9081 IBM2 - FOUNDING OF IBM
The crucial events which defined IBM in the last quarter of a century of the 20th century cannot be explained without a sound understanding of its history over the previous three quarters of the century. Even Microsoft's path to glory cannot be fully understood without some reference to this; where the young Bill Gates hero-worshipped IBM's founders. Accordingly, to provide the necessary context for the rest of the book, the next two chapters cover the early impact of its two business geniuses; respectively Thomas J Watson and his son, Tom Watson Jr.
19th Century Entrepreneurs…thus the first half century of IBM's history belonged unequivocally to one man; Thomas J Watson. As one of the last of the great turn‑of‑the‑century corporate 'entrepreneurs' he created, virtually in his own image, the IBM that was most widely reported; and the part of IBM that was copied by the Japanese. It was he who, paternalistically, built IBM around an almost religious set of beliefs; and in the process first developed its uniquely effective management style, despite his own earlier history of very questionable business ethics. It was certainly he who built IBM into just about the most effective selling machine yet seen, though the technology he championed never went much beyond the humble punched card. He took IBM from being a small scale producer of time clocks to a position in the front rank of high-tech multinationals. It was a feat of business management that has justifiably been recognised by all the commentators.
This part of the story represents a paradox, though. The modern organisation, of which IBM may be seen to have been the supreme example, is a corporate entity - whose success depends upon the collaborative work of many thousands of individuals and whose governance is enshrined in the jointly-agreed plans produced by its managers. Yet IBM, throughout its history, has shown just how important the one individual at the helm, the CEO from Thomas J Watson through to Lou Gerstner, can be for success or failure; and Bill Gates now enjoys a similar dominance over the affairs of Microsoft.
As already explained, this introductory review is intended to provide a perspective for the relevant lessons - derived mainly from IBM's management practices, since these were so influential. In this chapter, covering IBM's earlier years, they were almost all successes. Even then it compares them with what the best of modern theory might have to say. The book as whole is not intended, however, as a rigorous history of everything of importance that happened to IBM. Instead the facts here are deliberately edited, with the benefit of the hindsight possible from the Third Millennium, to see what formative factors can be discerned which might account for the unique corporation that IBM was later to become.
In any case, the formative years of IBM initially revolved around a series of paradoxes; at least in terms of its later development. IBM at its peak, in the late 1970s, was very much a corporation of the 21st century, rooted in the ultra‑sophisticated technology of the Information Revolution; and it was a company uniquely inspired, and controlled, by a code of ethics of almost religious intensity. Yet no‑one observing its birth would have predicted such an outcome. For IBM's origins were deeply rooted in the technology of the Industrial Revolution and in the entrepreneurial activities of the 19th century, whose ethics were those of capitalism at its reddest in tooth and claw.
The first 'father' of IBM was Charles R Flint. Born in 1850, he was a brilliant financier who built a business as a commission agent, doing most of his business with South America. His trade was mainly in raw materials, including nitrates and guano; the first paradox being that IBM's financial foundations were almost literally built on bird manure! He was best known as an arms merchant, as a supplier of munitions to warring factions, often to both sides at the same time; the second paradox being that a company so avowedly ethical as IBM was to become, with the proud motto of 'World Peace through World Trade', should have been founded on the profits of war. This superficial reading is, however, to take Charles R Flint out of the historical context, and to ascribe modern values to an age that had very different view of the priorities of business. In that age selling armaments was a highly respected occupation, as indeed it still is for the management of the large aero‑space corporations.
This brings us to the first of the italicized comments I will make upon the 'lessons' to be learned from IBM's experience.
A Time For Management Style…as the example of the earliest history of IBM shows, successful management style is a function of time and place. Not least, management style is determined both by the organisation and by the environment within which it operates. The environment will differ from place to place and - especially - from time to time. There is, therefore no one style which is suitable for all places and all times. Much as the style of the 1900s, described here, is not easily applicable to the 2000s, neither is that of the 1980s and 1990s. The lesson is that, especially in the context of the length of time it takes to change strong corporate cultures, managements need to think ahead to what will be the style needed a decade or more ahead. On the other hand conventional management theory, though it talks endlessly about differences in organisational design, takes little notice of variation with regard to place, and almost none with regard to time.
Along with most of my own italicised comments, throughout the book, I have tried to include - albeit very briefly as above - the traditional management theory which might be used to explain the phenomena I am commenting upon. The result is, as you can see here and will see while progressing through the rest of the book, surprisingly few of the important phenomena which determined the successes and failures of IBM and Microsoft are adequately explained by such theory.
Flint…was a workaholic who gloried in excitement, his only stimulant; for he never smoked or drank. He got his kicks from being one of the early aviators and racing yachts. He was constantly involved in a dozen or more ventures scattered around the world. In this context it needs to be recognized that IBM was just one of his many such ventures. Indeed, his record showed, apart from IBM, a tendency towards the numbers of ventures rather than their size.
The one outstanding factor that was particularly important for the future growth of IBM was his ideologically based commitment to the creation of industrial combinations (then called 'trusts', and ultimately the cause of the first anti-trust legislation); an activity that earned him the title amongst his contemporaries of 'father of trusts'. Paradoxically, in this respect at least, his real inheritor was to be the monopolist Bill Gates rather than IBM's managers! He put a great deal of energy into promoting the virtues of big business, in speeches and articles, stressing the economies of mass production. In particular he set down a vision of monopoly (echoing Thorstein Veblen) as a model for corporate success; much as, rather more discretely, Bill Gates has done. He believed that an irregulated market‑place would be highly wasteful, where competition forced lower quality goods. To achieve the bigness he prescribed, he created 'combinations'; bringing together companies with similar interests, to create a degree of synergy. The, very large, profits that he then took from those purchasing shares in these 'combinations' were, though, created more by traditional tricks of 'creative accounting' than by any immediate real benefit. This was achieved by capitalizing the new combination at a level far in excess of the capitalization of the individual parts. IBM was founded on such a sham; a further paradox for what became, until the mid 1980s at least, this most financially secure and stable of companies.
Autre Temps…ethical values, especially those relating to corporate governance, have changed considerably over time - and, no doubt, will continue to do so. Managers need, therefore, both to recognize what are the standards of their own times - and adhere to these - and also to realize that these are likely to change as time progresses. In some important respects, indeed, this was a feature which characterized the eventual battle between the ultra-ethical IBM and the free-wheeling Bill Gates; whose ethics, in many ways paradoxically harking back to an earlier time, better reflected those of the business world in the 1980s and 1990s. Thus, though management theory has recently recognized the importance of (ethical) values, and courses on ethics are now commonplace in business schools, this is happening at a time when corporate ethics are in practice the worst they have been for decades. Following the end of the Marxist challenge, stakeholder rights, especially the employment rights of employees, have been sacrificed on the altar of market capitalism (and especially of globalization). The fat cat CEOs, most of whom have shown very few entrepreneurial skills, have gorged on the resulting cream.
Time Clocks…the first, and ultimately irrelevant, components of IBM were created by Flint in 1900. One was International Time Recording, originally formed in 1889 to manufacture time clocks and with headquarters in Endicott (New York). The other was the Computing Scale Company of America created, also in 1889, from four companies making scales and food slicers. By 1910 International Time Recording had reached a successful level of $1 million a year revenue, but Computing Scale was not so successful.
At that time Flint considered combining them. The combination had a very questionable synergy as the components were in quite different businesses, and even their main facilities were separated by 1,000 miles. He argued, however, that there was a shared, if very tenuous, logic of 'measurement'. He also argued that investors could earn more from the two combined. His final justification was that the two separate lines of business allowed investors twice the chance of meeting objectives and paying dividends! In the event he engineered a three way combination, The third leg of this was to become the real business basis for the future of IBM. It was a company, unusually in such circumstances, not already owned by Flint; it was the Tabulating Machine Company.
Hollerith…this company had been formed by Hermann Hollerith. Born in 1860 he graduated as an engineer (of mines) from Columbia University in 1879. He immediately obtained a job with the US Census Bureau as a special agent collecting and analyzing statistical information on the use of steam and water power in the iron and steel industries. This was the inspiration for his one obsession as an inventor, and indeed for his one successful invention; his others were notably unsuccessful. Although he subsequently moved to MIT (Massachusetts Institute of Technology) as an instructor, he still continued to research a device for recording census statistics. He knew, from his brother-in-law who was involved in the silk-weaving business, of the Jacquard loom which used holes in cards to program its complicated patterns of weaving, but it was reportedly the further inspiration of a 'punch photograph' train ticket, on which passenger details (such as height and hair color) were punched out around the edge by the conductor, that clinched his key invention. Hollerith decided that each census taker could do the same, with the resulting 'card being sorted by a variation of the Jacquard loom; the important aspects of the invention being that the holes were sensed electrically rather than mechanically and that one card held all the information on an individual.
He left MIT to start his own company, being granted his first patent in 1884 and then successfully bidding for the Baltimore Census in 1889 and the following year obtained the contract for the US Census Bureau business. It was, however, only in 1896 that he incorporated as the Tabulating Machine Company, and undertook his own manufacturing; previously he had sub‑contracted this. Thereafter his business success was more variable, as competitors offered similar solutions. Eventually his fortunes declined to a low ebb when he lost the contract for the 1910 Census. Thus in 1910 he was short on funds, as well as somewhat short on new invention, and the approach from Flint therefore came at an opportune time.
The result, in 1911, was the corporation that was eventually to become IBM. It had a bonded indebtedness of $6.5 million, 25 times its current assets, of which $4 million was borrowed from the Guaranty Trust Company. It had 1200 employees and, with a deal of foresight, Flint called it the Computing Tabulating and Recording Company (CTR). Flint assigned it a value of $17.5 million, though in reality its tangible assets only added up to $1 million.
Its chairman was George Fairchild, who - as he had been a member of congress since 1906 - was not expected to take an active part in management. When the first president left after just one month, however, Fairchild took over and ran CTR until 1912 - when Frank N Kandolf, formerly CEO of the International Time Recording subsidiary, took over.
However the most important 'father' of the modern IBM had not yet appeared on the scene. He was Thomas J Watson. Born on February 17th 1874 he was very much the country boy; again a paradox in view of the great sophistication he eventually built into IBM. His father owned a modest lumber business located in Painted Post, 20 miles west of Elmira in the north of New York State. He himself as a child was something of a loner. An asthmatic, he was remembered as being shy at social gatherings; another paradox for someone who was to create one of the world's top sales forces.
