Content:

- Preamble

- The Author,

- The IBM Beginning

Tom Watson Sr.

C-T-R and IBM

Early Products

Tom Jr. and Dick Watson

- The IBM Corporate Philosophy

Respect for the Individual

Customer Service

Excellence

- The IBM Culture

Respect for the Individual

Full employment

Dress code

No alcohol

Open door

Personal experience

Speak-ups, Executive interviews, Opinion surveys

Employee benefits and compensation

Employee Performance Plans

Employee education

Marketing and sales commission plan

A real sales situation

More on education and marketing

Employee recognition

"THINK" logo

Corporate citizenship

- Evolution of Data Processing Technology

Competition

More on IBM technology

- The Marketplace, 50,60,70's

- Overview of the IBM Organization, 1988

- IBM Financial Growth, 1967 to 2001

Revenue, earnings, profit- 1988 to 2001

Stock performance- 1991 to 2001

Workforce- 1993 to 2001

- U.S. Anti-trust Actions

- Summation

- Conclusions

- References

-Appendix List

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Author: John J. Sailors

I spent 37 years with IBM, 1956 to 1993, starting with punched card systems, the 650, 1401, 1440, 305 Ramac, 1620, 1130 up through the System 360/370 and the PC. Half of that time was spent in the U.S. Company as a Marketing Representative, Regional Special Representative for Banking, Marketing Manager and Branch Manager. During that time I was based in Los Angeles, Long Beach, Phoenix, Seattle, Denver and Boise. See Appendix for more information on assignment as Branch Manager in Boise Idaho, 1965-1973. I qualified for 14 consecutive IBM 100% clubs and 6 Golden Circles for sales and sales management performance. See IBM wall plaque on next page

The second half of my career, beginning in 1973, was spent in IBM World Trade with the Americas/Far East Corporation. (A/FE was responsible for Canada, Mexico, Central and South America, Japan, China, Korea, Southeast Asia, India and Australia New Zealand). My assignments included Manager of AF/E Finance Industry Marketing and later Public Sector at AF/E Hq. in Mt Pleasant New York, Manager of Regional Industry Marketing and later Public Sector Industries for the Southeast Asia Region Hq. in Hong Kong and later Singapore, Director of Japan Marketing Operations Support Staff and later Government Application Development for Asia Staff Operations Hq. in Tokyo, and acting Country General Manager in Indonesia. This included a total of 10 years of overseas assignments. The two stops at A/FE HQ in Mt. Pleasant New York totaled six years. In these assignments we spent a lot of time flying to and from the A/FE countries. One year I did five trips from New York to the Far East and five trips to Latin America over a 12-month period. That added up to about 20 weeks on the road and a lot of long haul airline miles.

I finished my IBM career in San Jose reporting to the IBM Storage Division plant GM as Manager of State External Programs in California. This included Government, Community and Academic relation programs for all IBM locations in Silicon Valley with a total of over 15,000 employees. We also had responsibility for statewide legislative issues (like Unitary Tax) and business organizations such as the California Business Roundtable, the California Manufacturing Association and the Silicon Valley Manufacturing Group with a dotted line to the IBM Vice President in Washington D.C. for Government Relations.

Tom Watson Sr.

Early IBM Products

Tabulators and punched cards were the invention of Dr. Herman Hollerith and they were first used in tabulating the U.S. Census of 1890. These machines became the forerunner of today's' very common computer systems. See classroom presentation outline on the History of Data Processing in appendix.

Dr. Ken Kraemer a professor at UC Irvine visited the Hollerith family winery in Germany in 2004 and reported that they are using a punch card as their wine bottle label.

IBM Time equipment was also a very visible early product. They were used as time clocks for punching in and out of work and were seen as wall clocks in many schools and businesses. I have a 1920's working model of the Time Clock that was manufactured by the International Time Recording Co. in Endicott New York. It can print the time on an employee time card for Morning IN, Noon Out, Noon In, Night Out, Extra IN, and Extra Out. These employee time cards were then sent to the payroll department. This Time Clock can also be wired directly to alarm devices throughout the building to signal specific times of the day. After World War II the growth and profitability of this business slowed and was eventually sold off to Simplex and they are still in business today. See picture on next page of CTR products in January 1920.

In 1933 IBM purchased a company that made electric typewriters. After 13 years of initial losses, a new General Manager, Wiz Miller took over and from 1949 on posted 30% annual growth rates up through the 1970's. This was highlighted by the announcement of the IBM Selectric Typewriter that used a round ball as a print element and a correcting feature that could remove print from the page. This division later also sold dictation equipment and copiers. The typewriter division required an aggressive, smooth talking type of salesperson who was capable of making lots of cold prospect calls and demos at the secretary level. IBM was very good at moving these products.

IBM also manufactured and marketed Bank Proof Machines (802 and 803) for sorting, listing and totaling checks. These were 24 or 32 separate adding machines with tapes and a rotating drum with pockets to sort the checks by the bank drawn-on number. These bank sorted checks, with adding machine control tapes attached, went for posting to individual customer account ledger cards or to the clearing house meetings for exchange with other “drawn on” banks. Each individual check had to be handled manually several times in this labor intensive accounting process.

In the late 50's IBM Magnetic Ink Character Recognition (MICR) systems took over this application area.

Machine readable numbers pre-printed at the bottom of the checks identified the bank and their customer account number and a proof like machine was used to encode the amount of the check, also in magnetic ink. From there we used high speed MICR sorter/readers to sequence the checks and provide direct input to computers for processing. We had good competition from Burroughs and for a short time General Electric who built an early system called ERMA exclusively for the Bank of America. By co-incidence I was the IBM sales-rep. assigned to the GE manufacturing group in Phoenix while the ERMA was being built. They used an IBM 1401 and Cardatype in their accounting area. As an IBM rep. I was allowed in their accounting area but was prohibited from seeing their manufacturing line. The ERMA later became the GE 210 and was marketed commercially to other banks with a Burroughs MICR Sorter Reader attached. It had a short market life.

Another early IBM product was the 805 Test Scoring Machine invented by a teacher Reynolds Johnson who I will talk about later in this text. Using a high graphite pencil the student would mark their multiple choice test answers in a prescribed area on a standard piece of paper and the machine would read these pencil marks and score each test. IBM also had a mark sense reading card punch, which was used in several accounting applications. Graphite pencil marks on the card in prescribed areas would be read and cause the corresponding numbers to be punched back into the same card. It was a great way to decentralize data input to the point of the transaction occurrence.

In the late 80's on-line computer terminals and later Personal Computers began to take over the functions of the electric typewriter and copiers. The IBM typewriter business was sold to Lexmark..

In the late 70’s and early 80’s prior to the PC with Internet connections IBM developed a proprietary system called PROFS, (Professional Office System) which became an IBM dedicated worldwide network that could do word-processing and e-mail. We could talk on-line to IBM offices in 120 countries. Our terminals were simple Cathode-ray tubes (3270) connected to IBM mainframes and a dedicated satellite system. I could sign–on anywhere in the network. I can specifically remember doing “pass-thru” on a business trip to Korea with the e-mail software located in my Hong Kong office. The White House also had an IBM PROFS system installed during the Reagan administration, which led to some of Ollie North’s Iran/Contra problems. Some of his supposedly deleted communications were later retrieved from the central computer system and became public record.

The IBM Corporate Philosophy:

Under the leadership of Tom Watson Sr. a unique corporate philosophy was developed that included:

Give full consideration to the individual employee.

Spend a lot of time making the customers happy.

Go the last mile to do the thing right.

Under Tom Watson Jr. this business philosophy was codified into the "IBM Basic Beliefs:"

- Respect for the Individual, Respect for the dignity and rights of each person in the organization.

