IBM (International Business Machines)

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IBM (International Business Machines)

According to the Washington Post, "IBM didn't invent the computer … it invented the computer industry." Eventually expanding to become the largest company in the world, International Business Machines (IBM) came to represent, at different points in its history, the best and the worst of big business and American corporate culture.

Charles Ranlegh Flint, the "Father of Trusts," founded the Computing-Tabulating-Recording Company in 1911 upon the acquisition and merger of three manufacturers of such products as shopkeepers' scales, punch clocks, and large tabulating machines used by the census bureau. Flint hired Thomas J. Watson, Sr. to run his new company.

Watson was a star salesman and business executive at National Cash Register before joining what would become IBM. Upon his arrival, he implemented a system of territories, quotas, and commissions for his salesmen. The motto "T-H-I-N-K" was posted in all branch offices and salesmen were required to dress in sharp blue suits and white shirts. Those who met their quota joined the One Hundred Percent Club. The methods were successful, and by 1920, the company had tripled its revenues to $15.9 million. Watson renamed the firm International Business Machines in 1924. The sales focus and buttoned-up image Watson honed during the company's early days came to define IBM through the remainder of the twentieth century.

But beyond his sales focus, Thomas Watson was evangelical in his company pride and instilled his brand of optimism in his employees. He offered perks such as company sports teams, bands, and family outings. In the 1930s, IBM became one of the first companies to offer life insurance, survivor benefits, and paid vacations to its staff, and during World War II, it used profits from manufacture of weapons for the government to start a fund for widows and orphans of IBM war casualties.

From its origins as a manufacturer of tabulating machines, hawked by impeccably-dressed salesmen, IBM came to dominate the computer mainframe market in the 1950s, 1960s, and 1970s, earning the moniker, "Big Blue." Fueled by the personal computer boom of the early 1980s, the company became the largest and most profitable corporation the world had yet known. Ranked as America's most admired company year after year in surveys of U.S. businesses, IBM astonished the business community and consumers alike with its consistent growth and profitability, its lifetime employment policy, famed management methods, crack sales force, and technological leadership. It represented to many the ideal of what American corporate culture and big business could achieve.

By the early 1990s, however, IBM had come to represent just the opposite. In a very public fall from grace, it recorded the largest ever loss in corporate history, abandoned its lifetime employment guarantee, and shed tens of thousands of workers. The company, it seemed, had become the epitome of an overgrown, anonymous, monopolistic, bureaucratic monster—outmatched in marketing and technology by swifter, nimbler competitors; too big to change, it appeared destined to collapse under its own ungainly weight. By the end of the twentieth century, though, IBM staged a turnaround, and reemerged as a profitable corporate giant once more.

From the beginning, IBM grew rapidly. Through the 1920s and 1930s, the company profited by renting electric punched-card accounting machines to large companies. During the Great Depression, famously holding to its optimism and faith that the economy would improve, the company continued production at full capacity, even as sales declined. By 1936, IBM held 85 percent of the office machine market, with sales of $26 million. New Deal programs, such as the Social Security Act of 1935, required businesses and government alike to keep more records, thus increasing the demand for IBM's punched-card tabulating systems. By 1940, IBM had revenues of $46 million and a workforce of nearly 13,000 employees. Wrote Fortune that same year, "The International Business Machines Corp. has beheld no past so golden as the present. The face of Providence is shining upon it … it has skirted the slough of the Great Depression… its growth has been strong and steady."

It was the mainframe computer business that propelled IBM's explosive growth in the post-war era. After World War II, Watson Sr. greatly increased the firm's research and development budget, and his son, Thomas Watson, Jr., championed computer development. In 1948, IBM installed one of its first computers, a-buzz with thousands of neon lamps, relays, switches, tape readers, and punches on the ground floor of its New York headquarters for passersby to gawk at through a window. By 1960, there were 5,000 computers in the United States, most of them made by IBM, whose annual revenues had ballooned to $1.6 billion.

During this period, IBM was legendary as a fair and generous employer. Watson, Sr. had not resorted to mass layoffs during the Depression, and continued to pay salaries to absent employees serving in World War II. The firm generously paid moving expenses for transferred employees, guaranteeing a minimum resale price for their homes and retraining spouses for jobs in their new cities. Most famous of all was IBM's guarantee of lifetime employment for all workers.

Through its introduction of what became large-scale public goods, the company became an institution. IBM created FORTRAN in 1957, the world's first widely accepted computer language. In 1964, it implemented the largest civilian computerization task ever undertaken, the revolutionary SABRE reservation system used by American Airlines, and proceeded to implement similar systems for the other major airlines. In 1973, IBM created and implemented the ubiquitous Universal Product Code and bar code systems used in supermarkets.

