Looking Back:                       

 

Seeing IBM as it was,                       

 

The Business

 

The Culture

 

The People

 

The Customers

 

The Competition

 

The Government

 

A Retired IBMers' View and Experiences.      

 

 

 

By John J. Sailors, 6/2011(latest revision)

 

 

 

 

Preamble:

 

IBM's unique corporate culture was more than a business; it was a family with feelings of responsibility and obligation to its employees, its customers and the communities in which they all lived.  This paper is a review of IBM's history starting in 1914, an inside look at IBM from 1956 to 1993 and a brief look at IBM financial performance from 1993 to 2002 as seen by an outsider.  I'm proud to have been a part of the IBM heritage.

 

 

 


Content:

 

- Preamble

 

- The Author, 

 

- The IBM Beginning

 

Tom Watson Sr.

 

C-T-R and IBM

 

Early Products

 

Tom Jr. and Dick Watson

 

- The IBM Corporate Philosophy

 

Respect for the Individual

 

Customer Service

 

Excellence

 

- The IBM Culture

 

Respect for the Individual

 

Full employment

 

Dress code

 

No alcohol

 

Open door

 

Personal experience

 

Speak-ups, Executive interviews, Opinion surveys

 

Employee benefits and compensation

 

Employee Performance Plans

 

Employee education

 

Marketing and sales commission plan

 

A real sales situation

 

More on education and marketing

 

Employee recognition

 

"THINK" logo

 

Corporate citizenship

 

- Evolution of Data Processing Technology

 

Competition

 

More on IBM technology

 

- The Marketplace, 50,60,70's

 

- Overview of the IBM Organization, 1988

 

- IBM Financial Growth, 1967 to 2001

 

Revenue, earnings, profit- 1988 to 2001

 

Stock performance- 1991 to 2001

 

Workforce- 1993 to 2001

 

- U.S. Anti-trust Actions

 

- Summation

 

- Conclusions

 

- References

 

-Appendix List

 

 

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Author:  John J. Sailors

 

I spent 37 years with IBM, 1956 to 1993, starting with punched card systems, the 650, 1401, 1440, 305 Ramac, 1620, 1130 up through the System 360/370 and the PC.  Half of that time was spent in the U.S. Company as a Marketing Representative, Regional Special Representative for Banking, Marketing Manager and Branch Manager. During that time I was based in Los Angeles, Long Beach, Phoenix, Seattle, Denver and Boise. See Appendix for more information on assignment as Branch Manager in Boise Idaho, 1965-1973. I qualified for 14 consecutive IBM 100% clubs and 6 Golden Circles for sales and sales management performance.  See IBM wall plaque on next page

 

The second half of my career, beginning in 1973, was spent in IBM World Trade with the Americas/Far East Corporation. (A/FE was responsible for Canada, Mexico, Central and South America, Japan, China, Korea, Southeast Asia, India and Australia New Zealand). My assignments included Manager of AF/E Finance Industry Marketing and later Public Sector at AF/E Hq. in Mt Pleasant New York, Manager of  Regional Industry Marketing and later Public Sector Industries for the Southeast Asia Region Hq. in Hong Kong and later Singapore, Director of Japan Marketing Operations Support Staff and later Government Application Development for Asia Staff Operations Hq. in Tokyo, and acting Country General Manager in Indonesia. This included a total of 10 years of overseas assignments.  The two stops at A/FE HQ in Mt. Pleasant New York totaled six years.  In these assignments we spent a lot of time flying to and from the A/FE countries.  One year I did five trips from New York to the Far East and five trips to Latin America over a 12-month period. That added up to about 20 weeks on the road and a lot of long haul airline miles. 

 

 

 

I finished my IBM career in San Jose reporting to the IBM Storage Division plant GM as Manager of State External Programs in California. This included Government, Community and Academic relation programs for all IBM locations in Silicon Valley with a total of over 15,000 employees.  We also had responsibility for statewide legislative issues (like Unitary Tax) and business organizations such as the California Business Roundtable, the California Manufacturing Association and the Silicon Valley Manufacturing Group with a dotted line to the IBM Vice President in Washington D.C. for Government Relations.


During this 37-year period my family moved 17 times and IBM annual revenues grew from $800 million to over $65 billion.

 

Educational Background:

 

After high school in Newport Beach, California I spent 4 years in the U.S. Air Force, (1948-1952) the last 2 ˝ years in Tokyo during the Japanese Occupation and the Korean War.  This was after attending and being an instructor at the Air Force/IBM punched card training school at Lowry Air Force Base in Denver. I would later come back to Denver as an IBM Marketing Manager and twice more to Japan on A/FE assignments.

 

Following the military, I attended Orange Coast Community College on the GI Bill, where I served as President of the Associated Student Body in my second year. Played a role in getting Crew started as a sport at OCC and they are the only Community College in the U.S. still competing in this sport and must now row against all 4 year schools.  I then attended San Diego State University receiving a B.S. Degree in Business Management and Air Science with Honors and Distinction.  At San Diego State, I was a member of the Air Force ROTC and was commissioned a 2nd Lt. in the US Air Force Reserves at graduation.  I was also a member of the Sigma Alpha Epsilon (SAE) Fraternity.

 

After retirement from IBM in 1993, I served as a consultant to the Silicon Valley Manufacturing Group in organizing Workforce Silicon Valley, a federally funded "School to Work" program. Also Co-chaired the Workforce Board of Directors whose members included 11 school superintendents, 2 community college presidents and a comparable number of private sector executives.  See Workforce Silicon Valley brochure in appendix.

 

Also spent time as a consultant to the Santa Clara County Regional Occupation Center in San Jose.  This organization conducts vocational training for six Santa Clara County School Districts in over 20 career areas.  They also have a large Adult Education program. Together these programs have over 50,000 students per year.  

 

Following this activity I became the first Executive Director of the Tri-Valley Business Council located in eastern Alameda County.  This was an association of 100 companies located in a 5-city area that focused on public education, transportation and economic vitality issues.  The Council also operated the Crayons to Computers surplus equipment warehouse at Camp Parks for the local school districts.  With the help of female federal prison inmates from Santa Rita prison and private industry, we provided local schools with donated supplies and several hundred reconditioned and upgraded PC's each year.

 

Currently (2007) I’m a member of the Chabot/Las Positas Community College District, Measure B Bond, Citizens Oversight Committee which is spending $498 million over 5 years on new physical facilities. The two schools have over 21,000 students.

 

I’am also a member of Livermore Rotary, Pleasanton SIRS (Sons in Retirement) and the Pleasanton Men’s Club.

 

The IBM Beginning:

 

Tom Watson Sr.

 

In the late 1800's a gentleman by the name of Tom Watson Sr. (not to be confused with current golfer with the same name) started his business career as a teenager selling pianos and sewing machines across the countryside from a horse and buggy. He later joined the National Cash Register Company (NCR) as a salesman and in 18 years rose to general sales manager of the company. After a fall-out with NCR president John H. Patterson, he resigned in 1913 with a severance package of $50,000.

 

C-T-R and IBM

 

In 1914 at the age of 40, Mr. Watson became the general manager of Computing-Tabulating-Recording Company (C-T-R), which 10 years later, in 1924, changed its name to International Business Machines (IBM).  He would lead this company for the next 42 years, until the age of 82.  C-T-R products included commercial scales, meat and cheese slicers, industrial time-recording equipment and tabulators and punched cards.  See copy of Watson letter on following page dated February 13, 1924 changing CTR name to IBM.

 

Prior to leaving NCR, Cash, as the company was called, Mr. Watson and several other Cash executives were convicted of anti-trust law violations for activities to control the secondary market in NCR cash registers.  Mr. Watson was sentenced to a year in prison.  Later, after he joined C-T-R, his case was thrown out on appeal and the Justice Department elected not to try him again.  This experience probably hardened his attitude toward the U.S. Justice Department, especially in later Anti-Trust actions filed against IBM. More on this later.

 

In later years Mr. Watson coined the phrases "World Peace Through World Trade" and "There is no saturation point in education" and the word “THINK” which was used frequently in IBM employee and customer publications.

 

“Think” signs hung on the walls of all IBM locations worldwide under a picture of Tom Watson Sr. All of our customers were provided with wall and desk size THINK signs in several languages around the world.  See below.

 

 

 



 

 

Tom Watson Sr.

 

 

 

 

 

 

 

Early IBM Products

 

 

Tabulators and punched cards were the invention of Dr. Herman Hollerith and they were first used in tabulating the U.S. Census of 1890.  These machines became the forerunner of today's' very common computer systems.  See classroom presentation outline on the History of Data Processing in appendix.

 

Dr. Ken Kraemer a professor at UC Irvine visited the Hollerith family winery in Germany in 2004 and reported that they are using a punch card as their wine bottle label.

 

 

 

 

 

IBM Time equipment was also a very visible early product. They were used as time clocks for punching in and out of work and were seen as wall clocks in many schools and businesses. I have a 1920's working model of the Time Clock that was manufactured by the International Time Recording Co. in Endicott New York. It can print the time on an employee time card for Morning IN, Noon Out, Noon In, Night Out, Extra IN, and Extra Out. These employee time cards were then sent to the payroll department. This Time Clock can also be wired directly to alarm devices throughout the building to signal specific times of the day.  After World War II the growth and profitability of this business slowed and was eventually sold off to Simplex and they are still in business today. See picture on next page of CTR products in January 1920. 

 

 

In 1933 IBM purchased a company that made electric typewriters.  After 13 years of initial losses, a new General Manager, Wiz Miller took over and from 1949 on posted 30% annual growth rates up through the 1970's.  This was highlighted by the announcement of the IBM Selectric Typewriter that used a round ball as a print element and a correcting feature that could remove print from the page.  This division later also sold dictation equipment and copiers. The typewriter division required an aggressive, smooth talking type of salesperson who was capable of making lots of cold prospect calls and demos at the secretary level.  IBM was very good at moving these products.          

 

IBM also manufactured and marketed Bank Proof Machines (802 and 803) for sorting, listing and totaling checks. These were 24 or 32 separate adding machines with tapes and a rotating drum with pockets to sort the checks by the bank drawn-on number. These bank sorted checks, with adding machine control tapes attached, went for posting to individual customer account ledger cards or to the clearing house meetings for exchange with other “drawn on” banks. Each individual check had to be handled manually several times in this labor intensive accounting process.

 

In the late 50's IBM Magnetic Ink Character Recognition (MICR) systems took over this application area.

Machine readable numbers pre-printed at the bottom of the checks identified the bank and their customer account number and a proof like machine was used to encode the amount of the check, also in magnetic ink. From there we used high speed MICR sorter/readers to sequence the checks and provide direct input to computers for processing. We had good competition from Burroughs and for a short time General Electric who built an early system called ERMA exclusively for the Bank of America. By co-incidence I was the IBM sales-rep. assigned to the GE manufacturing group in Phoenix while the ERMA was being built. They used an IBM 1401 and Cardatype in their accounting area. As an IBM rep. I was allowed in their accounting area but was prohibited from seeing their manufacturing line.  The ERMA later became the GE 210 and was marketed commercially to other banks with a Burroughs MICR Sorter Reader attached. It had a short market life.

 

Another early IBM product was the 805 Test Scoring Machine invented by a teacher Reynolds Johnson who I will talk about later in this text. Using a high graphite pencil the student would mark their multiple choice test answers in a prescribed area on a standard piece of paper and the machine would read these pencil marks and score each test.  IBM also had a mark sense reading card punch, which was used in several accounting applications. Graphite pencil marks on the card in prescribed areas would be read and cause the corresponding numbers to be punched back into the same card. It was a great way to decentralize data input to the point of the transaction occurrence. 

 

In the late 80's on-line computer terminals and later Personal Computers began to take over the functions of the electric typewriter and copiers.  The IBM typewriter business was sold to Lexmark..

