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What New Economy?

“I resist the idea that there is a new economy-something that is separate and distinct from some other economy.”

“I resist the idea that there is a new economy-something that is separate and distinct from some other economy.”

When former American Express and RJR Nabisco executive Louis Gerstner Jr. arrived at IBM in April 1993, he took the helm of what seemed like a sinking ship. The company was hemorrhaging money, had lost its direction and, it seemed, its will to compete. Plans were in place to break IBM into smaller, independent businesses. But Gerstner shelved those plans and told his charges their hopes lay in wielding the sweeping power of the existing Big Blue, if it could be retooled for a new day of unceasing competition.

The turnaround has since become legend. Gerstner pushed IBM into the services business, now the fastest-growing segment of the roughly $90 billion company. Big Blue has also branded itself as the e-business leader, while continuing to innovate in storage, semiconductors, database technology and high-end computer systems.

However, as Gerstner-Lou to employees- stresses, there is never room for complacency. Last July, the IBM chairman and chief executive officer reorganized the firm to focus more sharply on the twin needs to protect and build current businesses while also going more aggressively after emerging opportunities-in particular by applying its computing and database expertise to plumb huge opportunities in genomics and the life sciences. In one of his most detailed interviews in recent years, Gerstner exchanged multiple e-mails with TR Editor at Large Robert Buderi about his brand of leadership, where IBM is headed, e-business and the promise of information technology.

TR: You came to IBM when the company was losing billions annually and had suffered a seemingly mortal blow in its ability to innovate. What were the major challenges back then?

GERSTNER: Even back in the dark days of 1993, I never believed that IBM’s technical community had lost the spark of innovation. If anything, one of the frustrations our technologists felt most acutely-along with our customers and shareholders-was that the company was too consistently slow to seize innovation, turn it into products and get them to market. That was a much bigger institutional shortcoming than a lack of innovation.

So that gap between our labs and the marketplace was one problem. It made us slow in an industry where being first is almost as important as being right. We were also in a prolonged three-geography [spanning three continents] recession, which naturally affected us more than it did a lot of our less-global competitors. The image of the mainframe was in a ditch. Our cost structure had been allowed to get way out of line with our competition, and the IBM workforce was dealing with the first wide-scale layoffs in the company’s history.

We took advantage of the crisis to move fast and get our financial restructuring behind us. We had to do that, because we also had to break the organization’s very natural, but very debilitating, obsession with “the problem.” We had to shift the mindset away from internal issues and institutional self-analysis to external issues, getting back into the marketplace and stringing some wins together.

TR: What are the major challenges today?

GERSTNER: I’d group them into two broad categories. Obviously everything starts with e-business, which will drive most of the customer investment in this industry for years to come. Our strategy is in place and makes sense to our customers, partners and investors. We have a strong set of products and services to offer against that strategy. So today, our leadership team spends most of its time on the gritty issues of operations, execution, implementation-sales execution, distribution channels, driving sales to Internet fulfillment, building speed to market. And building a culture that always, always focuses on the marketplace-customers and competitors.

So operational leadership is one priority. The other is technical leadership. With every industry being swept along by the e-business revolution, there has never been a higher premium on the ability to innovate. I don’t know how any company competes today without a thriving research and technical capability. There are major strategic battles being waged right now: in UNIX servers; in the software layer known as “middleware”; in a big shift in the semiconductor business, where the center of gravity is moving away from PC processors to high-end server-class microprocessors at one end, custom logic chips at the other and network processors in between. Last fall we announced a $5 billion investment in our semiconductor business to go after this opportunity. We’re playing a multidimensional game here-battling today’s competitors for immediate marketplace success, and investing in potentially game-changing, longer-term opportunities.

TR: What will high-end server-class microprocessors, network processors and custom logic chips do for us?

GERSTNER: What’s happening in the semiconductor marketplace is not so much about what the chips are going to do for us, as what we are choosing to do with our computers. We have entered a post-PC era. The self-standing, self-contained personal computer is no longer going to be the locus of interest and investment in this industry. In just a few years, non-PC devices like personal digital assistants, data-enabled cell phones and game consoles are going to make up well more than half of all Net access devices. There will be hundreds of millions of PCs in the world, but billions of other Net access devices. Coming right behind that, perhaps trillions of “things” we’d never call computers: household appliances, machine tools, medical devices, our cars. All of them will be outfitted with the ability to communicate, and with specialized, energy-efficient, inexpensive chips–which are a very different animal altogether than the brains inside today’s personal computers.

So that’s one end of the spectrum. At the other, chips for the big servers. Workloads are shifting off desktops to the infrastructure of computing and communications. The demand for transaction processors and Web servers is going to explode in the years ahead, because these are the systems that make sure e-business applications can scale, are available, reliable and much more secure than applications have had to be in the past.

