IBM Corp. is the world's leading maker of computer hardware—including mainframes, notebooks, personal computers, and servers—as well as the number one computer-related services provider. The firm is also second only to Microsoft Corp. in the computer software industry. While its position as a mainframe system powerhouse allowed it to experience stellar growth in the 1970s and 1980s, IBM spent most of the 1990s working to reinvent itself as an e-business services provider. By 2001, services—both e-business and otherwise—accounted for more than one-third of annual revenues.
In 1911, Charles F. Trust oversaw the formation of Computing-Tabulating-Recording Co. (C-T-R) by merging three companies: Hollerith's Tabulating Machine Co.; the Computing Scale Co. of America, established in 1901; and International Time Recording Co., founded in 1990. A manufacturer of industrial time recorders, scales, tabulating machines and more, C-T-R formed the core of what would become International Business Machines (IBM). Clients included railroads, chemical companies, utilities, and life insurance companies. Based in New York, the new firm employed 1,300 workers.
Flint hired National Cash Register Co. executive Thomas J. Watson, Sr. to run C-T-R as general manager in 1914. He laid the groundwork for what would become a key factor in IBM's long-term success—excellent customer service. Watson also focused on fostering employee loyalty by putting in place programs that offered rewards for meeting sales goals and by hosting various events for the families of employees. He was appointed president in 1915. That year, at the firm's first sales convention, Watson began to recognize that C-T-R's tabulating machines were its most promising products. He shifted focus from clocks and scales to tabulators and other basic office gadgets. In 1917, C-T-R launched its first international venture when it established a subsidiary named International Business Machines Co. in Canada. A unit also opened in Brazil. By then, employees totaled 3,000.
International expansion continued two years later when C-T-R moved into Europe for the first time. The firm launched an electric synchronized time clock system, which was quickly followed by the release of a printing tabulator and an electric accounting machine in 1920. C-T-R bought Chicago, Illinois-based Ticketograph Co. in 1921. In February 1924, C-T-R changed its name to International Business Machines Corp. New product releases included the Carroll Rotary Press, which produced punched cards at a high rate of speed; a self-regulating time clock system; and a horizontal sorting machine. Offices opened in Asia, Latin America, and the Philippines, and in 1925, the firm's accounting machines were launched in Japan. That year, shareholders received their first stock dividend.
Stock split three-for-one in 1926. Several IBM products were awarded first prize at the Sesquicentennial Exposition in Philadelphia, Pennsylvania. By most accounts, the firm was considered exceptionally profitable by the late 1920s, when earningss exceeded $5 million on sales of nearly $20 million. By then, IBM had become a leading player in office technology. The firm's punched cards could hold 80 columns, nearly double their previous capacity. In 1928, IBM unveiled an accounting machine able to perform subtraction. Although the stock market crash of 1929 left many businesses floundering, IBM was able to pay a five percent stock dividend. In fact, throughout the Great Depression, IBM hired new employees and continued growing operations and building inventory. In 1931, the firm launched its 400 series alphabetical accounting machines and 600 series calculating machines.
The firm faced its first legal battle in 1932 when the U.S. Justice Deptartment filed an antitrust suit against IBM after finding that its cross-licensing agreement with rival Remington Rand—a deal that was put in place in the 1910s—was anti-competitive. The suit also addressed IBM's exclusive punch card agreements, which prevented clients from using the cards with non-IBM machines. Four years later, after determining that IBM held 85 percent of the U.S. keypunch, tabulating, and accounting equipment markets, the Supreme Court ordered IBM to nullify its restrictive agreements. However, the ruling's impact on IBM was minimal as sales of its machines continued to grow.
In 1933, IBM built a new research and development laboratory in Endicott, New York. The firm also constructed the IBM Schoolhouse, a training facility for employees. After acquiring Electromatic Typewriters, Inc., based in Rochester, New York, IBM established a new electric writing division. The firm divested a portion of its scale manufacturing operations to Hobart Manufacturing in 1934. That year, the firm launched the 405 Alphabetical Accounting Machine and began offering a group life insurance plan to employees; survivor benefits were added to compensation packages shortly thereafter. The Social Security Act of 1935 offered an unprecedented opportunity to IBM as the government needed calculating machines that could maintain employment records for more than 26 million citizens. Because IBM had bolstered its inventory throughout the Depression, it was able to fulfill the landmark contract for more than 400 accounting machines and 1,200 keypunchers. The firm continued making new product releases, including its first successful electric typewriter and a proof machine to clear bank checks.