 

In the late 70’s and early 80’s prior to the PC with Internet connections IBM developed a proprietary system called PROFS, (Professional Office System) which became an IBM dedicated worldwide network that could do word-processing and e-mail.  We could talk on-line to IBM offices in 120 countries.  Our terminals were simple Cathode-ray tubes (3270) connected to IBM mainframes and a dedicated satellite system.  I could sign–on anywhere in the network.  I can specifically remember doing “pass-thru” on a business trip to Korea with the e-mail software located in my Hong Kong office.  The White House also had an IBM PROFS system installed during the Reagan administration, which led to some of Ollie North’s Iran/Contra problems.  Some of his supposedly deleted communications were later retrieved from the central computer system and became public record.

 

The IBM Corporate Philosophy:

 

Under the leadership of Tom Watson Sr. a unique corporate  philosophy was developed that included:

 

Give full consideration to the individual employee.

 

Spend a lot of time making the customers happy.

 

Go the last mile to do the thing right.

 

Under Tom Watson Jr. this business philosophy was codified into the "IBM Basic Beliefs:"

 

-                           Respect for the Individual, Respect for the dignity and rights of each person in the organization.         

 

-                           Customer Service, To give the best customer service of any company in the world.

 

-         Excellence, The conviction that an organization should pursue all tasks with the objective of accomplishing them in a superior way.

 

The “IBM Basic Beliefs” were prominently displayed in all IBM offices and I still have one of these displays. See attached.

 

To show how strongly Mr. Watson Jr believed in this Corporate Philosophy I would cite the following quotes from Tom Watson Jr's Columbia University Lecture Series.

                                                                               

"A corporation's beliefs must always come before policies, practices and goals.  The latter must always be altered if they violate these fundamental beliefs."

 

"We have got to have a concept that IBM is special.  Once you get that concept, it is very easy to give the amount of drive to work toward making it continue to be true."

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The IBM Culture:

 

From 1914 to 1993 company policies were developed and practiced to support a business philosophy that became known as the IBM culture.

 

- Respect for the Individual, This policy was implemented by management and personnel practices such as full employment, benefits and compensation, employee recognition, open doors, speak-ups, executive interviews, opinion surveys, etc. all of which will be discussed in more detail in this section.

 

- Full employment, everyone is guaranteed a job except for failure to perform. This practice remained in force from 1914 thru the depression of the 30’s to 1993, a total of 79 years. Very specific annual performance plans, grading and re-deployment were a part of this policy. Quoting from the book The IBM Way by Buck Rodgers, "during the economical problems of 1969-72 IBM moved over 12,000 employees from plants, labs and headquarters with light workloads to locations where they were needed.  5000 of these people were retrained for new careers in sales, customer engineering, field administration and programming."  IBM also had a practice against in-house promotions and world trade limited U.S. employee overseas assignments to a maximum of 5 years. This created further geographic re-deployment.  As stated in my bio I had 17 family moves in 37 years.  

 

Until recently most Japanese corporate culture also included full employment. 

 

- Dress code: white shirts, ties, conservative suits and, in the earlier days, hats were required on the job. I had to buy a hat to attend the IBM application and sales schools in Endicott. According to Mr. Watson Sr.," Everyone should look prosperous and successful in the eyes of the customer."  This applied to all customer contact personnel including maintenance and service.


- No alcohol:  alcohol was not permitted during the workday or at any company employee or customer functions.  This policy was still in place when the author retired in 1993.

 

- Open Door: all employees have direct access to the IBM Chairman or intermediate managers for any job related suggestions or grievances. In the mid 50's Tom Watson Jr.'s office handled about 300 open doors each year.  This was great training ground for Executive Assistants who were on the high potential list for future promotions.  This also helped IBM to remain free of unions, which is still true today.

 

A Personal Experience

I had a personal experience in this area when I was Branch Manager for Idaho and parts of Oregon and Wyoming in the early 70's.   Tom Watson Jr. Chairman of the Board and CEO, came to Boise to be the host and speaker at the bi-annual IBM family dinner. He flew himself into Boise in his personal Aero Commander plane late in the afternoon. He had skied 15,000 feet that day from a helicopter in Sun Valley. On the drive in from the airport he informed me that he was going to do an “Open Door” interview while he was is Boise, but quickly said it was not one of the Boise branch office people.  The Open Door turned out to be a black IBM typewriter salesman from the IBM Santa Monica California Branch Office, who in addition to being an IBM salesman was also active in the Black Panthers.  They spent two hours together closeted in my office before I had to interrupt them to get Mr. Watson to the IBM Family Dinner on time.  I learned later that Mr. Watson had this typewriter salesman transferred to IBM corporate personnel. He commented to me that he learned more about the black problem in the U.S. from this open door discussion than he had learned in many discussions with Bernard Baruch. See picture on following page of Mr. Watson and John Sailors taken before Boise Family Dinner in 1972.

 

 

 

Tom Watson Jr. and John Sailors. 1972, Boise Idaho

 

 

- Speak-ups, Executive Interviews, Opinion Surveys: All employees were encouraged to write signed or anonymous Speak-up letters to management on any grievance or suggestions for improving the business. This provided excellent feedback on employee-manager relations, employee morale and the state of the business. Many of these Speak-ups would find themselves the subject of Management Briefing Letters to all managers in IBM and changes in policy and practice would sometimes follow.   See "IBM World Trade Americas/Far East Corporation brochure "On Managing" dated April 1978 in appendix.

 

IBM employees were also invited to have Executive Interviews  periodically with managers one or more levels above their current  assignment.  These were considered private and confidential, and again provided excellent feedback on employee-manager  relationships, employee morale and the state of the business. This was also further pressure on immediate management to be sensitive to morale and their own man/manager relationships.

 

Annual Opinion Surveys were conducted throughout IBM and offices and organizations were graded.  These included questions on how you rated your immediate and higher managers.  A low opinion survey rating for your office or organization would invite a lot of outside attention.

 

-Employee benefits and compensation: Benefits were all non-contributory (IBM paid all of the costs) which included pensions, health care, education, etc. IBM stock options were extended to the most senior executives and a stock purchase plan was available to all employees at 85% of the current market price. The Pension program, in my case provides about 50% of the last IBM salary with half of this amount going to the surviving spouse.  In the 80's IBM established a 401k TSDP (Time Savings Deposit Program), which allowed each IBM employee to withhold 8% of their salary for a mutual fund investment, and IBM would match 50 cents on the dollar for the first 6%.  They also offered Group Life Insurance and Long Term Care Insurance programs through private carriers.  Today retirees do pay for health care coverage with medicare as prime.

Text Box: Tom Watson Jr.During World War II IBM paid 25% of an employee's salary while they were in military service.  This provided a strong incentive for these employees to return to IBM after the war ended.

 

In January of 1958 IBM put all hourly manufacturing employees on salaries.  This was the first major U.S. Corporation to make this change and was another defense against possible unionization.

 

- Employee Performance Plans: All IBM employees had annual performance plans and reviews.  The objectives were usually set at the beginning of the year and if there were any performance problems during the year, periodic reviews would be held.  The grading on these reviews (1 thru 5) determined the size and frequency of your next merit increase in salary.  A 1 rating was Far Exceeded, (walks on water) 2 was Consistently Exceeded, 3 Exceeded at Times, 4 Need to Improve and a 5 rating meant that the employee was on a documented improvement program.  A multiple year 4 rating or a single year 5 was usually grounds to manage that person out of the company.  Employee ranking was sometimes used to further validate performance ratings within a peer group.  Rankings were also used in 1993 to make the very first employee layoff decisions.   As an example of the Performance Plan process, I have included one of my performance plans and evaluation in the appendix.

 

- Employee Education: Marketing training in the 50's included eight weeks of punch-card machine training near your point of hire, in my case Los Angeles, and this included card design, machine operation and learning to wire the control panels; then eight weeks of application training in Endicott New York, learning how to do the many accounting applications on punched card systems such as billing, accounts receivable, inventory, payroll, etc.  This was followed by approximately six months working in a branch office as a junior salesman, making cold prospect calls and helping customers plan and implement punched card applications, in my case wiring the 607 Calculator control panels for the payroll application at the City of Long Beach. Finally, you spent four weeks back in Endicott for sales training. IBM songbooks and the singing of company songs most mornings was part of the school ritual. "Ever Onward" seemed to be the company theme song. This sales training included practice product demonstrations, proposal writing, and practice sales calls on the instructors and sales school managers.  See IBM Applications Class roster and picture on the next page that was taken in front of the IBM Homestead in Endicott New York, October 1956. I’am front row right.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-Employee Overseas Assignments and Organization

All IBM overseas country organizations were staffed with indigenous English speaking personnel and in most cases in the 70’s and 80’s the country General Managers were on assignment from an English Speaking Country. The one exception in Asia was IBM Japan where we had a large English speaking assignee staff organization in support of IBM Japan senior and middle management.  These assignments were usually 3 years in length from the U.S. with a possible one-year extension and could be an indeterminate length if the assignee was from England, Australia, New Zealand or Germany.  Under no circumstances could a U.S. employee stay on overseas assignment even with multiple locations longer than 5 years. 

 

The overseas living allowances for assignees were very attractive and included housing, tax assistance, cost of living and private schools for their children plus family home leaves once a year. College age children were flown to the overseas locations for summer and Christmas vacations each year. IBM also covered interest and maintenance costs on your U.S. residence while on assignment.  A hypothetical U.S. income tax was calculated on each assignee assuming they never left the states and this became the assignees maximum tax liability.  This was important because an assignee had U.S. income tax liability on all overseas allowances plus they had to pay a foreign income tax to the country of residence.

 

Tax loans were provided by IBM which were forgiven by grossing up the employees W2 withholding when they returned from assignment. It cost IBM an average of $500,000 per year to have a family on assignment in Japan. House and apartment rents for assignees were $10,000 or more per month or more. IBM also had a MAP (Management Acceleration Program) for high potential foreign employees whereby they and their families were brought on assignment, usually to IBM World Trade HQs in New York, for one year of staff experience and to improve their management and English speaking skills.
One of those, Bobby Romulo, became IBM Country GM and later Foreign Minister of the Philippines and we still have internet contact..

 

- Marketing and Sales Commission Plan: At the completion of training, you assumed a sales and installation quota and salary plus commission, (initially 60% salary and 40% commission) branch office sales territory that had a limited number of existing customers and a  lot of prospects. A dollar in revenue equaled a quota point. In the 50’s when I went on quota all IBM products were rented, with a 90-day cancellation notice, so the salesman had a commission liability to protect the existing rental revenue in the territory as well as, a rental growth quota for selling and installing new equipment. This meant that if you or someone else had collected the original commission on the equipment sale or equipment installation to this customer and sometime during your responsibility for this customer he elected to take out any of the IBM equipment or cancel any on-order equipment, you had to pay back the commissions originally earned by the selling or installing salesman.  This kept you totally tied to the success of this customer and his satisfactory use of IBM systems. (this was called the charge-back system)

 

There was a major emphasis and cash bonus for signing up new customers. I had 25 "new name accounts" during 5 years of direct sales responsibility in Phoenix, with no cancellations. If a competitive situation occurred with an existing customer or a potential new-account, the salesman was required to write a Special Situation Report. This got wide circulation so that the full regional and sometimes national resources of the IBM Company could be applied to help win or maintain this business.  It was a serious career error to lose any IBM business where you were either unaware of the competitive threat or failed to ask for Special Situation Report help.  Each salesman was required to keep a written Call Book detailing their day to day customer activity. Their immediate managers were required to read initial these Call Books on a weekly basis.  Frequency of customer coverage was also measured.


In government marketing, a strong emphasis was put on Pre-procurement marketing, which meant having a strong influence on the terms, conditions and product definitions contained in the formal  Request for Proposal (RFP). This was a fine line to walk because the amount of influence you had could be challenged in a post award protest hearing.  I will talk about an actual protest situation in a later section.  However if no pre-procurement marketing was done then it was a good probability that we would not bid on the RFP.  These procurements were normally longer in length than private sector marketing opportunities, so the salesmen were on a 90% salary and 10% commission plan. In government procurements, "Benchmarks" were usually required. This meant that you had to take a running program from the customers currently installed computer system, regardless of vendor, and show that you could run it faster on the proposed new system, i.e. "Benchmark." 

