We have been hearing a lot lately on the topic of American greatness, where it went, and how to reclaim it. But greatness is complicated, and our ideas of what is great and what is not have changed over time. In this column, I ask what the history of one mighty corporation—IBM—can tell us about the rise and fall of a particular kind of American greatness.
Decade after decade, IBM has been one of the world's largest, most profitable, and most admired companies. Of all American businesses, only General Electric, Apple, Microsoft, and Exxon-Mobile have generated more wealth.a Despite recent troubles, it has been ranked in the 2010s as the number one company for leaders (Fortune), the greenest company (Newsweek), the second most valuable global brand (Interbrand), the second most respected company (Barron's) and the fifth most admired (Fortune). IBM technical contributions to computing are second to none. Its researchers won six Turing awards and, more startling, four Nobel prizes. Its engineers produced the first hard disk drive, the first floppy disk drive, the first architecture implemented over a range of diverse but compatible machines, the first widely used high-level programming language, the relational database, the first scientific supercomputer, the first RISC designs, and the first DRAM chip.
As recently as 2014, IBM ranked ahead of its old adversary Microsoft on Fortune's lists of the largest U.S. companies (20th place) and of the firms most admired by managers (16th place). In ways good and bad, IBM has been at the forefront of changes in American business and in America's relationships with the world.
IBM's roots go back to the Tabulating Machine Company, founded by Herman Hollerith in 1896 to quickly tally data punched onto cards. The initial application was the U.S. Census, but punched card systems were also taken up for statistical applications in business. In 1911, Hollerith's firm was merged with several other producers of specialized business equipment to produce CTR, the Computing-Tabulating-Recording Company. The "Computing" part referred to weighing scales—an interesting example of how language evolves over time. Thomas J. Watson took over as manager in 1914. Ten years later CTR was renamed International Business Machines—less specific and more ambitious. It grew rapidly and consistently.
Watson was first and foremost a salesman, having learned his trade at National Cash Register, which was famous for its innovative sales practices. He loved public spectacles, gathering crowds at company rallies and picnics to listen to his speeches. The firm's strict dress code approximated a uniform: shirts were white, faces hairless.
Workers sang from the company songbook. Its anthem "Ever Onward: IBM Rally Song" promised "We're big, but bigger we will be, we can't fail, for all can see that to serve humanity has been our aim." Watson built a company with a sense of manifest destiny and an obsession with greatness. The word "great" appeared at least 45 times in the 1935 edition of Songs of the IBM, which began with "America" and "The Star Spangled Banner." The 86 new songs that followed celebrated every aspect of the company. They included such gems as "To Our I.B.M. Girls" and "To W.F. Titus, Assistant to the President, In Charge at Endicott."
Watson was savvy politically.
To Watson, greatness meant investing in workers inside and outside work hours, to motivate them and see to the threats of labor unrest and unionization. As IBM grew it copied NCR by introducing what historians have termed "welfare capitalism." Such firms promoted themselves as showpieces of modern labor practices, providing benefits programs such as pensions and profit sharing, worker education programs (such as art classes), and sports leagues. It eventually built its own country club, and it also built career ladders so that employees starting out in manufacturing or clerical positions could advance into technical or management jobs.
Watson was savvy politically. As other firms withered during the Great Depression of the 1930s, IBM bloomed, doubling its revenues from 1935 to 1940. Much business came from the New Deal's expansion of government bureaucracy, including the establishment of the Social Security Administration, which greatly increased demand for punched card equipment. When war followed depression, IBM supplied the tools to coordinate mobilization and diversified its production to create special machines for codebreaking and other military applications. Its revenues tripled from 1940 to 1945.
As chair of the International Chamber of Commerce Watson promoted "World Peace Through World Trade" during the turbulent 1930s, preaching the benefits of free trade. Watson always had global ambitions for his firm. The "I," after all, stood for International. Greatness meant engaging with the world to promote peace and stability, which were good for business. One of the firm's less well-known songs, "To Our Great I.B.M.," celebrated the firm's staff "overseas—in the heat of the tropics and northern cold," and praised "I.B.M. all glorious—on which the sun never does set." Watson loved arriving in far-flung places to open new subsidiaries and be acclaimed by local dignitaries. The song called him "our great president—king of the business world."
