Culture and Leadership at IBM

Culture and Leadership
at IBM
10/2004-5239
This case was written by John Weeks, Assistant Professor, INSEAD, as a basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation.
Copyright 2004 INSEAD, Fontainebleau, France.
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We shall not cease from exploration

And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.
T. S. Eliot
Introduction
In 2003, Sam Palmisano succeeded Louis V. Gerstner, Jr., to become Chairman and CEO of
the International Business Machines Corporation (IBM). He inherited a company with
revenues greater than Microsoft, Intel, and Accenture combined: IBM made $7.5 billion on
sales of $89.1 billion in 2003, an increase of nearly 10% on the year before. The company
had over 320,000 employees worldwide; it maintained a massive research operation that was
awarded more patents each year than any other company in any industry; it made more money
selling services than it did selling hardware or software products. It is remarkable to recall
that the idea that any of this would be true of IBM, or that the company would return to its old
practice of choosing a lifetime IBMer as CEO, had seemed wildly implausible only ten years
before. IBM was long one of the most profitable companies in the world, but, by 1993, when
Gerstner was recruited to lead the company, the prevailing wisdom was that the company was
a dinosaur headed for extinction. IBMs humiliation is already being viewed by some as a
defeat for America, declared The Economist. IBM will fold in seven years, predicted Bill
Gates.1 It was widely agreed that, to save itself, IBM needed to be broken up, it needed to
abandon its traditional strategy of being a one-stop provider of solutions, and it needed to
shed its insular culture and habit of promoting from within. In the span of ten years, though,
Gerstner turned IBM around and turned that conventional wisdom on its head, by leading a
massive transformation that left the company resembling nothing more than its old selfbut
successful once again.
Gerstner was the first outsider ever to lead the company, and he may be the last. He took over
from John Akers, a man who had the dubious distinction of presiding over the companys first
loss in its sixty-seven year history, a stunning $2.8 billion loss in 1991. A year after that,
IBM recorded what was then the biggest corporate loss in history: $4.9 billion. A year after
that, Akers was gone. During Akers tenure, a company proud to be known for its lifetime
employment policy had cut 107,000 jobs and had announced that 25,000 more people would
be let go in a continuing effort to control costs. IBMs share price had dropped, from a high
under Akers of $43, to under $13.2 A company once feared as the monopolist of the most
important industry in the world still had 300,000 employees and revenues of $65 billion at the
end of 1992, but its market capitalization was then no higher than that of Microsoft, a
company of 12,000 employees and $2.8 billion in revenues.
Something had gone terribly wrong, and it didnt seem hard for analysts and commentators to
identify the root cause. The problem, it was agreed, went much deeper than John Akers.
Trim, with a firm jaw, looking every bit the former Navy fighter pilot that he was, Akers had
a regal aura about him; he exuded a confidence born of the total success he had achieved in
every job hed ever had. He was a forceful speaker, with a firm voice able to command the
attention of an audience. Before Akers was named to the top job at IBM, a professor at
Harvard Business School showed his MBA students videotapes of a half-dozen senior

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IBMers, and, almost unanimously, the students chose Akers as the man who would become
Chairman. He was the CEO from central casting, recalled Irving Shapiro, the former
chairman of Du Pont and an IBM director. There was never any question about whether he
would get the job.3 Akers was the shining example of the leaders the IBM culture could
produce. And so, it was said, the root problem was not the man but the culture of which he
was the exemplary product. It was the IBM culturethe culture once vaunted as the
sustainable source of IBMs competitive advantagethat had brought the company to its
knees.
The argument went like this. The company was known for its cult-like culture that led
IBMers to dress the same, to act the same, to think the same and to partake of the same
hubris. IBM employees wore blue suits and white shirts; they sang corny company songs but
never drank alcohol; they were pampered with expensive benefits; they believed they were
the best; and they believed they knew best. Myopic and inward-focused, they missed the
implications of the PC revolution and remained in collective denial about the death of their
beloved mainframes. IBMs strong culture had once been lauded by academics and
McKinsey consultants alike. In the early 1980s, best-selling books, such as In Search of
Excellence, held IBM up as Americas best-run company and attributed its success to its
culture.4 The culture boosted the morale of employees, so they worked harder, and it
represented a shared mindset that eased coordination among the companys sprawling units
and kept people focused, so they worked better. IBMers shared the same goals, the same
approaches and the same language. As an influential study concluded:
By knowing what exactly is expected of them, employees waste little time in
deciding how to act in a given situation. In a weak culture, on the other hand,
employees waste a good deal of time just trying to figure out what they should do,
and how they should do it. The impact of a strong culture on productivity is
amazing. In the extreme, we estimate that a company can gain as much as one or
two hours of productive work per employee per day.5
But it was argued that, as the environment changed, this cognitive efficiency proved
dangerously ineffective, blinding the company. By the early 1990s, the received wisdom was
that, Neither IBMs colossal spending on R&D, some $55 billion over the past 10 years, nor
its gigantic marketing staff and sales force were enough to alert it to the technological and
commercial trends reshaping the industry.6 Moreover, the culture was a source of inertia and
arrogance. Having prevented IBMs leaders from understanding the changes in the
marketplace, it slowed their ability to change the company accordingly. The only solution
seemed to be to break up Big Blue, as IBM was known, into individual Baby Blues that, once
sold off, could become nimble and entrepreneurial, like the new competitors they faced.
Akers started this process by decentralizing the organizations structure into thirteen
autonomous units that were supposed to deal with each other at arms length and at market
prices, but progress was slow. IBMs chief financial officer admitted, at the beginning of
1993, that he still could not produce separate figures for many of these businesses.7
Akers resigned, and, on January 26, 1993, IBM announced that a committee had been formed
to look inside and outside the company for a new leader. It took four months for them to find
one. The media speculated on the desperation of the committee: Would any qualified person
take the job? The man they found, Lou Gerstner, was a former McKinsey consultant and
American Express executive and currently the CEO of RJR Nabisco. An outsider in a

