8. Fast Learners

Leadership and learning go hand in hand. This is hardly a new insight. In Plato’s dialog, The Republic, he wrote that learning was crucial for the Guardians, who held the reins of power in the utopian city state. Plato prescribed a tough regimen of intellectual and physical education for them from childhood, so they could grow to become leaders. The reason is simple: Leaders cannot guide their constituents unless they deepen their own knowledge through learning.

To be true to their function, however, leaders must be fast learners—in a way that does not necessarily refer to formal education or bookish knowledge. The need for rapid learning arises because all leaders—regardless of their domain—deal with realities that are in ceaseless flux. Markets change, new sets of political or military circumstances appear, and it is often unclear whether previous strategies or tactics still apply or new ones must be formulated. When situations change, is the correct response to stay the course or to change direction? Each decision is a judgment call, and leaders constantly are required to make them. To do so, they must be fast learners, seeking out new knowledge and information as they need it.

Each of the Top 25 leaders profiled in this book is a fast learner. William (Bill) H. Gates, chairman and chief software architect of Microsoft, belongs at the top of the list. He was a fast learner long before he began to write software programs at age 13, but especially so after launching Microsoft in 1975—at age 20—with his childhood friend, Paul Allen. In some 30 years, the company has grown into a software giant with more than 56,000 employees and annual revenues of $32 billion—largely because of Gates’s ability to rapidly learn—and get Microsoft to execute—what needs to be done to take the company to the next level.

Frederick Smith, founder, chairman and CEO of Federal Express, is another leader who has repeatedly demonstrated his ability to learn rapidly from observation and experience. The classic example, in Smith’s case, was his ability to sense, before either his customers or competitors, the need for a tracking and tracing system for the packages and documents that FedEx delivers. As Smith says, this has enabled FedEx to set itself apart in a competitive field and to offer services that cannot easily be “commoditized.”

Louis Gerstner, former chairman and CEO of IBM, is also a fast learner. Soon after joining the New York-based computer giant, he realized that a plan by the former leadership to break IBM into smaller Baby Blues would be disastrous, and he bet the company on pursuing the opposite strategy—one in which IBM would offer integrated solutions to companies with a vast range and variety of IT needs. This knowledge, combined with a sharp focus on performance, helped Gerstner engineer a massive turnaround at IBM.

Examples and insights from these leaders can be invaluable in helping executives see how fast learning is a critical attribute to develop their own leadership. A word of caution, however, might be in order. Fast learning, to be effective, must become a habit. Leaders who learn a few lessons rapidly, and then expect to replicate their successes by applying them over and over again, do so at great risk. Offering old solutions to new problems is often a prescription for failure.

William H. Gates

The Challenge: Keeping Microsoft’s Regulators at Bay (on Both Sides of the Atlantic)

Success sometimes undermines itself. At Microsoft, Bill Gates’s combativeness and relentless competitive drive helped propel the company to overwhelming dominance in the global software industry. This massive clout assured rising revenues and profitability for Microsoft and made Gates the world’s richest man. Market dominance, though, has a flip side. It created the greatest challenge that Gates and Microsoft have faced: Retaining their grip on the market while fending off antitrust regulators in the U.S. and Europe. In 2000, regulators in the U.S. came close to breaking up Microsoft into two companies. Though that threat has now disappeared, regulators still impose big legal and administrative costs on the company and could affect how it does business in the future.

Muttering against Microsoft’s monopolistic moves has been heard for more than a decade. A BusinessWeek article in November 1992 titled, “Does Bill Play Fair?” highlighted early concerns that the company, though just 17 years old, had grown too big too fast. The magazine noted that Microsoft’s MS-DOS operating system at that time was installed on more than 80% of the PCs worldwide. Today, Microsoft’s Windows operating system resides on more than 95% of the world’s PCs. That, by itself, is not necessarily bad. In fact, to the degree that it establishes a uniform, global standard for computing, it helps consumers. The problem is that Microsoft does not just make operating systems; it also produces software applications and competes for market share with other software firms. That issue has disturbed regulators—and undoubtedly Gates’s competitors. Critics allege that when confronted by a successful software rival, Gates and Microsoft seem to adopt a two-fold approach: Buy it or bury it. Both tactics have serious anti-competitive implications.