The largest and best-established foreign markets were in Europe, where IBM had a variety of distribution agreements, partnerships, and ownership stakes. When war came, Watson lost control over most of these, as its German subsidiary was expropriated by the Nazi regime and given control over operations in conquered countries. The end of the war gave IBM a chance to rebuild its European operations on a new model. The national subsidiaries came under the firm control of a new group, the IBM World Trade Organization.
European politicians loved exports but hated imports. Their ruined economies were short of foreign currency. Unfortunately, one is not possible without the other. In research with Petri Paju, I explored the novel arrangement IBM came up with to rebuild international trade at a time when wartime devastation, shortages of currency, rampant import tariffs, and strong political opposition to trade deficits made free trade impossible. (See "IBM Rebuilds Europe" in the Further Reading section at the end of this column.)
This plan centered on a humble product: the electric typewriter. In comparison to punched card systems, they were affordable and easy to introduce one at a time into a business. This made them an ideal product for IBM's new European subsidiaries to sell, building trust and relationships with local businesses who might later adopt punched card systems or computers. IBM avoided the highest tariffs, on finished goods, by setting up typewriter assembly plants in its eight major European markets.
That was practical, if suboptimal, but it could never make the thousands of parts needed for an electric typewriter in a small country like the Netherlands. Neither, for political reasons, could it import all of them. IBM's ingenious solution was to make sure that some pieces of every typewriter were manufactured within each country, to be traded internally for the other parts needed. This let its European subsidiaries exchange goods without creating trade deficits.
IBM and the U.S. both deepened their engagement with Europe at around the same time, and for similar reasons. IBM devised its interchange plan in the early days of the Cold War, as the Soviet Union consolidated its control over Eastern Europe and seemed poised to extend its reach further West. A strong supporter of the U.S. Marshall Plan, Watson believed that restarting the European economy would sell capitalism to wavering populations, bolster the position of the U.S., and rebuild trust between IBM staff in formerly hostile nations. Its public relations effort promoted the program in Reader's Digest as "a small but perhaps significant step towards a more unified Europe." In recognition of these efforts French foreign minister Robert Schuman, an architect of what became the European Union, arranged for Watson to receive one of his country's highest honors, induction as a Grand Officer of the Legion of Honor. IBM had a vested interest in the stability, economic openness, and growth of its foreign markets, and suffered when, as in South America during the 1970s, these conditions were not met.b
Greatness meant taking risks and making long-term investments in new technologies and platforms.
Watson died in 1956, shortly after passing control of IBM to his son, Thomas Watson Jr. As trade barriers came down and Europe's economies recovered, the firm's international operations expanded further. IBM's post-War decades, like those of the U.S. itself, were shaped both by the unifying tensions of the Cold War and the opportunities offered by a world in which major economies were recovering from devastation quickly enough to bolster its revenues but not yet to threaten its dominance.
IBM found ways to position its national subsidiaries as contributing both to the greatness of their host countries and to its own greatness as an increasingly global business. Many subsidiaries developed design and research capabilities as well as manufacturing, sales, and support. They were staffed and managed primarily by local employees, giving them dual status as locally rooted firms as well as agents of American economic power. Staff interacted at different levels. In IBM Finland, where our research has focused, staff interacted mostly with Finnish customers and colleagues. For training courses they worked with other Nordic people at the regional training center in Sweden. Senior or fast-tracked staff might travel further, to attend meetings at IBM's European headquarters in Paris, for a temporary assignment at a research facility in another country, or to attend a lavish international meeting of IBM's 100% Club for its best salespeople.c
Back in the U.S., IBM's rise to greatness in the emerging computer business was underwritten by a charter membership in what President Eisenhower called the "military-industrial-academic complex" of the early Cold War. Its first commercial computer model, the IBM 701, was branded the "defense calculator." Most went to atomic labs and aerospace engineering firms working on government projects. Government officials managed the delivery queue, ranking customers by their contribution to national security.
