companies clinging to proprietary technology are doomed. Biopharmas developing all those slick integrated tools and IT infrastructures, take heed:

"We know what it's like to be on the wrong side of history. The future won't be kind to those who ignore this lesson," he warns.

The copy in No. 16 about "not abandoning" the company's values sits astride a photocopy of a Sept. 21, 1953, policy directive from T.J. Watson Jr. reminding his charges to hire the best and brightest, regardless of "race, color, or creed." In the corporate world, IBM pioneered that standard.

Gerstner makes a few passing references about the life sciences. CEO Sam Palmisano, Gerstner's successor, mentions the grid computing network Big Blue is setting up with the University of Pennsylvania to advance breast cancer screening techniques.

Just to prove this is not a paid advertisement for Big Blue, let's look at IBM, pre-1990.

Anyone who competed or partnered with IBM felt its wrath. When IBM sneezed, the industry caught a cold. The rigid culture discouraged individuality and creativity. Slow afoot, IBM executives, famous for endemic indecision, didn't need to get out of their own way as long as they enjoyed the lucrative mainframe monopoly.

Also remember, Gerstner had to fire nearly 200,000 people, bringing IBM staff employment down to 240,000. The workforce was pocked with deadwood, and has since risen to 320,000. In the 1991-95 timeframe, IBM was nowheresville. It was that bad.

Employees were embarrassed to work there as the Age of the Dot-coms dawned.

There are plenty of challenges ahead. IBM must deal with declining hardware and flat software sales, propped up for now by a growing services business. It's still big and by definition, bureaucratic.

But Gerstner's exploits were no less daring than the risks T.J. Watson Jr. took in the early and mid-'60s with mainframes. Second chances aren't just a matter of luck. Pulling them off requires research, risks, the contrary view, and above all, trusting one's innermost instincts.

That's why IBM saw the white light and lived to tell about it.* 

For reprints and/or copyright permission, please contact Angela Parsons, 781.972.5467.