IBM: Behind the Monolith

Tom Watson Looks at the Past and Future

Wall Street Journal

Apr 7, 1986

Thomas Watson and IBM. The two names are almost synonymous. In a 57-year reign, Thomas Watson and his son Thomas Watson Jr. ran IBM, building it into what has become the most profitable industrial company in America.

The elder Watson led IBM from 1914 until his death in 1956. But it was the son who guided IBM into the greatest growth industry of the era after World War II and established the company's near monopoly in the mainframe computer business.

The younger Mr. Watson is now 72 years old. He hasn't been active in day-to-day company affairs since 1971, when a heart attack convinced him to slow down at age 57. He remained a director until 1979, when he began a two-year assignment as ambassador to the Soviet Union.

Mr. Watson joined IBM as a salesman in 1937. After five years in the Air Force during World War II, he returned to IBM as an executive vice president. He became president in 1952, chief executive officer in 1956 and chairman in 1961.

Mr. Watson is seldom interviewed about the computer business or IBM. But he recently agreed to sit down to a 2 1/2-hour conversation with Wall Street Journal reporter Randall Smith. Following are excerpts:

His Beginnings With IBM

I came in 1937 and I was 24 years old. I went through sales school, and all of these fellows who worked for IBM decided that they should make me successful, and in doing so perhaps advance their own positions or at least please my father. So for two years my sales quota was really made up by tremendous assistance (from) everybody, including the bending of territories perhaps.

It just disgusted me. I remember at the sales school, I'm sure the head of the school went around to the class and said, "Now you've got to make Tom Watson Jr. the president of the class." And I was just young enough to not be able to stand up and say, "the heck with this."

Feelings About His Father

The biggest motivation to me was fear and pride. Once I'd been around here a little while, I decided that my ambition was to prove to the world that I could run on the same race track as my dad. I liked the old gentleman, there was tremendous competition between us. It was a stormy 10-year period. He was 72 when I arrived here out of the Air Force. And he lived to 82.

The only big argument that I ever had with him was on financing the business. We were building factories and coughing out these rental machines, and we got the money back over six years. So it required an awful lot of financing. And when I'd say to him, "We need more money," I'd get a terrible argument back that "You and (president) Al Williams are spending money in a very careless way." And then I'd say, "All right, Dad, we can stop doing that. We'll just have to get rid of some of the sales force or stop hiring salesmen, because we're getting too many orders."

And that just killed him, because he'd been a salesman, and he'd walk over to the hatrack, and he'd say, "All right, I'll get my hat, and coat, we'll go over to see the Prudential."

Getting Into Computers

{Before the early 1950s IBM made primarily electrical and mechanical tabulators.} I began to think by the early '50s that I didn't want to miss any boats on where the company might be going when my father decided to step down or was struck down by health. So this was the reason that I began to push (into computers).

I remember we advertised the world's first commercial electronic calculator. And I thought that we would have to sell one to make the ad honest. And I think we sold several hundred. Every time we brought out something very fast, we'd think, gosh, maybe we can get rid of two or three of these, (and then) the market would sop up everything we'd produce.

And I said, "Dad, look, we have to get, not dozens, we've got to get hundreds of engineers in here to support what this market will enable us to do if we want to capitalize on it." We just hired every engineer we could.

Computer Development

There was consistent progress every year. The 360 {the 1965 model often cited as the key to IBM's dominance over the mainframe business} wasn't by any means the big progress. I suppose if you want to look at the computer that we built that was a watershed decision, it was what we called the defense computer, I think it was called the 701. (James) Birkenstock {then head of new machines} said, "I think we can make a machine which will fit into the defense industries, and help with the Korean War, and put us also in the high-speed computer business."

And they went around and got 20 orders. And we were going to ask $12,000 a month for this machine. And we came back and we worked it all through and it was going to cost $24,000 a month. We went back out and talked to everyone, and we didn't lose an order. Now that said to me, "Boy we've got our hands on something with this electronics, because we double the price of the doggone machine and everybody stays in place with the orders." We decided the same format would work for commercial machines.

And then transistors came out and our people had just learned (to go) from mechanics into tubes. We had hired some people who knew how to run tubes. But then comes transistors, and our people wouldn't shift over.

I bought 200 Japanese transistor radios, mailed them to all the engineers. And when they'd tell me that the shelf life was wrong on transistors or something, I'd always turn on my little Japanese radio. And I wrote them a memo that said from this point forward, there will be no IBM machine designed that isn't transistor based.

