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International Business Machines Corporation (IBM) is the largest computer maker in the world. Because of its enormous size, power, and success, and because it sells that most modern of tools, the computer, IBM has come to symbolize modern life itself for many. The company's nickname--Big Blue--is a phrase that may have been originally suggested by IBM's army of uniformly dressed salesmen, whose dark suits and white shirts were required by the firm's leader, Thomas Watson, Sr., who transformed the Computing-Tabulating-Recording Company (CTR) into a world leader in information technology.
CTR was formed in 1911 by Charles Runlet Flint. The so-called "father of trusts" merged two of his earlier creations, International Time Recording Company and Computing Scale Company of America, with a third, unrelated entity known as Tabulating Machine Company. The latter had been founded some years before by Herman Hollered, an engineer who invented a machine that would sort and count cards based on the pattern of holes punched in each.
Hollered had supplied the U.S. Census Bureau with these machines for use in the 1890 and 1900 censuses, and the device was quickly adopted by other organizations in need of rapid computation. As perfected, the tabulator operated in a simple three-step manner. Small cards were punched in a variety of patterns, each one representing a different category of the subject under survey; the assembled cards were run through a sorting machine, set to distribute them according to relevant categories; at the same time an accounting machine kept track of the results, and, in the later, more sophisticated models, performed any number of calculations based on those results.
Such a machine found increasing use in a society evolving rapidly into a largely urban, commercial matrix, where the ability to monitor and analyze large sums was critical to business profitability. Flint was less interested in Tabulating Machine Company than in the other two members of his new creation, which in any case got off to a slow start and threatened to stay that way.
In 1914 Flint hired a new general manager for CTR. Thomas Watson was already a well-known, if not notorious, figure in U.S. business. Watson had gone to work for John Patterson at National Cash Register (NCR) in 1895 and quickly proven himself a quintessential "NCR man"; bright, aggressive, and loyal, he rose to the position of general sales manager for the entire company in 1910. At Patterson's order, Watson then set up a company whose supposed purpose was to compete with NCR. The company's real purpose, however, was to eliminate NCR's competitors. In 1912, along with John Patterson, his former employer at NCR, Watson was convicted of violating the Sherman Antitrust Act on behalf of the company. Shortly after Watson and Patterson were convicted, Patterson fired Watson. Watson was then hired by Charles Flint. Watson never admitted any wrongdoing, and in 1915 the government dropped its case against NCR after the company became famous for its help during a catastrophic flood in its hometown of Dayton, Ohio. The threat of a jail sentence now past, Watson was made president of CTR.
Watson understood immediately that his company's future lay in its tabulating division, and it was there that he committed most of his energy and resources. Scales and clocks were useful items, but the United States would soon be a nation of office workers in need of basic office tools like the tabulator. Watson hired many ex-NCR men and patterned his own well-disciplined sales force along NCR lines--intense competition was combined with equally intense corporate loyalty, and salespeople were courteous, spotlessly dressed, and, above all, understood that CTR sold not a product but a service. A completed sale was just the beginning of the salesman's job; in effect, he had to become a partner in the customer's business, and together they designed a tabulating system for that particular organization.
As was the case at NCR, Watson's sales force became a key factor in his company's success. In a pattern that still holds today, many customers remained loyal because they trusted and to an extent relied upon the CTR salesman's knowledge of their business. Numerous, well-trained, devoted, and well-paid, the CTR sales staff actually dominated the company, ensuring that new technology followed upon the needs of customers and not the reverse. Throughout IBM's history (the company's name was changed to International Business Machines Corporation in 1924) massive and talented sales energy, rather than technological leadership, kept the company ahead of competitors.
Watson pushed hard in the late 1910s to make CTR the industry leader in tabulating design. He gradually turned back all boardroom challenges to his plans, and by 1925, was both chief executive officer and chief operating officer. In the ten years following Watson's arrival, CTR sales shot up from $4.2 million to a temporary peak of $13 million in 1919, weathered a minor crisis in the early 1920s, and stood poised to ride the booming U.S. economy. The newly named IBM faced some formidable competitors--Remington Rand, Burroughs, and NCR, among others--but from the beginning Watson steered clear of mass-produced, low-priced office products like typewriters and simple adding machines, concentrating instead on the design of large tabulating systems for governmental and private customers. With superior products and a more dedicated sales force, by 1928 IBM was the clear leader in its specialized field and a force in office technology as a whole.