- Customer Service, To give the best customer service of any company in the world.

- Excellence, The conviction that an organization should pursue all tasks with the objective of accomplishing them in a superior way.

The “IBM Basic Beliefs” were prominently displayed in all IBM offices and I still have one of these displays. See attached.

To show how strongly Mr. Watson Jr believed in this Corporate Philosophy I would cite the following quotes from Tom Watson Jr's Columbia University Lecture Series.

"A corporation's beliefs must always come before policies, practices and goals. The latter must always be altered if they violate these fundamental beliefs."

"We have got to have a concept that IBM is special. Once you get that concept, it is very easy to give the amount of drive to work toward making it continue to be true."

The IBM Culture:

From 1914 to 1993 company policies were developed and practiced to support a business philosophy that became known as the IBM culture.

- Respect for the Individual, This policy was implemented by management and personnel practices such as full employment, benefits and compensation, employee recognition, open doors, speak-ups, executive interviews, opinion surveys, etc. all of which will be discussed in more detail in this section.

- Full employment, everyone is guaranteed a job except for failure to perform. This practice remained in force from 1914 thru the depression of the 30’s to 1993, a total of 79 years. Very specific annual performance plans, grading and re-deployment were a part of this policy. Quoting from the book The IBM Way by Buck Rodgers, "during the economical problems of 1969-72 IBM moved over 12,000 employees from plants, labs and headquarters with light workloads to locations where they were needed. 5000 of these people were retrained for new careers in sales, customer engineering, field administration and programming." IBM also had a practice against in-house promotions and world trade limited U.S. employee overseas assignments to a maximum of 5 years. This created further geographic re-deployment. As stated in my bio I had 17 family moves in 37 years.

Until recently most Japanese corporate culture also included full employment.

- Dress code: white shirts, ties, conservative suits and, in the earlier days, hats were required on the job. I had to buy a hat to attend the IBM application and sales schools in Endicott. According to Mr. Watson Sr.," Everyone should look prosperous and successful in the eyes of the customer." This applied to all customer contact personnel including maintenance and service.

- No alcohol: alcohol was not permitted during the workday or at any company employee or customer functions. This policy was still in place when the author retired in 1993.

- Open Door: all employees have direct access to the IBM Chairman or intermediate managers for any job related suggestions or grievances. In the mid 50's Tom Watson Jr.'s office handled about 300 open doors each year. This was great training ground for Executive Assistants who were on the high potential list for future promotions. This also helped IBM to remain free of unions, which is still true today.

A Personal Experience

I had a personal experience in this area when I was Branch Manager for Idaho and parts of Oregon and Wyoming in the early 70's. Tom Watson Jr. Chairman of the Board and CEO, came to Boise to be the host and speaker at the bi-annual IBM family dinner. He flew himself into Boise in his personal Aero Commander plane late in the afternoon. He had skied 15,000 feet that day from a helicopter in Sun Valley. On the drive in from the airport he informed me that he was going to do an “Open Door” interview while he was is Boise, but quickly said it was not one of the Boise branch office people. The Open Door turned out to be a black IBM typewriter salesman from the IBM Santa Monica California Branch Office, who in addition to being an IBM salesman was also active in the Black Panthers. They spent two hours together closeted in my office before I had to interrupt them to get Mr. Watson to the IBM Family Dinner on time. I learned later that Mr. Watson had this typewriter salesman transferred to IBM corporate personnel. He commented to me that he learned more about the black problem in the U.S. from this open door discussion than he had learned in many discussions with Bernard Baruch. See picture on following page of Mr. Watson and John Sailors taken before Boise Family Dinner in 1972.

Tom Watson Jr. and John Sailors. 1972, Boise Idaho

- Speak-ups, Executive Interviews, Opinion Surveys: All employees were encouraged to write signed or anonymous Speak-up letters to management on any grievance or suggestions for improving the business. This provided excellent feedback on employee-manager relations, employee morale and the state of the business. Many of these Speak-ups would find themselves the subject of Management Briefing Letters to all managers in IBM and changes in policy and practice would sometimes follow. See "IBM World Trade Americas/Far East Corporation brochure "On Managing" dated April 1978 in appendix.

IBM employees were also invited to have Executive Interviews periodically with managers one or more levels above their current assignment. These were considered private and confidential, and again provided excellent feedback on employee-manager relationships, employee morale and the state of the business. This was also further pressure on immediate management to be sensitive to morale and their own man/manager relationships.

Annual Opinion Surveys were conducted throughout IBM and offices and organizations were graded. These included questions on how you rated your immediate and higher managers. A low opinion survey rating for your office or organization would invite a lot of outside attention.

-Employee benefits and compensation: Benefits were all non-contributory (IBM paid all of the costs) which included pensions, health care, education, etc. IBM stock options were extended to the most senior executives and a stock purchase plan was available to all employees at 85% of the current market price. The Pension program, in my case provides about 50% of the last IBM salary with half of this amount going to the surviving spouse. In the 80's IBM established a 401k TSDP (Time Savings Deposit Program), which allowed each IBM employee to withhold 8% of their salary for a mutual fund investment, and IBM would match 50 cents on the dollar for the first 6%. They also offered Group Life Insurance and Long Term Care Insurance programs through private carriers. Today retirees do pay for health care coverage with medicare as prime.

During World War II IBM paid 25% of an employee's salary while they were in military service. This provided a strong incentive for these employees to return to IBM after the war ended.

In January of 1958 IBM put all hourly manufacturing employees on salaries. This was the first major U.S. Corporation to make this change and was another defense against possible unionization.

- Employee Performance Plans: All IBM employees had annual performance plans and reviews. The objectives were usually set at the beginning of the year and if there were any performance problems during the year, periodic reviews would be held. The grading on these reviews (1 thru 5) determined the size and frequency of your next merit increase in salary. A 1 rating was Far Exceeded, (walks on water) 2 was Consistently Exceeded, 3 Exceeded at Times, 4 Need to Improve and a 5 rating meant that the employee was on a documented improvement program. A multiple year 4 rating or a single year 5 was usually grounds to manage that person out of the company. Employee ranking was sometimes used to further validate performance ratings within a peer group. Rankings were also used in 1993 to make the very first employee layoff decisions. As an example of the Performance Plan process, I have included one of my performance plans and evaluation in the appendix.

- Employee Education: Marketing training in the 50's included eight weeks of punch-card machine training near your point of hire, in my case Los Angeles, and this included card design, machine operation and learning to wire the control panels; then eight weeks of application training in Endicott New York, learning how to do the many accounting applications on punched card systems such as billing, accounts receivable, inventory, payroll, etc. This was followed by approximately six months working in a branch office as a junior salesman, making cold prospect calls and helping customers plan and implement punched card applications, in my case wiring the 607 Calculator control panels for the payroll application at the City of Long Beach. Finally, you spent four weeks back in Endicott for sales training. IBM songbooks and the singing of company songs most mornings was part of the school ritual. "Ever Onward" seemed to be the company theme song. This sales training included practice product demonstrations, proposal writing, and practice sales calls on the instructors and sales school managers. See IBM Applications Class roster and picture on the next page that was taken in front of the IBM Homestead in Endicott New York, October 1956. I’am front row right.

-Employee Overseas Assignments and Organization

All IBM overseas country organizations were staffed with indigenous English speaking personnel and in most cases in the 70’s and 80’s the country General Managers were on assignment from an English Speaking Country. The one exception in Asia was IBM Japan where we had a large English speaking assignee staff organization in support of IBM Japan senior and middle management. These assignments were usually 3 years in length from the U.S. with a possible one-year extension and could be an indeterminate length if the assignee was from England, Australia, New Zealand or Germany. Under no circumstances could a U.S. employee stay on overseas assignment even with multiple locations longer than 5 years.

