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WORLD BUSINESS

History's greatest corporate turnaround?

The man who rescued IBM from the edge of oblivion

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Lou Gerstner is credited with bringing IBM back from the brink.

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LONDON, England (CNN) -- International Business Machines pretty much invented computing, but then it all went spectacularly wrong.

It was in 1964 that IBM went from being good to great.

Chairman Thomas Watson jr, son of the company's founder, bet the future of IBM on the system 360. He invested almost double the company's annual revenue at the time on the project.

It became the classic mainframe computer. Its speed and compatibility revolutionized the way that businesses could process information.

Business guru Michael Hammer said it made IBM's position unassailable.

"It's hard for people today who weren't around at the time to understand the market dominance that IBM had in the computer industry," he said.

"It would make today's Microsoft and Intel look like wusses."

IBM was a leader in management practice as well as business.

The company's sense of its own significance was borne out by the IBM song, "Ever Onward."

"They were perceived as being perfectly managed. The whole image of the IBM sales rep in his blue suit and his white shirt epitomized a certain style of corporate America," said Hammer.

"They were really the apotheosis of mid-20th Century corporations."

But by the early 1990s the situation had changed dramatically.

IBM missed out on the rise of the personal computer and overlooked the market power of Microsoft's operating system.

The company was losing billions -- and by March 1993 it had just 100 days left before cash ran out. Enter Lou Gerstner.

Gerstner had a track record of success, having run American Express and RJR Nabisco.

Biscuits and credit cards, rather than information technology, were his forte. But what he did have was experience as an IBM customer.

"When I was at American Express, IBM was absolutely essential as a supplier," he said.

"I was very dependent on them but I was so frustrated that I couldn't get them to think in terms of my business needs as opposed to technology."

Solutions

Losing sight of the customer, the company was already getting ready to break itself up, into up to a dozen independent units.

Gerstner axed the plan, recognizing IBM's vertical integration of hardware, software and services was its greatest strength.

"What I said to the IBMers is 'right now the plan is to bust this company up and sell it off in pieces. As a customer I don't really think that makes a lot of sense because what I'd really like from IBM is for it to put the pieces together and give me a solution.'"

Costs and staff numbers were slashed, with 60,000 workers laid off in the first six months.

Gerstner also took on the fiefdoms that had come to characterize the company, forcing the company to pull together.

"We had a miniscule number of people getting stock options. I said 'if these people are going to work hard, carry us to the victory we want, a lot of people have to share in the rewards,'" he said.

"Tens of thousands more people were given stock options and participated in our success."

In Gerstner's eight years as chief executive the company grew by 40 percent, with services and consulting leading the growth. Its stock value rose eight-fold.

Critics charge that later years were marked by a lack of entrepreneurship, but for bringing IBM back from the brink his claim to a place in the pantheon of great CEOs is strong.

"IBM had all the ingredients for failure: arrogance, complacency, bureaucracy, a sense of malaise in the organization," Hammer said.

"I think that Gerstner's turnaround of IBM is the single greatest turnaround in modern business history."

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