And finally, if we’re going to realize the full power and potential of doing real e-business, the networked infrastructure is going to have to advance in leaps, not increments. The Internet we know today will look primitive in five years. Before long, we’ll see traffic moving over the Internet increase 1,000-fold, so we’re going to see explosive demand for chips to power chips in the networking and communications gear that keeps all of the digital information moving at high speed and bandwidth.

TR: How do last summer’s management changes address these challenges?

GERSTNER: You’re never going to implement a strategy without a structure that reinforces and complements it. We’ve evolved our e-business strategy for four years now. And we’re to the point in that strategy that it has taken hold in a way that an entire new market is exploding all around us. So the thing we need most right now is a very, very focused execution capability in the company.

At the same time, it’s pretty clear that we’re already moving out of the first phase of e-business. In the first phase, the killer app was business-to-consumer e-commerce-the race to offer all kinds of retail services on the Net, from stock brokerage to cars, loans, flowers and pet food.

In this next phase, we’re going to see a few things happen. Enterprises are going to get beyond e-commerce and integrate the entire enterprise using networked technologies. This includes business processes and relationships with other enterprises and industries, which is fueling all the interest in B2B [business to business] solutions. We’re also going to see a proliferation of applications deployed to take advantage of all kinds of Net access devices. We’ve been spending billions of dollars getting ready for this new world, to build out-with our customers, with telcos [telecommunications companies], with service providers-the enormously sophisticated infrastructure that will be required to support the next generation of e-business.

So the organizational moves we made last summer delineated these two related, but very different, business imperatives: executing today’s e-business strategy and seizing emerging opportunities in the next phase of e-business and beyond.

TR: What differences have you found in running a technology-based company versus an American Express or RJR Nabisco?

GERSTNER: One, they’re all competitive, but I’ve never seen an industry that’s as intensely, consistently and relentlessly competitive as this one. In every other industry I worked in, you could list the competitors and go back 10 or even 20 years and they were all the same. Today, every time you open the newspaper, there’s a new competitor-a real one-staking its place in this industry. I’ve heard people say this is a business for young people. I understand the thought behind that, but I disagree. This is an industry for hungry people. It’s “eat or be eaten.” And your appetite has to be big, or you’re going to look around and find out that someone else has carved up and devoured your customer base and market share.

The second thing I’d mention is speed. No industry on earth moves as fast as this one. Ever since the days of the first PC in the early ’80s, technical advance has come on shorter and shorter product cycles. Today, even in an industry known for speed, the rate of change is unprecedented, and it’s only being accelerated by the Net. It’s fun. It’s a challenge. But if you pause, say good-bye.

Finally-and I don’t want to gloss over this-this is an industry that does create things that make the world a better place. Every government in the world recognizes that investments in information technology are essential to their ability to drive economic development and the prosperity of their citizens. This is an industry that matters in ways far more profound than speeds and feeds and terabytes and areal densities.

TR: Going back to e-commerce: You stunned analysts a while back when you said most companies—including e-commerce companies-didn’t really understand e-commerce. Can you explain that?

GERSTNER: First, a couple of years ago, right in the middle of the so-called New Economy, and the near-hysteria over all the Internet startups coming to destroy the entrenched brand names in every industry, I raised a few eyebrows when I called the dot-coms “fireflies before the storm.” I said the real storm was going to hit when all those established businesses moved to exploit network technologies to reinvent their brands, customer relationships, supply chains and distribution systems. Well, that storm has arrived.

A year later, however, it seemed like we were lurching from dot-com hysteria to what I described as “dot-com alchemy.” It was unlike anything I’ve ever seen-a frantic attempt by some established businesses to pull off some kind of quick strike-to do something, anything, with the Internet just to show they were participating in the digital economy. What I was suggesting is that while the Net is a powerful vehicle for business transformation, it does not give anyone a free pass on basic business management-setting a solid strategy and implementing it well.

TR: So how would you characterize the New Economy?

GERSTNER: I resist the idea that there is a new economy-something that is separate and distinct from some other economy. Is the Internet, and is investment in information technology, driving a sustained period of economic expansion? Yes. But we have to be sure we understand the Internet is not killing off other technologies or industries, and it is not obsoleting all that came before it. The Internet is going to be remembered a lot like the way we see the impact of the electric motor today-first used in heavy industry, but eventually absorbed and adopted by every industry.

There’s been far too much emphasis on catchy ideas like this so-called New Economy, or new kinds of competitors, or new business life-forms. The enduring impact of this transformation isn’t going to be found in the meteoric rise of some new invention or business construct. It’s going to be about all the existing enterprises in the world figuring out how to win the battles inside their industries against their traditional competitors. That’s true whether we’re talking about pharmaceutical companies, manufacturers, financial services firms, universities competing for students or the best faculty, or governments competing for new investment.

TR: Related to this, can you say more on where you see IBM going in the next few years? What about 10 years down the road?

