412-012-1

IBS Center for Management Research

Leadership Development at IBM

This case was written by A J Swapna, under the direction of Debapratim Purkayastha, IBS
Hyderabad. It was compiled from published sources, and is intended to be used as a basis
for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.

2012, IBS Center for Management Research

IBS Center for Management Research (ICMR)

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Sankarapally Road, Hyderabad-501 504,
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 412-012-1

Leadership Development at IBM

“As the planet becomes smarter and more connected, every organization‟s success will depend on
having the best leaders for tomorrow—from front line to executives. Leadership development is a
top business priority. We need leaders who innovate, enable our clients‟ success, and embrace the
opportunities and challenges of the global marketplace.”i
– Ted Hoff, Vice-President, Center for Learning & Development, IBM Corporation, 2011.

In 2011, Fortune1 Magazine named International Business Machines (IBM) as the „Global Top
Company for Leaders‟. According to Fortune, “This technology giant has deep profiles on 60,000
employees in, or who have the potential to be in, leadership roles. Where the average company
might offer several hundred employees an international opportunity for two or three years, IBM
gives „mobility assignments‟ to thousands for three to six months.”ii
In 1993, IBM‟s sales and profits were declining at an alarming rate and the company reported a
record net loss of US$8.1 billion.iii Many business analysts opined that IBM needed a „change
agent‟ and with the right leadership, the company could be saved. The company had smart,
talented people with ample winning strategies but it was still at a standstill. There were no
technical problems either. All the company needed was someone to lead it and bring it back to
action. However, in 2001, eight years after the deep financial crisis, the company reported a net
income of US$7.7 billion.iv During the same period, that is from 1993-2001, the share price of
IBM shot up by almost 800%.v This was the period when Louis V. Gerstner Jr. (Gerstner) headed
IBM. Gerstner played a major role in reviving the fortunes of IBM (Refer to Exhibit I for the
Financial Data of IBM for the period 1992-2001). Under his leadership, IBM made significant
changes and strategically positioned itself in such as way as to suit the needs of its clients. From
being product-centric, it changed to being customer-centric and provided complete solutions to its
clients. IBM‟s image changed from being a company which primarily manufactured mainframes to
one which offered complete solutions in hardware, software, and other technologies. Sam
Palmisano (Palmisano) took over as the eighth CEO of IBM in 2002. IBM was financially strong
when Gerstner stepped down as CEO. Palmisano played a vital role in transforming IBM from the
world‟s largest computer maker to a services and software powerhouse. Under his leadership,
IBM‟s leadership development teams realized that the „On-Demand‟ strategy could bring in a new
set of leaders by quickly adapting to the changing market trends. He wanted IBMers to study the
traits of IBM‟s best performing leaders and replicate those traits across the organization. Under
Palmisano‟s leadership, IBM‟s earnings quadrupled and the stock rose to 57%. vi (Refer to
Exhibit II for the Financial Data of IBM for the period 2002-2010).
IBM‟s became well known for its leadership in many areas, including diversity, recruiting, training,
and executive development. IBM‟s leadership development initiatives were widely lauded and won
several accolades over the years. The organization spent approximately USD$750 million annually
on developing and training its employees, but how effectively the leadership competencies could be
deployed in an ever changing market conditions remained a point of debate.vii

1
Fortune is a global business magazine, published by Time Inc. It is known for its annual features ranking
companies by revenue.

2
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BACKGROUND NOTE

IBM, an American multinational technology and consulting corporation headquartered in New York,
USA, manufactured and sold computer software and hardware and offered consulting services in
diverse areas ranging from mainframe computers to nanotechnology2. As of September 2011, it was the
second-largest publicly traded technology company in the world by market capitalization.viii
The company was founded in 1911 as the Computing Tabulating Recording (CTR) Corporation
through the merger of four small companies: the Tabulating Machine Company3, the International
Time Recording Company4, the Computing Scale Corporation5, and the Bundy Manufacturing
Company6.ix In the initial years, it had a broad and unrelated range of products, offering everything
from scales and cheese slicers to clocks and typewriters.x Thomas J. Watson was appointed as its
first CEO in 1914 and he held the title for nearly four decades.xi He saw the company‟s future in
tabulators rather than scales and clocks. CTR adopted the name International Business Machines
(IBM) in 1924.xii Its distinctive culture and product branding gave it the epithet „Big Blue‟.xiii
In 1956, Tom Watson Jr, succeeded his father as CEO and under his leadership, oversaw the
digital computer age7 in IBM.xiv He predicted the role computers would play in business, and
gradually led IBM‟s transformation from makers of tabulating equipments / typewriters into a
computer industry leader. In 1964, „System/360‟xv, the first large computers to use interchangeable
software and peripheral equipment, were introduced.xvi Over half-a-century of Watson family
leadership came to an end in 1971 when Thomas J. Watson, Jr., stepped down and T. Vincent
Learson took over as CEO for the next two years.xvii
Frank T. Cary became the CEO in 1973. Under Cary‟s leadership, the computer industry expanded
and computers became a part of everyday life. In 1981, John R. Opel was appointed CEO at a time
when a new era in computing had begun with Personal Computers8 (PC). With the PC, the IBM
brand became well known in homes, small business, and educational institutions. In 1985, John F.
Akers became CEO. During his tenure, the emphasis was on streamlining operations and diverting
resources. It was under his leadership that IBM invested significantly in research and development,
a move that gave them four Nobel Prize winners9.xviii However, by 1992, IBM was in utter chaos
due to the back-to-back PC revolutions10. In 1993, the company recorded an annual net loss of
US$8 billion.xix Unable to manage its cost and streamline its operations, Akers proposed to split
the divisions into separate independent business units.