 

A real sales situation in Idaho, a federal government procurement requiring a "Benchmark"

 

In the case of the National Reactor Test Station (NRTS) procurement in southern Idaho, we had to take two hours of application running time on the currently installed system (in this case CDC, Control Data Corporation computer) and compress this to 30 minutes on the proposed 360 IBM System. Boise branch office System Engineers spent over two weeks in Poughkeepsie New York working on the Benchmark test. I flew with the 5 man NRTS evaluation team to New York and when we landed at Kennedy airport the IBM Corporate F-27, (this is a small two engine high wing prop plane that was equipped to carry 20 people in executive luxury), was parked in the next pod. (Arranged by the IBM Marketing Rep.) We then flew on the IBM plane to Raleigh North Carolina and at midnight, demonstrated two IBM 360 Systems talking to each other, which was part of the benchmark test. 


After a short rest stop in a motel, we climbed back aboard the F-27 at 6 A.M. and started flying towards Poughkeepsie NY. As of the night before, the systems engineering team, who had been working around the clock on this benchmark test, still had not reached the 30-minute target.  We had an agreement that we would make contact from the plane with the Systems Engineering (SE) team about an hour out of Poughkeepsie to get the current status, and if they needed more time to complete the preparation for the benchmark test we would seriously consider doing a plant tour before the benchmark demonstration in order to provide more time for the SE team to reach the Benchmark target. Someone also suggested that we could declare bad weather and land in up-state New York and bus the evaluation team back to Poughkeepsie in order to provide more time for the IBM Benchmark team. When we called in we got the good news that they were ready and we landed safely on a very icy runway in Poughkeepsie. 

 

The Benchmark demonstration went flawlessly with members of the evaluation team monitoring every computer device with stopwatches.   The Poughkeepsie test center was under going some renovation at the time and during the Benchmark a workman came into the room and used the top of one of the CPU boxes as a work bench to drill a hole into a piece of wood. Luckily it had no affect on our benchmark.

 

The next day when the five member NRTS team moved on to Minnesota for the Remington Rand Univac Benchmark test, one of our competitors in this procurement, the IBM team rode the same commercial plane with them from New York to Minneapolis and got off the plane with the NRTS team and said our goodbyes and hugs in front of a very large and surprised Remington Rand executive welcoming group.  We later sent a wire to the evaluation team at their Minneapolis motel, which said "Remember, Speed, Accuracy and Flexibility and a Quarter Inch Drill.”

 

We won this $12 million procurement against the installed CDC system, who had a very good reputation for scientific and nuclear code computing.  To complete this installation and pass an acceptance test, the branch office SE team had to write some special IBM software that enabled several IBM 1130 computers to act as remote terminals from the nuclear reactor test sites to the new central 360 systems.

 

- More on education and marketing: To sell industry solutions, and not just hardware, IBM sales classroom training was provided in specific industries such as banking, manufacturing, utilities, distribution, government etc. and sales territories and sometimes entire branch offices became specialized along these industry lines.  I attended Banking Industry School and that class was done by the Stonier Graduate School of Banking at Rutgers University. I also used the head of this program, Dr. Paul Nadler, as a guest instructor in several bank customer classes.  In addition, I attended Utility Industry and several government pre-procurement marketing classes. The emphasis was to sell business solutions and not products.  The axiom was you will never win a price and hardware battle, which meant comparing speeds, functions and price between competing systems.  The customer only bought business solutions and we trained our sales and systems engineering people to sell and install these solutions.

 

Regional non quota, non-commission Industry Special Reps were available to territory salesmen for branch office sales calls, working trade shows and conducting week long customer executive classes at our plant sites in San Jose, Endicott and Poughkeepsie.  The first day of these customer classes included introduction to data processing concepts followed by 3 and 1/2 days of specific industry application solutions on IBM computer systems.  Leading edge IBM customers were used as guest instructors. Plant tours were always on the agenda. The customers resided in IBM Homestead facilities at these locations. They ate breakfast and dinner in the Homestead and had lunch in the plant site employee cafeteria. A Thursday night graduation dinner was held with a senior IBM executive thanking them for doing business with IBM.  No alcohol was served.

 

I worked as a Banking Industry Special Representative on the West Coast and managed and taught many IBM customer classes in San Jose. I was teaching one of these classes the day that President Kennedy was assassinated on November 22nd 1962. My West Coast territory included all of the IBM branch offices from Denver to Hawaii and Alaska to San Diego.  My home base was Seattle and mostly the Seattle Airport.


IBM Japan also operated a customer education center at Amagi near Mt. Fuji, which I used several times for customer meetings and seminars while in A/FE.  Leading edge IBM U.S. and Canadian customers were also brought over to Japan to help teach these classes.  Simultaneous translation was done where required.  At the Thursday night graduation dinners everyone wore Japanese yukatas and the U.S. customer guest instructors were presented with glassed cased Japanese Doll thank-you gifts.  It cost us more to ship these dolls in glass cases to the U.S. than their original purchase cost.

 

We also took these industry seminars on the road.  In November 1981, over the Thanksgiving holiday, I organized and managed a University Applications seminar with stops in Hong Kong, Taipei, Shanghai and Beijing.  Our instruction team included Roy Miller, Director of Computing Systems at McGill University in Montreal.  They had a system called MUSIC, McGill University Student Interactive Computing, which we also demonstrated live in Beijing.  This demonstration was done at 11 P.M. at the Chinese National Statistical Bureau which had an IBM 1440 installed.  The 50 Chinese participants, mostly university professors, and all in Mao suits and hats, rode their bikes in the cold winter as far as sixteen miles to attend our demonstration.  This was their very first experience with on-line computer systems.  To show their appreciation, IBM Japan who had marketing responsibility for China at that time arranged for us to have turkey for dinner in the Beijing Hotel on Thanksgiving eve.  See picture of IBM instruction team taken on the Great Wall.  John Sailors is second from the left and Roy Miller on the far right. Also included with this paper is a 2 hour CD and DVD disk video record of this trip.

 

Company airplanes Dc3's, Two Engine Convairs, F-27s and later jet Gulfstreams were available to the U.S. branch offices to fly customers and prospects to IBM plant sites for one-day briefings and plant tours. (See roster and picture of IBM Boise flight departure to San Jose in the early 70's)


Beginning in the mid 50's IBM established their first management development schools.  All managers would receive from 2 to 6 weeks of management training on the importance of the IBM business culture and how to manage and motivate people.

 

In market research, IBM Domestic and A/FE Government Industry Marketing made good use of the University of California, Irvine based Public Policy Research Organization (PPRO).  This group of professors from the schools of Business Management and Computer Science, led by Professor Ken Kraemer, did extensive studies for IBM and others on the use of computers in government and why some countries had better computer penetration and use than others.  PPRO also sponsored MISPAC, Management Information Systems Pacific Area Community, and meetings were held at the East West Center in Hawaii.  In these sessions government computer users and academics from the U.S. and the Far East came together to discuss data  processing trends and directions and hopefully application transfer between countries.  PPRO is now called CRITO, Center for Research on Information Technology and Organizations and they still do research studies for IBM and others including the National Science Foundation.  Currently (2002) they are studying The Globalization of Information Technology with an emphasis on E-Business.

 

 

 

Business trip to China with McGill University to conduct

Seminars and demo MUSIC McGill University Student Interactive Computing System. 1981

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- Employee Recognition:  IBM employee rewards and recognition included annual 3-day Hundred Percent Club conventions for all salesmen and managers making their assigned quotas that year.  The early year Clubs were held in tents at Endicott NY but were later moved to major cities throughout the U.S. While in the U.S. company as a salesman, marketing and branch manager, I qualified for 14 consecutive Hundred Percent Clubs, 6 as a marketing representative and 8 as a manager, and was Vice President of the 1962 Western Region 100% Club held in San Francisco. This meant that I had the second best sales performance of all of the IBM sales representatives in the western half of the United States for that year. Managers ran on the total quotas assigned to all the people working for him or her. No alcohol was served at these conventions.

 

In the appendix you will find copies of several pages from the 1929 One Hundred Percent Club Convention brochure held in the Hotel New Yorker in January of 1930.  


Each year IBM also had a Golden Circle convention for the top performing 10% of the salesmen and managers who made their annual quotas and had 5 or more prior 100% clubs.  This 3-day event included wives and was held in such places as The Breakers Hotel in Palm Beach, Mexico City, Banff and Acapulco.  I qualified for 6 Golden Circles during my 14 years in domestic sales and sales management. Needless to say there was additional pressure from your wives to make the Golden Circle each year.  Again no alcohol was served but we did manage a few private cocktail parties in ours rooms before the official evening events. A major nationally known entertainer performed at the closing dinner such as Tony Bennet, the Carpenters etc. 

 

Quoting from Buck Rodgers' book, The IBM Way, "on the engineering side IBM had the Corporate Technical Award and the IBM Fellows program.  In 1984 IBM recognized 259 technical professionals, including 79 who shared $2.7 million in awards.  The largest award-$1.78 million- went to two teams of 48 employees who worked to bring about the success of the IBM PC and the 3880 Direct Access Storage Device.  Also five new IBM Fellows were named, bringing to 88 the number appointed since 1963.  They are chosen for their accomplishments in engineering, programming and science.  IBM Fellows are free to pursue their own projects for a 5-year period.  The title is retained for life."

 

 

CENTURY BEGINS, GLOBAL CONFLICT NEARS

 

 

 

In addition, I planned and helped to manage IBM Japan and IBM Southeast Asia Region (SEAR) Recognition Events held in Tokyo, Hong Kong, Seoul, Sydney and two in Manila during the 70's and 80's. These events took several months of pre-planning and we arrived at the event location 2 to 3 weeks before the convention. You would have 6 to 800 attendees from Japan and or the countries in Asia at each event.. (See appendix on 1975 IBM Japan Convention held in Manila Philippines in April 1976)

 

The most memorable experience of the Recognition event in Sydney was when the IBM Philippines qualifiers were able to attend the recognition event just a few days after Marcos was forced out of office and martial law was ended. The IBM General Manager Bobby Romulo and his 100 plus attendees were all on stage for a standing and emotional ovation from the 600  qualifiers from seven other Southeast Asian countries.  Mr. Romulo is the son of the late Carlos P. Romulo former Aide de Camp to General Douglas MacArthur during World War II, U.N. President and U.S. Ambassador, and Foreign Minister.  Bobby himself also went on from IBM to become Ambassador to the European Community and Luxembourg and later the Foreign Minister of the Philippines under President Ramos.  He is now senior advisor to the President of the Philippines.


"THINK" as mentioned earlier, was a one word-logo that was used throughout IBM.   An IBM Think Magazine was published bi-monthly and sent to all customers, employees and thousands of other people free of charge.  It contained mostly current event articles and an editorial from the Chairman. See copy in appendix.

In the early days desk top "THINK" signs were given to all of our customers. They were available in all languages around the world. 

 

At the IBM Education Center in Endicott "THINK" in two foot high bronze letters are placed over the entrance door and the marble steps in the entrance way are engraved with Think, Observe, Discuss, Listen, Read. Pictures of Tom Watson Sr. hung in each classroom and most other IBM locations worldwide with a THINK logo below the frame.

 

- Corporate Citizenship:

 

Over 2 % of annual corporate earnings went to the support of IBM employee and company participation in charitable and citizenship programs.  IBM had no Political Action Committees, PACS, and made no corporate political contributions but we did employ lobbyists in major state capitals and in Washington D.C.  From 1983 through 1987 IBM gave a total of $817.3 million to education and charitable causes making it a leader among all U.S. corporations and philanthropic foundations.  In 1988 community and academic support from IBM and its employees totaled more than $170 million nationally and $31.9 million in California. The company also spent $100 million on collaborative research with colleges and universities.  See 1988 brochure, a report on IBM's contributions to employment, education, technological innovation, and community service, in appendix

 

While based in the Southeast Asian Region office in Hong Kong I initiated an IBM PC model classroom program in 1985, using the Canadian University of Waterloo "JANET," (Just Another Network,) software and their installation personnel.  14 computerized classrooms were donated and installed in 7 countries at a cost of over $1 million.  The two person University of Waterloo installation teams would come out to Southeast Asia for two weeks each and install 2 classrooms on each visit. See participation award certificate below:

One of the classrooms went into a grammar school in Quezon City outside of Manila with IBM "Writing to Read" software.  Because of the open classroom we had to put in windows to protect the equipment from the elements and hire security.