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famously insular company, and a technological naif in a famously fast-moving industry,

Gerstner was instantly dubbed The Cookie Monster within IBM. He was brought in to
transform the company, to save it, probably by breaking it up and selling pieces off, as he had
done at RJR Nabisco. Nine years later, though, on the day of his retirement, he wrote to his
fellow IBMers:
But along the way, something happenedsomething that, quite frankly, surprised
me. I fell in love with IBM. I decided, like many of you, that this was the best
company in the world at which to spend my career. IBM is a fascinating,
important, frustrating, exhausting, and fulfilling experienceand Ive enjoyed
every minute (well, maybe not every minute)! I am an IBMer for life.8
Gerstner did not break up the company. He revived it. The company once mocked as a hasbeen in the very industry it had created had regained the respect of customers and
competitors. The company that everyone said needed to be broken up was still together. The
company that everyone said must stop relying on mainframe sales was selling more
mainframes than ever as internet servers. The company that everyone said could not be
profitable with so many employees and so much investment in basic research had more
employees than ever and had cut its R&D budget by less than a quarter, while actually
increasing the share allocated to basic and applied science from 78% to 87%. The company
that everyone said had to ditch its outdated, outmoded, indulgent culture had performed a
turnaround that centered around returning the company to its cultural roots. Analysts and
commentators agreed that Lou Gerstner had created a revolution within IBM, but Gerstner
himself mused, On one level so much about IBM has changed. On another level very little is
different.
Lou Gerstner
Lou Gerstner was not a technologist, and he did not pretend to be. On the day it was
announced that he would take over IBM, he was asked by reporters what sort of computer he
himself owned. He had a laptop, he said, but he honestly didnt remember who made it.9
When he was approached by Jim Burke, on behalf of the board, Gerstner told Burke he was
not qualified for the job. Burke replied that the board was not looking for a technologist, but
rather a broad-based leader and change agent. If that was the desired profile, then Gerstners
background fitted. He had gone straight from his undergraduate studies at Dartmouth to
Harvard Business School and from there to McKinsey & Company in New York City.
He stayed at McKinsey for nine years, reaching the level of senior partner, before leaving to
join his largest client at the time, American Express. Gerstner ran American Expresss Travel
Related Services Group for eleven years and left in 1989, to become the chief executive of the
newly created RJR Nabisco. Finding the company deep in debt after its leveraged buyout by
Kohlberg Kravis Roberts & Co., Gerstner sold $11 billion worth of assets in the first twelve
months. He earned a reputation as an aggressive cost-cutter and balance-sheet manager.
Gerstner knew something of IBM before he joined. He had been a customer of IBM at
American Express and so had seen the arrogant attitude the company could take towards its
customers.

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Ill never forget the day one of my division managers called and said that he had
recently installed an Amdahl computer in a large data center that had historically
been 100-percent IBM equipped. He said that his IBM representative had arrived
that morning and told him that IBM was withdrawing all support for his massive
data processing center as a result of the Amdahl decision. I was flabbergasted.
Given that American Express was at that time one of IBMs largest customers,
I could not believe that a vendor had reacted with this degree of arrogance.
I placed a call immediately to the office of the chief executive of IBM to ask if he
knew about and condoned this behavior. I was unable to reach him and was
shunted off to an AA (administrative assistant), who took my message and said he
would pass it on. Cooler (or, should I say, smarter) heads prevailed at IBM and
the incident passed. Nevertheless, it did not go out of memory.10
IBMs founder, Thomas Watson, Sr., had been the father of this attitude. His biographer,
Kevin Maney, tells the story of how, in 1943, Watson grew furious at a report prepared by the
companys second biggest customer at that time, Bethlehem Steel. The report listed
32 recommendations that Bethlehem demanded IBM make, or Bethlehem would take their
business elsewhere. Watsons reaction? To turn the threat around. Knowing that Bethlehem
would grind to a halt without IBMs machines, but that IBM would barely feel the loss, even
of such a large customer, Watson wrote to Bethlehem to say that, if they were not satisfied
with IBMs machines, and if IBM was doing such a terrible job, well then IBM would come
and take all the machines away. IBM, who rented rather than sold their machines at that time,
could do it. Bethlehem had no choice but to back down, and the contents of the report never
resurfaced.11 Forty years later, IBM was pulling the same stunts but without the same power.
The key lesson Gerstner learned in his time with IBM, as he later reflected, was the
importance of culture.
I have spent more than twenty-five years as a senior executive of three different
corporationsand I peeked into many more as a consultant in the years before
that. Until I came to IBM, I probably would have told you that culture was just
one among several important elements in any organizations makeup and
successalong with vision, strategy, marketing, financials, and the like I came
to see, in my time at IBM, that culture isnt just one aspect of the gameit is the
game.12
There were tremendous strengths in the companys culture, Gerstner came to recognize
characteristics that no one would want to lose.13 But much of what was wrong with IBM, he
diagnosed, lay in its culture as well. And a companys culture was first and foremost a
product of its history and the lasting influence of its founding leaders: Thomas Watson, Sr.,
who ran the company for forty-two years, and his son, Thomas Watson, Jr., who led it for the
next fifteen years.
Thomas Watson, Sr.

