Lou Gerstner

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Lou Gerstner

Lou Gerstner (born 1942) rescued IBM, the world'slargest computer maker, when he became its CEO in 1993. His career has been a study in corporate strategy and how to turn ailing companies around.

For most of its long history, IBM symbolized American ingenuity and corporate power. The company held a special place in the hearts and minds of the public and became more than a corporation-almost a national treasure-based on its development of the computer industry. In the mid-1980s, with the arrival of the personal computer, IBM was slow to realize the wholesale changes the new systems would bring to their business. After losing money for a decade, the decision was made to hire Louis Gerstner as chairman and CEO. He had gained an impressive reputation for rebuilding American Express and RJR Nabisco, and it was hoped that he could do the same for IBM. Gerstner was the first outsider to ever hold this position. In the past, top executives had all worked at IBM for many years and been promoted through the ranks. Within two years, Gerstner's strategic plans, combined with tough, cost-cutting measures, had transformed the ailing company and made it competitive once again. By 1997, IBM would post revenues exceeding $78 billion and its stock price had quadrupled. Gerstner had led IBM back to the top of the computer industry and initiated one of the world's greatest success stories.

Humble Beginnings

Lou Gerstner was born in Mineola, New York on March 1, 1942. Louis Gerstner, Sr. and his wife, Marjorie, raised four boys. The elder Gerstner worked as a night superintendent at the local Schaefer brewery, while his wife worked in the registrars office at a community college. Neither had a college education. All four boys excelled at Chaminade High School, a local Catholic boys school. Louis served as class president.

Gerstner attended Dartmouth College, majoring in engineering. He continued his education at the Harvard Business School and graduated in 1965. After graduation, Gerstner joined McKinsey & Co., one of the world's premiere strategic management consultant firms. Gerstner's hard work paid off at McKinsey. He became one of the youngest directors in the history of the company, at the age of 28.

Onward and Upward

In 1978, Gerstner joined American Express as president of the American Express Card Division. A year later, he was named president of the Travel Related Services Group, responsible for both travelers checks and travel service offices. When the group became a subsidiary of American Express in 1982, Gerstner became chairman and CEO. In 1985, he was named president of American Express.

American Express made significant strides under Gerstner's leadership. Card membership rose from 8.6 million to 30.7 million. The company also introduced two popular credit cards: the Platinum and Optima. Gerstner's strategic skills were essential in helping the company capitalize on the growing credit card market. He further impressed analysts with his administrative and marketing abilities.

In 1989, Gerstner became chairman and CEO of RJR Nabisco Inc., the food and tobacco conglomerate. His leadership skills and strategic thinking would be put to the test at RJR Nabisco. Only a year earlier, the company was the prize in an epic takeover battle that was later immortalized in the book, Barbarians at the Gate. RJR Nabisco agreed to a record $24.53 billion leveraged buyout by Kohlberg Kravis Roberts & Co. (KKR) after a very public battle against a group led by its flamboyant CEO, F. Ross Johnson. In the aftermath of the fight, the company was faced with billions of dollars in new debt. Gerstner had to confront the declining domestic tobacco market and revitalize its workforce after the takeover. Throughout his tenure at RJR, Gerstner had to contend with huge interest bills, which kept profits low or nonexistent. Adding to the company's problems, was a steady decline in market share of the Winston cigarette, its biggest moneymaker.

It did not take long for Gerstner to begin transforming the company's corporate culture. In his first year, Gerstner traveled to RJR facilities all over the world, logging 250,000 miles in an effort to learn as much as he could about the company. His mantra centered on cutting bureacracy, acting with a sense of urgency, quality, and teamwork. He even printed up cards emphasizing these points and sent them to all 64,000 employees. He took tough steps to repair RJR and replaced managers who did not share his strategic vision. The Wall Street Journal reporter, George Anders, described the new RJR as "A no-nonsense, impatient company where top-level strategy meetings are sometimes held on the linoleum aisles of supermarkets. Bureaucracy, flamboyant spending, and intra-company rivalries are out. Teamwork, urgency, and a Japanese-style fixation on quality are in. The Gerstner agenda," said Anders, "includes no big risks, no big innovations: It centers on running the current operations to maximum efficiency."

Within two years, the company's stock gained approximately 50 percent and operating profit rose 31 percent. One of Gerstner's greatest achievements was to get the company's two distinctly different operating units (tobacco and food) to work together. Instead of competing with one another for research and marketing money, the two units began sharing information under Gerstner's leadership. He also put a halt to needless factory upgrades, which had been the norm under earlier administrations.