The overseas living allowances for assignees were very attractive and included housing, tax assistance, cost of living and private schools for their children plus family home leaves once a year. College age children were flown to the overseas locations for summer and Christmas vacations each year. IBM also covered interest and maintenance costs on your U.S. residence while on assignment. A hypothetical U.S. income tax was calculated on each assignee assuming they never left the states and this became the assignees maximum tax liability. This was important because an assignee had U.S. income tax liability on all overseas allowances plus they had to pay a foreign income tax to the country of residence.

Tax loans were provided by IBM which were forgiven by grossing up the employees W2 withholding when they returned from assignment. It cost IBM an average of $500,000 per year to have a family on assignment in Japan. House and apartment rents for assignees were $10,000 or more per month or more. IBM also had a MAP (Management Acceleration Program) for high potential foreign employees whereby they and their families were brought on assignment, usually to IBM World Trade HQs in New York, for one year of staff experience and to improve their management and English speaking skills.
One of those, Bobby Romulo, became IBM Country GM and later Foreign Minister of the Philippines and we still have internet contact..

- Marketing and Sales Commission Plan: At the completion of training, you assumed a sales and installation quota and salary plus commission, (initially 60% salary and 40% commission) branch office sales territory that had a limited number of existing customers and a lot of prospects. A dollar in revenue equaled a quota point. In the 50’s when I went on quota all IBM products were rented, with a 90-day cancellation notice, so the salesman had a commission liability to protect the existing rental revenue in the territory as well as, a rental growth quota for selling and installing new equipment. This meant that if you or someone else had collected the original commission on the equipment sale or equipment installation to this customer and sometime during your responsibility for this customer he elected to take out any of the IBM equipment or cancel any on-order equipment, you had to pay back the commissions originally earned by the selling or installing salesman. This kept you totally tied to the success of this customer and his satisfactory use of IBM systems. (this was called the charge-back system)

There was a major emphasis and cash bonus for signing up new customers. I had 25 "new name accounts" during 5 years of direct sales responsibility in Phoenix, with no cancellations. If a competitive situation occurred with an existing customer or a potential new-account, the salesman was required to write a Special Situation Report. This got wide circulation so that the full regional and sometimes national resources of the IBM Company could be applied to help win or maintain this business. It was a serious career error to lose any IBM business where you were either unaware of the competitive threat or failed to ask for Special Situation Report help. Each salesman was required to keep a written Call Book detailing their day to day customer activity. Their immediate managers were required to read initial these Call Books on a weekly basis. Frequency of customer coverage was also measured.

"THINK" as mentioned earlier, was a one word-logo that was used throughout IBM. An IBM Think Magazine was published bi-monthly and sent to all customers, employees and thousands of other people free of charge. It contained mostly current event articles and an editorial from the Chairman. See copy in appendix.

In the early days desk top "THINK" signs were given to all of our customers. They were available in all languages around the world.

At the IBM Education Center in Endicott "THINK" in two foot high bronze letters are placed over the entrance door and the marble steps in the entrance way are engraved with Think, Observe, Discuss, Listen, Read. Pictures of Tom Watson Sr. hung in each classroom and most other IBM locations worldwide with a THINK logo below the frame.

- Corporate Citizenship:

Over 2 % of annual corporate earnings went to the support of IBM employee and company participation in charitable and citizenship programs. IBM had no Political Action Committees, PACS, and made no corporate political contributions but we did employ lobbyists in major state capitals and in Washington D.C. From 1983 through 1987 IBM gave a total of $817.3 million to education and charitable causes making it a leader among all U.S. corporations and philanthropic foundations. In 1988 community and academic support from IBM and its employees totaled more than $170 million nationally and $31.9 million in California. The company also spent $100 million on collaborative research with colleges and universities. See 1988 brochure, a report on IBM's contributions to employment, education, technological innovation, and community service, in appendix

While based in the Southeast Asian Region office in Hong Kong I initiated an IBM PC model classroom program in 1985, using the Canadian University of Waterloo "JANET," (Just Another Network,) software and their installation personnel. 14 computerized classrooms were donated and installed in 7 countries at a cost of over $1 million. The two person University of Waterloo installation teams would come out to Southeast Asia for two weeks each and install 2 classrooms on each visit. See participation award certificate below:

One of the classrooms went into a grammar school in Quezon City outside of Manila with IBM "Writing to Read" software. Because of the open classroom we had to put in windows to protect the equipment from the elements and hire security.

In San Jose with 15,000 local IBM employees from all divisions, the corporation and its employees donated over $7 million to local charitable causes in 1992. 50% of these monies were contributed by IBM employees thru the annual United Way Campaign that we ran at each site. This does not include the thousands of volunteer hours contributed by these employees each year. Being a major player in community support certainly enhanced the IBM image and made it easier to get marketing and political contacts when needed.

IBM San Jose property taxes also contributed 22% of the cities' re-development budget that year. We had constant discussions going with the Santa Clara County assessor on the value and life cycle of our plant and equipment. I'm sure this is a part of the reason why we have moved some San Jose manufacturing overseas to Hungry, Mexico, India, Malaysia and other overseas locations.

In 1989 I authored an IBM funded $20 million 5-year effort to help improve California K-12 education through the use of IBM PC technology. Ned Lautenback and Lucy Fjelstad IBM Corporate Vice Presidents funded this effort and the late Ed Sandel, formerly manager of IBM customer education in San Jose, managed the project. See brochure, IBM California Education Partnership in the appendix.

I received a commendation letter from Terry Lautenbach, President of the IBM Data Processing Division and a 10k cash bonus for selling the value of this program to the corporate office in New York. (By this time I had already moved on to a new assignment in Singapore and the presentation was made in a managers meeting in Hong Kong) I took 9 trips from San Jose to New York over a 3-month period to present this program at various management levels.

Most community contribution programs i.e. Matching Grants, Fund for Community Service and discretionary funding were driven by employee participation in that activity. As shown above a heavy emphasis was put on education. IBM San Jose had over 30 K-12 school partnerships, each one staffed by employee volunteers. (See flow chart on how this process was initiated and managed) We also hired up to 10 teachers as summer interns each year. They were paid $800 per week, given productive assignments, and had an IBM mentor who usually wound up as their classroom volunteer when school started again. This industry experience was invaluable to these teachers as they related the importance of education to careers in their classrooms. See appendix for presentation " A Corporate Community Support Program" 1992, and the brochure "A Responsible Neighbor" highlighting 1988 IBM community support in Silicon Valley. Also Corporate and Operating Unit Corporate Social Responsibility Directory, California Section. Also “The Bottom Line On Business/Education Partnerships", A survey of Opinion Leaders Conducted by The Wirthlin Group For The IBM Corporation.

As a part of my IBM Government and Community relation’s responsibilities in Silicon Valley I was invited (along with 10 of my corporate counterparts) to have a private breakfast in October of 1991 with then Governor Bill Clinton at the San Jose Fairmont Hotel. This was three days before he announced his candidacy for the Democratic nomination for President of the United States. A short time later, when he returned to Silicon Valley as an established Presidential candidate, he was able to fill the ballroom with corporate CEO's. He served two terms as President of the United States.

Following retirement from IBM in 1993 I spent part of a year with former IBM Program Manager Joyce Monda as a consultant at the Regional Occupational Center in San Jose helping to establish an educational foundation. From there I worked with the Santa Clara County Manufacturing Group on the Federal School to Work Opportunities Act of 1994 and I co-chaired the Workforce Silicon Valley board of directors that was a collaborative among Industry, Education, Government, Labor and the Community. See Workforce Silicon Valley brochure in appendix.