Booming Sales: 1920s-50s
The company was remarkably profitable. In 1928, for example, its profit of $5.3 million was nearly as great as that of giant Remington Rand, though the latter more than tripled IBM's sales of $19.7 million. In 1939, IBM's profit of $9.1 million exceeded that of the next four companies combined, and held an impressive 23 percent of sales.
IBM's business was particularly profitable for several reasons: the company focused on large-scale, custom-built systems, an inherently less competitive segment of the business; IBM's policy of leasing, rather than selling, its machines to customers was very profitable; and IBM maintained cross-licensing agreements dating back to the mid-1910s with its chief competitor, Remington Rand, preventing the two leaders from falling into competitive squabbles. The company required its customers to buy IBM cards for their IBM tabulators. The cards could not be read by any other machine. This last condition made it almost impossible for IBM customers to try other products. With literally millions of such cards already punched, IBM's clients tended to stay put.
The U.S. government filed a suit in 1932 alleging that the IBM-Remington Rand cross-licensing agreement and IBM's exclusive punch card design were anti-competitive. In 1936, after learning that IBM sold nearly 85 percent of all keypunch, tabulating, and accounting equipment in the United States, the Supreme Court ordered IBM to release its customers from all such card restrictions. The Court's decision had little impact on the company's growth, however. Even the Great Depression did not check IBM's progress, as most cash-pressed companies needed more numerical information, not less.
In addition, President Franklin D. Roosevelt's New Deal had created a large federal bureaucracy in need of the very calculating machines IBM manufactured. In 1935, at the same time the Justice Department was pursuing its case against IBM, the newly formed Social Security Administration placed an order with the company for more than 400 accounting machines and 1,200 keypunchers. The pattern was clear; modern society rested on massive organizations that required machines capable of massive calculations, which were made by IBM. By the end of the 1930s Thomas Watson was enjoying praise for his enlightened employee relations as well as for his "thinking machines."
During World War II both private and governmental demand for IBM tabulators increased. The machines were needed to monitor the manufacture and movement of vast resources. Sales boomed, more than tripling to $141.7 million in five years. The war offered IBM another opportunity, less immediately exciting but in the long run of far greater importance. The armed forces needed high-speed calculators to solve a number of military problems relating to ballistics and, later, the development of the atomic bomb. Partly as a result, IBM helped build what might be called the world's first computer, the Mark I. This machine was similar to the first electromechanical calculators built a few years earlier, which used IBM punch cards to work out long arithmetic sums; the Mark I was also capable of retaining a set of rules which could be applied to any later input. Such a memory is one of the essential differences between the calculator and the computer, and the Mark I represented a great step forward. With 765,000 parts and 500 miles of wire, the Mark I still delivered less power than today's hand-held calculator.
Entering the Early Computer Market
Computer design evolved rapidly during the war. IBM joined the partnership building the new Electronic Numerical Integrator and Calculator (ENIAC) at the University of Pennsylvania. ENIAC was useful to the military and gave IBM the experience it needed to precede with its own electronic machine. When the war ended in 1945, interest in ultra-high-speed calculators died down quickly; few outside the Army needed a room-sized machine designed to analyze howitzer trajectories. Only a handful of scientists continued refining the advances won by ENIAC, eventually creating a more saleable machine called UNIVAC around 1948. When IBM's old rival, Remington Rand, began to market UNIVAC in 1951, it took a significant lead in the new computer business. IBM continued its typically cautious approach. IBM waited until the new product proved its lasting appeal before leaping into the fray. Since it controlled 85 percent of the market for which computers were targeted, and because even electronic computers then still used IBM punch cards, Watson was not especially alarmed by Rand's success.