Big Lou Leads Big Blue

In the early 1990s, the giant computer company, International Business Machines (IBM), was struggling. Long a symbol of American corporate power, IBM lost $2.9 billion in 1991 and $5 billion in 1992. By 1993, the company's losses surpassed $8 billion and the value of its stock had dropped from $42.6 billion to $19.7 billion. Gerstner was one of 16 top business leaders to be considered as a possible successor to John Akers, who had resigned as CEO on January 26, 1993. After twice declining the position, Gerstner finally accepted.

Although not IBMs first choice, Gerstner's record at American Express and RJR impressed the search committee. He had a history of fixing ailing companies by making tough decisions to cut costs, including massive layoffs and improving efficiencies. IBM needed a strategist who would shake up the organization. According to USA Today's Leslie Cauley, Gerstner "demanded the twin titles of chairman and CEO and the authority to assemble his own management team. He wanted authority to do whatever he deemed necessary to make IBM healthy."

The decline of IBM was tied to its weakening hold on the computer industry, especially in big mainframe computers. It could not make up for that loss in the highly competitive personal computer and laptop business. Competitors were beating the company to the market with new products and cutting prices, in an effort to undersell the giant. Gerstner's challenges were twofold: he had to attend to the mainframe sector, then decide how the company's 13 divisions would be structured in the future. He also demanded that $1 billion be cut from the research and development budget, which flew in the face of IBM tradition.

By the time the new CEO celebrated his second anniversary, analysts were already touting IBMs comeback. Taking a tough step toward shrinking operations, Gerstner slashed the global workforce from a 1985 high of 406,000 down to 220,000. He focused on improving global ties in the more than 140 countries in which IBM maintained operations and made sure IBM computer products were getting to customers faster. He shook up IBMs fabled corporate culture that hinged on formality, and allowed employees to dress informally. In 1994, IBM posted a profit of over $3 billion, the first time in a decade that IBM was in the black.

Gerstner reduced costs by more than $6 billion. He also began an aggressive worldwide advertising campaign that emphasized IBMs global operations. He capitalized on IBMs worldwide brand name recognition in marketing the company. Gerstner realized that the company spent too much time arguing about technology and not enough determining what new products customers needed and finding ways to meet their needs. Within a couple of years, customers cited IBMs improved products and responsiveness. Gerstner himself made it his policy to talk with at least one customer per day. He also reorganized the company's sales force around specific industries, to provide more knowledgeable customer service.

Gerstner and his management team knew they needed to transition the company into fast-growing areas, like personal computers and consulting services, while rebuilding the mainframe division. In 1995, IBM purchased Lotus Development Corporation for $3.52 billion in order to expand its software products division. Lotus grew into one of the world's leading spreadsheet and business software companies. When IBM bought Lotus, there were only two million users. By 1998, the number jumped to over 22 million. IBM also acquired Tivoli Systems, a network management business, to compete in the network market. Several other purchases strengthened the company in other areas, such as purchasing systems, chip manufacturing, and global management support.

The rebirth of IBM was symbolized by its "Deep Blue" computer. Programmed to play chess against world champion Gary Kasparov, Deep Blue defeated the grand master in a highly publicized six-game match in 1997. Many observers thought Deep Blue was the first incarnation of computer systems that could actually think like human beings.

The Future

In Gerstner's first four and a half years, IBM shares quadrupled in value. In a complete transformation, the services business (which employs nearly half of the company's employees) accounted for 25 percent of sales. Gerstner was even willing to enter into an occasional alliance with competitors. In early 1999, IBM announced a seven-year $16 billion technology sharing arrangement with Dell Computer Corporation. The two giants will share patents and some development. Dell has agreed to purchase $16 billion worth of chips, disk drives, networking equipment, and other computer components. Dell will gain access to IBMs huge research and development operation (which routinely leads the world in new patents), while IBM strengthens its components division.

IBM has become more nimble under Gerstner. Instead of debating issues endlessly, he charged ahead. Gerstner is a tough-minded leader who was willing to revamp IBMs corporate culture in order to move the company forward. As a result, IBM has been able to capitalize on cutting-edge technologies, like electronic commerce. At the 1998 annual shareholders meeting, Gerstner explained, "We see the total market for Internet commerce hitting $200 billion by the end of the century. IBM is seen as the company for e-business solutions-by a 2 to 1 margin over our closest rival."

Although an unlikely choice to lead IBM in 1993, with little high tech experience, Gerstner's keen strategic sense and understanding of customer needs has been credited with resuscitating the ailing giant. Under Gerstner, IBM attained revenues of $78 billion in 1997, while net income exceeded $6 billion. IBM remains an American institution, and one of the world's most important corporations.