A Group Project for Strategic Leadership

“Louis V Gerstner”
Submitted to
Dr. Jagannath Mohanty

SUBMITTED BY
AKASH GHOSAL 201931005
ANURAG PANDEY 201931009
BHARAT PHULWANI 201931014
DEEPESH KUMAR SINGH 201931016
GANESH S RADHAKRISHNAN 201931017
MOHAMMED AZHAR KHAN 201931026
RASHIKA SOOD 201931033

[Cite your source here.]

 LOUIS V. GERSTNER - A Quintessential Leader

INTRODUCTION

Pre IBM –
Louis Vincent Gerstner Jr. born on March 1 1942 in Mineola, New York named after his father
who was an American businessman. Gerstner joined completed his bachelor of engineering from
Dartmouth College and went into Harvard for MBA.
Gerstner joined American Express in 1978 as executive vice president of company’s charge card
division. At that time American Express was competing with Visa & Mastercard. But to his
disadvantage AmEx card was not very popular and neither was it accepted in many stores. He
created various marketing push strategies to stores, physicians, college students, club owners,
housewives etc. He place his card as a better tool to track the money transactions. To target high
end customers he launched special AmEx cards Gold ($68 annual fee) & Platinum ($250 annual
fee) with higher line of credit. Due to his efforts sales of AmEx cards rebounded in couple of
years, which make Gerstner chairman and CEO of AmEx. After 11 years of successful career in
AmEx he joined as chairman and CEO of RJR Nabisco, a tobacco company many speculated his
career choice from cards to tobacco. But he proved his critics wrong following it’s 25 billion
dollar leveraged buyout by Kohlsberg Kravis Robers

IBM
IBM country club in Endwell New York was the literal epicenter of company culture, with 18
holes golf course, restaurant, swimming pool and tennis court. But this heaven like resort did not
last much longer. For seven decades IBM considered a model employer in American history, but
something has changed. IBM lay off 60,000 employees largest in American history till date.
After Vietnam war there has been a seismic shift in the American corporate society, with oil
crisis and rising inflation. IBM started losing its profitability. With new competitors rising on the
horizon IBM faces further turmoil. In 1993 the company posted 8 billion dollar loss biggest in
American history at that point of time.
For the first time in 82 years IBM hire an outsider for the company to lead. So Louis Gerstner a
former CEO of American Express was instated. As soon as he joined he was given a herculean
task of turning around the company loses into profits.
So he did the unthinkable, he laid off 60,000 employees even today it’s a record. IBM market
capital rose from 29 Billion dollars from 1993 to 168 Billion dollars in 2002. For this reason

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Louis V. Gerstner considered a savior of IBM. He once said to turnaround the company which is
making losses, every CEO has to understand the complexity of process inside the company. He
also said that successful companies suffer from success syndrome and its CEO’s job to keep an
eye on it.
He saw the problem with IBM’s divisive and consensus driven culture, he brings cultural
changes in the organization that turnaround the behemoth for good. According to him changing
culture is really hard and it’s not about communication or moral. Instead of focusing into moral
he made company better by beating competition in market which resulted in rising of morale of
employees automatically. Changing culture is about looking at every single process in the
company and finding that does this process lining up with the strategic intent of company.
Gerstner cut costs by right sizing and making reforms in pension plans of the company. Louis V
Gerstner always believes in result brought by team, he hated individualism among the
employees. He once fired the employee who was a star performer in the Europe division just
because he was unable to work in team, this send a strong message in the company that Louis
valued teamwork the most.
Strategic Challenges:

When Louis. V. Gerstner became the Chairman and CEO of IBM in 1993,
he faced numerous hurdles and the most crucial one of them was to prevent IBM a then
employer of 30000 people from going bankrupt. IBM then was the world’s largest computer
manufacturer and one of the topmost companies in the USA. In 1992 though it had around
$62.71 billion in revenue, it was reeling from losses of around $8.1 billion1. Thus, it was upto
Gerstner to turnaround such a big company like IBM and to make strategic decisions keeping
future sustenance of the company. Taking an excerpt from his speech at Harvard Business
School, “Transformation of an enterprise begins with a sense of crisis or urgency. No institution
will go through fundamental change unless it believes it is in deep trouble and needs to do
something different to survive” it can be seen that he knew the underlying problems and that
some structural changes needs to be made so as to focus on the survival of the company. The
challenges he faced in doing that are as follows:

i. It was important for him to understand the cultural implications brought in by any
changes made to the organization as IBM was built on dynamic sales culture. It was a
very individualistic and decentralized organization and making changes would mean for
people to work together, to leave behind the “I” culture which had been followed and
integrate as teams or groups if needed.