Having given up his first job - teaching - after just one day, he took a year's course in accounting and business at the local Miller School of Commerce; finishing in May 1892. His second job as a $6 a week bookkeeper was almost as brief as his first, and he soon chose the excitement of 'drumming'. He joined a travelling salesman, George Cornwell, peddling organs and pianos around the farms, for the local hardware store (William Bronsons). When Cornwell left he continued alone, earning the sum of $10 per week. It was only after 2 years of this life that he realized he would be earning $70 per week if he were on a commission; a lesson that perhaps colored much of his later approach in IBM. The impact of his indignation on making this discovery was such that he upped stakes and moved from his familiar surroundings to the relative metropolis of Buffalo.
He then spent a very brief period selling sewing machines for Wheeler and Wilcox. According to Tom Watson Jr., in his autobiography, "One day my dad went into a roadside saloon to celebrate a sale and had too much to drink. When the bar closed, he found that his entire rig - horse, buggy, and samples - had been stolen. Wheeler and Wilcox fired him and dunned him for the lost property. Word got around, of course, and it took Dad more than a year to find another steady job." As Tom Jr. went on to say "This anecdote never made it into IBM lore, which is too bad, because it would have helped explain Father to the tens of thousands of people who had to follow his rules."
In the meantime, he once more set out on the road selling. In this case his partner was C B Barron, a showman renowned for his disreputable conduct; which Watson, as life long Methodist, deplored. Jointly they peddled shares of the Buffalo Building and Loan. They were soon very successful and with his proceeds Watson set up a butchers shop as an investment. Unfortunately, true to form, Barron absconded with the commission and the loan funds, leaving Watson with no money, no investment (he lost the shop as a result), and no job. Thus for the second, and not the last, time he was fired; and again these early experiences may have formed his own unique, for the time, attitude when (at IBM) he abandoned the contemporary practice of ruthlessly hiring and firing labor as a commodity.
Fate decried that in his butchers shop Watson had a newly acquired NCR cash register, for which he then had to arrange new repayments. On visiting NCR he determined to join the company; and after a number of abortive attempts he finally succeeded. NCR was then one of the leading selling organizations, and John J Range, its Buffalo branch manager, became almost a father figure for Watson and was a model for his sales and management style. Certainly in later years, in a 1952 interview, he claimed he learned more from Range than anyone else. But at first he was a poor salesman, until Range took him personally in hand. Then he became the most successful salesman in the East, earning $100 per week.
Management Roulette…the effectiveness of management in general, and of senior management in particular, cannot be determined by any simple equation. Sometimes the least likely candidates perform the best - and performance should be the only true measure. Even then luck may be on their side - but, in any case, managers often need luck as much as skill. The one rule is not to shut the door on any candidate.
In 1899, at the age of 25, Watson was rewarded with the NCR agency for Rochester. This was not exactly a desirable territory, it was bottom of the league table of NCR's 160 branches; but as an agent he got 35% commission (much as do the modern PC dealers!). In any case within months he had made it number 6 in the league.
The selling style of the time was, to put it mildly, rough and Watson later admitted that he felt ashamed of some of his sales techniques (and regretted using them). There is a widely reported tale of Watson being told by a competing salesman of a call he was to make the next morning, some 20 miles away. The salesman arrived to find Watson had already made the sale. The most interesting aspect of this story is how it developed over the years. In the early days of IBM it was told, by Watson, as an essay in opportunism, as an example for eager salesmen to follow. Later, however, the story was turned around to illustrate regrettable conduct that should be avoided. Later still the story was expunged from IBM's oral history.
As a result of these techniques which largely revolved around knocking the main competitor (Hallwood) in four years Watson made Rochester effectively an NCR monopoly. As a reward he was called to the NCR head office in Dayton, Ohio.
Patterson…NCR had been built by John Patterson to be one of the most inspired selling organizations in the US. His methods were ruthless; but no more so than his contemporaries, for the modern niceties had not yet emerged. He had a genius, though, for innovation in sales management; NCR's 'Primer' was reportedly the first fully structured sales pitch and Patterson's brain-child. He also gave his salesmen guaranteed territories, where the normal practice previously had been to have salesmen competing with each other for the same business. He gave them training, and motivated them with the reward of the Hundred Per Cent Club (an institution later to be so successfully transferred to IBM). He built a pleasant environment for his workforce; glass walled factories with swimming pools (facilities echoed much more recently by the Silicon Valley start-ups). Apart from the lavish buildings, all of these were eventually brought with Watson to IBM. Even the famous THINK slogan reportedly originated when he was at NCR.
Patterson was also, though, a tyrant who believed that as a capitalist he could set himself above the ordinary law; as also did many of his contemporaries. Again this reflected the rather different standards of the time, though Bill Gates recently seems to have (very successfully) adopted a similarly cavalier view about Microsoft's strict adherence to the law! Patterson's competitive methods were, by our modern standards, scandalous. He encouraged his salesman to knock the competitors, by ever more dubious methods. He even set up a special 'competition' department whose sole function was to conduct 'dirty tricks' campaigns. They enmeshed their competitors in litigation and, reportedly, even produced carbon copy ('knock‑out') registers to undermine their reputation. The department indulged in industrial espionage, even extending occasionally to sabotage. Some of Microsoft's more vocal competitors would claim that Bill Gates' behaviour now is no less scandalous!
History Repeats Itself…as we will see later, this almost 'anti-social' behavior has returned to become fashionable - not least in the form of Bill Gates' management style at Microsoft. It is justified, as part of the price now being paid for the victory of market capitalism over socialism, as the 'macho' style needed to get the (short-term) results the financial markets demand! It seems also to be a justification for the very large payouts made to CEOs, almost regardless of their results. It probably is a price too high; so expect more civilized practices to - in turn - re-emerge! Much of management theory, despite its much publicized attempts at addressing ethical issues, is becoming increasingly equivocal about such matters; which are so financially rewarding to the CEOs who endow business schools!
Watson's role in the scheme of things was to knock out the competition in the used cash register market. As a process it was itself very questionable in terms of the anti‑trust legislation; as are some of the approaches recently adopted by Bill Gates. It was made even less legal by the chosen means. Using funds supplied by NCR he set up what was ostensibly a completely independent organization, Watson's Cash Register and Second Hand Exchange, in Manhattan. Undercutting the competition, for he had no need to make a profit (having effectively limitless funds from NCR), he gradually monopolized the business; until he was able to buy out the competitors, which he promptly did - again something which Bill Gates has also been accused of. He then moved on to Philadelphia and after that progressed across the country, repeating the operation and covertly establishing another near monopoly for NCR, in the second-hand business, to match that already established in the new machine market.
In 1908, when the second-hand business was merged into the regular sales offices, Watson became assistant sales manager; moving up to become sales manager in 1910 with a further role - working along with NCR's engineers - in new product development.
In terms of the questionable second-hand business, Watson later claimed that he didn't appreciate the implications of what he was doing, and indeed it is quite possible that he was so immersed in the work that he failed to understand the full depth of Patterson's machinations. Nevertheless it was a clear, indeed blatant, breach of the anti‑trust legislation; though until that time such legislation had, in the spirit of the age, been more honored in the breach rather than by adherence. Perhaps he was unlucky, but along with 30 other NCR managers (including Patterson) on 22nd February 1912 he was indicted in an anti‑trust suit instigated by managers previously dismissed by NCR.
In the six months before his trial he met his wife to be. Jeanette Kittredge. He married her just two weeks after the trial finished on February 13th 1913; having been found guilty and sentenced to a $5,000 fine plus a year in Miami County jail! The jail sentence was unexpected, previously only fines had been imposed; and the sentence was appealed.
Luck…once again Watson's luck held out. On March 26th 1913 the Miami and Mad rivers inundated Dayton in the worst floods to hit the US since 1889. The NCR plant, on high ground, became the town's sanctuary and Patterson there, and Watson in New York, organized the rescue operation; and in the process became national heroes.
Luck… management success depends on not a little luck. The saying is, of course, that you make your own luck (not least by hard work); but the reality is that - for the very high flyers in all fields - what is needed is something very akin to winning a lottery. There is no way that any of us can tap into that level of luck, but the recipients can at least recognize their good fortune (as did later TJW's son). Management theory takes no account of the luck involved. The Roman's, allowing their victorious generals their triumphs, did rather better in having a slave constantly remind their 'managers' - on their triumphal processions through Rome - of the ephemeral nature of such victories.
Watson still had to wait for the appeal. In the meantime, in April 1914, he was fired by Patterson, a not uncommon fate for senior NCR executives; perhaps because he refused to consider signing a 'Consent Decree' or perhaps simply because his new found reputation as a national hero was a challenge to Patterson, who insisted that he was the only king in his court.
So with a wife and small baby to support, and a one year jail sentence hanging over his head, he was unemployed (albeit with a $50,000 golden handshake). It was not an experience to be lightly forgotten, and the evidence is that it contributed significantly to the subsequent ethical foundations of IBM. Despite his ruthless sales techniques in NCR, he always had a reputation as a fair man, offering fair deals to the competitors he bought out. But the very dramatic change in ethical codes he underwent in moving to CTR (IBM), where other businessmen in those days never normally considered the wider effects of their actions, was somewhat akin to Paul's conversion on the road to Damascus.
I believe that the traumatic experiences of that time indelibly stamped his actions thereafter. He continued to deny his guilt; repeatedly saying "I do not consider myself a criminal" and "My conscience is clear". Yet the evidence suggests that underneath he had made a vow to himself that he would never again be put in that position. The philosophy that, based as much on ethics as business management, emerged from this 'vow' was one of the main factors, if not the main factor, that shaped the later IBM. It was perhaps most significant that he didn't even tell his children what had happened. Tom Watson Jr. had to find out about it from Charley Kirk, the executive vice-president he worked for when he returned to IBM in 1945.
Deep Motivation…despite popular belief, the evidence shows that the most successful managers are rarely motivated just by financial rewards. Their motivations are complex and, as here, the most powerful of all are often value based; and, as in the case of TJW, sometimes they are shaped on the Road to Damascus. Certainly, for most of its life IBM was driven by his new values. Much of management theory, and especially of economic theory, focuses almost exclusively on financial motivations. It takes no account of the inner forces (sometimes dark ones as well as public spirited ones) which drive the great leaders.
This was 1914 and Watson approached Flint, as a leading financier, for assistance in finding a similar job. Despite his apparently parlous situation he was still very clear as to the type of job he wanted. He had already turned down a number of offers. He wanted control of the business for himself, and be able to earn a share of the profits. Flint offered him CTR. Flint was, as described earlier, a great promoter of trusts and was presumably less worried about Watson's impending jail sentence. The other members of the CTR board were less sanguine, asking who was to run the company while he was in prison! As a result, they only gave him the title of general manager, until his sentence was, finally, quashed by the Appeal Court in 1915; when he became President of CTR.
