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IBM CORPORATE AFFAIRS

Gerstner's Attempt to Deliver Vision, Strategy Statements Falls Flat

Mountain Shook, Mouse Was Born

Long, "Techie" Talk Shows IBM CEO Is No Visionary, Nor a "Change Agent:" Trying to Fit in, Not Change "IBM Culture"

BARCELONA, Spain, 03/25/94 - The long-awaited "vision statement" by the IBM chairman, Lou Gerstner, turned out to be much ado about nothing.  "The mountain shook, (but only) a mouse was born," an Eastern European proverb says. In a very long speech, full of typical "IBM speak," the IBM boss proved not only that he was no visionary, but that he was no "change agent[1]," either.  

Instead of taking a sledgehammer to the "IBM culture," the change of which Gerstner himself admitted was a prerequisite for success, he seemed to have adopted it quite well.  The "techie" tone of the speech also suggested that it was written by someone with an engineering and/or manufacturing mentality, not by a "business architect."  

The speech lacked imagination; it lacked inspiration; it lacked even the basic understanding of the global economic and political trends against which any multi-national strategy must be plotted.  In short, it was a flat, begrudging response to criticism which IBM CEO's July comment drew - that "the last thing that IBM needs right now is a vision statement." 

The high point of the speech came when Gerstner read his vision statement early on in the talk and said, "well, that's it.  Thanks for coming."  It was the only line which drew audible laughter.  Yet, the flippant comment also revealed his true feelings - that IBM really did not need all this vision thing, just a better management mechanic at the top.  How do we know that?  Because, after almost an hour and a half, Gerstner concluded his speech with an "anti-vision statement."  

"So the most important strategic priority for IBM becomes, when you peel it to the core, to execute what it knows - and has known for years.  Execution will lead IBM back to success."  (It's a good thing for Gerstner that no analyst in the audience asked him, "whose execution?").  

On a more serious note, Gerstner's final comment sends some rather imperious messages (maybe John Akers wasn't the "Last Emperor" after all?):

To IBM shareholders, analysts and media:  "Here... Despite my better judgment, I've gone through the motions for you.  Now get off my back!"

To IBM employees:  "See how they (the shareholders) made me waste my time?  So, you'd better not.  Don't worry about the direction the IBM ship is sailing in.  It's in good hands now.  Just keep shoveling the coal, only faster, while I fix a few screws on the steering wheel."

To former IBM CEOs and current top executives: "Boy, how stupid you were...  You had it all - great image, fine strategies; solid products; nice people, loads of money...  Still, you blew it!  That's because you didn't have me!  I'll show you how it's done.  Pass me that wrench, Paul, will you?" 

In hindsight, maybe Gerstner should have walked out after getting his first laugh.  For, the rest of the speech provided ample cause for worry among IBM shareholders, and plenty of new reasons for IBM critics to hang him.  As for those arms-length IBM sympathizers who, like this writer, kept giving Gerstner the benefit of the doubt, and even defended him against some unfair raps in the media, yesterday's speech dashed any hopes that he would indeed be the "business architect" IBM needs.  And the latter hope was the main reason we applauded a computer industry outsider's, rather than an insider- technologist's, selection for the top IBM job a year ago (see ANNEX BULLETIN 93-19, 3/29/93).  Ironically, we also noted at the time that Gerstner was an outsider who comes as close as an outsider can to being an insider.  We wondered, therefore, if he were picked by the Board because he would not rock the boat too much and make radical changes.  Now we know that.  As does the stock market.  The IBM stock dropped 21/2 points after the Wall Street took a look at Gerstner's "vision."

 Gerstner's Vision Statement

"IBM's mission is to be the world's most successful and important information technology company.

Successful - in helping our customers apply technology to solve their problems.  And successful in introducing this extraordinary technology to new customers.

Important - because we will continue to be the basic resource of much what is invented in this industry."