Tom Jr. and Dick Watson

Tom Watson Jr. joined IBM in 1937 after graduating from Brown University. According to his own book, Father Son & Company, Tom Jr. was not a very good student. He spent 3 years in sales, training and handling a punched card machine sales territory in Manhattan. His real love was flying. He joined the U.S. Army Air Corps during World War II and was involved in setting up a ferrying system for U.S. manufactured warplanes to Russia. The route was over Alaska and through Siberia. He reached the rank of Lt Col. in his 4 years of service.

Following the war he returned to IBM, working in the corporate office as a Vice President, Executive Vice President, President and in 1956 became Board Chairman and CEO when Tom Sr. retired at the age of 82. Tom Jr ran the IBM Company for the next 15 years, retiring after a heart attack in 1971. He was responsible for moving IBM successfully from punched card machines to computers in the early 50's.

Mr. Watson Jr. went on to become Chairman of the General Advisory Committee on Disarmament and the Ambassador to Russia in the Carter Administration. Shortly after he assumed the ambassador-ship Russia invaded Afghanistan, which the U.S. condemned, and his time in Moscow was not very productive. Now we are in Afghanistan.

Mr. Watson was an avid sailor and pilot and continued to fly well into his 70's. He died in 1996. As mentioned earlier in more detail he visited the Boise branch office in the early 70's as a speaker for our bi-annual family dinner. See the picture on the next page of Tom Watson Jr. as it appeared in the September 1989 issue of THINK Magazine.

Dick Watson, the youngest son by 5 years also served in the Army in World War II reaching the rank of Major. After the war he got a degree in International Relations from Yale University and joined IBM as a sales representative. A year or so later Mr.Watson Sr. moved Dick to the corporate office as Vice President of International Sales.Later IBM made international sales a wholly owned subsidiary and Dick became President of IBM World Trade and later Vice Chairman of IBM. He also headed up IBM's manufacturing and development for System 360. When the 360 failed to make the planned announcement schedules he was removed from that job by his brother Tom.

Dick Watson went on to become Ambassador to France and died a few years later in an accident at his Connecticut home.

Evolution of Data Processing Technology

Beginning with Hollerith invented punched card systems in the late 1800s, followed by punched card or unit record systems, and then computing systems that we know today got their start in the early 50's. (See appendix for a presentation I did on the "History of Data Processing” for the Vintage Computer Festival in 2005.

Making the transition from Punched Card Systems to Computers in the early 50's was a very difficult decision for IBM. The Remington Rand "Univac" was the first commercial electronic computer on the market. IBM responded a short time later with the following systems. SSEC (Selective Sequence Electronic Calculator) 602A, 603, 604, and 607, all designed to work with punched card systems and programmed by wired control panels. Then came the magnetic tape 701 for scientific calculation, the 702 for accounting applications, the 650, a medium range magnetic drum storage system, and SAGE, Semi-automatic Ground Environment System, for the U.S. Air Force. The SAGE Systems each had 50,000 vacuum tubes and were duplexed at 58 locations around the U.S. to coordinate radar detection and response for incoming hostile bombers. This system had a very short life when the Russians launched Sputnik in 1958 and acquired missile delivery capability. SAGE is on display at the Computer History Museum in Mt. View California.

And finally the most significant breakthrough occurred in the mid 50's in a San Jose Lab on Notre Dame Street when the late Reynolds Johnson, the former teacher mentioned earlier who invented the 805 Test Scoring Machine, developed random access hard disk storage, similar to a long-playing musical record that was incorporated into the IBM 305 Ramac. I had the pleasure of sponsoring Reynolds Johnson for the Silicon Valley Junior Achievement Hall of Fame. At the awards dinner at the San Jose Fairmont Hotel, with he and his wife, I learned that in retirement he was working on a Chinese language typewriter in his garage. He passed away in 1998 at the age of 92. A one-page bio of Reynolds Johnson is on the next page. More complete information on Mr. Johnson is in the appendix. San Jose Junior Achievement has a video on his achievements and award, a copy of which I had sent to the Computer History Museum in Mt. View California..

These first ever data storage disks were 2 feet in diameter and it took 50 of these spinning platters to store 5 million characters. The reading and writing of data on these disks was done by a single read/write arm that traveled mechanically up and down a shaft to strattle the top and bottom of the individual spinning platters. Data access time was measured in seconds, but it was random access for the first time and not the batch sequence processing systems we had to live with before on punched card and magnetic tape systems. This gave birth to the first on-line computer systems in the industry.

I have one of the early 305 Ramac disks and several of the much smaller and denser storage versions. From 1956 to 1998 capacity went from 5 million characters on fifty 24 inch-diameter platters or 5 megabytes, in a box weighing one ton, to a single 1 inch-diameter platter with 340 megabytes of storage space which weighs less than a double-A battery. See picture of 305 Storage System being unloaded from a Pan American Airways cargo plane.

For the first time IBM customers had fast random access to customer’s records and data that began to match the internal speeds of the new computing systems. Airline reservations and banking systems were the first beneficiaries of this new storage technology. IBM can now store a world record 10 billion bits per square inch of disk surface.

Competition

Early competition in computers came from Remington Rand and the Univac, G.E who landed a contract to build a large check processing system called ERMA for the Bank of America, RCA, Honeywell, DEC, Prime and CDC, the latter in large scientific systems. As mentioned earlier, as a young IBM sales representative in Phoenix, I had IBM customer responsibility for the GE manufacturing plant that was building the ERMA for the Bank of America, which later became the GE 210 in the commercial marketplace. Against pretty good hometown competition from the local GE manufacturing plant, I did manage to sell an IBM MICR check reading 1401 computer system to The Bank of Douglas later known as The Arizona Bank. The Valley Bank installed a German built carrier envelope system for check processing and the 1st National Bank became a local demo center for GE computer manufacturing and their first commercial product, the GE210.

During this period I also sold a Unit Record system to Goldwaters Department Store to do inventory, sales analysis and accounts receivable. Senator Barry Goldwater's brother Bob ran the store and I remember helping the Senator's campaign committee run voter registration lists from punched cards on the stores' IBM 403 accounting machine. Goldwaters are gone today and all of the banks are under new names.

Sales wins against installed competitive computer systems were very difficult because of customer brand loyalty and the cost of re-programming from the competitors machine to IBM. As Branch Manager in Idaho we had 5 competitive win-backs over a 5-year period. This included Albertsons Grocery Chain from NCR, The State of Idaho Department of Highways from Univac, The State of Idaho Department of Administration from Univac, The U.S. Department of Employment Security from Univac and as described earlier the National Reactor Testing Station from Control Data Corporation (CDC).

The IBM domestic Branch Office was the focal point to the market place. A Data Processing Branch Manager headed it and if he had ten or more salesmen and system engineers, he had a Marketing Manager and or Systems Engineering Manager. In addition, a separate Field Engineering service organization for data processing equipment reported through their own chain of command. The Office Products Division had their own branch marketing and service organization and also reported to their own management chain. Administration and office facilities were shared by all three organizations and were the responsibility of the Data Processing Branch Manager. The split sales and service mission and management measurements for data processing equipment could sometimes cause a problem with customers. In large cities the branch offices could be specialized by industry sectors i.e. banking, manufacturing, distribution etc. In the smaller offices the industry specialization was done where possible at the marketing manager and or marketing representative level. The fun part of being in a branch was the employee es-spirit de corps that existed and the excitement of customer contact and competition. In Boise we used the Tiger Theme in most of our inside sales promotion. We also had an annual family campout at Redfish Lake. This included many personally owned boats used for water skiing and other lake activities. The highlight of the event was the Stanley Stomp, which was a piggyback race through the center of Stanley on Saturday night. It was also satisfying to be a representative of IBM because of the special recognition for excellence that the company had. You also had the feeling that you were a part of a special select group of people. I find it hard to understand today's IBM marketing organization that does not include a branch office operation and complete customer coverage. How do you get group identity, spirit and employee drive to succeed.? See picture on the next page of a Boise branch office sales meeting, the Tiger logo badge, branch office building and “Our Job Is”.

