I.B.M.: The Making of a Chief Executive

By Peter J. Schuyten
The New York Times

December 21, 1980

Armonk, N.Y. -- Few combinations of letters signify as much to an entire generation of Americans as I.B.M. To many, they bespeak a tradition of management excellence, marketing clout and technological innovation that has made the company the monolithic giant of the electronic data processing industry, which is itself regarded as the cutting edge of American industrial prowess.

Still to others, they invoke an image that is almost a parody of the American corporate culture, of three-piece suits and button-down collars, corporate golf courses and a strict Calvinistic morality.

And to all, the International Business Machines Corporation is to a greater extent than most companies a creature of the men who run it.

But I.B.M., long a symbol of stability and discipline in an increasingly turbulent world, is changing and has lost much of the verve of its youth and its once glamorous stock appeal to investors. And perhaps the most visible sign of that change will occur next month when the company observes that singular rite of corporate passage, the installation of a new chief executive. Frank T. Cary, the thin-lipped, tough-minded chairman will formally turn over the running of the company to president John R. Opel, who has been a member of the company's inner ruling council for more than a decade.

Like everything else about the company, there is an I.B.M. way of retirement that is distinctly its own. At a time when even the Federal Government is talking about allowing people to work until the age of 68, it is I.B.M.'s practice for executives in certain key positions, or ''turnover'' jobs, to relinquish their posts at the age of 60 in favor of younger executives. Mr. Cary, a healthy and energetic member of the workforce, reached 60 last week.

He retains the title of chairman, but the key decisions affecting the company, and by extension the rest of the data processing industry, will belong to Mr. Opel, who at 55 will be only the fourth chief executive officer I.B.M. has had since the death of the company's founder, Thomas J. Watson Sr., in 1956.

This is no mere formality. According to I.B.M. tradition, Mr. Cary will no longer be a member of the company's powerful corporate management committee, which passes on I.B.M.'s operating plans, formulates policy and reviews programs. Indeed, shortly after the transition occurs on Jan. 1, Mr. Cary, whose hobbies include skiing, tennis and, of course, golf, will begin taking more time off - first to go on a three-week photo safari in Kenya and Tanzania, and then, in June, to cruise the Greek islands with his wife, four children and their families.

''My board responsibilities will be the same, but when I give up the C.E.O. job, my decision-making powers will be limited,'' Mr. Cary said in a valedictory interview at I.B.M.'s low-slung, quartz and glass headquarters building perched atop a gentle hill in southern Westchester.

As if to underscore the point, he indicated that he would remain as chairman -not a turnover position - for one, or at most two more years, at which point Mr. Opel will presumably inherit the post.

At a time when people are asking where this nation's industrial growth will come from, I.B.M. stands as a monument to productivity and innovation that has led it to dominate the computer market almost since its inception.

Indeed, the company sets the pace for the $50 billion to $75 billion-a-year data processing industry in much the same way the General Motors Corporation dominates the automobile industry. But unlike General Motors, which of late has been suffering at the hands of its foreign competitors, I.B.M. holds sway in an industry that reaches around the globe, earning more in a year than most other computer companies accumulate in revenues.

Last year, for example, I.B.M. recorded profits of $3 billion on revenues that totaled nearly $23 billion, while employing some 340,000 people. It is the country's eighth-largest industrial company in sales and the second most profitable after Exxon. I.B.M. operates 44 plants in 15 countries, and regularly plows 6 percent of its gross profits back into research and development. By contrast the Burroughs Corporation, the No. 2 United States computer company, had profits of $305.5 million on revenues of $2.83 billion.

Although I.B.M. has not always been known as technologically competitive, it has historically been able to move into markets with such force and elan that it very quickly establishes itself as the dominant factor.

Moreover in its traditional business of large mainframe business computers it still commands an estimated 70 percent of the United States market, and it is still able to surprise the market with its pricing and product strategies, a fact that was amply demonstrated two years ago when it introduced its revolutionary and inexpensive 4300 series, the industry's first new generation of computer in 15 years.

