Thomas J. Watson 1874–1956 joined the company in 1914 as General Manager, and became its President in 1915. In 1924, the company changed its name to “International Business Machines. ” IBM expanded into electric typewriters and other office machines.
Watson was a salesman whose goal was to build a highly motivated, very well paid sales force that could craft solutions for clients unfamiliar with the latest technology. His motto was “THINK”. Customers were advised to not “fold, spindle, or mutilate” the cardboard cards. IBM’s first experiments with computers in the 1940s and 1950s were modest advances on the card based system. Its breakthrough came in the 1960s with its System/360 family of mainframe computers.
IBM offered a full range of hardware, software, and service agreements, so that users, as their needs grew, would stay with “Big Blue. ” Since most software was custom written by in house programmers and would run on only one brand of computers, it was expensive to switch brands. Brushing off clone makers, and facing down a federal anti trust suit, the company sold reputation and security as well as hardware and was one of the most admired American corporations of the 1970s and 1980s. After a series of reorganizations, IBM remains one of the world’s largest computer companies and systems integrators. With over 400,000 employees worldwide as of 2014, IBM holds more patents than any other U.
S. based technology company and has twelve research laboratories worldwide. The company has scientists, engineers, consultants, and sales professionals in over 175 countries. IBM employees have earned five Nobel Prizes, four Turing Awards, five National Medals of Technology, and five National Medals of Science. Of the companies amalgamated to form CTR, the most technologically significant was The Tabulating Machine Company, founded by Herman Hollerith, and specialized in the development of punched card data processing equipment.
Hollerith’s series of patents on tabulating machine technology, first applied for in 1884, drew on his work at the U. S. Census Bureau from 1879–82. Hollerith was initially trying to reduce the time and complexity needed to tabulate the 1890 Census. His development of punched cards in 1886 set the industry standard for the next 80 years of tabulating and computing data input.
In 1896, The Tabulating Machine Company leased some machines to a railway company but quickly focused on the challenges of the largest statistical endeavor of its day – the 1900 US Census. After winning the government contract, and completing the project, Hollerith was faced with the challenge of sustaining the company in non Census years. He returned to targeting private businesses in the United States and abroad, attempting to identify industry applications for his automatic punching, tabulating and sorting machines. In 1911, Hollerith, now 51 and in failing health sold the business to Flint for $2. 3 million of which Hollerith got $1. 2 million, who then founded CTR.
When the diversified businesses of CTR proved difficult to manage, Flint turned for help to the former No. 2 executive at the National Cash Register Company NCR, Thomas J. Watson, Sr. Watson became General Manager of CTR in 1914 and President in 1915. By drawing upon his managerial experience at NCR, Watson quickly implemented a series of effective business tactics: generous sales incentives, a focus on customer service, an insistence on well groomed, dark suited salesmen, and an evangelical fervor for instilling company pride and loyalty in every worker.
As the sales force grew into a highly professional and knowledgeable arm of the company, Watson focused their attention on providing large scale tabulating solutions for businesses, leaving the market for small office products to others. He also stressed the importance of the customer, a lasting IBM tenet. The strategy proved successful, as, during Watson’s first four years, revenues doubled to $2 million, and company operations expanded to Europe, South America, Asia, and Australia. At the helm during this period, Watson played a central role in establishing what would become the IBM organization and culture. He launched a number of initiatives that demonstrated an unwavering faith in his workers. He hired the company’s first disabled worker in 1914, he formed the company’s first employee education department in 1916 and in 1915 he introduced his favorite slogan, “THINK”, which quickly became the corporate mantra.
Watson boosted company spirit by encouraging any employee with a complaint to approach him or any other company executive – his famed Open Door policy. He also sponsored employee sports teams, family outings, and a company band, believing that employees were most productive when they were supported by healthy and supportive families and communities. These initiatives – each deeply rooted in Watson’s personal values system – became core aspects of IBM culture for the remainder of the century. Watson mandated strict rules for employees, including a dress code of dark suits, white shirts and striped ties, and no alcohol, whether working or not. He led the singing at meetings of songs such as “Ever Onward” from the official IBM songbook. The company launched an employee newspaper, Business Machines, which unified coverage of all of IBM’s businesses under one publication.
IBM introduced the Quarter Century Club, to honor employees with 25 years of service to the company, and launched the Hundred Percent Club, to reward sales personnel who met their annual quotas. In 1928, the Suggestion Plan program – which granted cash rewards to employees who contributed viable ideas on how to improve IBM products and procedures – made its debut. The company also expanded its product line through innovative engineering. Behind a core group of inventors – James W. Bryce, Clair Lake, Fred Carroll, and Royden Pierce – IBM produced a series of significant product innovations. In the optimistic years following World War I, CTR’s engineering and research staff developed new and improved mechanisms to meet the broadening needs of its customers.
