IBM

9034 IBM3 - SONS

Chapter 3 - THE SONS - THE CREATION OF THE COMPUTER CORPORATION

The second stage of IBM's development belonged to Thomas J Watson's sons - Arthur K and, in particular, Tom Jr. - who 'nepotistically' succeeded their father.  Such 'nepotism' is not unique, though the dynastic aspects of the IBM transfer of power - more redolent of the Roman Empire than a business - perhaps were. Many owners of businesses pass on their mantle to the next generation. T J Watson was, however, not the owner in the true sense. He was a manager, an employee, with only a very small personal stockholding. Yet such was his personal domination over the company that the succession was seen as a foregone conclusion. Despite this 'handicap' it is arguable that they became the most successful, though not the most spectacular, businessmen of their generation. Dick, the younger son, built World Trade (the overseas, non‑US, element of IBM) to match the strength of the US operation.

Greatest of all, though, was his elder brother Tom Watson Jr; for he created the IBM that came to rule the world. It was he who made IBM a computer company, masterminding the two great gambles; the first when IBM invested heavily to move into computing (then a non‑existent market), and the second when it invested even more heavily to launch the S/360 (which made its position virtually unassailable until the 1990s). It was he that made the laboratories almost an equal of the sales‑force, to supply the ever increasing demand for new technologies. At the same time he developed the organisation, and the philosophies, to successfully cope with the bureaucratic challenges that inevitably face (and often destroy) entrenched market‑leaders of IBM's size. His development of the unique philosophies, the management style that powered IBM from the 1950s to the 1980s, is at the heart of the most positive lessons in this book.

As a result IBM grew faster than even under his father, at a staggering 30% per annum compound for the next two decades. Yet he remains a largely unsung hero, dismissed by most commentators as a son - harbouring impossible dreams and impractical ideas, riding on his father's achievements.

What is particularly surprising was the degree of success that was achieved by the sons, and by Tom Jr in particular. Conventional business theory, perhaps rather dogmatically, would dismiss nepotism as a means of providing sound management. Indeed it may be that the refusal of the various commentators to recognise the true greatness of Tom Jr's contributions (and to dismiss him merely as an inheritor of his father's achievements, and his ideas as impractical nonsense) may owe something to an unwillingness to countenance the idea that (morally repugnant) nepotism can still produce successful managers. Yet the sons, in the case of IBM, showed more vision and courage than any of their more conventionally recruited contemporaries. Under their guidance IBM grew to be a true computer giant; achieving a dominance that it retained until the 1990s.

NEPOTISM AT WORK

In our modern egalitarian society there is, indeed, something morally repugnant about allowing advancement to be based upon blood ties. In a book, such as this, which is essentially radical in nature, you might expect me to hold forth on the evils of this; and, all other factors being equal, I would. On the other hand, though, such ties should not preclude good managers from making use of their talents - and Tom Watson Jr did just that and was, by any standards, an outstanding manager.

Indeed, paradoxically, nepotism may sometimes offer a better source of good management! Blood ties are not the only 'corrupt' means to reaching the peak of the management pyramid. Many other managers are there because of who they knew rather than what they knew; which is less obvious, but no less morally repugnant.

Less well reported is the filtering process which senior managers face. Having faced the first filter of successfully achieving academic success (then at the undergraduate level, and now also at the MBA level!), at each level of promotion - where there may be six or more distinct levels (with many sub-levels) in a career - the senior manager has to have achieved an 'acceptable' performance; before graduating to the level above. This process requires, therefore, that the final incumbents of the top offices have previously succeeded in the very different roles of junior and middle manager. Of course, the one role that they then need to succeed in is that of senior management (when their past successes become irrelevant). They may be better than their peers - who have also faced these filters - but one wonders if they are the best of all. Nepotism at least offers a wider field - of candidates who have not been screened out by irrelevant filters! My own experience suggests that it may even offer better odds of finding successful management. In my own career, of the best half dozen managers I have worked for, no less than half got where they were by at least some element of nepotism - usually being a member of the 'family' - which is a much higher proportion than amongst the management population in general (and of the mediocre managers I have worked for and with, none of whom benefited from this factor).

Worse Than Nepotism…the traditional career progression, for senior managers in larger organisations, insists that they succeed at all levels. This progressive filtering process unfortunately does not guarantee that the best candidates reach the top. Indeed it may exclude those most suitable for the highest position, since they may not necessarily succeed at the lower levels. It typically favors those who play safe, and in particular play office politics, not those who are creatively adventurous. Management theory now tends to assume that this - emergence of the elite - is the natural process of management succession for anything other than the family firm. It is, of course, anything but natural - though it may still be the best alternative available for many companies!

TJW Jr

Thomas Watson Jr. was born on January 14th 1914 just before his father was summarily, and so traumatically, dismissed from NCR. Then came two daughters, Jane and Helen, before the younger son, Arthur Kittredge (and rather oddly thereafter known as 'Dick') was born.

Both sons were immersed in IBM from a very early age; Tom Watson Jr. was later to say that IBM was always in his unconscious. He was taken on plant inspections - his first memory of such a visit (to the Dayton factory) was at the age of five - business tours to Europe and he made appearances at the Hundred Per Cent Club even before he was old enough to attend school. In the home, Thomas Senior's discipline was erratic and often harsh and irrational. Around the time he was thirteen Tom Jr. began to suffer recurring depressions. These continued for six years and - in his autobiography - he claimed that (according to the standards of later times) his behaviour then would have been seen as a symptom of clinical depression. It is accordingly always possible that a rebellion against these 'impositions' in their formative years was one of the factors that influenced both their management styles later at IBM.

Talking to a reporter in 1974 Tom Watson Jr described his relationship with his father; "My father and I had terrible fights.....He seemed like a blanket that covered everything. I really wanted to beat him but also make him proud of me". But this relationship was not all negative as Tom himself admitted in the same interview; "I really enjoyed the ten years (working) with him". In his own book (Father Son & Co.), on the very first page, he gives his own comment of the force that drove him; "I was so intimately entwined with my father. I had a compelling desire, maybe out of honor for the old gentleman, maybe out of sheer cussedness, to prove to the world that I could excel in the same way that he did."