2
IBM‟s nanotechnology brought out new atomic- and molecular-scale structures for enhancing
information technology and discovered their scientific foundations.
3
The Tabulating Machine Company founded by Herman Hollerith was formed in 1902. It manufactured
and sold data-processing equipments.
4
The International Time Recording Company‟s product line was mechanical time recorders which were
invented and patented by Willard L. Bundy in 1888.
5
Computing Scale Corporation incorporated in 1891 was formed by Edward Canby and Orange O. Ozias.
6
Willard Bundy invented the first time clock on November 20, 1888. In 1889, the Bundy Manufacturing
Company was formed as the first time recorder company.
7
In 1951, large scale electronic computers were put to commercial use. This period was popularly known
as the Digital Computer Age.
8
A personal computer, commonly known as a PC, is any general utility computer whose size, capabilities,
and price makes it suitable for individuals.
9
The Nobel Prize is an international award which is announced annually in recognition of cultural and
scientific advancement. In 1973, Leo Esaki was awarded Nobel Prize for Physics; in 1986, Gerd K.
Binnig and Heinrich Rohrer received the Nobel Prize in Physics; in 1987, J. Georg Bednorz and K. Alex
Müller were awarded the Nobel Prize in Physics; and in 1990, Harry Markowitz of IBM won the Nobel
Prize for Economics.
10
The PC revolution placed computers directly in the hands of millions of people. This transformed the way
customers viewed, used, and bought technology.

3
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Louis V. Gerstner, Jr. (Gerstner) was appointed as IBM‟s chairman and CEO in 1993. It was for
the first time that a leader from outside IBM had held this position. Under Gerstner‟s leadership,
IBM created an e-business revolution and successfully transformed itself, achieving an impressive
business turnaround without splitting its business units.xx In 2002, Samuel J. Palmisano was named
CEO of IBM. In October 2011, IBM announced that Virginia Rometty would take over as CEO
effective January 1, 2012. Rometty, who would replace Palmisano, would be the first woman to
hold the post of CEO in IBM‟s 100-year history (Refer to Exhibit III for the List of IBM CEOs
since its inception).xxi
A few notable inventions by IBM included the Automated Teller Machine (ATM)11, the floppy
disk12, the hard disk drive13, the magnetic stripe card14, the relational database15, the Universal
Product Code (UPC)16, the financial swap17, and the SABRE airline reservation system18. No other
US-based technology company had as many patents as IBM.xxii
In 2011, Fortune ranked IBM as the 18th largest firm and 7th most profitable in the US. xxiii The
company was also ranked as the 31st largest firm globally by Forbes19 for the year 2011.xxiv
Other rankings for IBM in 2011 included Best Company for leaders by Fortune (Refer to
Exhibit IV for the list of top ten companies for leaders worldwide), Second best global brand by
Interbrand20, Number one green company worldwide by Newsweek21, 12th most admired
company by Fortune, and 18th most innovative company by Fast Company22.xxv As of September
30, 2011, IBM employed more than 426,751 employees, generally referred to „IBMers‟, in over
200 countries.xxvi

11
An ATM is a machine which provides cash and performs other banking services on the insertion of a
card. IBM 3614 and 3624 were machines which were developed at IBM labs.
12
A floppy disk is a type of storage medium which comprises a disk of thin and a flexible magnetic storage
medium, which is covered in a plastic lined fabric that removes dust particles. IBM developed the first
Floppy disk in 1967. It was an 8 inch disk and could hold 80KB data in a read-only form.
13
The Hard Disk Drive (HDD) is used for data storage and helps in retrieving digital information, primarily
computer data. It was first introduced in IBM in 1956 for data storage.
14
The Magnetic Stripe card was introduced by IBM in 1960 for the US government security system. The
card is read by swiping the card against a magnetic reading device.
15
IBM developed the Relational Database in 1970 as a data storage model. It is based on the relational
model theory and the software used in relational database is called the Relational Database Management
System (RDBMS).
16
In 1949, IBM introduced the UPC, popularly known as bar code, which is used as an inventory tracking
tool.
17
IBM and the World Bank entered in an agreement in 1981 called a swap agreement. Swaps are
considered as over the counter instruments which are exchanged with a stream of payment liabilities for
another.
18
In 1964, IBM offered an airlines reservation system to the American Airlines Inc., which was the
principal subsidiary of AMR Corporation. It was the first airline reservation system to work live over the
telephones.
19
An American publishing and media company, Forbes was incorporated in 1917. Forbes magazine is
published biweekly and is well known for its ranking lists.
20
Interbrand is an consulting firm which specializes in brand services such as brand analytics, brand
strategy, brand valuation, brand engagement, and so on.
21
Newsweek an American weekly based in New York. It was merged with The Daily Beast in 2010. It
publishes editions in all leading world languages.
22
Fast Company was incorporated in 1995 as a business magazine and operates a network of related
websites.