In 1920, the company introduced the first complete school time control system, and launched its first printing tabulator. Three years later the company introduced the first electric keypunch, and 1924’s Carroll Rotary Press produced punched cards at previously unheard of speeds. In 1928, the company held its first customer engineering education class, demonstrating an early recognition of the importance of tailoring solutions to fit customer needs. It also introduced the 80 column punched card in 1928, which doubled its information capacity. This new format, soon dubbed the “IBM Card”, became and remained an industry standard until the 1970s. The Great Depression of the 1930s presented an unprecedented economic challenge, and Watson met the challenge head on, continuing to invest in people, manufacturing, and technological innovation despite the difficult economic times.
Rather than reduce staff, he hired additional employees in support of President Franklin Roosevelt’s National Recovery Administration plan – not just salesmen, which he joked that he had a lifelong weakness for, but engineers too. Watson not only kept his workforce employed, but he also increased their benefits. IBM was among the first corporations to provide group life insurance 1934, survivor benefits 1935, and paid vacations 1936. He upped his ante on his workforce by opening the IBM Schoolhouse in Endicott to provide education and training for IBM employees. And he greatly increased IBM’s research capabilities by building a modern research laboratory on the Endicott manufacturing site. With all this internal investment, Watson was, in essence, gambling on the future.
It was IBM’s first ‘Bet the Company’ gamble, but the risk paid off handsomely. Watson’s factories, running full tilt for six years with no market to sell to, created a huge inventory of unused tabulating equipment, straining IBM’s resources. To reduce the cash drain, the struggling Dayton Scale Division the food services equipment business was sold in 1933 to Hobart Manufacturing for stock. When the Social Security Act of 1935 – labeled as “the biggest accounting operation of all time” – came up for bid, IBM was the only bidder that could quickly provide the necessary equipment. Watson’s gamble brought the company a landmark government contract to maintain employment records for 26 million people. IBM’s successful performance on the contract soon led to other government orders, and by the end of the decade, IBM had not only safely negotiated the Depression but risen to the forefront of the industry.
Watson’s Depression era decision to invest heavily in technical development and sales capabilities, education to expand the breadth of those capabilities, and his commitment to the data processing product line laid the foundation for 50 years of IBM growth and successes. His avowed focus on international expansion proved an equally key component of the company’s 20th century growth and success. Watson, having witnessed the havoc the First World War wrought on society and business, envisioned commerce as an obstacle to war. He saw business interests and peace as being mutually compatible. In fact, he felt so strongly about the connection between the two that he had his slogan “World Peace Through World Trade” carved into the exterior of IBM’s new World Headquarters 1938 in New York City. The slogan became an IBM business mantra, and Watson campaigned tirelessly for the concept with global business and government leaders.
He served as an informal, unofficial government host for world leaders when they visited New York, and received numerous awards from foreign governments for his efforts to improve international relations through the formation of business ties. Historian and author Edwin Black, in his best selling book on the topic, IBM and the Holocaust, maintains that the seizure of the German subsidiary was a ruse. He writes: “The company was not looted, its leased machines were not seized, and continued to receive money funneled through its subsidiary in Geneva. ” In his book he argues that IBM was an active and enthusiastic supplier to the Nazi regime long after they should have stopped dealing with them. Even after the invasion of Poland, IBM continued to service and expand services to the Third Reich in Poland and Germany.
The seizure of IBM came after Pearl Harbor and the US Declaration of War, in 1941. The new chief executive faced a daunting task. The company was in the midst of a period of rapid technological change, with nascent computer technologies – electronic computers, magnetic tape storage, disk drives, programming – creating new competitors and market uncertainties. Internally, the company was growing by leaps and bounds, creating organizational pressures and significant management challenges. Lacking the force of personality that Watson Sr.
had long used to bind IBM together, Watson Jr. and his senior executives privately wondered if the new generation of leadership was up to challenge of managing a company through this tumultuous period. “We are,” wrote one longtime IBM executive in 1956, “in grave danger of losing our “eternal” values that are as valid in electronic days as in mechanical counter days. “Watson Jr. responded by drastically restructuring the organization mere months after his father died, creating a modern management structure that enabled him to more effectively oversee the fast moving company. He codified well known but unwritten IBM practices and philosophy into formal corporate policies and programs – such as IBM’s Three Basic Beliefs, and Open Door and Speak Up!Perhaps the most significant of which was his shepherding of the company’s first equal opportunity policy letter into existence in 1953, one year before the U.
S. Supreme Court decision in Brown vs. Board of Education and 11 years before the Civil Rights Act of 1964. He continued to expand the company’s physical capabilities – in 1952 IBM San Jose launched a storage development laboratory that pioneered disk drives. Major facilities would later follow in Rochester, Minnesota; Greencastle, Indiana; Kingston, New York; and Lexington, Kentucky.
