Change Management

9-805-130

REV: JULY 8, 2009

LYNDA M. APPLEGATE

ROBERT AUSTIN

ELIZABETH COLLINS

IBM's Decade of Transformation: Turnaround to

Growth

This is my last annual letter to you. By the time you read this, Sam Palmisano will be our new chief

executive officer, the eighth in IBM’s history. He will be responsible for shaping our strategic direction as well

as leading our operations. . . . I want to use this occasion to offer my perspective on what lies ahead for our

industry. To many observers today, its future is unclear, following perhaps the worst year in its history. A lot

of people chalk that up to the recession and the “dot-com bubble.” They seem to believe that when the economies

of the world recover, life in the information technology industry will get back to normal. In my view, nothing

could be further from the truth.

Lou Gerstner, IBM Annual Report, 2001

In 1990, IBM was the second-most-profitable company in the world, with net income of $6 billion

on revenues of $69 billion, and it was completing a transformation designed to position it for success

in the next decade. For the world leader in an industry that expected to keep growing spectacularly,

the future looked promising. But all was not well within IBM, and its senior executives realized it. “In

1990, we were feeling pretty good because things seemed to be getting better,” one executive

remarked. “But we weren’t feeling great because we knew there were deep structural problems.”

Those structural problems revealed themselves sooner than anyone expected and more terribly than

anyone feared. Beginning in the first quarter of 1991, IBM began posting substantial losses. Between

1991 and 1993, IBM lost a staggering $16 billion. In April 1992, John Akers, IBM CEO from 1985 to

1993, vented his frustrations during a company training program. His comment, “People don’t

realize how much trouble we’re in,” made its way from company bulletin boards to the press,

shaking employee and investor...