 Actually, we rather like the above "vision statement."  It has the right elements of good leadership.  It is simple; it is inspiring; it is concise; it is non-specific; it is customer-oriented, and most importantly - it gives even the mechanics toiling in the engine room a 40,000-foot view of where the ship is sailing and why they are up to their elbows in grease. 

Unfortunately for Gerstner, it is his execution of the vision statement into actionable strategies that we've found rather disappointing.  For example, "helping customers apply technology" to us meant growing the systems integration and outsourcing businesses.  

"'Atta boy!" we thought.  "Finally, someone is moving IBM back up the food chain."  We were wrong.  The bottom line of the rest of his strategic rhetoric was that IBM would like to be another Intel.  Or another Microsoft.  Only bigger.  In other words - to remain a global manufacturer.  

The only thing such a strategy ensures is a loss of jobs in the U.S. and other developed countries, and a continuing pressure on margins.  Such a "strategic" plan is a sign that Gerstner is merely a "20th century" executive, as were his IBM predecessors, not a "21 century" visionary.  A peak at the pie chart about the U.S. jobs in 1992 on page 4 should help explain why we think so (also see ANNEX BULLETIN 93-52, 11/05/93).

 Some Gerstner Stunners...

 Services.  We were stunned that Gerstner's speech devoted only about 30 seconds to the fastest growing IBM business segment, and the only one which increased significantly in 1993 - the services.  Buried as a subplot in the "realign the way we deliver value to customers"-strategy discussion, Gerstner said, "we're realigning our marketing organization to create highly-skilled industry groups that will provide... a full range of services..."

Size.  As he has done on many previous occasions, Gerstner extolled the virtues of large size in global (manufacturing) competition.  He was right, also as we have said quite a few times in the past.  Consequently, he was also correct when he decided last September not to break up IBM into manufacturing units (thus diminishing their potency), something he also repeated in his latest address. 

At the same time, we have also said on many past occasions that in the services business, big size only means big problems; that successful services leaders tend to act as an amoebae.  They know when to split up successful operations before the size-induced snags hit them (see ANNEX BULLETINS 93-16, 3/18/93, and 91-31, 6/12/91, for example).

Evidently, Gerstner still does not get it.  He does not seem to understand that IBM is today a part-manufacturer.  These are very different businesses.  They must be managed using different strategies and tactics, not just better, as he says.  That the IBM boss is still indiscriminately trumpeting the virtues of big size, shows that in his heart he is an industrialist, not a world's technological visionary, which his own "vision statement" pre-supposes.  Or is it maybe that someone else is still feeding him these industrialist lines? (e.g., what is Paul Rizzo, one of the IBM old-timers who helped run the ship aground, still doing on the Board of a 21st century company?  Except, of course, if IBM isn't a 21st century company...)

Software.  During the Q&A which followed his speech, Gerstner was asked how he intended to protect the IBM software margins in view of the deep discounting in the industry.  "Very carefully," he bristled.  We could not help but recall similarly curt answers when John Akers was asked to account for his decisions.  This was only a "warm up" answer, though.  The real stunner was yet to follow.  "We've got to reduce the cost of software (in order) to maintain shareholder value (!?)."  Wait a minute.  Giving the store away is hardly a way to reward the shareholders, is it?

Mainframes.  Another stunner was that whatever future the IBM mainframes have left in them, Gerstner's comments about them are likely to shorten it.  It was a classic shot in the foot on a par with Carl Conti's 1989 humorous comparison to dinosaurs (see ANNEX BULLETIN 89-33, 6/01/89).  "Although the mainframe will not use the POWER/PC, it, too, will migrate to a microprocessor base, the S/390 microprocessor," Gerstner said.  

The fact that the mainframes will continue to revolve around the S/390 chip, rather than the POWER technology which the AS/400, the RS/6000 and PCs will be using, contradicts Gerstner's sales pitch about the benefits of consolidations of IBM hardware and product developments.  In other words, his statement implies that IBM will continue to spend the money on two different technologies at the same time as its chairman is touting the virtues and cost savings resulting from the R&D investment consolidation for the PCs, AS/400 and RS/6000 processors.  The apparent isolation of the IBM mainframe platform may only accelerate its decline. 

