Shape of a successful turnaround

You’re CEO of a once great company, now beleaguered on all sides by competitors and a rapidly changing industry. How do you get back on top?

That’s the question Michael Dell has been asking himself since 2007, when he retook the top job at the computer company he founded in 1984. And last year, he decided that the answer was to take the company private, to escape the hectoring of the public market. But even if he succeeds in convincing shareholders to let him buy back his company, the real challenges lie ahead.

Luckily for Dell the history of corporate turnarounds provides clues as to what the company must do to get back on track.

If Michael Dell and Silver Lake Partners, the private equity firm that helped take the company private, are to succeed, they should look to the case of IBM in the 1990s. The firm’s transformation under CEO Lou Gerstner is the subject of a Harvard Business School case study by Lynda Applegate, Robert Austin and Elizabeth Collins. Two decades later, it offers hints at what Dell must do to succeed.

There are two basic patterns to a successful turnaround, HBS professor Jan Rivkin told me in a recent interview. (Rivkin wrote a 2010 case study on Dell’s decline.) The company must identify some assets from which it can squeeze more cash, in order to improve its short-term position. Then it must pick the right areas to reinvest in, to fuel the company’s longer-term success. Both strategies are evident in the case of Gerstner and IBM.

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In 1990, IBM was the second most profitable company in the world, and “the world’s dominant player in the growing IT industry,” according to the IBM case study’s authors. And yet by the next year, due to an overreliance on the mainframe computer market and a bloated cost structure, it began posting losses.

While it’s difficult to summarize the changes Gerstner initiated after taking the reins in 1993, a few decisions stand out. Amid aggressive cost cutting, Gerstner’s “One IBM” strategy included shifting resources to IBM’s consulting and services business, which grew rapidly.

Yet the improved financial position came at a cost. Long-term investments were being de-prioritized, thanks to “the focus on flawless execution and short-term results [that] had intensified under the ruthless cost cutting necessary to survive the 1990s.” And so, beginning in 1999, Gerstner began reorganizing the company to identify “emerging business opportunities” that could one day become billion-dollar businesses. Of the 18 areas selected, life sciences, business transformation services, Linux and pervasive computing would each soon grow to over $1 billion in revenue.

Though the history of tech turnarounds suggests some optimism about the future of Dell, the specifics are far from certain. With the PC market in decline, Dell will need to look elsewhere both to improve its short-term financials and to invest in the future. “The markets that they have talked about publicly are all ones with established players that are pretty darned good,” Rivkin told me. “It’s not as if Dell is going to sneak up on IBM in services, for instance.” The tablet space is similarly competitive.

“The marvelous thing about Dell, historically, is that they found a different way to compete. A core lesson of [Dell’s famed] direct model was, ‘To be better, you first have to be different,’” said Rivkin. “That said, I find it hard to bet against Michael Dell, the guy. If you were to make a list of people who could make it work despite all the challenges, Michael Dell would have to be on your short list.”

(Walter Frick is an associate editor at Harvard Business Review.)

© 2013 Harvard Business School Publishing Corp.

Distributed by The New York Times Syndicate