Heir apparent Thomas Watson, Jr., strongly favored an all-out push into the computer market. By the time he became president in 1952, he had won the power struggle with his father and led IBM into an immense research program designed to surpass Rand. The new president staked his reputation--as well as a significant portion of IBM's assets--on the computer campaign, which had paid off by 1955 with the success of IBM's new 705 general purpose business computer. By the following year Remington Rand had already lost its lead. It was no surprise that IBM came to dominate in computers so quickly, since at that time the computer business was only a small segment of the office products market, which IBM continued to control. The 85 percent of offices using IBM tabulating equipment simply switched over to IBM computers.
In 1949 Thomas Watson's younger brother, Dick Watson, was also brought into the business. The 30-year-old Dick Watson was named president of IBM World Trade Corporation, the parent company's new subsidiary for international sales. In 1949 World Trade had sales of only $6.3 million but operated in 58 countries. In the more prominent of these countries World Trade set up a subsidiary to market IBM products and even do additional research and development. As the world's industrial powers awoke to the computer age, they found themselves greeted by IBM. It was not unusual for local IBM units to achieve market domination comparable to that of the parent company in the United States. Only in Japan and the United Kingdom were local competitors able to match IBM's presence, forcing the latter to settle for around 33 percent of the market. Barely on the sales map in 1949, World Trade eventually surpassed IBM domestic in total revenue.
Meanwhile, the U.S. computer business filled up with potential rivals. Some of these, like RCA, General Electric, and the newly merged Sperry Rand, were as large as or larger than IBM and should have been able to mount a serious challenge. In every case, however, competitors either lacked an adequate sales organization or were not fully committed to the commercial computer business. RCA, for example, made important contributions to computer technology, but mainly with an eye toward possible applications in its growing television business. Sperry Rand, on the other hand, still controlled the successful UNIVAC machine but was hopelessly behind IBM in sales experience and customer loyalty.
In 1952 the government filed a second, more ambitious antitrust suit against IBM. In 1956 IBM entered into a consent decree, which ordered it to divest many of its card-production facilities, sell its machines as well as lease them, submit to certain cross-licensing agreements, and create a subsidiary to compete with itself in the service end of the business. None of these injunctions limited IBM's success, but the 1957 appearance of a small company called Control Data did.
IBM Computer Dominance Through the 1970s
Control Data Corporation (CDC) was a pioneer in niche specialization in the computer world. This tactic seemed to be the only way to compete successfully with IBM. The newcomer made very large, very fast computers for scientific and governmental users in need of maximum crunching power, and after a brief battle, IBM largely ceded the field to CDC. IBM's bread and butter remained the medium to large business computer.
In 1958 Sperry Rand and Control Data brought out the first second generation computers, which used transistors instead of vacuum tubes. No sooner had IBM met this challenge with its own line of transistorized machines, than it faced the arrival of the industry's third generation--integrated circuitry. Once again IBM lagged in technological change as Honeywell and CDC brought out the first integrated circuit units in the early 1960s, but this time Big Blue's response necessitated a companywide revolution. Integrated circuitry was clearly destined to become the industry standard, and IBM decided to bring out a complete line of such computers. After an unprecedented capital-spending program involving six new plants and many thousands of new workers, the company introduced its 360 line in April 1965. Small, fast, and accompanied by a new set of exclusive software, the 360s were an immediate and lasting success, remaining the worldwide computer leader for more than a decade.
Sperry Rand, GE, Burroughs, RCA, Honeywell, NCR, and Control Data were unable to close the gap between themselves and IBM, which now delivered 65 percent of all U.S. computers. Control Data filed yet another antitrust suit in 1968, charging that IBM had sold "phantom" computers to its customers to keep them from placing orders for superior CDC products. The government filed its own suit the following year, supporting CDC's claims and alleging other monopolistic practices. Encouraged by these efforts, IBM's competitors, big and small, filed 22 similar lawsuits in the next few years. IBM beat back every one of them, however, with one exception. The U.S. Justice Department continued its battle for 13 years, until President Ronald Reagan's administration dropped the suit shortly before a ruling was expected.
