Chapter 17 - Navigating the Waves at IBM

Seldom can a CEO recruited from inside a company navigate disruptive change in an industry’s business model. “More companies fail because of strong cultures than weak strategies,” observed Richard Foster. Someone steeped in the culture can’t crack the culture. Wang, Digital Equipment, and IBM all proved the point. It took outsider Louis Gerstner to rescue IBM from the mistake-ridden reign of the consummate insider, John Akers.

We first met John over lunch at IBM’s Armonk, New York, headquarters in 1982. “Gentleman Johnny,” as we privately called him, appeared physically fit, with a slightly ruddy complexion and a shorter stature than the prototypical IBM senior executive. A Yale graduate and former Navy fighter pilot, Akers spent his first twenty years at IBM’s “crown jewel” sales division, becoming its president at age thirty-nine, before being named to head the midrange computing group. For a corporation that had always honored salespeople, he was a logical choice for CEO. And it didn’t hurt that he’d once been Frank Cary’s administrative assistant.

Our meeting began on a strangely nervous note when he showed us a cartoon urging caution with consultants that someone had “slipped under my office door.” He then proceeded to give Naomi and me a long, informed, and comprehensive rundown of IBM’s most fundamental strategic requirements for the next decade.

IBM had to develop products more quickly, he told us: “Too many four-year development projects have produced still another system the world didn’t need.” He also praised the swifter time-to-market models employed by the minicomputer companies and the Japanese. Though wrong about the Japanese (outside of consumer products, they were actually very sluggish), Akers definitely reflected the popular wisdom: “[The Japanese] announce something every six months; if customers don’t respond, they change it. Six months may be too short for real product development, but we certainly need granularity [i.e., regular frequency] in our midrange product announcement rhythm.”

Ahead of their contemporaries at Digital or Wang, the IBM executives had already begun to appreciate the profound changes in product development and business model initiated by the new PC companies. “Today, IBM has more humility,” said Akers. “We can’t possibly address all the market opportunities. So I no longer care where we acquire technology if it’s cost-effective.” So, too, with software: “Unfortunately, our determined self-reliance in the 1970s means that the software available for intermediate-scale processors hasn’t grown much in five years. We missed all the sales potential of third-party software developers, particularly in the engineering/scientific markets.” Later, a divisional product VP chimed in: “Not one of the four most popular operating systems on the market today was developed by a hardware vendor.”

Armonk was beginning to feel the margin pinch. “Part of our plan involves tighter pricing,” said Akers. “We can no longer be comfortable with any substantial delta [i.e., difference] between our prices and those of competitors.” Good thinking. Too little action, unfortunately.

The Opel-Akers Interregnum

In February 1983, when CEO John Opel assumed the chairmanship from the retiring Frank Cary, Akers was named president and chief operating officer, cementing the line of succession. The antitrust suit had been dismissed as “without merit” by the incoming Reagan Justice Department. At almost the same moment, Opel ignited a short-term booster engine for revenue growth with a new mainframe-pricing policy designed to tilt customers toward purchase rather than lease.

By some accounts, Opel was worried that a competitor like Amdahl might leapfrog IBM technology and encourage customers to cancel their IBM leases and return the now severely devalued equipment.