 

In San Jose with 15,000 local IBM employees from all divisions, the corporation and its employees donated over $7 million to local charitable causes in 1992.  50% of these monies were contributed by IBM employees thru the annual United Way Campaign that we ran at each site.  This does not include the thousands of volunteer hours contributed by these employees each year.  Being a major player in community support certainly enhanced the IBM image and made it easier to get marketing and political contacts when needed. 

 

IBM San Jose property taxes also contributed 22% of the cities' re-development budget that year.  We had constant discussions going with the Santa Clara County assessor on the value and life cycle of our plant and equipment.  I'm sure this is a part of the reason why we have moved some San Jose manufacturing overseas to Hungry, Mexico, India, Malaysia and other overseas locations.

 

In 1989 I authored an IBM funded $20 million 5-year effort to help improve California K-12 education through the use of IBM PC technology.  Ned Lautenback and Lucy Fjelstad IBM Corporate Vice Presidents funded this effort and the late Ed Sandel, formerly manager of IBM customer education in San Jose, managed the project.  See  brochure, IBM California Education Partnership in the appendix.

 

I received a commendation letter from Terry Lautenbach, President of the IBM Data Processing Division and a 10k cash bonus for selling the value of this program to the corporate office in New York.  (By this time I had already moved on to a new assignment in Singapore and the presentation was made in a managers meeting in Hong Kong)  I took 9 trips from San Jose to New York over a 3-month period to present this program at various management levels.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Most community contribution programs i.e. Matching Grants, Fund for Community Service and discretionary funding were driven by employee participation in that activity. As shown above a heavy emphasis was put on education. IBM San Jose had over 30 K-12 school partnerships, each one staffed by employee volunteers.  (See flow chart on how this process was initiated and managed) We also hired up to 10 teachers as summer interns each year.  They were paid $800 per week, given productive assignments, and had an IBM mentor who usually wound up as their classroom volunteer when school started again.  This industry experience was invaluable to these teachers as they related the importance of education to careers in their classrooms.  See appendix for presentation " A Corporate Community Support Program" 1992, and the brochure "A Responsible Neighbor" highlighting 1988 IBM community support in Silicon Valley. Also Corporate and Operating Unit Corporate Social Responsibility Directory, California Section. Also “The Bottom Line On Business/Education Partnerships", A survey of Opinion Leaders Conducted by The Wirthlin Group For The IBM Corporation.

 

As a part of my IBM Government and Community relation’s responsibilities in Silicon Valley I was invited (along with 10 of my corporate counterparts) to have a private breakfast in October of 1991 with then Governor Bill Clinton at the San Jose Fairmont Hotel.  This was three days before he announced his candidacy for the Democratic nomination for President of the United States.  A short time later, when he returned to Silicon Valley as an established Presidential candidate, he was able to fill the ballroom with corporate CEO's.  He served two terms as President of the United States.

 

Following retirement from IBM in 1993 I spent part of a year with former IBM Program Manager Joyce Monda as a consultant at the Regional Occupational Center in San Jose helping to establish an educational foundation. From there I worked with the Santa Clara County Manufacturing Group on the Federal School to Work Opportunities Act of 1994 and I co-chaired the Workforce Silicon Valley board of directors that was a collaborative among Industry, Education, Government, Labor and the Community.  See Workforce Silicon Valley brochure in appendix.

 

Tom Jr. and Dick Watson

 

Tom Watson Jr. joined IBM in 1937 after graduating from Brown University. According to his own book, Father Son & Company, Tom Jr. was not a very good student.  He spent 3 years in sales, training and handling a punched card machine sales territory in Manhattan.  His real love was flying. He joined the U.S. Army Air Corps during World War II and was involved in setting up a ferrying system for U.S. manufactured warplanes to Russia.  The route was over Alaska and through Siberia. He reached the rank of Lt Col. in his 4 years of service.

 

Following the war he returned to IBM, working in the corporate office as a Vice President, Executive Vice President, President and in 1956 became Board Chairman and CEO when Tom Sr. retired at the age of 82.  Tom Jr ran the IBM Company for the next 15 years, retiring after a heart attack in 1971. He was responsible for moving IBM successfully from punched card machines to computers in the early 50's. 

 

Mr. Watson Jr. went on to become Chairman of the General Advisory Committee on Disarmament and the Ambassador to Russia in the Carter Administration.  Shortly after he assumed the ambassador-ship Russia invaded Afghanistan, which the U.S. condemned, and his time in Moscow was not very productive.  Now we are in Afghanistan.

 

Mr. Watson was an avid sailor and pilot and continued to fly well into his 70's.  He died in 1996. As mentioned earlier in more detail he visited the Boise branch office in the early 70's as a speaker for our bi-annual family dinner. See the picture on the next page of Tom Watson Jr. as it appeared in the September 1989 issue of THINK Magazine.

 

 

 

 

Dick Watson, the youngest son by 5 years also served in the Army in World War II reaching the rank of Major.  After the war he got a degree in International Relations from Yale University and joined IBM as a sales representative.  A year or so later Mr.Watson Sr. moved Dick to the corporate office as Vice President of International Sales.Later IBM made international sales a wholly owned subsidiary and Dick became President of IBM World Trade and later Vice Chairman of IBM. He also headed up IBM's manufacturing and development for System 360.  When the 360 failed to make the planned announcement schedules he was removed from that job by his brother Tom. 

 

Dick Watson went on to become Ambassador to France and died a few years later in an accident at his Connecticut home.

 

Evolution of Data Processing Technology

 

Beginning with Hollerith invented punched card systems in the late 1800s, followed by punched card or unit record systems, and then computing systems that we know today got their start in the early 50's.  (See appendix for a presentation I did on the "History of Data Processing” for the Vintage Computer Festival in 2005.

 

Making the transition from Punched Card Systems to Computers in the early 50's was a very difficult decision for IBM.  The Remington Rand "Univac" was the first commercial electronic computer on the market.  IBM responded a short time later with the following systems.  SSEC (Selective Sequence Electronic Calculator) 602A, 603, 604, and 607, all designed to work with punched card systems and programmed by wired control panels. Then came the magnetic tape 701 for scientific calculation, the 702 for accounting applications, the 650, a medium range magnetic drum storage system, and SAGE, Semi-automatic Ground Environment System, for the U.S. Air Force. The SAGE Systems each had 50,000 vacuum tubes and were duplexed at 58 locations around the U.S. to coordinate radar detection and response for incoming hostile bombers.  This system had a very short life when the Russians launched Sputnik in 1958 and acquired missile delivery capability.  SAGE is on display at the Computer History Museum in Mt. View California.

 

And finally the most significant breakthrough occurred in the mid 50's in a San Jose Lab on Notre Dame Street when the late Reynolds Johnson, the former teacher mentioned earlier who invented the 805 Test Scoring Machine, developed random access hard disk storage, similar to a long-playing musical record that was incorporated into the IBM 305 Ramac. I had the pleasure of sponsoring Reynolds Johnson for the Silicon Valley Junior Achievement Hall of Fame.  At the awards dinner at the San Jose Fairmont Hotel, with he and his wife, I learned that in retirement he was working on a Chinese language typewriter in his garage. He passed away in 1998 at the age of 92.  A one-page bio of Reynolds Johnson is on the next page.  More complete information on Mr. Johnson is in the appendix. San Jose Junior Achievement has a video on his achievements and award, a copy of which I had sent to the Computer History Museum in Mt. View California..

 

These first ever data storage disks were 2 feet in diameter and it took 50 of these spinning platters to store 5 million characters. The reading and writing of data on these disks was done by a single read/write arm that traveled mechanically up and down a shaft to strattle the top and bottom of the individual spinning platters. Data access time was measured in seconds, but it was random access for the first time and not the batch sequence processing systems we had to live with before on punched card and magnetic tape systems. This gave birth to the first on-line computer systems in the industry.

 

I have one of the early 305 Ramac disks and several of the much smaller and denser storage versions. From 1956 to 1998 capacity went from 5 million characters on fifty 24 inch-diameter platters or 5 megabytes, in a box weighing one ton, to a single 1 inch-diameter platter with 340 megabytes of storage space which weighs less than a double-A battery.  See picture of 305 Storage System being unloaded from a Pan American Airways cargo plane.

 

 

 

For the first time IBM customers had fast random access to customer’s records and data that began to match the internal speeds of the new computing systems.  Airline reservations and banking systems were the first beneficiaries of this new storage technology. IBM can now store a world record 10 billion bits per square inch of disk surface. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Competition

 

Early competition in computers came from Remington Rand and the Univac, G.E who landed a contract to build a large check processing system called ERMA for the Bank of America, RCA, Honeywell, DEC, Prime and CDC, the latter in large scientific systems.  As mentioned earlier, as a young IBM sales representative in Phoenix, I had IBM customer responsibility for the GE manufacturing plant that was building the ERMA for the Bank of America, which later became the GE 210 in the commercial marketplace. Against pretty good hometown competition from the local GE manufacturing plant, I did manage to sell an IBM MICR check reading 1401 computer system to The Bank of Douglas later known as The Arizona Bank.  The Valley Bank installed a German built carrier envelope system for check processing and the 1st National Bank became a local demo center for GE computer manufacturing and their first commercial product, the GE210.

 

During this period I also sold a Unit Record system to Goldwaters Department Store to do inventory, sales analysis and accounts receivable.  Senator Barry Goldwater's brother Bob ran the store and I remember helping the Senator's campaign committee run voter registration lists from punched cards on the stores' IBM 403 accounting machine.  Goldwaters are gone today and all of the banks are under new names.

 

Sales wins against installed competitive computer systems were very difficult because of customer brand loyalty and the cost of re-programming from the competitors machine to IBM.  As Branch Manager in Idaho we had 5 competitive win-backs over a 5-year period.  This included Albertsons Grocery Chain from NCR, The State of Idaho Department of Highways from Univac, The State of Idaho Department of Administration from Univac, The U.S. Department of Employment Security from Univac and as described earlier the National Reactor Testing Station from Control Data Corporation (CDC).  


The two competitive win-backs at the State of Idaho Department of Administration and State Highways involved marketing all the way up to the State Governor level.

 

I was program chairman for the Boise Rotary Club during the 1968 election year.  To get to know the current Governor, Don Samuelson better and the 4 candidates running against him, I invited each of them to successive Wednesday Boise Rotary luncheons to speak to the membership.  As program chairman I sat at the head table with the candidates and got to know and introduce each of these gentlemen to the Rotary club members before their talks..  In this election Cecil Andrus unseated the incumbent Don Samuelson and we worked closely with his staff in replacing two Univac Systems with IBM 360 systems.  Andrus later became Secretary of Interior in the Carter Administration and Governor of Idaho for a second time.  He also published a book in 1998 called "Cecil Andrus, Politics Western Style" which highlights his efforts at conservation of land and wildlife in the west.  I have an autographed copy of the Andrus book and still maintain email contact with two former members of his administration in Boise. Also had the pleasure of playing golf with him in a visit to Boise in 2008.

 

As mentioned earlier, the losing vendors many times challenged these competitive wins in government. IBM had this experience in the case of the State of Idaho procurement for Highways and the Auditors Office.  Highways was a competitive winback against Univac and the Auditor was an IBM computer upgrade. The Univac people felt that IBM had too much influence on the RFP and challenged our ability to deliver the equipment as quickly as we did from the date of the signed order.  360 delivery schedules were very long and the IBM (Anti-trust) Consent Degree required strict sequential delivery to all our on-order customers nationwide.  It was our practice to get non-binding Letters of Intent from our potential customers in order to book 360 delivery schedules before the actual order was received, which we did in this case..