So the die was cast and CTR was joined with Thomas J Watson; the final paradox being that the true founder of the modern IBM, the most moralistic of companies, was at that time a felon convicted of business practices unacceptable even to a period that was notable by its lack of standards! Clearly, though, he had already decided that the future of CTR was to be very different.
Surprisingly, in view of his past record at NCR and his later colossal influence on IBM, he initially maintained a very low profile (almost tantamount to seeking obscurity) for the next decade; until 1924, when the chairman George W Fairchild died and he finally took over sole control. For the whole of the previous decade, in some ways uncharacteristically, he consistently deferred to Flint, Fairchild and Hollerith.
In the meantime he took personal charge of 400 demoralized and poorly supervised salesmen. His stated objective was to produce a sales force in the NCR mould, as well as advanced machines that would be superior to any of the competitors. In a series of small meetings he presented his 'competitive proposition' to the sales force. Despite the aggressive sounding title, right from these beginnings there was as much emphasis on the ethics and philosophies of the business as there was on sales techniques. In particular he stressed sincerity, integrity and loyalty; saying that they should do nothing that could be construed as 'unfair competition' and should conduct themselves in an 'honest, fair and square way'; something which would be radical even today - and certainly does not seem to be part of the Microsoft vocabulary.
The other philosophies that motivated IBM for the next three quarters of a century were also evident. The company motto was to be 'We sell and deliver service'; CTR was to be in the business of genuinely assisting its customers. Watson strongly believed that when a sale was made both sides came out ahead.
Win-Win…this is the win-win philosophy which has supposedly led relationship marketing in recent years. The difference was that TJW insisted that it was more than a slogan. Eventually enshrined as IBM's philosophy of 'Customer Service', it pervaded all IBM's marketing strategies for the next three quarters of a century! Although a number of sales trainers, most notably Miller et al[i], have described this 'philosophy', theory (even marketing theory) still places little emphasis on selling practices.
Even the emphasis on the individual, later developed by his son, was present. His most memorable chalkboard presentation (even at that early stage the use of visual media, later to be the ubiquitous flipchart and now the overhead projected foil or acetate, was central to meetings!) showed;
The Man ufacturer
General Man ager
Sales Man ager
Service Man ager
Office Man ager
Evangelizing the central nature of the individual in the operations of the company, Watson highlighted the central nature of 'Man' in all these operations. In 1917 he said, to a New York audience, "When practicing the art of selling use all your talents. Put everything you have into your efforts; above all put your personality into them. Never copy anybody, Be yourself."
White Shirts…so much for the IBM organization‑man myth, promoted by IBM's detractors. It is possible that the origin of this myth was a function of appearance, for Watson brought from NCR the requirement for salesman to be neatly dressed in dark suits and white shirts (a philosophy that has held to the present day); but as a mark of (business) respect for their customers rather than as a uniform. It should be remembered that the normal dress for salesmen at that time was a loud check suit! In fact Watson definitely did not want any uniform; and when a uniform was suggested for his shop-floor workers he quite specifically rejected it, "I don't want any of our workers wearing uniforms". The dark business suit did, however, become a sort of uniform throughout IBM, and perhaps, however unofficially, it served the same function of promoting 'single status' that an actual uniform does in some Japanese companies; but without the unacceptable, to western eyes, loss of individualism.
There was, in addition, a commitment to the ethics and philosophies of IBM; which effectively included, in the early years, a commitment to a personal lifestyle. IBM'ers were to be sober, almost puritanical, pillars of the community. They were not to not drink, or indulge in licentious behavior; and at that time even the house they lived in was of interest to IBM. But underneath these largely superficial similarities there was still a real commitment to individualism. The problem of image was simply that these similarities, however superficial, were so different to the much less restrained behavior of other sales forces that theirs was the uniform image retained by outsiders.
The showbiz surrounding sales activities in IBM, of the Hundred Per Cent Club (HPC) for example, did nothing to dispel the myth. The 'tent city' (with a circus tent, appropriately, for the main events, and dormitory tents, luxuriously appointed with every facility, for participants) that covered the ground of the Homestead and IBM Country Club (at Endicott) for the HPCs in the 1940's was a cultural wonder to be experienced. Even until recently, although based in modern convention halls, the US HPC retained the flavor with the main events still being held in the 'main tent'! The IBM songs that were developed in the earlier times, including most famously 'Ever Onward' to the tune of Romberg's 'Stout Hearted Men', were also a cultural mystery to outsiders. They were later such an embarrassment that Tom Watson Jr. banned them for a while. Again they still lingered on at US HPCs, an anachronism for Europeans, but hugely enjoyed (as were all the theatricals developed by Watson) by the participants.
Charismatic Change…the first requirement for changing an organization is to convince its members that the change is not just necessary, but is possible. A charismatic entry by a new CEO - here Thomas J Watson and later Lou Gerstner - is often the trigger for such change, but other public symbols (such as IBM's dark suits in contrast to the then salesmen's traditional check suits) can also help move the culture on. Thus, Bill Gates differentiated Microsoft by taking almost exactly the opposite line on its image. Some management theory has recently emerged, about 'turn-around' situations, which does stress the role of a new CEO, and symbolic acts, in such processes of change. It also stresses the 'advantage' of starting with a corporate 'near-death' experience, as IBM had just before Lou Gerstner rescued it.
Full Employment…in addition to the HPC Watson brought the idea of training schools from NCR. He didn't bring the more ruthless of the labor relations, though. For example even if a salesman constantly failed to make the HPC he was usually only moved to a less demanding position. Watson wanted to be a paternalistic employer, paying premium salaries with excellent fringe benefits; even paying for education, and providing country clubs (such as those at Endicott just mentioned). The policy of promotion from within was also put into practice; which was one of the key factors that shaped the later IBM.
Many of these factors were later to be shared by the Japanese companies; though not, as a central philosophy, by Microsoft. Most important of all, though, was to be the policy of 'Full Employment' which was the foundation of IBM's enduring strength; as it also was of the Japanese corporations, who later were to so effectively copy it along with the other IBM practices.
Returning to the history of IBM, after Watson had been at CTR for 11 months the Appeals Court ordered a retrial. Although he refused to sign a Consent Decree a new trial never took place; and he was duly promoted by the board of CTR to the title of president.
CTR was a company with three separate elements. Computing Scale was always a problem; and the largest element of this (Dayton Scale) was eventually sold off in 1933, to Hobart Manufacturing. Time Recording was then still the main revenue earner, and was used by Watson as a vehicle for diversification; though none of these was great success. Time recording was retained by IBM, surprisingly in view of its irrelevance to the rest of the business, for half a century; it was only sold off in 1958.
The piece of the action that most interested Watson, perhaps because it was closest to his NCR experience, was the tabulating business and this was where he directed much of his attention; and by the early 1930s this had indeed become the largest piece of CTR.
Returning to the 1920's, though, while still under Fairchild's domination Watson went for a significant degree of growth. This saw revenue grow from $4.2 million in 1914, when he took over, to the peak of $16 million in 1920. The price of this, however, was a precarious cash position and when in 1921 sales fell to $10.6 million he faced a cash-flow crisis. Once again CTR was to be funded, indeed rescued, by Guaranty Trust. Watson was forced to cut costs across the board, including reducing R & D and laying off some employees. He never again allowed his cash position to fall so low. He subsequently maintained a policy of low dividends, high revenues and careful cost controls. He adopted the very conservative accounting principles that held true (no matter how many 'gambles' IBM later undertook) until the 1980s (when their abandonment may be deemed to have been one of the causes of IBM's ultimate decline!).
Conservative Accounting…there is a temptation to indulge in 'creative' accounting, as IBM has done since the late 1980s, since this can make the results look better for the financial markets. The problem is that in the process you can fool yourself as well; as IBM management did in throughout the 1980s! It is much better to be honest. So far, due to its very rapid rate of growth, Microsoft has not had to race any hard choices on funding. On the other hand, if it ever does, its dependence on highly leveraged stock valuations might pull it down - though it did have enough cash to survive the dot.com crash. Even with the Enron scandal posing embarrassing questions, the accounting profession still prides itself on its traditional standards, and seems less interested in how honestly informative are the resulting reports!
CTR had been pushed into the need to rent Hollerith equipment because it was unreliable! Watson, however, recognized the other benefits and in particular took on board the idea that renting equipment was inherently more stabilizing, since the income continued when equipment orders would otherwise have dried up. Less obviously, it forced sales personnel, aware that they might lose the rental, to maintain regular contact with customers; thus ensuring that - even as early as the 1930s - that customer relationships were well managed. This approach became central to IBM's activities, and was especially important to its survival through the Depression in the 1930s. Once again, it was abandoned in the 1980s; also with disastrous consequences.
Rent, Rent, Rent…there is a temptation, to which IBM eventually succumbed, to grab the money and run. On the other hand, renting the product - or adopting some other form of on-going 'club membership' approach - forces you and all your staff to regularly address customers' needs. It often is the only guarantee that good customer relationship management occurs. Microsoft, seemingly safe with its monopoly, now seems to also be neglecting its customers and may eventually pay the price for this 'arrogance' as IBM did in the 1990s.
Thereafter, Watson deliberately lagged on the introduction of new products (but not on research), even after competitors launched he still waited until the market was ripe for large scale development; again a feature that was at the heart of IBM's new product policies until recently (where the much increased speed of movement of the markets wrong-footed the management). Indeed, Bill Gates' entrepreneurial (risk-taking) gambles on new products has justifiably earned Microsoft its leading position in its markets. But Watson also recognized the importance of sound R&D: appointing, in 1922, James W Bryce[ii] to manage this (moving him from its Time Recording Division, which he had joined in 1915); though Watson continued to be personally involved R&D - not least, insisting on rigorous standards.
In 1924 Fairchild died and, at the age of 50, Watson at long last came out of the shadows, to create the company in his own image; and, for the next quarter of a century until he was 75, he led it to greatness. Almost the first, prophetic, move he made was to rename it International Business Machines, IBM. This was a name he had already given in 1917 to the Canadian subsidiary (and later to CTR's South American operations). It was prophetic because at that time CTR was only barely international, and was just on the fringes of 'business machines'; a concept that didn't emerge fully until the 1960's.
