Lou Gerstner on Change and Leadership

Transformation of an enterprise begins with a sense of crisis, or urgency.

Louis V. Gerstner, Jr.

HBS piece from 2002

“People at IBM were very smart. I didn’t have to [look] outside; I had to find the people already there” who were ready to turn things around, he said. “So I didn’t need a lot of outsiders. I just needed a few.”

“IBM’s extraordinary success in the ’60s and ’70s was built on one of the most dynamic sales cultures in the world,” he said. In his various roles before joining IBM, he was often a customer for the famously dynamic IBM salespeople. “They were very good, very relentless, very focused. And very individualistic.”

That kind of individualism and decentralization had served Big Blue well for many years, but by the 1980s and early 1990s it was no longer tenable. He saw that the company needed to come together to survive.

Most managers in corporate life these days fixate on strategy as their way of envisioning company transformation, Gerstner said. Strategy work by itself, though “terribly important,” is not enough to save a dying company. “You don’t ‘win’ with strategy,” he said. “Everybody’s strategy in industry is fairly similar. There’s no way to create a unique strategy. You can have a good one, but you can expect that your competitors are going to emulate it every day.”

“In our case we were able to define a strategic path that made sense,” he said, adding that the strategic path was not altogether different from what some people at IBM had been espousing before he arrived. But now a united culture gave IBM’s strategy the speed and effectiveness that was missing before. The Internet was certainly a galvanizing force, too. The company has spent $800 million per year for the last nine years on process transformation, he said, and it is now transforming the process systems once again to make them all network-enabled.

“It took me to age fifty-five to figure that out. I always viewed culture as one of those things you talked about, like marketing and advertising. It was one of the tools that a manager had at his or her disposal when you think about an enterprise.”

He added, “The thing I have learned at IBM is that culture is everything.”

HBR 2002

via CNN interview in 2011

“… leaders get people to do things they otherwise wouldn’t do. And so leadership, in my opinion, is all about change.”

—Louis V. Gerstner, Jr.

ZAKARIA: We’re back with a special edition of GPS, “How to Lead.”

If true test of leadership come during crisis, then Lou Gerstner has been tested many times. He’s been president of American Express, chairman and CEO of RJR Nabisco, but perhaps his biggest test came at IBM.

When Gerstner took over Big Blue in 1993, the American icon was on the road to failure. The year he took over, IBM had $8 billion in losses. The year he left, IBM had $8 billion in profits, and it had become world class once again.

Lou Gerstner on what skills he needed to affect that kind of turnaround.


ZAKARIA: Lou Gerstner, pleasure to have you.

GERSTNER: Thank you. Glad to be here.

ZAKARIA: You — you’ve turned three companies around, but you also work at a management consulting firm. You’re with McKinsey, RJR, American Express, IBM. IBM is the most famous turnaround, where you, “made an elephant dance,” as you described it.

How do you get people to do what you want them to?

GERSTNER: Well, I think you start off with — I mean, I start off with my definition of leadership, which is leaders get people to do things they otherwise wouldn’t do. And so leadership, in my opinion, is all about change.

You know, you don’t need a leader to sort of administer something that’s going very well. In fact, in one sense, an overly ambitious person in that circumstance can probably screw it up. But leadership comes to the fore when something has to change, and I think that it begins — it begins with creating a sense of urgency, it begins with creating a sense of purpose, a need to change because nobody wants to change. Nobody — I don’t care who you are. High levels of an organization, maybe the young people are more attuned to change.

So leaders create a sense of urgency and a sense of direction.

ZAKARIA: And that’s a power of persuasion, right?


ZAKARIA: Because you — then you have to make your case, as it were.

GERSTNER: It’s about communication. It’s about honesty. It’s about treating people in the organization as deserving to know the facts. You don’t try to give them half the story. You don’t try to hide the story. You treat them as — as true equals, and you communicate and you communicate and communicate.