Concerned that IBM was too slow in adapting transistor technology Watson requested a corporate policy regarding their use, resulting in this unambiguous 1957 product development policy statement: “It shall be the policy of IBM to use solid state circuitry in all machine developments. Furthermore, no new commercial machines or devices shall be announced which make primary use of tube circuitry. “In 1952, IBM began working with MIT’s Lincoln Laboratory to finalize the design of an air defense computer. The merger of academic and business engineering cultures proved troublesome, but the two organizations finally hammered out a design by the summer of 1953, and IBM was awarded the contract to build two prototypes in September. In 1954, IBM was named as the primary computer hardware contractor for developing SAGE for the United States Air Force. Working on this massive computing and communications system, IBM gained access to pioneering research being done at Massachusetts Institute of Technology on the first real time, digital computer.
This included working on many other computer technology advancements such as magnetic core memory, a large real time operating system, an integrated video display, light guns, the first effective algebraic computer language, analog to digital and digital to analog conversion techniques, digital data transmission over telephone lines, duplexing, multiprocessing, and geographically distributed networks. IBM built fifty six SAGE computers at the price of US$30 million each, and at the peak of the project devoted more than 7,000 employees 20% of its then workforce to the project. SAGE had the largest computer footprint ever and continued in service until 1984. More valuable to IBM in the long run than the profits from governmental projects, however, was the access to cutting edge research into digital computers being done under military auspices. IBM neglected, however, to gain an even more dominant role in the nascent industry by allowing the RAND Corporation to take over the job of programming the new computers, because, according to one project participant, Robert P.
Crago, “we couldn’t imagine where we could absorb two thousand programmers at IBM when this job would be over someday, which shows how well we were understanding the future at that time. ” IBM would use its experience designing massive, integrated real time networks with SAGE to design its SABRE airline reservation system, which met with much success. In 1969 IBM “unbundled” software and services from hardware sales. Until this time customers did not pay for software or services separately from the very high price for the hardware. Software was provided at no additional charge, generally in source code form. Services systems engineering, education and training, system installation were provided free of charge at the discretion of the IBM Branch office.
This practice existed throughout the industry. IBM’s unbundling is widely credited with leading to the growth of the software industry. After the unbundling, IBM software was divided into two main categories: System Control Programming SCP, which remained free to customers, and Program Products PP, which were charged for. This transformed the customer’s value proposition for computer solutions, giving a significant monetary value to something that had hitherto essentially been free. This helped enable the creation of the software industry. Similarly, IBM services were divided into two categories: general information, which remained free and provided at the discretion of IBM, and on the job assistance and training of customer personnel, which were subject to a separate charge and were open to non IBM customers.
This decision vastly expanded the market for independent computing services companies. The company began four decades of Olympic sponsorship with the 1960 Winter Games in Squaw Valley, California. It became a recognized leader in corporate social responsibility, joining federal equal opportunity programs in 1962, opening an inner city manufacturing plant in 1968, and creating a minority supplier program. It led efforts to improve data security and protect privacy. It set environmental air/water emissions standards that exceeded those dictated by law and brought all its facilities into compliance with those standards. It opened one of the world’s most advanced research centers in Yorktown, New York.
Its international operations grew rapidly, producing more than half of IBM’s revenues by the early 1970s and through technology transfer shaping the way governments and businesses operated around the world. Its personnel and technology played an integral role in the space program and landing the first men on the moon in 1969. In that same year, it changed the way it marketed its technology to customers, unbundling hardware from software and services, effectively launching today’s multibillion dollar software and services industry. See unbundling of software and services, below. It was massively profitable, with a nearly fivefold increase in revenues and earnings during the 1960s.
In 1967 Thomas John Watson, Jr. , who had succeeded his father as chairman, announced that IBM would open a large scale manufacturing plant at Boca Raton to produce its System/360 Model 20 midsized computer. On March 16, 1967, a headline in the Boca Raton News announced “IBM to hire 400 by year’s end. ” The plan was for IBM to lease facilities to start making computers until the new site could be developed. A few months later, hiring began for assembly and production control trainees.
IBM’s Juan Rianda moved from Poughkeepsie, New York, to become the first plant manager at IBM’s new Boca operations. To design its new campus, IBM commissioned internationally renowned architect Marcel Breuer 1902–1981, who worked closely with American architect Robert Gatje 1927–2018. In September 1967, the Boca team celebrated a milestone, shipping its first IBM System/360 Model 20 to the City of Clearwater – the first computer in its production run. A year later, IBM 1130 Computing Systems were being produced and shipped from the 203 building. By 1969, IBM’s Boca workforce had reached 1,000.
