`We Won't Stop...Until We Find Our Way Back'

As IBM begins its third year under Chairman Louis V. Gerstner Jr., the computer giant's turnaround remains a work in progress. His cost-cutting has produced an earnings rebound that has doubled IBM's stock from its nadir. Core businesses such as mainframes and minicomputers are showing surprising strength, and the company is also seeing good results in new markets--such as services and selling components. In anticipation of a strong first-quarter earnings report on Apr. 20, analysts have been boosting their estimates.

But there are problems, too. IBM's $11 billion software business remains in turmoil, and the $10 billion IBM PC Co. is digging out from a disastrous 1994. On the eve of the annual shareholders meeting, Gerstner surveyed his realm in an exclusive interview with BUSINESS WEEK Department Editor Ira Sager.

Q: Last year, you set priorities for the company: return to profitability, be more competitive, increase shareholder value, and grow. What are the priorities for the next 12 to 18 months?

A: Well, return to profitability--we've done that. And we've increased shareholder value. But there is a never-ending quest for increasing shareholder value in this company. You see that chart [points to a 1990-94 stock chart]? You see that peak? We won't stop this journey until we find our way back.

Increasing revenue is absolutely essential because this is an industry where if you don't grow, you fall backwards. Competitiveness I would probably translate into an objective of increasing our market share, which is, in effect, the same thing. That is still a very high priority.

Q: One competitiveness problem has been getting products out on time. The PC company, I'm told, missed every deadline last year.

A: Well, first let me agree with you that time to market is one of our highest priorities, and one in which we are far from satisfied. The PC company has been the most glaring weakness.

But at the same time, as I think our annual report indicates, nearly half of our hardware sales in 1994 came from products we introduced in the last 18 months. We had a phenomenal new-product-introduction year last year. But I would give us a "C" grade on this because there is still more to do. And the areas where we've got to do better are principally in our PC business and in our desktop software business.

Q: How critical are those efforts--the PC business, the desktop software--to the future of IBM, to the turnaround?

A: We consider them very important. We simply will not accept anything less than success in our PC company and in our software company. And we don't see any reason to accept anything less than success. That doesn't mean that we're going to be in every market. It doesn't mean that we have to make productivity applications to be in desktop software. It doesn't mean that we have to make every client-server application.

But it does mean that we have to build on some of the very powerful skills we have in databases, in transaction processing, in messaging, in collaborative computing, and in operating systems. There's no company in the world that has built more operating systems than IBM. In fact, it's hard to argue whether anyone else has built more than one.

We have a lot of money invested in rebuilding our software company. OS/2 is the hottest product in the stores

today. It's increasing share. By the way, part of our software company problem has been that we're terrible marketers of software. Our biggest competi-

tor in software is not a very good technical company. But it's one of the

best marketing companies I've ever seen, and I've spent 20 years in marketing.

Q: What about the personal computer business, where IBM has slipped badly?

A: Well, our PC company made some real improvement in the first quarter. Are they done? Huh! Far from it. Let me tell you something. [IBM PC Co. President G. Richard] Thoman made a very, very brave decision that I supported: to make a whole lot of fundamental changes simultaneously. We could have done things that kind of allowed us to return gradually. But we made the decision, at his urging, to take the short-term hit and really attack the problems. And the problems he found were very considerable, and so it's been a rocky 8 or 10 months.

I sense that there is a very clear understanding today in the division as to what they have to do. There's enthusiasm to prove to the world that they can do it. Yet there are still a couple of four-minute miles that have to be run before they get the gold medal.

Q: How much of what they're doing is a model for the rest of the company?

A: The PC company is not the model for the rest of the company. When I got here, everybody said: Look at this hot PC company. They're doing all the things that the rest of IBM should be doing. But when you peeled it away, they were doing things that were--thank God--not adopted by the rest of the company.

Q: You talk about the need for computer makers to deliver real value to customers. What do you mean?

A: I am probably the only customer who has ever run a significant information-technology company. Most of this industry is run by propeller heads who absolutely love the technology. I spent 20 years buying and using this technology, and I have a great respect for its ability to transform industries and create competitive advantages. But I also know that creating that kind of value requires a lot more than just the pure technology.

