Number
12
IBM Corporation
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Before disgruntled techno-rebels ever heard of Microsoft, IBM was the company they loved to hate. The monolithic Big Blue was the first big dog in technology, dominating the industry. (It was sued three times for antitrust violations.) From the 1920s when its tabulators, time clocks, and typewriters first set their own standards, through the 1980s when its PC became the model for desktop computing, virtually no one—technologically speaking—could escape its grasp. Factor in its infamously conformist corporate culture, and it’s easy to see how International Business Machines consistently drew the ire of dissidents.
But then the company—on top since Thomas Watson Sr. peddled mechanical tabulating machines and Thomas Watson Jr. pushed early business computers—inexplicably missed several important waves in technology. It opened its PC design to everyone, but waited too long to market an operating system needed by resultant “clones.” It jumped early into cyberspace, but picked the wrong vehicle in the ill-fated Prodigy online service. It also was unprepared for a shift in corporate purchasing power, which evolved from the massive departments it had always dealt with to individuals making technology decisions in today’s small companies. In 1993, its net loss hit $8 billion.
However, when Lou Gerstner took over, IBM has been remade and resurrected. Gerstner freed it from unproductive habits. He trimmed the bloated workforce, but recruited top newcomers. He introduced important products such as “hub” computers (or servers) that move data between workstations and the Internet. Most importantly, he rejected cries to disassemble the company, correctly sensing it was uniquely qualified to provide integrated solutions for an array of contemporary technological needs. Such services, rather than specific products, thus became the driving force behind his new IBM.
And it worked. Revenues hit record levels. Market capitalization grew 10-fold. Even the culture relaxed, with annual reports now featuring modern folks in blue jeans rather than automatons in dark suits. Some questioned whether it could be maintained, but Gerstner remained upbeat—targeting e-commerce as the next frontier, even as he reluctantly prepared for his retirement in the not-so-distant future.
Thomas Watson Sr. (also known as TJ) joined the company that would become IBM in 1914, the same year Thomas Watson Jr. was born. TJ left his job as secondin-command at the National Cash Register Company one year earlier. He joined the Computing-Tabulating-Recording Company as general manager, and became president after 11 months. At 40, Watson found himself with a new baby and a new business. The latter—with 1,300 employees, a half dozen North American plants, and headquarters in New York—sold everything from commercial scales to cheese slicers. Both father and son would have a lot to say about that in coming years.
TJ was an accomplished salesman, having hustled sewing machines and musical instruments before joining NCR and working his way up to general sales manager. At C-T-R he put his experience to use, paying particular attention to the Punch Card Tabulating Machine developed in 1890 for the U.S. Census Bureau. To sell it to businesses, such as railroads and insurance companies, Watson adopted numerous tactics from his previous firm. These included employing only clean-cut salesman who aggressively competed for generous performance incentives, hanging assorted inspirational slogans like “THINK” and “Make things happen” throughout the workplace, and instilling fiery company spirit by promoting employee sports teams, family outings, and even a company song.
Watson built a fanatical workforce. And within a half-dozen years tripled revenues to about $15 million before expanding into Europe, South America, Asia, and Australia. Concentrating on tabulators, time clocks and typewriters, he refocused the company and in 1924 changed its name to International Business Machines to reflect its new emphasis.
The Depression quieted most American businesses in the 1930s, but it seemed only a minor inconvenience to Watson. During the decade he unveiled new calculating machines, and gave employees medical and life insurance, a pension, and paid vacations. This kept everyone busy and loyal until the Social Security Act of 1935 was passed, bringing IBM a huge contract to maintain records for the new program’s 26 million participants. To assist in what the company still calls “the biggest accounting operation of all time,” Thomas Watson Jr. came aboard in 1937.
IBM was an optimistic place, but the start of World War II changed everything. TJ offered his plants to the U.S. Government, and got them producing some three dozen war-related items such as bombsights and rifles. At the same time, his son left for a five-year hitch as a B-24 pilot.