Niche specialization was clearly the only way to survive in the face of IBM's power. In 1960 Digital Equipment Corporation (DEC) brought out a relatively small, inexpensive computer designed for researchers, effectively creating the microcomputer business. Micros were only a further step in the evolution of the computer, but IBM chose not to enter the market. DEC was soon joined by a host of other micro manufacturers offering a wide range of computers for ever smaller tasks, culminating years later in Apple's marketing of the personal computer for home use. IBM failed to join this race until 1980, at which late date it was unable to dominate the market, as it did mainframes and minicomputers.
In 1971 Tom Watson retired from IBM after suffering a heart attack. His successor, Frank Cary, remained in charge until 1981, at which time John Opel was named CEO. Under these men and IBM's present chairman, John Akers, the 360 line of computers grew into the 370, sales continued to climb, and in the golden year of 1984 corporate earnings reached a staggering $6.6 billion on revenue of $46 billion. With a return on shareholders' equity of 25 percent, IBM was the unchallenged favorite of Wall Street and perceived by many in Washington as the only U.S. company able to hold its own against Japanese competition. The firm was profiled in a best-selling book as a paradigm of business excellence.
Losing Ground in the 1980s
The years following were not nearly so kind to IBM. A drop in earnings for 1985 was dismissed as inevitable after the glory year of 1984, but by the end of the decade financial analysts were convinced that IBM was in need of an overhaul. Revenue growth was slow and earnings weak by IBM standards, resulting in a long decline in the company's stock price, and its share of the worldwide computer market had fallen from 36 percent to 23 percent. Chairman Akers responded by cutting his workforce by 32,000 (from a 1985 peak of 405,000) and urged a return to IBM's traditional strength in marketing and customer relations. After a good year in 1990, however, revenue in 1991 fell for the first time since the 1940s and Akers was widely quoted as saying that the company faced a crisis.
By historical standards, he was correct: Big Blue was losing ground. The dip in revenues could be explained as part of the severe 1990-91 recession that took its toll on the entire computer industry, but clearly IBM was no longer the juggernaut it had been during most of its history. Underlying its sluggish growth was a fundamental change in the nature of the computer industry, and that was change itself--the continually accelerating rate of technological breakthrough in the world of data processing. So long as computers had remained primarily large and very expensive machines designed for number crunching (mainframes), it was possible for IBM to keep its dominant position by simply building bigger and faster machines.
The increasing power of semiconductor chips changed all of that, however; computers became smaller and were applied to a greatly broadened range of tasks. The mini, micro, and workstation technologies all tended to undercut the value of monolithic mains, and independent breakthroughs now tended to focus on software and the crucial problem of networks, the means by which computers communicate with each other and with other forms of data transmission such as telephone and video. Sheer computing power remained important, of course, but it became available in a far greater range of machines at prices that dropped every week.
Given these changes, IBM faced a vastly more complex marketplace both in terms of niches and in the number of its competitors around the world. A wide consensus of observers agreed that IBM's enormous size was a drawback in the quicksilver markets of the 1990s, and in November 1991 Chairman Akers announced the dawn of a new era at the company. Each division of IBM would become a semi-detached business, responsible for its own decisions and bottom-line results. The details of this centrifugal structure transformed IBM into becoming a type of holding company with possibly dozens of discrete operating units under its loose administration. It was hoped that IBM's PC (personal computer) division, for example, would be better able to respond to customer needs and a changing marketplace than when it was forced to take its decisions to company headquarters before acting; and similarly with IBM's mains, minis, software, maintenance, and the many other parts of this $70 billion-per-year corporation.
New Management in the Mid-1990s
Akers had sold the copier division to Kodak in 1988 and followed up in 1991 with the sale of Lexmark, IBM's typewriter, personal printer, keyboard, and supplies business. The divestiture plan had not progressed far, however, when Akers was fired in 1993 and replaced by Lou Gerstner, former CEO of RJR Nabisco. Gerstner scrapped the plan and set about revitalizing the company.
Turning IBM's size and diversity to its advantage, Gerstner expanded the company's small services division, making it a place customers could come for network solutions. By recommending products appropriate for each customer rather than simply pushing IBM goods, Global Services grew rapidly. By 1995 it surpassed Electronic Data Systems (EDS) to become the largest computer services business in the world.
