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Invest in R&D: the Solutions Perspective

Shortly after Gerstner arrived at IBM, he demonstrated his willingness to invest in the company's future, in the form of research and development, despite the company's mind-numbing losses. On the table was his predecessor's plan to dissolve IBM's research and development department. Again, Gerstner went in the opposite direction. He decided to keep the Watson Research Center (IBM's R&D lab) intact, and he instructed the researchers based there to spend more time on coming up with solutions to customers' problems.

Specifically, he pushed for R&D investments focused on the Internet. Gerstner recognized the incredible potential of the Internet as a driver of transactions early on, and he was so convinced of its potential that he was willing to reorganize the company around that idea:

If we really believe this, we're going to reprioritize all the budgets in the company. In a period of four weeks, we reallocated $300 million. We created the Internet division. It became the catalyst for change in the company.

Gerstner calls this his second "bet the company" decision (the first was keeping the company intact). Early on, he shifted 25 percent of IBM's R&D into Net projects, and in 1999 he increased that percentage to 50 percent (and by then the R&D budget had grown to an impressive $5 billion).

Increased R&D expenditures were only the beginning. The IBM chief was fiercely determined to remake IBM into a provider of complete solutions and a leader in what he called "network computing." This was no fad or bannerwaving exercise; instead, it was a company initiative designed to help the company remake itself:

The real leadership in the industry is moving away from the creation of the technology to the application of the technology.

Here are some Gerstner-like activities that you could implement in your own organization:

  • INVEST IN THE FUTURE. Regardless of the current market environment, companies cannot afford to be complacent. Make sure that your organization is betting on the future by making the right investments now.

  • WHEN MAKING "BET THE COMPANY" DECISIONS, MAKE SURE YOU'RE RIGHT. Gerstner called his $300 million decision to create the Internet Division his second "bet the company" decision. While no one has a crystal ball, bet the company only when there is compelling evidence that your decision is the right one.

  • BE A TREND SPOTTER. Gerstner recognized that the future of computing would depend on "moving away from the creation of the technology to the application of the technology." He was right, and his understanding of that fundamental shift in his industry played a role in the IBM turnaround.

Gerstner did so many things right, and—as noted—pulled off one of the great turnarounds in corporate history. Business historians may not rank him alongside Jack Welch or Bill Gates, but a compelling case can be made that he deserves a place in that pantheon. His rare ability to see a situation for what it was and then bring about meaningful change made him one of the most effective CEOs of his day.

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