IBM was born on February 5, 1924. It was on that day that Thomas Watson, Sr. applied to
the New York Stock Exchange to change the name of the Computing-Tabulating-Recording
Company (C-T-R) to the International Business Machines Company (IBM). The life of Tom

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Watson, Sr. is a rags-to-riches story. He was born, in 1874, on the struggling family farm in
rural New York state. Leaving school at 16, he took a series of jobs, including selling sewing
machines door to door from a cart. Watson had an intensely superstitious learning style; he
drew lifelong lessons from episodes that made an impression on him. Take, for example, his
attitude about alcohol. Like most traveling salesmen, Watson spent most of his evening at the
local saloon of whatever town he was visiting. According to family lore, one evening Watson
came out of a bar having drunk until closing time and found that his horse and cart, and the
sewing machines on it, had been stolen. He decided then and there that alcohol could never
be mixed with business.14
Finding no real success in any of his ventures, he joined National Cash Register (NCR) as an
apprentice salesman, in 1896. He proved himself an excellent salesman and rose quickly in
the company. In 1903, he was picked out by NCRs notoriously visionary and tyrannical
founder, John Patterson, for a special assignment. NCR had a virtual monopoly in the cash
register business, and its machines were durable enough that the main competition it faced
was from dealers selling older, used NCR machines. Watsons assignment was to destroy the
used cash register business. He went undercover and set up the phony Watson Second-Hand
Cash Register Company, which was funded by NCR. The strategy was to move into a market
and undercut all existing used cash register businesses, until they were driven out of business.
Watson ran this business for nearly five years, devastating used cash register businesses in
city after city.15 He was rewarded for his efforts with an executive post in NCR and became
Pattersons right-hand man.
Watson would later say that, Nearly everything I know about building a business comes
from Mr. Patterson.16 Hallmarks of the IBM culture like the Hundred Percent Cluban
elaborate convention where salesmen, who had met their quota, were celebrated and
pampered at the companys expense, while forced to attend long inspirational lectures by their
leaderswere copied from NCR.17 Like Patterson, Watson ran his company as a dictator.
Like Patterson, Watson was addicted to flattery and would surround himself with sycophants.
Yet, like Patterson, Watson inspired fierce loyalty among his salesmen, and they delivered
results for him.
Watson learned another lesson too from Patterson and NCR. In 1912, Patterson, Watson, and
twenty-eight other officials and employees of NCR were indicted by a federal grand jury, on
charges of criminal violation of the Sherman anti-trust law. The government showed a
pattern of deception and intimidation by NCR, including Watsons used cash register
operation, and, in February 1913, the defendants were convicted and sentenced to a year in
prison, pending appeal. If there was a single moment, biographer Kevin Maney writes,
when Tom Watson changedwhen he decided that a squeaky-clean image and reputation
were paramount in business and in lifethis was that moment.18 The relationship between
Patterson and Watson soured during this time, and Watson was forced out of NCR by the end
of 1913, before the appeal had even been heard. Watson would avoid jail, and, at age 40, with
$50,000 in severance, he left for New York City to find a job.
He landed as head of C-T-R, a conglomeration of small companies that made time clocks,
scales, and also Hollerith tabulating machines, which added up and sorted information
recorded as punched holes on rectangular cards.19 There is no evidence that Watson saw the
future of tabulating machines as information processors, and, indeed, he was no technological
visionary. As Chairman of IBM, he would later famously turn down Chester Carlson, who

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tried to interest IBM in his xerography machineCarlson would go on to found Xerox, and
IBM would later spend millions trying to break into the copier business.20 It wasnt
technology that attracted Watson to C-T-R. Watson was a salesman, and he wanted to run his
own sales company. C-T-R offered that opportunity.
C-T-R was a loose confederation of very different businesses, none of them performing well
financially. It had no single culture, except what Watson imposed on its various divisions,
each of which had long done things differently. Watson was impressed with his own business
philosophy and was fond of giving advice and having those around him take it. Early on in
C-T-R, he made it clear that he believed, If you are going to call on important people, you
have to dress like them. This meant dressing in conservative business suits, and the
company quickly had an unwritten dress code. Similarly, Watson made clear his belief that
business and alcohol did not mix, and subordinates took note.21
The company faced it first major test during the recession of 1920-21. In 1920, C-T-R was a
small company with $14 million in revenues, $2 million in earnings and 2,731 employees, but
it was growing fast. Watson, who believed that the bold move was usually the right move,
pushed his management team to double the size of the company in 1921. It was a terrible
decision; the company boosted production and built up inventories just in time for the bottom
to drop out of the economy. Watson resorted to layoffs and salary reductions to get by. Full
employment was not part of the culture at that point and wouldnt be until the company was
on much firmer footing.22 What Watson did believe, though, was that treating workers well,
giving them security and superior benefits, was the best way of keeping the unions out of the
companysomething he was intent on doing.23 Over the years, his views became
increasingly progressive, as he recognized the importance of loyal, happy workers.
Watson disliked the company name, Computing-Tabulating-Recording Company. It seemed
to tie his hands, first of all, from selling one or more of the three divisions: computing,
tabulating, or recording. He also complained that it wasnt powerful-sounding, like General
Electric or American Telephone and Telegraph, nor was it euphonious. He changed the name
to IBM in 1924 and, in so doing, became IBMs founder.24 Euphony would turn out to be
important for the unexpected reason that the company would become known for its Songs of
the IBM. In the early 20th centurya time before radio and a time when making music was a
common and natural part of many social occasionsit was not unusual for people to sing
songs at corporate functions. Watson liked singing, and sycophantic executives took note of
this. In particular, Harry Evans proved to have a special talent for taking popular songs and
making up his own words, sometimes humorous, more often obsequious, to go along with
them. In 1925, Evans went to Watson to propose putting together a booklet of his IBM songs,
so that people could sing them at company gatherings.25 Watson approved, and what started
out as a fun idea became a ritual and eventually an embarrassment to many, including Tom
Watson, Jr.26 Here is an example, this one sung to the tune of Auld Lang Syne:
T. J. Watson/ youre our leader fine/ the greatest in the land
We sing your praises from our hearts/ were here to shake your hand
Youre IBMs bright guiding star/ youre big and square and true
No matter what the future brings/ we all will follow you.
As IBMs revenues soared, so did Watsons sense of self-importance. He wanted IBM to be
more than a company; he wanted it to be an institution. IBM almost exclusively hired young

