Power Point: 5 tips from IBM’s turnaround champ

July 17, 2008, 8:10 PM UTC

Former IBM CEO Lou Gerstner

It’s been 15 years since IBM set what was then the record for the biggest annual loss in U.S. corporate history. Today, thanks to growth in emerging markets, Big Blue is one of the tech industry’s big success stories — and is expected to report healthy second-quarter sales and profits after the market closes today. IBM is also one of only four stocks on the Dow 30 that are up over the past year (the others are Procter & Gamble , Johnson & Johnson , and McDonald’s ).

The man who started IBM on the path to recovery, Lou Gerstner, copped a Legend in Leadership award at the Yale CEO Summit in New York in last month. At the podium, Gerstner, CEO of IBM from 1993 to 2002 and now chairman of private equity giant Carlyle Group, dished up some wise tips on the topic he knows best: how to transform a Fortune 500 company. Here’s an edited transcript of his advice:

1. It’s very important to distinguish between a transformation and a turnaround. A turnaround involves a company that has fallen off the rails and has executed poorly. It takes a driven executive, but it’s not that bad. A transformation is truly difficult. The company must fundamentally change its model. It’s very, very problematic.

2. If you’re trying to transform a dodo, you’re not going to make it. I agree with Warren Buffett’s rule: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.”

3. It’s all about culture. You have to transform the culture, not just the strategy. Culture is what people do when no one is watching.

4. Integrate as a team. When I arrived at IBM, there were “Team” signs all around. I asked, “How do people get paid?” They told me, “We pay people based on individual performance.”

5. You have to understand what people do everyday — the processes, the values, the rewards. It requires immense involvement by the CEO. If you’re a CEO who tells employees, “That’s it. You know where we’re going,” you’ll find yourself with no followers.

P.S. Gerstner mentioned that two or three CEOs have gone into large corporations and “failed to transform” them — but wouldn’t name names. He let one name slip: Kodak (EK). What two other companies do you think Gerstner was thinking of?