How to Cure a Behemoth's Blues
By Don MacRae
It was early in 1993, and the world's best-known company was teetering on the brink of a meltdown. The leadership challenge: Save it by restoring its profitability and dominant position in the marketplace. This would require a Herculean effort in generating and managing change. One contender for the job was code-named "Able." The selection committee chose that tag because he was at the top of its list of 125 candidates. From the start, he was regarded as perhaps one of only two or three corporate leaders in the world who could meet the challenge.
Three years earlier, the company had recorded its most profitable year. Able accepted the position, and when he came aboard, however, it was losing $16 billion and moving toward dissolving into a confederation of business units. More than 90% of profits came directly or indirectly from one product line whose sales were declining rapidly. Competitors were charging 30% to 40% less, yet the fear of lost revenue led management into refusing to cut prices.
READY FOR THE CHALLENGE.
Moreover, the company wasn't even participating in one rapidly growing segment, and it was suffering an alarming decline in its marketplace image. What bothered the new leader most was the belief throughout the organization that a simple tinkering with the formula that once had been so successful would solve the problems. How could such a prominent company be so out of tune with reality? Why did it persist in trying to dance the Charleston to a rap-music tune?
Able, who earned his engineering degree from Dartmouth and MBA from Harvard, had been preparing for this challenge all his business life. For him, mere tinkering was a nonstarter. He thought a competitive and cultural transformation was necessary.
He had the credentials and experience to carry that off. As a director at management consultants McKinsey & Co., he had learned to analyze and understand the underpinnings of a company, its marketplace, competitive position, and strategic direction. As chairman and CEO of RJR Nabisco he had learned that free cash flow is the single most important measure of corporate performance. As president of the parent company and chairman and CEO of American Express' largest subsidiary, he had learned how to drive strategic and cultural change.
Four days before he took on his new role, Able spoke by teleconference to the general managers of the company's operations in other countries -- the business' acknowledged power base at that time. Instead of warm and fuzzy platitudes, he spoke for 45 minutes about his agenda and expectations. He outlined five, 90-day priorities and asked each of the general managers for a 10-page report covering topics that ranged from customer needs and competitive analysis to how the writers viewed their company and what its short and long-term business strategies should be. The papers were due in 30 days.
Next, he met with 175 key customers in a conference setting. He outlined his expectations, including: redefining the outfit's identity and priorities, starting with the customer; making a recommitment to quality, and to being easy to work with; focusing on customers, and the performance they expected. Finally, he spoke of reestablishing his company's leadership in the marketplace.
Following that, Able met his top 50 executives to announce the first step in the cultural change: the "Bear Hug." Each exec was to visit a minimum of five of the company's biggest customers within three months. Each of their direct subordinates (another 200 executives) would do the same. From each visit, he expected a two-page report, to be sent to him and to anyone else who could help solve the customer's problems.
STANCHING THE WOUND.
The competitive and cultural change was under way. The "new company" was going to be built from the outside in: Customers would drive everything. On the inside, everyone would be asked to make three "personal business commitments" (PBCs) to winning, execution, and teamwork, and they were to submit an annual plan translating those commitments to action. The maestro had played the first few bars of his new symphony.
The first order of business was to stop the bleeding. Able made four critical decisions that gave a sense of direction to employees and the markets. He decided to keep the company together, launched a massive program of expense reduction, reengineered the way the organization carried out nearly every process, and sold unproductive assets to raise cash. Stability soon followed. There was better focus on day-to-day execution. New growth strategies were in the works. Able had been there less than 10 months.
The company's return to profitability was going to hinge on two big bets: the industry's direction and Able's strategy. He and his management team decided that over the next decade, customers would increasingly value technology suppliers that could integrate products from various companies. They also wagered that consulting services, not hardware, would provide the highest profits. It was a good bet: The services business has grown from $7.4 billion in 1992 to $30 billion in 2001, making it the largest in the industry.
AND HIS NAME IS...
Another big bet was that stand-alone computing would give way to networks. The company launched a hugely expensive and complicated multiyear effort to rewrite its critical software products to run on networks. Its software group has since become the leader in that field and one of the most powerful outfits of its kind in the world -- No. 1 or No. 2 in every market in which it participates, with 2001 revenues of $13 billion. Another big bet. Another big win. The organization had clearly learned how to dance to a livelier tune.
Who is Able? By now, I'm sure you recognize the exploits of Lou Gerstner Jr., who retired this year as CEO of IBM. Who Says Elephants Can't Dance? (HarperCollins, 2002) is his account of an incredible corporate turnaround. I have done little justice to the complexity of the challenges he faced or the solutions he introduced as he led IBM back to its position of leadership and influence. You'll have to read his book for the whole story. It belongs in the holiday stocking of every corporate leader or aspirant to that role.
Yes, elephants can dance. All it takes a leader like Lou Gerstner to teach them the right steps.