In the late 1950s IBM had the same markets in mind when developing STRETCH, arguably the first supercomputer. STRETCH introduced new semiconductor packaging, new architectural features such as pipelining and memory protection, and new capabilities such as multitasking. A modified STRETCH was the core of the government's HARVEST system for message decryption and keyword searching, the ancestor of today's NSA data mining efforts. When first tested in 1961 STRETCH ran 30 times faster than IBM's previous flagship system, a leap forward that would be unthinkable today. But unfortunately IBM had promised pre-launch customers that STRETCH would be at least 60 times faster, and priced it accordingly. It was immediately pulled from the market, but in the decades since historians have highlighted the importance of the new technologies developed during the project for IBM's subsequent domination of the mainframe computer market.
Still more important to IBM's electronic transformation was SAGE, a collection of air defense centers hooked up to radar stations to direct fighters to intercept Soviet bombers. I often come across fanciful claims that early computers such as ENIAC or Colossus filled an entire building (or even a city block). The AN/FSQ-7 computers at the heart of SAGE were the only ones that came close. Two full installations, clustered redundantly, together filled one entire floor of each of the 23 SAGE control centers. SAGE tapped the urgent flow of government money to defense projects, raised through marginal income tax rates of up to 91% on wealthy Americans like Watson, to push the vacuum-tube technology of the day toward capabilities that would never have been viable for commercial applications. It pioneered computer networks, real time operation, and graphical displays.
Although SAGE itself targeted bombers rather than missiles, and so was strategically outmoded before it was fully deployed, it remained operational into the 1980s. Its true legacy was technological. While IBM's mainstream business evolved gradually from punched cards to small computers, its defense projects jumped straight into the future. America's Cold War strategy of containing Soviet expansion without fighting a large-scale war required clear superiority in military technology and industrial productivity. The technologies that IBM and its industrial and academic partners, such as MIT and the System Development Corporation, developed for SAGE and STRETCH helped to preserve those advantages.
Greatness meant taking risks and making massive long-term investments in new technologies and platforms. During the 1960s IBM, home of the dark suit and starched collar, made a gamble on a scale that would appall today's hoodie-clad, thrill seeking, Silicon Valley executives. While today's tech companies like to boast about their "moon-shot" projects, firms such as Alphabet, Facebook, and Oracle derive the vast majority of their revenues from a handful of products and services that dominate their respective niches. Backward compatibility is more important than innovation, as Microsoft showed when turning Windows and Office products into lucrative monopolies. Most tech firms develop a platform as startups and grow it steadily over many years, defending it against threats from upstart competitors.
By the 1970s IBM held a similarly dominant position in the business-oriented mainframe market, but only because it launched a massive research and development effort during the early 1960s. In April 1964 when IBM introduced its System/360 range it rendered its entire installed product base obsolete. Two years earlier IBM had reportedly budgeted $5 billion to develop the new range, twice its entire annual revenue. According to Watson Jr. the actual costs were so high that in 1965 the firm unexpectedly found itself just "a few weeks" from needing "emergency loans to meet the payroll." (See "Father, Son & Co" in the Further Reading section.)
Before this IBM offered several incompatible ranges of computers for different markets and sizes of company. Customers increasingly expected to receive bundled with their machines an extensive collection of systems software packages, such as programming languages and operating systems. The cost of developing these tools across so many different platforms was rising. Incompatibility also threatened customer loyalty. Computers became obsolete every few years, but successful application programs could evolve over decades of use. Any computer upgrade that required customers to recode their applications was a chance for IBM's competitors to steal an account away, particularly as the newly introduced COBOL language was intended to let users move applications between computers from different vendors.
It was this project that introduced the phrase "computer architecture," to describe design features at a more abstract level than their implementation in a specific computer model. System/360 imposed a common machine instruction set, word length, character set, and peripheral interface over an industry-spanning range of machines. For example, smaller machines implemented in micro-code instructions that were handled directly in hardware by the larger ones. From smallest to largest, the first wave of System/360 machines differed by a factor of 500 in memory capacity and a factor of approximately 20 in processor performance.
The machines were all supposed to run a single operating system, with the bigger ones loading more modules and turning on more features. That part of the plan didn't work out so well. Fred Brooks' classic study of the problems of OS/360, The Mythical Man Month, was a founding text of software engineering and helped win him an ACM A.M. Turing Award.
