IBM's Transformation - In 1955 - Is Still Relevant
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IBM was at a fork in the road in 1955. They had a choice between two possibilities, one "safer" than the other.
- They could grow rapidly by focusing their efforts on computers, a risky vision at best as the number of installed computers probably numbered in the tens or hundreds.
- Or, basically, they could retain the status quo by slowing things down and focusing on what they did best, manufacture punch cards and the related rental equipment, all very profitable (Watson, 253).
What to do?
Anyone who knows anything about the Watson's - the father/son duo who consecutively managed IBM for years - knows exactly what they did. They, meaning Tom Watson's son and Al Williams, a senior manager, bet the farm, but in a good way. Their plan? Transform the company.
- They professionalized management, by installing a "chain of command, large-scale decentralization, a planning process," and "formal business policies (Watson, 253)."
- They created an organization chart and split up some of the responsibilities that had reported to the Tom Watson, the father.
- Headquarters worried about computers and punch-card equipment. All the other products like "military products, typewriters, punch cards, and time clocks" (Watson, 254) were spun out into new divisions under their own management.
Another key change occurred away. It was driven by the market in a way, but it required a risk-taking attribute that ensured that IBM would continue to grow. The strategy is pretty simple stated: Make stuff, but don't customize it. In the IBM case that meant, sell computers, but figure out how to sell the same configuration over and over again. Yes, the initial few down the production line were hugely expensive, but over time the costs of manufacturing came down and they were able to take advantage of the scaling up of the manufacturing lines to reduce costs.
The first product IBM scaled up in this manner was a general purpose scientific computer that they pre-sold to government laboratories (Watson, 205). Later, they found out that there was only one little flaw in their plans. Their initial computer, called the Defense Computer, was initially priced at $8,000 a month. When production began, they found that the correct price might be as much as $18,000 a month (Watson, 228), obviously a big difference. First amazing discovery in computers for IBM: the customers still wanted the computer. That changed a lot of minds at IBM about the future of computers (Watson, 228).
The real transformation of IBM into a computer company didn't occur until the introduction of the IBM System 360, a 360 degree machine meant to be sold to both the scientific and business markets in all sorts of configurations. The investment came to more that $5 billion dollars, certainly a "bet the farm" undertaking. Three big problems presented themselves: hardware design for all the different configuration, and software design totaling millions of lines of code, all at the same time IBM was trying to manufacture its own electronic parts (Watson, 346-349). The biggest decision of all was whether to announce the complete line piecemeal, or to show it all at once. They chose the later and, even though they had to use mockups in the original product showings, ultimately pulled it off.
Mission statements (What is or product or service? What marketplace do we sell to?) actually play a big part in the story. Early on, IBM was a punch card company. It almost stayed that way, thus missing, almost, the huge growth in data processing in all its myriad forms.
Joe Nocera, writing in the New York Times, calls this one of the ten best business books ever. An interesting read.
Reference
Novera, Joe. The Best Business Books Ever? New York Times. 17 July 2008. http://executivesuite.blogs.nytimes.com/2008/07/17/the-best-business-books-ever-index.html?hp
Watson, Thomas J., Jr. Father Son & Co. My Life at IBM and Beyond. Bantam Books.1990.