In 1936, IBM became one of the first U.S. companies to offer employees paid holidays and vacations. That year, the firm released a collator and a test-scoring machine. Employees exceeded more than 10,000. By the start of World War II, IBM was posting earnings in excess of $9 million, or roughly one-quarter of sales. With revenues nearing the $50 million mark, IBM had become the leading office machine maker in the U.S. Analysts pointed to three major practices that enhanced IBM's performance: its policy of leasing its machines to clients; its focus on large-scale, customized systems; and its cross-licensing deals with rivals.
MOVE TO COMPUTING
IBM operations were focused on the war effort beginning in 1941, and the firm manufactured fire control instruments for ships and planes, automatic rifles, and bomb sighting devices. It was during the war years that IBM made its first move toward computing. In 1944, in conjunction with Harvard University, IBM created the Automatic Sequence Controlled Calculator, the first large-scale device that could process lengthy calculations. Over eight feet tall, the five-ton machine, known as Mark I, housed nearly 500 miles of wire and 765,000 parts. Some industry experts consider Mark I the world's first computer.
IBM established the Watson Scientific Computing Laboratory at Columbia University in 1945. Sickness, accident, and retirement plans were offered to employees that year, and special programs were put in place for handicapped workers. IBM also became the first company to grant money to the United Negro College Fund. In 1946, IBM introduced its first small, electronic calculator, known as the 603 Multiplier, and pocket-sized braille writing devices. Stock split five-for-four. Watson continued building the firm's non-cash employee compensation package, adding a hospitalization plan. He also began hosting dinners for employees and their spouses. By then, the firm's workforce totaled roughly 22,500. A vested rights pension plan, along with total and permanent disability income plans, were added to the benefits package in 1947. The following year, IBM introduced its Selective Sequence Electronic Calculator, its first large-scale digitized calculator. Other innovations included the 604 Electronic Calculating Punch. The Card-Programmed Electronic Calculator, unveiled in 1949, was the firm's first product built exclusively for computing centers. The 407 Accounting Machine and the IBM Model A "Executive" Electric Typewriter were also shipped that year.
IBM moved into Israel and the United Kingdom in the early 1950s. When competitor Remington Rand began marketing the UNIVAC computer and gained a significant share of the new computer market, IBM opted to monitor demand before delving deeper into computers. Thomas Watson, Jr. took over as president in 1952. Believing IBM should, in fact, focus its efforts on computers, Watson launched a large-scale research program with the goal of bypassing Remington Rand. According to IBM's Corporate History, "Just as his father saw the company's future in tabulators rather than scales and clocks, Thomas J. Watson, Jr. foresaw the role computers would play in business, and he led IBM's transformation from a mediumsized maker of tabulating equipment and typewriters into a computer industry leader." The U.S. Justice Deptartment filed its second antitrust suit against IBM that year; the litigation eventually resulted in a consent decree between IBM and the government. Shortly thereafter, the firm launched a computer designed for scientific calculations, the IBM 701. The vacuum tubes used in the 701 were smaller and easier to replace than the switches used in earlier machines. Product introductions in 1953 included the IBM 702, the 650, and the Model A Toll Biller. That year, IBM created a formal equal opportunity hiring policy, vowing not to discriminate on the basis of race, color, or creed. IBM constructed the Naval Ordnance Research Calculator for the U.S. Navy in 1954; it was considered the fastest and most powerful electronic computer to date.