An example of Gates’s “buy it” approach was the way he dealt with Intuit, which makes personal finance software programs such as Quicken and Quickbooks. When its own personal finance products failed to make a dent in Quicken’s massive market share, Microsoft in 1994 tried to take over Intuit. Regulators soon intervened—the U.S. Justice Department sued Microsoft to prevent the merger—and by 1995, the deal was dead.

Critics also claim that when buying a potential rival seems unlikely, Gates and Microsoft turn to hardball. The “bury it” tactic typically consists of offering the Microsoft application as a free download or bundling it with the Windows operating system. More often than not, this continues until the competing application is no longer a threat. The best-known case in point: Netscape.

Launched in 1994, Netscape’s Navigator browser rapidly became popular among non-technical users around the world who were just awakening to the power of the world wide web. By the time Netscape went public in 1995, the Navigator was the dominant browser among web users—the hype surrounding its IPO helped inflate the dot-com bubble. Microsoft, however, struck back with Internet Explorer, which it later claimed was an inseparable part of Windows. As a free add-on, the Internet Explorer gained steadily in popularity, while Netscape, whose revenue model suddenly became uncertain, was sold in 1998 to AOL Time-Warner.

Over the next few years, Internet Explorer continued to grow at the Navigator’s expense. In May 2003, Microsoft signed an agreement with AOL Time-Warner, as part of which AOL agreed to use Internet Explorer as its primary browser for seven years. Some observers believe that was the final nail in the Navigator’s coffin. CNET’s News.com website noted that Netscape would move from “a neglected orphan of AOL Time-Warner to a candidate for euthanasia.”

To deal with such issues, trustbusters at the U.S. Justice Department began looking into Microsoft. Following the lawsuit in Intuit’s case, they struck a more decisive blow against the company in 2000 when Judge Thomas Penfield Jackson found Microsoft guilty of anti-competitive practices and described it as a “predatory monopoly.” Jackson ordered that the company be broken into two: One company would make the operating system while the other made software applications. Microsoft, however, pushed back. It appealed; the decision was reversed, and a much gentler punishment, in the form of restrictions, was imposed. Today, the case to break up Microsoft is all but dead. As The Economist noted in 2004, it “produces occasional rumbles, like the death-rattle of a mortally wounded dragon, but it no longer poses a threat to the company’s survival.”

Still, Gates and his colleagues continued to face two other challenges. One was Microsoft’s fight against Real Networks, whose Real Player software (which lets users access audio and video content on the Internet) competes with Microsoft’s Media Player. The issue loomed large in the minds of regulators at the European Commission, who announced in March 2004, after a five-year investigation, that “Microsoft has abused its near-monopoly power in markets for PC operating systems which resulted in restricting the interoperability of Windows PCs with non-Microsoft servers. The company also broke the law by abusing its power in markets for the technology that allows people to play music and videos on their PCs,” regulators said.

Wharton professor Eric Clemons thinks the EU’s point was well taken. “Under any technical definition of antitrust, any technical definition of abuse of market power, it’s self-evidently true that Microsoft has monopoly power and that it abuses it,” Clemons states. “The classic definitions involve things like cross-subsidizing product lines. Any time you give away products free, then by definition you’re overcharging for something else. You have to be. If you’re overcharging for something else, then you’re crushing competitors...[Microsoft] can charge whatever it wants for Windows, and it can give away Media Player. The fact that it gives away Media Player, under traditional antitrust law, [makes] it clear that it is overcharging for the operating system.”

The second challenge involved Google, Microsoft’s biggest rival in the Internet search field. Google, which went public in August 2004, is the most popular search engine—according to one estimate, it accounts for some 80% of all Internet searches—but its revenues, at $1 billion, are a fraction of Microsoft’s. Microsoft, which offers searches through its MSN web portal, launched a “toolbar” plug-in that resembles Google’s toolbar. “Initially, the MSN toolbar is a free optional download, as Microsoft’s web browser and media player once were,” noted The Economist. “The next step, inevitably, will be to integrate such search functions into Windows, on the grounds that it constitutes a core technology that should be part of the operating system...In other words, Microsoft is preparing to use its dominance in web-browser and operating-system software to promote itself in yet another separate market—search engines this time—at the expense of competitors.”

