Look to Thomas Watson’s Past for IBM’s Future
When Thomas Watson Jr., who died last Friday at 79, stepped down as chairman of IBM Corp. in 1971, the company that he and his father built had $8 billion in annual sales and $1 billion in profit.
Last year by contrast, IBM had more than $60 billion in sales--but losses estimated at $14 billion. In recent years, the decline of IBM--a company that once seemed destined to rule the world of technology and business--has become the stuff of mystery, a doctoral thesis or a novel waiting to be written.
Yet Watson himself wrote the book that gives many reasons for IBM’s rise to greatness as well as clues to its decline and possible hints about its future--not to mention lessons for all business. It’s called “Father, Son & Co.,” a 1990 book that is both a candid autobiography and one of the best business stories ever written.
Watson, who led IBM for almost 20 years, “had a very strong belief in the value of technology,” says Jack D. Kuehler, who worked for 35 years at IBM and retired last year as its president. “He knew that a company had to sense change and go with it.”
Watson saw the first computer, ENIAC--which later evolved into the Univac computers that today are products of Unisys Corp.--shortly after World War II and realized that the speed of electronic computing would make IBM’s electromechanical machines obsolete. So he led IBM into computers in the early 1950s--but not just into the field, to leadership of it.
In 1954, just as IBM was about to bring out a new computer, it learned that Univac’s new machine would possess superior capabilities. So Watson rushed forward development of memory technology that had been planned for three years hence and had it running in IBM machines within six months.
Then in the 1960s, he bet the company on the System/360, a single computer design available in models renting for $2,500 to $115,000 a month. The effort to produce the 360 was grueling. Watson’s book describes bitter arguments, near disasters and tough decisions--one of which demoted and hurt Watson’s own brother.
But the 360 was a wild success, and IBM began to pull away from the pack.
In a fascinating footnote to what might have been, Watson learned of a potential joint venture in the 1960s between Xerox and IBM, which he favored because he foresaw technological possibilities from a combination of copier and computer. But the venture had fallen through because of opposition from engineers in both companies.
That was unfortunate because Xerox’s Palo Alto Research Center originated the basics of the personal computer--the technology that ultimately undermined IBM, even though the company today sells more PCs than anybody.
Almost immediately after Watson stepped down, following a heart attack at age 56, IBM began to change. Chairman Frank Cary, who led IBM in the 1970s, perceived a threat from Japan and spent billions to stave off a computer invasion that never came because Japanese firms lacked the technology.
Computer technology was moving too fast for Japan’s large firms and soon it moved too fast for IBM. The Armonk, N.Y., company began to look upon each new development as a threat rather than an opportunity, says Bob Djurdjevic, a former IBM executive who now runs Annex Research in Phoenix.
It missed on minicomputers in the 1970s and, more seriously, it missed the full implications of the personal computer which Apple brought out in the late ‘70s. IBM set up a separate unit to produce a PC quickly, using Intel microprocessors and Microsoft software.
But the company did not turn itself inside out, as it had for the 360.
Rather, it tried as much as possible to maintain comfortable cash flows from older products while giving only a defensive response to new ideas.
As a result, IBM missed all sorts of technology. “The Sony video camera in the 1970s was an electronic product and IBM could have had that technology--with vast implications for today,” says Paul Saffo of Institute for the Future, a Menlo Park research firm. “If IBM were awake on software, Microsoft would never have become the powerhouse firm it is today.”
But yesterday’s gone, what of tomorrow? Enthusiasm for IBM stock has been growing--it rose again Tuesday to $59 a share, near a 12-month high but a fraction of the $175 a share IBM sold for in 1987.
Investors buying for earnings are likely to be disappointed. Analyst Steven Milunovich of Morgan Stanley sees IBM earning $5 a share in 1996, which makes $59 a generous price today.
The better possibilities lie in the technology in IBM’s labs. “They lead in distributed databases, the kind that allow computers to talk to each other in airline reservation systems,” says Kenneth Bosomworth of International Resource Development, a Connecticut research firm.
And IBM has a software system, developed through a joint venture with Apple called Taligent, “that offers whole new ways of thinking about computing,” says Kuehler.
“Whenever we had superior technology to complement our systems knowledge, our business skyrocketed,” wrote Watson, who saw to it that the company kept ahead in a changing world.
What remains to be seen is whether IBM’s new chairman, Louis V. Gerstner, a former management consultant and head of RJR Nabisco who talks a lot about marketing, will pick up that legacy.
IBM shareholders should insist that he reread Watson’s book.