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 ii. Changing the pay structure and integrating all employees to the new structure.
iii. To change the company from its sales driven approach to a customer-centric one as
customers of 90’s wanted solutions to their problems and IBM was to use its
technological competency to address it
iv. To change their manufacturing systems and technological expertise as PC’s were
becoming more in demand and IBM who dealt only in mainframes at that time was losing
many of its customers to its competitors.
v. To adapt to the introduction of the World Wide Web and change their way of doing
business.
vi. To change the Business model of IBM to adapt to the customer needs rather than
focusing on just selling their products and making revenue.1
vii. Making positive turnover so that the company isn’t dissolved.
viii. Reviewing former decision of ex-CEO J. F. Akers to split IBM into 11 different
subsidiary units.
ix. Gaining employees trust before making major changes around the company. But on the
positive side, he would be able to kick start the process as he was an outsider and the
employees would not have been comfortable with an insider doing it.

Strategic Intent:

Every major transitional changes a company goes through is laid out by

defining its vision for it and what the company desires to achieve through it. When Gerstner
however joined IBM in 1993, he told that Vision is the last thing IBM needs right now. What
he actually meant was that IBM does not have the luxury to plan for the future, weigh and
take decisions. It was the time when Wall Street analysts had almost written off IBM as a
viable company post the billion dollar losses it revealed. They needed hard core execution so
as to save the company economically and keep it afloat. He announced after a month he
joined that he doesn’t sense a crisis at IBM but rather a sense of urgency to build on strengths

1
IBM website, IBM history, page 17 <https://www.ibm.com/ibm/history/documents/pdf/1990-1995.pdf>

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 and at the same time get rid of impediments and areas of weakness the company faces. He
said that he had developed a four-part strategy2 for it.

i. Get the company right-sized.

ii. Spend a whole lot more time with customers and to squeeze out whatever arrogance
remains in the selling approach of IBM.  And also to start talking to customers about
what they could do to define for them the computing model of the Nineties.
iii. To figure out the handful of big strategic issues they need to wrestle with and resolve.
iv. Deal with employee morale and incentives.

The first Major decision Gerstner took was to not split the company into subsidiaries called
“baby blues” and keep the company as a whole. In his first big message to the company, he said
to his employees that IBM was going to be driven from the marketplace. In his own words, “we
are going to build this company from the customer back and not from the company out”. These
words clearly implies that they needed to establish a strategy where the company should earn its
reputation which is built on customer happiness and belief. It meant that IBM as a whole should
come together as a whole to provide whatever services necessary to the customers and should
have a customer-centric approach rather than their previous sales driven one.

Gerstner in an interview3 gave his approach to return IBM to profitability. He said it consists
of getting IBM to develop “a series of market-driven, very tough, highly effective market
strategies for each of its businesses – strategies that deliver performance in the marketplace and
shareholder value.”

Strategic Actions:

Whenever we see a top-notch market leading company, one can safely say that it is there
because of its Strategic actions. Same is the case with IBM under Louis. V. Gerstner. He is
known for his historic turnaround of the company and building foundation for how the company
is performing now.

2
CNN Money archives, 31 May 1993,
<https://money.cnn.com/magazines/fortune/fortune_archive/1993/05/31/77917/index.htm>
3
Los Angeles Times, July 28 1993, < www.latimes.com/archives/la-xpm-1993-07-28-mn-17823-story.html>

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 Some of his Major strategic actions to which the impact is visible till date are:

i. To keep the company together and not to have split it into 11 different entities/Baby
blues. This was a very decisive thing as the previous CEO J. F. Akers had decided to split
the company into strategic units according to the product/domain of operation. Gerstner
recalls that this was the most important decision he has made not just in IBM, but his
entire business career.
ii. When Gerstner took the reins of the company in 1993, he felt that his workforce and
customers diversity did not reflect that of the market diversity. To rectify it, Gerstner
launched a diversity task-force initiative in 1995 that became a cornerstone of IBM’s HR
strategy. The goal of the initiative was to uncover and understand different groups (like
Asians, gays, lesbians etc.) and the differences in them and find ways to appeal to a
broader set of employees and customers.
iii. He radicalised changes in employee stock incentives to put IBM and its people more in
step with the marketplace. When he had joined only 300 executives had received stock
options. By 2002, more than 60,000 people receive it.
iv. He created a broad computer based services unit that sold bundles of hardware, software,
consulting and maintenance to manage business processes. This was a shift away from its
main hardware business of the Mainframes. This could be called as the first step towards
the type of company IBM is today.
v. He integrated the company as a whole team. He changed the whole compensation plan
also to do it. In the new compensation system, rewards were based on total corporate
performance rather than division/unit performance This was a major cultural change IBM
faced as prior to his coming, the company had been operating as divisions where they
don’t share plans with each other, intra-communication was near obsolete, each unit
fought for more sales, individual price transfer between products were prevalent so that
everyone could get a little piece of the customers money. He said “Changing the attitude
and behaviour of thousands of people is very, very hard to accomplish. You can’t
mandate it or engineer it. All you can do is create the conditions for transformation,
provide incentives.”
vi.  One of the key decisions Gerstner took was the push for its services business to be
brand-agnostic. In cases when IBM hardware or software wasn't the best option for a

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 customer, the services division was free to sell/recommend products from other
companies. He said that “The customer would not accept a services company if all it did
was flog I.B.M. products”. This showed that he wanted IBM to flourish as a customer-
centric Services company.
vii. When he arrived at IBM, he found that IBM and not Microsoft was the biggest software
company in the world. The only setback he found was that all the software it sold worked
only with IBM hardware. He committed IBM to open system standards meaning that its
products could be used by competitors and vice-versa. It made customers use IBM
software in other devices and other software in IBM hardware. It was a much needed
decision where clones of its products were made at cheaper prices by its competitors.
viii. In 1995, it was his decision to embrace and ride the internet waves. He formed the
Internet division whose main role was to march the entire company towards the
“Networked World”. It carved out a massive advertising and marketing campaign,
beginning to push ''e-business” (as IBM had coined it).'' In 1997, IBM’s stand was
“helping companies do e-Business”.
ix. Another one of his cultural changes was the abolishment of IBM’s famous white shirt and
tie culture.

Analysis of Actions

The strategic actions of the Louis. V. Gerstner can be analyzed on the Four-Frame model by Lee
Bolman and Terry Deal.

Bolman and Deal authored a book, Reframing Organizations: Artistry, Choice and

Leadership  (1991) mentioning that leaders’ approach to organizational issues should be from
four perspectives, also called as 'Frames'.

Bolman and Deal outlined The Four Frames as follows:

1. Structural
2. Human Resource
3. Political
4. Symbolic

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The descriptions of the four frames are:

1. Structural: This frame focuses on the obvious 'how' of change. It's chiefly a task-orientated
frame. This frame focuses on strategy; setting measurable goals; clarifying tasks, responsibilities
and reporting lines; agreeing metrics and deadlines; and creating systems and procedures.

2. Human Resource: This frame focuses more on people's needs. It mainly concentrates on
providing employees the power and opportunity to carry out their jobs well, also at the same
time, addressing the employees’ needs for human contact, personal growth, and job satisfaction.

3. Political: This frame addresses the problems of individuals and interest groups who are
having sometimes opposing (often hidden) agendas, particularly at times when company budgets
are limited and the company has to make hard choices. In this frame we see coalition-building,
conflict resolution work, and power-base building to assist the leader's initiatives.

4. Symbolic: This frame focuses on people's needs for a sense of purpose and meaning in their
work. It focuses on inspiring people by making the organization's direction feel meaningful and
unique. It includes creating a motivating vision, and recognising excellent performance through
company celebrations.

Bolman and Deal suggested that a leader should look at the organization's challenges through
these 4 Frames or 'lenses', to gain an overall insight, and to decide which frame or frames to use.

The leader may use one frame (implying a behavioural approach) for a time, and then shift to
another or he/she might combine and use a number of frames, or all four, at the same time.

An important aspect of this Four Frame Model seeks to avoid the temptation for leaders to get
stuck, view and act on situations through one frame alone.

Bolman and Deal insist that because no frame works well in every situation, then a leader who
sticks with one frame is bound eventually to act improperly and ineffectually.

Instead, it is the responsibility of the leader to choose the appropriate frame of reference, and
display behaviour accordingly, for each challenge.

Asking the right questions and diagnosing the vital issues is at the centre to this methodology.

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Analysis of the strategic actions of the Louis. V. Gerstner on the Four Frame model:

1. The action to keep the company together and not to have split it into 11 different entities was a
structural approach.