But in recent years the company has paid a price for its conservatism as upstart competitors such as Digital Equipment and Data General Corporation in minicomputers, Wang Laboratories in automated office equipment, and Amdahl in plug-compatible equipment that runs on I.B.M. software, have carved out market niches that have become large businesses in their own right. And just behind them are a pack of aggressive Japanese competitors, such as Fujitsu, Hitachi and Nippon Electric, whose strategy is to gain market share by offering equivalent performance at lower prices, regardless of the effect on profit margins.

Then too, while the price of computer hardware has been dropping at a precipitious rate, software and maintenance costs are rising with alarming regularity, changing a traditionally technology-driven industry into one that is increasingly dependent on labor costs, thus raising questions of whether the overall costs of computing will eventually start to rise.

Moreover, I.B.M., it has often been noted, has been late entering new markets - most notably the minicomputer and distributed data processing businesses, in which a large central computer serves as a host to smaller satellite computers - and the market for local or interoffice data communications networks.

And finally, as computer technology increasingly becomes indistinguishable from, and indeed dependent on, digital communications techniques, I.B.M. faces the possibility of competiting with that other giant of American technology, the American Telephone and Telegraph Company.

In fact, some question whether I.B.M. will ever regain its place as the premier glamour stock, selling for as much as 66 times earnings as it did in the mid-1960's under Thomas J. Watson Jr., son of the company's founder and now United States Ambassador to the Soviet Union.

Indeed, Mr. Cary says his singular disappointment during his tenure is that I.B.M. stock has hovered between 15 and 20 times earnings, compared with earnings multiples under Mr. Watson of 40 and 50. ''It would have been a hard act to follow, and certainly nobody could have been expected to,'' Mr. Cary said. ''But nevertheless, it is disappointing when the value of the stock is down during the decade when you are running the company.''

In short, the rules of the game are changing, and the question facing Mr. Opel, 55 years old, is whether I.B.M. is still limber enough to change with them.

John Roberts Opel, whose custom it is to work in his shirtsleeves, standing at a narrow, chest-high work table in his third-floor office, joined I.B.M. in 1949 as a local branch salesman in his hometown of Jefferson City, Mo. His territory ranged from the Ozark Mountains to the Iowa border. Like Mr. Cary, he holds a Master of Business Administration degree (from the University of Chicago, while Mr. Cary received his from Stanford University) and also came up on the sales side of the company.

After 10 years in the field, his abilities as a salesman brought him to the attention of the then-I.B.M. president and chief executive officer, Thomas J. Watson Jr., who brought him to corporate headquarters as his executive assistant. Two years later he was elected a corporate vice president.

In 1968, Mr. Opel, who on first meeting appears more relaxed and more affable than Mr. Cary, although company insiders say he is cut from the same mold as the chairman, was named senior vice president and chairman of the management committee. Four years later he was named head of the Data Processing division, the company's largest marketing operation.

Having worked closely with Mr. Cary for nearly two decades - their offices are now separated only by a small, tastefully decorated anteroom - it was only natural that when Mr. Cary moved up to chairman, Mr. Opel, whose outside interests include opera, fishing and ornithology, would succeed him as president, a title he will continue to hold.

Last year, Mr. Opel's compensation, including securities, insurance and other emoluments, came to more than $750,000. Mr. Cary earned nearly $930,000.

And next in line after Mr. Opel appears to be Paul J. Rizzo, the 52-year-old senior vice president who was named the third member of the company's ruling inner council earlier this year.

To be sure, I.B.M. has not exactly been standing still in the face of all the changes affecting the information processing business. In fact, in the last half-dozen years, a period that roughly corresponds to Mr. Cary's stewardship of the corporation, I.B.M., besides rolling out a new generation of computers that are setting new price and performance standards for the industry, has been doing somewhat uncharacteristic things. It has opened retail stores and formed joint ventures that include a videodisk project with MCA Inc., the Hollywood entertainment conglomerate, and a high-speed communications satellite program with Aetna Life and Comsat.