Ageism…it is clearly arguable that Thomas J Watson's greatest contributions were made after the age of 50 - the point at which, in modern organizations the most appropriate future for many managers is considered to be retirement! This recent change in practice evidently is not just inhumane but unproductive. The resulting waste of talent, and especially of intrinsic knowledge, poses a challenge which progressive governments are already addressing; but few commercial organizations seem to see the need to act upon. As yet, apart from the ethical dimensions, there is little debate about this amongst theorists. In particular, the differing employment needs at various lifestages, which are just as evident as those already recognized by marketers amongst consumers, have yet to be dealt with in any significant way.
He also celebrated his new status with the first Quarter Century Club. Even though CTR had only been going for 13 years, he based qualification on the earlier constituent companies. Personnel management was clearly to be the core of the business.
Over the next decade and a half, to the outbreak of World War II, IBM's business increasingly became that of tabulating. The essence of it was the punched card. The equipment in a typical customer installation comprised a number of punches to record the data (and some verifiers, similar to punches, but used to check the data by keying it a second time), a sorter to sort the cards into the chosen sequence, and an accounting machine; first launched, in 1920, as a printer with some basic arithmetical functions added. The essence though was the punched card, first introduced in the famous 80 column format in 1928, and it was from this humble 'commodity', ordered by the millions, that IBM's profits largely derived. The customers were typically large businesses, and IBM tailor made each system to their specific requirements.
Throughout the depression of the 1930's IBM was one of the few employers to maintain full employment; and it was long its proudest claim that it had not made anyone compulsorily redundant in half a century. This was partly because it was in an industry that was less affected by the depression; the statistics of the unemployed required as much government processing, indeed rather more, than those for the employed.
A commitment to full employment was, as described earlier, a central tenet of Watson's management; perhaps reflecting his own experiences. This was most dramatically evidenced by his building for stock for a period; to be dramatically rescued by unexpected government business that only IBM could supply. This was described in his son's book ('A Business and its Beliefs') as "...during the Great Depression...rather than resort to mass factory layoffs, IBM produced parts for inventory and stored them. It was a gamble that took nerve....Happily the risk paid off in 1935...". This has sometimes been ascribed by unkind critics to a simple error in forecasting, but that ignores the basic philosophies of IBM at the time; and it would have required a quite deliberate decision to override IBM's very carefully controlled, and conservative, accounting practices. From its earliest days, indeed, he was so committed to the greatest of IBM's philosophies, and the one which probably more than any other accounted for its outstanding success later - lifetime employment, that he was willing to risk everything to maintain this principle!
Lifetime Employment - one of the most effective bases, if indeed not an essential one for building especially powerful cultures, has been a guarantee of (lifetime) employment. This offers all the participants a very powerful stake in the future of the organization. It is one which may demand a high level of investment, and courage when the going gets tough, but its impact on the organization in the longer term can be immense. Much later, when IBM abandoned it, the (hidden) decline had been going on for too long and the financial markets upon which IBM had come to depend would not have sanctioned the levels of investment needed; and John Akers was certainly not the courageous manager TJW had been! Bill Gates has never signed up to this philosophy, but then Microsoft's growth has never required him to make large numbers redundant; and his workforce know this! Theory, not least that of Peters & Waterman, used to recognize the concept - as late as the end of the 1980s - but even then it was largely seen as an output from rather than an input to the overall management process. These days it is widely believed - in practice as well as in market dominated theory - that, despite IBM's successful maintenance of the approach for more than three quarters of a century, it simply is not a viable alternative. Worse still, managers in our survey of the future believed that lifetime-employment is very much less likely to occur than a global nuclear war!
It was in the middle of the Depression, in 1932, that Watson formally established an Education Department at Endicott, then IBM's main plant; with the first three engineers graduating in 1934. By 1937 almost half the 32,000 factory employees at Endicott were enrolled; in 52 classes, studying 24 different subjects. Tool-making was an especially important skill being taught, but even the factory supervisors and executives had to attend its 'Supervisor's' School.
The education facilities were conveniently placed near the 'Homestead', the clubhouse which was the hub of IBM's leisure complex; as well as being the hotel for customers attending education. It was a near idyllic location for doing business and, according to his son Tom Jr., Thomas Watson Sr. - who had a permanent suite of rooms there - said it was his favorite IBM location.
Working Environment…as the IBM Homestead example showed, providing the best environment for work - even a luxuriously comfortable one - is a recipe for excellent productivity. This is one environmental philosophy that Bill Gates has signed up to; perhaps because, like IBM's laboratories which are sited in near idyllic locations to keep its developers happy, the key members of Microsoft's staff are such developers.
The earliest research, at Endicott, focused on product needs, indeed largely on quality control, rather than the more fundamental investigations which were later, in the 1980s, to earn IBM two consecutive Nobel prizes for Physics. For example, the paper-testing laboratory was then especially important; where, by 1937, Endicott was producing up to 10 million cards a day. But a 'Methods Research Department' which, in the context of punched cards, was effectively the start of IBM's 'software development' (albeit that it then revolved around the wiring of plug-boards rather than computer programs), was started at much the same time.
Trust…Watson never lost his respect for even the humblest members of his workforce, and in turn this earned him their trust. Even half a century later the veterans at Poughkeepsie plant fondly remembered his tours of inspection. As the 'royal' entourage swept through the factory Watson would almost invariably sneak away, unnoticed, to be discovered as the alarm spread some time later sitting with one of the older workers. As likely as not he would be sharing his sandwiches, and certainly listening to his views; which kept Watson abreast of what was truly happening in IBM!
As a lifelong Democrat he was an ardent supporter of Roosevelt (as his sons were later of Kennedy). This support did not, however, stop the US Supreme Court, in 1936, from upholding the judgement that IBM, together with Remington, should cease its practice of requiring its customers to buy their cards from it alone. In the event it made little difference because IBM was the only effective supplier to the market; and profits continued undiminished. His membership of the Democratic party didn't, incidentally, stop him from later playing a large part in Eisenhower's presidential progress. In particular Watson arranged for him to be granted the Presidency of Columbia University, which became his power-base in the run up to the presidency.
During World War II 274 mobile IBM punched card units followed the front‑line controlling the logistics of supply; and, in the process, exposing a new generation of users to the benefits of data processing. In any case IBM's business, in common with that of many other manufacturers, grew substantially on the back of the increased economic activity generated by the war effort. From a revenue of $34.8 million in 1939 sales climbed to a high of $143.3 million in 1944, before falling off slightly at the end of the war.
Towards the end of the war the research arms of the services started to develop requirements for the first true computers; the nuclear weapons industry perhaps being the most significant potential customer. In terms of commercial applications, however, the Bletchley Park code‑breaking work in England was very much a side event; though it did produce Alan Turing as one of the great theoreticians of computing. IBM's contribution, in 1943, was the Mark I, an electro‑mechanical monster 51 feet long by 8 feet high and containing 530 miles of wiring! It cost $200,000 (plus a donation of another $100,000 to cover operating costs) and was installed at Harvard.
Even with this example IBM did not really get into computing in its modern form. It built a further electro‑mechanical marvel, the Mark II, the IBM Selective Sequence Electronic Calculator (SSEC) with 21,000 relays and 13,000 vacuum tubes, which it grandly installed in its headquarters in 1948. The real action was, however, elsewhere at the University of Pennsylvania where the ENIAC (Electronic Numerical Integrator And Computer) team were developing the first electronic computer; unveiled at the University of Pennsylvania in 1946. Even in 1949, despite Watson's alarm at the progress shown by the UNIVAC (which had emerged from the ENIAC project), IBM was only just starting to design its first family of true, electronic computers; the 701. At that stage it was probably at least two years behind UNIVAC; which was subsequently, in 1950, sold to IBM's competitor, Remington Rand, which a year later also purchased the other group working in the field, Engineering Research Associates (ERA), to become the undisputed leader in computing..
Thus ended a decade and an era, for control of the future of IBM then moved to Watson's sons. With sales of $214.9 million in 1950 IBM was already one of the giants to watch.
The End Of An Era…it was an era spanning three and a half decades, in which IBM had aggressively pursued the technology of the punched card, and largely ignored the computer. It was an era, though, in which the sales organization which became the real source of IBM's muscle‑power was built. It was also a period in which the ethics and philosophies, which ultimately distinguished IBM from most other companies, were established and developed. Indeed an article in Fortune, during 1940, retrospectively described T J Watson as having the appearance and behavior of a "somewhat puzzled divinity student"! It went on to quote almost religious fervor by IBM senior executives, including one who said "Mr. Watson gave me something I lacked ‑ the vision and foresight to carry on in the business, which from that day forward I have never had any thought of leaving". The reporter also singled out for comment the widespread display of the 'THINK' slogan; comparing it with the roadside crucifixes in some Catholic countries! The products may not have been there, but the structure of the later IBM was already in place.
The Religion Of Organization - as IBM had already demonstrated, the most powerful cultures share many of the features of religions. In particular, the most powerful commitment by their members - and the one which protects them from most changes in the external environment - is typically to the values of the organization rather than to any of its more physical manifestations. Even so, none of the Watsons saw themselves as gods; but perhaps Bill Gates does see himself as something close to this - which may pose problems when he is eventually seen to have clay feet! Management theory, whilst now recognizing the (ethical) importance of values, typically still places them low down on the list of management priorities; and much lower than financial considerations.
Perhaps surprisingly, in view of the miracles of growth routinely expected of IBM in later years, apart from the war years the rate of growth was relatively slow. Revenue only increased by a quarter in the 11 years from 1920 ($16 million) to 1931 ($20.3 million); admittedly after a very fast start (which showed in the 1921 fall back to $10,6 million). Similarly in the six years from 1931 to 1937 ($31.7 million), when the company was relatively successful despite the Depression, sales only increased by a half. Even in the six years immediately post war, 1944 ($143.3 million) to 1950 ($214.9) - when IBM built its solid reputation, sales also only increased by a half. One should not, however, underrate the very solid achievements of these periods, typically averaging around 7% growth per annum, which although apparently unimpressive against those of the later IBM were still significantly ahead of most other companies (indeed for any company to have even held its sales levels through the 1930's was seen to be near miraculous).
The biggest sales increase, by more than four times, came in the war years from 1939 ($34.8 million) to 1944 ($143.3 million); a better than 30% per annum compound growth rate. Once more the fortunes of IBM were, paradoxically built on the profits of war; though not literally since the wartime excess profits tax ensured that profits did not grow apace, and indeed at $9.7 million in 1944 they were virtually unchanged from the $9.1 million in 1939 (and thereafter never regained their previous high, percentage, levels).