 

With a lot of outside IBM help in preparation, I spent most of one day in an Idaho legislative hearing justifying these two IBM 360 orders against Univac testimony and the underlying party politics between the legislature and the Governor's office. The new Governor, Cecil Andrus, was the first Democratic Governor in Idaho in 25 years and the legislature was still controlled by the other party. This computer procurement attracted a lot of local press and the legislative committee upheld the IBM procurement decision.  For anti-trust reasons IBM was very sensitive to this type of publicity. A copy of my testimony is in the appendix. For more information on the State of Idaho and the National Reactor Testing Station  procurements also see attachment “IBM Idaho, 1965-1973.


More on IBM Technology

 

The next major breakthrough from vacuum tubes was the invention of transistors, which were faster and gave off far less heat.  From transistors the computer technology moved to Integrated Circuit Computer Chips that incorporated transistors, resistors and diodes on a single tiny unit. Quoting from the book Broken Promises by D Quinn Mills and G. Bruce Friesen of the Harvard Business School Press, "IBM was basically a machine assembler.  Because critical electronic parts represented such a small part of a computer's value, IBM bought parts that it did not itself make from vendors like RCA or GE. 

 

As these components became more complex, however, the value added in machine assembly decreased while the value-added in parts fabrication increased.  Components makers thus found themselves pushing forward into computer assembly while computer assemblers found themselves pushed backward into components manufacturing for competitive protection."

 

In 1960 IBM had eight computers in their product line, none of which had software or hardware compatibility between systems, so if a customer needed to migrate from one to another he had to completely re-write his programs.  This gave birth to the IBM 360 System, called by Fortune Magazine the $5 billion gamble.  IBM hired 60,000 new people and built 5 new plants and announced a series of upward compatible new systems that rented from $2500 up to $115,000 per month. 

 

In 1961 IBM hit $2 billion in revenues (2 1/2 times bigger than when Mr. Watson Sr. retired in 1956), the stock quintupled in price, and IBM owned 4000 of the 6000 computers in the marketplace.  Also in 1961 IBM World Trade Inc. hit $350 million in revenues and was growing at double the U.S. domestic rate.  By 1966 IBM was at $4 billion in sales with 7000 to 8000 computers installed and for the first time had $1 billion in pre-tax profits.


In the 1982 to 1986 time frame IBM both won and loss leadership in the new personal computer business.  The first microcomputer was created by Xerox and seemed to pose no threat to IBM's mainframe time-share business.  Later in 1977 when Apple introduced their first microcomputer IBM began to take notice.  The IBM Office Products Division, (typewriters and copying equipment) had responsibility for this product area but failed to mount a development effort.  Then CEO Frank Cary set up a separate development effort in Boca Raton with direct reporting to him.  The initial IBM PC's captured a large share of the PC revenues and established an industry standard.  This standard was expanded by IBM's decision to go with Open Systems, which meant that IBM would license all of its PC hardware design and purchase components and operating systems from the outside.  This gave birth to the PC clone industry and a very large number of software application companies. 

 

The reasoning behind IBM's decision on Open Systems is highly suspect today and with hindsight appears to have been a very serious strategic business mistake.  Under the open systems strategy IBM procured computer chips mainly from Intel and the Windows PC operating system from Microsoft.  When IBM declined Bill Gates offer to buy control of MS/DOS, Compaq licensed MS/DOS, purchased chips from Intel and with Open Systems was able to clone IBM machines.  The market then became a consumer pricing and distribution game and IBM failed to hold market share. (Now estimated at 5.5% in 2004) Apple stayed proprietary with their hardware and software and now has less than 2% of the market. So who was right? The merger of HP and Compac has made it a two-company race with Dell. Because of the small commodity profit margins, in April 2005 IBM sold their PC division to Leveno in China but retained a 19% share and transferred several key executives to the new owners.

 

To date, IBM has achieved dominance in information technology, first with punched card tabulators, then with early mainframe computers (650, 1401, 701, 702) then with integrated mainframe systems (360 and 370) and finally with early personal computers.   Four times IBM has lost this market dominance as it failed to react quickly enough to new generations of hardware, software and market requirements.  Anti-trust actions against IBM, which will be discussed later,  also played a role in this industry re-structuring.


IBM's 1998 breakthrough in copper microchips promises a significant increase in the capacity and speed of semiconductors as well as reductions in cost.  This could foster a new generation of computer competition.

 

In the year 2000, for the eighth straight year, IBM earned more patents than any other company (more, in fact, than our eight closest competitors combined).  By year-end, fully one third of those patents had made their way from the lab to the marketplace in IBM products or licensing agreements.  This generated more than $1.5 billion in revenue in 2000.  IBM continues to lead in this area. 

 

The Marketplace in the 50's, 60's and 70's

 

In the 1950's and 60's 95% of IBM's revenue came from the rental of IBM equipment.  As mentioned before, the IBM sales representative, through the company sales plan commission contract, was tied financially to the complete maintenance and growth of that customer's rental revenue.  The rental price was also bundled to include all IBM services for hardware maintenance, education, manuals, sales support and later systems engineering.  With this much revenue coming from monthly rentals including monies for the second shift usage of the equipment, it was much easier to forecast annual revenues, but IBM had to finance the cost of the equipment until the rentals covered the manufacturing costs.  Protecting this rental contract required a strong relational and on-going partnership with each customer. 

 

The IBM sales representative was usually considered a part of the customer's data processing staff and spent many hours at the customer site.  I can remember many all night working sessions in customer's data processing installations especially during application conversions. Getting home at 6 or 7 in the morning, still in a business suit, created an image problem for me in the neighborhood.  This close working partnership gave IBM great knowledge of customer data processing requirements, which was fed back to IBM research and product development groups.

 

In the 1970's, partly because of the desire to grow IBM revenues faster and pressure from the U.S. Justice Department to unbundle pricing for related support services, we began an emphasis on the out-right sales of IBM equipment. Instead of relation-ship rental contracts you now had transactional purchase contracts and the customer had to purchase all of the support services and equipment separately. The customer now made the decision on how much IBM support and service he needed and could afford.  This new contract approach broke the Customer/ IBM partnership and made it much more difficult for IBM to monitor and define future customer requirements.


The IBM commission liability in the sales plan also changed because there was no revenue flow to protect on a purchase contract. Unbundled purchase contracts and IBM's new open system policy opened up the market to many more competitors, which was the objective of the Justice Department.  It also opened the mainframe market to Japan or JCM’s.

 

We are seeing a re-play of the unbundled pricing argument today in the court action between Microsoft and the U.S. Justice Department on Internet browsers and other marketing practices.  Market definition and market penetration by individual companies was, and still is, the main issue even though the corporate players continue to change.

Will cover more on this subject in a later section.

 

Overview of the IBM Organization in 1988:

 

Quoting from a special issue of "THINK" magazine in the appendix:

 

“Ten years ago, in 1988, IBM was organized into 3 basic geographic companies, U.S. Data Processing Division, Europe Middleast and Africa (EMEA) and the Americas Far East (A/FE) which includes Canada, Latin America, Japan, Korea, China and all of the Southeast Asian countries including India, Australia and New Zealand.”

 

IBM was a company of 390,000 people, doing $54 billion in sales in 132 countries by supplying 5 million customers with some 10,000 hardware, software and services offering.

 

In the two years, 1986 and 1987, IBM had invested more than $10 billion in research, development and engineering. 

 

There were more than 100 education centers around the world, staffed by 7000 professionals.  In 1988, there was 5 million employee student days and more than 2 million customer student days.

 

There were 41 product Development Labs for both hardware and software.

 

There were over 40 manufacturing facilities and three-fourths of all IBM products manufactured outside the U.S. were traded across national boundaries.  There were also 53 distribution centers.

In addition, thirty-two countries were connected to the Corporate Consolidated Data Network, which consisted of more than 200,000 terminals worldwide.  3200 IBMvnet communication nodes were located in 55 countries. The system was called PROFS, Professional Office System, and was the forerunner of what is known today as the internet.  As mentioned before, this type of dedicated system was in use by the White House and during the Iran investigation and this proved to be the source of information on the conduct of key players in the Iran/Contra scandal.


The IBM domestic Branch Office was the focal point to the market place.  A Data Processing Branch Manager headed it and if he had ten or more salesmen and system engineers, he had a Marketing Manager and or Systems Engineering Manager.  In addition, a separate Field Engineering service organization for data processing equipment reported through their own chain of command.   The Office Products Division had their own branch marketing and service organization and also reported to their own management chain.  Administration and office facilities were shared by all three organizations and were the responsibility of the Data Processing Branch Manager. The split sales and service mission and management measurements for data processing equipment could sometimes cause a problem with customers.  In large cities the branch offices could be specialized by industry sectors i.e. banking, manufacturing, distribution etc.  In the smaller offices the industry specialization was done where possible at the marketing manager and or marketing representative level.  The fun part of being in a branch was the employee es-spirit de corps that existed and the excitement of customer contact and competition. In Boise we used the Tiger Theme in most of our inside sales promotion.  We also had an annual family campout at Redfish Lake.  This included many personally owned boats used for water skiing and other lake activities.  The highlight of the event was the Stanley Stomp, which was a piggyback race through the center of Stanley on Saturday night. It was also satisfying to be a representative of IBM because of the special recognition for excellence that the company had. You also had the feeling that you were a part of a special select group of people.  I find it hard to understand today's IBM marketing organization that does not include a branch office operation and complete customer coverage. How do you get group identity, spirit and employee drive to succeed.?  See picture on the next page of a Boise branch office sales meeting, the Tiger logo badge, branch office building and “Our Job Is”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I used this license plate on my car in Boise for a couple of years and still have it. .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Branch Office reported to a regional District Office and the District Offices reported to one of 3 Regional Offices in the U.S.

 

While I was a Marketing Manager in Denver I'm reminded of a situation with Buck Rodgers, then the Vice President and Western Region Manager in Los Angeles.   I was responsible for Banking and Utilities marketing in Colorado and for the sub-office covering the State of Wyoming.  The Riverton Wyoming Chamber of Commerce was planning a technology conference and asked IBM to provide a keynote speaker at their final dinner event.  Not being shy, they went directly to Mr. Watson’s office and the invitation was forwarded on to regional manager Buck Rogers's office in Los Angeles.  Buck agreed to do the speech and was to fly to Denver, late in the afternoon, the day before the conference and then he and I would fly to Riverton the next day.  That same afternoon Denver had their floods of 1966 and most of southwest Denver including my golf course, Columbine Country Club, was under water.

 

 I had a 10-year-old daughter and her 10-year-old friend riding a train from Telluride to Denver that afternoon and the flooding held up the train.  For that reason I failed to meet Buck's airplane and met up with him later at the hotel.  He was a little on the cool side and I have since been reminded of an episode he related in his book The IBM Way where he was late to a Watson meeting because of a customer meeting. Mr. Watson was not happy until Buck told him that it was a customer situation that caused him to be late.  I didn't have the same customer excuse, but two 10 year olds stranded on a train outside Denver in a flood was all I had.  Buck Rodgers is probably the best public speaker I have ever heard and I had that pleasure at many hundred percent clubs, golden circles and branch manager meetings.  He is a center stage, no podium, and no notes type speaker.  So the next morning on the plane to Riverton, Buck pulls out an envelope, and says to me, what should I talk about?

 

My response was that there were going to be several hundred people there tonight and the Wyoming State Governor will introduce you and the State is a very good IBM customer.  He jotted a couple of notes and that evening gave a great speech.  Today, I don't remember what he said but we continued to do a lot of business in Wyoming.  Buck went on to become President of the Data Processing Division and for 10 years was responsible for IBM marketing worldwide.  He rides a white horse in IBM marketing history.

 

·       Columbine Country Club, which I was a member of, was supposed to host the annual PGA golf tournament that year and I was very active on the membership promotion committee. Because we lost 4 holes in the 1966 floods the tournament was moved to Muirfield in Ohio and was held at Columbine the following year, 1977. By that time I had been promoted to Branch Manager in Boise, but our District Manager in Seattle held a district branch managers meeting back in Denver so we could all attend the Tournament during one of the days.