The marketing tragedy for IBM is that Gerstner was plain wrong when he said that the mainframes will not use the POWER technology.  He should have said that at the present time the S/390 microprocessors offer a better performance than do the RISC-based microprocessors used in the RS/6000 and the new AS/400.  Which is the reason IBM mainframe developers chose the S/390 CISC-based chip over its RISC counterparts.  But, the S/390 chips use the same CMOS technology as the other IBM platforms, and are even made at the same Burlington plant.  When the RISC architecture catches up to that CISC (used for S/390s), which we estimated might be in the 1996-1997 time frame, there is no reason why the IBM mainframes may not work off the POWER platform as well. 

Faux pas such as this is what happens when a lay person tries to act as if he were a technologist.  It also cheapened Gerstner's enthusiasm early on in the speech about how excited he was about the new parallel mainframes, whose debut is expected in early April.  His euphoria was evidently genuine, but several years too late.  If only Akers had said something like that in, say 1990 or 1991.  Now, it will take an army of PR "spin doctors" to soften the harm which Gerstner's careless remarks have done to IBM's already besieged mainframe lines.  

China Follies

Globalism .  Gerstner also surprised us with his relative naiveté in international affairs considering that he had run multinational operations even before joining IBM.  Several times during his speech he extolled the virtues of the Chinese market, and marveled at the opportunities which exist there for companies like IBM.  "Our business in China increased more than 50% last year," he said.  That's nice.  "Now, how much money did IBM make in China last year?" an inquisitive shareholder might have asked.  Alas, nobody did at the New York Gerstner press conference.  Had someone asked that question, however, chances are that the answer would have been probably a "negative profit" (an "IBM speak" for a loss).

Yet, "there aren't many companies that have the reach and breadth to help a country like China develop from the ground up an information technology infrastructure," Gerstner continued to speak as if IBM were some sort of a United Nations' public utility, not a private company whose shareholders expect it to make money.  Since when is IBM in the business of "nation building," anyway?  We saw what happened in Somalia even when our government naively attempted to do just that.  Besides, if that is indeed a part of IBM's new charter, why wasn't it in the "vision statement?"  Furthermore, why would IBM not invest first in American "nation building" by broadening the IBM customer base well beyond the traditional "FORTUNE 500"-type companies?  Of course, that would be reaching well beyond Gerstner's and IBM's traditional comfort zone, wouldn't it?

Meanwhile, back to the China, if Gerstner is bullish on it because of its supposed future growth and profit opportunities, then he, as well as many other multinationals, might end up rudely disappointed.  As did the British textile industrialists a century ago, who also saw immense opportunities in China.  They, too, counted Chinese heads to justify their enthusiasm.  "If every Chinese consumed as much of our product as the average Australian does now, we would double our global sales...[2]" they reasoned.  Or, "if every Chinese added just one inch to his shirt tail, the mills of Lancashire could be kept busy for a generation."  Well, one hundred years later, Chinese can make any length of shirt tails they choose as the mills of Lancashire rust in the dustbin of history.  Will the same be true with the computer chips?  We would not be surprised.  Nor would IBM end up as the only company holding the bag.  Intel, for example, has also just announced plans to open its first plant in China.

But, the rise of China in the world affairs is bound to cause a new global political instability, just like the rise of Germany and (later) Japan did in the late 19th and early 20th century.  China's future growth is predicated on its exports.  Political instability won't help the exports or world trade.  In other words, the current bonanza may not last.  Even some Chinese diplomats in Europe seem worried that their country may be growing too fast. 