Certainly Tom Jr., handicapped by imperfect eye-hand coordination which had also adversely affected his reading[1], started out as a determinedly mediocre student. This was despite the fact that, in later years, he was clearly one of the most intelligent businessmen of his generation; a potential that only Benjamin Wood, a professor at Columbia (who tested the young Tom), seems to have detected[2] - for he seems to have managed to hide his true potential from almost everybody else! He only scraped into Brown University (and even then on his father's name); clearly showing he was not interested in most of the course while there. He was instead the young playboy (though that was the traditional employment for his also-wealthy contemporaries). In his autobiography, he stated that, when he was a boy, "....I got it into my head that the Old Man wanted to me to come into IBM, take it over and run the whole deal. The very idea made me miserable." 

IBM…inevitably, though, in 1937 he did join IBM, and just as inevitably he was an outstanding success. He immediately was voted class president at IBM trainee school; though I (and he) could not conceive of any trainee, in the climate of that period, even considering voting for anyone else! He achieved this position despite the fact that he drank openly (a fault that would have resulted in a severe admonition, if not even instant dismissal, for others). Indeed he reportedly had a drink 'problem' which was not fully resolved until the end of his wartime service. His younger brother, Dick, had such a problem throughout his life. No doubt amateur psychologists would read into these problems a reflection of their strict upbringing; but any such problems as did exist were not of importance in the context of both their enormous contributions to IBM.

Both sons served in the forces during the Second World War, Dick (dropping out of Yale) as a Major in Ordnance and Tom Jr as a pilot, a Lieutenant Colonel chauffeuring top brass around the USSR. Tom Jr later admitted to journalists that the one career he really would have liked to follow was that of an airline pilot. Running IBM, which was then already a future mapped out for him, came a poor second best!

After the war Dick (at the insistence of his father) returned to Yale to study languages - recording a better academic performance than his brother - not joining IBM until 1948. Tom Jr in the meantime began his training, his grooming for stardom, in IBM; returning to the company at the beginning of 1946. He was then assistant to Charles A Kirk - who he saw as a competitor - but Tom Jr. was, even so, promoted to be a Vice President just six months later and was promoted to the board just four months after that, while Kirk unexpectedly died soon after, in 1947. Continuing to make record progress, he become Executive Vice-President in 1949!

This training programme was to take him, over the next 5 years, through many of IBM's operating groups. Tom Jr himself believed that of all the influences on him during this period the most important was Al Williams, a Chartered Accountant (CPA) who became president of IBM in 1961; it was Al Williams who said of IBM "It is not bigness we seek, it is greatness. Bigness is imposing. Greatness is enduring..."

Greatness…"Bigness is imposing. Greatness is enduring[3]." This should be a valuable motto for the big organisations. If IBM had remembered it in the 1980s they might now be better placed! Management theory has no concept equivalent to 'greatness'; though, in view of their importance to society in general, maybe such a concept should be invented by which to better judge the behaviours of the leading transnationals!

Institutionalised Nepotism…it is an unrecorded benefit of nepotism, at its most productive, that training can be given in far greater depth and for a much longer period (even sometimes at the expense of the job the individual is supposedly currently undertaking) than is usually possible for the less privileged manager, fighting his way up the management pyramid. It was, perhaps surprisingly, a feature retained by IBM after the Watsons. Their successors in the process (as the potential crown princes), young managers chosen for their ability not for their family connections, were identified very early (typically when they reached the level of branch manager) and then spent perhaps a decade or more being subjected to the same extended training for royal succession that was accorded to the young Watsons. This had the immense benefit that no matter how poor the initial choice (and it was difficult in IBM to find anyone who was less than very capable) the subsequent training was almost bound to create a top level executive who was head and shoulders above his contemporaries in other companies. Perhaps only IBM, in this way, managed to successfully institutionalise nepotism! As always IBM managed to find strengths in the most unlikely of situations. The success was evident in the calibre of the top managers - though it finally failed to match the challenges of the later 1980s; though, even then, the real failure might have been that of selecting a CEO (John Akers) who had not followed this path.

Institutionalised Nepotism…it is especially productive to talent spot potential high flyers early; and then to ensure that they are not screened out by the irrelevant junior and middle management filters - and, indeed, are trained at length for their final roles. As stated earlier, management theory tends to assume that senior managers gradually climb the promotions ladder, succeeding at every stage. There is little reference to special programmes for high-flyers.

The Advent of Computing

Tom Watson Jr's influence was first felt in IBM's move to computing. It is true that his father also fully recognised the importance of the emerging computers and was enthusiastic about them. As reported for instance in Tom Jr's autobiography, his father came back from a visit to a computer laboratory at Columbia University saying " You ought to go up there and see that. I don't know what it was, but the fellow was doing it two hundred thousand times a second!"  Even so, it was Tom Jr, however, who had the foresight to put in place the engineers needed to develop the experimental 701 programme, and who initiated the crash programme to further develop this into the 702 version as a true commercial computer. This was a courageous decision, requiring a substantial investment (the first of a number of such investments that were needed as IBM computer generation succeeded generation). For the first time in three decades retained profits would not suffice. IBM would have to sell bonds, placing the company deeper in debt than ever before. This was at a time when the market for computers was anything but obvious; and some observers thought it would be limited to a handful for use by government (no‑one else would surely be able to afford them or to find a suitable use for them!).

In his original book, Tom Watson Jr made it clear that almost everyone in IBM opposed his decision to invest in the development of computers. In particular, IBM's technical experts condemned it. Even the supporters of the new technology underestimated the potential. It was Cuthbert Hurd (brought in from the Oak Ridge laboratory of the Atomic Energy commission) who, rather than any of the Watsons made the famous prediction (optimistic for the time)  that "…he could find customers for as many as thirty machines."[4] Yet that decision, and the single-minded way Tom Watson Jr fought to make it work, was the making of IBM. Thus, the commercial development of the computer, for which IBM will be remembered, was undoubtedly Tom Jr's great achievement.

