Big Blue at 100: Still the standard for American companies

Steven Pearlstein
Columnist June 18, 2011

I first met IBM in 1964 at the World’s Fair in New York City. You might say it was corporate love at first sight.

Like many small investors during that era, my father was a proud IBM shareholder, which among other benefits entitled us to passes for a special showing at the IBM pavilion. Once we settled into our seats, as I recall it, the entire audience was magically lifted 50 feet in the air and into a spherical, multimedia auditorium, where we were treated to a magical tour of the technological future. I can’t remember what we heard and saw, but I do remember wishing that it would never end.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

That was a period of great confidence and optimism in American business. The whole world seemed to admire America, Americans admired big businesses and big business admired IBM. The old joke was that nobody ever lost his job by buying IBM, which was as much a knock on the risk-aversion of corporate executives as an acknowledgment of IBM’s reputation for quality and reliability. In those days, Big Blue was the place everyone wanted to work and invest. It recruited the best graduates from the best universities, imbued them with its core values of “excellence,” “customer service” and “respect for the individual,” and sent them out in blue suits and white shirts to sell the world on electronic computing.

That year, 1964, was also a turning point for IBM.

In the previous half-century, the company had grown from a business machine company producing cheese slicers, calculators and punch-card readers into an innovation powerhouse that had developed the vacuum tube and Fortran, discovered how to store massive amounts of data on magnetic tapes and designed the refrigerator-size machines that could retrieve that data in seconds. Its computers kept the records of the Census Bureau and the Social Security Administration, guided missiles and rockets for the Navy and the new space program, and allowed American Airlines to introduce the first automated reservation system.

In 1964, IBM introduced its 360 line of computers that revolutionized computing by making it affordable and accessible to businesses and organizations of almost any size. Thomas Watson Jr., the son of the company’s founder, had bet the company on the 360, completely reorganizing and investing what today would be the equivalent of $35 billion into its development. The 360 line was so successful that IBM was soon pulling far ahead of its erstwhile competitors at Sperry, Burroughs and Remington Rand, drawing the attention of the antitrust division at the Justice Department. The government would later go to court in what proved to be an unsuccessful effort to break up the computer monopoly.

I, of course, knew none of that back in 1964. The only thing I took away from my World’s Fair visit was that everything about IBM seemed very classy. In the years since, there’s been very little to disabuse me of that initial impression. There was the gorgeous design that was built into everything the company created, from the elegant three-letter logo and the iconic IBM Selectric typewriter to the headquarters tower at 590 Madison Ave. in Manhattan. There was the memorable and endearing advertising created by David Ogilvy and his associates, including the award-winning Charlie Chaplin campaign for IBM’s new line of personal computers. You experienced the classiness in the professionalism of the repair service. And you sensed it from the fierce loyalty and pride of IBMers, whose belief that they were more than just employees was reinforced by generous wages and benefits, extensive training and ironclad job security.

Here’s a company whose researchers won Nobel prizes, whose executives stood up to discrimination and prejudice before it was fashionable, and whose name could invariably be found on the list of major donors of the best universities and cultural institutions. And its computers outfoxed the world’s chess champion and took the crown in Jeopardy.

All of which goes a long way toward explaining why IBM, almost uniquely among technology companies, has managed to survive a series of technological sea changes and make it to its 100th anniversary, which was celebrated last week in New York. Since 1911, as the world has progressed from the calculator and typewriter to the mainframe to the personal computer and now to the Internet, this corporate centurion remains at the top of its game and near the top of the technology heap.

Last year, IBM posted revenue of more than $100 billion, with a gross profit margin of 46 percent, a pre-tax operating profit margin of nearly 20 percent, with enough free cash to finance $6 billion in acquisitions and $6 billion in R&D while returning $18 billion to investors in dividends and share buybacks. As a global company, it operates in 170 countries, with roughly 70 percent of its revenue and employees overseas. Although its market valuation of $200 billion has been surpassed by Apple and Microsoft (but not yet Google), it is still the fifth most valuable U.S.-based company, and it remains a player to be reckoned with in computer hardware, software, advanced chips and computer services.

Over the century, IBM managed to stumble badly only once, in the early 1990s, when it misjudged the threat from mini-computers and personal computers. Although IBM’s introduction of a PC line in 1991 was considered a huge marketing success, and helped to spur the desktop revolution, the company was late to understand how much of a threat it posed to its highly-profitable mainframe business, whose revenue fell from $13 billion in 1990 to $7 billion three years later. Moreover, in the rush to bring out a personal computer, it was forced to rely on Intel computer chips and a Microsoft operating system that would wind up creating most of the value and capturing most of the profit.

It wasn’t, however, just the strategy that had gone awry. As Steve Hamm writes in a book commissioned for the 100th anniversary, “Making the World Work Better,” some of the core beliefs that had carried the company through other periods of transition had become impediments. Respect for employees, according to Hamm, “had morphed into a sense of entitlement, “excellence in all things had turned into a decision-inhibiting perfectionism, and “the best customer service” became an exercise in giving customers what they said they wanted rather than presenting them with the breakthrough innovation they never knew they needed.

By 1993, things were so desperate that IBM for the first time reached outside its ranks and hired Lou Gerstner, an executive with RJR Nabisco, as chief executive. Gerstner mounted a painful rescue that included closing facilities, selling off businesses and firing 35,000 employees. Gerstner’s strategy was to move IBM out of low-margin equipment manufacturing while moving more aggressively into software and corporate outsourcing of computer services. Under the current chief executive, Sam Palmisano, who took over in 2002, that strategy includes a strong focus on cloud computing, strategic consulting and data analytics.

Although IBM has a new strategy, it has managed to hang on to an old and what many on Wall Street and in the corporate world consider an outmoded ethos — namely, that the company exists not simply to maximize profit for shareholders but to maximize the benefits it can offer to customers, employees and the society as a whole.

In a recent book, “SuperCorp,” Harvard Business School professor Rosabeth Moss Kanter argues that companies that embrace this broader social purpose are the ones that survive and prosper over the long haul. Why? Because, Kanter says, they are able to attract and motivate the best employees, take better risks, generate the most innovation and see market opportunities that others cannot.

With its centennial, IBM is living proof that stakeholder capitalism is neither dead nor doomed. A thousand dollars invested in IBM stock in 1915 would be worth $40 million today, which ought to be enough to satisfy anyone’s definition of good shareholder value. And it’s still one of the classiest corporate acts around.

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