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people straight out of college and sent them through up to twelve weeks of education and
orientation at the IBM School House in Endicott. Lecturers taught IBMs history and
Watsons management philosophy, as well as sales techniques and product information.
Watson visited each new class, passing on his wisdom and telling stories.27 The front door to
the School House had the motto THINK written over it in two-foot-high brass letters.28
THINK was a motto Watson brought from NCR, and, at IBM, rectangular signs saying
THINK could be found in every executives office, in meeting rooms, factories, cafeterias.
The story was often retold of Watson, in one particular meeting, looking for the THINK sign
to reinforce a point he was making, only to notice that there wasnt one. The THINK
signwhere is it? I guess somebody took it down. What do you know about that? Find out,
Mr. Waters, when that was taken out of this room and have four put in.29
The company became famous for the THINK slogan and the signs and was even teased in
newspaper cartoons for their ubiquity.30 Watson relished the publicity, as he cultivated the
idea that IBM was special. We do a great many things in our business that strike outsiders as
being unusual, Watson said. Sometimes, young men disagree with our ideas or our
policies, because they believe they know better ways. Such young men never make a success
with us.31
Tom Watson, Jr.

Tom Watson, Jr. hated the cult around his fatherseeing his fathers mottoes pasted up
everywhere, hearing songs about his father, smelling the deference among IBMers to his
father.32 From the time Tom Jr. joined IBM in 1937, to the day his father died twenty years
later, in 1956, the two fought bitterly. Watson Sr. cherished the idea of passing the company
on to his two sons (Toms younger brother, Dick, was put in charge of IBM World Trade, the
name the company gave to its international operations), but IBM was his life, and he enjoyed
his role as president of IBM more than anything else. He couldnt, or wouldnt, let go. He
held onto control of the company, with executives falling over themselves to implement his
increasingly idiosyncratic whims, until he became a self-parody, even telling the same stories
over and over in meetings. Tom Jr., who had been named IBMs president in 1952, became
increasingly impatient with the interference of his father, who retained the titles of chief
executive and chairman.
Perhaps the most important issue over which Watson father and son fought was electronics.
Tom Jr. believed that the future of the company lay in electronic computers. Tom Sr.
believed to his death that punch cards were the best means of data storage, and that customers
would never trust their data to magnetic storage in place of real pieces of paper they could see
and touch. Tom Jr., however, pushed the company into electronics, and everyone in IBM
knew that it was his team that had developed the IBM 701the first successful line of
general purpose computersand he earned the companys respect as a leader in his own right
because of it.33 IBMs revenues exploded during the post-war economic boom, and that
growth continued through the 1950s. In 1955, Tom Jr. appeared on the cover of Time
magazine over the caption:
IBMs THOMAS J. WATSON, JR.
CLINK. CLANK. THINK.

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IBM had become synonymous with the computer, and Thomas Watson, Jr. (to the jealous
annoyance of his father) had become synonymous with IBM.34 Watson Sr. died the next year,
at the age of 82.
In the years after he took over the company, and as it became increasingly huge and
decentralized, Tom Jr. felt it important to codify the philosophy that his dad had espoused in
managing the company. He derived three basic beliefs and argued that the company had to be
ready to change everything else, except those beliefs. They were:
Respect for the IndividualRespect for the dignity and the rights of each person in the
organization.
Customer ServiceTo give the best customer service of any company in the world.
ExcellenceThe conviction that an organization should pursue all tasks with the
objective of accomplishing them in a superior way.
Until 1993, all new employees were taught the importance of the Basic Beliefs; they were
considered the cornerstone of IBMs culture. More than technological innovation more
than management and marketing skills more than industry leadership, reads a copy of the
companys employee handbook from the 1990s, IBMs Basic Beliefs define the company.
The 1960s saw IBM launch the hugely successful System/360 line of mainframe computers
that would be the engine of the companys profits for over twenty years. Fortune magazine
called the project, IBMs $5,000,000,000 Gamble. The company spent more money
developing System/360 than was spent on the Manhattan Project to develop the atom bomb
during World War II. It was the biggest privately financed commercial project ever
undertaken, but the biggest risk to the company stemmed from the fact that System/360 would
make all of IBMs current machines obsolete and replace them with a new family of
processors. It cannibalized the markets already dominated by IBM. What was revolutionary
was that the new machines were all compatible with one another.35 When customers outgrew
one machine, they could upgrade to a different System/360 model, without having to replace
software or peripherals, such as tape and disk drives and printers. This was extremely popular
with customers and helped to lock them into IBM, by making switching to a competitor
expensive.
For the next twenty years, IBM was essentially a one product-line company, and, on the back
of that one product-line, the company grew at a compound rate of 14 percent a year from
1965 to 1985. Gross margins averaged 60 percent during that period, and IBM had a
30 percent share of the market. The company had leap-frogged its competitors and came to
dominate the market, to such an extent that the Johnson administration would file a massive
antitrust suit against the company, in 1969, that would drag on until it was dismissed without
merit during the Reagan administration. Two things happened to the culture of the company
during this period. The first was that the tremendous profitability led to an expansion of
employee benefits and programs that made IBM one of the best employers in the world. The
second was that the scrutiny from the Justice Department of IBMs competitive practices led
to a cautiousness that was reflected even in the vocabulary used within the company. Words,
such as market, marketplace, market share, competitor, competition, dominate,
lead, win and beat, were banned from written materials and internal meetings.36

