Book Summary Preview : Who Says Elephants Can’t Dance?

The Big Idea
In the early 1990s, International Business Machines Corp. (IBM Corp.) was in a devastating slump. Stock prices had dropped from $43 in 1987 to $12 in 1992. System/390 mainframe sales were at an all time low. IBM Europe, Middle East and Africa (EMEA) reported a dismal gross profit margin of 38% in 1992, down from 56% in 1990.

In both print and TV, chroniclers heralded the eventual demise of this industry giant. Charles Morris and Charles Ferguson co-authored a book titled Computer Wars. In it was a statement allegedly quoting Bill Gates as saying that IBM “will fold in seven years.” The Wall Street Journal said, “IBM will never again hold sway over the computer industry.

Then came Louis V. Gerstner, Jr. and IBM was never the same again.

The IBM Facts

IBM was created by Thomas J. Watson, Sr. in the early 20th century. Originally, IBM was simply a collection of small companies, with largely unrelated product lines – dealing in everything from cheese cutters to typewriters. It must be noted, though, that even in its early stages of business, IBM had become known as a pioneer in computation.

In 1956, IBM’s new CEO, Thomas Watson Jr., catapulted IBM into the future with the development of the System/360, IBM’s collection of highly successful mainframes. Before the S/360, a company that made and sold computers based each system on proprietary technology. Each system had its own line of peripherals and wouldn’t work with other systems, even those machines that were produced by the same company. As a result, if customers wanted to upgrade, they had to completely discard their old systems and purchase new ones. The S/360 was revolutionary, capitalizing on the integrated circuit (today’s semiconductor chip). These circuits made the machines more powerful, reliable and less costly. It also allowed an entire family of computers to be built, each one capable of working with the other, including all peripherals.

The S/360 was an expensive undertaking, costing $5 billion (in the 1960s!). IBM went into several new businesses, among them the semiconductor industry. Software tools, programming languages and operating systems had to be developed. The sales force required knowledgeable, technology-inclined members with the capacity to assist customers in reinventing business functions such as accounting, payroll and inventory management.

These were big risks but at its launch, customers ate the S/360 up. Revenues grew at a compound growth rate of 14% between 1965 and 1985. Gross profit margin was at 60%. So successful was the S/360 that the United States Department of Justice filed an antitrust suit against IBM in 1969. Business behavior changed and although the suit was dropped in the 1980s, IBM’s success also became IBM’s ruin. The “next big thing” had arrived.

Grabbing Hold
Lou Gerstner Jr. began his IBM career on April 1, 1993. By then, IBM was in the red and many thought it would take a miracle to reverse IBM’s state of finances. That miracle was Lou.

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