Gerstner to Lead Transformation of IBM

INTERNATIONAL Business Machines Corporation - under the leadership of new chief executive Louis Gerstner Jr. - is facing perhaps the greatest challenge in its 79-year history.

IBM, long the flagship of the US computer industry, rang up a $5 billion loss last year and slashed its dividend in half. In recent years the firm has reduced its work force by 25 percent, cutting more than 100,000 positions. Meantime, IBM's total market share continues to shrink as the company faces stepped-up competition from domestic and overseas rivals.

The big question being asked on Wall Street - where Big Blue's stock has lost some 70 percent of its value since 1987 - is whether Mr. Gerstner can turn the giant company around in the next year or so - as he sought to do at his last firm, RJR Nabisco, the huge tobacco and food company.

Rising speculation that Gerstner would replace current IBM head John Akers was confirmed March 26. Gerstner's appointment followed an intensive two-month search. Considered one of the "superstars" among US corporate executives, he is credited with partially reviving RJR Nabisco by shedding failing or marginal operations. Gerstner was also president of American Express Company and a partner at McKinsey & Co., a consulting firm.

IBM wanted in part to "find someone who knew how to take charge of a large organization and accelerate change in a meaningful way," says James Moore, president of GeoPartners Research Inc. in Cambridge, Mass.

"IBM has not created an organization that can manage business evolution" successfully, Mr. Moore says. So Gerstner will have to "re-engineer IBM from the bottom up."

Experts say he will have to ensure that IBM follows through with plans to break the giant company, based in Armonk, N.Y., into smaller, more efficient and entrepreneurial operating units.

IBM was late in meeting the growing demand for smaller computers, which have become progressively cheaper and more powerful. Though pushing into the lower-end personal computer and workstation markets, Big Blue has maintained its emphasis on large and expensive mainframe computers - the traditional core business of the company. But sales for mainframe computers are down substantially this year, reflecting not only a slower global economy, but also the emerging preference for smaller machines.

Some financial analysts expect that IBM will post a loss of over $300 million for the first quarter of 1993, compared to a profit of $600 million in the same period in 1992.

Big Blue's stock has fallen in recent months to the $51 range, although it did register a modest increase following the appointment of Mr. Gerstner. The stock hit its record high in 1987, when it was valued at $175.

"Gerstner was captain of an armada at RJR Nabisco," says Sam Albert, president of Sam Albert Associates, a consulting firm in Scarsdale, N.Y. In other words, that company is a large firm comprised of smaller, innovative units."IBM is a battleship needing to be an armada."

"1993 will be the most pivotal and significant year in the history of the IBM company," Mr. Albert says. The company, he says, needs to master the cultural change that has occurred within the computer industry, including the shift towards smaller, more personal computers; "manage the [IBM] bureaucracy;" and also meet tough overseas competition. Most of all, the company "has to make the changes very quickly, with little time to spare," says Albert.

Gerstner is known as a decisive, pragmatic manager - a man, Mr. Akers noted, who combines qualities of "toughness and energy."

Gerstner's specialty is management, not the computer business itself. At both American Express and RJR Nabisco Gerstner was considered an innovator, willing to "reinvent" the two companies. At American Express Gerstner rapidly built up the company's core credit card business; at RJR Nabisco Gerstner shed several brands and divisions - Del Monte and Chung King, for example. But some critics say that Gerstner largely neglected rebuilding the firm's main tobacco business.

Changing the underlying culture at the world's largest computer company will be far more difficult than was the case at those companies. RJR Nabisco and American Express were essentially marketing firms - one marketing finance, the other marketing commodities.

IBM, by contrast, is a highly technological company, with a work force that has an ingrained and proud sense of identity going back many decades.

Akers, for example, is a 33-year veteran of IBM. Of the company's $60 billion annual revenues, the largest component comes from the mainframe sector - the one area that IBM most needs to rethink and, presumably, downsize. By contrast, the personal computer and workstation segments represent the two smallest sectors in terms of revenues.

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