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John Akers
In 1980, IBM had $40 billion in sales. CEO John Opela man who had cut his teeth solving
manufacturing and logistics problems during the rollout of System/360gambled the
company in the same way that Watson pere and fils had each done again and again. He set a
target for IBM to reach $100 billion in sales, by 1990. The company built factories and
facilities and hired over 100,000 people through the 1980s, in pursuit of that goal.37 IBM was
focused on Japanese competitors, such as Fujitsu, Hitachi and NECand also on AT&T
which was moving into the computer businessand had decided that the strategy for beating
them was to be the low cost provider, by leveraging economies of scale. By 1985, when Opel
was replaced by Akers, it looked to be on track to meet its bold goal of $100 billion. Sales of
mainframes and of IBMs unexpectedly successful PCs were booming. The antitrust suit had
been dropped. The company looked invincible. Within two years, however, it was clear to
Akers and his team that the market had changed dramatically. The cost of computing power
dropped dramatically, as chips became cheaper and more powerful much more quickly than
anticipated. Computer-industry sales grew by less than 10% annually through the second-half
of the 1980s. IBMs sales didnt grow at all. Suddenly the company had a massive
overcapacity problem.
Between 1987 and 1991, Akers slashed manufacturing capacity by 40% and made deep cuts
in the workforcewhile, technically, not breaking a pledge made by Watson after the
Depression that the company would never lay anyone off. He decentralized the management
of the company and shifted R&D spending from hardware to software and services. He
changed IBMs arrogant and aloof attitude towards competitors, signing alliances with
hundreds of companies, including Apple, Toshiba and Siemens. He pushed forward the
development of OS/2, as part of a strategy to take back control of the PC operating system
from Microsoft. And he launched a culture change program inside the company, called
Market Driven Quality, that was centered around the idea of empowerment and the reality of
a new pay-for-performance incentive system. The old social contract, which had been based
on expectations of lifetime employment, retraining (because people dont become obsolete,
only skills become obsolete) and equal pay for equal work, was labeled old-fashioned and
marked for change. As The Economist wrote, ten days before Akers resigned, Any defender
of Mr. Akersthough it is hard to find one these dayscan point out that, far from being
content to pursue business as usual, he began to overhaul IBMs management and operations
soon after its sales and profits faltered in his first year.38 Nevertheless, the companys
fortunes continued to deteriorate, and Akers was pushed out.
The Culture of IBM

During his time at IBM, Gerstner consciously avoided learning much about the history of the
company; brought in to drive change, he said he dreaded learning the reasons why things
were the way they were.39 Gerstner did not learn the IBM culture from reading about the
company or asking colleagues about the company or from talking with his predecessor, John
Akers. Gerstner did meet with Akers in his first days after taking over, and the two men
talked about many subjects, but Gerstner noted later, Whats striking from my notes is the
absence of any mention of culture, teamwork, customers, or leadershipthe elements that

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turned out to be the toughest challenges at IBM.40 Gerstner learned the culture only by living
in it, experiencing what it meant and seeing the reaction when he imposed his will on it.
Artifacts: Alcohol, Dress Code, Foils
Three weeks into the job, Gerstner was flying back to New York on IBMs corporate jet from
the companys annual shareholders meeting in Tampa, Florida. He turned to the flight
attendant and said, This has been a really tough day. I think Id like to have a drink.
She said, You dont mean an alcoholic drink, do you? I certainly do! Gerstner replied.
What kind of vodka do you have? We have no alcohol on IBM planes. It is prohibited to
serve alcohol. Gerstner recalls saying, Can you think of anyone who could change that
rule? Well, perhaps you could, sir. Its changed, effective immediately.41
The vaunted corporate dress code was changed just as quickly. In his first meeting as
Chairman, Gerstner wore a blue shirt with his dark suit and noticed immediately that all of the
other men in the roommembers of the Corporate Management Board, the top fifty people in
the companywere wearing white shirts. The next time the Corporate Management Board
met, Gerstner wore a white shirt and found everyone else wearing other colors.42 Lower down
in the organization, especially in the research and development labs where customers were
rarely seen, informal dress had long been the informal rule. Two years later, the change was
made official, when Gerstner abolished the dress code altogether. He notes:
When I abolished IBMs dress code in 1995, it got an extraordinary amount of
attention in the press. Some thought it was an action of great portent. In fact, it
was one of the easiest decisions I made--or, rather, I didnt make; it wasnt really
a decision. We didnt replace one dress code with another. I simply returned
to the wisdom of Mr. Watson and decided: Dress according to the circumstances
of your day and recognize who you will be with (customers, government leaders,
or just your colleagues in the labs).43
No presentation or meeting in IBM was complete without the use of overhead transparencies,
called foils within the company. The use of foils in meetings was so ubiquitous that top
managers in the company had desks with fancy overhead projectors built into them. A few
days after joining IBM, Gerstner called for a meeting with Nick Donofrio, who was then
running the System/390 business, to understand the state of the business. Naturally, Donofrio
had prepared a stack of foils.
Nick was on his second foil when I stepped to the table and, as politely as I could
in front of his team, switched off the projector. After a long moment of awkward
silence, I simply said, Lets just talk about your business.44
The news of this action spread by email across the company, worldwide. Talk about
consternation! Gerstner says with obvious amusement. It was as if the President of the
United States had banned the use of English at White House meetings. Still, when he tried
to hold a meeting of his most senior managers without foils two months later, they insisted
they couldnt do it. As instructed, they prepared only brief presentations, but they
nevertheless also had their staff come up with the standard stack of foils: ten for the
presentation, ten to back up each those ten, in case Gerstner had a question, and ten to back up
each of those hundred.45