Great Decisions Need Great Courage…in such a way, the really big decisions often move outside of conventional management theory. There is no theory you can use to bolster the courage you need to take such decisions.

R&D…behind this decision was another one, that of spending more on R & D. Al Williams had pointed out to Tom Jr that IBM was only spending 3% on R & D when other high technology companies were spending between 6% and 9%. Tom Jr learnt the lesson, and thereafter - at least until the 1990s (when, even then, Gerstner only dropped it to 6%) -  IBM consistently spent 9%. The latest figure (at 6%) is, in fact, still a relatively high level of R & D. But at its peak, of 9%, it compared with the typical average for the top 20 US companies of around 4% (3.7% in 1983) For comparison, the equivalent figure for Japan was 5.1%, though its high technology companies exceeded even the IBM level ‑ with the 1983 spending for Canon being 14.6% and that for NEC being 13.0%.

Investing to Succeed…the future of organisations depends upon the success of their investments; not least in the area of R & D. Success depends upon the quality of these investments, which is difficult (indeed an art) to manage. But, at least as much, it depends on their quantity - which is very easy indeed to manage. If you invest enough - as now does Bill Gates as well - you will eventually succeed. This is a simple lesson which is recognised by very few organisations outside of Japan - and not at all in theory! Theory does recognize the  importance of investment in R & D. It does not, however, explain just how high that level of investment may need to be.

TJW Sr….Although the initiative, and as such much of the credit for the birth of the information revolution, must go to Tom Jr. considerable courage was also displayed by his then ageing father who, despite his long commitment to internal funding, backed his son to the hilt; reportedly with the words "It is harder to keep a business great than it is to build it".

Tom Jr's position was regularised when he was made president in 1952, but the justification for his earlier decision did not come until 1954 when the first orders for the 702 were canvassed; and ultimately in 1956 when, after the launch of the more powerful 705 (which, again on Tom Jr's initiative, was developed in parallel with the 701/702), IBM regained the technological imperative from UNIVAC, and also regained its position as market leader in sales.

It should be noted, even so, that - until the late 1950s - it was the US Airforce SAGE computerised tracking system which accounted for more than half of IBM's computer sales. The company made little profit on these sales but, as Tom Jr. said in his autobiography "It enabled us to build highly automated factories ahead of anybody else, and to train thousands of new workers in electronics."

Government Funding…many major development programmes are funded, directly or indirectly, by governments. Obtaining your share of such funds - typically by lobbying - is crucial to the development of many large organisations. Indeed, many of the most profitable ventures depend on government patronage. Almost half a millennium ago The East India Company at one extreme and the privateers at the other were given their licences to make money by Elizabeth the first. More recently even President Eisenhower, despite his military background, warned of the ever growing power of the military-industrial complex. But, if your organisation ever is invited to insert its snout into the government trough accept with alacrity; you will be almost guaranteed to make your fortune. Management, and especially economic, theory tends not merely to denigrate such funding but to ignore its very existence. As a result it offers little advice on how to lobby for it!

TJW Jr contd.

Tom Jr's decision was justified; in the longer term it redirected IBM to its later position dominating the computer market. Even in the short term it paid off; for revenues more than tripled in six years, from $214.9 million in 1950 to $734.3 million in 1956. This dramatic rate of growth almost matched the wartime years; a better than 30% compound growth rate that Tom Jr more or less maintained for the full twenty years of his leadership of IBM. It was a record that few business leaders can have matched, and even outshone that of his illustrious father.

Right through to 1955, despite the presence of his son, Thomas Senior still kept a firm grip on the reins. In his autobiography, Tom Jr. described the position of his father as "He wanted to make me head of IBM, but he didn't like sharing the limelight." Then, Tom Jr. took over effective control in a moment that, according to some reports, might have been worthy of a Hollywood business epic; though the formal handover took place a few months later. The occasion was the decision to sign the Consent Decree which was offered by the government after its latest anti-trust investigation. Thomas Senior resisted, for as a matter of principle he had never signed a Consent Decree; even when the alternative, in 1914, was possibly a jail sentence. His son was more of a pragmatist and saw that the Consent Decree, which sought to strip IBM of half its card-making capacity, was largely irrelevant where the future of the company was already in computers not cards. There was though another condition, that IBM had to sell machines outright as well as on lease, that was to have repercussions in the late 1960's when leasing companies recognised the financing loophole that it created.

According to the more dramatic version of the story, confirmed by Tom Jr himself, after having had a row with his father he called a cab and left to sign the Decree. While actually in court to sign the decree, in a touch that was worthy of the direction of Orson Welles, Tom Jr. received a note, delivered by messenger, from his father. It simply said;

                              100%

                              Confidence

                              Appreciation

                              Admiration

                                          Love

                                          Dad

The father had finally handed the reins over to his son in one of the most elegant ways that business has recorded! Tom Watson Jr himself saw the moment not long afterwards when his father died, and left him alone to run IBM, as the most traumatic. In his words (from the opening sentence of his book, Father Son & Co); "When my father died in 1956 - six weeks after making me head of IBM - I was the most frightened man in America. For ten years he had groomed me to succeed him, and I had been a young man in a hurry, eager to take over, cocky and impatient. Now, suddenly, I had the job - but what I didn't have was dad there to back me up".

Dick Watson and IBM World Trade

In 1949, six years earlier, Thomas Senior had resolved the dynastic problem of succession by his two sons in a truly imperial style. While the US Corporation, even now the backbone of IBM's business, was to become the personal fiefdom of the elder, the rest of the world, the newly formed World Trade, was to be the property of the younger son, Dick; thus protecting both their positions from sibling rivalry.