Besides, any multinational strategic planner who does not have a "doomsday scenario" (read a world war) as a part of his plan, is simply playing ostrich.  Will IBM find itself once again on the "wrong" side of a world war?  For the sake of IBM's shareholders, we hope that Gerstner will take quite a few deep breaths before directing any more IBM investments into China.  He might consider how bullish Tom Watson, Sr., used to be on Germany and Italy, for example, before World War II.  The legendary IBM boss even accepted medals from Hitler and Mussolini for his work in helping industrialize those countries' tabulating industry, something Watson, Sr. later said he regretted. 

In the 1970s, IBM made the same mistake in the former Soviet Union under the leadership of Frank Cary when it invested heavily during a temporary thaw in the Cold War.  When the relations with the Soviets worsened following their invasion of Afghanistan, IBM was one of the companies left holding the bag.

Gerstner might save himself and the IBM shareholders such potential embarrassments by learning from history, including that of his own company, so as not to repeat it.

By the way, we find it truly amazing that a member of the prestigious Council for Foreign Relations, possibly the world's foremost authority on foreign affairs, does not seem to read the reports or heed the warnings which his own organization puts out!? (e.g., the Kristoff's China article).  We hope that the IBM employee recommendations get a better treatment...

Financial Update

Even though Gerstner brought the entire top IBM echelon along, the only other IBM executive to speak at the New York meeting was Jerry York, IBM's CFO.  He pointed out that the gross margins have now stabilized at under 40% (38% to 39%), which is where they've been for the last five quarters.  Previous to that, they had been dropping at about 5% each year since 1990.  In 1993, IBM also had a positive cash flow of about $800 million.  "The financial ship is at least starting to head in the right direction," York said.  As a result, York said that he still thinks that last July's restructuring charges were IBM's last. 

York also pointed out that three-quarters of IBM's debt was related to customer financing (e.g., ICC in the U.S.).  In addition, the company could have taken the debt down by about $5 billion.  But, "we had a strong liquidity preference," York explained.  Considering the recessions in Europe and Japan, and only a slow growth in the U.S. economy, this certainly seems a prudent financial tactic.

Happy bargain hunting!

Bob Djurdjevic


[1]A "change agent," is how the IBM director who led the CEO selection process, Jim Burke, described Lou Gerstner's intended role a year ago introducing the new IBM boss.

[2]See  "The Rise of China" by Nicholas Kristoff (FOREIGN AFFAIRS Volume 72, No. 5 - Nov./Dec. 1993 issue).

Examples of Gerstner's "IBM Speak"

  •  "Task forces," not individuals still make recommendations at IBM (thus there's no one to blame when they fail);

  •   "End users[1]" buying from "niche providers" who promised "interoperability"

  •     Did you know that IBM's "OEM customers are hungry for magneto-resistive recording heads?"

  •   "Mission critical" applications

  •     "Non-secure" data

  •     Avoiding specificity on account of supposed competitive concerns (just like John Opel[2])

  •     A myriad of acronyms, such as X-Script; ATM, SOM, DSOM...

      (the preceding examples were all taken from just the first third of Gerstner's speech).



[1]Early on in his "IBM Speak" indoctrination (may 1993), Gerstner objected to our use of the word "users."  He said he preferred the term "customers."

[2]See Annex Computer Report, May 1984.

---

A "Play-by-Play" Analysis of Gerstner's Six Strategic Initiatives

1. Exploiting Technology Better.  "At our core, we are a technology company," Gerstner said.  "Without question, technology is our greatest strength."  Spoken like a true successor to Frank Cary, John Opel and John Akers - the three men who thrust IBM into disastrous commodity-type businesses.  In turn, this divorced the company from its customers.  Even the late Tom Watson, Jr., said he was alarmed with such developments.  And here we thought IBM's greatest strength were its customer relationships!  Evidently, we were wrong... "Driving key technologies... can be done and it pays off even in a so-called commodity segment of the marketplace," Gerstner said.  He proceeded to deliver a pitch which sounded ominously close to Earl Wheeler's SAA (Systems Application Architecture). 