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The Value of Non-Concurrence

Other cultural patterns were also made evident to Gerstner in those early meetings. Important
management meetings at IBM were held around long conference tables, with two rows of
chairs behind the principals filled with young executives. These backbenchers were the
administrative assistants (AAs) to the senior executives. They took notes, organized things,
watched and learned. They provided a back channel of communication between senior
executives, through which compromises were hammered out. The career path to the top of
IBM typically involved several AA assignments. Gerstner disliked the fact that being an AA
taught you more about managing internal politics than about serving the customer or leading
subordinates.
He disliked even more IBMs famous contention system, which was supposed to encourage
debate and a multiplicity of views and reduce the danger of groupthink. The idea of nonconcurrence was that people could agree to disagree, and therefore arguments could be
debated passionately without fear of threatening the underlying relationships or the
commitment of everyone to work together afterwards. As Buck Rodgers, a vice-president of
marketing, who left the company in 1984 to become a public speaker, enthusiastically
described it, non-concurrence was a key element of IBMs successful culture. Happily, a lot
of arguing is done at IBMabout new products, changes in pricing, revisions of terms and
conditions, restructuring of the organization and overall long-term objectives.46 Twenty
years after Rogers was writing, Gerstner found that non-concurrence had degenerated into a
Culture of No, where no one would say yes, but everyone could say no. Gerstner lamented:
The situation got even worse, because at least a public nonconsent has to be
defended among ones peers. More often than not, the nonconcur was silent. It
would appear that a decision had been made, but individual units, used to the
nonconsent philosophy, would simply go back to their labs or offices and do
whatever in the world they pleased!47
Gerstner experienced this himself when, during a visit to Europe, he discovered by accident
that European employees where not receiving all of his company-wide emails. It turned out
that the head of the EMEA (Europe, Middle East, and Africa) unit was intercepting the
messages. When Gerstner confronted him and asked why, the manager replied, These
messages were inappropriate for my employees. And, They were hard to translate.
I summoned him to Armonk the next day. I explained that he had no employees,
that all employees belonged to IBM, and that from that day on he would never
interfere with messages sent from my office. He grimaced, nodded, and sulked as
he walked out the door. He never did adapt to the new global organization, and a
few months later he left the company.48
Leading Culture Change

Gerstner found himself in charge of what he had discovered to be arguably the most complex
organization anywhere in the world outside government, and he quickly came to see that the
levers of power in IBM had uncertain effect. The problem was the culture, and Gerstner had
learned that he couldnt change the culture directly.

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Changing the attitude and behavior of hundreds of thousands of people is very,

very hard to accomplish. Business schools dont teach you how to do it. You
cant lead the revolution from the splendid isolation of corporate headquarters.
You cant simply give a couple of speeches or write a new credo for the company
and declare that the new culture has taken hold. You cant mandate it, cant
engineer it.
What you can do is to create the conditions for transformation. You can provide
incentives. You can define the marketplace realities and goals. But then you have
to trust. In fact, in the end, management doesnt change culture. Management
invites the workforce itself to change the culture.49
Gerstner figured it would take at least five years to change the culture, and he later admitted
that was an understatement by half. Creating the conditions for that change would mean
changing the structure and the strategy and the incentives of the company, while always being
blunt about the cultural implications of what was being done.50 What changing the culture
didnt mean, for Gerstner, was preparing a vision statement. He was widely quoted for a
statement he made at a press conference shortly after his 100th day as head of IBM.
Announcing 35,000 layoffs, he said:
What Id like to do now is put these announcements in some sort of perspective for
you. Theres been a lot of speculation as to when Im going to deliver a vision of
IBM, and what Id like to say to all of you is that the last thing IBM needs right
now is a vision.
What IBM needs right now is a series of very tough-minded, market-driven, highly
effective strategies for each of its businessesstrategies that deliver performance
in the marketplace and shareholder value. And thats what were working on.
The press seized on this, especially given his record with RJR Nabisco, as evidence that
Gerstner was a mindless cost-cutter. Gerstner felt misunderstood, however. First, the press
tended to omit his caveat that right now the company didnt need a vision. His view was
the company needed an enormous sense of urgency, and that any long-term project, that
people could wait for to produce a magical turnaround, would blunt the day-to-day need
simply to do a better job serving customers.51 Second, he felt sure the press and IBMs
competitors would laugh if they heard what he really had in mind for the company. Gerstner
had, in fact, already made the bold strategic decisions that would shape his ten year tenure at
IBM:
Keep the company together and not spin off the pieces
Reinvest in the mainframe
Remain in the core semiconductor business
Protect the fundamental R&D budget
Drive all we did from the customer back and turn IBM into a market-driven rather than an
internally focused, process-driven enterprise52