I used this license plate on my car in Boise for a couple of years and still have it. .

The Branch Office reported to a regional District Office and the District Offices reported to one of 3 Regional Offices in the U.S.

While I was a Marketing Manager in Denver I'm reminded of a situation with Buck Rodgers, then the Vice President and Western Region Manager in Los Angeles. I was responsible for Banking and Utilities marketing in Colorado and for the sub-office covering the State of Wyoming. The Riverton Wyoming Chamber of Commerce was planning a technology conference and asked IBM to provide a keynote speaker at their final dinner event. Not being shy, they went directly to Mr. Watson’s office and the invitation was forwarded on to regional manager Buck Rogers's office in Los Angeles. Buck agreed to do the speech and was to fly to Denver, late in the afternoon, the day before the conference and then he and I would fly to Riverton the next day. That same afternoon Denver had their floods of 1966 and most of southwest Denver including my golf course, Columbine Country Club, was under water.

I had a 10-year-old daughter and her 10-year-old friend riding a train from Telluride to Denver that afternoon and the flooding held up the train. For that reason I failed to meet Buck's airplane and met up with him later at the hotel. He was a little on the cool side and I have since been reminded of an episode he related in his book The IBM Way where he was late to a Watson meeting because of a customer meeting. Mr. Watson was not happy until Buck told him that it was a customer situation that caused him to be late. I didn't have the same customer excuse, but two 10 year olds stranded on a train outside Denver in a flood was all I had. Buck Rodgers is probably the best public speaker I have ever heard and I had that pleasure at many hundred percent clubs, golden circles and branch manager meetings. He is a center stage, no podium, and no notes type speaker. So the next morning on the plane to Riverton, Buck pulls out an envelope, and says to me, what should I talk about?

My response was that there were going to be several hundred people there tonight and the Wyoming State Governor will introduce you and the State is a very good IBM customer. He jotted a couple of notes and that evening gave a great speech. Today, I don't remember what he said but we continued to do a lot of business in Wyoming. Buck went on to become President of the Data Processing Division and for 10 years was responsible for IBM marketing worldwide. He rides a white horse in IBM marketing history.

· Columbine Country Club, which I was a member of, was supposed to host the annual PGA golf tournament that year and I was very active on the membership promotion committee. Because we lost 4 holes in the 1966 floods the tournament was moved to Muirfield in Ohio and was held at Columbine the following year, 1977. By that time I had been promoted to Branch Manager in Boise, but our District Manager in Seattle held a district branch managers meeting back in Denver so we could all attend the Tournament during one of the days.

The following table identifies the company’s percentage of 2001 revenue by business category.

Hardware= 38.8%

Global Services= 40.7%

Software= 15.0

Global Financing= 3.9%

Enterprise Investments/Other= 1.3%

Total 100%

What can Microsoft and others learn from

IBM’s 48 years of Anti-Trust experience?

Setting the business tone: Tom Watson Jr. IBM Chairman and CEO

Added comments and narrative by:

John J. Sailors

IBM Retired

Marketing Executive

U.S. Anti-trust Actions against IBM

Within two weeks after Roosevelt took office and closed down the banks the government started its first anti-trust action against IBM. By the end of 1935 according to the court, the company had under lease 85.7% of all tabulating machines, 86.1% of sorting machines and 81.6% of all the punches. By pre-agreement with Remington Rand both companies only offered equipment on a term lease contract and the user had to buy their punched cards only from their equipment supplier. IBM cards had 80 columns and used square holes and Remington Rand cards had 90 columns and used round holes.

Again because of IBM's large market share in punched-card and early computing systems the U.S. Justice Department filed an Anti-trust suit against IBM in January of 1952. This suit was based upon the Sherman Act of 1890, as amended, entitled: "An act to protect trade and commerce against unlawful restraints and monopolies." The issue was the definition of the Tabulating and Electronic Data Processing Systems industry and IBM's revenue share of that market, and by nature of its size, IBM's ability to control pricing, standards and competition in that market. Without trial or adjudication IBM and the U.S. Justice Department agreed to a Final Judgment on January 25th, 1956 that set forth the following, which are quotes and paraphrases from the consent degree.

The Data Processing Industry was defined as:

- Tabulating Cards- the punched-card storage media containing 80 alphanumeric characters per card.

- Tabulating Card Machinery- the rotary presses used to manufacture tabulating cards.

- Tabulating System- a group of machines used for entering, converting, receiving, classifying, computing and recording alphanumeric accounting and or statistical data by means of tabulating cards.

-Electronic Data Processing System- any machine or group of automatically inter-communicating machine units capable of entering, receiving, storing, classifying, computing, and or recording accounting and or statistical data without intermediate use of tabulating cards, which system includes one or more central data processing facilities and one or more storage facilities.

The overall objective of the U.S. Justice Department suit was to segment the data processing industry into individual components and to create competition in each of these segments. In the 1956 Consent Decree, IBM and the Justice Department agreed to the following:

- To place purchase prices on their equipment for the first time. Heretofore all IBM equipment was offered for term lease only and this lease price included all services and support including manuals, education, equipment maintenance & repair and sales and technical support.

- The customer paid extra for equipment use over a standard workday.

- Prohibited IBM from getting into the used equipment or secondary market for IBM equipment. As mentioned before, Mr. Watson Sr. was convicted of an Anti-trust violation for attempting to control the secondary market on cash registers when he was the General Sales Manager for National Cash Register Company back in 1913. He was sentenced to a year in jail, which was reversed on appeal after he joined CTR, which 10 years later became IBM.

- IBM had to provide the same support services for lease or purchase customers without a separate charge except for maintenance and repair.

- All lease agreements were restricted to one year.

- IBM cannot require a customer to disclose the use to be made of the equipment.

- IBM cannot require a customer to use only IBM maintenance and repair services on lease or purchased equipment.

- Comparable IBM training must be provided at a reasonable charge for all persons planning to engage in the repair, maintenance and distribution of IBM equipment. This also included the requirement to sell sub-assemblies and parts to the new companies.

- Cannot require a customer to purchase tabulating cards only from IBM.

- IBM must divest itself of 50% of the total capacity for the manufacture of tabulating cards in the United States over a 7-year period. This included royalty free patent licenses on card making supplies and rotary presses. Had to agree to sell some of our own rotary presses if not available commercially.

- IBM was forced to make a separate Corporation out of its service bureau operations.There were several administrative provisions to insure a separate business operation. A favorite sales strategy was to sell a service bureau contract and after conversion then move this customer and all of the wired control panels to his own leased equipment.

- IBM must offer unbundled-restricted, non-exclusive on all its patents. A reasonable royalty may be charged (except as mentioned before on patents relating to tabulating cards and tabulating card manufacturing equipment, which shall be royalty free.) Failure to agree on royalty fees will be decided by the court, with burden of proof on IBM. This provision led to IBM's open system policy that currently produces over $1.7 billion in annual license revenue. For the last ten years (1992 to 2002) IBM has been leader in annual patent approvals.

- To insure compliance with this Final Judgment the Department of Justice shall have access to all books, ledgers, accounts, correspondence, memoranda and other records and documents, plus officers, directors, agents, or employees and upon request IBM shall be required to submit reports on all matters contained in the final judgment.