I probably spent 50 percent of my time in the first six months at IBM talking to people about the need for IBM to do something different.

ZAKARIA: Did you paint the real picture, which was that IBM was — was on its way to a kind of potential extinction?

GERSTNER: Yes, I did. But I also painted the picture that there was a huge opportunity for us to be a leader again if we did things differently. So you just can’t go out and paint a picture of, my God, it’s awful, it’s awful, it’s awful. We’re going to die. And then people say, that’s nice, but what are you doing here? What is your role?

And so you need to create a sense of urgency, but you — along with that, you need to create a sense of hope and direction for the future. And then — and this is the most important part — and then you have to make sure that everything that happens in that organization is aligned with that new direction.

ZAKARIA: When you look at a person, middle, senior management, average guy, they’re scared of change, as you said, but they’re also scared of being the revolutionary. So you’re asking them to do things differently, and they’re wondering, wait a minute, but whenever I’ve — you know, I’ve — I’ve had a standard operating procedure. I’ve done my job well. Now I’m being asked to do something completely different.

How do you convince them that — you know because you’re just one guy in this big organization.


ZAKARIA: Everybody else might still be aligned to the old way.

GERSTNER: But — but you see, that’s what I mean about changing the processes that — that say to them that we’re going to behave differently, and, therefore, it’s allowable, and not only allowable, expected for you to behave differently.

And so one of the things that I needed to build in IBM, because of the strategy we created, was an ability to team inside of IBM, an ability to work as a team across the business unit. Well, I found out that the compensation system was based entirely on individual performance. It was all individual performance. So I changed the compensation system so people got rewarded only for a team effort.

Well, that sort of gives people some incentive to change. They now see that the — the rules have changed, the system has changed.

ZAKARIA: Machiavelli once said it is better to be feared than loved. Some people have said your leadership style was more to get people to fear you. Is that fair?

GERSTNER: I don’t think so. I think what my leadership style is to get people to fear staying in place, to fear not changing.

I mean, I love that quote from Andy Grove that said “Only the paranoid succeed” or “only the paranoid survive.” I mean, I think you do need some kind of paranoia in an organization that we’re in a competitive battle, and we need to stay on top. And you want to call that fear? I’m OK with that.

But I don’t want people to fear other people. I want them to fear our competitors, and to feel like they need to change and they need to keep driving for success. Personal — personal animosity or personal fear gets you nowhere.

On the other hand, I don’t think you can have a great need to be loved and be an effective change agent. I mean, you do have to make tough decisions. You do have to, in effect, tell people that things aren’t the way they used to be, and, you know, I’m responsible for seeing that change gets made and hold people accountable.

ZAKARIA: Lou Gerstner, thank you very much.

GERSTNER: You’re welcome.

Gerstner’s first 30 days (1993)

The day I arrived I met with the senior management group. John Akers introduced me. I talked to them for 20 or 30 minutes. I said I want to sit down in the next couple of weeks with each of you and review your business. I want you to tell me what it is you do, who are your competitors and customers, what are your strengths and weaknesses, what are your short-term and long-term challenges? I have been doing that for the last month. I’ve been moving all over the company, mostly listening to people. I’ve met with all the product units. In many cases, after a meeting in the conference room we gather a whole bunch of people in the hallway, everybody from managers to support staff people, and they ask me questions. I have been reading a lot about the company. And I’ve been talking to a lot of outsiders. At night I get E-mail notes. They’re tailing off now, but for the first couple of weeks they ran about 200, 250 a day. I take them home and read them. Most of them are from people suggesting things they think ought to be done. Many give me opinions on IBM’s strengths and weaknesses.

What are the main themes? The No. 1 message is, ”Let’s get the fix done quickly in the company.” For reasons that are not clear to me, nor do I care to figure them out, the adjustment period that IBM has been going through in trying to deal with changes in its markets is now carrying into its second or third year. The longevity of that change is as dysfunctional as the seriousness of the change.