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LEADERSHIP UNDER LOU GRESTNER: PROPOSALS, IMPLEMENTATION,

AND THE TRANSFORMATION

THE CHALLENGE
Gerstner was chairman of the board of IBM Corporation from April 1993 until his retirement in
December 2002.xxvii He was CEO of IBM from 1993 until March 2002 and was credited with
turning around IBM‟s fortunes. IBM was passing through the worst phase ever in its nearly eight-
decade-long history before Gerstner joined. It recorded an operating loss of US$325 million in the
first half of 1993, and the stock price dipped by about 15 percent within a few months of Gerstner
becoming CEO.xxviii The company‟s financial situation was deteriorating. The company posted a
net loss of US$2.86 billion in 1991, followed by a net loss of US$4.97 billion in the financial year
1992. Referring to the Herculean task ahead of him at IBM, Gerstner had said, “The challenge they
have laid down is immense. I don‟t underestimate its magnitude, but I take up that challenge with a
great determination to succeed. We will build on IBM‟s traditions, but we will not hesitate to make
every change necessary to meet the challenge of a very rapidly adjusting market place.”xxix
After the IBM board meeting on March 30, 1993, Gerstner noticed the absence of elements such as
culture, teamwork, customers, or leadership. These turned out to be the toughest challenges at IBM.
“The tasks were varied, but from what I could understand, AA‟s [Administrative Assistants] had
primarily administrative duties and even, at times, secretarial chores. For the most part, AAs organized
things, took notes, watched, and, hopefully, learned. What they didn‟t do was interact with customers,
learn the guts of the business, or develop leadership competencies,”xxx explained Gerstner.
INITIAL PLANS
Gerstner‟s immediate task at IBM as CEO was to make the company profitable. He visited
different IBM offices all over the world and met customers, competitors, senior executives,
financial analysts, and consultants to get a first-hand account of the actual state of affairs. He
called upon the top twelve managers of IBM and asked them to clearly define their business in
terms of various parameters23. During these interactions, he learnt that customers appreciated IBM
for providing solutions for a host of computer related needs. But Gerstner realized that the quality
of IBM products needed to be improved.
INTEGERATION & DECENTRALIZATION
Gerstner also felt the need to integrate IBM‟s different business units in order to improve product
quality. This led him to take the crucial decision of reversing the plans of his predecessor Akers to
split IBM into 11 entities. Another challenge before him was bringing about cultural change. He
decentralized decision making wherever possible and emphasized central strategy and common
customer focus which led to diffused responsibility and leadership. Due to the huge size of IBM‟s
operations which was spread across the world, it was very difficult for Gerstner to closely monitor
its functioning. He delegated the authority to take decisions regarding the regular operations of
these units to the heads of the respective units. A few crucial strategic decisions were left to him.
For this purpose, Gerstner created a corporate executive committee comprising ten executives to
monitor and integrate the operations of different units and keep him updated about them.
OPERATION BEAR HUG
For Gerstner, the first step in IBM‟s cultural change was an attempt to build the company from
„outside in‟. He called this „Operation Bear Hug‟.xxxi As part of Operation Bear Hug, Gerstner
sent his top 250 managers to meet customers. Each manager was supposed to meet at least five
customers. Through these meetings, the managers saw how important their work was and
understood how each one of them could add value to their customers. Through this initiative, IBM

23
Grestner defined various parameters such as type of business, customers, competitors, markets and
SWOT analysis.

5
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developed itself into a solution provider. According to Gerstner, “IBM was brimming with talented
people who had unique expertise. If I didn‟t give the players on the home team a chance, they‟d
simply take their talent and knowledge and go somewhere else. I just had to find the teammates
who were ready to try to do things in a different way.”xxxii
LAY OFFS & POLICY CHANGES
After Gerstner arrived, over 100,000 employees were laid off from a company that had maintained
a lifetime employment practice since its inception.xxxiii Within six months of becoming CEO,
Gerstner abolished the lifetime employment policy followed by the company. Though this policy
aimed at improving the loyalty of employees toward the organization, Gerstner felt that it was no
longer relevant in the highly competitive scenario. He tried to cultivate a performance driven
culture at IBM and insisted on results. In his efforts to downsize, he reduced the workforce by a
further 35,000 in July 1993.xxxiv Layoffs and other tough management measures continued in the
first two years of Gerstner‟s tenure, but the company was saved, and business continued to grow
steadily once again.
Gerstner brought about major changes in the compensation structure of employees. To make them
more accountable, he declared that the bonuses earned by the executives would depend on the
overall performance of the company and not on their individual performance. Earlier,
compensation had always been in the form of salary. Stock options24 were not common and were
awarded as incentives only to employees belonging to the executive cadre, and bonuses were
awarded based on their performance.xxxv Gerstner made stock options an inherent part of IBM‟s
compensation structure. He believed that this would make the employees more responsible, as
their performance would affect the stock prices, and hence, their personal financial gains. Further,
by providing stock options, the company could retain its skilled manpower. The number of
employees who received stock options increased from 1300 in 1992 to 72,500 in 2001.xxxvi
The compensation structure was mostly uniform for all employees across a certain salary grade,
irrespective of the nature of work they handled. Employees were also awarded bonuses which
varied according to IBM‟s overall performance. As they moved up the hierarchy, the performance
linked bonus component of their total remuneration also grew. This move was aimed at enhancing
the commitment of employees. However, Gerstner scrapped other benefits such as club
memberships, medical benefits, and pension schemes.
COST-CUTTING MEASURES
In addition to lay-offs, a series of other cost-cutting initiatives were undertaken in the same year
such as the sale of the Federal Systems25 unit for US$1.575 billion, the sale of IBM‟s art
collection26 worth US$25 million, and the sale of IBM property worth US$248 million.xxxvii For the
financial year 1993, IBM registered a record net loss of US$8.1 billion.xxxviii
CHANGING THE WORK CULTURE
Before Gerstner became CEO, the employees had to strictly adhere to a formal dress code
prescribed by the management. Gerstner tried to minimize such restrictions and created an
informal culture at IBM. Employees were also given more freedom in their work-related affairs.
Earlier, meetings at IBM had lasted for hours. Gerstner made these shorter. He focused on central
issues, and wanted decisions to evolve out of each meeting. Gerstner believed that employees
should present themselves in a simple manner before the customers, and try to solve their
problems, instead of just focusing on selling IBM‟s products.

24
Stock options refer to shares which are offered by the company as incentives to its employees.
25
Federal Systems was a division of IBM, which sold computers and electronic components to defense and
public agencies of the US Government.
26
IBM‟s art was a collection of paintings which was started by IBM‟s founder, Thomas Watson Sr.