In the final part of this chapter I may seem to jump forward by half a century. This is because the most important cultural lessons from the time of Thomas Watson Sr. can also be seen in the later work of the leading Japanese multinationals. Indeed, IBM seems likely to have been one of the original models for the 'Japanese Miracle'. The fact that much of the Japanese economy has since dropped into a black hole does not invalidate these lessons; its problems have been much more about the massive difficulties experienced by its financial sector (and the damage caused by the collapse in value of its property market). In any case, the real magic was only ever to be seen at work in a handful of Japan's major transnationals, and these remain as strong as ever - as do their lessons which the West now feels free to ignore. In particular, Toyota - the premier example, with which I have since worked at board level - still has just as much to teach Western corporations! More important, in the context of this book, the Japanese clones demonstrate that IBM's successes, using these approaches, were not so unique as to be irrelevant to other organizations.
William G Ouchi described some of the elements behind this in his 'Theory Z'; which has long been well respected by the academic community, but is less well known in the world of management practice. He saw these as essential to creating the partnership between employer and employee (based on a feeling of mutual trust), which was so characteristic of IBM and still is of Toyota and a number of other leading Japanese corporations - as well as a few in the West, though no longer IBM! Their basis is strong beliefs, and the most fundamental of these is 'Full Employment'; which IBM had so dramatically to abandon. Thereafter the essence of the style is involvement of the individual in the future of the organisation; enriching their job and effectively giving them the right of personal development within a strong corporate culture. These naturally link to the work of Thomas J Watson, so I will explore them here.
Most interestingly, in his book Ouchi also identified IBM as one of his key 'Theory Z' companies; that, almost alone in Western culture, follow patterns similar to the Japanese companies. Indeed he credited IBM with the initial revelation that led to his theory. He described a meeting where he presented his interim results to a group of IBM executives. One of the IBM vice‑presidents spoke up "Do you realise that this form you have been describing as Japanese is exactly what IBM is? Let me point out that IBM has developed this form in its own way ‑ we have not copied the Japanese!". Although Ouchi went on to say "this man's reaction was an opinion with which other IBM employees might strongly disagree", and thus effectively dismissed the range of other lessons he might have gone on to learn from IBM itself, he did then (stimulated by this incident) go on to develop his cross‑cultural 'Theory Z'. One interesting implication is that neither he, nor the IBM executives, apparently appreciated that the similarities had probably come about precisely because the Japanese had, in one way or another, copied IBM!
to 'the theory' dominates much of academic thought. Unlike marketing research,
where the objective is to find out what is happening in the real world, academic
research is required (by its leading exponents) to start with a hypothesis which
the fieldwork then tests. This should be for falsification as much as for
verification, as Popper classically suggested, but the reality is that it forces
the researcher to be myopic in the extreme - as can be seen here by Ouchi's
failure to see what was placed in front of him! This is compounded by the desire
of academics to sell their own view of the world, and the need of many
consultancies to sell their own unique insight. The result is that in recent
years there has been very little guidance from the so-called experts that has
been genuinely based upon experience. Peters & Waterman's work was perhaps one
of the few exceptions, which may be why it was criticized by many academics (and
then rubbished when IBM, their prime example, proved fallible) and yet was so
popular with practitioners!
My own enlightenment came with my discovery of the book 'MITI and the Japanese Miracle', by Chalmers Johnson. He ascribes their miracle to the actions of MITI, the Japanese Ministry of International Trade and Industry. This is a view that, having now met a number of its modern gurus face to face, I would fully support. MITI's control of the large Japanese corporations, now using 'administrative guidance' (backed by government organised cartels) to integrate national activities, has been as successful as it has been different from the Western (by comparison) 'laissez faire'. Now it is by suggestion, but in the 1950s it was much more direct.
Buried in Johnson's book, however, were some key references that suggested a possible explanation of how the revered Japanese management practices came about. Johnson identified one key development as that of the creation of the Industrial Rationalization Council (Sangyo Gorika Shingikai) in 1949 under the auspices of the newly formed MITI. This was the main means of liaison between the government and the business community. He goes on to say "perhaps the council's least known but later most applauded activities were in the areas of reform of management, the institutionalization of the lifetime employment system, and the raising of the productivity of the Japanese industrial worker". Johnson also goes on to explain how "…excited by the American concept of 'scientific management', the Industrial Rationalization Council churned out publications and sponsored speakers, leading during the mid‑1950's to what was called the 'business administration boom' (keiei bumu) and to making best-sellers of books such as Peter F Drucker's 'The Practice of Management' (published in 1954 and translated into Japanese in 1956)".
This reference to Drucker's book is, for me, the crucial link. For on looking to my own copy (which was my 'bible' in the 1960s; as it was many other managers') I was fascinated to rediscover that the book contains a section (Chapter 19) which is nothing more than an eulogy to IBM's working practices (including 'lifetime employment' and 'job enrichment') which also turn out to be those, in this combination, of modern Japan. One particular element, which more or less definitively ties the main source of the new Japanese culture to Drucker - and not so directly to IBM - is the emphasis on 'quality circles', which over the years were such a distinctive aspect of Japanese working. They are, indeed, a prominent feature of Drucker's description of IBM. But they only related to one IBM factory, which did not transmit them to the rest of IBM - and indeed IBM in general ultimately had to import them from Japan as did many other organisations!
In the final analysis it is not essential to prove that IBM was the model for the Japanese corporations; though that adds a certain historical interest. Its real importance (as stressed by Ouchi) is that it followed the same management philosophies and techniques that once made the Japanese so successful. A study of IBM - at its peak - will, therefore, also derive the lessons that so many have tried to deduce from the Japanese. In learning how IBM operated its 'philosophies' the Western manager can gain an understanding of how the Japanese corporations also operate; and this lesson is 'written' in a cultural context which is more understandable (and is not confused by irrelevant Zen accretions). In addition, as we will see in the later section, its practices as developed by Tom Watson Jr (after the time that MITI probably made the Japanese copy) go beyond the Japanese examples to begin to form the 'cultures' needed to handle the cellular organic organisation structures increasingly demanded by the Information Society.
The conclusion I eventually drew was that the 'lessons' to be learnt from IBM may be that much more valuable; since they encompass much of 'Theory Z' (which is, in any case, a brave attempt to encapsulate the 'Japanese Miracle'), but go rather further, and are in the more digestible Western idiom. The main 'philosphies' which emerged from the time of Thomas J Watson, which still dominated the IBM culture half a century later in the 1980s when it was at the peak of its success, and which were later so successfully copied by the most admired Japanese multinationals, were:
Tom Watson Jr's statement, quoted earlier in this chapter, suggests just how important beliefs were to IBM. Indeed the one common factor that held IBM together in a very rapidly changing world was not its technology, but its unique ethics and culture.
In the later IBM, up until the two Johns foolishly - and near fatally - junked them, these were encapsulated in its 'Three Philosophies' as:
Respect for the Individual
Pursuit of Excellence
As Tom Jr. reported in his autobiography, however, these had much earlier origin - in his father's time - in a less concentrated, and more colloquial form, as:
Give full consideration to the individual employee.
Spend a lot of time making the customer happy.
Go the last mile to do a thing right.
It cannot be stressed too strongly just how important were the beliefs as the main driving force of IBM, as they will be for other companies seeking to emulate its particular style of management. They were not optional, or philosophical bunkum (as most observers have previously concluded). As Peters and Waterman also stressed (using the different terminology of 'shared values' or 'superordinate goals') they were the essential pre‑requisite to, and mainspring driving, the whole business.
The Power of Belief…it is difficult to overestimate the power that any organisation can derive from the shared beliefs of its members. This now applies just as much to the success of Microsoft as it once did to IBM. Very few organisations, unfortunately, tap this power - possibly because the rules which apply to it seem more relevant - in our modern secular society - to religious orders than to business management. Yet those organisations which do exploit this power, and IBM certainly did (before it, quite literally, lost its beliefs!), create a body of personnel which can surmount almost any obstacles and achieve almost any degree of success. Peters & Waterman made this element central to their work. Few other academics have gone so far.
On the other hand, Tom Peters remained strangely quiet about his previous commitment to culture after a number of the corporations (including, above all, IBM) which he put on a pedestal in 'In Search of Excellence' dramatically lost their leading positions in the later 1980s. On the other hand, I - at least - still believe in the strength of an organisation's culture. The failures were (at least in IBM's case) precisely because they did not follow the strengths the culture offered, but undermined it!
The prime belief was seen by Tom Watson Jr to hinge on 'the IBM policy on job security'. This was, until very recently, central not just to IBM's beliefs, but also to 'Theory Z' and to the policies of the Japanese corporations; though it should be noted that 'lifetime employment' has been a feature only offered by the larger Japanese corporations (employing only 35% of the workforce); and Rodney Clark suggests that even then it is often less of a commitment than the observers (and the employees) believe.
A policy of 'full employment' (or even a general belief by the employees that such a policy of 'lifetime employment' exists) is a major prerequisite for building trust with employees. The evidence shows that a 'lifetime job' is reciprocated, by employees considering all their actions in terms of what is best for the whole organisation; where in most Western companies they desperately protect their own little empires, often against the interests of the whole, due to the constant fear of redundancy hanging over them. This is one reason why employee relations are often better in a boom; even though that is when, with some scarcity value, employees should be taking a tougher line.
Growth Fuels Success…as we will see in the later sections of the book, growth is an almost essential prerequisite for the development of a strong culture. Absence of growth, on the other hand, can seriously undermine a culture - especially in terms of a loss of confidence by its leaders - and ultimately was a major factor in the later fall of IBM; though Microsoft has yet to experience such a problem. Growth, therefore, has a double effect. In the first instance it produces the resources which can be ploughed into investment (which are nearly always demanded by a strong culture, even when it is long established). In the second, it reinforces the self-confidence which is a basic driver of such a culture. Management theory recognizes growth as an important output of successful management It does not, to any significant degree, recognize it as a necessary input to success of the management process itself. Indeed, in general, management theory tends to limit itself to discussing static situations, where change has been frozen in time. This may make the theories easier to develop, and to explain to students, but it does not do justice to the dynamic situation - where 'change is constant' - facing them in real life.
The security of 'full employment' is not just reflected in greater flexibility (for which the Japanese workers were renowned, but at the time were at least matched by the IBM work force), it is also reflected in an infectious feeling of optimism. Indeed according to Tom Watson Jr "the importance we attach to job security is one of the principal reasons why people like to work for IBM".
