Lou Gerstner on corporate reinvention and values
The former IBM CEO offers his thoughts on the principles and strategies that sustain a company in the long run.
Lou
Gerstner will always be known as
the man who saved IBM after resuscitating, then reinvigorating, the
near bankrupt company when he took over as chairman and CEO in 1993.
Gerstner’s career, though, spanned 43 years which also included
more than a decade at McKinsey, senior positions at American Express,
and four years as chairman and CEO of RJR Nabisco. Since stepping
down from IBM in 2002 he has continued to lead an active “portfolio”
life in education, healthcare, and private equity. In this
conversation with former McKinsey managing director Ian Davis, he
reflects on the DNA of companies that keep on creating value.
The
Quarterly:
How
do you think about corporate longevity? Does it help executives if
their companies explicitly aim to be around a long time, by which I
mean a generation or more?
Lou
Gerstner I
don’t think so. It seems to me that companies should focus on
trying to be successful five years from now, perhaps ten. If your
business has already been around, say, 20 years, I don’t see how it
can help the management team if one of the primary objectives is
getting to 100. It’s not something they can execute on. I’m not
sure what you can do to guarantee
success in that time frame, or even on a 20- to 30-year view.
The
Quarterly:
So
why do some businesses last much longer than others?
Lou
Gerstner: A
lot of it has to do with the industry. Many companies that have made
it over many years have been in slow-changing industries that haven’t
been much affected by the external environment, that are
characterized by significant scale economies, or that are heavily
regulated.
Take
food production. The big global players in this sector are not,
typically, huge profit generators, and their turnover only increases
modestly—say, by 1 to 2 percent a year, in line with demographic
trends. But those businesses are in a nice place: there’s not much
new competition, and the changes they’re up against, whether
technological or otherwise, tend to be relatively small. In the
automobile industry, it’s long cycle times and scale economies that
deter others. And in banking, it’s been regulation. You see a lot
of small bank start-ups in the US but the reason that so many of the
large players have been around a long time is that state and federal
laws make it difficult to start a national bank.
The
Quarterly:
Conversely,
the entry and exit barriers are much lower in, say, software or
technology, where capital requirements for new entrants can be
relatively light.
Lou
Gerstner: That’s
true, and it’s in those sectors that companies are most often
subject to strong competition, technological innovation, and
regulatory change. The question, at the end of the day, is whether
leaders in these and other industries can adjust. I would argue that
more often than not they can’t. Think about all those companies in
the computer or consumer-electronics industries, like Control Data or
RCA. Corporate longevity is either driven by the leadership team that
is there or by a new one that comes in from the outside and is able
to manage the transition to a significantly different competitive
environment. There was nothing that said American Express or IBM
couldn’t go out of business, and IBM very nearly did. For a long
time, American Express wouldn’t go into credit cards, because it
thought that would cannibalize its Travelers Cheques business. When I
arrived at IBM in 1993, there was no inheritable or even extendable
platform. The company was dying.
The
Quarterly:
Is
there something in the DNA of those firms that have endured—perhaps
a willingness to respond to a change of direction—that enables them
to survive?
Lou
Gerstner: In
anything other than a protected industry, longevity is the capacity
to change, not to stay with what you’ve got. Too many companies
build up an internal commitment to their existing businesses, and
there’s the problem: it’s very, very difficult to “eat your
seed corn,” go into other activities, or radically change something
fundamental about what you’ve been doing, like the pricing
structure or distribution system. Rather than changing, they find it
easier to just keep doing the same things that brought them success.
They codify why they’re successful. They write guidebooks. They
create teaching manuals. They create whole cultures around sustaining
the model. That’s great until the model gets threatened by external
change; then, all too often, the adjustment is discontinuous. It
requires a wrench, often from an outside force. Andy Grove put it
well when he said “only the paranoid survive.”
Remember
that the enduring companies we see are not really companies that have
lasted for 100 years. They’ve changed 25 times or 5 times or 4
times over that 100 years, and they aren’t the same companies as
they were. If they hadn’t changed, they wouldn’t have survived.
If you could take a snapshot of the values and processes of most
companies 50 years ago—and did the same with a surviving company in
2014—you would say it’s a different company other than, perhaps,
its name and maybe its purpose and maybe its industry. The leadership
that really counts is the leadership that keeps a company changing in
an incremental, continuous fashion. It’s constantly focusing on the
outside, on what’s going on in the marketplace, what’s changing
there, noticing what competitors are doing.
The
Quarterly:
How
important are values in sustaining companies, even those that change?
And can values be an enemy of change?
Lou
Gerstner: I
think values are really, really important, but I also think that too
many values are just words. When I teach at the IBM School, I use the
annual reports of about ten major companies that invariably announce,
on the back page or inside back page, “These are our values.”
What’s striking to me is that almost all the values are the same.
“We focus on our customers; we value teamwork; we respect the
dignity of our workforce.”
