A Different Shade of Blue : Gerstner Hailed for Retooling IBM, but Doubts Linger

SAN FRANCISCO — He has brought IBM back to profitability and doubled its stock price. He has loosened its famed dress code of blue suits and white starched shirts and plans to jettison much of the company’s 450-acre wooded headquarters on expensive real estate 35 miles outside of New York. Now he’s acquiring Lotus Development Corp. in a hostile acquisition so skillfully executed it has even the biggest IBM skeptics impressed.

Introducing the new, improved IBM, a product of Louis V. Gerstner Jr. It’s slimmer, it’s faster and it’s willing to break the old IBM molds.

But if Gerstner has a flair for powerful gestures that symbolize the change he wants to bring about--and a financial track record that so far outshines what even the most optimistic follower could have hoped for--experts say he has yet to make some of the fundamental changes that will enable the behemoth to compete long-term in the fast-changing technology marketplace.

“The challenge is to become an organization that is less oriented to the football-style, strategic way of thinking into the hockey or soccer way, where you have to change on the dime,” says Andrew McGill, a professor of organizational change at the University of Michigan who has worked with both Lotus and IBM.

“Lotus is Gerstner’s first real test. Does he IBM-ize Lotus and waste several billion dollars? Or does he use the opportunity to bring a new creative process to IBM?”

Gerstner has taken a positive step, experts say, by keeping on Lotus Chief Executive Jim Manzi and giving him control over some IBM departments that are engaged in software efforts. The outspoken and strong-willed Lotus chief has clashed in the past with some IBM executives, most notably software chief John Thompson, but he is now in a position to imbue IBM with some fresh thinking.

The Lotus acquisition also gives IBM an instant presence in personal computer software, where it has for years been humiliated by one-time ally Microsoft Corp. Indeed, with Lotus Notes, a product that enables PC users in far-flung locations to communicate easily and share documents, IBM has gained a leading position in one of the most important new areas of computing.

Notes could potentially become a new standard for tying together computers in companies--a competing product from Microsoft is not yet on the market.

Making Notes work also points up the kind of cultural problems Gerstner must solve: IBM has traditionally been unwilling to let one part of the company undermine products offered by another part of the company, but for Notes to be successful, some of IBM’s own customers will want to take applications off expensive IBM mainframes and put them on networks of PCs with Notes.

Certainly, Gerstner has made strides in hacking away at the insular IBM culture, once a model for the corporate world but in recent years a symbol of the sclerotic organization that had lost touch with the market.

One former insider says product plans used to take almost a year to wend their way through IBM as every group that was affected was asked for its assent. “It was Akers’ belief that the groups should sort these things out themselves,” he says, referring to Gerstner’s predecessor, John Akers. “There were all these little fiefdoms. If there was anyone who disagreed with what you were planning to do, it had to be resolved before you could move on. Something that should have taken three weeks could take eight or nine months.

“I’m told that all that is gone,” he says.

Joe Gugliemino, an IBM veteran now running the Apple-IBM joint venture Taligent, vouches for the change. He now reports to one IBM executive, software chief Thompson, who helps him navigate the company’s shoals.

“These days, when I call I know that I’ll be talking to someone who wants to help and he’ll take on all the cross-IBM strategies,” Gugliemino says. “He’ll sort things out.”

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While the bulk of the layoffs that cut IBM’s employment to 215,000--barely half its 1986 peak--were made by Akers, most of those cutbacks were at the middle-management level. It was Gerstner who took the ax to top executives-- including veterans Robert J. LaBant, Ellen M. Hancock and James A. Cannavino, who had run such key units as personal computers, networking and sales.

“We had a few public hangings of people who didn’t want to get on the new programs,” Gerstner told Business Week in a recent interview. “That told everybody we were serious.”

The old IBM was run in the main by marketing people; even finance executives came out of marketing. Gerstner’s chief financial officer, Jerome B. York, by contrast, is a numbers pro who helped make Lee Iacocca a success by slashing costs at Chrysler. York “is nobody’s sweetheart,” says an ex-IBM executive. “People are scared to death of him.”

IBM’s advertising, too, is getting more scrappy. “I’ve noticed that their ads have become nastier,” says Lawrence Ellison, chairman of Oracle Corp., an important producer of database software. “In a sense, that is a good sign. They’re trying to be less careful.”

But for all of that, deep problems remain. IBM’s personal computer division has yet to show the results of two major reorganizations in as many years. In the spring of 1994, the company launched a fire sale to clear out old inventory. When it came out with a new model in the fall, it couldn’t meet booming demand. These and similar problems have helped push it to a humiliating fourth place in the PC market.

IBM bungled the PowerPC joint venture with Apple and Motorola by failing to agree on a common hardware design early on and failing to develop a version of its OS/2 software for the machine quickly enough, observers agree.

And many analysts are deeply concerned that much of the company’s financial turnaround can be traced to an unexpected--and almost certainly temporary--increase in mainframe sales. Mainframes--the giant computers that companies traditionally have used to manage payroll, inventory and other big numbers-crunching tasks--still account for two-thirds of sales, and the new sources of revenue that will make up for the long-term falloff are not in evidence.

“It’s like an ailing grandmother who has had a good day but is in graceful decline,” says Scott McCready, an analyst at IDC, a Framingham, Mass., market research company.

When Gerstner first arrived at IBM, he announced that the last thing the company needed was a “vision.” He was ridiculed by many in the industry for saying so, but events since then, most analysts say, indicate that he was right to focus first of all on stabilizing the company.

But now, a growing number of customers and shareholders want to see the vision that will show where IBM is headed next. The Lotus acquisition provides only a hint.

“He [Gerstner] needs a strong No. 2 who can bring the vision thing,” says George Colony, president of Cambridge, Mass.-based Forrester Research. “Customers need to know the vision if they are to stick with IBM. Employees need to know if they are to follow.”