That employment number grew to around 1,300 in the next year as a Systems Development Engineering Laboratory was added to the division’s operations. The Golden Decade of the 1960s was a hard act to follow, and the 1970s got off to a troubling start when CEO Thomas J. Watson Jr. suffered a heart attack and retired in 1971. For the first time since 1914 – nearly six decades – IBM would not have a Watson at the helm. Moreover, after just one leadership change over those nearly 60 years, IBM would endure two in two years.
T. Vincent Learson succeeded Watson as CEO, then quickly retired upon reaching the mandatory retirement age of 60 in 1973. Following Learson in the CEO office was Frank T. Cary, a 25 year IBMer who had run the very successful data processing division in the 1960s. Datamation in 1971 stated that “the perpetual, ominous force called IBM rolls on”. The company’s dominance let it keep prices high and rarely update products, all built with only IBM components.
During Cary’s tenure as CEO, the IBM System/370 was introduced in 1970 as IBM’s new mainframe. The S/370 did not prove as technologically revolutionary as its predecessor, the System/360. From a revenue perspective, it more than sustained the cash cow status of the 360. A less successful effort to replicate the 360 mainframe revolution was the Future Systems project. Between 1971 and 1975, IBM investigated the feasibility of a new revolutionary line of products designed to make obsolete all existing products in order to re establish its technical supremacy.
This effort was terminated by IBM’s top management in 1975. But by then it had consumed most of the high level technical planning and design resources, thus jeopardizing progress of the existing product lines although some elements of FS were later incorporated into actual products. Other IBM innovations during the early 1970s included the IBM 3340 disk unit – introduced in 1973 and known as “Winchester” after IBM’s internal project name – was an advanced storage technology which more than doubled the information density on disk surfaces. Winchester technology was adopted by the industry and used for the next two decades. Some 1970s era IBM technologies emerged to become familiar facets of everyday life.
IBM developed magnetic stripe technology in the 1960s, and it became a credit card industry standard in 1971. The IBM invented floppy disk, also introduced in 1971, became the standard for storing personal computer data during the first decades of the PC era. IBM Research scientist Edgar ‘Ted’ Codd wrote a seminal paper describing the relational database, an invention that Forbes magazine described as one of the most important innovations of the 20th century. The IBM 5100, 50 lbs. and $9000 of personal mobility, was introduced in 1975 and presaged – at least in function if not size or price or units sold – the Personal Computer of the 1980s. IBM’s 3660 supermarket checkout station, introduced in 1973, used holographic technology to scan product prices from the now ubiquitous UPC bar code, which itself was based a 1952 IBM patent that became a grocery industry standard.
Also in 1973, bank customers began making withdrawals, transfers and other account inquiries via the IBM 3614 Consumer Transaction Facility, an early form of today’s Automatic Teller Machines. IBM had an innovator’s role in pervasive technologies that were less visible as well. In 1974, IBM announced Systems Network Architecture SNA, a networking protocol for computing systems. SNA is a uniform set of rules and procedures for computer communications to free computer users from the technical complexities of communicating through local, national, and international computer networks. SNA became the most widely used system for data processing until more open architecture standards were approved in the 1990s. In 1975, IBM researcher Benoit Mandelbrot conceived fractal geometry – a new geometrical concept that made it possible to describe mathematically the kinds of irregularities existing in nature.
Fractals had a great impact on engineering, economics, metallurgy, art and health sciences, and are integral to the field of computer graphics and animation. A less successful business endeavor for IBM was its entry into the office copier market in the 1970s, after turning down the opportunity to purchase the xerography technology. The company was immediately sued by Xerox Corporation for patent infringement. Although Xerox held the patents for the use of selenium as a photoconductor, IBM researchers perfected the use of organic photoconductors which avoided the Xerox patents. The litigation lasted until the late 1970s and was ultimately settled. Despite this victory, IBM never gained traction in the copier market and withdrew from the marketplace in the 1980s.
Organic photoconductors are now widely used in copiers. President of IBM John R. Opel became CEO in 1981. His company was one of the world’s largest and had a 62% share of the mainframe computer market that year. While frequently relocated employees and families still joked that IBM stood for “I’ve Been Moved”, and employees of acquisitions feared that hordes of formal IBM employees would invade their more casual offices, IBM no longer required white shirts for male employees, who still wore conservative suits when meeting customers.
Former employees such as Gene Amdahl used their training to found and lead many competitors and suppliers. Expecting Japanese competition, IBM in the late 1970s began investing in manufacturing to lower costs, offering volume discounts and lower prices to large customers, and introducing new products more frequently. The company also sometimes used non IBM components in products, and sometimes resold others’ products as its own. In 1980 it introduced its first computer terminal compatible with non IBM equipment, and Displaywriter was the first new product less expensive than the competition. IBM’s share of the overall computer market, however, declined from 60% in 1970 to 32% in 1980. Perhaps distracted by the long running antitrust lawsuit, the “Colossus of Armonk” completely missed the fast growing minicomputer market during the 1970s, and was behind rivals such as Wang, Hewlett Packard HP, and Control Data in other areas.