One of the divisions slated to be sold in the divestiture plan was IBM Research, notorious for its long-term research into technologies that never were translated into saleable products. With an $8.9 billion loss in 1993, IBM was searching for costs to cut. Gerstner, however, refused to sell off the division, although he did trim the $6 billion budget by $1 billion. Researchers were also instructed to spend more time working directly with customers, focusing on solutions for real customer problems. The changes led to the resignation of many of the company's scientists. Despite the new focus on the bottom line, the research division continued to lead the industry in patents each year through the 1990s.
By 1994 Gerstner's turnaround strategy was already bearing fruit: The company posted a profit for the first time since 1990. IBM was helped in its recovery in the mid-1990s by the massive growth of the Internet. Although the company abandoned its browser and sold its Prodigy online service, the company benefited from the Internet boom through sales of the big servers needed to run it. IBM also began helping customers move onto the Internet by creating web sites and establishing e-commerce.
In the mid-1990s IBM moved into new areas of the computing industry. In 1994 it signed an agreement with Cyrix to manufacture its computer chips. The following year it purchased Lotus Development, a software company best known for its office software, for $3.5 billion. IBM saw the company's Notes groupware, designed to help a company's staff communicate more effectively, as helpful in its foray into networked desktop computing. Remaining at its Boston headquarters, Lotus continued as an independently run subsidiary, with very little interference from IBM. With IBM's resources and distribution network supporting Lotus, Notes users rose from two million in 1995 to 22 million by 1998. IBM benefited by including the Lotus software in a package of applications called eSuite. In 1996 IBM gave a boost to its software planning for networks by purchasing Tivoli Systems Inc., which specialized in creating tools for network management.
By 1996 IBM's recovery seemed solid, with a $50 billion rise in its market value since 1993. The company's image got a boost in 1997 when its computer Deep Blue won a six-game chess match against World Class Champion Garry Kasparov. The computer, which used huge amounts of parallel processing, could evaluate 200 million chess moves a second, a processing capability the company hoped could be used in such endeavors as weather forecasting and modeling financial data.
Difficult Times in Late 1990s Leading to Prosperity in 2000s
IBM continued to expand via new product development and acquisitions through the late 1990s. In 1997 the company bought Unison Software, which specialized in managing computer systems, and in 1998 purchased CommQuest Technologies, a designer and manufacturer of wireless communications chips. Other smaller purchases included a majority holding in site development software company NetObjects in 1998 and NUMA systems expert Sequent Computer Systems in 1999.
The company's shift to providing services had progressed well by the late 1990s. Services accounted for 29 percent of IBM's revenues in 1998 and 39 percent of pretax profits. By 1999, e-business service revenue alone exceeded $3 billion, a 60 percent increase from 1998. Also in 1999, IBM acquired two new technology companies--Sequence Computer Systems and Whistle Communications--and signed contracts exceeding $15 billion with several other technology companies: Dell Computer Corporation, Acer Incorporated, Cisco Systems, Inc., and Nintendo Company, Ltd.
Y2K, the fear that all computer-related systems would malfunction upon entering the year 2000, caused financial difficulties for IBM in 1999, decreasing server revenue 17.9 percent from 1998. In 2000, with financial distress lingering, IBM focused on strict management of costs and expenses. It also continued to concentrate on service. In the year, demand for services and products dramatically increased (as fears of Y2K subsided), so much that IBM could not always meet customer needs. But by 2000's end, while IBM's earnings rose 16 percent, the value of stock decreased 21 percent, from $108 to $85. This decline partly reflected the state of the stock market, as 2000 watched nearly all information technology stocks decrease in value.
In 2001 the financial situation for IBM turned gloomy, as the company lost nearly $3 billion in overall revenue, decreasing net income from $8 billion to $7.7 billion. IBM's CEO V. Gerstner, Jr., attributed the losses to a sluggish technology economy and a decline in personal computers and hard disk drives. Still, IBM continued to perform relatively well in the areas of services, software, zSeries servers, and high-end storage. The company continued its focus on cutting costs, but 2002 did not fare any better for IBM.