It is less easy to see the full impact of Dick's career than it is of his brother's; the person at the centre of the IBM web in Armonk always receives the credit for most of the gains. What is clear, however, is that World Trade grew immensely in stature under Dick Watson; and IBM became a true multinational.

International Time Recording had established an office in Paris as early as 1914. Over the next decades up to the Second World War CTR established further offices in a number of countries around the world, though the operations were still typically small in comparison with the US business. The war obviously destroyed this international side of IBM; though some companies proved immensely resistant to destruction. The Hungarian company, for example, survived the Nazi occupation, and indeed the subsequent Communist take-over; still as an independent company which was firmly part of IBM. There is a, probably apocryphal, story told to me by the local management there of the Watson sons doing the rounds of the communist bloc in the late 1960's and asking the relevant ministry in Hungary how IBM should do business; only to be told, to their surprise (at least according to the tale), that they should use the local company as normal! Whatever the truth of the story it is certainly true that IBM Hungary was then still in existence as one of the handful of capitalist subsidiaries officially operating behind the iron curtain.

When I visited it in 1982 it was perhaps not the typical IBM country operation, with offices above a shop and a charming lady General Manager (definitely then a rarity in IBM), but it was - according to its staff- a fully functioning part of IBM; and certainly the staff were just as enthusiastically full of the IBM culture as any other IBM'ers. Apparently the IBM culture was so strong that it was even able to assimilate communist society! It has to be recorded, though, that a general manager in another communist country had to be bought out of prison by IBM following that country's communist take-over; their secret police reportedly could not believe that the summary customer engineering records (returned to the US on punched cards, ready for processing) could be anything other than coded espionage reports!

In the late 1940's the one obvious exception to IBM's world-wide coverage was the United Kingdom, together with its Commonwealth. In these areas the British Tabulating Company had an exclusive right to make and sell IBM products. With the arrival of Dick Watson at World Trade in 1949 negotiations were commenced to ensure that the whole (non-US) world was its oyster; and IBM eventually started to market for itself in the UK in 1951. The British Tabulating Company went on to become ICL, then one of IBM's lesser but not inconsiderable rivals. It too can claim to have been in effect founded by the Watsons, father and son!

Dick Watson's achievement was to weld the disparate companies into a global whole, which was World Trade; to become a genuinely equal partner with US Domestic (IBM's name for its US corporation). That philosophy later came of age with the development of the 360 range of computers, where World Trade shared as an equal; including, for the first time, the R & D work. The World Trade of the 1990s, which was equal in size to IBM Domestic and just as profitable, became a full partner; though it has since been merged with it - and separate trading figures are no longer included in the annual report. Although subject to Armonk's directions it was to a degree autonomous and had its own manufacturing facilities for each of IBM's products; for the main products it had them in each of its regions.

Despite the international credentials of the Watsons, their successors have not all been so cosmopolitan. The potential problem of 'insularity' of subsequent Armonk management is best illustrated by the story told by a senior (IBM) European executive during the late 1970's. When he and his wife were attending a very impressive, and congenial, meeting hosted by a number of IBM main board members and their wives, he attempted to return the compliment by inviting one couple to a similar event in Europe. He was astonished to receive the reply, from the wife, that neither of them even possessed passports! The executive was supposedly John Akers - which may help explain some of his later problems in coming to terms with the world-wide IBM; though, to be fair, after that time he did travel the world extensively. The incident, on the other hand, highlights the very real achievement of Dick Watson - working against such an insular culture -  in establishing World Trade as an equal partner within IBM.

The intention, after Dick's arrival, had been that there should be no export of products from US Domestic to the rest of the world. My own experience, confirmed by that of other observers, is that the transfer price for products sourced in the US, but delivered outside, incorporated a remarkably high mark‑up. Other observers see this as the classical capitalist ploy of returning hidden, locally untaxed, profits to the US. This is not my view, because the figures show that such trade still is, in IBM's terms, negligible. My view is that it was precisely the opposite; it is a penalty clause built in to force World Trade to build locally. Since the arrival of Lou Gerstner, however, the picture is less clear - especially where the trading figures for 'World Trade' (now just another part of IBM) are not given separately. Indeed, in view of the creative accounting now employed, it is quite possible that IBM's transfer prices are now manipulated; and certainly its tax bills have been reduced!

Transnationals are Created by Force Not Circumstance…there has been much debate in recent years about 'globalisation'. There is supposed to be an inexorable force stalking the world which creates transnationals. The example of IBM shows that it, at least, was very much the opposite. It typically requires a degree of dedication - and  the use of a considerable amount of brute force within the organization - to turn any corporation into a genuine transnational. Those who are sitting on their laurels waiting for it to happen to them should look again! Much academic theory has also recently been expended on the phenomenon of globalisation; and especially of the problems this poses for national governments trying to control them. The reality is much different. In recent times, indeed, the colonial nature of such transnationals as there actually are - and there are relatively few of them - is much reduced. They well know, as did IBM, that they are foolish if they make enemies of their national hosts. The problem is that they offer very convenient targets for jingoistic newspapers; and equally useful excuses for government failures!

Although Dick Watson was able to build World Trade in volume terms, he was not able to dramatically increase its true geographical spread; though that was never his stated intention. IBM would boast that it operates in most countries (though, since the cut-backs of the early 1990s, this is often now through agents and not the local offices IBM was previously so proud to maintain), but its volume business is still really confined to Europe (and even then to the 4 'major' countries; Germany, France, Italy and the UK) and Japan. Such concentration is inevitable in an industry whose customers have to be highly developed, both in a technical and financial sense. The third world is not, yet, a significant market for large computers.

TJW Jr's Research and Development

Of the two brothers, however, it was Tom Watson Jr. who, possibly unfairly, was seen to make the most obvious impact on IBM as a whole. As we have already seen, one of the greatest of these was his impact on the technology. Prior to his time IBM had been just about the best selling organisation in the world, with a reasonable range of products; for Thomas Senior had always insisted on sound products. Tom Jr, however, created and funded the research and development structure that is essential to modern high technology industry. It was under his supervision that the laboratories were built up, to a point where, in the late1980s, they contained a respectable number of Nobel Prize winners; and to the point where the R & D function could stand on an equal footing with marketing, true to his original objective.