In 1979 BusinessWeek asked, “Is IBM just another stodgy, mature company?” By 1981 its stock price had declined by 22%. IBM’s earnings for the first half the year grew by 5. 3% – one third of the inflation rate – while those of minicomputer maker Digital Equipment Corporation DEC grew by more than 35%. The company began selling minicomputers, but in January 1982 the Justice Department ended the antitrust suit because, The New York Times reported, the government “recognized what computer experts and securities analysts had long since concluded: I. B. M.
no longer dominates the computer business”. IBM wished to avoid the same outcome with the new personal computer industry. The company studied the market for years and, as with UNIVAC, others like Apple Computer entered it first; IBM did not want a product with a rival’s logo on corporate customers’ desks. The company opened its first retail store in November 1980, and a team in the Boca Raton, Florida office built the IBM PC using commercial off the shelf components. The new computer debuted on August 12, 1981 from the Entry Systems Division led by Don Estridge. IBM immediately became more of a presence in the consumer marketplace, thanks to the memorable Little Tramp advertising campaign.
Though not a spectacular machine by technological standards of the day, the IBM PC brought together all of the most desirable features of a computer into one small machine. It had 128 kilobytes of memory expandable to 256 kilobytes, one or two floppy disks and an optional color monitor. And it had the prestige of the IBM brand. It was not cheap, but with a base price of US$1,565 it was affordable for businesses – and many businesses purchased PCs. Reassured by the IBM name, they began buying microcomputers on their own budgets aimed at numerous applications that corporate computer departments did not, and in many cases could not, accommodate.
Typically, these purchases were not by corporate computer departments, as the PC was not seen as a “proper” computer. Purchases were often instigated by middle managers and senior staff who saw the potential – once the revolutionary VisiCalc spreadsheet, the killer app, had been surpassed by a far more powerful and stable product, Lotus 1 2 3. IBM’s dominance of the mainframe market in Europe and the US encouraged existing customers to buy the PC, and vice versa; as sales of what had been an experiment in a new market became a substantial part of IBM’s financials, the company found that customers also bought larger IBM computers. Unlike the BUNCH and other rivals IBM quickly adjusted to the retail market, with its own sales force competing with outside retailers for the first time. By 1985 IBM was the world’s most profitable industrial company, and its sales of personal computers were larger than that of minicomputers despite having been in the latter market since the early 1970s.
By 1983 industry analyst Gideon Gartner warned that IBM “is creating a dangerous situation for competitors in the marketplace”. The company helped others by defining technical standards and creating large new software markets, but the new aggressiveness that began in the late 1970s helped it dominate areas like computer leasing and computer aided design. Free from the antitrust case, IBM was present in every computer market other than supercomputers, and entered communications by purchasing Rolm – the first acquisition in 18 years – and 18% of MCI. The company was so important to component suppliers that it urged them to diversify. When IBM 61% of revenue abruptly reduced orders from Miniscribe shares of not only Miniscribe but that of uninvolved companies that sold to IBM fell, as investors feared their vulnerability. IBM was also vulnerable when suppliers could not fulfill orders; customers and dealers also feared becoming overdependent.
The IBM PC AT’s 1984 debut startled the industry. Rivals admitted that they did not expect the low price of the sophisticated product. IBM’s attack on every area of the computer industry and entry into communications caused competitors, analysts, and the press to speculate that it would again be sued for antitrust. Datamation and others said that the company’s continued growth might hurt the United States, by suppressing startups with new technology. Gartner Group estimated in 1985 that of the 100 largest data processing companies, IBM had 41% of all revenue and 69% of profit.
Its computer revenue was about nine times that of second place DEC, and larger than that of IBM’s six largest Japanese competitors combined. The 22% profit margin was three times the 6. 7% average for the other 99 companies. Competitors complained to Congress, ADAPSO discussed the company with the Justice Department, and European governments worried about IBM’s influence but feared affecting its more than 100,000 employees there at 19 facilities. However, the company soon lost its lead in both PC hardware and software, thanks in part to its unprecedented for IBM decision to contract PC components to outside companies like Microsoft and Intel. Up to this point in its history, IBM relied on a vertically integrated strategy, building most key components of its systems itself, including processors, operating systems, peripherals, databases and the like.
In an attempt to accelerate the time to market for the PC, IBM chose not to build a proprietary operating system and microprocessor. Instead, it sourced these vital components from Microsoft and Intel respectively. Ironically, in a decade which marked the end of IBM’s monopoly, it was this fateful decision by IBM that passed the sources of its monopolistic power operating system and processor architecture to Microsoft and Intel, paving the way for rise of PC compatibles and the creation of hundreds of billions of dollars of market value outside of IBM. John Akers became IBM’s CEO in 1985. During the 1980s, IBM’s significant investment in building a world class research organization produced four Nobel Prize winners in physics, achieved breakthroughs in mathematics, memory storage and telecommunications, and made great strides in expanding computing capabilities.
