Today, US tech multinational, IBM is one of the world’s largest employers and a renowned recruiter of MBA graduates. James W Cortada, author of IBM: The Rise and Fall and Reinvention of a Global Icon traces the roots of the company’s culture and its strategy for growth back to the 1920s
Thomas Watson [IBM’s chairman and CEO, 1914-1956] and his colleagues spent the 1920s and 1930s creating a brand image that reflected their positive view and plans for the future but that also translated into transactions, profits, growth, and prestige. They battled ignorance of what their products could do, invented new ones, hired people, expanded operations, overcame the worldwide economic tragedy of the Great Depression, and endured an antitrust challenge, the first of several that would threaten to scar IBM. As historian Robert Fitzgerald has pointed out, American firms were early adopters of various marketing and market segmentation practices, many of which were in evidence at IBM. The company did not go after mass markets – its products were too specialised – but the IBM case demonstrates that practices used by large manufacturing and distribution firms were common at IBM, such as market segmentation, use of advertising, and education of customers.
IBM’S strategy for growth in the roaring 1920s
IBM grew in terms of bricks and mortar, number of people, and products built, transported to customers, and leased. IBM’s growth was physical, yet the company grew as fast as many digital companies of the early twenty-first century. Executives of many companies, and business professors, have long been fascinated with IBM because of its ability to grow profitably, normally thinking only of the mainframe computer years, but the 1920s and 1930s provide an even more remarkable story of growth and prosperity. The numbers tell an outstanding story, suggesting the complexity of the issues IBM faced, which demonstrated the results of sound execution.
In 1923, the year before Watson changed the company’s name [from the Computing-Tabulating-Recording Co. (C-T-R) to International Business Machines Corp. (IBM)], C-T-R generated $11 million USD in revenue, and by 1939 that had tripled to $38 million USD; profits had quadrupled. The company began 1924 with 3,161 employees, nearly a third outside the United States. In 1939, IBM employed over 11,000 people, still with a third outside the United States. It therefore remained very much an American company, but one that paid attention to expanding its business worldwide. The salient fact is that its workforce had grown in size by three and a half times in just 16 years! Almost as impressive as any of these numbers is that IBM dominated its chosen markets: 80% of all tabulating machines around the world came from IBM, as did nearly all the cards these machines consumed, both providing a continuous, safe revenue flow to the company.
There was plenty of credit to go around for this success. Dominating all major decisions was Watson himself. His engineers executed well, too, while his sales force grew and matured over time. Luck helped in the 1920s, when the economies of the industrialised world expanded; bad luck followed in the 1930s, when they shrank; but more good fortune came when Watson refused to let the Great Depression slow him down and the US government launched Social Security and other economic and welfare programmes.
For the kinds of products IBM sold, it needed a healthy economy, especially in the United States. The start of the 1920s was terrible, but the economy shifted to prosperity, increasing GDP and per capita income by 30% during that decade. New industries emerged and rapidly expanded. These included radio, movies, automobiles, appliances, construction, electricity, and chemicals, a long list. The 1920 US census reported for the first time that more people lived in cities than in the countryside. New and old companies needed office appliances, including everything IBM was selling except more cheese slicers. IBM rode the wave, with revenue rising from $10.2 million USD in 1922 to $20.3 million USD in 1931.
One feature of life at IBM was its seemingly constant reorganisations to align and optimise products, people, and customers.
Senior managers paid considerable attention to innovations or, to use economic historian Deirdre Nansen McCloskey’s more precise term for such matters, betterment, which speaks more to the purpose of changes in a technology or product while thinking tactically about the matter. Watson wanted his machines to dominate their market, not simply do well. He told his senior managers that this could be done by controlling all patents related to tabulating, regardless of whether they were held by IBM or others, and that is why IBM was willing to buy out other companies. It was essential that IBM have the most effective, uniquely designed, and patented cards in the business so that rivals could not displace its equipment. IBM would need to expand manufacturing. Watson wanted IBM to have the best R&D and sales operations in the office appliance industry. None of these messages was new to the men assembled in that room.
What seemed new, however, was the intensity of IBM’s growing commitment to this strategy and to the message that the others embrace it as enthusiastically as Watson did. It was vintage Watson: ‘There isn’t any limit for the tabulating business for many years to come.’ After a great year in 1927, in which IBM brought in $4 million USD in profit and was set to increase that by an additional $1 million USD in 1928, Watson again brought his close associates into the same conference room. This time he lashed out at them for not having done even better. He wanted everyone to push harder, to ‘never feel satisfied.’