When Tom Jr started this process in 1949 IBM was reportedly two years behind its main competitor, UNIVAC. In the 1980's, it was arguably up to a decade ahead of anyone else; though its problems since seem to have destroyed much of its strength in this area. This was not so obvious to the outside world, because the new products still followed the conservative release pattern started in the 1920's (and pursued very profitably until recently). Despite the hype about 'pre-releasing' products which did not yet exist, only when the market was sufficiently developed, and a launch was financially justifiable, did IBM commit its marketing resources. In the labs though, thanks to Tom Jr, they were able to dream the dreams of decades hence; independent and untroubled by the commercial winds blowing elsewhere. It was an ideal environment for an industrial researcher, and a highly productive for IBM.

Conservative Development…the most powerful approach to R & D demands that it leads the way to the future, but accepts that the actual launch timing is decided by the development of the market. This requires courage, however, and the resources to wait, and to overcome mistakes. With the frantic pace of development in the high-tech markets, however, the new motto may well be launch and be damned. Theory tends to assume that market introduction is mainly determined by the (suitable) availability of the new product or service.

Patience…in its most extreme form, as practised by IBM, the corporation would allow competitors to make the running in relatively undeveloped markets, even though it already had the technical expertise for exploit them. It patiently waited for the right time (and, in the process, learned from its competitors' mistakes). 

The first, sour, fruit of this was the STRETCH programme to develop a 'supercomputer' a hundred times more powerful than the 704; but still based on the vacuum tube. It failed, at a reported cost of $20 million. Although embarrassing in terms of the rumours that drifted to the outside world, it would not however be the last IBM computer series to be killed and the cost was small in IBM's terms; and the experience gained was invaluable. One of IBM's strengths was that - until the 1980s - it really did learn from experience. Most other companies are only too anxious to bury deep their embarrassing mistakes; and never use the invaluable information they have gained. IBM on the other hand made very good use of these particularly hard earned lessons. I cannot think of a single fiasco, and there had been quite a few in the history of IBM, that was not - in my time - used to learn lessons that have later returned a dividend many times over when incorporated in more successful plans and activities. So it was with STRETCH. Unfortunately, as we will see later, it was not as true of the weak management in the 1980s!

Bad Experiences are a Good Thing…the importance concept to grasp here is that IBM learned the lessons of its bad experiences. It undoubtedly would have preferred to succeed, but - having failed - it retrieved something from the investment by learning. Few other organisations do this - as the later IBM did not! Management theory now stresses the importance of the 'learning organisation'. Even so, it is less clear how, apart from using the consultancies promoting these ideas, organisations are to achieve this ideal; and too many still want to bury their failures and forget about them.

The three actual computer ranges that eventually emerged from 1958 onwards comprised the 7070 and 7090 (for large government business), the 1620 (for the scientific community) and the 1401 (for commercial use). Despite the fact that many observers believed that Tom Jr was frittering away the resources his father had built up, these new ranges were remarkably successful, doubling IBM's sales once more over the six years from 1958 ($1.17 billion) to 1964 ($2.31 billion), maintaining IBM's dramatic growth rate virtually undiminished at approaching 30% compound. The effect was that IBM had become independent of outside funding.

The IBM 360

Only 18 months after work had started on the 1401 Tom Watson Jr set the labs to work on what was to become the 360 range of computers. This was perhaps IBM's biggest gamble, and one on a scale that has rarely been equalled by governments let alone by companies. It was a decision on the part of Tom Watson Jr that can only be described as truly courageous.

The initial R & D reportedly cost $500 million, but this was merely the tip of the iceberg. The total investment, including six new plants built around the world (with IBM switching from being the world's largest purchaser of electronic components to being the world's largest producer of these!), was estimated to have cost $5 billion over 4 years. It was indeed, at the time, the most costly privately financed programme in history; according to Tom Wise it cost more than the Manhattan (atomic bomb) project up to the time of Hiroshima. It eventually absorbed 2,000 programmers; when problems with the 'leading edge' software caused the delivery schedule to slip near disastrously. It also added 50,000 to IBM's total workforce world-wide.

Most adventurously of all it was incompatible with the preceding ranges of machines; at a time when the Honeywell 200 had been announced as the first 'plug compatible' (that is a machine that simulated, or 'copied', the 1400) to which the customers' existing programs could be easily transferred. It was the last time IBM could afford the luxury, for by the time of the launch of the subsequent 370 computer the customer base was too valuable, and too tightly locked in to the technology, for any such risk to be commercially viable.

It is understandable that Bob O Evans, then head of IBM Federal Systems Division, described it at the time to reporter Tom Wise as "You bet your company...". He did though add the much less publicised rider  "....but it was a damn good risk and a lot less risk that it would have been to do anything else, or do nothing at all".

The gamble was of course a success, and made IBM virtually unassailable until the 1990s. The 360 range was announced on April 7th 1964 and the first 360/40 installed  (albeit late; but with the  production problems resolved) a year later in April 1965.

Although the project was Tom Watson Jr's greatest business achievement as reported outside IBM it was actually masterminded by his heir apparent, T V Learson, with Gene Amdahl (covering technical matters and later to found one of IBM's least welcome rivals), Albert Williams (who had the critical, and unenviable, task of keeping Wall Street happy with the massive investment programme), and Dick Watson (handling the production plan). It was later claimed that TVR (as Learson was known) used the predictably impossible task of bringing in the production on schedule to destroy Dick as his competitor (though Dick probably wasn't helped by his reputation for hard drinking and occasionally literally falling down on the job; as he reportedly did at one Family Dinner at the Hursley Labs).