What does all this have to do with Bill Gates’s leadership? A great deal, because by all accounts, Microsoft’s moves follow from the intensely competitive culture that Gates has built at the company since its inception. In the spring of 2004, however, some signs appeared that Microsoft may be mellowing. The company settled its long-standing dispute with Sun Microsystems, an old enemy. Microsoft also signed a major cross-licensing agreement with Siemens that allowed both companies access to one another’s patents. Optimists might say that these are welcome signs that after years of brawling, Microsoft and its chairman are moving toward a more collaborative, or at least less confrontational, approach to leadership. Time will tell.

Leadership Lesson

Combining Agility and Ability

Bill Gates was an eighth grader at Seattle’s prestigious Lakeside school when he found a new machine installed in the math and science building. As Stephen Manes and Paul Andrews write in their biography, Gates: How Microsoft’s Mogul Reinvented an Industry—and Made Himself the Richest Man in America, it was an ASR 33 Teletype, an “ungainly electro-mechanical contraption combining a keyboard, a printer, a paper tape punch and reader, and a modem that could connect the unit via telephone to the outside world.” Gates found it fascinating. He taught himself how to program it so fast that William Dougall, a teacher who had helped bring the computer to Lakeside, said, “It took him a week to pass me.” With that introduction to software came the first indication what a fast learner Gates could be. It was no accident that one of his books would be titled, Business @ The Speed of Thought.

During his career, Gates repeatedly has shown he is a quick study who responds to and shapes emerging developments. Two examples stand out as being critical to Microsoft’s emergence as the dominant company in global software, as well as Gates’s personal development as a leader. They include the manner in which a fledgling Microsoft struck its deal with IBM to become the developer of the MS-DOS operating system for Big Blue’s PCs; and the way that Microsoft, despite initially lagging behind Netscape, rapidly recognized and responded to the emergence of the Internet.

At least five years before starting work on the IBM PC, Gates, his friend Paul Allen, and other associates had developed a version of the BASIC programming language for the MITS Altair, one of the first personal computers. At that time, Gates was a student at Harvard. One of the earliest lessons Gates learned was to treat software as a business. In the hobbyist-driven culture of those times—and in an interesting foreshadowing of debates that would occur 20 years later about free versus paid content on the Internet—users were willing to pay for hardware, but they expected software to be provided free. Gates challenged that assumption, arguing that hardware without software was meaningless. As such, if a company hired and deployed full-time programmers to write software code, it would incur costs and expect to recover them by earning revenues and making a profit. Treating software as a commercial proposition from the beginning—a stance that made Gates unpopular among the “free software” crowd—Gates and Allen set up Microsoft in 1975. In their first year, they received some $16,000 in royalties for Altair BASIC from MITS. In 1979, the year the company moved into new digs in Bellevue, Washington, revenues crossed $1 million.

By the early 1980s, personal computers were widely recognized as a fast-growing market. The Apple II, made by Apple Computer, was going strong, as were other machines made by Commodore, Radio Shack, and other firms. IBM was impatient to launch its own personal computer and was looking for a partner whose software could drive the machines. After an expensive and disastrous attempt to develop its own version of BASIC, IBM executives approached Microsoft in the summer of 1980. Initially, nonplussed by Gates’s youthful looks (he was 25 but looked 18), they were won over by his confidence and knowledge of software. Microsoft was soon ready to sign an agreement to write software in BASIC and other languages for the IBM PC—driven largely by Gates’s belief that the company would do what it took to land IBM’s business.

That, by itself, would have been a major coup for Microsoft—but a larger opportunity was in store. Many computers at the time used the CP/M operating system made by a company called Digital Research. Though Microsoft and Digital Research had a close relationship—and Gates recommended Digital’s operating system for the PC—IBM and Digital were unable to arrive at an agreement. Determined not to let the transaction fall through, Gates cut a licensing deal with a company called Seattle Computer, which had developed a rudimentary operating system called QDOS (an acronym for “Quick and Dirty Operating System”) to replace Digital. Before the IBM PC was launched, however, Gates played a masterstroke: Microsoft acquired the operating system—now renamed 86-OS—from Seattle Computer for $75,000.

As Manes and Andrews write: “It wasn’t just a fair deal for Microsoft. It was the deal of the century.” This acquisition ensured that when the IBM PC was launched in 1981, Microsoft owned—and had the licensing rights to—its software and operating system. It laid the foundation for Microsoft’s operating systems—initially MS-DOS and then Windows—to become the prevailing standard in the PC industry. Today, some 95% of PCs around the world operate on Microsoft’s operating system.

