Chapter 2 - The Strategic Gold Standards

A successful strategy hinges on a leader’s vision and steadfast determination to challenge and, if necessary, disrupt the company's own business model, despite subordinates' fears and customers' grumblings. Both Watsons did just that at IBM. Tom Sr. jettisoned major pieces of a sleepy conglomerate to usher in sixty years of supremacy in the newfangled business of data processing. Tom Jr. navigated IBM through three critical and hazardous transformations: the move into electronic computers with the attendant replacement of his father's highly profitable punch-card business; the settlement of the 1956 antitrust suit in a capitulation that actually enhanced IBM’s competitiveness; and the creation of the System/360, the product line that would effectively terminate his father’s competitors.

In the 1930s, IBM's tabulating equipment held 90 percent of the punch-card market. And no small measure of its continuing success can be attributed to the smooth succession of command from father to son in 1956, when the eighty-two-year-old Tom Watson Sr. relinquished the presidency to Tom Watson Jr. The younger Watson was just forty-two, but he had already accumulated a lifetime of experience with the company. Rather than a dying man's nepotism, this was actually an astonishingly successful transition, especially for an industry where founders generally stayed too long and were replaced only in extremis by executives too weak to maintain or regain competitiveness.

In the 1960s, Big Blue used its IBM System/360 computer line to pound its seven traditional competitors. Unwittingly, however, System/360 also spawned a whole new computer industry of "plug compatibles"-both mainframes and peripheral equipment that could displace IBM's own mainframes, tapes, disks, and printers. What is more, the competition came not from doddering survivors of the electromechanical age but from robust newcomers, notably a bevy of entrepreneurs and the Japanese giants—Fujitsu, Hitachi, and Nippon Electric. Once again, the company rose to the challenge.

Throughout those years, the Thomas J. Watsons—first the father and then the son—remained firmly in control, making farsighted decisions that would keep their company planted atop an industry undergoing unimagined change.

The Founding Father

The old man was tough as a tree trunk, having started his career selling everything from sewing machines to investments from the back of his horse-drawn carriage. His management expertise came later from John Henry Patterson, the legendary czar of “the Cash,” otherwise known as the National Cash Register Company (NCR), whose relentless business practices would eventually spark a government investigation and the antitrust conviction of his young protégé. Tom Watson had helped set up unmarked storefronts to covertly crush resellers of NCR cash registers by undercutting their prices until they collapsed. Though Watson took the heat as NCR’s front man, an ungrateful Patterson fired Tom in 1913, in part, many suspected, as a potential competitor.

Two years earlier, a band of entrepreneurs led by Charles Flint had lashed together a time-clock company, a scales company, and the Hollerith tabulating-equipment business to form the Computing- Tabulating-Recording Company (CTR). Flint was every bit the stuff of business legends in the mold of J. P. Morgan or Cornelius Vanderbilt. Before CTR, he had put together the United States Rubber Company and the American Chickle Company (the maker of Chicklets, Dentyne, and other chewing gums). He bought the ships that formed the Brazilian Navy, sold the Russians $35 million worth of submarines, and (unsuccessfully) peddled the patents for both the Wright brothers’ airplane and Simon Lake’s submarine to various foreign governments.