IBM Financial Growth

 

IBM had a very steady linear growth, over 23 years, in gross revenues from $5 billion in 1967 to $69 billion in 1990, for an average 6% compound growth rate.  From 1991 through 1993 IBM begin to experience some revenue growth and profitability problems.  Stock prices also reflected a loss in investor confidence.  However over the four years, 1994 to 1998 a new revenue growth curve has been established, at an average compounded rate of 5.5% with earnings in the 8% range.  IBM stock prices had shown significant re-bound, including a 2 for 1 stock split in May of 1997 and again in 1999. But this was followed by a 35% decline in stock price in 2001/2.

 

Below are the revenue, earnings and percent of profit from 1988 - 2002.

 

Revenue Growth:                          Earnings          %Profit

 

1988= $59,461 billion            +5.8 billion     +9.8%

 

1989= $62,710 billion            +5.2 billion     +8.4%

 

1990= $69,018 billion            +6.0 billion     +8.7%

 

1991= $64,792 billion            +2.1 billion     +3.3%

 

1992= $64,523 billion            +1.4 billion     +2.2%

 

      *1993= $62,716 billion            (-$8.1 billion   -12.9%)

 

1994= $64,052 billion            +$3.0 billion   +4.6%

 

1995= $71,940 billion            +$6.3 billion   +8.8%

 

1996= $75,947 billion            +$5.8 billion   +7.7%

 

1997= $78,508 billion            +$6.1 billion   +7.8%


1998= $81,667 billion            +$6.3 billion   +7.7%  

 

1999= $87.548 billion            +$7.0 billion   +8.0%

 

2000= $88.396 billion            +$8.1 billion   +9.1%

 

2001= $85,866 billion            +$7.7 billion   +8.9%

 

* Heavy company re-structuring costs. I Retired.

 

Stock performance:

 

Based on revenue and earnings results stock prices took a dive from 1991 to 1993 before starting a significant recovery.

 

Year-end closing prices adjusted to reflect 2 for 1 stock split May 9th 1997.

 

1991= $44.50

 

1992= $25.18

 

1993= $28.25

 

1994= $36.75

 

1995= $45.99

 

1996= $75.75

 

1997= $104.63

 

1998= $182.00 (12/23/98)

 

1999= $246.00 (5/14/99)  *

 

2000= $108.00

 

2001=$98.00 (10/12)

 

2002=$81.60


*Another 2 for 1 stock split was approved for May of 1999.

 

Stock price after the split.

 

1999=$117.00 (6/9/99)

 

  $137.00 (7/9/99)

 

The economic downturn of 2001 and 2002 has caused the IBM stock to fall over 35% and was at $78 per share on 11/9/02 and now 87 on 9/12/03. The stock price is back up to $119 on 8/23/09.

 

Workforce

 

In 1985 IBM had 405,535 employees worldwide and by 1994 had reduced that workforce by 47% to 219,839.  These early personnel reductions required large one-time charges for severance and early retirement.  In 1993 IBM discontinued the 75-year old full employment policy and began involuntary separations.  Since that time there has been a steady re-growth in the workforce while maintaining an annual decline in expense to revenue ratio.

Number of Employees

 

1994- 219,839

 

1995- 225,347

 

1996- 240,615

 

1997- 269,465

 

1998- 291,067  + 24% growth over 1994

 

                1999- 307,401  + 29% growth over 1994

 

                2000- 316,303   + 30.5% growth over 1994

 

                2001- 319,876   + 31.2% growth over 1994  

 

(In addition IBM has another 46,703 employees in wholly owned subsidiaries and complimentary organizations)

 

The following table identifies the company’s percentage of 2001 revenue by business category.

 

        Hardware= 38.8%

 

        Global Services= 40.7%

 

        Software= 15.0

 

        Global Financing= 3.9%

 

        Enterprise Investments/Other= 1.3%

                Total       100%

 

 

What can Microsoft and others learn from

IBM’s 48 years of Anti-Trust experience?

 

Setting the business tone:  Tom Watson Jr.  IBM Chairman and CEO

 

     Added comments and narrative by:

 

     John J. Sailors  

     IBM Retired

     Marketing Executive

 

 

U.S. Anti-trust Actions against IBM

 

Within two weeks after Roosevelt took office and closed down the banks the government started its first anti-trust action against IBM.  By the end of 1935 according to the court, the company had under lease 85.7% of all tabulating machines, 86.1% of sorting machines and 81.6% of all the punches.  By pre-agreement with Remington Rand both companies only offered equipment on a term lease contract and the user had to buy their punched cards only from their equipment supplier. IBM cards had 80 columns and used square holes and Remington Rand cards had 90 columns and used round holes.

 

Again because of IBM's large market share in punched-card and early computing systems the U.S. Justice Department filed an Anti-trust suit against IBM in January of 1952.  This suit was based upon the Sherman Act of 1890, as amended, entitled: "An act to protect trade and commerce against unlawful restraints and monopolies."  The issue was the definition of the Tabulating and Electronic Data Processing Systems industry and IBM's revenue share of that market, and by nature of its size, IBM's ability to control pricing, standards and competition in that market.  Without trial or adjudication IBM and the U.S. Justice Department agreed to a Final Judgment on January 25th, 1956 that set forth the following, which are quotes and paraphrases from the consent degree. 

 

The Data Processing Industry was defined as:

- Tabulating Cards- the punched-card storage media containing 80 alphanumeric characters per card.     

- Tabulating Card Machinery- the rotary presses used to manufacture tabulating cards.     

- Tabulating System- a group of machines used for entering, converting, receiving, classifying, computing and recording alphanumeric accounting and or statistical data by means of tabulating cards.     

 -Electronic Data Processing System- any machine or group of automatically inter-communicating machine units capable of entering, receiving, storing, classifying, computing, and or recording accounting and or statistical data without intermediate use of tabulating cards, which system includes one or more central data processing facilities and one or more storage facilities.

 

The overall objective of the U.S. Justice Department suit was to segment the data processing industry into individual components and to create competition in each of these segments.  In the 1956 Consent Decree, IBM and the Justice Department agreed to the following:

 

-        To place purchase prices on their equipment for the first time. Heretofore all IBM equipment was offered for term lease only and this lease price included all services and support including manuals, education, equipment maintenance & repair and sales and technical support.

 

-        The customer paid extra for equipment use over a standard workday.

 

-        Prohibited IBM from getting into the used equipment or secondary market for IBM equipment. As mentioned before, Mr. Watson Sr. was convicted of an Anti-trust violation for attempting to control the secondary market on cash registers when he was the General Sales Manager for National Cash Register Company back in 1913.  He was sentenced to a year in jail, which was reversed on appeal after he joined CTR, which 10 years later became IBM.

 

-        IBM had to provide the same support services for lease or purchase customers without a separate charge except for maintenance and repair.

 

        -   All lease agreements were restricted to one year.

 

-        IBM cannot require a customer to disclose the use to be made of the equipment.

 

-        IBM cannot require a customer to use only IBM maintenance and repair services on lease or purchased equipment.

 

-        Comparable IBM training must be provided at a reasonable charge for all persons planning to engage in the repair, maintenance and distribution of IBM equipment. This also included the requirement to sell sub-assemblies and parts to the new companies.

 

-        Cannot require a customer to purchase tabulating cards only from IBM.

 

-        IBM must divest itself of 50% of the total capacity for the manufacture of tabulating cards in the United States over a 7-year period. This included royalty free patent licenses on card making supplies and rotary presses. Had to agree to sell some of our own rotary presses if not available commercially.

 

-        IBM was forced to make a separate Corporation out of its service bureau operations.There were several administrative provisions to insure a separate business operation. A favorite sales strategy was to sell a service bureau contract and after conversion then move this customer and all of the wired control panels to his own leased equipment.

 

-        IBM must offer unbundled-restricted, non-exclusive on all its patents. A reasonable royalty may be charged (except as mentioned before on patents relating to tabulating cards and tabulating card manufacturing equipment, which shall be royalty free.) Failure to agree on royalty fees will be decided by the court, with burden of proof on IBM. This provision led to IBM's open system policy that currently produces over $1.7 billion in annual license revenue. For the last ten years (1992 to 2002) IBM has been leader in annual patent approvals.

 

-        To insure compliance with this Final Judgment the Department of Justice shall have access to all books, ledgers, accounts, correspondence, memoranda and other records and documents, plus officers, directors, agents, or employees and upon request IBM shall be required to submit reports on all matters contained in the final judgment.

 

To further foster competition IBM instituted a "no unhooking" policy.  Once a competitor received an order for equipment the IBM salesman was not allowed to call on or make any contact with that company until the competitors equipment was installed, which could be several months or as long as a year.  

 

On the last day of the Johnson Administration in January of 1969 the Justice Department Attorney General Ramsey Clark, filed additional Anti-Trust actions against IBM, seeking to break the company into smaller parts.  It is interesting that Ramsey Clarks' father Tom Clark was the U.S. Attorney General that initiated the first anti-trust action against IBM in 1952. The real issue in both cases was "market definition" and IBM's share of that market and the ability to set industry standards and prices. Mr. Watson Jr. pointed out that "the data processing industry was very broad and that competition was strong and increasing thanks to the constant evolution of technology, which no one had a monopoly on."

 

In December of 1968 Control Data Corporation (CDC) also filed suit against IBM claiming unfair marketing practices.  In the CDC discovery process they requested millions of documents and executive correspondence from IBM, which they indexed on a computer system and shared with Justice Department Anti-trust lawyers.  In late 1972 IBM decided to settle the CDC suit.  We sold them the Service Bureau Corporation for $63 million, plus cash and contracts worth $101 million and covered $15 million in CDC legal fees.  In this settlement, as was standard legal practice, IBM also gained ownership of CDC's legal work product, the very large discovery database index and documents and as was IBM's legal right they immediately destroyed this index. Without this help from CDC the Justice Department suit drug on for 11 years before it was dismissed by the courts.  During that time significant changes were also taking place in the computer industry structure, which may have made the original suit moot.

 

These changes included:

 

IBM lowered their Educational Allowance (discount) from 60% to 15%, and Digital Equipment Corporation became very strong competitor in higher education.

 

Plug Compatible Machines (PCM) were announced which copied IBM hardware and licensed IBM software and the Japanese and Amdahl began to compete in the large systems area. The cost of conversion was no longer a big cost barrier to switching vendors. To meet this new competition IBM spent over $10 billion on new plants and facilities and, as was mentioned before, began a major shift from rental to a purchase business.  During this period IBM also decided to unbundle their pricing.  Known as "The New World," they began to price hardware, software, education and technical (SE) services separately.  This created whole new markets and companies in the data processing industry.

 

In 1961 IBM published a Guide on Anti-trust Responsibilities for all employees. (Copy contained in appendix)  It included the basic elements of policy and the law including a complete copy of the 1956 Consent Decree, to give the employee reader awareness and sensitivity to anti-trust areas.  The guide opened with the following statement by Mr. T.J. Watson Jr. that was made in New York City on March 22, 1961, to all members of the IBM Corporate Management Committee, Division Presidents and General Managers, the Corporate Staff Assistant Directors and Staff Heads.

 

Mr. Watson's speech, an exact quote: “Setting the Business Tone.

 

We have always tried to operate the IBM business at a high rate of speed; and to sustain this speed, we have reorganized several times in recent years following the basic pattern set at Williamsburg in November of 1956.  Our fundamental objective in all of these organizational changes has been to focus management's attention on the individual problems of our business, breaking these problems down into their component parts so that a man can get his arms around them.

 

The overriding objective has been one of tempo.  We have urged you, and through you all of your people, to make decisions and make them quickly.  We have tried to instill a strong sense of proprietorship all the way down the management line to achieve this.  We have used different phrases to express this- "a sense of urgency," "healthy dissatisfaction," "proprietorship," "delegation," etc.

 

I am firmly convinced that a good deal of our success has stemmed from our willingness to pick people who want to make decisions and who seem to innately have this sense of urgency.  The "young man in a hurry" has done well in IBM, and I propose that he continue to do well.

 

However, we do have a problem in coping with bigness, and it is the problem of dealing with size that I want to discuss with you.

 

Because of our size, our actions are closely watched.  People look for reasons to accuse us of improper actions whether they are competitors, imitators or the Federal Government.  The purpose of this get-together is to discuss some of the problems of complying with the letter and spirit of the anti-trust laws without losing the speed of action that I like to think of as characterizing the IBM business.  We can't move so fast

that while we are acting one can hear the breakage in the background.