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FOCUS
Gerstner observed that while the goodwill enjoyed by IBM helped push its products into the
market, there was no proper marketing strategy. Therefore, he decided to evolve a uniform
marketing strategy for IBM. In 1993, Abby Kohnstamn27 was appointed corporate marketing
head.xxxix Before Gerstner, IBM managers across the world had had more than 70 different
advertising agencies and there was no coordination between them. xl As a result, monitoring these
agencies was a difficult task. Gerstner‟s decision to centralize the advertising and media strategy
played an important role in strengthening the image of IBM. The advertising contract for IBM‟s
operations across the world was awarded to Ogilvy & Mather28.
The subsequent refocusing on the IT services business (which grew to nearly 50% of IBM‟s
revenues), the embrace of the Internet as a business phenomenon, and the broad effort to revive the
company‟s culture resulted in one of the most remarkable turnarounds in business history. IBM
was credited with making the PC a mainstream product, but it relied on Intel chips and Microsoft
software29. For this reason, it could no longer monopolize PC market. By the end of 1994, IBM
ceased new development of OS/230 software. It withdrew entirely from the retail desktop PC
market, which had become unprofitable due to price pressures in the early 2000s, and sold the PC
division to Lenovo Group Limited31 in 2005, just a few years after Gerstner stepped down as
CEO.xli
WORLDWIDE MANAGEMENT COUNCILS
A Worldwide Management Council (WMC) comprising 35 executives was formed in the early
1990s to discuss the new initiatives taken up by IBM and the probable impact of these on
operations across the world.xlii These measures were a major step toward Gerstner‟s efforts to
decentralize decision-making at IBM. It also encouraged communication in its businesses. The
WMC had to meet four or five times in a year over a two-day session at which the members
analyzed the operating unit results and discussed company-wide initiatives.
E-BUSINESS
In 1997, a full-fledged „e-business‟ strategy for IBM was evolved which provided a complete
package for e-business namely hardware, software, training, security, networking, and services.
Lotus Notes Groupware32 was added as another powerful feature to IBM‟s e-business solutions.
The Lotus Notes server33 enabled users to access information in real time. During the period 1995-
1998, the number of Notes users increased from 3 million to 22 million and during 1997-2002,
IBM spent over US$5 billion on advertising its e-business initiative.xliii,xliv Acknowledging the
success of the e-business campaign, Gerstner said, “I consider the e-business campaign to be one
of the finest jobs of brand positioning I‟ve seen in my entire career.”xlv

27
Abby Kohnstamm was senior vice president for marketing of IBM from 1993 to 2006.
28
Founded in 1948, Ogilvy & Mather is an advertising agency based in Manhattan with branches in 120
countries.
29
The desktop application services and applications for the operating system developed by Microsoft are
called MS Software.
30
OS/2 stands for Operating System/2 which was developed by IBM in 1987 and was discontinued in 2006.
31
The world‟s second largest PC maker, Lenovo, was incorporated in 1988 in China under the name
Legend. Lenovo sold desktops, servers, notebooks, tablet computers, netbooks, peripherals, printers,
televisions, scanners, and storage devices.
32
Lotus Notes Groupware was a set of groupware applications developed by Lotus. It supported accessing
distributed databases over a local area network.
33
Lotus Notes server periodically checked the status of other servers in the network and copied the updated
contents of its database to others.

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In 1997, IBM reported a net income of US$6.09 billion. Gerstner‟s thrust on customer service had
yielded results.xlvi Later in 1998, IBM extended the benefits of e-business to its customers. Instead
of investing a large amount of money on call centers and other allied activities, IBM solved
customers‟ problems through online support systems. In 1999, when the world was waking up to
the „Year 2000 problem‟34, popularly known as „Y2K‟, IBM addressed this problem by forming
customer support teams.xlvii This gesture reiterated IBM‟s standing as a truly customer-driven
company. In the same year, Gerstner was awarded the „Man of The Year Award‟35 by leading US
magazine, Industry Week.xlviii
Under Gerstner‟s leadership, IBM continued its good financial performance. The company
generated revenues of US$88.4 billion and a net profit of US$8.1 billion in 2000.xlix However, as a
result of the global recession in the IT industry, IBM‟s net income fell to US$7.7 billion while
revenues dipped to US$85.9 billion for the financial year ending December 2001.l

IBM LEADERSHIP COMPETENCIES

At the first Senior Leadership Group (SLG) meeting at IBM held in 1996, Gerstner envisioned a
program which focused on developing leadership capabilities. A comprehensive plan for building
great leaders for IBM was crafted, which included careful selection, development, and rewards for
best talent. At Gerstner‟s behest, Hay Group36 formed a set of 11 competencies under four heads.li
IBM leadership competencies prepared participants to take up leadership roles in all areas of the
business.
IBM‟s success was based on the leadership and management best business practices. Leaders
were held accountable for growing and developing other leaders. Good leadership was viewed as
an asset to be carefully managed for the best possible return. Management teams at all IBM‟s
business units regularly discussed emerging leaders and development opportunities in a „five
minute drill‟37.lii
Gerstner considered employee participation as a vehicle to promote and reward executives who
embraced the new IBM culture. The IBM Leadership competencies were developed by
understanding the skills sets, potential, and persona of IBM‟s best talent (Refer to Figure I for the
IBM leadership competencies).

34
Software applications around the globe were designed in such a manner that dates began with “19__”.
However, in the new millennium, the dates had to begun with “20__”, which required upgradation in the
software applications, particularly in those related to accounting and databases .
35
Industry Week is a trade publication which is owned by Penton Media Group. The Man of the Year
award is given by Industry Week to recognize people, who have attained remarkable success in their
respective fields.
36
Headquartered in the US, Hay Group was founded in 1943 as a HR management consulting providing
consultancy services worldwide.
37
IBM Five minute drills were meetings of top management with senior managers to discuss people who
showed leadership competencies in approximately five minutes.