Despite these problems, IBM's gamble paid off magnificently. IBM's core platform evolved through countless new models over the next 50 years, though the 370, 380, and 390 ranges and on to today's System z machines. These never dropped backward compatibility with the 360 range and IBM never lost its dominance of the mainframe market. Its most direct competitors of the 1960s, including General Electric, which was still a much larger firm, were unwilling to match this investment. Most exited the computer business over the next decade. IBM was dominant at home and abroad.
For Watson Jr., greatness included a commitment to elegance in design and the finest in modern architecture. An IBM System 360 featured prominently in the recent TV show Mad Men, where its stylish complexity symbolized the rise of analytic approaches to advertising. Today the clean, confident design aesthetic of the 1950s and early 1960s is more popular than ever. Period houses, furniture, and consumer products sell for a premium. No company did more to popularize that aesthetic and bring it into the American mainstream than IBM.
As documented by John Harwood in his book The Interface: IBM and the Transformation of Corporate Design, 1945–1976, IBM's design chief, Eliot Noyes, assembled one of the most influential teams in history. Their skills were applied not only to the firm's computers and office products, which received a unified and stylish industrial design language, but also to documentation, public exhibits, and architecture. IBM hired Charles and Ray Eames, probably best remembered today for their iconic chairs, to produce one of the earliest exhibits on the history of computing. Its landmark buildings, which hoisted the firm's logo like a flag in the leading cities of the free world, were designed by star architects such as Mies van der Rohe.
IBM's greatness also rested on its commitment to science. For its research headquarters, in Yorktown Heights, IBM turned to industrial architect Eero Saarinen, responsible for such futuristically iconic structures as the Gateway Arch in St. Louis and the TWA terminal at JFK airport. The lab curves in an oval shape, glowing in the dark like a flying saucer. Into the 1950s IBM retained a hands-on, product-centered engineering culture, long after Bell Labs and General Electric hired scientists and built up centralized research and development centers. By the 1960s, however, its international network of research facilities set the standard for corporate commitment to research. Its researchers, envisioned by Saarinen as "tweedy pipe-smoking men," enjoyed the enviable conjunction of university-like research facilities with IBM's generous pay and benefits and freedom from teaching duties. The firm's Nobel prizes came from basic research into fields such as superconductivity and electron microscopy. IBM's willingness to fund basic science reflected the many possibilities for payback across the huge range of products it developed and manufactured, from semiconductors and core memories to disk drives, keyboards, punched cards, printers, and dictating machines.
The most successful computing firms of the 1970s and early-1980s targeted niche markets where IBM's core architecture did not compete well. DEC established a huge new market for minicomputers, SDC and Cray targeted supercomputers, while Wang built a thriving business around word processing and office automation. IBM offered credible projects in most of these areas, but it came to them after other firms were already established. Because it had to cover its heavy overheads for things like research and management, to procure parts from its own factories, and to avoid threatening the products of other divisions its smaller machines tended to be less powerful or more expensive than those of competitors. Even new technologies developed within IBM, such as RISC processor architectures and floppy disks, were deployed more aggressively by its competitors. Its strengths in build quality, sales, and support could sometimes offset these disadvantages.
The booming market for personal computers posed a particular challenge to IBM. These machines were much cheaper than traditional computers, had shortened design and production cycles, and were often purchased by individuals or departments rather than by corporate information systems departments. In 1981 IBM startled the world with its 5150 Personal Computer. Like competing models, but unlike other IBM products, it was designed quickly by a small team using standard parts. The IBM PC set a standard for personal computers that quickly dominated the market, and, as I explained in an earlier column, gradually evolved into the platform that dominates desktop, laptop, server, and supercomputer markets today.d
In the longer run, however, IBM was ill equipped to compete in the new market it had defined. IBM's efforts to fight the producers of "clone" machines by shifting the market to a new, proprietary, standard, the PS/2 range, failed miserably. In the early 1990s IBM still produced solid personal computers, and enjoyed great success with its business-oriented ThinkPad laptops, but faced a fiercely contested market in which it had no inherent competitive advantages.