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He intended, in other words, to return IBM to Watsons roots. But he could not say that in
July 1993.
If the last thing IBM needed in July 1993 was a vision, the second to last thing it
needed was for me to stand up and say that IBM had basically everything right
and we would stand pat but work harder.53
In essence, Gerstner made two huge gambles. He gambled that, as a unified company, IBM
could act as an integrator of technologies, and his experience as a customerat Amex and at
RJRsuggested that people would pay for that. And he gambled that standalone computing
would give way to networks, and that mainframes would play a key role in a networked
world. These gambles meant keeping Watsons company intact and reinforcing its key
elements. Gerstner calls the decision to keep IBM together, the most important decision I
ever madenot just at IBM, but in my entire business career.54
Competitive Focus
During the painful internal reengineering and rightsizing of the company that he initiated,55
Gerstner sought to focus management attention on competitors. Competitionwinning,
beating the other guyswas everything for Gerstner. I hate, hate, hate losing, he said.56 He
didnt see the same hatred in the eyes of the IBMers around him. In the spring of 1994, he
called a senior management meeting, to be attended by the top 420 managers in the company.
He showed charts tracking the companys poor performance over the past decade; he showed
photographs of the CEOs of their main competitors, such as Bill Gates, Scott McNealy, and
Larry Ellison, and read aloud the dismissive things they had said over the years about IBM.
You know, I have received literally thousands and thousands of e-mail messages
since Ive been in this company, and Ive read every one. I want you to know that
I cannotI cannotremember a single one that talked with passion about a
competitor. Many thousands of them talked with passion about other parts of
IBM. Weve got to generate some collective anger here about what our
competitors say about us, about what theyre doing to us in the marketplace. This
competitive focus has to be visceral, not cerebral. Its got to be in our guts, not
our heads. Theyre coming in to our house and taking our childrens and
grandchildrens college money. Thats what theyre doing.57
To help spread this message, Gerstner wrote out eight principles that he thought should be the
underpinnings of the new culture at IBM. The first was:
The marketplace is the driving force behind everything we do.
IBM has to focus on serving our customers and, in the process, beating the
competition. Success in a company comes foremost from success with the
customer, nothing else.
Is this similar to Tom Watson, Jr.s Basic Belief in Customer Service? Some thought so, but,
in Gerstners estimation, the Basic Beliefs had lost their power and become empty homilies.
Their meaning and interpretation were endlessly debated in the company, sometimes with the
sophistication of constitutional lawyers arguing over the doctrine of original intent. In other
words, they werent so much wrong, rather they had become useless. Gerstner tore up the

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Basic Beliefs and replaced them with his Eight Principles (see Appendix). They werent
meant to move the company away from the Basic Beliefs; their intent was to breathe life back
into the underlying principles that had established the success of the company and give them
normative force again.58 A three-day leadership course was developed to instill these
principles and provide the skills needed to exercise them, and all executives were required to
attend.59
To ensure that the principles of the new culture would become more than just words on a
page, Gerstner felt that the measurement and rewards systems must be changed, to match the
desired behaviors in the new culture. Thus, every year, each IBM employee listed the actions
he or she was going to take in the upcoming year to fulfill his or her commitment to the key
principles, and performance against these commitments was a key determinant of merit pay
and variable pay. This coincided with a move, started during the leadership of John Akers,
away from the old cultural norm of little differentiation in compensation and generous
employee benefits, to one of much greater differentiation in pay, based on performance, fewer
benefits, and the use of stock options, to ensure that the interests of the employee was aligned
with that of the company.60
Moon Shot
The early years of Gerstners tenure at IBM were painful ones for the company. They
involved massive layoffs, reengineering, centralization of authority, abandonment of beloved
projects. As the companys fortunes improved, and the sense of urgency receded, what would
motivate further change and prevent the company from backsliding?
The companys golden agemuch of it reality, but at least part of it illusionhad
such a powerful hold on the imaginations and hearts of some IBMers, that every
change was perceived as a change for the worse. They wanted to stop time,
despite the realities of the marketplace and societal change.61
What was needed, Gerstner believed, was something akin to System/360, or John F.
Kennedys promise to put a man on the moon. A grand project to focus attention and
generate enthusiasm. A moon shot. It would come in the form of e-business, a term IBM
credits itself with having coined and made real. The company has spent more than $5 billion
in e-business marketing and communications, to explain the concept and position itself to
customers (and employees) as uniquely able to provide solutions to any e-business problem.
Looking Back and Ahead
Gerstner had originally forecast that it might take five years to change IBMs culture. In the
end, it took ten years, and still we might ask whether culture change had actually been
achieved and, if so, was it permanent? Gerstner was the first to say that constant
reinforcement would be necessary, if the company was to avoid falling back into the
arrogance of success.62 The change is fragile, and it is ongoing. The key, Gerstner says, is
that his successor continues to communicate clear strategies and values, reinforces those
values in everything the company does and allows people the freedom to act, trusting they
will execute, consistent with those values.63

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If you ask me today what single accomplishment I am most proud of in all my

years at IBM, I would tell you thisthat as I retire, my successor is a long-time
IBMer, and so are the heads of all our major business units.64
The consummate outsider, brought in to shake up IBM, did so and, along the way, fell in love
with the company and returned it to its roots. He held the CEO job longer than any other
man, except Watson father and son, and he retired feeling in his heart like a True Blue IBMer
but knowing that, compared to the people around him, most of whom had spent their entire
careers in the company, he would always be an outsider. Unlike his successor, Sam
Palmisano, Lou Gerstner didnt bleed blue.