What has kept Microsoft at the top all through this period is Gates’s agility and his ability to understand new market conditions and what they mean for Microsoft. In the 1990s, for example, Gates was quick to understand the impact of the Internet on business processes as well as on Microsoft. Gates explained his perspective at the Internet World Conference held in April 1996. “The Internet phenomenon is really unbelievable,” he said. “It’s the most fantastic thing to happen in the world of computing since the original PC.”

According to Gates, in the two decades since its arrival, the PC brought about massive changes. For instance, it transformed the way documents are created—because now more than 90% of all documents are created electronically. Still, the distribution of many of those documents did not initially change because most people printed the documents and mailed them, just as they would if they had been type-written or handwritten. In other words, before the Internet came along, the PC was not a communications tool, in part because the cost of communications was high and, secondly, because there wasn’t a large enough critical mass of people who might want to use the PC to communicate with one another.

Between 1994 and 1996, however, the situation changed. Several factors came together to allow the PC to become a powerful communications device. In addition to a decline in the cost of communications, the number of PCs and people connected to the Internet increased dramatically. Result: A critical mass of users emerged that could use their computers to communicate. “What’s going on today is like the arrival of the printing press, or the telephone, or the radio,” Gates said. “And these communications tools did have pervasive effects. They made the world a smaller place...Now the personal computer connected to the Internet is far more powerful in many ways than any of these other communications devices.” What makes it more powerful, Gates added, is the fact that the Internet allows PC users to connect to one another—and the marginal cost of communicating in this environment is close to zero.

For Gates, it wasn’t enough to rapidly learn how the Internet was transforming society; he also had to engage Microsoft in taking advantage of the opportunities it offered. Microsoft responded to the rise of the Internet in three ways.

First, Microsoft developed the Internet Explorer web browser, which it positioned directly against Netscape, the most popular web browser of the mid-1990s. Pursuing a tactic that it had repeatedly used against rivals, Microsoft bundled the Explorer browser with its Windows operating system. Gates and Microsoft bet on the fact that, although this aggressive move might backfire, the regulatory backlash wouldn’t be strong enough to counter the business benefit of becoming the market leader in this product. That, after a lengthy battle with the Justice Department’s trustbusters, is exactly what happened.

Second, Microsoft began to adapt existing products and develop new products centered on the Internet. According to Gates, “Group collaboration will become very strong on the web with the ability to not only have audio but also to share applications...The value of those systems is really hard to exaggerate.” To cater to these needs, Microsoft deployed productivity software as well as authoring tools, both built upon the foundation of its existing products.

Third, when companies came along that had established a strong presence in a niche where Microsoft was lagging behind, Gates responded with another time-tested tactic: acquisition. Example: one of the fastest-growing areas during the dot-com boom years was email, as Gates had noted in his analysis of PCs becoming popular communications tools. Hotmail, an upstart provider of free email (supported by advertising) saw explosive growth in this domain and became a Microsoft acquisition target: It was taken over in 1998 for more than $400 million.

Such moves, based upon fast learning and faster action, enabled Gates to keep Microsoft moving onward and upward—and to keep his own leadership skills well honed.

Frederick Wallace Smith

The Challenge: Overnight Innovation

Fred Smith had one big idea and it generated an entire industry, nearly overnight.

Smith founded Federal Express in 1971 and the company grew to become the world’s first overnight delivery system, handling 5.4 million shipments a day in 210 countries. It wasn’t easy, but Smith’s toughest job was yet to come.

“This company was enormously successful in its first 20 years of existence largely because it filled an unmet need,” says Smith. “As we entered into the 1990s, it became very obvious that this single line of business was simply not going to be viable by itself over the long haul. It was the classic case of great success potentially sowing the seeds of its own destruction.”

Now known as FedEx, the company’s purple and orange jets still ferry time-sensitive packages through the night skies. But Smith has recast FedEx as an information-technology firm that manages customers’ internal supply chains as well as their shipments by air and truck, even whisking goods through customs.

In a sense, FedEx helped drive itself out of its original business. The company showed its customers how much more efficient they could be by cutting back on inventory and supplies, and shipping only what was needed, when it was needed. Once companies figured that out, there were fewer last-minute shipments that absolutely, positively had to get there with a premium payment to FedEx. Businesses are always “in the process of commoditization,” says Smith. “You simply have to constantly look to where markets and needs are going and anticipate those needs.”