2. The action of launching a diversity task-force initiative to uncover and understand different
groups was a combination of political and human resource approach.

3. The strategic action of radicalisation in employee stock incentives was a political approach to
the issue.

4. The strategic action to shift from the manufacturing business to a broad computer based
services unit comes under structural frame.

5. The action to change the whole compensation plan and basing it on total corporate
performance rather than division/unit performance was a combination of human resource and
political approach to the organizational issue.

6. The decision to make the IBM business brand-agnostic was a symbolic approach so that the
organization's direction feel significant and distinctive.

7. His decision to adapt IBM to open system standards was a structural approach to eliminate
the competition because the clones of its products were made at cheaper prices by its
competitors.

8. His decision to embrace and ride the internet waves was a structural approach to march the
entire company towards the “Networked World”.

Impact of Strategic Actions:

A company is as good as its decision-making skills are and IBM under Louis Gerstner
had undertaken not only a plethora of good decisions, but also maintained a strategically coursed
action plan. The outcomes of these Strategic Actions are visible even to this day.
The major impacts of those actions can be listed as follows.
i. Although IBM has moved from being a staunch leader in computer hardware to a market
leader in software services, thereby changing almost the entire mode of operations and
domains of expertise, but the company still stands together as a market leader. If IBM
had been divided into baby blues, probably the quick adaptation with the changing

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 market trends would not have been possible and the shift in the domain would totally be
a distant dream.
ii. The diversity task-force launched in 1995 by Gerstner has made IBM’s image on the
map as a diverse and non-discriminative company. Not only did it stand against racism
back then, but even now, the diversity of communities (both regional and sexual) that
belong to the employee base creates a harmonic environment and puts IBM’s business
environment in a very favourable position.
iii. His decision to provide stock options to employees has instilled in the employees’ minds
a sense of belongingness, which provided better results.
iv. It was Louis Gerstner who actually took the first step into making IBM what it is today,
by shifting from its domain.
v. He brought about the intra-communication into IBM, which has been instrumental in
making the entire company stand together as one.
vi. Presently, IBM is largely into e-Business and stands as a prominent name there. This,
however would not have been possible without Louis Gerstner’s decision to start
‘helping companies do e-Business’ in 1997.
vii. His decision to make IBM products an open system, proved to be a huge benefit as this
was soon followed by the trend of assembling machines with best features from different
companies. And IBM products flourished in this trend.

Non-Parallel Corporate and Its Impact

We needed to integrate as a team inside the company so that we could integrate for the customers on
their premises.

- Louis V Gerstner, Jr

For me, it's important to build good partnerships rather than score centuries. Once, you have those
partnerships, you will also get centuries.

- MS Dhoni

What made board members of IBM, search for another CEO for the company?

At that time, IBM was enjoying the success of its System/360 mainframe and had transformed into a
bureaucratic monster, making an impressive 8-billion dollars loss. This gigantic company was actually
not far from being short of cash. IBM was in deep trouble when Louis V. Gerstner came on board as
chairman and CEO almost a decade ago.

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Why the Indian Cricket Board finally decided upon bringing changes and stop the long lasting defeat
spell to Indian cricket ?

Indian cricket team was going under a lot of turbulence and this can be very well showcased, if the time
line is observed from 2004 to 2007, finally when MS Dhoni became the Captain of Indian ODI Cricket
Team.

Since 2004, India had not been doing well in One-day Internationals. The players who took India to great
heights over the past ten years such as Sachin Tendulkar, Sourav Ganguly and Anil Kumble grew older
and did not maintain their form and fitness. Following the series loss to Australia, India collapsed on the
final day in the Third Test in Bangalore in early 2005 against Pakistan to squander a series victory, and
then lost four consecutive ODIs against Pakistan. This was exacerbated by the suspension handed to
captain Ganguly for slow over-rates. In 2006 also the story remained somehow same and finally in 2007,
MS Dhoni was made Indian ODI Team Captain.

Louis V. Gerstner and MS Dhoni, both entered their respective domains under difficult
circumstances and finally emerged as great leaders.

Similarities Between Both The Personalities

Gerstner :

Three weeks into the job as the newly installed chairman and CEO in 1993, Gerstner was presiding over
his first meeting at the company on the topic of strategy. Everyone in the room was actively sharing ideas.
"After eight hours I didn't understand a thing," Gerstner shared in a talk for MBA students at HBS. "I was
very depressed.”, He said.