Entrepreneurial Gambles…it is sometimes assumed that an entrepreneur is another form of - somehow more effective - manager. This is probably not true. By their natures they are often gamblers on a grand scale - as Tom Watson Jr demonstrated with the IBM 360. To gain the benefit of their successes you must run the high risk of their failures. This is typically unacceptable to modern, risk-averse, businesses; and even more of a problem for their career managers. They must, therefore, accept that they are unlikely to benefit from genuine entrepreneurship - and should find other routes to future success! Management theory, backed by economic theory and now by political hype, enthuses over entrepreneurs; though it often equates these to those making large amounts of money (which, as we see elsewhere, may not be quite the same!).

Organizational Structures

Perhaps Tom Watson Jr's truly greatest (but largely unrecorded) contribution to IBM was in terms of organisational structure, as had his been his father's; for one new range of products, no matter how successful, carries a company for a few years only. This achievement was, however, less widely reported, and even less widely appreciated.

In 1956, in a move that later became a biannual event, he reorganised IBM on divisional lines, to give a decentralised organisation, with 5 major divisions (in the US). The new structure comprised;

                        Field Engineering Division ‑ the most important grouping selling to (and servicing) commercial customers.

                        Federal Systems Division ‑ selling to (and servicing) the special requirements of the US government (including, later, major involvement as sub‑contractors to the NASA space programme).

      Systems Manufacturing Division

      Components Manufacturing Division

      Research Division

In the wings, almost as also‑rans, were Electric Typewriter, IBM World Trade, Service Bureau Corporation and Supplies Division; as well as the Time Division (which was  sold off two years later in 1958).

Tom Jr's own comment on the situation was "We had a superb sales organisation but lacked expert management organisation in almost everything else". He set out to rectify the lack and redirected IBM into an organised bureaucracy capable of absorbing the shocks of change; and indeed eventually designed to even create its own shock wave of change.

He also introduced the concept of line and staff. In his own words[5] "By the mid-50s just about every big corporation had adopted the so-called staff-and-line structure. It was modeled on military organizations going back to the Prussian army in Napoleonic times."

Staff & Line…it might have been the management flavor of the month in the 1950s, but unlike many fads it has stood the test of time and is still implemented in most large companies; albeit the size of the 'staff' groups have - according to fashion - varied, and are currently supposed to be small! In management theory 'staff' are seen, incorrectly, as an overhead cost rather than the asset they should be.

Management by Objectives (MBO)…somewhat ahead of time, for MBO was very much the flavor of the 1960s to come, the other great strength of his reorganization was that, again in Tom Watson's own words[6] "…it provided IBM executives with the clearest possible goals. Each operating man was judged strictly on his unit's results, and each staff man on his effort toward making IBM the world leader in his specialty."

MBO…Management By Objectives is now engrained in management theory across the board, the only debates being about how the objectives should be set, and judged, and - especially - how achievement of them should be rewarded. The efficacy of outside directors 'auditing' the performance of a large corporation was brought into question by the collapse of Enron, but the main dispute still revolves around the practice of outside directors, on the remunerations committee, circulating around the boards of their 'friends' and awarding each other highly questionable payouts for achieving difficult to miss targets; and sometimes even for failing to hit them!

 

Armonk…perhaps the final element of formal organisational change was the isolation of headquarters staff in Armonk, in up‑state New York. This was said by him to be in order to be near his family. He lived close by in Connecticut, where taxes were lower; but kept his staff across the border in New York State so, it has been suggested, that IBM would not be seen as similarly evading taxes! Cynics have indeed said it was his fear of nuclear warfare (he was the owner of a fall‑out shelter).  I suspect that such cynical views miss the point, for (whatever the reason) the physical separation of Armonk, I believe, contributed to subsequent senior management's ability to survey the world IBM scene more dispassionately; a degree of detachment that it used to particularly good effect in its strategic planning. This was the case, at least, until the 1980s when Armonk's  isolation may have worked against the interests of IBM, by reinforcing the problems of 'groupthink' which then seemed to emerge.

IBM chose to isolate its senior management geographically, which is a particularly effective approach, but I have also worked with a third world government which just as effectively stopped the lobbyists from obtaining access to its council of ministers in the capital by cultural means!

Head Office Detachment…one of the risks of a head office staff is that it will become embroiled in day to day dramas (and politics). This is not its function! Its reason for existence is to set the strategies, for the long-term, and let others (often better qualified for the task) implement them. To achieve this lofty position it must be isolated from the short-term (though, obviously, not unaware of it). The consequent potential danger, not to be ignored however, is an isolated management group which becomes prone to 'groupthink'. There has been much debate recently on the role of corporate headquarters; though most of this has focused on downsizing. The dangers of 'groupthink' were best documented by Irving Janis[7].

Principles and Beliefs - Respect for the Individual

Perhaps his most important organisational contribution was, however, in the area of ideology.

He had a very clear moral and ethical sense, just as strong as his father's but more in line with the twentieth century. He extended the IBM practice of protecting its employees, even though they were already protected and preserved under the philosophy that 'people' were IBM's finest asset. The Open Door policy (which we will see later in the chapter on Human Resource Management) originally started by his father was continued, but he introduced a whole series of new programmes that added up to IBM's 'Respect for the Individual', which was at the core of its later personnel policies; described at some length later in this book. For the first time he directed managers to hire Negroes and members of minority groups to every extent possible. He was a liberal, in a liberal era; following the tradition set by his father he promoted the careers of the Kennedys (and as with his father's experience, this still did not protect IBM from the inevitable anti‑trust suit!).

He was also a disciple of individualism, and this led to the 'controlled anarchy' which was , I believe, at the heart of IBM's continuing success (though I doubt he would have subscribed to the description of 'anarchy'!); and which was one of the casualties of the failing IBM. He deliberately set out to destroy the patriarchal worship and evangelising that was a feature of his father's reign. He had all the IBM song books banned, and indeed destroyed; so that those illicit copies that survived had a rarity value when allowed back in again a decade later! He was even seen wearing a striped shirt; the foundations of the old IBM really were being rocked!

