book.chapter Four pivotal choices

When Lou Gerstner took over as chairman and CEO of IBM on April 1, 1993, he was well aware of the monumental task ahead. IBM was on the brink of reporting a staggering $16 billion loss, and there was widespread skepticism about the company's survival in its existing form. The consensus was that IBM needed a major overhaul or breakup. Gerstner, an outsider and the first to lead the tech giant, chose a measured approach, spending the initial months understanding IBM's vast operations, which included approximately 300,000 employees and several large divisions with multi-billion-dollar revenues. He recognized the state-of-the-art research labs and the potential of the technologies being developed. By the end of July 1993, Gerstner had made several critical decisions. He chose to keep IBM intact, seeing the company's size and scope as a competitive edge. He aimed to transform IBM into a systems integrator that provided complete solutions rather than fragmenting into specialized segments. To revitalize IBM's economic model, Gerstner initiated a massive cost-reduction program, which included laying off 35,000 employees and cutting back on corporate excesses. He also undertook the reengineering of IBM's internal business systems to improve efficiency and reduce costs. Gerstner's strategy involved selling nonproductive assets to generate working capital, including the corporate headquarters and other properties. He also reduced the dividend payout to shareholders. On July 27, 1993, Gerstner publicly outlined his strategy, emphasizing the need for market-driven, effective strategies for each business unit rather than a grand vision. His priorities were to restore profitability, win customer loyalty, become more competitive in the client/server market, maintain IBM's full-service provider status, and enhance customer responsiveness. Despite initial mixed reactions, Gerstner's approach was not limited to downsizing. He continued to invest in mainframes, semiconductor technology, and R&D to maintain IBM's technological edge. He also focused on making IBM market-driven, reduced the size of the board for better accountability, reorganized the company around global industry teams, revitalized the IBM brand, and restructured corporate compensation to align with company performance. Gerstner's leadership was about execution and creating a sense of urgency. He emphasized the need to stop seeking blame, avoid long-term projects waiting for a magical turnaround, and focus on immediate action to address the company's challenges. His tenure at IBM is remembered for the remarkable turnaround of the company's fortunes, setting a precedent for corporate revitalization.