MS Dhoni:

MS Dhoni featured in his debut game in 2005 and got run out for a duck. The whole series didn’t yield
fruitful results but the selectors showed faith in him and gave him another go for the ODI series against
Pakistan. The rivalry between India and Pakistan is the one that the whole world watches with keen eyes,
which created a terrific opportunity for him to come back in the game. This could also be observed as his
luck that played its game at the right time.

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Both these situations clearly depicts that MS Dhoni and Grestner, faced some significant difficulty
after their debut in their respective fields. Making them stand somewhere at similar stages in their
respective career.

Gerstner:

He mentioned in an interview, “Transforming IBM is not something we can do in one or two years. The
better we are at fixing some of the short-term things, the more time we have to deal with the long-term
issues. You can't really start addressing the long-term issues unless you've got a stabilization”.

MS Dhoni:

It all started with this. Thrown into the fire with a completely new team and an unfamiliar format, the first
time a T20 World Cup was being played, Dhoni retained his calm until the final moment of the
tournament when he tossed the ball to an obscure medium pacer. It worked! Thus began Captain Cool's
journey.

This clearly states that both of them never believed in making long term decisions randomly and
always made sure of creating a firm hold of ongoing situations while forecasting the upcoming
challenges.

Gerstner:

For Gerstner the toughest challenge he faced in rejuvenating IBM and the subject of most of his book was
changing the IBM culture. He always mentioned that culture is king for any organisation. Even in his
book, ‘Who Says Elephants Can’t Dance?’, he writes, “Culture isn’t just one aspect of the game. It is the
game. What does the culture reward and punish – individual achievement or team play, risk taking or
consensus building?”.

MS Dhoni:

He's a man who always puts the team's interest ahead of him. He rarely promotes himself up the batting
order to let the others play and score runs. But when the team is in trouble, he always engineers and paces
his innings beautifully and builds partnerships.

Thus, if we analyse both these scenarios it is evident that be it MS Dhoni or Lou Gerstner, they both
understood the real meaning of team and culture, which indeed helps them achieve their targets.
And maybe that is also a big reason for both of them being remembered as one of the most
remarkable leaders till date.

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Learnings
When Lou became the CEO, the common question asked to him was “culture here stinks, how are u
going to change it?”

He found out that everyone was being paid on the basis of individual performance and was expected to
do team work and noticed that people in the organization were busy competing with each other and
trying to choke down the customers through sales.

To which he responded that he cannot change the culture but he can build the morale which was
currently low by defeating the competitors.

His way to build a culture was looking at every single process and does it line up with the strategic intent
of the company which was to integrate, to provide solutions.

There was one instance where his communications were not reaching Middle eastern and European
employees (around 200,000) because of the person handling these areas, the area head, thought these
communications weren’t right for the employees. Lou gave him 1 chance to fix this and he failed to do,
so Lou fired him. He was the #1 performer of the company as evident from the regions he was holding.
Then people saw how serious Lou was about working together on the same page.

The changes made by Lou

 Customer centric
 Cutting cost by right sizing,
 Cutting down pension plans which made the transition difficult
 Focus on catering to wider market needs, i.e. going forward with new trends
 Innovating the already developed products and services
 Focusing on compensation plan to promote teamwork

Future predictions
Reaching a high 106.9 Billion$ revenue in 2011, it has since been decreasing steadily and reached 77
billion$ now.

Earnings per share for the shareholder when the share prices were the highest (211$ per share) was 14$
and now the share trades at 107$ and still the EPS is 10$ which is a matter of concern as it is evident
from the data that IBM is focusing on maximizing shareholders wealth without its own sustenance in the
view.

If this trend continues, soon enough IBM would be back to bankruptcy days that Lou Gerstner pulled it
out of. It is pretty clear that IBM is in a desperate need of a leader like Lou to get itself back on track.

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Refrences:
https://www.cricadium.com/ms-dhoni-biography-know-captain-cool/

https://hbswk.hbs.edu/archive/gerstner-changing-culture-at-ibm-lou-gerstner-discusses-changing-the-
culture-at-ibm

http://www.accesocp.com/blog/9-estrategia-strategy/10-ibm-restructuring-louis-gerstner.html

https://money.cnn.com/magazines/fortune/fortune_archive/1994/10/03/79800/index.htm

https://mashable.com/2017/01/05/ms-dhoni-india-captain-achievements/

https://en.wikipedia.org/wiki/Louis_V._Gerstner_Jr.

youtube.com/watch?v=YsNs3LA3QXE
www.cnn.com
www.bloomberg.com
www.moneycontrol.com

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