But
when you go inside those companies, you often see that the words
don’t translate into practices. When I arrived at IBM, one of my
first questions was, “Do we have teamwork?,” because the new
strategy crucially depended on our ability to provide an integrated
approach to our customers. “Oh, yes, Lou, we have teamwork,” I
was told. “Look at those banners up there. Mr. Watson put them up
in 1938; they’re still there. Teamwork!” “Oh, good,” I
responded. “How do we pay people?” “Oh, we pay on individual
performance.” The rewards system is a powerful driver of behavior
and therefore culture. Teamwork is hard to cultivate in a world where
employees are paid solely on their individual performance.
I
found a similar problem at American Express, where our stated
distinguishing capability was the quality of the service we delivered
versus that of our competitors Visa and MasterCard, which were owned
by a diverse group of bank holding companies. It turned out that on a
quarterly basis, we only measured financial performance and that the
assessment of our service quality, on crucial customer-satisfaction
matters such as statement clarity or phone-call wait times, was only
done once a year.
People do what you inspect—not
what you expect.
If
the practices and processes inside a company don’t drive the
execution of values, then people don’t get it. The question is, do
you create a culture of behavior and action that really demonstrates
those values and a reward system for those who adhere to them? At
American Express, we had an annual award for people, all over the
world, who delivered great service. One winner I’ll never forget
was a young chauffeur whose car windscreen had smashed and hit him in
the head while he was driving an American Express client to the
airport. Bleeding profusely, he continued the journey and got the
client to the plane on time. By explicitly recognizing through
worldwide communications the incredible commitment of people like
this (and the rewards they receive), you can get people to behave in
a certain way. Simply talking about it as part of your values isn’t
enough.
The
Quarterly:
Some
companies with reputedly strong values still find it hard to change.
Do values ever get in the way of the adjustment you are talking
about?
Lou
Gerstner: I
find it hard to think about bad values per se. The problem, as I say,
comes when values are simply ignored and not reinforced every day by
the internal processes of the company. The fault lies in not
demanding adherence to the important values: sensitivity to the
marketplace, awareness of competitors, and a willingness to deliver
to the customer whatever he or she wants, regardless of what your
internal historical assets have been.
In
that sort of situation, it’s very hard to change. IBM was enamored
with mainframes because mainframes made all the money. But if we were
going to change, we had to find a way to take the money away from
mainframes and allocate it to something else. So it isn’t what
companies say; it’s what they do. Do you think Eastman Kodak didn’t
see the move from analog to digital photography? Of course they did.
They invented it. But if they had a value—I’m sure they did—of
being market sensitive and following the customer, they didn’t
follow it. They didn’t make the shift.
The
Quarterly:
Are
there any relevant lessons from your post-IBM experience in the
private-equity industry?
Lou
Gerstner: I think
that private-equity activity tends to come at the end of the
corporate cycle, when a company is already in trouble, has been
mismanaged, or is an orphan in need of new leadership. So private
equity is another outside agent that comes in when management has
failed to do what it needs to do.
The
Quarterly:
Is
the management of generational change within a company an important
component of adaptability and staying sensitive to the market? Does
involving younger people meaningfully in routine decisions help
create the right conditions for change?
Lou
Gerstner: The
problem with all of these things is that there’s a ditch on both
sides of the road. I’ve known times in my career when older and
wiser heads restrained younger people carried away by short-term
dollar signs. So it’s hard to generalize, but certainly you have to
listen to all the executive team. Organizations, in my experience,
tend to be healthiest where there is a supremacy of ideas, where
people are willing to listen to the youngest person in the
room—provided, of course, that he or she has the facts.
My
successor at IBM has embraced what we called an IBM jam. It goes on
for several days; every IBMer could dial in and discuss important
topics like cloud computing or mobile computing. That represented a
real effort at IBM to tap the ideas of the younger, newer employees,
not just the senior executives. Always listening to the younger folks
won’t guarantee you the best strategy. But if you don’t listen to
them at all, you won’t get it either.
The
Quarterly:
Do
you think ownership structure makes a difference? We’ve noticed
that a large proportion of enduring companies have been privately
owned.
Lou
Gerstner: There
are obviously many more private companies than public companies,
certainly in the United States, so you would probably expect this
outcome. One thing I would say, though, is that the preoccupation
with short-term earnings in the public-company environment—not
something private companies are so concerned with—is quite
destructive of longevity.
And
that’s a bad thing. Who says the analysts are right when they mark
down a company’s stock just because it makes 89 cents in the first
quarter rather than the 93 forecast by the market? Are they thinking
about the long-term competitiveness of the company? Are they thinking
this would have been a good time to reinvest, or are they just
churning out numbers and saying they want earnings per share to go up
every quarter? This kind of short-term pressure on current earnings
can lead to underinvestment in the long-term competitiveness of a
business.
It’s
very interesting to me that a company like Amazon has been able to
convince the world that it doesn’t have to make meaningful
earnings, because it’s investing for the future—building
warehouses and building distribution and building hardware and
software applications. It’s so rare to see that happening. It’s
like they’re acting like a private company. It could be that
private companies can operate without the pressure of trade-offs of
short- and long-term investment and performance.
This
interview was conducted by Ian
Davis, former
managing director of McKinsey, and McKinsey Publishing’s Tim
Dickson.
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