In 1973, he established his now-famous hub-and-spoke system in Memphis. Initially, Smith wanted to provide overnight transport of checks for the Federal Reserve System; hence the name Federal Express. The Federal Reserve then backed out, but the company grew and enjoyed success through the late 1980s before hitting severe headwinds.

The problems stemmed in part from Smith’s support for a project called Zapmail, a system that used fax machines at FedEx offices to transmit documents for clients in different cities. After being introduced in 1983, the service was soon eclipsed by the rise of fax machines priced cheaply enough that most offices could purchase their own. In addition, Zapmail was based on satellite technology, which needed the space shuttle to work effectively. But the space shuttle blew up, dealing a body blow to FedEx’s plans. FedEx folded Zapmail in 1986, taking a costly write-off.

Innovation is not without risk. “There are lots of examples of that at companies,” says Smith. “But on the other side of the coin, if you’re too cautious and too late—that’s the story of the dinosaur businesses. Navigating that fine line is very important.”

With revenue-growth slowing as the company came into the 1990s, Smith looked for new markets overseas. His revolutionary overnight-delivery idea had worked well in the U.S., but by the time he arrived in Europe, imitators were already in place. Although FedEx spent $1.5 billion on a global expansion, by 1991 it was beaten back. Meanwhile at home, competitor UPS was gaining ground and FedEx was struggling with a difficult integration of the legendary Flying Tigers cargo carriers.

FedEx was forced to regroup. Smith determined future growth would take place through the acquisition of more diverse transit companies, including ground operations. The major thrust, however, would be to buy and develop information companies that would tie into the shipping business.

The company had always been ahead of the curve in information systems. In 1979, it created a central computer system to track everything from vehicles to weather scenarios. In 1986, it introduced a hand-held, bar-code scanner to track packages. And in 1994, it became the first large transportation company to make extensive use of the Internet.

“One of FedEx’s biggest innovations, one that revolutionized our business but also revolutionized the whole world of business, was the development of a positive tracking and tracing capability for millions of discrete items in motion,” says Smith. “We saw a need that nobody else had seen. It was the understanding that what customers really wanted was to manage their inventory when it’s moving as well as at rest.”

He met the challenge of remaking FedEx into an information trafficker by assembling a management team with legal and financial expertise because he knew he would have to shape the new company with acquisitions. Smith also stressed the need for executives to communicate with employees, to let them know why the company needed to move in new directions.

“It took leadership and communication by the operating management to explain to our folks what we were doing and make them feel good about it,” says Smith. “Finally, it required the development of an iron-clad, disciplined business plan to execute on the acquisitions of new product lines we were offering, and to make sure we supported our original employees. In essence, we turned the new people we acquired purple.”

In the late 1990s, FedEx went on an acquisition binge that added new ground and freight capabilities as well as logistics and technology services. In 2004, it paid $2.4 billion for Kinko’s, the printing and office services retailer. Kinko’s had itself been migrating from a neighborhood copy shop to an information and document management company.

Smith says vision goes with his job title. “At the end of the day, that really is what the CEO job is all about. I don’t think I have a lock on that particular skill. The common denominator for people that have vision, and one of the things I think I bring to the table is the ability to look at a broad range of issues and synthesize a product, or service, or business solution.”

Leadership Lesson

Learning to Change Direction at Express Speed

Federal Express founder Fred Smith was not just a fast learner; he also was an early one. As noted previously, the idea that became FedEx began life as a term paper for an economics class when Smith was an undergraduate at Yale in 1965. The main point of his paper was simple: As machines replace human labor, productivity will rise, but so will the need to fix equipment quickly when it breaks down. This means a system must be found (or created) to ensure that organizations have rapid access to spare parts and materials when they are needed. From this seemingly obvious but revolutionary notion, Smith created a hub-and-spoke–based transportation system of rapidly moving inventory that not only revolutionized its own business but “revolutionized the whole world of business,” Smith says.

Along the way, Smith had to quickly learn—and sometimes unlearn—lessons so he could change direction as needed to keep FedEx growing. For example, while serving as a marine in Vietnam, he noted how military supply chains worked to provide food, uniforms, and ordnance to soldiers, but he also recognized that these processes were too supplier-focused; they emphasized constantly pushing out items that the military had decided to distribute. In contrast, the logistical processes he wanted to set up had to be primarily customer-driven. He later applied these insights when developing a delivery system for FedEx.