Q: Yet the customers continue to snap up the latest technology....

A: I would say we are at a very important inflection point right now. More and more customers are saying: "Simply giving me more raw power is not enough." When I talk to customers who are trying to reengineer, they often ask me the following question: "It takes me 36 months to do a major reengineering project. How do I fit your one-year product cycle into my 36-month problem-solving cycle? How do I design systems that are supposed to last, hopefully, for 5 to 10 years on a set of technology that may change in a year?"

We're not going to slow down the pace of technology. We will not change the pace of microprocessor technology, storage technologies, and communications technologies--the three basic drivers of the industry. The answer is to do a better job of packaging technology into workable, long-term solutions for the customer.

Q: How does this translate into IBM's bringing value to its customers?

A: We will continue to have people buy off-the-shelf pieces of technology. And you compete there on the basis of who has got the best technology, best price, best delivery. At the same time, the same customer or others are going to say: "I need somebody to really deliver solutions." Solutions involve hardware, software, and what we call services.

One of the most important new demands that our customers are making is for something called systems management. You have a whole set of network management and security issues that require the kind of sophisticated software development that IBM has been known for. And it requires digital network capability, which we also have done for years.

Q: What do you see as the long-range identity of IBM now?

A: Our first strategic initiative is exploiting our technology. We have consistently developed the vast majority of the intellectual capital in this industry, whether it was in processors or storage or software or data communications. It's easy to look at technology companies and say: There's Intel and there's Advanced Micro [Devices] and there's EMC. But we've got one of those inside of IBM. And then you look at software companies. Well, we've got one of those, too. And then you go look at services, and there's Andersen Consulting, there's EDS Corp. Well, we're the biggest one of those, too. And networking. You know, the IBM global network is emerging as one of the most important data networks in the world.

Yeah, we've kind of stubbed our toe badly in personal computers. But we're still No.2. And that's a rather significant position to have. And we haven't given up on No.1. This was a short-term aberration. Mainframes? People seem to think that business is going to go away. We don't. And our share of that business keeps going up. We're opening the gap between us and competitors.

The answer to your question is, we are going to continue to be an industry leader. We're going to be the company that has the capacity to deliver total solutions and a multiproduct, multisector approach to the market. There will always be some companies--I call them the meteors--that have some hot product and shoot off for five years or so. Five years later, they're dead on their feet, single-product companies. But I think that, day in and day out, our diversity and our capacity to integrate will be a very powerful tool for us, and for shareholders and customers.

Q: Do you have the management to translate this into results?

A: What I've found in IBM is that the very core strengths had always been there and were still there. [The problem] was more the attitudes, the kind of management structures and the management behavior that got built up in the face of success. I call it the curse of success.

So we had to change the way people behaved around here--we didn't have to change IBM's fundamentals. We still had powerful technology. We had very smart people. And we have a geographic reach that others would kill for. Everybody's talking about the age of Asia. Look at the size of IBM's Asian operations and how long they've been there. And Latin America.

We had all these great skills and, despite that, we managed to screw up. So that gets to behavioral issues. I've been fortunate enough to have to only work on the behavioral side. I was also blessed by the fact that you need a crisis to focus on the need for change. Basically what I said to people around here is: We just lost $17 billion and 150,000 people lost their jobs, and the media is throwing us on the junkyard pile. It appears that what we were doing wasn't working. Would you not agree? And, therefore, we ought to try something different.

The ability to appeal to a bunch of smart people, who obviously saw that the old system wasn't working, was very constructive. Then we did things relating to the compensation system and to breaking down the feifdoms. And we had a few public hangings of people who didn't want to get on the new programs. That told everybody we were serious. So it's been a long two years.

Q: You feel good about where the company's headed?

A: Yes, I'm feeling good about it because IBM people are feeling good. There's a renewal of spirit in the company that is highly constructive and will be an important part of continuing the transformation. We're all feeling good now, but not complacent. The first person who acts complacent around here is going to get a two-by-four on the side of his or her head.

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