To further foster competition IBM instituted a "no unhooking" policy. Once a competitor received an order for equipment the IBM salesman was not allowed to call on or make any contact with that company until the competitors equipment was installed, which could be several months or as long as a year.

On the last day of the Johnson Administration in January of 1969 the Justice Department Attorney General Ramsey Clark, filed additional Anti-Trust actions against IBM, seeking to break the company into smaller parts. It is interesting that Ramsey Clarks' father Tom Clark was the U.S. Attorney General that initiated the first anti-trust action against IBM in 1952. The real issue in both cases was "market definition" and IBM's share of that market and the ability to set industry standards and prices. Mr. Watson Jr. pointed out that "the data processing industry was very broad and that competition was strong and increasing thanks to the constant evolution of technology, which no one had a monopoly on."

In December of 1968 Control Data Corporation (CDC) also filed suit against IBM claiming unfair marketing practices. In the CDC discovery process they requested millions of documents and executive correspondence from IBM, which they indexed on a computer system and shared with Justice Department Anti-trust lawyers. In late 1972 IBM decided to settle the CDC suit. We sold them the Service Bureau Corporation for $63 million, plus cash and contracts worth $101 million and covered $15 million in CDC legal fees. In this settlement, as was standard legal practice, IBM also gained ownership of CDC's legal work product, the very large discovery database index and documents and as was IBM's legal right they immediately destroyed this index. Without this help from CDC the Justice Department suit drug on for 11 years before it was dismissed by the courts. During that time significant changes were also taking place in the computer industry structure, which may have made the original suit moot.

These changes included:

IBM lowered their Educational Allowance (discount) from 60% to 15%, and Digital Equipment Corporation became very strong competitor in higher education.

Plug Compatible Machines (PCM) were announced which copied IBM hardware and licensed IBM software and the Japanese and Amdahl began to compete in the large systems area. The cost of conversion was no longer a big cost barrier to switching vendors. To meet this new competition IBM spent over $10 billion on new plants and facilities and, as was mentioned before, began a major shift from rental to a purchase business. During this period IBM also decided to unbundle their pricing. Known as "The New World," they began to price hardware, software, education and technical (SE) services separately. This created whole new markets and companies in the data processing industry.

In 1961 IBM published a Guide on Anti-trust Responsibilities for all employees. (Copy contained in appendix) It included the basic elements of policy and the law including a complete copy of the 1956 Consent Decree, to give the employee reader awareness and sensitivity to anti-trust areas. The guide opened with the following statement by Mr. T.J. Watson Jr. that was made in New York City on March 22, 1961, to all members of the IBM Corporate Management Committee, Division Presidents and General Managers, the Corporate Staff Assistant Directors and Staff Heads.

Mr. Watson's speech, an exact quote: “Setting the Business Tone.

We have always tried to operate the IBM business at a high rate of speed; and to sustain this speed, we have reorganized several times in recent years following the basic pattern set at Williamsburg in November of 1956. Our fundamental objective in all of these organizational changes has been to focus management's attention on the individual problems of our business, breaking these problems down into their component parts so that a man can get his arms around them.

The overriding objective has been one of tempo. We have urged you, and through you all of your people, to make decisions and make them quickly. We have tried to instill a strong sense of proprietorship all the way down the management line to achieve this. We have used different phrases to express this- "a sense of urgency," "healthy dissatisfaction," "proprietorship," "delegation," etc.

I am firmly convinced that a good deal of our success has stemmed from our willingness to pick people who want to make decisions and who seem to innately have this sense of urgency. The "young man in a hurry" has done well in IBM, and I propose that he continue to do well.

However, we do have a problem in coping with bigness, and it is the problem of dealing with size that I want to discuss with you.

Because of our size, our actions are closely watched. People look for reasons to accuse us of improper actions whether they are competitors, imitators or the Federal Government. The purpose of this get-together is to discuss some of the problems of complying with the letter and spirit of the anti-trust laws without losing the speed of action that I like to think of as characterizing the IBM business. We can't move so fast

that while we are acting one can hear the breakage in the background.

In any company of a size as ours, there are three basic classes of conduct with which we are concerned:

1. In the first class are those acts, which are in and of themselves violations of the anti-trust laws or the Consent Decree. There is no need to belabor them. They are clearly to be avoided. Examples of some of these violations are:

(a) Delivering machines out of strict sequence, which we are ordered to follow under the Consent Decree.

(b) Raising purchase prices of machines above equivalence to rental prices.

(c) Agreeing openly or impliedly with a competitor on prices, terms of sale, marketing methods, territories or customers.

(d) Open aggression, such a deliberately misstating the capacity of a competitor's machines.

These obvious violations everyone should know enough to avoid. The penalty for violation of the anti-trust laws or the consent decree must, of course, be dismissal. However, so that there will be no unintentional stumbling in this area, we will put out a written statement of those practices particularly to be avoided.

(A personal note from my (the author) experience--an IBM sales rep was offered and accepted a copy of competitors written proposal from a school district purchasing agent. In another situation, a sales rep. discussed the circumstances of an IBM bid loss in state government with a newspaper reporter in a casual conversation in a barbershop and this information was reported in the local newspaper. In both cases the IBM sales reps were dismissed from the company and in the latter case the immediate manager was also disciplined for failure to set the

proper tone and caution with his people.)

2. The second class consists of those acts, which, though not themselves illegal, may create a pattern of apparent monopolistic practices. Even though no one will probably start a lawsuit over any one of them, these acts may accumulate into an anti-trust action brought by either by the Government of by an aggrieved competitor. Examples of this category are:

(a) Unhooking- that is, the inducing of a cancellation of a firm competitive order prior to installation.

(b) Proposal or mention to a prospect of a commercial product before it has been officially announced, when done to thwart a specific competitor.

(c) Subtle disparagement of competitor’s products by suggesting, for example, that his cards may not work so well in our machines.

Acts in this second category, standing alone, technically may not be a violation of the anti-trust laws. But when judged by hindsight a series of several of these acts might be regarded as an indication of an overall attempt to monopolize and provoke the institution of an action.

Each of you is responsible for recognizing the impropriety of these acts and eliminating them.

3. The third class of conduct is subtler than the first two categories and may be thought of under the heading of "corporate ethics and morality." But these acts may also provoke complaints to the Department of Justice and, in any anti-trust suit which may be brought for violations arising out of acts in the first two categories, these unethical practices would add fuel to the anti-trust fire.

It is hard to define the third category of acts other than by a simple test, which I am sure already exists in the conscience of each of you. It is this: Turn the situation around. Suppose that you were the competitor - small, precariously financed, without a large support organization, and without a big reputation in the field- but with a good product. How would you feel if the big IBM Company took the action, which you propose to take. Would you regard the IBM Company as taking unfair advantage of you? Would you consider that the IBM Company was using a sales tactic, which IBM possessed solely because of its size and reputation, and which, therefore, was unavailable to you.

We must avoid the type of action-even lawful action-which irritates, antagonizes and finally goads a competitor to action. We simply cannot shoulder people around or give the appearance of doing so.

When considering your actions, remember that there is a timing problem involved. Small irritants, when put together in a black book, can be made to add up to an extremely damaging, if not illegal, picture.

This is part of the problem of evaluating any single act. If you have a perfectly nice son and if you were to document on a single sheet of paper all of his misdemeanors over a year's time-and then read them off-your perfectly nice son would probably sound like the worst possible juvenile delinquent.