Lifetime Employment…quite simply, this philosophy was such an important part of IBM's success, that it is worth reiterating as many times as is necessary to convince you of that importance! Unfortunately, almost nobody in the West - I believe wrongly - any longer believes that it can exist in modern economies.
Full employment may, even before the recessions of the 1990s, have seemed to be an idealistic luxury for many companies; which were constantly riding the roller‑coaster from boom to bust and back again. That decade, when recession was accompanied by a much harsher political climate, put paid to any attempts to introduce lifetime employment in most companies. Indeed, our recent survey of managers' future expectations found that, sadly, they rated 'lifetime employment' to be less likely to occur than anything else. Only 15% thought there was any chance of it coming back, compared with 30% who thought there might be a nuclear war!
In its earlier days when its problems were less intractable, IBM, though, had a particularly effective solution to this. It was largely resourced, in manpower terms, to meet the troughs. The peaks were met by its employees working that much harder; sometimes very much harder (a key measure in the Opinion Survey, which we will look at later, was the hours worked). This may appear a naïve approach, but such was the relationship of trust that it worked! It had the added advantage that employees were rarely under-employed; and in my experience the employees most ready to complain about working conditions (and, most paradoxically, about 'overwork') were precisely those who have time to spend on such things; IBM'ers simply did not have time to waste on such unproductive discussions.
The Japanese corporation approach the problem from the opposite end - by in effect reducing salaries when times are hard. They do not actually do this, it might cause problems even in Japan. Instead, a significant part of their workers income comes from annual bonuses linked to the profits of the corporation. Thus, when times are hard, these bonuses are not paid - and the wages bill automatically decreases.
Cyclical Balances…permanent employment demands some mechanism for balancing out peaks and troughs in the workload. This may be handled by resourcing for troughs, with workers over-stretched at the peaks, or resourcing for peaks, with pay cut back in the troughs. Either way causes pain - but the benefits of lifetime employment typically outweigh this. On the other hand, much of labour theory, especially in economics (but with the notable exception of Human Resource Strategies), sees labour inputs as being a variable cost of an organisation - a commodity which can be dispensed with when - as has frequently been the case in recent years - the accountants call for cost-savings. In terms of labour economics, Atkinson described how the burden of such job cuts fell on the peripheral workers - the unskilled workers who have few rights - though the 1990s showed that such cuts (especially those dignified as 're-engineering') could just as easily fall on managers!
The Japanese, however, also rely on their ability to lay off any 'temporary' workers, and (perhaps even more important) to pass the problem on to their suppliers. This 'industrial dualism', where the very large numbers of small companies and their workers suffer markedly worse terms than do the favoured large corporations (who are typically their customers), is a feature of Japan which is not widely appreciated in the West (where it is only the large corporations that are in evidence).
A subsidiary device employed by IBM, and (which again will be examined later) to a much greater extent by the Japanese corporations, is the deliberate use, in normal times, of temporary staff and contractors. These are laid off first in any recession, leaving the permanent staff still in employment. It is a 'cynical' approach which might seem to be against the tenor of the other beliefs, but it works (even in IBM); since the very strong culture blinds its participants to such unpalatable facts - though, following my reporting of the problem, IBM in the later 1980s went as far as including the relevant statistics in its annual report (and presumably no longer ignored it). With a much tougher approach to employment policies in general, Gerstner has ceased to provide any significant employment statistics in his latest annual reports.
Cynical Balances…another way of handling cyclic workload variations is to pass the pain to outsiders; to temporary staff or sub-contractors. 'Buying-in' (or subcontracting-out) is now favoured by management theory, and especially by economic (transaction cost) theory; but this does not take into account any of the ethics of having first and second class citizens. Doeringer and Piore described this especially in terms of economic dualism, the favoured workers in the larger organisations were better treated than the workers in the('secondary market') smaller organisations. In the late 1990s, again, safe work in the larger companies was also proved to be illusory - as they increasingly used globalization as an excuse for, and a mechanism for, mass cuts in employment locally.
People Cuts Last…but in any case IBM always cut other costs before people costs. IBM'ers may have had to work, temporarily, in marginally less congenial surroundings but their salaries were protected. In the extreme, Hewlett‑Packard (another Theory Z company identified by Ouchi, as well as being one of Peters' and Waterman's favourite examples) at one stage asked all employees to take salary cuts rather than create any redundancies. This was accepted by the staff. It may have been uncomfortable, but it maintained the security of 'full employment'.
The reverse process can, unfortunately, be undertaken even faster. After several years of implied threats, in 1993 IBM finally took the fateful (and perhaps fatal) step, of abandoning its three quarters of century old commitment to full employment. The fall-out from these, and related, decisions are investigated in more detail in a later section of this book. It is still too early to definitively record the long-term cost of this short-term action, but (in view of its central role in IBM's culture) it clearly undermined the whole basis of the central belief which energized the IBM culture for decades. It is reasonable to expect that - at the very least - the impacts will be felt for several decades in the future!
The second basic belief later reported by Tom Watson Jr was that "we want to give the best customer service of any company in the world". It was, however, already an important part of IBM's overall beliefs from the time of Thomas J Watson. As reported by Peters and Waterman, it was also a key factor shared by all the successful companies in their investigations for McKinsey & Co.
Surprisingly, this does not appear to feature significantly in Japanese philosophies. Thus, Kenichi Ohmae, for example, defines Japanese corporate strategy in a way that seems slightly strange to Western (marketing indoctrinated) ears; "What business strategy is all about ‑ what distinguishes it from all other kinds of business planning ‑ is, in a word, competitive advantage. Without competitors there would be no need for strategy, for the sole purpose of strategic planning is to enable the company to gain, as efficiently as possible, a sustainable edge over its competitors". This aggressive competitiveness is also the main factor to which Abbeglen and Stalk ascribe the Japanese corporations' success. Such single minded concentration on competitive advantage (copying and improving; as all its corporate victims would instantly recognize) provides a clear edge in the 'battle' (as the Japanese appear to see it) for markets. It does, incidentally, leave them rather vulnerable when they have won; for then there is no longer anyone to copy!
Customer Service Philosophy…as we have seen, this turns out to be an immensely strong strategy; just as long as all those involved follow it (and of course in IBM they did). It is so strong because it does not just focus the sales and marketing activity of the company on the customer needs (which is the essence of good marketing), but it focuses all company activities on this most important requirement. Many companies, immersed in the great sophistications of marketing theory, forget this simple fact of life; which was once highlighted in IBM by a poster campaign that quite simply stated 'the customer pays your salary'! This is one puzzling aspect of Bill Gates' approach to business; at times he almost seems to revel in alienating his customers - leaving the impression that he believes his monopoly will last for a thousand years! The importance of the customer is, according to our research, recognized by something like 90% of organisations. The problem is that recognition is not enough. Actions are needed to convert this into a marketable competitive advantage. Marketing theory is replete with many techniques which promise just this. None are as powerful, however, as the simple philosophy of 'customer service' - just so long as it is implemented as full - and throughout the organisation - as it was by IBM.
Indeed IBM only became weak, in marketing terms, when this philosophy was not carried through by its 'Third Parties'; the dealers in particular. Its eventual weakness in this area should not be underestimated, though, by any company using IBM as a model. It was IBM's undoing, and it certainly would also be for a lesser company.
The third basic IBM belief was, to quote Tom Watson Jr once more, "the force that makes the other two effective. We believe that an organisation should pursue all tasks with the idea that they can be accomplished in a superior fashion". This 'pursuit of excellence' resulted in what might best be called a tone. It was a blend of optimism, enthusiasm, excitement and pace". A work force infected with such a 'tone' sometimes can work miracles (certainly 'Japanese Miracles'). In IBM it was primarily intended to motivate the development process - to the extent that its scientists won a number of Nobel prizes. Even so, it also offered powerful support for 'customer service' in its marketing activities. In one shape or other this is probably the belief most commonly shared by members of organisations across the whole spectrum of business activity. It was no accident that Peters & Waterman's book - with its title of 'Pursuit of Excellence' - found such an enthusiastic audience.
Pursuit of Excellence…despite the cynicism - not least in the media - concerning the motives of workers in general, most managers, and indeed most staff and workers, are motivated by the idea that what they are striving to achieve is excellence. Accordingly, the need is, on the one hand, to offer them a real opportunity to seek and achieve this and, on the other, to do nothing to stop this process. It is the latter aspect that is the downfall of almost all organisations. They only expect their workforce to do what it is told! This concept is, apart from the work of Peters & Waterman, rarely even discussed in Western management theory - though it is demanded of workers in Japan. On the other hand, as we will see later, Bill Gates has successfully pursued lesser ambitions in terms of the 'quality' of his own software; though he may have redefined Microsoft's 'excellence' in terms of its dominance of its markets (and valuation on the financial markets).
Although IBM had very clearly enunciated objectives in terms of numeric targets, where its 'Stratplan' later was the key strategic control document, its main controls on the day to day business used to be controlled as much by the beliefs (Ouchi refers to this as 'implicit controls'). Thus, the main motivation for individuals, often largely unrecognized, was the set of beliefs that added up to the overall IBM culture; and, indeed, it the weakening of these hidden controls that contributed to IBM's later uncontrollable problems. Previously, though, even when cost savings programmes produced economies that really hurt, the main complaint (genuinely held) was usually that these were impacting IBM's efficiency and service to the customer; the impact on the employees themselves was rarely discussed by them.
It is too easy for any company to concentrate on maximizing its performance in terms of financial measurements, often because these are the easiest to see, without appreciating the wider impact on less tangible (and sometimes more important) investments in work force loyalty. Again, no doubt IBM's changes in direction will have had similar long-term effects. Once again, Microsoft's much leaner organisation, and higher (software) margins, mean that it is less exposed to the growth in its costs base outrunning its growth in revenues.
It is perhaps significant that the Japanese have a reputation for being poor accountants. In addition they do not even have a major business school to teach the orthodoxies of management. In Western terms their financial control procedures are often a disaster; and yet as their results will demonstrate their effective control is second to none. As Abbeglen and Stalk report "Few Japanese companies employ the elaborate capital budgeting processes widely practiced in the West. Indeed, few Japanese companies have the massive organizational apparatus called 'Finance' which is characteristic of Western companies".
This is perhaps even more obvious in the lack of an obvious organizational structure. Kenichi Ohmae, for example, says "Most Japanese corporations lack even a reasonable approximation of an organisation chart. Honda, with $5 billion in annual turnover, is obviously quite a flexible, strategy‑oriented company, capable of making prompt and far‑reaching decisions. Yet nobody knows how it is organised, except that it employs project teams very frequently....From the Western corporate point of view, such an arrangement would be confusing and unworkable. Yet most Japanese corporations can react to a changing environment much more readily than their Western counterparts". Abbeglen and Stalk also report "...the kaisha seem not as prone to vertical organizational structures as their Western competitors".