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Figure I

IBM Leadership Competencies

Focus to Win
Customer Insight
Breakthrough Thinking
Drive to Achieve
Mobilize to execute
Team Leadership
Straight Talk
Teamwork
Decisiveness
Sustain Momentum
Building Organizational Capability
Coaching
Personal Dedication
The Core
Passion for business
Adapted from Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic
Turnaround,” (Harper Business 2002)
The Competencies were formed around four areas namely,
Focus to Win: It laid emphasis on understanding the business environment and setting
strategies for yielding positive results.
Mobilize to execute: Team work in execution and speedy implementation with flexibility.
Sustain Momentum: Obtaining lasting results that continue to grow.

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Passion for business: The core of the leadership competencies was the passion for business.
Being excited about what IBM technology and services can do for the world. This passion for
the business and winning in the marketplace formed the core of IBM leadership model.
However, by 1999, Gerstner was not satisfied with the leadership development taking place solely
through these competencies. He had noticed that when changes were taking place in IBM, the
cultural side remained stagnant. He felt that the leadership principles and competencies had to be
simpler and had to be rooted in people‟s daily activities. For this purpose, he revalidated the
existing 11 competencies, further broke them down to three, and called them “Win, Execute,
Team” (Refer to Table I for the revalidated leadership competencies of IBM).liii
Table I

Leadership Competencies Revalidated in 1999

Win: It was vital that all IBMers understood that business was a competitive activity.
There were winners and losers. In the new IBM, there was no place for anyone who
lacked zeal for the contest. Most crucially, the opponent was in the market place, not
within IBM. Competing in the marketplace was the driving criterion for all of their
actions and all of their behavior.
Execute: This was all about speed and discipline. There would be no more of the obsessive
perfectionism that caused IBM to miss market opportunities and let others capitalize
on IBM‟s discoveries. No more studying things to death. In the new IBM, successful
people would commit to getting things done – fast and effectively.
Team: This was a commitment to acting as one IBM, to teamwork between individuals,
between workgroups, between divisions – plain and simple.
This short, tight and clear message spread across IBM and became the crux of many IBM
programs and initiatives.
Adapted from Robert P. Gandossy, Marc Effron, “Leading the Way: Three Truths from the Top Companies
for Leaders,” (John Wiley & Sons, 2004).
The other common best practices used at IBM were Formal Development Programs, 360°
feedback, Executive Coaching, Job Assignments, Mentoring, Networking, Reflection, Action
Learning, and Outdoor challenges (Refer to Exhibit V for the Best Practices adopted at IBM).
“Leadership is a personal journey for each person, but I think having a culture that says this stuff
matters particularly when it‟s linked to your business strategy is a very powerful combination”,
said Brendon Riley, CEO, IBM - UK and Ireland.liv

IBM’S NEXTGENS AND SENIOR LEADERSHIP GROUP

In February 1995, Gerstner formed a Senior Leadership Group (SLG) with 300 top executives. The
SLG was formed to focus attention on leadership development. This group acted as change agents
for IBM‟s transformation and membership was not granted automatically; it had to be earned.
Membership of the SLG was not based on rank or role. Every year, a few people retired and a few
new people were added to the SLG. Every year, the CEO of IBM hosted a meeting of the SLG.
These meetings reviewed the company‟s strategies, the competitive situation, and other key
initiatives. However, a major portion of the time was devoted to leadership development.
“Digging down in the organization and finding great talent is a difficult thing to do. So in 2002, we
asked the SLG to reach down in their organization and find a young person with less than ten years
of work experience who could someday sit in their chairs. No fancy assessment or identification
process and [the SLG] responded with enormous enthusiasm and are now sponsors of this group we
call our „NextGens.‟ NextGens are assigned coaches to assist in their accelerated development,”lv
said Donna Riley, vice president of global executive resources and development at IBM.

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The NextGens were given the opportunity to attend IBM‟s Advanced Leaders Series. The program
was composed of two classes: the Global Development Center and Global Business Management.
360-degree feedback and evaluations were received in a number of simulations by members of the
SLG. IBM used several channels to identify and develop its best talent. One such channel was its
Executive Assistant Program.

IBM’S EXECUTIVE ASSISTANT PROGRAM

Another IBM leadership development initiative was its Executive Assistant Program that focused
on the NextGens. The company‟s Worldwide Management Council handpicked Executive
Assistants who in turn served the top global executives. Under the program, the Executive
Assistants were given broad exposure to the business problems and its leaders. A Coach and a
program manager guided these Executive Assistants in key learnings. Though the Executive
Assistants Program jobs were for a relatively shorter duration, mostly ranging from 9 months to 12
months, they provided valuable insights and exposure into IBM‟s business and challenges for its
budding talent.
According to Randy MacDonald, IBM‟s executive vice president, Human Resources, “It‟s
important that we tap our strongest people from all over the world and work directly with them and
give them the right exposure, it also forges a strong network across IBM and that‟s a lot of who we
are as a company.”lvi

IBM’S NEW LEADERSHIP TRAITS

In October 2002, IBM‟s then CEO Sam Palmisano unveiled a new initiative that he hoped would
transform the company. He felt that IBM should quickly adapt to the rapidly changing market trends
through an „On-Demand‟ business model.lvii He wanted to study IBM‟s best performing leaders and
replicate their traits across IBMers. According to Mark Elliot, IBM EMEA general manager, “On-
demand is about being responsive, it is about sensing changes and responding dynamically. It is also
about being variable and being able to adapt cost structures to needs and demands.”lviii
In 2003, IBM‟s leadership development team under the guidance of Palmisano, realized that the
„On-Demand‟ strategy would demand a new set of leaders who were as sensitive to changes in
their business environment. In the same year, Hay Group conducted a series of interviews with top
IBM executives, extracted the best practices from the best leaders, and crafted leadership traits
based on these (Refer to Exhibit VI for Leadership Traits at IBM).