IBM created two new divisions for its electric typewriter and military product operations in 1955. The IBM 705 machine, launched that year, was the firm's first general purpose business computer; its success help to oust Remington Rand from its first place spot in the new computer market. In fact, the majority of businesses already using IBM office machines—roughly 85 percent of the market—eventually switched to IBM computers. IBM reorganized into six autonomous divisions in 1956. Employees totaled 72,500. To fund additional growth, the firm offered 1.05 million shares of stock. IBM also established Service Bureau Corp. as a wholly owned subsidiary; created the first computer disk storage system, known as RAMAC (Random Access Method of Accounting and Control); and introduced the FORTRAN computer language. In 1958, Control Data and Sperry Rand launched computers using new transistor technology in place of vacuum tubes. As a result, IBM began working on the IBM 7090, a transistor-based machine that could perform nearly 230,000 calculations per second. IBM also divested its time equipment operations. The following year, IBM created its Advanced Systems Development unit to experiment in emerging markets.
Thomas J. Watson, Jr. took over as chairman of the board in 1961, and Albert L. Williams was appointed president. That year, IBM established its components division. Three new divisions—industrial products; real estate and construction; and research—were created in 1963. In April of 1964, IBM introduced the System/360, which used software and peripheral equipment compatible with each of the five models in the line of computers. This interchangeability was a new concept in the computer industry, and it proved to be one of IBM's most important moves. The firm also acquired Science Research Associates, Inc. and created a field engineering division. The electric typewriter division was renamed the office products division. Gaining its largest space-based contract to date, IBM's federal systems division landed a contract to build a component for the Saturn launch vehicles. In 1965, the firm used a computer-based communications network to connect its U.S. and European engineering, manufacturing, and administrative facilities to coordinate work on System/360. IBM also shipped the 2361—the largest computer memory in history—to NASA space center in Houston, Texas. Orders for System/360 continued to grow. T. Vincent Learson succeeded Albert Williams as president in 1966, and employees neared the 200,000 mark. Thomas J. Watson, Jr. was named "Businessman of the Year" in Saturday Review. The firm found itself facing a third lawsuit in 1968 when Control Data Corp. brought charges against IBM for allegedly selling its clients "phantom" computers to prevent them from ordering Control Data machines. The following year, the U.S. Justice Department filed its own suit against the firm, finding merit with Control Data's complaints, as well as concerns regarding other anti-competitive activities.
Product releases in the 1970s began with the System/370, IBM's most powerful computer ever, and a photocopy machine. The firm also introduced an electronic supermarket checkout station; a consumer banking transaction facility that proved to be the precursor to Automated Teller Machines (ATMs); the 5100 Portable Computer, which was discontinued early in the next decade; the 5110 Computing System; and the 5520 Administrative System. Thomas Watson, Jr. resigned as CEO in 1971, and Learson took the reigns of IBM. In 1973, a federal district court dismissed Control Data's case against IBM after IBM agreed to sell its Service Bureau Corp. to CDC. Frank T. Cary took over as CEO that year. He reorganized the firm's overseas operations into two groups: IBM World Trade Europe/Middle East/Africa Corp. and IBM World Trade Americas/Far East Corp. The Justice Department's antitrust suit against IBM went to trial in 1975. Throughout the 1970s, the firm successfully defended itself against antitrust cases by Xerox Corp., Memorex, Transamerica, and others. In 1979, the field engineering division began offering 24-hour telephone assistance for customers with software problems. The first IBM retail shops, called IBM Product Centers, opened in London and Buenos Aires.
The first IBM Product Centers in the U.S. opened in 1980. A fledgling IBM subsidiary, known as IBM Instruments, Inc., launched a line of analytical instruments. IBM also began shipping the 5120 Computer System—the least expensive IBM machine to date—and its Displaywriter word processing system. In 1981, IBM changed its marketing practices to allow marketing teams to sell and distribute an entire product line to clients. John R. Opel took over as CEO. The firm introduced its landmark IBM Personal Computer (PC), which helped to launch the PC revolution, in August of that year. The machine was the firm's smallest and least expensive computer system to date. It used a processor chip from Intel Corp. and the DOS operating System of Microsoft Corp.
To sell its PCs, IBM began authorizing retailers like Sears, Roebuck & Co. and Computerland. The firm also expanded its sales channels to include manufacturers who integrated IBM products into their systems. In 1982, the U.S. Justice Department finally dropped its 13-year antitrust suit against IBM. The firm developed independent business units to explore new high-growth markets, such as telecommunications. IBM also acquired a minority stake in Intel Corp. Research, development, and engineering costs totaled $3 billion for the year. In 1984, IBM, acquired ROLM Corp. Dealer outlets across the globe totaled 10,000. Sales reached $46 billion, with net income growing to $6.6 billion.
