Critical Incidents in Growth of IBM
In 1911, Flint acquired Hollerith Tabulating Machine Company and merged it with International Time Recording Co. (ITR) to form the Computing Tabulating & Recording Company (CTR). In CTR, Hollerith developed the practice of leasing rather than selling his tabulating machines to customers. Hollerith’s machines were prone to breaking down and needed frequent repair. In 1914, CTR was kept afloat by the tabulating business. In 1914, the brilliant salesman Thomas Watson was hired as general manager of CTR.
He established a facility to train salespeople to create a sales force. He developed the theory to sell a service not just a product. He believed to provide good quality customer service not just lease and install the machine. In 1917, CTR’s sales increased to eight million dollars from four million in 1914. In 1924, Watson became chairman of CTR and changed its name into (International Business Machine (IBM) and started to sell to the international market. In 1939, Watson bought Electromatic Typewriter Co.
which made IBM the leader in electric typewriters in 1945. In 1945, IBM changed its focus from improving existing business machines into developing new products to meet customer information processing needs. This change in operating philosophy led to the development of the first working computer. In 1948, Tom Watson sons joined IBM and encouraged research laboratory to recruit electronic specialists which led to the production of IBM’s 603 and 604 electronic multipliers.
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After the invention of the transistor and the Integrated Circuit in 1959, the production of the transistor-based computers while maintaining the vacuum-tube based computers led to much confusion between customers and sales force. In 1964, IBM 360 system was launched to integrate all mainframe parts in one compatible system which forced IBM to be involved in producing all components of the mainframe computer by opening six new plants around the world. The compatible design and the power of the 360 system that was backed up by a marketing plan captured 70 percent of the market.
In 1969, IBM leased 50,000 computer systems to create revenues of $7. 2 billion. 2. IBM Competitive Advantage In 1927, IBM had competitive advantage over Burroughs, NCR, and Remington Rand by allowing their customer to lease their machines then supported these machines with trained service representatives who can make suggestions to customers for improving their information processing systems. Customers were happy because of the lower cost and reliable service from always using new machines that replaced old ones continuously.
Customers did not have to allocate large capital and faced no threat of purchasing a machine that would be outdated quickly with newer technologies. CTR also retained control over outdated machines and prevented their reselling in the used market which was a problem for NCR. IBM leasing strategy provided them with steady cash flow and enabled customers to purchase thousands of punch cards to operate their leased machines. IBM also had competitive advantage in producing the newest technology by their large expenditures on research development.
In 1939, IBM owned 80% of business accounting machines and Remington Rand and Burroughs were minor competitors. In 1956, Tom Watson, Jr. redirected the research and development thrust of IBM from mechanical to electronic. His research staff contained 4000 electrical engineer. He also created a small lab specializing in developing advanced information storage devices which in three years created the computer disk later to become the backbone of IBM computer systems. In 1956, IBM 650 provided IBM with competitive advantage as they were faster than their competitors’ products and yet provided at a cheaper price in a lease format.
The production of the powerful 360 system as the first complete mainframe package with integrated components offered. IBM competitive advantage stemmed from its capacity to produce such system and failure of others to produce such system in spite of their ability to produce new technology. 3. IBM Business-level strategy In 1927, CTR created a competitive advantage in its domain by allowing their customer to lease their machines rather than buy them. Customers enjoyed the saving of the capital to buy machines and were ensured reliable and top-notch machines.
CTR also invested large amounts in research and development which lead creation of a new line of tabulators that were easier to use than their competitors’ models and were priced below and offered for lease on favorable terms. In 1956, Tom Watson developed the IBM 650 series which was slower than the 700 series but much cheaper. One thousand IBM 650 machine were sold and thousands of punch card customers were introduced to computers. IBM 650 allowed IBM to have 75 percent of the market with Remington, NCR, and Honeywell sharing the rest. 4. IBM corporate-level strategy
IBM corporate level management has developed core competences to enlarge its existing domain as well as expand into new domains. In 1915, Watson licensed foreign companies to produce and sell the tabulators in foreign markets thus opening new markets. The licenses paid a royalty to CTR according to their sales which increased CTR revenues. In 1945, IBM corporate-level strategy showed interest in developing new products to meet customer information processing needs. This change led to the development of the first working computer which protected IBM’s business level strategy.
IBM maintained its competitive advantage of providing advanced products at cheaper prices. After the invention of the transistor in 1956 and the invention of Integrated Circuit in 1959, the newly produced transistor-based computers created a lot of confusion for sales employee and customers. Customers seeking upgrade was faced with completely leasing a new system and rewriting all the programs for the new system. Watson solution was the production of the new 360 series which would cover all scientific and business needs and render all previous IBM products obsolete.
Corporate-level strategy was to make it difficult for customers to change to competitors’ products both because of their superior quality and incentives to upgrade. The new strategy made it easier for business-level strategy to offer their sales support of an integrated package. 5. IBM changes in structure change due to changes in strategy In 1939, Watson split CTR and sold the scale division due to its irrelevance with company main business and kept time clocks because customers purchased many time cards which were similar to punch cards. He also bought Electromatic Typewriter Co. which made IBM the leader in electric typewriters in 1945.
In 1960, Watson split the data processing division into two units: one for newer machines at price over $10,000 and one for older machines at price less than $10,000. The division caused competition between managers of the split divisions and also led to duplication of research and development efforts. The division mainly aimed to decrease the confusion of employees and customers resulting from the diverse range of computers leased by IBM vacuum-tube based or transistor-based. In 1955, IBM was run by Tom Watson Sr. and he oversaw all operations and a line of top managers were always waiting to see him.
IBM had no organizational chart, no chain of command and no policy of decentralization. After Watson Sr. retired, his sons decided to create an organizational chart to get rid of the centralized management style that didn’t cope with the company’s growth. Domestic IBM was split into five separate divisions: the Field Engineering Division which served commercial customers, the Federal System Division which served government customers, the System Manufacturing Division which manufactured the computers, the Component Manufacturing Division which manufactured the Components, and the Research Division which performed basic research.
A top management team of the most senior six people oversaw the company strategy. A corporate staff was created to be made of experts in sales, marketing, manufacturing, finance, and communication to advise the CEO and oversea activities of the divisions. 6. IBM Position in 1970 In 1970, the Watson family control over IBM came to an end. Dick Watson resigned from IBM to become the U. S. ambassador to France. Tom Watson retired in 1971 after he suffered from a heart attack. By then IBM was the largest computer company in the World and dominated the mainframe computer industry.
The company spent 10 percent of its revenues in research and development to maintain its dominance in the world. Foreign revenues increased to $3. 5 billion and accounted for 50 percent of IBM’s total revenues. In spite of this success, IBM growth was starting to slow down as its rate of growth was 16 percent per year from 1955 to 1970 compared to 22 percent from 1946 to 1955. This decrease in growth was due to increased competition in the mainframe computer market and from other companies producing different computer applications.
The high growth of 22 percent maintained by IBM from 1946 to 1955 was due to IBM corporate-level strategy which in 1945 was interested in developing new products to meet customer needs. IBM entered the new domain of computers and expanded its current domain to the international level. In order for Learson to regenerate such growth, he must search the new innovations for opportunities to produce a new product and indulge into a new domain. Being a leader in such new domain and with high spending in research and development, Learson would be able to produce new products that would better meet customer needs utilizing new technologies.