In 1980, IBM Research legend John Cocke introduced Reduced Instruction Set Technology RISC. Cocke received both the National Medal of Technology and the National Medal of Science for his innovation, but IBM itself failed to recognize the importance of RISC, and lost the lead in RISC technology to Sun Microsystems. In 1984 the company partnered with Sears to develop a pioneering online home banking and shopping service for home PCs that launched in 1988 as Prodigy. Despite a strong reputation and anticipating many of the features, functions, and technology that characterize the online experience of today, the venture was plagued by extremely conservative management decisions, and was eventually sold in the mid 1990s. The IBM token ring local area network, introduced in 1985, permitted personal computer users to exchange information and share printers and files within a building or complex. In 1988, IBM partnered with the University of Michigan and MCI Communications to create the National Science Foundation Network NSFNet, an important step in the creation of the Internet.
But within five years the company backed away from this early lead in Internet protocols and router technologies in order to support its existing SNA cash cow, thereby missing a boom market of the 1990s. Still, IBM investments and advances in microprocessors, disk drives, network technologies, software applications, and online commerce in the 1980s set the stage for the emergence of the connected world in the 1990s. But by the end of the decade, IBM was clearly in trouble. It was a bloated organization of some 400,000 employees that was heavily invested in low margin, transactional, commodity businesses. Technologies IBM invented and or commercialized – DRAM, hard disk drives, the PC, electric typewriters – were starting to erode.
The company had a massive international organization characterized by redundant processes and functions – its cost structure couldn’t compete with smaller, less diversified competitors. And then the back to back revolutions – the PC and the client server – did the unthinkable. They combined to dramatically undermine IBM’s core mainframe business. The PC revolution placed computers directly in the hands of millions of people. It was followed by the client/server revolution, which sought to link all of those PCs the “clients” with larger computers that labored in the background the “servers” that served data and applications to client machines. Both revolutions transformed the way customers viewed, used and bought technology.
And both fundamentally rocked IBM. Businesses’ purchasing decisions were put in the hands of individuals and departments – not the places where IBM had long standing customer relationships. Piece part technologies took precedence over integrated solutions. The focus was on the desktop and personal productivity, not on business applications across the enterprise. As a result, earnings – which had been at or above US$5 billion since the early 1980s, dropped by more than a third to US$3 billion in 1989.
A brief spike in earnings in 1990 proved illusory as corporate spending continued to shift from high profit margin mainframes to lower margin microprocessor based systems. In addition, corporate downsizing was in full swing. Akers tried to stop the bleeding – desperate moves and radical changes were considered and implemented. As IBM assessed the situation, it was clear that competition and innovation in the computer industry were now taking place along segmented, versus vertically integrated lines, where leaders emerged in their respective domains. Examples included Intel in microprocessors, Microsoft in desktop software, Novell in networking, HP in printers, Seagate in disk drives and Oracle Corporation in database software. IBM’s dominance in personal computers was challenged by the likes of Compaq and later Dell.
Recognizing this trend, management, with the support of the Board of Directors, began to implement a plan to split IBM into increasingly autonomous business units e. g. processors, storage, software, services, printers, etc. to compete more effectively with competitors that were more focused and nimble and had lower cost structures. These efforts failed to halt the slide.
A decade of steady acceptance and widening corporate growth of local area networking technology, a trend headed by Novell Inc. and other vendors, and its logical counterpart, the ensuing decline of mainframe sales, brought about a wake up call for IBM. After two consecutive years of reporting losses in excess of $1 billion, on January 19, 1993, IBM announced a US$8. 10 billion loss for the 1992 financial year, which was then the largest single year corporate loss in U. S.
history. All told, between 1991 and 1993, the company posted net losses of nearly $16 billion. IBM’s three decade long Golden Age, triggered by Watson Jr. in the 1950s, was over. The computer industry now viewed IBM as no longer relevant, an organizational dinosaur. And hundreds of thousands of IBMers lost their jobs, including CEO John Akers.
In April 1993, IBM hired Louis V. Gerstner, Jr. as its new CEO. For the first time since 1914 IBM had recruited a leader from outside its ranks. Gerstner had been chairman and CEO of RJR Nabisco for four years, and had previously spent 11 years as a top executive at American Express.