It is in this part of the speech that Gerstner also bungled IBM's long-term mainframe strategy, and praised the new mainframe technologies at the same time.  And he touted IBM's OEM sales and  licensing.  In the latter category, IBM now earns close to $500 million per year.  "If you commit yourself to leadership in microprocessors - and we've done that - then you must commit to leadership in basic semiconductor technology," he said. 

In other words, slide even further down the food chain into commodity parts, not just complete systems!?  As if second-guessing our doubts about this strategy, Gerstner concluded this section by saying, "we're not doing all this just to keep our plants humming." (Wanna bet?)  "OEM is a profitable business for IBM.  Our margins are in line with other leaders in the OEM marketplace," he said. 

So, it is equally low?  Besides, who are these "leaders in the OEM marketplace?"  As far as we know, the OEM marketplace has always been an outlet for semiconductor manufacturers to unload their surplus production when they blew their demand forecast.  Judged by the same criteria, IBM certainly qualifies as a "leader" in the missed forecast department.  Just consider the following exchange which we had with a senior IBM executive in early 1992 on the same subject (an excerpt from ANNEX BULLETIN 92-23, 4/24/92):

            IBM's new OEM strategy, which the company launched in early 1991, is another example of its lack of vision.  By selling its excess manufacturing capacity on the open market, IBM is not only entering the commodity, rather than the "value added" businesses; the company is actually playing right into the strength of its Japanese competitors (i.e., mass production, component sales).

            During a dinner conversation in mid-March, a senior executive defended his former employer's OEM business.  He said that it also benefited IBM by keeping the Japanese inroads to a minimum.  "Otherwise, IBM would have conceded to them the manufacturing."  "Okay," this writer replied.  "Let's suppose that you are right.  Now, let me ask the same question a different way.  Assuming that IBM did not already have all this excess manufacturing capacity, would you still think it was a good idea?"  "No, I would not," he confessed.  "In other words, IBM is being held hostage to its own decisions made more than a decade ago, isn't it?" this writer concluded.  The executive was nodding pensively.

       We went on to suggest to him that the "new IBM", whatever it may be, must start asking itself a question of what business it wants to be in.  Then it should get out of the non-strategic businesses in the least painful way.  Perhaps even by selling them to the Japanese?  Of course, in today's IBM, this would probably be heresy.  Which is, in part, why the label "new" doesn't stick.

The preceding lines were spoken two years ago.  Based on Gerstner's latest speech, the label "new" doesn't stick with his Administration, either.  Overall, there was an obvious disconnect between Gerstner's overeager technology pitch in this part of the speech, and his other genuinely passionate "customer-centric" remarks.  It almost seemed as if different people had written the various parts of IBM chairman's talk.  In the future, we suggest he does it himself, especially if speaking to audiences knowledgeable in both technology and humanities and in the context of leadership.

2. Increasing Client/server Market Share.  As we have said on previous occasions, claiming that one is the client/server business is like saying "I've been inoculated against contagious diseases."  It is a stamp of approval; a ticket out of the purchasing departments' quarantines.    Well, now that one is out, what is "client/server?"  Talk to a dozen different customers, and you'll get half-a dozen different definitions.

In light of the above, Gerstner's objective - that IBM should increase its share of the client/server market - a noble goal overall, had a bit of a hollow ring without a prior definition of what that market is.  As Dr. Gene Amdahl reminded us more years ago than we care to remember, when IBM was engaged in the bitter antitrust battle with the Justice Department and needed to prove that its market share was relatively small, "even the pencils were counted as 'input devices' in the calculation of the total DP market."  Consequently, without putting some stakes in the ground, Gerstner's claims, such as, "yes, we're arriving late to the dance, but not too late," are meaningless. 

Once again, as if giving the IBM mainframe a "kiss of death," Gerstner also said that, "we will bring all our non-S/390 operating systems - OS/2, OS/400 and AIX - together in a common, highly scalable family of operating systems..."  The implication was clear.  And wrong.  The S/390 is an orphan, or at best, an adopted child in this loving PC bigots' family.  In reality, the new IBM parallel mainframes are more scalable than any of the systems Gerstner so fondly mentioned. 