While the war raged, the line between Senior’s declining reign and Junior’s emergence was irrevocably drawn. In 1944 IBM completed a six-year collaboration with Harvard to develop the Mark I, or Automatic Sequence Controlled Calculator. Over 50 feet long and weighing five tons, it was the first machine capable of automatically executing long computations. Seeing few commerical possibilities, the elder Watson dismissed the new technology. But the younger Watson envisioned it as the company’s future, and upon his return from the war began advocating for such development. His position ultimately won out, and in 1952 he was named IBM’s president.
During the next several years the company went the way of both Watsons, moving solidly into the new age of computers while solidifying its old-world culture. A strict level of almost Victorian morality prevailed, while workers often toiled overtime and on holidays. As compensation, they were offered top benefits along with an inherent promise of lifetime employment. This created a fiercely faithful staff that eventually developed the first computer to efficiently perform basic business functions, such as billing, payroll and inventory control—thus opening new opportunities that IBM was ready and eager to address.
The younger Watson fully emerged from TJ’s shadow by aggressively pursuing this new market. And in 1956—just six weeks before the elder Watson’s death— Thomas Jr. was named IBM’s CEO. One of his first acts was to reorganize into six autonomous divisions. He then completed the move from old-fashioned tabulators to cutting-edge computers by developing the first transistorized mainframes (which the Air Force also used to run its Ballistic Missile Early Warning System) and the first “family” of compatible business computers (which accepted interchangeable software and peripherals). He also revolutionized the way such products were sold, unbundling the hardware, software and services previously offered only as packages. The company blossomed during his tenure, which ended a year after he suffered a heart attack in 1970, growing from 72,500 to 270,000 employees and from $892 million to $8.3 billion in gross revenue. Fortune magazine called him “the greatest capitalist who ever lived,” and he sat on the board until 1984.
Not surprisingly, life after the Watsons was not so smooth. IBM products became increasingly ingrained in everyday life, as epitomized by its supermarket checkout stations and early automatic teller machines. It remained the leader in large computers, and claimed the desktop market for itself for awhile after unveiling the PC. Old technology (like the ubiquitous Selectric typewriter) was jettisoned, and new technology (as embodied by the pioneering, but ultimately unsuccessful, Prodigy service) was embraced. But when growth peaked in 1986, a swollen, complacent workforce and corporate-wide arrogance stemming from years as the unmatched industry leader, kept IBM from pursuing potentially lucrative new directions.
By the early 1990s, IBM no longer seemed sure of its customers or the products they needed. Pressures mounted along with losses. In desperation, the board turned for the first time to an outsider—Louis V. Gerstner Jr.—and beseeched him to turn their company around.
Before Lou Gerstner, every chief executive at IBM was home-grown. Gerstner began his career with McKinsey & Co. and American Express, and then served four years as chairman and CEO of RJR Nabisco. In 1993, the year IBM posted record losses and Thomas Watson Jr. died, Gerstner moved to Big Blue despite some initial misgivings. His skeptical and outsider’s perspectives would both prove critical in the years ahead.
Gerstner began with a bang, slashing annual expenses by $9 billion. Among other things this meant layoffs—unambiguously reneging on the historical promise of lifetime employment—and the newcomer had to deal with the resultant personal and cultural fallout. But that, he said later, was one vital step in getting the company back on track.
Another major reemphasis was on customer orientation, a sensibility shared by both Watsons but largely missing since their departure. This was achieved in part by revamping the product line to meet the real needs of the customer, whom Gerstner believed was mainly interested in network computing issues. He began by acquiring complementary businesses (such as Lotus Development and Tivoli Systems), and fighting pressures to split IBM into independent companies (recognizing the advantages of offering broad but integrated services).
In 1997, IBM emphatically proved its heavy-duty hardware still packed a punch. It created a machine nicknamed Deep Blue that defeated world chess champion Garry Kasparov in a six-game match. But the attention remained primarily on helping clients plan, install and operate virtually any type of high-tech network. As the century turned, a strong interest developed in e-business customers, for whom IBM could do everything—from hosting simple Web sites to orchestrating entire corporate technolog y programs. A reorganization early in 2000 aimed for accelerated growth in this area and also hinted at a possible successor to Gerstner, whose employment contract calls for him to remain at least until March 2002 when he turns 60. Without confirming or denying such a departure he is concentrating on building IBM’s strengths in e-business, which he’s targeted as his next frontier.