After Smith laid out his framework for an overnight delivery system for high-priority documents and packages, he still had to change direction many times to keep the company aloft. Early on, an obscure airline regulation would have restricted the type of airplane he could fly. Smith went to Washington and got the rules changed so he could fly larger planes.

In 1997, the company used new computer technology to identify low-profit customers and weed them out for better overall returns. The company that was born to deliver overnight then slowed the pace, building a better network of ground transportation to deliver items that don’t absolutely, positively have to be there overnight, but could get there in a few days.

One of the most important lessons Smith learned is that customers are keenly concerned about the status of their packages, not only when they are shipped and when they arrive, but also while they are in transit—an insight that spurred FedEx to pioneer the development of tracking and tracing capabilities. Having learned before its competitors that FedEx was not just in the business of transporting cargo but also of providing information about that cargo to clients, Smith led the company to invest in information technology. As Fortune magazine reported, Smith “stressed that knowledge about cargo’s origin, present whereabouts, destination, estimated time of arrival, price, and cost of shipment was as important as its safe delivery. He...insisted that a network of state-of-the-art information systems—a sophisticated mélange of laser scanners, bar codes, software, and electronic connections—be erected alongside the air and vehicle networks.”

Smith says the reason he created this information system was that “people who move things—whether it is an abstract for an engineering survey or a critical part for an airplane or a hospital—they all would like the same level of control when it’s moving, as if it were in their hands or in their warehouse.” This understanding, synthesized with where technology was going, allowed FedEx to capture and manipulate the data at a low cost. The resulting innovation “has now revolutionized the world of logistics. It is one of the greatest improvements in societal productivity you could name,” says Smith.

“The simple system by which FedEx tracks and traces all the cargo it delivers has allowed all businesses to significantly improve the velocity of their supply chains. It has dampened business cycles. That’s an example where you see a need that’s not immediately apparent. I will assure you that not one in 100 of our customers would have said, ‘I need a system like that.’ They just couldn’t envision that until we had it.” Based on his ability to sense what his customers didn’t know they needed, Smith has formulated his own definition of vision. He says, “It’s simply a broad understanding of big needs and developments, and then understanding how you can do something about it.”

In addition to speeding up the transportation process, Smith argues that these innovations have made the process more cost-effective. In 1980, logistics accounted for 16% of the cost of producing goods; now it is 10%, Smith notes.

FedEx has also had to adopt varying strategies in Europe, where its hub-and-spoke system did not play out so well in Brussels. By the time FedEx began moving into Europe in the mid-1980s, imitators had already set up systems similar to its own. Regulators blocked FedEx from flying into new markets. Later, expensive acquisitions were difficult to integrate. But Smith says the company has persevered, changing its game plan along the way.

“Being absolutely determined to accomplish something is a very, very important asset,” Smith told Investor’s Business Daily in 1998. “A lot of people are put off by adversity or mistakes. If you keep your eye very firmly focused on where you want to go, and you’re determined to get there, that’s worth a lot.”

Smith says his greatest contribution to society is the development of FedEx, which he says has allowed businesses to become vastly more productive. “I love what I do because it’s right in the middle of everything. We basically are the sinews that keep the economic body operating every day.” In part, that goes back to his service in Vietnam. As he told Fortune in 1997: “I wanted to do something productive after blowing so many things up.”

Louis V. Gerstner, Jr.

The Challenge: Making Elephants Dance

“My friends, in the last three years we have lost $17 billion and half our market share. The media is writing our obituary and our competitors are laughing at us,” Louis Gerstner recalls telling IBM employees in 1993, shortly after he undertook the monumental task of turning around this blue chip company in freefall. “Don’t you think we ought to try something different?”

The turnaround, Gerstner concedes, did not hinge on developing some heretofore-unknown strategy. It depended, instead, on actually focusing on business fundamentals, such as consolidating the company’s 266 bookkeeping systems, 128 chief information officers, and 339 surveys for measuring customer satisfaction. “IBM knew what directions it needed to take. I found thousands of pages of good strategic analysis in the file,” says Gerstner. “But the company didn’t execute on any of those strategies. Why? Because internally the culture was bound up in a strait jacket... [Managers] would have loved me to introduce a new strategy, so they could do what they did so well: discuss and debate abstract concepts.”