Gerstner brought with him a customer oriented sensibility and the strategic thinking expertise that he had honed through years as a management consultant at McKinsey and Co. Recognizing that his first priority was to stabilize the company, he adopted a triage mindset and took quick, dramatic action. His early decisions included recommitting to the mainframe, selling the Federal Systems Division to Loral in order to replenish the company’s cash coffers, continuing to shrink the workforce reaching a low of 220,000 employees in 1994, and driving significant cost reductions within the company. Most importantly, Gerstner decided to reverse the move to spin off IBM business units into separate companies. He recognized that one of IBM’s enduring strengths was its ability to provide integrated solutions for customers – someone who could represent more than piece parts or components.
Splitting the company would have destroyed that unique IBM advantage. These initial steps worked. IBM was in the black by 1994, turning a profit of $3 billion. Stabilization was not Gerstner’s endgame – the restoration of IBM’s once great reputation was. To do that, he needed to devise a winning business strategy. Over the next decade, Gerstner crafted a business model that shed commodity businesses and focused on high margin opportunities.
IBM divested itself of low margin industries DRAM, IBM Network, personal printers, and hard drives. The company regained the business initiative by building upon the decision to keep the company whole – it unleashed a global services business that rapidly rose to become a leading technology integrator. Crucial to this success was the decision to become brand agnostic – IBM integrated whatever technologies the client required, even if they were from an IBM competitor. IBM augmented this services business with the 2002 acquisition of the consultancy division of PricewaterhouseCoopers for $3. 5 billion US.
Another high margin opportunity IBM invested heavily in was software, a strategic move that proved equally visionary. Starting in 1995 with its acquisition of Lotus Development Corp. , IBM built up its software portfolio from one brand, IBM DB2, to five: DB2, Lotus, WebSphere, Tivoli, and Rational. Content to leave the consumer applications business to other firms, IBM’s software strategy focused on middleware – the vital software that connects operating systems to applications. The middleware business played to IBM’s strengths, and its higher margins improved the company’s bottom line significantly as the century came to an end. Not all software that IBM developed was successful.
While OS/2 was arguably technically superior to Microsoft Windows 95, OS/2 sales were largely concentrated in networked computing used by corporate professionals. OS/2 failed to develop much penetration in the consumer and stand alone desktop PC segments. There were reports that it could not be installed properly on IBM’s own Aptiva series of home PCs. Microsoft made an offer in 1994 where if IBM ended development of OS/2 completely, then it would receive the same terms as Compaq for a license of Windows 95. IBM refused and instead went with an “IBM First” strategy of promoting OS/2 Warp and disparaging Windows, as IBM aimed to drive sales of its own software and hardware.
By 1995, Windows 95 negotiations between IBM and Microsoft, which were difficult, stalled when IBM purchased Lotus Development whose Lotus SmartSuite would have directly competed with Microsoft Office. As a result, IBM received their license later than their competitors which hurt sales of IBM PCs. IBM officials later conceded that OS/2 would not have been a viable operating system to keep them in the PC business. While IBM hardware and technologies were relatively de emphasized in Gerstner’s three legged business model, they were not relegated to secondary status. The company brought its world class research organization to bear more closely on its existing product lines and development processes.
While Internet applications and deep computing overtook client servers as key business technology priorities, mainframes returned to relevance. IBM reinvigorated their mainframe line with CMOS technologies, which made them among the most powerful and cost efficient in the marketplace. Investments in microelectronics research and manufacturing made IBM a world leader in specialized, high margin chip production – it developed 200 mm wafer processes in 1992, and 300 mm wafers within the decade. IBM designed chips were used in PlayStation 3, Xbox 360, and Wii game consoles. IBM also regained the lead in supercomputing with high end machines based upon scalable parallel processor technology. Equally significant in IBM’s revival was its successful reentry into the popular mindset.
Part of this revival was based on IBM technology. On October 5, 1992, at the COMDEX computer expo, IBM announced the first ThinkPad laptop computer, the 700C. The ThinkPad, a premium machine which then cost US$4350, included a 25 MHz Intel 80486SL processor, a 10. 4 inch active matrix display, removable 120 MB hard drive, 4 MB RAM expandable to 16 MB and a TrackPoint II pointing device. The striking black design by noted designer Richard Sapper made the ThinkPad an immediate hit with the digerati, and the cool factor of the ThinkPad brought back some of the cachet to the IBM brand that was lost in the PC wars of the 1980s.
Instrumental to this popular resurgence was the 1997 chess match between IBM’s chess playing computer system Deep Blue and reigning world chess champion Garry Kasparov. Deep Blue’s victory was a historic first for a computer over a reigning world champion. Also helping the company reclaim its position as a technology leader was its annual domination of supercomputer rankings and patent leadership statistics. Ironically, a serendipitous contributor in reviving the company’s reputation was the Dot com bubble collapse in 2000, where many of the edgy technology high flyers of the 1990s failed to survive the downturn. These collapses discredited some of the more fashionable Internet driven business models that stodgy IBM was previously compared against.