But IBM's core business was mainframe computers, and in this area, it held a 70 percent market share through the 1960s. Its competitors, left to split up the remainder of the industry, were often referred to in the business press as the "seven dwarfs." IBM's investment in research and development was unmatched. In the 1960s, the company undertook the largest ever development project up to that point, a five-billion-dollar effort to create the next generation of mainframe computers, an effort larger than the Manhattan Project.

As technology advanced, computing power became less concentrated in large mainframes and, by the mid-1970s, personal computers were possible in the home, each as powerful as the early mainframes of decades before. IBM's next challenge was to sell these types of computers, not directly to other businesses via its sales network as in the past, but to consumers through the retail market. In the early 1980s, the company unveiled its line of personal computers, which propelled its growth ever higher, even as new competitors such as Apple Computer and Microsoft began to stake out claims in the growing market with their own rapid growth.

Dubbed by Barron's, "America's most beloved stock" and by The Washington Post, "long the bluest of the blue-chip performers," the reliability and size of IBM stock and dividend growth was renowned. Said Barron's, "just about everyone and his dog owns IBM." Watson, Jr. was labeled by Fortune Magazine, "the greatest capitalist in history." IBM was highlighted in the 1982 business book In Search of Excellence. It grew to be the most valuable company in the world in 1984, worth $72 billion and earning the largest profit ever to that point, $6.6 billion.

But as IBM's reputation was growing as a fair, wildly successful and innovative company, it was coming to represent something else, too. In 1969, the government began a 13-year, ultimately unsuccessful, anti-trust case against the accused monopolist. In 1975, IBM pulled the plug on its five-year Future Systems development project for the next generation of mainframe computers, effectively wasting over $100 million and many millions of staff hours. The impression was spreading that IBM was just too big and involved in too many businesses; too bureaucratic to execute or innovate, as a monopoly it just didn't have to try.

In 1984, the year of IBM's record profits and valuation, a comparatively small upstart, Apple Computer, ran a historic television advertisement during the Super Bowl. In the ad, an endless regiment of identical gray drones stared at a large screen, listening to a speech by an authoritarian leader—only to be freed by a colorful interloper who shatters the screen. This portrayal of "Big Blue" as "Big Brother" was an explicit reference to George Orwell's dystopic totalitarian vision in his novel 1984.

The final blows came in the early 1990s, when the company suffered its first loss in history and its stock market value fell by more than half. In 1993, the company took a loss of $8.5 billion. Said Barron's in late 1992, "The old saw that IBM is always a safe stock pick, handed down through the generations … finally bit the dust last week." Also in 1992, Fortune wrote about IBM's "bulging, lethargic bureaucracy," and said, "employee morale is in the dumps," labeling the company a "humbled American corporate behemoth" with an "inward-looking culture" that had "lost touch with consumers." According to The Wall Street Journal in 1993, the company had "unraveled." IBM ran nearly one hundred different voluntary buyout and early retirement programs to reduce staff while trying to maintain its no-layoff policy.

By the late 1990s, IBM had largely recovered. By hiring its first ever CEO from outside the company, acquiring other firms, and selling off some of its businesses, it was able to regain profitability, but not its unquestioned dominance in what had become a much larger industry.

For many Americans, IBM—strong, paternalistic, and rapidly growing—was emblematic of the triumph of American corporate culture for most of the twentieth century. Indeed, their methods and image were similarly regarded internationally. This made its dramatic failures in the early 1990s all the more astonishing, as observers watched the company rapidly became a symbol for all that was wrong, not right, with corporate America. Its reemergence in the late 1990s saved the company, but not the rarefied ideal that large, benevolent corporations could represent the best of an ingenious, industrious, and compassionate American business culture. An American myth that IBM helped to create, it now helped to dispel.

—Steven Kotok

Further Reading:

Campbell-Kelly, Martin, and William Aspray. Computer: A History of the Information Machine. New York, Harper Collins, 1997.

Carrol, Paul. Big Blues: The Unmaking of IBM. New York, Crown Publishers, 1993.

Mills, Daniel Quinn, and G. Bruce Friesen. Broken Promises: An Unconventional View of What Went Wrong at IBM. Boston, Harvard Business School Press, 1996.

Pugh, Emerson W. Building IBM: Shaping an Industry and Its Technology. Boston, MIT Press, 1995.

Rodgers, William H. Think; A Biography of the Watsons and IBM. New York, Stein and Day, 1969.

Watson, Thomas J., and Peter Petre. Father, Son and Co. New York, Bantam Books, 1990.