Tuesday, April 15, 2014

Who Says Elephants Can't Dance

I finally got around to reading the Warren Buffett recommended Who Says Elephants Can't Dance. I should have read it a long time ago; it is easily the best book by a former CEO that I've ever read.

Lou Gerstner was brought in to lead IBM in the early 1990s as it was losing money hand over fist. The company had become bloated following decades of success with its mainframe computer. But now, a slew of component makers (as opposed to the fully integrated sytems from IBM) were disrupting the mainframe with cheaper (albeit less reliable) alternatives. Not only did Gerstner have to stop the bleeding (mainframe sales were down big as desktop sales were taking off) ASAP, but he also had to change the company's long-term strategy so that it was no longer reliant on a product destined for decline.

There were a lot of reasons I enjoyed this book. First, the level of detail Gerstner goes into when discussing strategic direction is awesome. Gerstner discusses the stack, the fully integrated portfolio IBM had provided its customers, including hardware, software, services and their subcomponents. Competitors were specializing within individual subcomponents, resulting in more efficient operations, but more headaches for customers who had to put the components together. Gerstner had to figure out where IBM strategically fit on that stack, and he takes you through the thought process that caused him to focus the company on middleware and services, while shutting down or selling many of the other areas which IBM used to provide.

Also, Gerstner seems to have crossed paths with a lot of interesting characters from other books I've read and have discussed on this site. Obviously, he was both a partner and competitor of both Bill Gates and Andy Grove, who respectively ran the two companies with moats in the desktop stack (Microsoft and Intel). You are also likely familiar with the book Barbarians at the Gate; well, upon "winning" (a dubious distinction when you drastically overpay) RJR Nabisco in that deal, KKR actually had Gerstner run the company while it was private. Another neat connection is that Gerstner was asked to lead IBM by none other than Tom Murphy, who is known very well in value circles as an Outsider CEO for running Capital Cities. The book also read like a giant case study for The Innovator's Dilemma, another favourite of mine.

IBM's situation in the early 1990s as Gerstner describes it also reminded me of Blackberry today. The parallels are striking:

- Years of success with business customers with a fully integrated solution
- Disruption from consumer devices causes big drop in sales
- The company has to not only stop the bleeding immediately, but also blow up its integrated model so that it can focus on its strengths and where a moat may be, while exiting/selling its other segments

If you want to grow as a business person and investor, I cannot recommend this book enough.


Evan said...

I haven't read The Innovator's Dilemma -- do you think this book could help you spot companies about to go through the same pain? van you apply what you learned in the book in a meaningful way or is it more a good business story?


Saj Karsan said...

Hi Evan,

I think so, but can't say for sure. I've summarized it here, so you can get the short version: http://www.barelkarsan.com/2012/08/the-innovators-dilemma-chapter-1.html

Kerrie Peacock said...

I still haven't read this book even though it's been sitting on my bookshelf for ages. Maybe this is just the motivation I need to read it finally!