As IBM recovered its financial footing and its industry leadership position, the company remained aggressive in preaching to the industry that it was not the Old IBM, that it had learned from its near death experiences, and that it had been fundamentally changed by them. It sought to redefine the Internet age in ways that played to traditional IBM strengths, couching the discussion in business centric manners with initiatives like e commerce and On Demand. And it supported open source initiatives, forming collaborative ventures with partners and competitors alike. Change was manifested in IBM in other ways as well. The company revamped its varied philanthropic practices to bring a sharp focus on improving K 12 education.
It ended its 40 year technology partnership with the International Olympic Committee after a successful engagement at the 2000 Olympic Games in Sydney, Australia. On the human resources front, IBM’s adoption and integration of diversity principles and practices was cutting edge. It added sexual orientation to its non discrimination practices in 1984, in 1995 created executive diversity task forces, and in 1996 offered domestic partner benefits to its employees. The company is routinely listed as among the best places for employees, employees of color, and women to work. And in 1996, the Women in Technology International Hall of Fame inducted three IBMers as part of its inaugural class of 10 women: Ruth Leach Amonette, the first woman to hold an executive position at IBM; Barbara Grant, PhD, first woman to be named an IBM site general manager; and Linda Sanford, the highest – placed technical woman in IBM.
Fran Allen – an early software pioneer and another IBM hero for her innovative work in compilers over the decades – was inducted in 1997. IBM dominated the electronic data processing market for most of the 20th century, initially controlling over 70 percent of the punch card and tabulating machine market and then achieving a similar share in the computer market. IBM asserted that its successes in achieving and maintaining such market share were due to its skill, industry and foresight; governments and competitors asserted that the maintenance of such large shares was at least in part due to anti competitive acts such as unfair prices, terms and conditions, tying, product manipulations and creating FUD Fear, Uncertainty and Doubt in the marketplace. IBM was thus the defendant in more than twenty government and private antitrust actions during the 20th century. IBM lost only one of these matters but did settle others in ways that profoundly shaped the industry as summarized below. By the end of the 20th century, IBM was no longer so dominant in the computer industry.
Some observers suggest management’s attention to the many antitrust lawsuits of the 1970s was at least in part responsible for its decline. CDC filed an antitrust lawsuit against IBM in Minnesota’s federal court alleging that IBM had monopolized the market for computers in violation of section 2 of the Sherman Act by among other things announcing products it could not deliver. A 1965 internal IBM memo by an IBM attorney noted that Control Data had publicly blamed its declining earnings on IBM, “and its frequent model and price changes. There was some sentiment that the charges were true. ” In 1973 IBM settled the CDC case for about $80 million in cash and the transfer of assets including the IBM Service Bureau Corp to CDC. It was in some ways one of the great single firm monopoly cases of all times.
IBM produced 30 million pages of materials during discovery; it submitted its executives to a series of pretrial depositions. Trial began six years after the complaint was filed and then it battled in court for another six years. The trial transcript contains over 104,400 pages with thousands of documents placed in the record. It ended on January 8, 1982 when William Baxter, the then Assistant Attorney General in charge of the Antitrust Division of the Department of Justice dropped the case as “without merit. ”Telex, a peripherals equipment manufacturer filed suit on January 21, 1972, charging that IBM had monopolized and had attempted to monopolize the worldwide manufacture, distribution, sales, and leasing of electronic data processing equipment including the relevant submarket of plug compatible peripheral devices.
After a non jury trial in 1973, IBM was found guilty “possessing and exercising monopoly power” over the “plug compatible peripheral equipment market,” and ordered to pay triple damages of $352. 5‐million and other relief including disclosure of peripheral interface specifications. Separately Telex was found guilty of misappropriated IBM trade secrets. The judgment against IBM was overturned on appeal and on October 4, 1975, both parties announced they were terminating their actions against each other. 1983 saw the announcement of the System/36, the replacement for the System/34.
And in 1988, IBM announced the AS/400, intended to represent a point of convergence for both System/36 customers and System/38 customers. The 1970s had seen IBM develop a range of Billing, Inventory Control, Accounts Receivable, and Sales Analysis BICARSA applications for specific industries: construction CMAS, distribution DMAS, and manufacturing MMAS, all written in the RPG II language. By the end of the 1980s, IBM had almost completely withdrawn from the BICARSA applications marketplace. Because of developments in the antitrust cases against IBM brought by the US government and European Union, IBM sales representatives were now able to work openly with application software houses as partners. For a period in the early 1980s, a ‘rule of three’ operated, which obliged IBM sales representatives, if they were to propose a third party application to a customer, to also list at least two other third party vendors in the IBM proposal. This caused some amusement to the customer, who would typically have engaged in intense negotiations with one of the third parties and probably not have heard of the other two vendors.