IBM dominated the computing industry for decades with mainframe systems used by virtually every corporation and government agency. By the late 1980s, however, companies like Hitachi and Amdahl were offering mainframe alternatives at lower prices, while others like Dell and Compaq were encroaching on the personal computer business. In the process, IBM’s stock value crashed to $12 per share in 1993, from $43 in 1987.

Gerstner, the first outsider to lead IBM, had only a few months to set Big Blue on the right track. He quickly put an end to any talk of breaking IBM into several little blues—the prevailing wisdom on how to harness the company’s valuable assets. Instead, Gerstner moved to transform the company into an “integrator,” which would build, run, and house systems for customers using its own components as well as those of its competitors. His decision ran counter to the trend of the day, which favored the idea of smaller, nimbler technology companies specializing in only a few products and transforming themselves quickly to meet market demands. “We were getting killed by these single-point competitors,” says Gerstner. “The only way we would have a distinctive competence in the market place was to be an integrator.”

After extensive talks with customers, Gerstner concluded that clients wanted companies like IBM to handle their complex computing tasks. He reasoned that the typical products delivered by the computer industry are overly complex—difficult to install, integrate, and operate. He realized that customers are concerned about what they need done while the computing industry thinks about components and systems. “When I was a customer, what I really wanted was someone to translate these components into solutions,” says Gerstner. “So I made this decision basically from my gut, from having been a customer.”

None of the steps would have been successful without flushing out a calcified IBM culture composed of fiefdoms that were out of touch with each other and with their customers’ needs—insidiously undermining performance. Gerstner describes the IBM of that era as suffering from “success syndrome,” a disorder afflicting companies that have been successful for decades. This malady, he says, locks them into repeating what made them successful in the first place, even when the competitive environment changes and new steps are required to remain relevant.

Gerstner says he spent about 40% of his time during his first two years meeting IBM employees face-to-face, exhorting them, and filling them with a sense of urgency over a short-term plan that had to be executed. “I was very blunt, very direct, and very honest,” Gerstner notes. “I appealed to their pride, their competitive juices, and their economic necessities.” He told them it was time to get back to fundamentals like talking to customers and actually selling products rather than simply developing them. He essentially rebuilt the culture to focus on performance.

Along the way, Gerstner led the charge against a vast number of internal processes that would invariably derail any changes. For example, he revamped compensation, promotions, and training programs. “It takes an enormous amount of work to change the culture because the culture is embedded in everything. As a leader, you can’t just get on a soap box and say, ‘Let’s do this, let’s do that,’ if every day when [managers] come to work, the processes and the systems in the company drive them in a different direction.” The cultural revolution spearheaded by Gerstner at IBM invariably involved bloodletting. “Those people who could not adapt to that new culture left on their own volition or they left because we told them they had to leave.”

Gerstner concedes he was never fully confident about the company’s turnaround. “I was always convinced that we had gotten the strategy right or at least the direction we were going in right. My confidence was challenged by my sense of whether we could execute.”

They could. Between 1993 and 2001 (Gerstner stepped down as CEO the following year), IBM’s annual net income rose to $7.7 billion from a loss of $8.1 billion; revenues rose to $85.9 billion from $62.7 billion, and the stock price rose to $120.96 per share from $14.12 per share.

In his book, Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, published in 2002, Gerstner wrote that “changing the attitude and behavior of thousands of people is very, very hard to accomplish.... You can’t simply give a couple of speeches or write a new credo for the company and declare that a new culture has taken hold. You can’t mandate it, can’t engineer it. What you can do is create the conditions for transformation, provide incentives.”

Gerstner seems to have done that. After his retirement, he noted that IBM, despite its insular culture, was rich with creative talent that only needed to be set loose. The head of every major business unit today, he said in his book, is a long-time IBMer, including his successor as CEO, Sam Palmisano.

Leadership Lesson

Life Lessons for Fast Learners

Imagine this: A young man or woman, about five years removed from an MBA, meets Louis Gerstner on an elevator, realizes he is the former CEO of IBM, and asks him how to become a successful leader. What would Gerstner’s two-minute reply be? In the blunt manner that former associates at American Express, RJR Nabisco, and IBM have come to know well, he says: “Part of the problem with people coming out of business schools is that they want to be leaders immediately. Their attitude is, ‘Make me the CEO.’ But they’ve got to realize that before they can succeed as leaders, they must first become effective workers and managers.”

