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IBM Cuts 13,000, but Maybe It Should Have Laid Off One

By Rob Enderle
May 9, 2005 5:00 AM PT

A few months ago the Harvard Business Review did a piece on CEOs and pointed out the average tenure of an external CEO was 18 months, which suggests that a lot of CEOs are simply not qualified for the job they were selected for. Recently the HP board came to the conclusion that their high profile CEO, Carly Fiorinia, wasn't doing her job and took the incredibly painful path of replacing her with another who had a proven track record in the specific areas they felt HP needed more work. In that instance it wasn't a qualification problem but rather the willingness to do a job they wanted done.

This isn't unusual in business. At all levels people often get jobs they simply are not suited for. But at the top level the process of selection and correction is vastly more visible and often seems, after the fact, to reflect more on the competence of the related boards then on the competence of the CEO.

IBM Cuts 13,000, but Maybe It Should Have Laid Off One

IBM's Case

I spent a lot of years in and around IBM moving from position to position ostensibly as part of an executive training program. I was in finance, internal audit, competitive analysis, marketing, planning, and even participated in two failed attempts to spin off divisions -- first the software division and then the storage division.

During that time I got a first-hand look at what made IBM work, and in my last year there focused almost exclusively on what happened after the founding family left and concluded that it was largely the collapse of the office of the CEO that led to IBM's downfall in the '80s.

The CEOs preceding Louis Gerstner, in order to hit quarterly numbers, divested IBM of key capital assets that had assured IBM's long-term health. A very accurate metaphor was that they consistently sold the geese that were laying the golden eggs, and when they ran out of geese the firm started to collapse. Louis Gerstner came in and stopped that practice while Jerry York, the CFO who had just come from turning Chrysler around with Lee Iacocca, did much of the really heavy lifting by fixing IBM's internal processes.

Unfortunately much of that heavy lifting stopped when York left in a failed attempt to take over Chrysler but enough had been done so that IBM could be restored to at least a portion of its one time glory. From that point on Louis Gerstner seemed to lose more and more interest in making changes and by the end his strength seemed to be that he wasn't actually doing anything to damage the company.

Charting a Course

Sam Palmasano, IBM's current CEO, replaced Louis Gerstner and appeared to immediately return IBM to the path it had been on prior to Gerstner. And while it took awhile, last quarter's disappointing results seems to indicate that that path, like it was previously, is not a positive one for IBM.

The first external indicator of endemic problems inside IBM came when IBM spun off its printer division years ago. This became Lexmark, and the first thing the Lexmark executive team did was enclose the key policies that defined IBM behavior in plastic and glue them to the manufacturing floor in a symbolic move to tell the employees the rules had changed, and they weren't to follow what had become overly restrictive practices ever again. Lexmark quickly reemerged as a power in the printing business where for IBM, printing had become largely irrelevant.

Recently this experience was repeated. The IBM Storage division, which had lost massive market share and had experienced just as massive quality difficulties, was sold the Hitachi which quickly turned it into a power again. Today it dominates the hot MP3 hard drive music player category and made products like the iPod Mini possible. Had they remained with IBM, neither would have been possible showcasing the significant drag IBM and its policies, had been on that unit.

Shifting Power

However, there was a cost: IBM was seen as a one-stop shop for technology and by having its own storage division had been able to position itself strongly against Dell, who used EMC. By divesting, IBM lost much of that competitive lever and Dell, and HP, became marginally stronger in bidding situations involving storage.

More recently the IBM PC Division was spun out and sold to Lenovo. Having been identified as a major source of IBM's inability to compete, IBM's executive management felt they were simply paring off an ineffective unit. The first thing that unit did when it separated from IBM was start a process to identify and eliminate the restrictive policies that kept them from being able to compete, policies that come from IBM corporate.

Once such policy was evident to the outside world when the PC Division released a TV ad showing a couple of guys at a bar to promote IBM's hard drive air bag technology. At the end of the ad the one of the guys drops a notebook onto the floor thinking it belongs to the other guy and says something like "OK let's see if it still works," the other guy says "that isn't my notebook."

But when the original ad was done there was an additional segment where the owner of the laptop comes back and says "Hey dude, where's my notebook?" providing a humorous connection to Dell and likely turning the ad from being just good to being award-winning. IBM policy forbade that last segment.

The collateral damage from the IBM PC Company sales has been dramatic. IBM, which was the most trusted vendor in the segment, had been telling customers that they remained committed to the PC Division and that no sale was forthcoming, and then they breached this trust by selling the unit.

When you trade on trust you have to be trustworthy, and a large percentage of IBM's customer base now doesn't trust IBM, which has had a significant negative impact on IBM sales. In addition, the PC was a visible IBM brand.

Admitting Error

After he left the company, Louis Gerstner wrote a biography of his experiences and listed as his big mistake the exit from the consumer business, which cost IBM a great deal of visibility and economies of scale. That action alone almost handed much of IBM's business to Dell and HP. Selling the entire division not only didn't correct that problem, it would seem to have increased it exponentially.

As the IBM brand on notebooks transitions to Lenovo, Lenovo will gain visibility at IBM's expense and this brand benefit is likely worth several times what the entire unit cost Lenovo to purchase. Moreover, it will cost IBM many times the money they received.

Comparing Lenovo to SBC, which spun out of AT&T and recently bought its old parent, will likely be increasingly easy, particularly if what I saw in China is representative of Lenovo's capability. In other words, IBM's CEO is back to selling golden geese and there aren't many left.

The IBM Layoff

Now, you may ask yourself, what does putting 13,000 people out of work (last week's news) have to do with fixing that problem? The answer is nothing, but IBM had to show it was doing something to address the problem and, unfortunately for labor, the market seems to like layoffs.

IBM's excessive bureaucracy goes back to the 80s, yet that is what is seen as the reason for this layoff. People are actually a small part of the problem created by errant practices that the spun-off units immediately know to get rid of. This is something the IBM executive staff simply doesn't seem to see or understand.

In addition, these layoffs are coming out of services in a geography that typically responds very badly to layoffs. Services are a people business founded on relationships. This means the long term collateral income damage from this decision could easily exceed the short-term cost benefits.

When IBM was great, under its founders, it protected its employees first and its executive management remained engaged with all levels of the company. At that time anti-competitive policies not only didn't proliferate they were aggressively eliminated. Perhaps it is time IBM's board looked back into the company's history and recaptured some of those practices, and put someone in charge that could fix IBM without turning it into a place where good people "used to" work, selling the "golden geese," or creating, in Lenovo, yet another Dell-like competitor.


Rob Enderle, a TechNewsWorld columnist, is the Principal Analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends.


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