Respect for the Individual…in the modern information society it has become essential to treat members of an organisation as individuals; to help them exploit their talents and to fulfil their individual promise - in the process enriching the organisation (whose most valuable investment has now typically become the people within it) as well the individual. However, management theory, even that of HRS, still tends to deal with groups rather than individuals.

The 'Wild Duck'…at the heart of this philosophy was the 'wild duck'. In the 1950's Tom Jr. (or perhaps one of his speech writers) had read a fable in one of Kierkegaard's books (not Ibsen, as reported by a number of writers, but still surely the most unlikely of models for a modern multinational!). In the fable, which is also featured in Tom Watson Jr's own first book (A Business and Its Beliefs), but which  - interestingly - is not even mentioned in his later autobiography, some villagers took pity on wild ducks flying south and fed them with corn. Unfortunately those that became tame and depended on the corn didn't continue south and died in the winter; only those which remained wild were able to continue their flight south. The moral was that it is easy to tame a wild duck, but impossible to return a tame duck to the wild. Tom Jr genuinely believed in a cult of individualism, and could express real contempt for what he saw as conformity.

Promoting the message of the 'wild duck' at every opportunity he said "As you stand up and are counted you will first run into the group who equate newness with wrongness....Second you're sure to meet cynics, people who believe anyone who sticks his neck out is a fool....Follow the path of the unsafe independent thinker....Speak your mind and fear less the label of crackpot than the stigma of conformity".

It was heady stuff for any large corporation; and particularly for one of the calibre of IBM.

Beliefs…he took the beliefs sufficiently seriously to incorporate them in 1962 in 'Principles and Beliefs' in the McKinsey Foundation Lecture Series; published in 1963 by McGraw Hill under the title 'A Business and its Beliefs. The Ideas that Helped Build IBM'.

In it he said that he believed a corporation like IBM "...owes its resiliency not to its form of organisation or administrative skills, but to the power of what we call beliefs and the appeal these beliefs have for its people.....In other words the basic philosophy, spirit and drive of an organisation have far more to do with its relative achievements than do technological or economic resources, organisational structure, innovation and timing.....IBM is still very much the company it has always been and what we intend it always shall be. For while everything else has altered, our beliefs remain unchanged."

Such philosophical, indeed near religious, thoughts were seen by most IBM watchers as hypocritical nonsense. William Rodgers in 'THINK', for example, dismisses them as "While Tom railed against conformity IBM enforced, it was a clear example of an intellectual, or perhaps emotional, disposition to honour what corporate policy stifled". An old colleague of Tom Jr was found who said "Tom doesn't believe it; he probably just wishes it was true. Life would be simpler and better that way. And who wouldn't like that?"

Undoubtedly there was an element of hope outstripping experience in his pronouncements. Equally, I imagine, a number of IBM's more die‑hard managers merely paid lip‑service to the new climate, but otherwise continued to enforce conformity in their ranks.

But ultimately, I believe, the cynics were wrong to dismiss all the evidence offered by Tom Jr's many pronouncements across more than a decade and a half. It was no temporary fad and a prolonged 'climate', promoted (and indeed enforced) over such a long period by as strong a manager as undoubtedly was Tom Watson Jr, has to have some significant impact The evidence in the later IBM - at least until the later 1980s - indicated that Tom Jr's efforts were not wasted and he succeeded in his ambition.

Wild Ducks…I have already said that it is probably now too risky for a whole organisation (at least a large one) to be dominated by gamblers (true entrepreneurs, that is). On the other hand, a wise organisation tolerates and encourages the 'free-thinkers', even those who are willing to question its basic business beliefs. These are the people who will, from time to time, create the future. Wild ducks often prove to be one of an organisation's greatest, but hidden, assets. Creativity theory does, as you might expect, stress the importance of encouraging such creative thinkers. It also recognises their often odd characteristics - and asks that you forgive them these in return for their potentially outstanding contributions. The rest of management theory, however, makes little or no allowance for them.

They will be a pain, as IBM's 'wild ducks' were, but they can do no harm unless management is infected by their most unworkable ideas. In return for being tolerated they may well see some aspects of the future more clearly. Any organisation would do well to heed the voices of its wild ducks, even if it then chooses (on a specific issue) to ignore them. It will have taken its decisions with all the information at its command, not with just those bits which it wants to hear!

Mind you TJW Jr. was especially lucky in that the ethical nature of IBM that he promoted, paradoxically, was strongly reinforced by the (anti-trust) threats of the US Justice Department!

Rather strangely, in view of his preoccupation with these philosophies whilst running IBM, they do not feature strongly in his auto-biography; which stresses the more conventional elements of his reign! Perhaps the pressure to conform eventually effects the most adventurous of managers!

Anti-Trust

At the time of the launch of the 360 range IBM was under considerable competitive pressure from the large 6600 computers offered by Control Data. To counter this IBM announced, in August 1964, the 360/91, followed over succeeding months by a number of replacement machines, Only a few of these were ever produced (reportedly only 25 machines; and at a loss of $110 million) and in 1967 IBM stopped selling them.

Control Data, understandably, was less than happy with this spoiling strategy (as they saw it) and claimed these were only 'fighting machines' (such as had been used by Watson Sr. at NCR) purely designed to keep Control Data out. It is possible, as I for one believe, that IBM simply outstripped its own capabilities and just couldn't meet its promises; even IBM does not usually contemplate a $110 million loss to fund a fighting machine. The jury is still out, however, for although CDC instituted an anti‑trust suit in December 1968 a settlement was reached in 1973. From IBM's point of view, the most important aspect of this settlement was that CDC was required to destroy its index to the millions of documents were about to be also used by the Department of Justice; and without which their case was to be much less powerful!

The history of the CDC anti‑trust suit, and the host of copycat suits by other companies that it spawned is worthy of a book in itself (and indeed there is at least one such book). Ultimately, though, it adds little to one's knowledge of IBM as a whole. Of the literally millions of pages (to be precise 66 million pages and more than 2,500 depositions) that have been archived in the case, those that have been abstracted - apparently almost exclusively by the prosecution in the case - were designed to show IBM in a bad light. More important, from the point of view of this book, they were not representative of how IBM then normally did business; no matter how reprehensible, or even illegal, each individual item so reported might be considered to be.

