Lou Gerstner Takes the Gloves Off

The IBM CEO on the turnaround--and on his critics

In less than two months, IBM (IBM ) Chairman Louis V. Gerstner Jr. will retire. Outside of the Watsons, no other leader has left as big a mark on IBM. Gerstner has written about his experiences in Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround. The book will be in stores on Nov. 12.

Recently, a relaxed Gerstner met with BusinessWeek Associate Editor Ira Sager. For the first time, Gerstner answered critics who have charged that his turnaround was built on fancy financial footwork. He also tackled CEO compensation, discussed what's wrong with the computer industry, and disclosed a surprise about his future plans: He's going to study Chinese history and archaeology. Note: This is an extended, online-only version of the interview that appears in the Nov. 18 issue of BusinessWeek.

Q: In those first months after you replaced former IBM CEO John F. Akers, what was your biggest surprise?

A: I went into IBM believing that its problems were primarily strategy and execution. When I got there, I found out that the direction the company needed to go was pretty clear. This was not a question of picking a direction and saying: "Charge!" You would do that and turn around and nobody was following behind you.

It was an organization of fiefdoms. People had the view that "if this is not in my interests, I'm not going to participate." I felt I had fallen down a rabbit hole. That's when I realized the problems weren't strategy. They were: How do I execute that strategy?

Q: In the book, you use the phrase "counter-intuitive corporation." What do you mean?

A: There is this view that has been prevalent for as long as I've been in the business world that large companies are slow, ineffective, and that small companies are faster, better, more entrepreneurial. I don't buy into that. It's harder to make large companies faster, entrepreneurial, more responsive. But it doesn't mean they can't be that way.

This is probably the subject of another management book, but this is all about creating organizations where knowledge moves in a different way than control. Large companies have to have elaborate systems of control because there's lots of things to count, oversee, report, and add up. You create this kind of skeleton of an organization, which keeps it upright and moving. But you don't want knowledge, which is what people really leverage in a large institution, moving along the same pathways as control.

You've got to free knowledge so that it moves horizontally in an organization, not hierarchically, and allows organizations to leverage the fact that they have a big presence in various markets so they know things. That knowledge can move across the enterprise. Smaller companies have no way to leverage information.

Q: Why is it important to make a connection between strategy and corporate culture?

A: You must start with a new set of directions, and then you must help the culture move toward executing the strategy. [The corporation] won't move unless it sees the vitality and intellectual underpinning of the strategy.

People said, why doesn't IBM change? It wasn't for lack of strategy. It wasn't for lack of exhortation on the part of the leadership saying, "We've got to change." Nothing happened.

The culture didn't want to change. It didn't buy into the strategy. The culture, which is made up of all kinds of practices and behaviors in the institution, fought the change. So what you have to do is go in and change all the processes that underlie cultural behavior. We changed the compensation system. We changed the organization system. We said, it doesn't matter any more what your unit does, the whole company has to succeed before you get any payoff.

Q: Did you change the IBM culture as much as you expected, and do you think it could slide back into its old ways?

A: We have fundamentally changed the culture 180 degrees. IBM'ers around the world, they buy into [this culture] just as much as they bought into the old culture. They see the value of it.

Now, if we hadn't been successful financially and in terms of market share, they would have said, hey, this isn't working. But we have created an integrated $88 billion company with 350,000 people in 160 countries.

There's a lot of centrifugal force inside this organization that doesn't want to go back to the old world.

Those forces of darkness exist in the company at all times, and they exist in all enterprises: a tendency to pull away from any kind of central or common activities. The task for the top management team is to keep this thing moving and keeping it together and keeping it integrated. It's going to take continued attention to keep the culture consistent with the strategy.

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