It is in this part of his speech that Gerstner also "ad libbed" something which was not in the original script.  "The work of what we (read I?) promised the customers won't be done until the world of proprietary systems comes to an end," he said.  Wow!  Kiss good-bye the MVS, the OS/2, the OS/400, or the AIX?  We hope not.  Maybe we should just kiss good-bye the notion that even after a year on the job, the IBM chairman understands the technology which he talked about so much. 

As for his reference to the S/360 developments (on Watson, Jr.'s watch), it is reminiscent of John Akers' invoking a parallel with Watson in June 1991 (see ANNEX BULLETIN 91-32, 6/18/91).  The only thing we can say to Gerstner, as we did to Akers, it to quote Senator Bentsen in his 1988 vice presidential debate with Dan Quayle: "I knew John Kennedy.  John Kennedy was a friend of mine.  Senator, you are no Kennedy!"

3. Leadership in Network-Centric Computing.  Overall, this sounded to us as a rehash of DEC's marketing pitches from the 1986-1987 time frame (remember, "network is the system; and the system is the network"-line? (see ANNEX BULLETIN 87-04, 1/20/87).

It is in this section, however, that Gerstner also said some of the most positive things in his speech.  Such as that, "the business market will be built on solutions to meet specific customer and industry requirements."  And that IBM is "going to help large (why only large?) enterprises roll out network-centric solutions - but with a much stronger focus on industry-specific problem-solving than we had in the past."  Well said!  We wish there were more lines like this...

4. Realign Delivery of Value to Customers.  This is the section in which Gerstner spoke of "realigning our marketing organization to create highly-skilled industry groups... etc." - the 30 second-"sound bite" about services. 

And even though Gerstner seemed proud of the fact that he had talked to "thousands of customers," which is great, by the way, it is not the customers upon whom IBM must rely upon for innovation.  It is the visionaries on the IBM payroll, if any, who Gerstner should have also talked to.  For, there are come things which customers like but don't know that they do until someone offers them to them.

For example, the airlines' frequent flyer programs, possibly the world's greatest creative marketing concept, is something which was initiated by the vendors, not the customers in the transportation business.  Similarly, the customers never knew they'd like the taste of Coke until Coca-Cola offered it to them.  Nor did they know that they would really love the "mouse" until Apple gave it to them.  Or the Windows' flexibility.  And so on...

Trying to be innovative on the basis of customers' advice, especially from that of the large corporate customers with whom Gerstner seems to mingle all the time, is about as good a ticket to disaster as we can think of.  Remember all those cartoons of objects designed by a committee? 

Which is not to say that these customers would not be excellent test sites for new ideas.  Just don't expect one bureaucrat to help another by being creative (except, perhaps, in the way some governments manage to siphon off money from naive or powerless taxpayers).

Ironically, even though this Gerstner strategic initiative supposedly dealt with the "delivery of value to customers," no new truly progressive ideas were advanced toward this objective. 

For example, we've been advocating since at least 1986 that IBM should start charging for the value of its work to the customer, not its cost of providing the specific solutions (see the "free MIPS" arguments in ANNEX BULLETIN 86-44, 11/06/86).  These arguments still seem to fall on death ears.

5. Expand Rapidly in Emerging Geographic Markets.  We've said all we had to say on this subject earlier in this report.

6. Leveraging IBM's Size.  Ditto.

 ===============

Also, check out: ICC: More Armonk "Fudge," Armonk's
"Fudge Factory,"
"Now IBM Is Even 'Officially' Spineless", "Where Armonk Meets Wall Street, Greed Breeds Incest", "Some Insiders Cashed in on IBM Stock Buybacks", "Louis XIX of Armonk", "Wag the Big Blue Dog", "the new blue"  

 








Volume XIII, No. 94-12
March 25, 1994

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

5110 North 40th Street,      Phoenix, Arizona 85018
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