The most important impact, though, was that it possibly prompted the US Justice Department in January 1969 (at the very end of Johnson's presidency) to mount its own anti‑trust suit. This one was not so easily settled. It consumed the efforts of hundreds of lawyers and probably hundreds of millions of dollars over a decade and a half; until it was eventually withdrawn in January 1982. It is arguable that some of the most dubious of its practices were stimulated by the various cases brought against it. For instance, one of its covert offices, not listed in any IBM directory but located in Victoria Street in London during the early 1980s (and staffed by a very high-powered group of IBM managers), probably really was set up - as IBM claimed - to ensure that IBM might fully meet the requirements of the EEC. On the other hand, the - possibly apocryphal - reports of that group's covert activities at the time did seem to suggest that there was at least some 'laundering' of IBM's key files (as more recently happened to some of Enron's) to ensure that there was no evidence of IBM's past transgressions, rather than that there were no transgressions per se!

The key effect of this, though, was that, for a critical decade and a half, IBM was under the constant scrutiny of the US government; which was ready to pounce on the slightest transgression, and almost continuously threatened break‑up on the lines of Standard Oil earlier in the century. The ethical standards promoted by Tom Jr might possibly have faded into obscurity under the pressure of normal business priorities. Under the scrutiny of the US Justice Department, on the other hand, they became the very backbone of IBM.

Thus, I believe the anti‑trust suit, which has usually been portrayed as a threat to IBM, was in perverse reality a critical element in its success; and indeed was essential to the development of the modern company, founded more on philosophies than profits. The paradoxes did not cease with the departure of Thomas J Watson Sr.

Regulation as an Asset…most organisations view regulation, usually by national governments, as a major limitation on their operations (indeed, often as an evil to be combated!). Yet, most large organisations owe much of their strength to such regulation. IBM's experience was possibly untypical, but regulation more generally stabilises markets and often consolidates the positions of large corporations. They would, therefore, be wise to see how they can best optimise the impact of such regulation, looking to maximise positive results rather than just minimising the negative ones. Management theory, and especially neo-classical economic theory, tends to see any regulation as a negative activity which should be opposed at any cost!

It is perhaps not coincidental that soon after the pressure of 'anti-trust' had been removed in 1982 (compounded by the fact that there was no longer a member of the Watson dynasty in power to oversee its moral values) IBM's results (for 1985/1986) deteriorated. The author DeLamarter ('Big Blue' - Dodd Mead) and his colleagues had forecast that, released from the chains of anti-trust, IBM would be unstoppable (even to the extent, such was their thesis, that it would rapidly become a danger to the community as a whole). I, on the contrary, predicted in my earlier book exactly the opposite. I am glad to say, in terms of the community (though sorry for the sake of IBM which I would have wished to see succeed), that the very reverse turned out to be the case.

Corporate Modesty…one element of philosophy that applied only to Armonk, but was - until the two John's began to believe their own propaganda - I believe a critical factor of IBM's longevity as a dominant feature in the most volatile of markets, was an acute awareness of its own fallibility. This was derived from the Watsons. Tom Jr, for example, in 1974 revealed to a reporter that "The secret I learned early on from my father was to run scared and never think I had it made....I never felt I was completely adequate to the job and always ran scared...The fundamental for our (IBM) success was running scared. I've seen us go by companies whose chief executives used to make me shake in awe". Bill Gates too suffers from the same profitable fear! IBM's Two John's later just ran, and ran, confused!

Running Scared…it is a virtue, for any great leader to aspire to, that he or she should be aware of their own limitations; and those of their organization. One of the most widely used - albeit too often misused (so beware!) - concepts of management theory does stress the importance of understanding an organization's Weaknesses (and the Threats it faces) as well as its Strengths (and the Opportunities open to it) - in the memorable acronym SWOT. It is, as used by most managers though, a dangerously incestuous process - examining only the strengths and weaknesses they see inside the organisation (and not the more important threats and opportunities which apply outside of it!).

An Unsung Leader

I will complete this chapter with a tribute to Tom Watson Jr., who died at the end of 1993; just as the company he loved was about to be destroyed. He was a mere mortal, a damaged one at that (if you read between the lines of his autobiography), but he was one of the truly great business leaders of the second half of the twentieth century. Indeed, he had been dubbed by Fortune magazine 'the greatest capitalist who ever lived' -  a compliment (possibly dubious in intent in view of his connections with the Democratic Party) which, typically, misunderstood his most important contributions to the development of management thinking.

He may have achieved his initial position by nepotism, but he never abused it, and indeed used it to improve the lot of man (or at least those men - and women - working in IBM). He held that position not for power, but because he wanted to make those improvements. He was, surprisingly, a modest man - who belittled his own talents (even to himself), but he had the courage to lead the world into the computer age and to put in place some of the greatest management innovations yet seen. regrettably, few others have followed in his footsteps (not even, fatally, at IBM!).

If you want a model of an ideal CEO you should read about him, his flaws as well as his greatness, in his autobiography (written in conjunction with Peter Petre): 'Father, Son & Co.: My Life at IBM and Beyond (Bantam Books, 1990). It concentrates on his personal life (despite the title) but still gives an insight into what drove him to greatness. Best of all, though, I would recommend that you track down a copy of his earlier book, 'A Business and its Beliefs' (McGraw Hill : 1963). This is a definitive statement of his philosophies, and conveys in a relatively few pages an excellent feel of the culture that made IBM great.  'The IBM World' by Nancy Foy (Eyre Methuen:1974) contains a detailed account of IBM in the early 1970's, and still gives a reasonable feel for the IBM of that time (which remained relatively unchanged, in many of the areas she described, throughout Tom Watson Jr's term of office).  

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