His Business Strategy

I was very, very skeptical about any diversification. Every time something would come in and be offered to us, we'd talk about it, and my old man would say, "Shoemaker, stick to your last." And we have really done that. And I know that we're into some outside things now {such as telecommunications}, and I don't know the merits or demerits of it, but it must have been a very difficult decision for them to make, because by staying right inside the ballpark he did awfully well.

{For similar reasons, IBM didn't enter the midsize computer market quickly, and instead left it to Digital Equipment Corp. and Data General Corp.} In the first place, we were still sticking to our last, where we were good. And where would this company be if we had entered every field in the computer business, and been very successful at it? Would we not have been broken up? I'm not saying that I stayed out of those areas in order not to be broken up. But we were very careful, if somebody was coming into this thing, to not target all of our efforts to slaughter them.

Employee Relations

It was a very small company, so we didn't have anywhere near the problems early on (of union-organizing drives). We were paying well above their average, and to this day we pay above-average wages for skills and for territories, geography.

And father, whether because of union ideas or not, or just the fact that he'd been a very poor guy, didn't like the paced-production-line idea. He realized that it had built American automobiles, but he didn't want to do it in IBM. So he stopped paying for piecework back in the early '30s.

We have tried to produce an unusual group of employees. Not only at the top but all the way through the business, and we go to inordinate pains to keep those people happy.

I tried like hell not to lose anybody that was able and making real contributions to the business. I've even gone from my desk to a person's house to apologize for an insult.

I am a deep believer in hiring and developing from within. The reason is that you get a hell of a morale (boost) inside the business. The minute you start doing a little on the outside, it's a little easier to do more and do more and do more, and pretty soon you're like the auto companies or the food companies (with) people jumping around.

There are two advantages to (hiring from within). You develop a loyalty inhouse because nobody sees people being brought in above them. And you lower your turnover rate and the departure of your family secrets. People are going to be very mobile unless you give them a great stake in staying.

Corporate Culture

My father had a funny way of dressing. He wore cotton long underwear the year round, and he pinned his socks to the underwear, instead of wearing garters. Very fastidious guy.

(When an employee made fun of the socks and long underwear, Dad) said, "you can't imagine what these people looked like when I took this business over." He said they had green shirts and yellow ties. And he said, "Call on bankers and call on important people, you've got to dress like them." So he said, "I asked everybody to wear a white shirt and stiff collar, because I thought that's what the president of the Guaranty Trust probably wore."

That's how the dress culture got going. He was not at all wrong in this. He disliked intensely somebody who would come in with a vest and a big watch chain with a hound's tooth hanging on it, or several Phi Beta Kappa keys. Because, he said, "if you don't dress sort of like the background, people are going to concentrate on your watch fob, when what you want them to concentrate on is your sales talk."

I think his aversion to liquor related to some experiences he himself had when he was very young. He was the kind of guy who could make any mistake but he never made the same mistake twice. So he said, "I don't want anybody to drink when they're on duty in IBM, and I don't want anybody to come back to the office if they've taken the customer out for lunch and had a cocktail. If they're close to a customer and they're talking and the customer smells the booze, the customer's going to think that's liquor talking, not the individual."

The Future of IBM

We are in an environment where the need for high-speed computing is continuing to grow. It has been fulfilled on a relatively moderate basis. I think all of us see a great potential in the future for computing. (In contrast), there's a finite number of vehicles needed to transport people around the U.S. and a finite amount of oil needed to run those vehicles.

(The recent acquisitions of Rolm Corp. and of a stake in Intel Corp.) were brought about because our technology is beginning to impinge on communications and communications are vital to us. But at the same time, we're taking on people who are strange to us. I think it was a vital move, but it's going to be a new experience for IBM.

So I'm not envious of the IBM management in trying to learn to manage these outside things, even though I believe it was a necessity.

Pleasures of Retirement

A year ago, I went around Cape Horn on my sailboat. And then I finally got to Antarctica. I had a 14-year-old grandson who was down there with me. And on another occasion I sailed a daughter out to Easter Island and on through the Polynesian Islands to Fiji. So I've done that and I've worked for government, and I've had a lot of fun.

(In 1971) I had a very smart doctor. He said do you have anything further to prove (at IBM)? I said I probably haven't. He said why not get out?

I went to see the doctor yesterday and I said, "Boy, you'll never know what a great life you gave me by suggesting that I get out of business."

Copyright Dow Jones & Company Inc