Implicit Controls…though largely ignored by most organisations, these forms of control are the most powerful - especially in the longer term. Because they tend to be hidden, they are more difficult to target, monitor and manage- but ignoring them does not solve the problem! Bill Gates is lucky in that the key elements of his organisation are still small enough, and indeed local enough, to be controlled by him personally; albeit now by emails. On the other hand, they too cannot work in isolation. They must be balanced by the correct package of direct (financial) controls. Management theory is, in this context, dominated by financial controls. The emphasis is on accuracy of reporting , which - excluding the tendency towards creative accounting - may be correct in terms of these financial measures. The major error is one of omission, those aspects of performance (especially implicit ones) which are difficult to measure are neglected - simply because they are difficult to measure!
During the time of Thomas Watson Sr., who had up to forty executives reporting directly to him, there was no organization chart. This was, according to his son Tom[iii], "…because Dad didn't want people to be so focused on specific jobs that they concentrated only on those jobs." Something like this is still possible in the smaller Microsoft structure; where Bill Gates is able to take most of the key decisions himself.
Later, IBM did have a published organizational structure but due to the frequent changes it was often unclear what the titles meant; and departmental briefs were accordingly flexible (helping IBM to change as rapidly as the Japanese). Of course IBM, like Honda, had its 'task forces'.
This indeed parallels Kenichi Ohmae's comment that "Japanese organisations, in which each position is loosely defined and each manager's area slightly overlaps others, are typically much better placed to identify interface issues, and act accordingly without major reorganization".
Pyramids Celebrate Death…the traditional, pyramid shaped, hierarchical structure is unsuited to requirements of modern management. On the one hand, its rigidity inhibits change and, on the other, the rapid development of horizontal communications - most notably in terms of electronic communications - is increasingly bypassing the vertical flows which are an essential element of the pyramid; so control is inevitably lost. Management theory does recognize the passing of the pyramid - looking instead to new forms, such as networking (peer to peer relationships) and to cellular organic forms. Even so, 70% of the managers taking part in our research said that they still worked in such hierarchical organisations - though less than a third of them expected this to be the case by 2010.
The later IBM also had great strengths in conventional long-range planning. Some of the difficulties later experienced with 'third parties' can be seen to be, at least in part, a result of abandoning its normal careful, indeed conservative, planning processes; seduced by the 'happy accident' that was the launch of the personal computer. On the other hand, Bill Gates has made a (very successful) policy out of inspired opportunism.
Again to give some balance to the argument for culture, in 1987, at the height of the fashion for organizational cultures, Michael Porter (then on sabbatical from Harvard Business School) incisively summed up many of the dangers in an article in The Economist (20 May, 1987). His theme was that 'Corporate culture...popularised in part by the runaway success of 'In Search of Excellence'...Companies lavished attention on the 'soft' side of management...It had suddenly become embarrassing to talk about strategic thinking'. That is a view I would wholeheartedly support, though I think such dangers - arising from naive responses to 'culture' - have long since passed out of management fashion. But, for the record, the cultural aspects are, as I have stressed, complementary to the more conventional aspects of running a business; they can never substitute for these - as IBM found to its immense cost in its relatively unplanned adventure with 'third parties'. In addition to opportunism, Bill Gates has inspired an organisation which thrives on flexibility - as IBM did in earlier times (though, once more, flexibility is much easier to achieve in times of rapid growth).
It is my firm belief that most IBM'ers required no incentives to persuade them to excel; the belief in the 'pursuit of excellence' was too well engrained in the culture. In a similar fashion it is difficult to believe that the Japanese need direct incentives to persuade them to work. Yet incentives do appear to have played a central role in both cultures. This has certainly been the case at Microsoft, until recently, where its recruitment seemed to focus on how many millionaires it had amongst its staff - even the junior members of whom were rewarded with various forms of stock options. It is not yet clear what the dot.com crash, which slashed Microsoft's share price, has done for this incentive!
It is true that in IBM they offered one antidote to the bureaucracy, by very clearly setting the priorities. It is only too easy for any bureaucracy to set its own rather different objectives; but the incentives are an ever‑present reminder as to what makes the business really run. Certainly the incentive programme is important in Japanese companies. Their annual bonuses, earned as a group rather than as individuals, often come to the equivalent of five to six months pay. As we have also seen, an additional benefit the presence of such high levels of bonuses, at least in Japan, allows the corporations to absorb short term downturns in the market. Wage costs are automatically reduced, by the lost bonuses, without any need for salary levels to be reduced.
Within IBM great care was taken to ensure that the implementation of incentives was fair, not arbitrary. The heart of this process was the A & C (Appraisal and Counseling) where the individual agreed their manager what their objectives would be. It was a demonstrably fair and open process that demystified many of the negative aspects of incentives.
At the end of the day it is still not clear why they then were so central to its culture. Perhaps, as they were directly related to the business process (to which the culture has unequivocally committed itself), they were a, highly visible, unifying set of values which aided the building of a common identity. Within IBM, and the Japanese companies as well, the rituals that define the group culture were most often related to such incentives; reaching their peak within IBM in the theatrical drama of the HPC (Hundred Per Cent Club).
Complex Human Beings - Complex Motivations - Complex Incentives…the IBM example shows that human motivations are complex, especially when operating in such sophisticated organizational structures as IBM's. To 'incent' such staff needs reward packages (financial and social) which are equally complex - and often almost specific to the individual. Those who claim that they have the one gold-plated solution to motivating staff can be safely ignored! There has been much debate about incentives; not least for sales personnel. Almost all of this has, however, revolved around financial incentives; which, helped by boom time, certainly have seemed to work at Microsoft. The evidence, not least from IBM, is that other forms of incentive may be more effective.
As described by Ouchi, this is a philosophy that allows the employee to develop, and change jobs (and even specialties), within a company. The 'Western' alternative still has them staying within their specialty and changing companies; retaining a job security which is based on their specialty, since this is just as applicable in other companies. This has become even more important recently, since it insures them against redundancy from a company (the endemic problem in the West) but does not protect them against the redundancy of their specialization; hence the conservatism, if not Luddhism, of many Western worker groups, and increasingly of managers.
IBM built career paths which allowed individuals to develop, probably within a broad specialization (such as manufacturing or marketing; though switches across even these boundaries were possible) but ranging quite freely within these. To a lesser extent, this philosophy also applies in Human Resource Strategy (HRS) where Atkinson's 'core' workers now are used to provide 'functional flexibility' - though it should be noted that this is typically to obtain advantage for the organisation rather than the worker (and disadvantages, even more, the 'peripheral' workers).
The changes have the added virtue of allowing individuals to build contacts across the organisation; and accelerates the formation of a sound horizontal communications network. Indeed it is probably the main (and possibly the only) basis for the all important horizontal communications of the Japanese corporations.
In Microsoft, though, there seems to be a wall between the favoured 'developers' (the equivalent of Atkinson's 'core' workers) and others (the 'peripheral' workers); so career development opportunities may be much more limited - though its rapid growth has produced opportunities even without specific policies.
Growing Staff…investing in the development of staff, especially in terms of non-specialized career development, offers many advantages. Clearly, it develops functional flexibility, in that staff can cover more jobs/roles. But it also dramatically improves the effectiveness of personal communications networks - and improves employee morale with corresponding improvements in productivity. Non-specialized career development, within organisations, does not feature strongly in Western theory; except in HRS - which is, in any case, largely derived from Japanese practice .
This leads naturally to the concept of which IBM was one of the pioneers; and which already featured - more than four decades ago - in Drucker's very influential 'Practice of Management'. IBM expected (to the extent that it did not publicise the fact) all its staff to 'grow' their own jobs. It was quite natural for an IBM'er to add functions to their job specification; often without even discussing it with their manager (but simply as a result of the job needing to be done). There was less of the 'territorial imperative' which makes demarcation disputes so bitter elsewhere.
For the departmental manager there was, though, an imperative (spelled out in the A & C, the annual review of each individual's progress, if nowhere else) that he or she had to provide subordinates with satisfying roles in the organisation. The result was that job enrichment in IBM was once more an engrained (if unspoken) philosophy. The best people to advise you on job enrichment are those whose jobs you want to enrich; and this is responsible for a great deal of the success of quality circles. I have no evidence that this philosophy (unlike many others) has yet broken down - and it is now widely employed by other organisations (including my own university) - so perhaps it is more stable than most.
In my own case, for example, at each of the job changes I made within IBM I was fully consulted as to what my future needs were; and jobs were sought to meet those needs. The choice was very clearly mine, and on two occasions I resisted very strong pressure from senior management to take jobs they thought more suitable (and in both cases, I have to report, time proved their judgement correct; but the right even to make your own mistakes was at that time entrenched in IBM!). The extreme of this process, in which surely only IBM would indulge, was that I arrived in one job to find that I had no manager to report to; so IBM allowed me to choose my own manager (who, incidentally, was the best I ever worked for within IBM).
Enrichment…quite simply, helping the individual to enrich his or her job also enriches the organization; though Microsoft seems to manage well without too much of this. This is one aspect of HRS which has, in recent years, been widely accepted - though not necessarily implemented.
Within IBM there was no formal process that required consensual decision making. As with most Western companies the decision was apparently the manager's, hierarchical, prerogative. In practice, though, a great many of the more important decisions were, as in other Western companies, taken in committee; certainly at the departmental level. Until Gerstner changed the ground rules, the style of these meetings was different in IBM, however, and could be described as consensual. It was thus the style of meetings that to a large extent determined the degree of involvement. Of course the attendance at these meetings delineated the range of personnel involvement, and it was significant that IBM meetings tended to be more open than most to a very wide range of attendees. Usually everyone involved in the implementation, not just the managers responsible, would enter the meeting circuit before irreversible decisions were taken. Thus, although group decision-making in general (as it characterizes management practices) is less obvious and in particular some part of the formality of the Japanese consensus decision (the 'ringi' system) might have been absent in IBM, an informal consensus was typically observed. It would seem, on the other hand, as if Microsoft works to the more traditional 'one-man-one-vote', where the one man whose vote counts is Bill Gates!
