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The man behind Big Blue's revival

Lou Gerstner
IBM grew by 40 percent under Gerstner's tenure.
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International Business Machines Corporation

LONDON, England (CNN) -- IBM was this week confirmed as the leading producer of the world's most powerful computers.

A top 500 list, produced in conjunction with the International Supercomputer Conference in Germany, features 224 entries for IBM's "Blue Gene" system. IBM had just 159 systems in the last list in November 2003, six less than rivals Hewlett Packard.

Having also reported profits for the fifth quarter in succession in April, and celebrated a place as the leading technology company on this year's Fortune 500 list, times are good for "Big Blue."

Yet a little more than a decade ago, International Business Machines -- a company that can trace its origins back to the 19th century -- stood on the brink of extinction.

From the 1960s, when IBM revolutionized business computing with the System-360 mainframe computer, until the 1980s the company dominated the technology industry.

"They were considered the perfect company," explains business guru Michael Hammer. "They had grown to dominate the key industry of the late 20th century. They epitomized a certain style of corporate America."

By the early 1990s, however, the situation had changed dramatically. IBM had missed out on the rise of the PC and overlooked the market power of Microsoft's Windows operation system.

The business methods that had helped IBM achieve market dominance now made it look like a corporate dinosaur.

Profits of $6 billion in 1990 had become losses of $8.1 billion by 1992. By March 1993, when Lou Gerstner was appointed CEO, the company had just 100 days left before the cash ran out.

Track record

Gerstner arrived with a track record of success. Having previously run American Express and RJR Nabisco, Gerstner knew biscuits and credit cards, rather than computers. But he did have experience of the frustrations of dealing with IBM as a customer.

"When I was at American Express IBM was absolutely essential as a supplier, but I was so frustrated that I couldn't get them to think in terms of my business needs instead of technology," recalls Gerstner.

Having re-focused IBM on the needs of its customers, Gerstner started to reconfigure the company to emphasize its strengths: long-term service contracts, outsourcing deals, mainframe installations and foundation software.

Far from breaking up IBM into individual units, as had been planned in the dark days of 1992, Gerstner recognized that IBM's vertical intergration of hardware, software and services was its greatest asset.

"I said, look, right now the plan is to bust this company up and sell it off in pieces," says Gerstner.

"I said I don't really think that makes a lot of sense because as a customer what I'd really like from IBM is that they put the pieces together and give me a solution."

Gerstner may have decided to keep IBM together, but internally the company was undergoing radical upheaval. A plan to slash expenses by $7 billion was devised, with 60,000 workers laid off in the first six months.

Gerstner also took on the fiefdoms that had come to characterize the company, earning a reputation as a tough and demanding boss.

Stock options

But the rewards for those who survived justified Gerstner's heavy-handedness. In his eight years as chief executive IBM grew by 40 percent with services and consulting leading the growth, while its stock value increased eightfold.

"We had a miniscule number of people getting stock options," says Gerstner.

"I said, if people are going to work hard and carry us to victory we want, a lot of people have to share in the rewards. So tens of thousands of people were given stock options and participated in our success."

And if Gerstner's traditional approach made IBM look old-fashioned and monolithic during the dotcom boom, they were also the reliable name that businesses turned to during the bust that followed.

Even during 2001, the nadir for technology companies, IBM recorded profits of more than $8 billion.

If one thing sums up IBM's transformation under Gerstner, who stepped down in 2002, it is the company's architectural award-winning new headquarters at Armonk, New York.

"It said bureaucracy," said Gerstner, recalling the 1950s building that Armonk replaced.

"It was row after row of closed offices. It was very hard to find a computer in many of the offices. There was no visible demonstration that we were a computer company. We could have been an insurance company!

"So when we designed this building we wanted first and foremost to have our products visible. So people would walk in and say: 'I understand, this is the leading computer company in the world.'"

As for the future, Gerstner believes his successor, Sam Palmisano, could face an even greater challenge in taking IBM to "the next level of greatness."

"He faces a different set of challenges," says Gerstner. "In some respects his are harder than mine because I had the benefit of a crisis. I had that burning platform so I could galvanize everyone at IBM to work harder, to change.

"He's starting from a platform that in a sense could lead people to get complacent. And complaceny is the greatest enemy of excellence. So his job is to keep everybody running hard and keeping focused, and that's harder than what I had to do."

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