 

In any company of a size as ours, there are three basic classes of conduct with which we are concerned:

 

1.  In the first class are those acts, which are in and of themselves violations of the anti-trust laws or the Consent Decree.  There is no need to belabor them.  They are clearly to be avoided.  Examples of some of these violations are:

 

(a) Delivering machines out of strict sequence, which we are ordered to follow under the Consent Decree.

 

(b) Raising purchase prices of machines above equivalence to rental prices.

 

(c) Agreeing openly or impliedly with a competitor on prices, terms of sale, marketing methods, territories or customers.

 

(d) Open aggression, such a deliberately misstating the capacity of a competitor's machines.

 

These obvious violations everyone should know enough to avoid.  The penalty for violation of the anti-trust laws or the consent decree must, of course, be dismissal.  However, so that there will be no unintentional stumbling in this area, we will put out a written statement of those practices particularly to be avoided.

 

(A personal note from my (the author) experience--an IBM sales rep was offered and accepted a copy of competitors written proposal from a school district purchasing agent. In another situation, a sales rep. discussed the circumstances of an IBM bid loss in state government with a newspaper reporter in a casual conversation in a barbershop and this information was reported in the local newspaper.  In both cases the IBM sales reps were dismissed from the company and in the latter case the immediate manager was also disciplined for failure to set the

proper tone and caution with his people.)

 

2.  The second class consists of those acts, which, though not themselves illegal, may create a pattern of apparent monopolistic practices.  Even though no one will probably start a lawsuit over any one of them, these acts may accumulate into an anti-trust action brought by either by the Government of by an aggrieved competitor.  Examples of this category are:

 

(a) Unhooking- that is, the inducing of a cancellation of a firm competitive order prior to installation.

 

(b) Proposal or mention to a prospect of a commercial product before it has been officially announced, when done to thwart a specific competitor.

 

(c) Subtle disparagement of competitor’s products by suggesting, for example, that his cards may not work so well in our machines.

 

Acts in this second category, standing alone, technically may not be a violation of the anti-trust laws.  But when judged by hindsight a series of several of these acts might be regarded as an indication of an overall attempt to monopolize and provoke the institution of an action.

 

Each of you is responsible for recognizing the impropriety of these acts and eliminating them.

 

3.  The third class of conduct is subtler than the first two categories and may be thought of under the heading of "corporate ethics and morality."  But these acts may also provoke complaints to the Department of Justice and, in any anti-trust suit which may be brought for violations arising out of acts in the first two categories, these unethical practices would add fuel to the anti-trust fire.

 

It is hard to define the third category of acts other than by a simple test, which I am sure already exists in the conscience of each of you. It is this:  Turn the situation around.  Suppose that you were the competitor - small, precariously financed, without a large support organization, and without a big reputation in the field- but with a good product.  How would you feel if the big IBM Company took the action, which you propose to take.  Would you regard the IBM Company as taking unfair advantage of you?  Would you consider that the IBM Company was using a sales tactic, which IBM possessed solely because of its size and reputation, and which, therefore, was unavailable to you.

 

We must avoid the type of action-even lawful action-which irritates, antagonizes and finally goads a competitor to action.  We simply cannot shoulder people around or give the appearance of doing so.

 

When considering your actions, remember that there is a timing problem involved.  Small irritants, when put together in a black book, can be made to add up to an extremely damaging, if not illegal, picture.

 

 This is part of the problem of evaluating any single act.  If you have a perfectly nice son and if you were to document on a single sheet of paper all of his misdemeanors over a year's time-and then read them off-your perfectly nice son would probably sound like the worst possible juvenile delinquent.

 

You are all familiar with the recent electrical industry case.  You were all shocked by the flagrant disregard by responsible senior executives of one of the most fundamental rules of the anti-trust laws: namely, the rule against fixing prices.  The tragedy is that these businessmen thought they were doing right for their companies in engaging in this secret conspiracy, knowing it was illegal.

 

Moreover, you should know what Chief Judge Ganey said in that case:

"This court has spent long hours in what it hopes is a fair appraisal of a most difficult task.  In reaching that judgment, it is not at all unmindful that the real blame is to be laid at the doorstep of the corporate defendants and those who guide and direct their policy.  While the Department of Justice has acknowledged that they were unable to uncover probative evidence which could secure a conviction beyond a reasonable doubt, of those in the highest echelons of the corporation here involved, in a broader sense they bear a grave responsibility for the present situation, for one would be most naive to believe that these violations of the law, so long persisted in, affecting so large a segment of the industry and finally, involving so many millions upon millions of dollars, were facts unknown to those responsible for the conduct of the corporation and, accordingly, under their various pleas, heavy fines will be imposed." (sounds like Enron)

 

You all realize the shocking indictment of the integrity of American industry, which has resulted from these actions.  A result which rightly makes the man in the street distrust and dislike big business and also has caused bewilderment on college campuses.

 

I would like to conclude this subject by making the following points:

 

1.  There should be no question that I mean business when I say it is our policy to comply with the anti-trust laws in letter and spirit.  Similarly, there should be no question that you line managers bear the primary responsibility in this area also.

 

2.  All operating people must make their business decisions against a backdrop of a keen awareness of this policy.  Actions must be examined critically to determine not only if they are legal or illegal but also whether someone else might interpret them as being legal or illegal.  Decisions must be made with a realization that the consequences that may result to the IBM Company may be of a more serious and permanent nature than any temporary business advantage to be gained.

 

3.  We have a staff of lawyers inside and outside the Company who can help educate you and your people and who can advise you as to the law and as to specific transactions.  To use the lawyers correctly, however, certain things must be made clear:

 

(a) All operating people have a clear responsibility not to conceal, misstate or fail to analyze the facts, since any legal advice is no better than the facts upon which it is based.

 

(b) All operating people have the responsibility to keep the lawyers advised of trends in the market and in competition, and also to inform the lawyers of proposed transactions in sufficient time to permit a careful analysis of the problem.

 

 

(c) Division counsel must be understood as not only representing their divisions but as also having a responsibility of protecting the reputation and legal posture of the IBM Company as a whole.

 

4.  Our job as the top management of this business is to:

 

(a) Fully understand the business and legal environment in which we operate.

 

(b) Make certain that our people understand those facets of this environment appropriate to their particular jobs.

 

(c) Make sure that our people understand the specific "do's" and "don'ts" of their jobs.

 

5.  Finally, in doing all these things we must preserve the delicate balance between the pace of operation that has brought us where we are, and the caution that is necessary for operating in today's world.      

(End of Mr. Watson's statement)

 

Mr. Watson certainly tried to set the tone and responsibility for how the IBM Company intended to operate under the consent degree.  It was a hard walk to make in a highly competitive marketplace.

 

To insure compliance and understanding of the above, all IBM marketing people were required, annually, to read and certify in

writing that they fully understood the IBM Business Code of Conduct.

 

Below are excerpts from IBM's Business Conduct Guidelines.

 

Our company has an enviable reputation.  People generally think of us a competent, successful and ethical.  These three qualities are related.  Our adherence to strict ethical standards has contributed, in a very direct way, to both the professionalism of our company and our success in the marketplace.  Over the years, we have emphasized again and again that every employee is expected to act in accordance with the highest standards of ethics.  This is still true today.  And it will be true tomorrow.

 

Business today is being called upon as never before to explain its actions, provide reasons for its decisions and speak out clearly on where it stands on ethical behavior.... it is essential in this time of questioning and testing that everyone----employees and their families, customers and competitors, friends as well as critics---know just where IBM stands on basic ethical issues.... If there is a single, overriding message in these guidelines, it is that IBM expects every employee to act, in every instance, according to the highest standards of business conduct.  Ultimately, in every business decision---as in personal ones---the responsibility is yours.

 

We depend on you to do the right thing; right for both you and the company.  It is no exaggeration to say that IBM's reputation is in your hands.

 

The Business Conduct Guidelines go on to give practical examples of do's and don'ts in our marketplace especially as it relates to competition and being sensitive to the power of IBM's size.  

 

From what I read in the newspapers on the Microsoft anti-trust trial I see history is repeating itself.  It is interesting that control and ownership of just a software operating system and integrated application software can provide so much power in the marketplace. In the IBM anti-trust cases it was superior revenue and market-share of hardware, software and related services in the entire Data-processing industry that caused the Justice Department to react.    Perhaps Microsoft should spend some time studying IBM's anti-trust experience and try to broaden the legal definition of today’s data processing industry and their relative share.  There is plenty of case law and precedent for what is going on in the industry now.

 

Another issue is how “user friendly” are today’s personal computers and can a more fragmented computer industry solve that problem. Today the consumer becomes the systems integrator (hardware, software and support) and the average consumer is ill equipped to do this. 800 numbers and overseas call centers do not provide timely support. This is a significant part of the total cost of computing and our anti-trust laws don’t take this into consideration.  Perhaps we should go back to a bundled lease price or a PROFS like system where the user has terminal only and the operating system, applications and storage reside on a mainframe or server type computer.  Today that is known as a Thin or Virtual Client system and is being pushed as a better solution in the Education Classroom.

 

 

Summation:

 

- Why did IBM lose momentum in the early 90's?

 

The industry technology, price performance and profit margins changed quickly and dramatically.  IBM's open system policy enabled peripheral equipment suppliers to interface their products i.e. tape drives, hard files and printers directly to IBM mainframe central processing units. JCM’s (Japanese Computer Manufacturers) and Amdahl started cloning IBM mainframes.  The IBM open-system policy also gave birth to the PC clone industry and such companies as Compaq and Dell.  It is interesting that Apple Computer elected to maintain proprietary control of their PC hardware and software and today they are less then 5% of the PC marketplace and IBM is only about 12%, but we belong to a Microsoft Windows group controlling 90% of the total market.  PC application software development will chase the larger market share.  The distribution channels used have also been an important factor in PC industry growth today.  IBM's recent long term OEM parts contract with Dell will make it harder to measure true PC market share and revenue in the future.  In the first few months of 1999 IBM has announced $28 billion worth of OEM technology deals.  The recent announcement of the one inch 340 megabyte micro-drive is aimed at digital cameras, hand-held PC's and personal audio players.  

 

The market for computers expanded from government and business to include the consumer public where IBM lacked distribution and sales experience.  For the first time IBM was forced to sell their products through retail organizations instead of the blue suit and white shirt.

They went to Internet sales only on PC products and in 2005 sold the entire PC division to a China based company, retaining only a 19% share.

 

IBM elected to pay large incentives to force voluntary personnel reductions and finally had to resort to involuntary layoffs, breaking a 75-year-old policy of full employment. They went from 405,000 employees to 291,000 in three years.  They are now back to 320,000 in the year 2001 plus 47,000 subsidiary and complimentary employees.  

 

The number of new companies in the industry expanded       dramatically in both hardware and software around the world.  The Japanese became direct competitors in the large systems area.  Digital Equipment Corporation (DEC), Data General and Wang became competitors in the mid-range and Control Data Corporation (CDC) Cray, Honeywell and Hitachi in large mainframes.  None of these companies are in the market today. The results of the HP Compaq merger in 2003 will be interesting to watch not to mention some of their current legal problems at the Board level.


Manufacturing and some development began to move overseas to lower costs, especially in hard files.  In June of 1999 IBM announced that they were moving hard file development and manufacturing to Hungry, Mexico and Japan.  Eleven hundred IBM San Jose people will lose their jobs in this product movement.  This layoff coupled with the announcement of a new and less attractive pension system for current employees has led to rumors of the first possible unionization in IBM.

(To date in 2009 this has not happened)  The Hitachi buy in to IBM San Jose hard file manufacturing will also be interesting to watch. 

 

It became more difficult to protect intellectual property, especially software in Asia. Neil Killgren, an IBM Patent Attorney from the UK spent 7 years based in IBM Hong Kong working this problem in all Southeastern Asian countries including mainland China with varying degrees of success. It is still a major problem today. 

