The Rise And Fall Of The ‘IBM Way’

Deborah Cohen, a professor of history at Northwestern University reviews the book ‘The Greatest Capitalist Who Ever Lived’, a biography of Thomas Watson Jr, the CEO of IBM in the middle of the 20^th century. Under Watson Jr, IBM rose to being a computing giant in the post war era, before succumbing to the innovator’s dilemma when it let a the then tiny Microsoft dominate the era of personal computing. The book seems to attribute both the rise and fall of IBM to Watson Jr’s personality. First, the success to his risk-taking ability:

“In the early 1960s, he made a bet-the-company gamble on the decision to produce a fully compatible line of computers, the System/360. At that point, IBM was producing seven entirely separate systems with different levels of computing power. Each had a distinct internal architecture, so migrating data from one computer line to another was often impossible. Clients that wanted to upgrade their computers would effectively have to start from scratch. And IBM itself was saddled with inefficiencies in production, including 2,500 distinct types of circuit boards.

The System/360 has been described as one of the greatest product innovations in 20th-century American history, next to the Ford Model T. Achieving compatibility across a wide array of processors was an engineering nightmare, requiring millions and millions of lines of code. IBM’s investment was equivalent to $50 billion today, more than twice the cost of the Manhattan Project. The new computer made every one of the company’s other lines obsolete, meaning that if the System/360 didn’t work as anticipated, IBM stood to lose its clientele to other firms.

When the System/360 line finally shipped after many reversals, including problems in both the engineering and manufacture, it proved an instant success. From 1964 to 1970, IBM added almost 120,000 new employees (for a total workforce of 269,000), and its revenues more than doubled, from $3.2 billion to $7.5 billion, unprecedented growth for a major corporation. Saying “let’s not be piggish,” Watson Jr. had stopped taking his stock options, worth five times his annual salary, in 1958.”

And behind this risk-taking ability lay a story of an Oedipal conflict with his father – Thomas Watson Sr:
“Most notable, the authors go further than most scholars have in portraying the son’s embrace of computers as a repudiation of his father. The resentment, they explain, was mutual: When Watson Jr. appeared on the cover of Time magazine in 1955, a marketing triumph for the company, the old man didn’t say a word. The rivalry between them continued to spur Watson Jr. on, even after his father died the next year.

In a sense, Watson Jr. was founding a new company when he took over IBM, and the need to prove himself meant that he ran the firm like an entrepreneur rather than an heir. Instead of surrounding himself with yes-men, he preferred, he wrote, “sharp, scratchy, harsh, almost unpleasant guys who could see and tell me about things as they really were.” He established a system of “contention management” that required executives and their subordinates to fight out disagreements in front of the corporate management committee. The guarantee of lifetime employment was supposed to encourage responsible risk-taking and make the inherent friction within the hierarchy productive for the company. As Richard Tedlow has observed, Watson Jr. wanted the dynamic he had with his father to “metastasize” throughout IBM.”

Cohen goes on to attribute the eventual fall to elements of Watson’s personality.

“Tom Watson Jr. was in the Soviet Union, serving as President Jimmy Carter’s ambassador there, when IBM’s executives made the disastrous deal with Bill Gates. Watson wrote an unusually frank memoir, Father, Son & Co., which in 1990 spent 14 weeks on the New York Times best-seller list. By that time, IBM—“my company,” he still called it—was a wounded giant. Overinvested in the mainframe business during the 1980s, Watson’s successors failed to capitalize on the PC and its software, forfeiting a huge consumer market. As IBM’s fortunes sank in the early ’90s, Watson Jr. would wake up crying at night. He died in 1993 after a stroke.

Lou Gerstner, the executive who took on the job of rescuing IBM that same year, was respectful about the Watsons’ leadership. But in his own memoir, he left no doubt about the damage their six-decade reign had caused. The contention-management system had failed: The bad feeling it created led to a habitual avoidance of conflict rather than a frank airing of alternatives. The lifetime guarantee of employment had ossified into an entitlement, and Gerstner insisted on its formal end.”

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