GERSTNER: Services is our fastest-growing business. We lead the industry on virtually any dimension you could pick. It’s a unique business, unlike any I’ve ever seen in terms of its ability to continually reinvent itself and generate new opportunities. We’re certainly seeing that now, with a whole new category of services developed expressly for e-business. That’s everything from huge demand for our strategic consulting and business innovation services, through Web design and hosting.

All that said, we’re not leaving behind our core businesses in computing infrastructure-servers, storage, networking and middleware-to morph into a services business. Look at the marketplace. E-business is driving an explosion in transactions, data flows and workloads. That drives huge requirements for a new generation of computing infrastructure to support e-business: more flexible, scalable, reliable, intelligent and self-managing. Building infrastructure-that’s our franchise.

The final point I’d make is that our customers don’t come to us as a product shop, or a “body” shop, or as a software business, or as a strategic consultancy, or as a research and development organization, though we’re all those things. Our customers bring us their most sophisticated business challenges, and they expect us to tailor information technology solutions drawn from a portfolio that spans high-end consulting to maintenance. They look to us to integrate the technologies with each other, and with their business strategies. This requires that we strengthen our leadership in both services and technology. That’s what we do.

TR: Any thoughts on “the next big thing”?

GERSTNER: Well, first of all, we’ve got a long way to go on e-business. We’re about five years into a transformation I expect to take another 20 years.

However, there is a market emerging now around the marriage of information technology with life sciences research and genetics that I personally believe represents the next major revolution-not only in this industry, but for society at large. We’re going to do things like simulate the birth of cells, understand things we can’t even begin to examine today and potentially find ways to build new drugs to combat heart disease, genetic defects, cancers.

A year ago, we launched a $100 million supercomputing project called Blue Gene to explore one of the great mysteries of genetic science: the way proteins fold to form healthy or diseased cells. To do it will require computing on a scale that has never been attempted before–petaflop speeds, one quadrillion operations per second. But we’ve been getting ready for this one for a long time.

Even today, I don’t think most people know it, but the chess match between the Deep Blue supercomputer and Garry Kasparov was really a big, public laboratory where we were refining a new approach to computing. We were learning how to marry very sophisticated algorithms with massively powerful processing to attack profoundly difficult problems. What we learned in that chess match and all our subsequent “deep computing” work is being applied now in partnerships with major medical centers, universities and pharmaceutical and life sciences companies to lead this revolution in biology and health.

TR: How do you value the role of science and technology inside a company as sales-and marketing-driven as IBM?

GERSTNER: When I arrived at IBM in 1993, the first IBM site I went to was the [Thomas J.] Watson Research Center in Yorktown Heights, N.Y. I went there because I wanted those researchers to hear from my own lips that if IBM was going to survive and rebuild, we were going to do it around our very rich history of innovation and technical leadership. I wasn’t pandering. I came to IBM with a firmly held conviction that at our core, we were-and are-a technology company. If that’s not working, we can’t compete.

Seven years later, it’s working just fine. I mean, going into our R&D labs around the world remains one my favorite things to do. The record of achievement is mind-blowing: Deep Blue. Prototypes of quantum computers. Holographic storage. Chips that will power the next generation of Net access devices. The most powerful supercomputer technology on the planet and all the software and servers that power the most heavily trafficked sites in the history of the World Wide Web. Believe me, every CEO I talk with eventually gets around to asking how his or her organization can get access to this foundry of innovation, and to our technologists themselves.

So, I’d tell you that I entered IBM with a deep respect for the company’s technical heritage, and that has only grown over the last seven years-seven years, by the way, in which IBM technologists have earned more U.S. patents than any other company in the world.

TR: To end on a personal note: What excites you most about technologies in your labs?

GERSTNER: You said “personal.” All right then, let me talk about an issue that is both my greatest concern about this networked world, and at the same time my greatest source of hope about what’s possible here. There are a lot of people who believe a networked world is going to fortify the so-called digital divide-they see it creating a bigger gap between the people in the world with access to information and those without. That’s a legitimate concern. But it is not the predestined outcome.

We’ve already talked about this explosion in low-cost access devices. One implication is obvious. We’re going to have the chance to take unprecedented levels of service and information to the entire world, without requiring people to purchase a full-blown PC. Now, a lot has to happen in terms of telecommunications deregulation and competition to bring access charges down in many parts of the world. But there’s an opportunity here for governments to bring their citizens into the world of the information “haves” and to join this revolution, rather than standing outside looking in.

I was with 300 European business leaders at a conference on e-business last fall. I talked about e-procurement, e-commerce, e-service. Then Shimon Peres spoke, and said I had forgotten to talk about one of the “e’s”-e-peace. He then went on to talk about a school in Palestine where they have put computers in an Arab and Israeli neighborhood. The technology allows children to reach out to one another. His point was that these children will have a new chance to grow up without the biases of their parents and of the older generation. So, this technology isn’t just about competitive advantage and market share and productivity in a commercial sense. This technology touches all of society-schools and governments, universities, health care-every part of the lives we live, and it really can make the world a better place.

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