DEVELOPING LEADERS AT IBM – THE PROCESS

IBM focused on the needs of corporate customers. The main factor that attracted talented people to
IBM was its quality of leadership and development. “We strive to make sure that IBM is seen as
the best choice for people with talent to develop themselves and their careers,” lix said Sej Butler,
IBM‟s European Recruitment Manager. Jean Kerr (Kerr), Manager, Leadership Development in
the UK and member of IBM‟s Global Leadership Development Organization, believed that the
essence of the IBM leadership and development was its effective people management and
competency-led philosophy. “The advantage of our competency-based approach is that it is so
transparent. The competencies are based on the behaviors shown by our global role-model leaders.
What this means is that from the moment someone joins IBM, they know exactly what is expected
of them,” lx she said.
Once a graduate was hired, IBM competencies such as leadership, communication, team working,
and analytical skills were tested. For the first two years, all graduates irrespective of their degrees
went through the same training. During the training period they were put on job rotations to find
out which kind of role suited them better. On completion of the initial two-year training period,
candidates were trained for another two years to develop their expertise in the related field.

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LEADERSHIP FOUNDATION

Leadership Foundation, considered as the second stage of leadership development, allowed the
first formal contact with the leaders at the Global Leadership Development Organization.
Managers identified the leadership potential each candidate possessed and supervised a learning
program, usually a work-enabled learning program or an online self learning program. “The work-
enabled learning is a very important component. This is something they can do with their own
leaders as we find leaders teaching leaders to be a very powerful tool,” lxi said Kerr.

EMERGING LEADERS

Candidates who performed exceedingly well at the Leadership Foundation were sent to the next
level of leadership program called Emerging Leaders. Under this program, business intelligence on
varied topics such as financial analysis, business growth, leaders‟ emotional intelligence, team
work, motivation, and so on, was blended.

BASIC BLUE

IBM launched its first manager development program in 1999 and named it Basic Blue. lxii On
completing the Emerging leaders program, each candidate was supposed to take on his/her
first management role, known as „Basic Blue‟. The Basic Blue program involved an intensive
examination of the individual manager‟s strengths and weaknesses and involved peer-to-peer
training. After participation in the Basic Blue program, there were a range of developmental
programs available which could be opted for based on the needs of the individual. At this
stage, candidates with high potential were identified and selected to join the global executive
resource talent pool. They in turn became the next generation executives of IBM. “We do put
emphasis on individuals to manage their own careers, but, likewise, there are very robust
structures in place to nurture talent, and it is very clearly mapped out what needs to be
delivered to get to the next stage. There is no great mystery in terms of what you need to
achieve,” lxiii said Kerr.

OTHER INITIATIVES

According to J. Randall MacDonald, Senior Vice President, Human Resources, IBM Corporation,
“The ability of an organization to look ahead and identify the skills it will need in the future, and
then rapidly develop a critical mass of individuals with those skills in a cost-effective manner, will
be a core competency for those companies looking to compete in the globally integrated world.” lxiv
The expansion of IBM‟s commitment to Africa and leadership development was announced at
THINK: A Forum on the Future of Leadership, an IBM conference to mark the company‟s
Centennial celebrations that summoned more than 700 emerging leaders from government,
business, academia, and science from around the globe, and examined how models of leadership in
business, technology, and society must evolve to meet the challenges of the 21st century. IBM got
young talent to work with local leaders on local problems around the world. In this way, the
employees developed and IBM obtained an insight into their abilities.
More often than not, many companies in developed economies sent their managers to emerging
markets. IBM, on the other hand, started sending its managers from emerging markets to
developed markets to enable them to get hands-on experience in a mature economy. This too, in a
way, prepared them for the future. Analysts opined that such efforts were one big reason for IBM
being ranked No. 1 on the new global list of „Top Companies for Leaders‟.

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RISK OF INSULARITY?

Over the decades, IBM had received several accolades for its efforts to nurture leadership
development at the company. The success of IBM leadership development was its orientation
toward building leadership competencies for the near future. The leadership development
initiatives and the succession planning helped the company immensely in making a smooth
transition when a CEO retired from his post. At IBM, leadership development was used as a tool to
socialize managers on key corporate values and build a strong, coherent culture.
In the 1980-1990 period, millions of dollars were invested in training and developing leaders at
IBM. But the company realized later that leaders developed at IBM were outdated because a future
generation of IBM leaders were being trained and developed based on a corporate scenario which
no longer existed.
The IBM 2010 Global CEO survey reported that around 1,500 CEOs who were surveyed stated
that, “the single most important leadership attribute they are looking for in Future leaders is
Creativity, and the ability to cultivate creativity throughout the organization”. In addition to this,
less than half of the CEOs surveyed felt that they were successfully handling the growing
complexity of the Global business marketplace. A peer-reviewed research demonstrated that
upcoming leaders who expressed creative thinking were often passed over for promotions and
sidetracked from opportunities for general levels of responsibility. The research went on to state
that, “the negative association between expressing creative ideas and leadership potential is robust
and undergoes an important but previously unidentified bias against selecting effective leaders.”lxv
The most potential drawback which critics voiced was using internal instructors for leadership
development programs because they opined that it could lead to corporate inbreeding which was
popularly known as the “General Motors syndrome”38.lxvi Leadership experts also criticized IBM
leadership development programs saying that the instructors were teaching outdated models which
did not fit into the ever changing trends of IT industry and hampered its competitiveness in the
market. Critics claimed that a generation of IBM leaders had become obsolete even before they got
a senior leadership role. As such, some experts opined that the success of IBM‟s leadership
development, among others, would depend on listing competencies which did not become obsolete
and which were futuristic.

38
The term, „General Motors syndrome‟ was coined by Conger & Benjamin in 1999, to denote the industry
leaders which reap success and believe that they are too big for failure.

