When Hardware Stalls, Turn to Service

Gerstner knew that IBM's hardware business, which had carried the company for so long, was shrinking at an alarming rate. Within a 3-year span during the early 1990s, hardware sales dropped 50 percent, erasing more than $14 billion in hardware profits. Meanwhile, margins were thinning to an alarming degree. Although the company sold $12 billion worth of personal computers in 1993, those sales ended up putting the company far deeper in the red.

Following in the footsteps of GE's Jack Welch, IBM's new CEO set his sights on boosting the company's service businesses. Welch had proved that services could be the key to jump-starting a stagnant manufacturing business, and IBM—with an enormous base of still-loyal customers—was in an ideal position to take the same path. And although the IBM service businesses were started well before Gerstner arrived, it was he who recognized, and acted upon, the tremendous growth potential of service:

Services is the fastest-growing part of the information technology industry, and our services business is growing 20 percent a year—and 50 percent faster than the overall industry. One of the things we like best about this opportunity is that it's big—twice as big as hardware, and there is no dominant competitor. At least not yet.

But the shift to being a services-oriented company meant an enormous change for IBM. Henceforth, the company would have to acknowledge the existence of its competitors—with whom it had traditionally had bad relations—and work with them to provide customers with better solutions. "The customer would not accept a services company if all it did was flog IBM products," explained Gerstner. But forging relationships with the companies that had toppled IBM off its accustomed pedestal was anathema to IBM traditionalists. In fact, recalls Gerstner, his decision to move into services "set off an incredible bomb in the company. Here was a part of IBM that was going to work closely with Oracle, Sun Microsystems, and, God forbid, Microsoft."

But Gerstner's bet on services was both smart and well timed. By the time he retired in March of 2002, services were delivering approximately half of the company's sales and profits. IBM's Global Services Business, the company's single largest business, helped IBM "look at technology through the eyes of the customer" and played a significant role in fulfilling Gerstner's goal of a market-obsessed IBM.

Gerstner's decision to develop IBM's service business holds several important business lessons worth noting here:

• BE SURE TO MONITOR THE GROWTH OF YOUR CORE BUSINESS AND OTHER KEY BUSINESSES. Gerstner could not help but know that hardware sales were shrinking dramatically. If and when your core business falters, it isn't likely to occur as quickly (IBM's hardware sales fell 50 percent in 3 years!). Since the signs are usually not that obvious, be sure to closely monitor your largest businesses, their closest competitors, and any other trends or signs that may affect these businesses now or sometime down the line.

• DO NOT EXPECT MANAGERS AND EMPLOYEES TO READILY ACCEPT A SHIFT IN STRATEGY. Remember that Gerstner said that the move to services "set off an incredible bomb" within IBM. Any substantial strategic change is likely to be resisted by those who have spent years doing things the old way. That is why it is so important to set the stage by working on changing the culture before implementing any major new strategic initiative. If that isn't possible, then work on culture and strategy simultaneously.