IBM's old factories in Endicott, its former headquarters, now lie in ruins. So do many of its other manufacturing facilities around the world, such as a plant in Greenock, Scotland that once employed 13,000 people. Total IBM employment has fluctuated in recent years around 390,000, similar to its 1992 peak, but today many more of these people are believed to work in India than in the U.S.e (In 2010, IBM stopped releasing counts of its employees by country). IBM is no longer a predominantly American firm, or a clear leader in its central areas of business. It has retreated from its old commitments. If today's IBM seems less monumental, less public-spirited, less consequential than the "Big Blue" of old, we should look not so much to the firm itself as to the evolution of global capitalism since the 1980s.
In 1993, IBM declared what was at that point the largest annual loss of any company in history: $5 billion. Its new manager, Louis Gerstner, faced calls to break up the company and sell off the parts. Instead, he began a process of strategic reorientation away from mass-market hardware and toward software and business services. Gerstner's initial cull of 60,000 jobs, which to this day remains corporate America's largest single layoff announcement ever made, signaled the arrival of a new IBM culture in which the firm no longer made a lifetime commitment to its employees. To survive, IBM was going to have to move on from the legacy of the Watsons and find a new definition of greatness.
Turning around IBM was seen, with some justification, as a managerial triumph. Monumental tech corporations crumble quickly to sand. Few have faced a serious crisis and recovered. After stumbling, once-dominant firms such as Wang, Data General, Palm, DEC, Digital Research, Novell, Word Perfect, Lotus, and Compaq were quickly acquired and assimilated by more successful competitors. Most recently, the remains of Yahoo were acquired by Verizon, to be combined with the wreckage of AOL. Verizon is jettisoning the names, calculating that their brand history has a negative value.
Like newer tech firms such as Google, IBM deliberately fostered a distinctive corporate culture, shaping its organizational structures as carefully as its products. IBM tended to be a reasonably early and very thorough adopter of organizational innovations rather than a pioneer. It turned to management committees and strong divisional structures only after the death of Watson Sr. As it modernized, IBM embraced both corporate philanthropy and, following the racial tensions of the late-1960s and the women's liberation movement, the idea that corporations should be committed to gender and racial diversity in their hiring and promotion practices. Its adoption of benefits programs, research labs, and industrial design followed a similar trajectory, as did its more recent embrace of fashionable green and urban initiatives. To keep its place as a model of modern capitalism IBM has consistently adopted ideas just as they enter the corporate mainstream.
If anything IBM was a little late to the 1980s shareholder revolution, now associated more than anything else with the phrase "greed is good," that stressed the idea that companies exist to maximize shareholder value, and that this outweighs responsibilities to employees, communities, or social causes. But as with its earlier shifts, IBM embraced the emerging orthodoxy with a vengeance. This has meant shifting out of lower margin businesses. As troubles first mounted, IBM sold off its printer business in 1991 to create Lexmark. The process continued even after IBM returned to financial health. In 2003, it sold its hard disk drive business to Hitachi, in 2005 the iconic ThinkPad laptop brand went to Lenovo, followed in 2014 by its low-end server business. Its point-of-sale business sold to Toshiba in 2012, and its semiconductor manufacturing business was acquired by GlobalFoundries in 2015.
The new definition of greatness was crystalized by CEO Sam Palmisano in 2010 when he promised investors that IBM's earnings per share would double from 2010 to 2015. IBM attempted to maximize this metric by slashing costs, such as employees and investment in new technology, and by using funds from selling off chunks of the company to repurchase shares. These steps hurt IBM's position in new battlegrounds such as cloud computing. Despite recent efforts to change course, IBM's revenues have now fallen for 22 successive quarters. IBM has attempted to shrink its way back into to greatness.
IBM sold its landmark building on the Chicago River to a private equity group. Its giant logo has been taken down, but a massive TRUMP emblem now glows on the skyscraper next door. This seems somehow appropriate, as if the retreat of IBM from its mid-century version of American greatness opened the door to the rise of a rather different sense of America's place in the world. Global capitalism, driven above all by financial metrics, has withdrawn its implicit long-term commitments to workers and nations. The American public has lost faith in big business, free trade, and international engagement. Trump promised to make America great again by building walls, stepping back from its commitment to the defense of NATO allies, and tearing up trade deals.