Gerstner offers plenty of advice to fast learners who want to become effective workers and managers en route to the Holy Grail of lasting leadership. “First, find an industry that is growing,” he says. “Remember Warren Buffett’s statement that when an industry with a bad reputation needs an executive with a good reputation, it is the industry’s reputation that stays intact. You’ve got to direct yourself to a profession in an industry that has prospects for growth.” Having done that, Gerstner adds, for the first five years, no matter what job you are offered, just adopt the adage, “I’m going to do this job better than anyone has ever done it before.” Focus on getting the job done better, not on who’s on the fast track to being noticed. “Don’t game it,” he says. “Outperform. Believe me, people will notice you.”

Gerstner contends that when you become a leader, the situation changes. “As a leader, you become a manager of many people. Then it is a question of whether you can communicate honestly,” he says, explaining that leaders need to ask themselves several questions: “Can you provide people with an offensive direction that they can get excited about? Can you communicate honestly about where the company or the unit is? Can you be open about talking to your team members about their performance and how they need to get better? Can you develop a sense early on that your job is to make them successful and that their job is to make you successful? Because, at the end of the day, if you make them successful, they are going to make you triple successful.” In a nutshell, Gerstner says, the critical task of becoming a leader is passing through the difficult time of understanding that a strategy has to be executed correctly, and that you have to depend on others to get the work done.

When Gerstner was in his late 20s and early 30s, he had a hard time recognizing this reality. “Too many young people, when there is a shortfall in an organization, simply say, ‘Give me that, I will do it—I will write the memo, prepare the presentation, do the work.’” At some point on the way to becoming a leader, that mindset has to change. “Leaders recognize that they only succeed if their team succeeds. And for a team to succeed, you need straight talk, sharing, and openness.”

Do different kinds of organizations differ in the kind of leadership they need? For example, did Gerstner need different leadership qualities at IBM than he did at American Express or RJR Nabisco? “First of all,” Gerstner says, “IBM forced me to change not so much my leadership style but my managerial style to a certain extent.” As president of American Express, Gerstner had been heavily involved in regular operational reviews of the business. “I reviewed every one of my businesses every month with a strong performance measurement system. I worked operations regularly with my division presidents and group executives. When I got to IBM, I realized there were so many businesses, group executives, and division presidents that if I started having monthly financial reviews with every one of them, I would spend all month doing it and then start all over again.” As a result, he came up with a new system at IBM, one that relied more on other people to drive results. “So, this is the message I would give a young manager trying to become a leader. You will find yourself increasingly becoming dependent on others, and by the time you get to the top of an organization, your success will depend on your ability to select, motivate, and encourage the team working under you. That will account for 90% of your success.”

The fact that at IBM Gerstner was much less involved with day-to-day operations helped him realize the importance of culture as the embodiment of what people do, what they think, and what they value in an institution. “I had viewed culture as one of the things that you, as a leader, need to understand, and manage, like you do finance, marketing, public relations, and so on,” he says. “I finished my IBM career with the view that culture is not one of the things you do, it is everything. Everything resides in culture. It is the crucible. So if you think you are going to change a company’s strategy, you had better understand before you even try whether the culture will support or fight that strategy.”

“I heard someone say the other day that when strategy clashes with culture, culture always wins. Again, this is something that many people simply don’t understand. At one level, culture seems theoretical and soft because it consists of values, attitudes, behavior. But those values and behavior are driven and reinforced every single day by the processes in the company.”

Gerstner offers an example of the dissonance that can emerge within a company when culture is in conflict with operations. “I love CEOs who say, ‘We believe in the long term and are building for the long term,’ and then on the next day, a memo arrives from the CFO saying, ‘I want you to cut your budgets by 5% for the next two quarters.’ People respond to the CFO’s message, because they have to do that. So the culture becomes short-term oriented, not long-term, even though the CEO is out there, pointing to the fences on long-term growth. Such mixed messages produce conflicts within organizations. That is why so many successful people in the last decade who have come from outside to run an organization get enormously frustrated. They feel that what they point to, and suggest, and argue for, and even demand, does not get done.”