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Appendix
Thomas Watson, Jr.s Basic Beliefs
Respect for the Individual
Respect for the dignity and the rights of each person in the organization.
Customer Service
To give the best customer service of any company in the world.
Excellence
The conviction that an organization should pursue all tasks with the objective of accomplishing them
in a superior way.
Louis Gerstner Jr.s Eight Principles
1. The marketplace is the driving force behind everything we do
IBM is too preoccupied with our own notions of what businesses we should be in and how they should
work. In fact, the entire industry faces this problem. We are all guilty of producing confusing
technology and then making it instantly obsolete. IBM has to focus on serving our customers and, in
the process, beating the competition. Success in a company comes foremost from success with the
customer, nothing else.
2. At our core, we are a technology company with an overriding commitment to quality
There is a lot of debate about what kind of company we are and should be. No need, because the
answer is easy: Technology has always been our greatest strength. We just need to funnel that
knowledge into developing products that serve our customers needs above all else. The benefits will
flow into all other areas of the company, including hardware, software, and services.
3. Our primary measures of success are customer satisfaction and shareholder value
This is another way to emphasize that we need to look outside the company. During my first year,
many people, especially Wall Street analysts, asked me how they could measure IBMs success going
forwardoperating margins, revenue growth, something else. The best measure I know is increased
shareholder value. And no company is a success, financially or otherwise, without satisfied
customers.
4. We operate as an entrepreneurial organization with a minimum of bureaucracy and a neverending focus on productivity
This will be hard for us, but the new, warp-speed marketplace demands that we change our ways. The
best entrepreneurial companies accept innovation, take prudent risks, and pursue growth, by both
expanding old businesses and finding new ones. Thats exactly the mindset we need. IBM has to
move faster, work more efficiently, and spend wisely.
5. We never lose sight of our strategic vision
Every business, if it is to succeed, must have a sense of direction and mission, so that no matter who
you are and what you are doing, you know how you fit in and that what you are doing is important.
6. We think and act with a sense of urgency
I like to call this constructive impatience. We are good at research, studies, committees, and
debates. But in this industry, at this time, its often better to be fast than insightful. Not that planning
and analysis are wrongjust not at the expense of getting the job done now.

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7. Outstanding, dedicated people make it all happen, particularly when they work together as a
team
The best way to put an end to bureaucracy and turf wars is to let everyone know that we cherishand
will rewardteamwork, especially teamwork focused on delivering value to our customers.
8. We are sensitive to the needs of all employees and to the communities in which we operate
This isnt just a warm statement. We want our people to have the room and the resources to grow.
And we want the communities in which we do business to become better because of our presence.

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Notes
1
2
3
4
6
7
8
9
10
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14
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16
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18
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22
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25
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31
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33
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35
36
37
38
39
40
41
Gerstner, Louis. 2002. Who Says Elephants Cant Dance: Inside IBMs Historic
Turnaround. New York: HaperCollins. Pages 10-13.
Adjusted for subsequent stock splits.
Carroll, Paul. 1993. Big Blues: The Unmaking of IBM. New York: Crown. Page 153.
Peters, Tom and Robert Waterman. 1982. In Search of Excellence: Lessons from
Americas Best-Run Companies. New York: Warner Books.
Deal, Terrence and Allen Kennedy. 1982. Corporate Cultures: The Rites and Rituals of
Corporate Life. London: Penguin. Page 15.
The Economist. What went wrong at IBM? January 16, 2003. Page 23.
Ibid.
Gerstner. Page 279.
Carroll. Page 355.
Gerstner. Page 4.
Maney, Kevin. 2003. The Maverick and His Machine. New York: Wiley. Page xxiv.
Gerstner. Page 181-182.
Gerstner. Page 214.
Maney. Page 17.
Maney. Pages 6-9.
Watson, Thomas, Jr. 1990. Father Son & Co. New York: Bantam. Page 13.
Maney. Page 11.
Maney. Page 25.
Maney. Page 43.
Maney. Page 331.
Maney. Pages 71-4.
Maney. Page 87.
Maney. Page 107.
Maney. Page 89.
Maney. Page 118.
Watson. Page 68-9.
Maney. Page 241.
Watson. Page 68.
Maney. Page 192.
Maney. Page 147-48.
Maney. Page 150.
Maney. Page 273.
Maney. Page 361-63.
Watson. Page 240-41.
Watson. Page 346-52.
Mills, D. Quinn and G. Bruce Friesen. 1996. Broken Promises: An Unconventional View
of What Went Wrong at IBM. Boston: Harvard Business School Press. Pages 12-13.
The Economist. What went wrong at IBM? January 16, 2003. Page 23.
Gerstner. Page 282.
Gerstner. Pages 39-40.

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42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64

Gerstner. Page 43.
Carroll. Page 355.
Rogers, Buck. 1986. The IBM Way. New York: Harper and Row. Page 137.
Gerstner. Page 193.
Gerstner. Page 87.
Gerstner. Page 187.
Gerstner. Page 188.
Gerstner. Page 71.
Gerstner. Page 72.
Gerstner. Page 72.
Gerstner. Page 61.
See Changing the Culture at IBM case for more details of these initiatives.
Gerstner. Page 207.
Gerstner. Page 204.
Gerstner. Page 209.
Gerstner. Page 212.
Gerstner. Page 109.
Gerstner. Page 234
Gerstner. Page 73.

5239
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MAY NOT BE MADE WITHOUT

We shall not cease from exploration

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famously insular company, and a technological naif in a famously fast-moving industry,

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Thomas Watson, Sr.

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Tom Watson, Jr.

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The Culture of IBM

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The Value of Non-Concurrence

Leading Culture Change

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Changing the attitude and behavior of hundreds of thousands of people is very,

Reinvest in the mainframe

Remain in the core semiconductor business

Protect the fundamental R&D budget

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If you ask me today what single accomplishment I am most proud of in all my

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Gerstner. Pages 21-22.

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