From this viewpoint, Thomas Watson Sr. and Donald Trump are the bookends of the "American Century." That phrase was promoted during the war in anticipation of a post-war world in which the U.S. maintained a stable, rules-based international order wherein its allies and businesses both prospered.
Turning around IBM was seen, with some justification, as a managerial triumph.
The odd thing is that as individuals they have a lot in common. Both ran family businesses shaped in their own images. Watson Sr. was remembered, even by his own son, as a difficult, changeable, and emotionally distant man. Like Trump, he fed on the energy of crowds, and preferred rallies to committee meetings. Both worked through personal relationships rather than organizational structures. Both were teetotal workaholics who, as businessmen, coveted access to politicians from both parties. Trump has changed his party registration at least five times. Watson was driven more by an admiration for power than any ideological convictions as his allegiances shifted smoothly from boosting Roosevelt's New Deal to launching Eisenhower's political career. Time magazine remembered Watson, accurately, as the greatest salesman of his age, but his greatest product was always himself. Watson's early forays abroad were as much about the joy of planting his flag in another country as about rational economics, to the extent that during the 1930s many subsidiaries were branded as Watson companies rather than IBM. Trump remade himself as an international brand to be licensed to property developers and other businesses after his attempts in the 1980s to build a more conventional business empire collapsed under mountains of debt and multiple bankruptcies. Long before IBM grew into a top-tier corporation Watson had made himself a household name and secured one of the country's biggest compensation packages. Trump's gift for publicity and role as a reality television star gave him a public profile incomparably higher than those of developers with far larger empires (spot quiz: name the heads of Vornado Realty Trust and The Related Companies.)
The fact that, despite these shared traits, Watson and Trump held such diverging ideas of how to make America great points to some much deeper shifts in politics and capitalism. Watson's vision of American-led global prosperity was always easy to criticize, particularly from those he hoped to lead, but compared to the alternatives it had a lot to recommend it. IBM's post-War European investments served the firm's interests, and those of the U.S., but they only paid off many years later once tariffs and capital controls were lifted and customers were able to afford more expensive punched card and computer systems. Watson was firmly committed to the dismantling of trade barriers, and his belief that extending supply chains across national borders would foster peace and prosperity was vindicated by the expansion of the European Union in the 1990s. I suspect that Watson shared the opinion expressed to Congress in 1953 by Charles Wilson, another politically engaged business leader, that "what was good for our country was good for General Motors, and vice versa." Watson was sure that what was good for IBM was good for the U.S., but also good for the broader causes of global prosperity and liberal democracy. That blinkered and self-interested faith in corporate virtue crumbled long ago. Recently, I have been feeling more fond of vain, pompous old Thomas Watson Sr., and the empire he created, than I ever thought possible. To quote a short poem by Leonard Cohen, who died the day before Trump was elected, "oh, and one more thing/you aren't going to like/what comes after America."
Watson, T., Jr, and Petre, P.
Father, Son & Co: My Life at IBM and Beyond. Bantam, NY, 1990. One of a handful of truly excellent business memoirs, this covers Watson Jr.'s impressions of his father as well as his own work as leader of IBM.
The Maverick and His Machine: Thomas Watson, Sr. and the Making of IBM. Wiley, NY, 2003. Biography of the elder Watson, focused on his difficult personality and role as the "first celebrity CEO."
IBM and its Imitators: Organizational Capabilities and the Emergence of the International Computer Industry. Business History Review 22, 1 (Jan. 1993), 1–35. An award-winning analysis of IBM's early involvement in computers.
Memories That Shaped an Industry: Decision Leading to IBM System/360. MIT Press, Cambridge, MA, 1984.
Building IBM: Shaping an Industry and its Technologies. MIT Press, Cambridge, MA, 1994. An insider analysis of the firm.
Paju, P., and Haigh, T.
IBM rebuilds Europe: The curious case of the transnational typewriter. Enterprise & Society 17, 2 (Feb. 2016), 265–300.
a. See http://nyti.ms/2wESvrA
e. See http://nyti.ms/2xMsmWT
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