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Exhibit I
Operational & Financial Performance of IBM for the Period 1992-2001
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Sales
Revenues 64.5 62.7 64.1 71.9 75.9 78.5 81.7 87.5 88.4 85.9
(US$ bn)
Net Income
(5.0) (8.1) 3.0 4.2 5.4 6.1 6.3 7.7 8.1 7.7
(US$ bn)
Earnings
per share (2.17) (3.55) 1.24 1.76 2.50 3.00 3.29 4.12 4.44 4.35
(in US$)
Employees
301.5 256.2 219.8 225.3 240.6 269.5 291.1 307.4 316.3 319.9
(000s)
Source: Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business 2002).

Exhibit II
Operational & Financial Performance of IBM for the Period 2002-2010
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sales
Revenues 81.19 89.13 96.29 91.13 91.42 98.79 103.63 95.76 99.87
(US$ bn)
Net Income
5.33 6.59 7.50 7.99 9.42 10.42 12.33 13.43 14.83
(US$ bn)
Earnings per
3.07 3.75 4.39 4.91 6.06 7.15 8.89 10.01 11.52
share (in US$)
Source: IBM Annual Reports.

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Exhibit III
List of IBM CEO’s Since its Inception
Name of the CEO Position Held between the Period
Thomas J. Watson 1914–1956
Thomas J. Watson, Jr. 1956–1971
T. Vincent Learson 1971–1973
Frank T. Cary 1973–1981
John Opel 1981–1985
John F. Akers 1985–1993
Louis V. Gerstner, Jr. 1993–2002
Samuel J. Palmisano 2002–2011
Virginia M. Rometty effective 2012
Adapted from http://www-03.ibm.com/press/us/en/biographies/former.wss

Exhibit IV
Top Ten Companies for Leaders- Fortune 2011, Global List
1. International Business Machines Corporation
2. General Mills, Inc.
3. The Procter & Gamble Company
4. Aditya Birla Group
5. Colgate-Palmolive Company
6. Hindustan Unilever
7. ICICI Bank Limited
8. McDonald‟s Corporation
9. Whirlpool Corporation
10. PepsiCo, Inc.
Source:http://money.cnn.com/galleries/2011/news/companies/1111/gallery.top_companies_leaders.fortune/i
ndex.html

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Exhibit V
Best Practices Adopted at IBM
HR Practice Description
Formal program Classroom-based learning includes a variety of practices.
360 feedback Multi-source ratings of performance organized and presented to a manager.
Coaching Practical, goal-focused form of one-on-one learning.
Job assignments Providing “stretch” assignments in terms of role, function, or geography.
Mentoring Advising/developmental relationship, usually with a more senior manager.
Networks Connecting to others in different functions and areas.
Reflection In-depth thinking about personal experience.
Action learning Project-based learning directed at important business problems.
Outdoor challenge Team-building experiences in outdoor/wilderness settings.
Adapted from Robert P. Gandossy, Marc Effron, “Leading the Way: Three Truths From the Top Companies
For Leaders,” (John Wiley & Sons, 2004).

Exhibit VI
Leadership Traits at IBM
Innovation
Thinking Horizontally: Focus on IBM‟s capacity to address client or market opportunities in
innovative ways.
Informed Judgment: Creates a distinct source of information which aims at making an informed
judgment regarding strategic decisions with both short-term and long-term implications.
Strategic Risk-Taking: Innovation in fostering growth, using multiple resources from around
IBM.
Dedication
Building client partnerships: Builds collegial relationships with key clients based on mutual
strategic interests.
Collaborative influence: Creates interdependence, building genuine commitment across the
organizational hierarchy to achieve a common goal.
Embracing challenge: Builds the belief in others that they can innovate and grow the business
proactively.
Trust and personal responsibility in all relationships
Earning trust: Doing what is right for long-term good relationships inside and outside of IBM.
Enabling growth: Changes systems or processes that hinder IBM‟s overall growth and
performance.
Passion for IBM‟s future: Gets others energized to realize IBM‟s unique potential.
Developing IBM people & community: Takes accountability for investing in the future
leadership of IBM.
Adapted from Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic
Turnaround,” (Harper Business, 2002).

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End Notes:

i
Sandy Macys, “Twenty Best Companies for Leadership,” www.images.businessweek.com, February
16, 2010.
ii
“Leadership and Development at IBM,”
http://graduateschool.topuniversities.com/articles/careers/leadership-and-development-ibm
iii
Iain Hay, “Transformational Leadership: Characteristics and Criticisms,”
www.leadingtoday.org/weleadinlearning/transformationalleadership.htm
iv
Stanley S. Litow, “IBM‟s Corporate Service Corps a New Model for Global Leadership
Development,” www.asmarterplanet.com, September 20, 2011.
v
Ibid.
vi
Geoff Colvin, “Sam Palmisano‟s Legacy of Leadership at IBM,” www. management.fortune.cnn.com,
November 18, 2011.
vii
Rajeev Dubey, “Big Blue‟s True Colours,” www.businessworld.in, 09 July, 2011.
viii
Steve Lohr, “I.B.M.‟s Chief on Corporate Longevity and Leadership,” www.bits.blogs.nytimes.com,
November 3, 2011.
ix
www-03.ibm.com
x
Steve Lohr, “I.B.M.‟s Chief on Corporate Longevity and Leadership,” www.bits.blogs.nytimes.com,
November 3, 2011.
xi
www-03.ibm.com/employment/us/diverse/50/exectask.shtml
xii
www-03.ibm.com/ibm/history/exhibits/logo/logo_5.html
xiii
“Leadership and Development at IBM,”
http://graduateschool.topuniversities.com/articles/careers/leadership-and-development-ibm
xiv
www-03.ibm.com/employment/us/diverse/50/ceo.shtml
xv
System/360 offered the user a choice of five processors with nineteen combinations of power, speed,
and memory.
xvi
www-03.ibm.com/ibm/history/history/decade_1960.html
xvii
www-03.ibm.com/employment/us/diverse/50/ceo.shtml
xviii
www.research.ibm.com/resources/awards.shtml
xix
“Lou Gerstner‟s Turnaround Tales at IBM,” www.knowledge.wharton.upenn.edu, December 18, 2002.
xx
Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business 2002).
xxi
David Hsu, George S. Day, Lawrence G. Hrebiniak, Michael Useem, “Inside Job: Changing of the
Guard at IBM,” www.knowledgetoday.wharton.upenn.edu, October 26, 2011.
xxii
www.ibm.com/ibm/licensing/patents/
xxiii
“Fortune 500,” www.money.cnn.com, May 23, 2011.
xxiv
Sam Churchill, “IBM: 100 Years Old Today,” www.dailywireless.org, June 16, 2011.
xxv
http://wn.com/International_Business_Machines
xxvi
http://money.cnn.com/galleries/2011/news/companies/1111/gallery.top_companies_leaders.fortune/
xxvii
Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business 2002).
xxviii
Marshall Goldsmith, “Partnering: The New Face of Leadership,” (AMACOM, October 2002).
xxix
Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business, 2002).
xxx
Ibid.
xxxi
Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business 2002).
xxxii
David Hsu, George S. Day, Lawrence G. Hrebiniak, Michael Useem, “Inside Job: Changing of the
Guard at IBM,” www.knowledgetoday.wharton.upenn.edu, October 26, 2011.

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xxxiii
Robert P. Gandossy, Marc Effron, “Leading the Way: Three Truths from the Top Companies for
Leaders,” (John Wiley & Sons, 2004).
xxxiv
“Lou Gerstner‟s Turnaround Tales at IBM,” www.knowledge.wharton.upenn.edu, December 18, 2002.
xxxv
Stanley S. Litow, “IBM‟s Corporate Service Corps A New Model For Global Leadership
Development,” www.asmarterplanet.com, September 20, 2011.
xxxvi
Linda Tischler, “IBM‟s Management Makeover,” www.xcompany.com, November 1, 2004.
xxxvii
Nigel Cope, “IBM Learns the Art of Cost-Cutting,”www.independent.co.uk, February 15, 1995.
xxxviii
Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, “Strategic Management: Competitiveness and
Globalization: Concepts and Cases,” (Cengage Thomson learning, 2007).
xxxix
www.ibm.com/ibm100/us/en/icons/ebusiness/team/
xl
Laurence Zuckerman, “Associate of Gerstner Selected I.B.M. Counsel,” www.nytimes.com, May 16, 1995.
xli
“In Focus: Lou Gerstner,” www.edition.cnn.com, July 2, 2004.
xlii
www-03.ibm.com/employment/us/diverse/50/exectask.shtml
xliii
Robert P. Gandossy, Marc Effron, “Leading the way: three truths from the top companies for leaders,”
(John Wiley & Sons, 2004).
xliv
“Lou Gerstner: Changing Corporate Culture,” www.edition.cnn.com, December 9, 2005.
xlv
Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business 2002).
xlvi
“Lou Gerstner‟s Turnaround Tales at IBM,” www.knowledge.wharton.upenn.edu, December 18, 2002.
xlvii
Robert P. Gandossy, Marc Effron, “Leading the way: three truths from the top companies for leaders,”
(John Wiley & Sons, 2004).
xlviii
http://archive.computerhistory.org/resources/text/IBM/IBM.various.1976.102646158.pdf
xlix
“Lou Gerstner‟s Turnaround Tales at IBM,” www.knowledge.wharton.upenn.edu, December 18, 2002.
l
“Lou Gerstner‟s Turnaround Tales at IBM,” www.knowledge.wharton.upenn.edu, December 18, 2002.
li
Linda Tischler, “IBM‟s Management Makeover,” www.xcompany.com, November 1, 2004.
lii
Robert P. Gandossy, Marc Effron, “Leading the way: three truths from the top companies for leaders,”
(John Wiley & Sons, 2004).
liii
Louis V. Gerstner Jr., “Who Says Elephants Can‟t Dance? Inside IBM‟s Historic Turnaround,”
(Harper Business 2002).
liv
Linda Tischler, “IBM‟s Management Makeover,” www.xcompany.com, November 1, 2004.
lv
Robert P. Gandossy, Marc Effron, “Leading the Way: Three Truths from the Top Companies for
Leaders,” (John Wiley & Sons, 2004).
lvi
Susanne Gargiulo, “Tracking the Talent, Finding the Leaders,” www.edition.cnn.com, October 31, 2011.
lvii
Linda Tischler, “IBM‟s Management Makeover,” www.xcompany.com, November 1, 2004.
lviii
www-935.ibm.com/services/us/bcrs/pdf/br_business-resilience.pdf
lix
“Leadership and Development at IBM,”
http://graduateschool.topuniversities.com/articles/careers/leadership-and-development-ibm.
lx
“Leaders Developing Leaders at IBM,” www.cedmaeurope.org, September 2009.
lxi
Ibid.
lxii
Marshall Goldsmith, “Partnering: The New Face of Leadership,” October, 2002.
lxiii
“Leadership and Development at IBM,”
http://graduateschool.topuniversities.com/articles/careers/leadership-and-development-ibm.
lxiv
“IBM Global Human Capital Study: Looming Leadership Crisis, Organizations Placing Their
Companies‟ Growth Strategies at Risk,” www-03.ibm.com, October 18, 2007.
lxv
http://www-935.ibm.com/services/in/ceo/ceostudy2010/
lxvi
David Wilkins, “Working Beyond Borders – IBM,” www.taleo.com, August 5, 2011.

18