So IBM in the 1920s was all about growth, opening more offices, and reaching out to new markets in Europe, Latin America, and even Asia. It was also about Watson being completely in charge of ‘his’ company. Everyone of any consequence in the firm reported to him. In the late 1920s, 13 companies made up IBM, and Watson had regional and division executives, the R&D community, and manufacturing reporting to him. Watson biographer Kevin Maney looked at an early organisation chart of the 13 companies, which included the IBM holding firm, and saw a list of 14 executives who also worked across the 13 subsidiaries, plus the board of directors, now made up of handpicked men. Maney calculated that there were nearly 200 people reporting to Watson. He called it, ‘a web, with Watson as the spider.’ Watson was behaving very much like a company founder who, by growing up with the company as it expanded, kept up with what so many other people were doing and, like many startup founders, had difficulty surrendering authority to his direct subordinates. Nevertheless, he expected them to take initiatives to fulfil his vision. In fairness to Watson, while unable to surrender authority, he generously shared praise and credit for successes. Many of his speeches were devoted to praising, ‘the men of The IBM.’
His views became IBM’s policies. Management overwhelmingly did not like unions, so they provided enough benefits to keep workers in Endicott [the state of New York location of IBM’s original headquarters], and later elsewhere, from organising. Watson fed his vanity through speechmaking and communicating with his employees, but his management team also knew they had to keep their employees content because they were crucial to the expansion of IBM. Especially in Endicott, management did not want them trying to get jobs at the other big firm in town, the Endicott Johnson Shoe Company, run by George Johnson (1857–1948), a highly progressive entrepreneur who Watson came to admire and learn from, which usually had better benefits. IBM raised salaries, built employees a golf course, and introduced two weeks of paid vacation, all in the mid-1930s at the height of the Great Depression. Watson believed IBM could afford to construct a large training building in Endicott to educate factory workers, engineers, salesmen, managers, and customers. His optimism was not fully shared by the company’s board of directors, but he built the facility anyway. His benevolence mirrored policies implemented by other US corporations.
IBM’s strategy involved creating a corporate culture that kept everyone informed about the company’s intentions, values, expected behaviours, objectives (targets) individuals and their organisations were expected to achieve, and employees’ actions outside the walls of IBM. That goes far in explaining the many presentations Watson and various levels of managers made to groups of employees, and why Watson spoke to every sales training class held in Endicott and to other classes and groups of customers. In 1934, IBM published an 886-page anthology packed with hundreds of Watson’s missives, adding to IBM’s information ecosystem. Each division had its own processes to inform employees, distribute executive memoranda, host departmental or division-wide meetings, and publish newsletters. In 1924, a company-wide internal publication, Business Machines, was launched and became IBM’s primary channel for printed communications to all employees. It reported on Watson’s talks, new products, employees, personnel practices, events in the company, and market conditions.
IBM’s information ecosystem was designed to reinforce its culture of THINK, one based on the use of data and practical thoughtfulness. Recall, too, that by the early 1920s, field engineers and salesmen were relying on their own manuals for product information. The company added weekly reports on sales up the chain of command and did similarly at the factories. Each country had its own board of directors, which was expected to communicate quarterly with New York headquarters in a prescribed manner. Country general managers spoke increasingly with headquarters staff and more frequently wrote reports addressed to New York about daily operations. Executives were expected to be active in this information ecosystem. By the mid-1920s, there had emerged an information ecosystem involving employees and customers and an effective corporate culture supporting that community. The company’s culture facilitated the functioning of the ecosystem, with many activities supporting this community, reflecting company values and desired behaviours. The interlacing of IBM’s ‘world’—ecosystem— and its culture is a theme that has permeated the history of IBM.
The 1920s became a good time for Watson to build his company, its collection of customers, and its culture. Businessmen were considered ‘hot’, fashionable. In January 1925, President Calvin Coolidge famously said: ‘The chief business of the American people is business.’ American companies basked in this glow. IBMers were caught up in it, too. Engineers came up with new equipment, and salesmen found new customers and new uses for IBM’s machines. A biographer said Watson still, ‘loved coming up with data processing ideas, which he then dropped like hand grenades onto his beloved engineering teams,’ who had to respond by trying to implement them. His ideas ranged from coming up with machines for use by bank tellers to developing a heating lamp to keep his machines from breaking down during humid weather.
This is an edited extract from IBM: The Rise and Fall and Reinvention of a Global Icon by James W Cortada (The MIT Press, 2019).
James W Cortada is Senior Research Fellow at the Charles Babbage Institute, University of Minnesota. He worked at IBM for 38 years in sales, consulting, managerial, and research positions.