Gerstner was replaced as CEO by the company's president, Samuel. J. Palmisano, but the new CEO would not immediately improve IBM's finances. Under new leadership, the company invested heavily in the areas of research and development, capital expenditures, and acquisitions. For one, IBM acquired PricewaterhouseCoopers' global business consulting and technology services unit, PwC consulting, for $3.5 billion in cash and stock. As a result, IBM created a new global business unit, IBM Business Consulting Services, which became part of IBM Global Services. In the same year, IBM introduced a number of new products, including the eServer z800, an entry-class mainframe and eServer p650, which immediately became the world's most powerful eight-way UNIX server. Innovation aside, IBM ended 2002 with an earnings decrease of 35 percent, to $5.3 billion.
Palmisano turned focus on an on-demand business management technique, a strategy IBM pegged "e-business on demand." The strategy, according to IBM, would help to further meet customer demands, as well as to take better advantage of market opportunities and to ward off external threats. The strategy proved sound, as 2003 total revenue improved by 10 percent, or nearly $8 billion, from 2002, with global services contributing close to $6 billion of this. In addition, gross profits rose almost $3 billion from 2002.
The year 2003 also witnessed further innovation at IBM, including the introduction of the world's most advanced server, the eServer z Series 990; the eServer p690 system, offering 65 percent more speed than its predecessor; and two new high-end iSeries servers: iSeries 825 and 870. IBM concluded 2003 with the sale of the 20 millionth ThinkPad since introducing the ThinkPad line of laptops in 1992.
Success followed IBM into 2004. To begin the year, IBM and Unica Corporation signed a lucrative contract with BJ's Wholesale Club for a new marketing platform that would personalize interactions with BJ's members. At the same time, IBM broke the record for patents received in a single year, with 3,415 for new products. One such product, introduced in 2004, was the IBM eServer Blade Center HS40, the most powerful and flexible (and smallest) 4-way blade server available.
With continually increasing revenues and a recovering economy, IBM looked toward growth, including plans to acquire Candle Corporation, which specialized in infrastructure management information. Further innovation was anticipated, specifically concerning IBM's semiconductor manufacturing facility, for which IBM accepted a $325 million investment from Sony Group for the use of chip production.
Principal Subsidiaries: IBM Credit LLC.; IBM International Foundation; IBM International Services Corp.; IBM Business Transformation Center, SRL; Tivoli Systems, Inc., IBM World Trade Corp.; IBM Plans Management Corp; IBM Foreign Sales Corp.; WTC Insurance Corporation, Ltd. (Bermuda); IBM Canada Credit Services Co.; IBM Canada Limited-IBM; IBM Argentina Sociedad Anonima (99.99%); IBM de Bolivia SA (99.98%).; IBM Brasil-Industria, Maquinas E Servicos Limitada (Brazil; 99.99%); IBM de Chile SA (99.99%); IBM de Columbia SA (90%); IBM Del Ecuador; Grupo IBM Mexico S.A. de C.V. (99.99%); IBM del Peru SA (99.99%); IBM Del Uraguay SA; IBM de Venezuela SA; IBM A/NZ Holdings Pty, Ltd. (Australia); IBM Australia Ltd.; IBM New Zealand Ltd; IBM India Ltd (99.99%); PT IBM Indonesia (99%); YK IBM AP Holdings; IBM Japan, Ltd; IBM Korea, Inc.; IBM Malaysia SDN BHD; IBM Philippines, Inc. (99.99%); IBM Thailand Company Ltd (99.99%); IBM Israel Ltd (99.99%); IBM Turk Limited (Turkey; 98%); IBM South Africa Group Ltd.; IBM China Company Ltd.; IBM Central Holding GMBH (Germany); IBM Ireland Ltd.; IBM Nederland NV (Netherlands); IBM United Kingdom Holdings Ltd; IBM United Kingdom Ltd.; IBM Europe Holding BV (Netherlands); Compagnie IBM France SA; International Business Machines SA (Spain; 99.99%); IBM Danmark As (Denmark).
Principal Divisions: Global Services; Hardware Systems Group; Personal Systems Group; Technology Group; Software; Global Financing; Enterprise Investments.
Principal Competitors: Accenture; Dell Computer Corporation; Hewlett-Packard Company; Microsoft Corporation; Toshiba Corporation; Xerox Corporation.
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