You are all familiar with the recent electrical industry case. You were all shocked by the flagrant disregard by responsible senior executives of one of the most fundamental rules of the anti-trust laws: namely, the rule against fixing prices. The tragedy is that these businessmen thought they were doing right for their companies in engaging in this secret conspiracy, knowing it was illegal.

Moreover, you should know what Chief Judge Ganey said in that case:

"This court has spent long hours in what it hopes is a fair appraisal of a most difficult task. In reaching that judgment, it is not at all unmindful that the real blame is to be laid at the doorstep of the corporate defendants and those who guide and direct their policy. While the Department of Justice has acknowledged that they were unable to uncover probative evidence which could secure a conviction beyond a reasonable doubt, of those in the highest echelons of the corporation here involved, in a broader sense they bear a grave responsibility for the present situation, for one would be most naive to believe that these violations of the law, so long persisted in, affecting so large a segment of the industry and finally, involving so many millions upon millions of dollars, were facts unknown to those responsible for the conduct of the corporation and, accordingly, under their various pleas, heavy fines will be imposed." (sounds like Enron)

You all realize the shocking indictment of the integrity of American industry, which has resulted from these actions. A result which rightly makes the man in the street distrust and dislike big business and also has caused bewilderment on college campuses.

I would like to conclude this subject by making the following points:

1. There should be no question that I mean business when I say it is our policy to comply with the anti-trust laws in letter and spirit. Similarly, there should be no question that you line managers bear the primary responsibility in this area also.

2. All operating people must make their business decisions against a backdrop of a keen awareness of this policy. Actions must be examined critically to determine not only if they are legal or illegal but also whether someone else might interpret them as being legal or illegal. Decisions must be made with a realization that the consequences that may result to the IBM Company may be of a more serious and permanent nature than any temporary business advantage to be gained.

3. We have a staff of lawyers inside and outside the Company who can help educate you and your people and who can advise you as to the law and as to specific transactions. To use the lawyers correctly, however, certain things must be made clear:

(a) All operating people have a clear responsibility not to conceal, misstate or fail to analyze the facts, since any legal advice is no better than the facts upon which it is based.

(b) All operating people have the responsibility to keep the lawyers advised of trends in the market and in competition, and also to inform the lawyers of proposed transactions in sufficient time to permit a careful analysis of the problem.

(c) Division counsel must be understood as not only representing their divisions but as also having a responsibility of protecting the reputation and legal posture of the IBM Company as a whole.

4. Our job as the top management of this business is to:

(a) Fully understand the business and legal environment in which we operate.

(b) Make certain that our people understand those facets of this environment appropriate to their particular jobs.

5. Finally, in doing all these things we must preserve the delicate balance between the pace of operation that has brought us where we are, and the caution that is necessary for operating in today's world.

(End of Mr. Watson's statement)

Mr. Watson certainly tried to set the tone and responsibility for how the IBM Company intended to operate under the consent degree. It was a hard walk to make in a highly competitive marketplace.

To insure compliance and understanding of the above, all IBM marketing people were required, annually, to read and certify in

writing that they fully understood the IBM Business Code of Conduct.

Below are excerpts from IBM's Business Conduct Guidelines.

Our company has an enviable reputation. People generally think of us a competent, successful and ethical. These three qualities are related. Our adherence to strict ethical standards has contributed, in a very direct way, to both the professionalism of our company and our success in the marketplace. Over the years, we have emphasized again and again that every employee is expected to act in accordance with the highest standards of ethics. This is still true today. And it will be true tomorrow.

Business today is being called upon as never before to explain its actions, provide reasons for its decisions and speak out clearly on where it stands on ethical behavior.... it is essential in this time of questioning and testing that everyone----employees and their families, customers and competitors, friends as well as critics---know just where IBM stands on basic ethical issues.... If there is a single, overriding message in these guidelines, it is that IBM expects every employee to act, in every instance, according to the highest standards of business conduct. Ultimately, in every business decision---as in personal ones---the responsibility is yours.

We depend on you to do the right thing; right for both you and the company. It is no exaggeration to say that IBM's reputation is in your hands.

The Business Conduct Guidelines go on to give practical examples of do's and don'ts in our marketplace especially as it relates to competition and being sensitive to the power of IBM's size.

From what I read in the newspapers on the Microsoft anti-trust trial I see history is repeating itself. It is interesting that control and ownership of just a software operating system and integrated application software can provide so much power in the marketplace. In the IBM anti-trust cases it was superior revenue and market-share of hardware, software and related services in the entire Data-processing industry that caused the Justice Department to react. Perhaps Microsoft should spend some time studying IBM's anti-trust experience and try to broaden the legal definition of today’s data processing industry and their relative share. There is plenty of case law and precedent for what is going on in the industry now.

Another issue is how “user friendly” are today’s personal computers and can a more fragmented computer industry solve that problem. Today the consumer becomes the systems integrator (hardware, software and support) and the average consumer is ill equipped to do this. 800 numbers and overseas call centers do not provide timely support. This is a significant part of the total cost of computing and our anti-trust laws don’t take this into consideration. Perhaps we should go back to a bundled lease price or a PROFS like system where the user has terminal only and the operating system, applications and storage reside on a mainframe or server type computer. Today that is known as a Thin or Virtual Client system and is being pushed as a better solution in the Education Classroom.

Summation:

- Why did IBM lose momentum in the early 90's?

The industry technology, price performance and profit margins changed quickly and dramatically. IBM's open system policy enabled peripheral equipment suppliers to interface their products i.e. tape drives, hard files and printers directly to IBM mainframe central processing units. JCM’s (Japanese Computer Manufacturers) and Amdahl started cloning IBM mainframes. The IBM open-system policy also gave birth to the PC clone industry and such companies as Compaq and Dell. It is interesting that Apple Computer elected to maintain proprietary control of their PC hardware and software and today they are less then 5% of the PC marketplace and IBM is only about 12%, but we belong to a Microsoft Windows group controlling 90% of the total market. PC application software development will chase the larger market share. The distribution channels used have also been an important factor in PC industry growth today. IBM's recent long term OEM parts contract with Dell will make it harder to measure true PC market share and revenue in the future. In the first few months of 1999 IBM has announced $28 billion worth of OEM technology deals. The recent announcement of the one inch 340 megabyte micro-drive is aimed at digital cameras, hand-held PC's and personal audio players.

The market for computers expanded from government and business to include the consumer public where IBM lacked distribution and sales experience. For the first time IBM was forced to sell their products through retail organizations instead of the blue suit and white shirt.

They went to Internet sales only on PC products and in 2005 sold the entire PC division to a China based company, retaining only a 19% share.

IBM elected to pay large incentives to force voluntary personnel reductions and finally had to resort to involuntary layoffs, breaking a 75-year-old policy of full employment. They went from 405,000 employees to 291,000 in three years. They are now back to 320,000 in the year 2001 plus 47,000 subsidiary and complimentary employees.

The number of new companies in the industry expanded dramatically in both hardware and software around the world. The Japanese became direct competitors in the large systems area. Digital Equipment Corporation (DEC), Data General and Wang became competitors in the mid-range and Control Data Corporation (CDC) Cray, Honeywell and Hitachi in large mainframes. None of these companies are in the market today. The results of the HP Compaq merger in 2003 will be interesting to watch not to mention some of their current legal problems at the Board level.

The price vs. performance ratio of the PC is showing a significant change. You get fantastic capacity for your money today. In the old days we use to worry about excess machine capacity and how fast we could get new applications on the system so we could sell the upgrade or next machine. We are facing that problem again but internal speed growth and price reductions seem to be todays market drivers and not machine applications and support capacity.

The telephone and TV cable companies are trying to expand their revenue share of the Internet market and voice transmission along with video capability over the net will be interesting to watch.