 

Two companies gained control of PC industry standards through superior market share, Microsoft on the PC operating system and Intel on technology. IBM had opportunities to be a major player in both areas and failed.  These two companies, especially Microsoft, are now facing Anti-trust action similar to what IBM faced from 1952 to 1985.  The case law established in the IBM suits could provide some guidelines.   What goes around comes around in the data processing industry.   

 

The fastest growing and most profitable part of the industry today is application software, people services and the Internet. Hardware development - speed, capacity, affordability and complexity has far outrun the average users ability to use the full potential of these systems. In many applications they are not always "user friendly." The current consumer technical support structure of 800 phone systems (IBM's is located in Ireland and Canada) is not staying up with the demand.  Spam and viruses are growing problems for the desktop user.


The life cycle of the hardware is about 18 months with no secondary market. (They get dumped in landfill, or donated  developing countries which creates additional problems)   In fact most of these older machines wind up in our schools. This makes a good case for leasing especially in government and business and let the supplier run the risk of obsolescence. Consumer leasing might be an interesting way to build in better customer support.  It is also interesting that lease contracts were the only way to acquire IBM equipment from 1924 to 1956. 

 

It is also interesting to see the new offering of a free computer if you sign a term contract for a specific Internet service.  This is similar to some cellular phone contracts.

 

Before the economic downturn in 2001/2 there was an estimated employment shortage of over 200,000 computer systems people in the U.S. and our schools and colleges were not stepping up to the problem. Computer vendors and major users are being forced to recruit qualified people from overseas and the State Department has placed immigration caps on this source.  The recent demise of many dot.com companies has leveled this problem and the movement of many of these jobs overseas to cheaper labor markets has created IT employment problems in the U.S.   The use of the Internet has also made job and work location less important.  One of my sons’ was an editor and

writer for a publishing company while living in Taipei and now does basically the same work on the net from Livermore California.  Another son manages the networks for a large shipping company and can work many of the problems from his computer at home.

 

Network security is also becoming a very important issue and the Internet will have a significant international economic and political impact on the way we distribute information, goods and services in the future. IBM announced in May of 1999 that they now get 25% of their annual revenues (over $20 billion) from Internet related products.  Would strongly recommend reading  “The World Is Flat” by Thomas L. Friedman for a better understanding of where worldwide communications, electronics and education is taking our global economy and political scene, especially in China India and Russia.

 

 

In summary:

 

The technology is continuing to change at an even faster pace.

 

New and cheaper distribution channels are being developed.

 

Manufacturing and now development is moving overseas for cost reasons.

 

It is still difficult to protect intellectual property, especially software in Asia.

 

Anti-trust actions are again threatening to change the industry structure and business practices. 


The price vs. performance ratio of the PC is showing a significant change.  You get fantastic capacity for your money today.  In the old days we use to worry about excess machine capacity and how fast we could get new applications on the system so we could sell the upgrade or next machine. We are facing that problem again but internal speed growth and price reductions seem to be todays market drivers and not machine applications and support capacity.

 

The telephone and TV cable companies are trying to expand their revenue share of the Internet market and voice transmission along with video capability over the net will be interesting to watch.

 

The universities and community colleges need to expand their technology-training role especially in science and engineering. This can also be complimented by on-line distance learning, right into the home if necessary.

 

Network freedom and security around the world has taken on more importance as we begin to use the net for worldwide distribution of goods and information.

 

The internet and it’s low cost of use is forcing political changes in the developing world.

 

Conclusions:

 

With open doors, speak-ups, executive interviews, opinion surveys, performance plans, quota assignments, merit pay, dress codes etc. IBM was a very tightly managed company up thru 1992.  For several years IBM was also selected by Fortune Magazine as the most admired company in the U.S.

 

In the early 90's with $65 billion in annual revenues and four hundred thousand employees world-wide and a full employment practice, IBM could not respond quickly enough to the dramatic changes in technology, price performance, lower profit margins and the movement into consumer products.  Many new companies entered the industry worldwide and over a space of less than 10 years two new companies in the PC product area, Intel and Microsoft, gained a large enough market share to establish themselves as a de-facto standard in software and hardware technology.  Lateness in PC hardware design, open systems and the failure to establish the OS2 operating system as the PC industry standard over Microsoft's Windows reduced IBM to being a nitch player at 12%.  Additional market niches include servers, intermediate and large systems for government and business, OEM parts, patent licenses and more recently people services and Internet related businesses. IBM is doing very well in these areas.  IBM in 2005 installed the world’s fastest computing system at the Lawrence Livermore National Laboratory with a processing speed of 230,000 taraflops.

 

To compete IBM had to lower product prices and the overall cost of doing business. This led to bringing in the first Chairman from outside the company in 1993, abolishing the full employment practice and many other cultural and business practices that had proved successful to IBM over 75 years. (For a first hand account of this most recent IBM history, read retired Lou Gerstner’s 2001 book titled “Who Says Elephants Can’t Dance” which covers his 9 years as IBM’s CEO.)

Less than 10 years later Hewlett/Packard had to follow the same path.  Their merger with Compaq has given them a PC market leadership share equal to Dell at the end of 2002. But this is a consumer priced low margin business. It remains to be seen if they can compete with IBM with their purchase of EDS in the services market. They have done very well in the printer market but again this is a low margin consumer priced product.  Ink cartages are probably the money maker here. (Another story.  I help to sell HP on building their PC printer manufacturing plant in Bosie Idaho, when I was the IBM Branch Manager there in 1972. At the request of the Governor Cecil Andrus, I hosted a luncheon and golf course tour at Crane Creek Country club for the search team made up of HP executives and their wives .I was also club president that year.

 

We will also see a movement away from the current distributed intelligence/storage desktop computers to centralized intelligence/storage systems with wireless dumb terminals for both cost, security and “user friendly” reasons.  Sounds like PROFS all over again. IBM recently announced (9/02) a new $10 billion marketing program called “On Demand Computing” with a heavy emphasis on services and consulting support.  The reaction from a friend and former GM of IBM Australia, Brian Finn, “looks like 360 all over again” where IBM also bet the farm on a possible change in computer market requirements. I have also learned from another friend, Professor Ken Kraemer at UC-Irvine, that the notion of information utilities is about 50 years old.  As evidence he cites two early books, National Information Utilities and Community Information Utilities.  Quoting Dr. Kraemer “ It is amazing on how long it takes to actually realize some ideas in the real world.”

 

In Northern California high housing cost and a low supply close to Silicon Valley job centers has created major transportation problems.  Two hour round-trip commutes are not uncommon. Public transportation has not kept pace, especially in a north south direction.   This has had a negative impact on skills availability and job growth.  There is also a lack of political will to build more houses in some local communities surrounding Silicon Valley to match the job growth.

 

There may never be another corporate philosophy and culture that takes full responsibility for its' employees, places community support so high in it's priorities while maintaining profitability and industry leadership. IBM's sheer size led to an organizational bureaucracy that made IBM slow on its' feet and unable to react fast enough to the changing market place.  Predictions of a $100 billion + IBM in the 90's certainly didn't happen.  Everything seems to be driven today by the price of corporate stock and quarter-to-quarter earnings growth.  IBM continues to hire more people, do layoffs and move manufacturing and some development overseas.  They have also recently changed the pension system for current employees that places more responsibility on employee contributions and savings and less emphasis on employment tenure.  Employees and retirees are now sharing health care costs for the first time and as a retiree I’ve learned that IBM Managed Care is secondary and covers very little beyond Medicare.  Many of us have gone to IBM Prescription coverage and Dental only.

 

The 75-year-old IBM culture as created by the Watson’s died in 1993 when IBM brought in their first CEO ever from the outside.  IBM had to make some of these changes, especially in employee population, in order to survive in the new marketplace.  Financial recovery has been slow but steady since the loss year of 1993.  IBM seems well positioned in several markets and has a good chance of weathering the current 2009 economic downturn.  The next few years are going to be interesting to watch.

 

 

References:


Father Son & CO. My Life at IBM and Beyond, by Thomas J. Watson Jr. and Peter Petre, June 1990

 

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

 

Big Blues, The Unmaking of IBM, by Paul Carroll, Former Wall Street Journal reporter, 1994

 

The IBM Way, Insights into the World's Most Successful Marketing Organization, by Buck Rodgers with Robert L. Shook, Foreword by Thomas J. Peters, co-author, In Search of Excellence. 1986

 

Who Says Elephants Can’t Dance by retired CEO Lou Gerstner in 2002

 

Special issue of IBM Think Magazine, September 1989, IBM A Special Company, 75 Year History

 

You} IBM 1994 Annual Report

 

IBM (in 10 words or less) 1995 Annual Report

 

The New IBM, 1997 Annual Report

 

Startup, IBM 1998 Annual Report

 

IBM Annual Reports, 1999, 2000, and 2001

 

IBM Financial Growth- Value Line Publishing, 10/23/98

 

DPD Magazine, IBM Australia, October 1980

 

"Tech industry direction hangs in balance," USA Today October 16th, 1998

 

Corporate and Operating Unit Corporate Social Responsibility Directory, "Global Vision--Local Action" November 1991


Picture of John Sailors receiving a Community Service Award for IBM from the wife of the Vice President, Marilyn Quayle, 1993 in San Jose

 

Award Letter to John Sailors from Terry Launtenbach, President of the IBM Data Processing Division, 1990

 

Copy of proposal letter for IBM System 370 to Idaho State Auditor, August 14th, 1972

 

The World Is Flat, A brief history of the twenty-first century, by Thomas L. Friedman

 

Recollections of Paul Willingham IBM Customer Engineer, 1963 and forward.

 

Appendix: Selected copies of this backup material available upon request.

 

Presentation, A Corporate Community Support Program, by John Sailors, 1993

 

Picture-IBM Asia Pacific Education Executive Conference

Tokyo August 1986

 

Picture-IBM Asia Pacific Education Executive Conference

Tokyo August 1985

 

1958 Hundred Percent Club San Francisco

 

News clip on Microsoft on Anti-trust payout to IBM

 

Proposal letter to Idaho State Auditor Aug 14, 1972

 

Input to Kate Fickle on 1990 performance

 

Oct. 1974 Performance Plan, Tokyo Japan

 

Picture of Marilyn Quale, wife of U.S. Vice President

Presenting 1993 award to John Sailors in San Jose

 

News clips

 

IBM Australia DP Magazine Oct. 14th 1980

 

1962 HPC Club Officers

 

District 15 Branch Managers and staff, early 70’s

 

SEAR Marketing Managers Conference Tokyo Japan 1978

 

IBM SEAR Recognition Event

 

Vintage Tech Festival speech Nov. 7th 2004

 

Brochure IBM Thailand

 

IBM Indonesia Newsletter

 

Kate Fickle letter—200,000 yen award

 

Herb Hipp letter Sept 30th 1974

 

Office staff realigned at Asia Pacific Hq. Sept 20, 1974

 

Finn letter on SEAR Recognition Event 1979, Manila

 

Junior Achievement The Great Inventors

 

Bob Evans 77 Helped IBM transform Data Processing

Sept 8th 2004

 

Chart on South Bay IBM Community Support 1992

 

Think Magazine 1988

 

The Importance of Economic Development Programs in the

Growth of High Tech Industries

 

In Brief – Livermore Lab’s Blue Gene/L Still World’s Fasteset

 

Celebrating 40years of System 360

 

Listening in on the 1929 One Hundred Percent Club Convention

 

Testimony of JJ Sailors before State of Idaho Legislative Committee on computer procurements, 1972

 

HP Search team to Boise in 1973

 

Brochure, A report on IBM’s contributions to employment education technological innovation and community service 1988

 

Brochure-A Responsible Neighbor 1988  

 

Executive Briefing 1975 IBM Japan Recognition Event Convention held in Manila in April 1976

 

Performance Plan and Evaluation, JJ Sailors 5/1/90-1/31/91

 

Brochure, On Managing, IBM World Trade Americas/Far East Corporation 1978

 

Computing Systems presentation

 

Brochure, Workforce Silicon Valley 1994

 

IBM Corporate and Operating Unit, Corporate Social Responsibility Directory

 

IBM Idaho 1967-1973

 

Public Education Experience and Background 1981-2007