In the last two years, the company has also turned to the credit markets for $1.8 billion in medium- and long-term financing, and has set up a $2 billion line of credit with its banks, none of which has been touched.

In addition, the company split its stock four for one in May 1979, a move that brought the price under $100 a share for the first time since the early 1930's.

But to some people, these moves are merely a prelude to the kinds of things that lie ahead for I.B.M. ''As I.B.M. moves into the 1980's, its primary emphasis will be on communications and software, and to do that the company is going to radically reorganize its divisional structure,'' said Howard Anderson, the president of the Yankee Group, a computer and telecommunications consulting company.

For one thing, as William R. Becklean, a vice president of Kidder, Peabody & Company who follows technology issues, points out, today's communications facilities cannot economically support the the huge data transmission needs of the office of the future, a market that is expected to burgeon in the mid-1980's. Then, too, now that the Federal Communications Commission has taken the chains off of A.T.& T., the telephone company is expected to enter various parts of the computer and enhanced-communications market.

Mr. Cary is the first to acknowledge that A.T.&T. may well wind up as I.B.M.'s principal domestic competitor in the years ahead, but he leaves the door open on whether I.B.M. itself will become a communications carrier.

''The most important thing is to lower communications cost,'' he said. ''Whether we want to be a carrier is somewhat problematic right now. It depends on the costs of entry and the returns. Besides, it's a highly regulated business,'' he said, without adding that I.B.M. has an abhorrence of government regulation.

In one sense, I.B.M. is already in the communications business, through its Satellite Business Systems partnership with the Communications Satellite Corporation and the Aetna Life and Casualty Corporation. Last month, S.B.S. successfully launched the first of three high-speed data satellites, but according to Mr. Anderson, S.B.S. will only go so far toward insuring that I.B.M. continues its traditional hegemony over the data-processing world.

One area where Mr. Cary will continue to be involved is the company's 12-year battle with the Justice Department, which is seeking to break up the company on antitrust grounds. At one time in the mid-1970's, I.B.M. faced some 25 private antitrust actions, plus the Government's suit. That number is now down to just four suits, two of which are dormant, according to Mr. Cary. It leaves only the Greyhound case, and, of course, the Justice Department action.

Indeed there has been speculation that even that might change under the new Republican Administration. ''There is some talk about a change in attitude on the part of the new administration that sounds encouraging, but to comment on it at this point would be pure speculation,'' Mr. Cary cautioned.

There are signs that the famous I.B.M. culture has loosened up a bit under Mr. Cary, as blue shirts and even mustaches and beards are in evidence at I.B.M. offices these days. What's more, salesmen are now permitted to have a drink at lunch with prospective customers, just as long as they don't make any subsequent calls on clients later in the day. Then too, the company on occasion will serve wine at its family night dinners, but only off company premises.

One business that I.B.M. won't be entering any time soon, according to Mr. Cary, is the private branch exchange, or P.B.X., market. The modern age's answer to the telephone switchboard, computer-controled P.B.X.'s, according to some observers of the information processing industry, could well be the key to the door of the office of the future, serving as a powerful gateway for voice and digital communications into, and out of, the office.

Instead, I.B.M., not surprisingly, holds with the view that it will be the large central processor that will provide the central control mechanism of the automated offices of the future.

''The balance may well shift to a network environment,'' he said, ''but large central data processing operations will continue.'' In a similar vein, Mr. Cary stressed that despite the company's recent moves to diversify into such areas as satellite communications, videodisk technology and medical instrumentation, there were no major diversifications ahead in I.B.M.'s future.

''All those things might be substantial contributors to the growth rate of smaller companies, but it's got to be a billion-dollar business before it has an effect on I.B.M.'s growth,'' he said. Besides, he continued, ''the growth of I.B.M. is going to come from the business of I.B.M. - information processing.''

Illustrations: Photo of John Opel and Frank Cary Graph of IBM's stock