The universities and community colleges need to expand their technology-training role especially in science and engineering. This can also be complimented by on-line distance learning, right into the home if necessary.

Network freedom and security around the world has taken on more importance as we begin to use the net for worldwide distribution of goods and information.

The internet and it’s low cost of use is forcing political changes in the developing world.

Conclusions:

With open doors, speak-ups, executive interviews, opinion surveys, performance plans, quota assignments, merit pay, dress codes etc. IBM was a very tightly managed company up thru 1992. For several years IBM was also selected by Fortune Magazine as the most admired company in the U.S.

In the early 90's with $65 billion in annual revenues and four hundred thousand employees world-wide and a full employment practice, IBM could not respond quickly enough to the dramatic changes in technology, price performance, lower profit margins and the movement into consumer products. Many new companies entered the industry worldwide and over a space of less than 10 years two new companies in the PC product area, Intel and Microsoft, gained a large enough market share to establish themselves as a de-facto standard in software and hardware technology. Lateness in PC hardware design, open systems and the failure to establish the OS2 operating system as the PC industry standard over Microsoft's Windows reduced IBM to being a nitch player at 12%. Additional market niches include servers, intermediate and large systems for government and business, OEM parts, patent licenses and more recently people services and Internet related businesses. IBM is doing very well in these areas. IBM in 2005 installed the world’s fastest computing system at the Lawrence Livermore National Laboratory with a processing speed of 230,000 taraflops.

To compete IBM had to lower product prices and the overall cost of doing business. This led to bringing in the first Chairman from outside the company in 1993, abolishing the full employment practice and many other cultural and business practices that had proved successful to IBM over 75 years. (For a first hand account of this most recent IBM history, read retired Lou Gerstner’s 2001 book titled “Who Says Elephants Can’t Dance” which covers his 9 years as IBM’s CEO.)

Less than 10 years later Hewlett/Packard had to follow the same path. Their merger with Compaq has given them a PC market leadership share equal to Dell at the end of 2002. But this is a consumer priced low margin business. It remains to be seen if they can compete with IBM with their purchase of EDS in the services market. They have done very well in the printer market but again this is a low margin consumer priced product. Ink cartages are probably the money maker here. (Another story. I help to sell HP on building their PC printer manufacturing plant in Bosie Idaho, when I was the IBM Branch Manager there in 1972. At the request of the Governor Cecil Andrus, I hosted a luncheon and golf course tour at Crane Creek Country club for the search team made up of HP executives and their wives .I was also club president that year.

We will also see a movement away from the current distributed intelligence/storage desktop computers to centralized intelligence/storage systems with wireless dumb terminals for both cost, security and “user friendly” reasons. Sounds like PROFS all over again. IBM recently announced (9/02) a new $10 billion marketing program called “On Demand Computing” with a heavy emphasis on services and consulting support. The reaction from a friend and former GM of IBM Australia, Brian Finn, “looks like 360 all over again” where IBM also bet the farm on a possible change in computer market requirements. I have also learned from another friend, Professor Ken Kraemer at UC-Irvine, that the notion of information utilities is about 50 years old. As evidence he cites two early books, National Information Utilities and Community Information Utilities. Quoting Dr. Kraemer “ It is amazing on how long it takes to actually realize some ideas in the real world.”

In Northern California high housing cost and a low supply close to Silicon Valley job centers has created major transportation problems. Two hour round-trip commutes are not uncommon. Public transportation has not kept pace, especially in a north south direction. This has had a negative impact on skills availability and job growth. There is also a lack of political will to build more houses in some local communities surrounding Silicon Valley to match the job growth.

There may never be another corporate philosophy and culture that takes full responsibility for its' employees, places community support so high in it's priorities while maintaining profitability and industry leadership. IBM's sheer size led to an organizational bureaucracy that made IBM slow on its' feet and unable to react fast enough to the changing market place. Predictions of a $100 billion + IBM in the 90's certainly didn't happen. Everything seems to be driven today by the price of corporate stock and quarter-to-quarter earnings growth. IBM continues to hire more people, do layoffs and move manufacturing and some development overseas. They have also recently changed the pension system for current employees that places more responsibility on employee contributions and savings and less emphasis on employment tenure. Employees and retirees are now sharing health care costs for the first time and as a retiree I’ve learned that IBM Managed Care is secondary and covers very little beyond Medicare. Many of us have gone to IBM Prescription coverage and Dental only.

The 75-year-old IBM culture as created by the Watson’s died in 1993 when IBM brought in their first CEO ever from the outside. IBM had to make some of these changes, especially in employee population, in order to survive in the new marketplace. Financial recovery has been slow but steady since the loss year of 1993. IBM seems well positioned in several markets and has a good chance of weathering the current 2009 economic downturn. The next few years are going to be interesting to watch.

References:

Picture of John Sailors receiving a Community Service Award for IBM from the wife of the Vice President, Marilyn Quayle, 1993 in San Jose

Award Letter to John Sailors from Terry Launtenbach, President of the IBM Data Processing Division, 1990

Copy of proposal letter for IBM System 370 to Idaho State Auditor, August 14th, 1972

The World Is Flat, A brief history of the twenty-first century, by Thomas L. Friedman

Recollections of Paul Willingham IBM Customer Engineer, 1963 and forward.

Appendix: Selected copies of this backup material available upon request.

Presentation, A Corporate Community Support Program, by John Sailors, 1993

Picture-IBM Asia Pacific Education Executive Conference

Tokyo August 1986

Picture-IBM Asia Pacific Education Executive Conference

Tokyo August 1985

1958 Hundred Percent Club San Francisco

News clip on Microsoft on Anti-trust payout to IBM

Proposal letter to Idaho State Auditor Aug 14, 1972

Input to Kate Fickle on 1990 performance

Oct. 1974 Performance Plan, Tokyo Japan

Picture of Marilyn Quale, wife of U.S. Vice President

Presenting 1993 award to John Sailors in San Jose

News clips

IBM Australia DP Magazine Oct. 14^th 1980

1962 HPC Club Officers

District 15 Branch Managers and staff, early 70’s

SEAR Marketing Managers Conference Tokyo Japan 1978

IBM SEAR Recognition Event

Vintage Tech Festival speech Nov. 7^th 2004

Brochure IBM Thailand

IBM Indonesia Newsletter

Kate Fickle letter—200,000 yen award

Herb Hipp letter Sept 30^th 1974

Office staff realigned at Asia Pacific Hq. Sept 20, 1974

Finn letter on SEAR Recognition Event 1979, Manila

Junior Achievement The Great Inventors

Bob Evans 77 Helped IBM transform Data Processing

Sept 8^th 2004

Chart on South Bay IBM Community Support 1992

Think Magazine 1988

The Importance of Economic Development Programs in the

Growth of High Tech Industries

In Brief – Livermore Lab’s Blue Gene/L Still World’s Fasteset

Celebrating 40years of System 360

Listening in on the 1929 One Hundred Percent Club Convention

Testimony of JJ Sailors before State of Idaho Legislative Committee on computer procurements, 1972

HP Search team to Boise in 1973

Brochure, A report on IBM’s contributions to employment education technological innovation and community service 1988

Brochure-A Responsible Neighbor 1988

Executive Briefing 1975 IBM Japan Recognition Event Convention held in Manila in April 1976

Performance Plan and Evaluation, JJ Sailors 5/1/90-1/31/91

Brochure, On Managing, IBM World Trade Americas/Far East Corporation 1978

Computing Systems presentation

Brochure, Workforce Silicon Valley 1994

IBM Corporate and Operating Unit, Corporate Social Responsibility Directory

IBM Idaho 1967-1973

Public Education Experience and Background 1981-2007