John F. Akers took over as CEO in 1985. After several decades of considerable growth, the firm faced a slowdown in both earnings and sales, and stock prices begin a long, gradual decline. One factor in the firm's plateau was stiff competition from rivals like Compaq Computer Corp., which was able to developed its own IBM-compatible PC. In fact, makers of these IBM "clones" were able to outsell IBM in the retail PC market. In 1985, IBM developed the token-ring local area network (LAN), which allowed employees working at desktop PCs to share files and peripheral equipment like printers with other desktop PC users. Ironically, the PC revolution that IBM had played a major role in sparking also eventually forced the computing giant to reinvent itself. Used to selling large-scale systems to businesses, IBM was ill prepared to target the fastest growing segment of the burgeoning PC market: individual consumers. By the end of the decade, IBM had made plans to cut thousands of jobs through attrition and take a $2.3 billion charge against earnings for restructuring.
Although the firm spent the early part of the 1990s pursuing new markets and forging joint product development agreements with other firms, it continued to flounder. The accelerating rate of technological advancements in the data processing industry had eroded IBM's dominant position, which depended on businesses using very large and expensive mainframes designed essentially for number crunching. As increasingly powerful semiconductor chips allowed for smaller computers able to handle a broader range of functions, minicomputers, microcomputers, and work stations had undercut the value of huge mainframes. Believing that IBM needed a major overhaul to best respond to these market changes, Akers announced his intention to divide IBM into nine semi-autonomous divisions, each accountable for its own corporate decisions and performance. In 1992, IBM launched its first laptop computer. Losses reached $8 billion the following year.
SHIFT TO E-BUSINESS SERVICES
RJR Holdings executive Louis V. Gerstner, Jr. was hired to take over as CEO and chairman on April 1, 1993. He canceled Akers' plan to divide IBM into separate entities, believing that the firm's ability to offer comprehensive business solutions to clients would prove beneficial in the long run. He also began reigning in IBM's research and development spending, which had reached $6 billion by 1992. In June of 1995, IBM bought Lotus Development Corp., hoping to strengthen its foothold in the computer software market and use the Lotus Notes messaging software to offer integrated email, data processing, and Internet services to clients. The firm also folded its software operations into a single unit to simplify purchasing and support services for customers. Sales that year totaled $71 billion. In 1996, IBM added network software maker Tivoli Systems Inc. to its holdings.
By mid-1997, services had become the fastest growing segment of IBM's operations. The firm began touting itself as an e-business products and services provider. Earnings reached $6 billion on sales of $78.5 billion. IBM divested its Global Network operations to AT&T Corp. for approximately $5 billion. In 1998, the company acquired wireless communications chip maker CommQuest Technologies. That year, IBM increased its advertising budget by 21 percent, pushing its e-business servers, software, hardware, technology, and services in an effort to target business managers expected to use the Internet to streamline processes, improve bottom lines, increase visibility, and so on. The firm bought Denmark-based corporate resources planning software maker Management and Applications Support in 1999. It also updated the e-business portion of its own World Wide Web site. Sales climbed to $88.4 billion.
IBM's first e-Business Innovation Center was launched in Santa Monica, California, in January of 2000 with 16 employees. Central to the firm's e-business services was its WebSphere server software, which IBM used to support the e-commerce initiatives, including retail Web sites, of clients. The Web-Sphere Commerce Suite 4.1 package launched that year included Web development tools and customer classification functions that allowed e-business to hone future marketing efforts. By December, employees at the center had grown to 135, and e-business services had increased more than 70 percent to $5.2 billion. IBM's own Web site realized a 65 percent increase in sales, reaching $9 billion.
Rather than targeting dot.com upstarts, as many e-business service providers had done, IBM peddled its services to traditional businesses. As a result, when the dot.com fallout in 2000 left many in the e-business services industry floundering, IBM continued to grow. By 2001, 25 e-Business Innovation Centers were either operating or being constructed. According to a January 2001 article in the Los Angeles Business Journal, "IBM wants to establish itself as the one-stop shopping source for customers seeking Web-related creative design, consulting and tech support."
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