Management by Committee… whilst rank still exists, in consensual management decisions are typically taken individually with everyone contributing as equals (usually in a meeting). It might sound like anarchy, but in practice those involved would in any case have had to commit to the decision for it to work in practice - and their involvement in the decision process itself simply brings their commitment into focus earlier. It is a very powerful, time-saving, device. According to much of conventional theory, however, management by consensus should not work. The traditional organizational model is based on hierarchy, which demands concepts such as delegation (or even Management By Objectives, MBO) - all of which, however, assume that some of the participants are subservient to others. Even the more recent concept of 'networking', which assumes that managers contacts are made in a much less formal way (through their network of peers and other contacts), still assumes a degree of subservience.
Interpersonal skills…implicit in this informal process is, as identified by Ouchi, an emphasis on interpersonal skills. IBM trained almost all its personnel (no matter how lowly) in interpersonal skills. At the higher levels, of course, most of the management had been through the best sales force in the world; so that 'interpersonal skills' were raised to an artform. It is a training that paid dividends, particularly in the meeting environment; for a connoisseur of meetings (which I became over the years in IBM) such meetings are a joy to behold.
Communications Skills…not least because of the advent of electronic communications, the essential element of organizational control has now become the communications between the individuals within them; as well as between these and the outside world. It is essential, therefore, that the communications skills of all the individuals are developed - by training - to the highest level. There are now many consultancies which will promise to undertake such training. Unfortunately, too many of them are charlatans, so you must be very careful in your choice.
Arguably IBM should have stood for 'I'm Busy in a Meeting'; for they took a disproportionate part of the time of key personnel; until Lou Gerstner banned them! But in many ways they were the powerhouse of IBM, where much of the action (not just talk) really was, and they worked; they worked very well! It is reported that the modern IBM has eschewed this meetings culture. The much reduced time devoted to such meetings may have seemingly improved productivity by a significant amount; but, as in most productivity measures designed to boost the measurable figures, one wonders what indirect, intangible, benefits have been lost!
The almost inevitable outcome of the 'tone' of excitement, that Tom Watson Jr talked about, is the development of a strong culture. It was, indeed, the strength of the culture that most distinguished IBM, even in the later throes of its terrible problems - right up to the time of Lou Gretna. This was also true of the larger Japanese corporations; to the extent that many of the features, originally imported from the US, are now mistaken for a part of Japanese national culture. Excitement of a rather different nature, but no less effective for that, also stimulates life at Microsoft.
Once more the work of Peters and Waterman, as well as Peter Drucker earlier, showed a similar level of importance ascribed to the 'culture' in each of the successful US companies they studied. As we have seen, even in the early days of CTR (pre‑IBM) T J Watson put a great deal of effort into developing the culture. Much of this effort went into 'theatrical' activities (largely because he couldn't afford anything more tangible); and this still remains in the form of the HPC (Hundred Per Cent Club). It was clearly targeted at developing a shared identity; and it worked.
It would be naive for a company to think of going out and buying a culture off the shelf; that is simply not how its works. The problems of conflicting cultures that later bedeviled the interface between IBM and its dealers illustrate (as we will see later) just how difficult can be the positive use of cultural factors. Neither IBM nor its dealers were then able to come to terms with each other's cultures; a problem that might have initially been exacerbated by the fact that PC group, the guardians of the interface, subscribed to yet another culture! A really powerful culture will not be an import, it will be a natural outgrowth of how people feel about the company. Only if the employees feel that they want to 'belong' will they consider it worthwhile committing themselves to a shared group identity. The essential pre‑requisite is, once more, the trust built on the basis of company beliefs (along with 'full employment'). If the beliefs are 'rich' and strong (and indisputably also held by top management) it is more likely that the resulting culture will be rich, and strong; as was IBM's. A company will have made the grade when its employees naturally refer to themselves (and think of themselves) as 'nationals' of that company. Even now, the term 'IBM'er' is normal, and meaningful, in IBM. It simply states a fact about individuals that they believe is as descriptive of them as their nationality; and that is a very unusual degree of personal commitment.
Within limits, a 'departmental' culture can be built to compensate for a missing (or unacceptable) company culture. This is most obviously seen in those departments where the 'loyalty' is to the manager rather than to the company. This is, of course, a potential threat to the company; for such a manager is in the position to take a complete team with him when he moves (a phenomenon that I, and most managers, have observed happening ‑ at least to some degree ‑ a number of times). This development of 'departmental' cultures is evident in most companies. It can be seen in the different languages that are used to keep strangers at bay (especially in the frequent use of acronyms which are meaningless to the outside world). It is, at least in part, often at the root of inter‑departmental rivalries. These are usually seen, with some justification, as debilitating; but properly channeled could represent a source of strength (and management could profitably seek the cultural source of each department's strength to try to integrate it into the company culture). IBM is just as prone as any other company to departmental cultures (one of the first tasks in moving to any new department is to learn the special language and procedures that it cherishes; where these are directly comparable with tribal rituals and taboos). The significant difference in IBM was that the company-wide culture always took precedence over the departmental; where the reverse is more normally true.
Culture Power…the culture of an organisation can be its most important investment. It is, however, an investment which typically takes more than a decade to come to fruition; as did Microsoft's. Cultures are not built overnight, but once built they can power the organization on to greater success than any other investment. Peters & Waterman's main contribution was to make the management world aware of the importance of culture - and, for the best part of a decade, it became a focus for many organisations. Unfortunately, when their examples - not least IBM - fell on hard times these ideas were sidelined by management theory; and managers were allowed to return to cost-cutting which they found much easier to get their heads around. As we have seen, this was a mistake - culture is just as important as it ever was.
One definitive aspect of the development of the common culture may be an involvement in the whole lifestyle of employees. This certainly happened in the early days of IBM, when paternalism (in the best sense) reigned supreme. In later years, though, IBM carefully 'backed‑off' to a more modern relationship (which went to some lengths not to intrude in the private lives of its employees). The compromise worked because it was still based on the philosophy of trying to understand exactly what were the employee's 'whole' needs. It was an attitude of mind which was set by putting the needs of employees highest in the list of the company's priorities. Until the recent problems, the stockholders of IBM always had to accept that they came behind its employees in its list of priorities; yet one more feature that it shared with the Japanese corporations. It remains to be seen how the very different priorities, which have emerged since Gerstner so clearly put the stockholders (or at least the financial markets) at the head of his priorities and the employees right at the bottom, will change the internal culture. IBM, with its changed - much more conventional - priorities can now scarcely be accused of putting its employees first (except, perhaps, into redundancy!).
Again, such a 'holistic' approach can work within a department as much as within a company. Indeed it is much easier to operate at this level. Tom Watson Jr claimed that he had always tried to keep IBM like a small company (a claim that in reality was not even true of IBM in its earliest days; but his was a philosophy that favoured more personal contact with employees). In particular, a departmental manager has the opportunity to take a personal interest in all his employees. There are managers who do not practice a philosophy of 'holistic relations' and who are still respected by their teams (for dynamism and enthusiasm, and sheer competence, goes a long way in leading any team), but my observation is that most 'good' managers (as rated by their subordinates) that I have observed have been very much involved in addressing the personal aspirations of all their team members.
Holism…the most important investment of modern organisations is almost always that residing in their people. This is not, however, just in their present skills, it is in them as whole individuals. What the organisation will demand of them tomorrow may be totally different to what it requires of them today. It is essential, therefore, to undertake Life-Long-Learning (LLL) and develop them as whole persons. Management theory, apart from HRS, is still reluctant to recognize any intangible investments - least of all, perhaps, in people. There has been a great deal of hype about LLL, not least from governments, but - apart from the few companies which have followed the same model as IBM - almost no serious LLL programmes have been undertaken.
As Kono & Clegg[iv] say, perhaps stating the obvious, "Japanese management is no longer 'flavor of the month'…What a difference a decade can make. In the brave new world of e-commerce, the US economy is absolutely and unchangeably number one…And what now of Japan? It struggled through the 1990s suffering the overhang of the late 1980s bubble economy, financial collapses, political incapacity, real estate crises…Who is interested in Japanese management now?"
The answer is implicit in the question. The problems, widely reported in the Western media, were in the Japanese economy, and especially with firms in the financial sector, not in the small number of multinationals - such as Toyota - which had represented the much admired models for managers in the 1980s. These are no longer so widely admired or used as models for Western management. Again as Kono & Clegg say "We argue that it would be a great mistake to write off Japanese management…Most of the firms remain strong and globally competitive…Japan is still providing many high tech products, such as automatic cameras, DVDs, LCDs, semiconductors, small ball-bearings and cars that dominate the world market." These model corporations maintained their strengths through the many fads which have since the 1980s afflicted their Western counterparts; from reengineered cost-cutting to the follies of the dot.com boom. Their most important philosophy remains that of continuous improvement; 'Kaisen'.
The main thrust of the philosophies embraced by Thomas J Watson more than half a century ago, and still at the heart of IBM's culture until the 1990s, was to create the partnership between employer and employee; and between departmental managers and their team members. The first step is for the employer to create a feeling of trust (based on its beliefs; particularly that of 'full employment') - only then can all the other contributors to a shared culture be profitably introduced. As emphasized by Ouchi these are very subtle processes, which cannot (as yet) be subject to any rule book. All that can be said is that a genuine commitment to the philosophies should by itself encourage the development of the desired cultural phenomena. The effect is more akin to a religious commitment than to scientific management; but it is no less powerful as a result.
As we will see in the final section of the book, perhaps the biggest question still hanging over IBM is what price it will eventually have to pay for its abandonment of these philosophies. Will it ultimately disappear completely or will small remnants remain? We have now seen that the giant which dominated the world at the beginning of the 1980s no longer exists, at least in terms of the philosophies described here, and it is doubtful that it will ever regain a comparable standing!
Apart from Ouchi's 'Theory Z' two further books can usefully be read as complementary in this context. Nancy Foy's 'IBM World' gives a somewhat more detailed account of this earlier period (albeit with a publication date of 1973) of some of the areas I cover only briefly. As a definitive account of the beliefs (up to 1963), Tom Watson Jr's own book, 'A Business and its Beliefs', cannot be bettered; though his later autobiography, which offers a fascinating insight into his personal life of the time, does not describe them in any detail. Unfortunately both the earlier books are out of print, but they are well worth the effort if you can persuade your library to track them down for you.
[i] Miller, RB, SE Heiman & T Tuleja, (1985) Strategic Selling, William Morrow
[ii] Pugh p40
[iii] Watson, Thomas J Jr. & Peter Petre, (1990) Father Son & Co: My Life at IBM and Beyond, Bantam Books, p 151
[iv] Kono, Toyohiro & Stewart Clegg, (2001), Trends in Japanese Management, Palgrave, p xi