Chapter 3 - Reorganizing to Rearm

The organizational structure of an enterprise can be a battering ram of corporate strategy in one period and an enervating dead weight in the next. In the 1960s, Tom Watson Jr. centralized the development staffs to unify development of System/360 as a line of mainframe models arrayed from small to large along a carefully graduated price ladder. Each division was charged with working a slice of the entire system product line that would mesh compatibly with every other slice. In other words, the Systems Products Division engineered everything from processors to tapes to communications devices, while Systems Development programmed software for operating systems, storage, and telecommunications, and Advanced Systems tried to juggle all the parts and pieces for the next-generation announcement. IBM's crown jewel was the Data Products Division, whose "blue-suiters" sold the products and provided every CEO from 1911 until 1993, when outsider Lou Gerstner broke the tradition.

Typically announced on the same day as the processors were new tapes, disks, printers, and telecommunications controllers— each enhancing the others' market potential even at risk to its own. And further neatening the customer’s decision was the bundling of software and service costs into the system’s purchase or rental price. One price covered everything. To coordinate this parade of computers, peripherals, software, training, and pricing, IBM established a process of forced reviews that subjected almost everything and anything to "concurrence" or "non-concurrence" by various executives across the vast organization. Every product plan drew endless meetings and memos signaling agreement or disagreement in sometimes ferociously combative prose.

The concentration of effort was fine so long as the competition mirrored IBM's end-to-end systems offerings, but it became a noose once the industry fragmented. Then dozens of specialized competitors fed on the IBM market, taking advantage of their insurmountable cost advantages and ability to target especially vulnerable points in the product line. They also knew that IBM’s cumbersome management process would impede its response. IBM needed powerful leadership to chart a new course. And the question that rippled through the industry was whether or not the new CEO, Frank Cary, was up to the challenge.

Many outsiders thought not. In their judgment, Cary would be a mediocre leader at best. Our friends at Fortune chuckled over his request for an invitation to one of the luncheon meetings the magazine regularly scheduled with top-rung business leaders. The journalists couldn’t conceive of the power-conscious Tom Watson Jr. or Vin Learson ever asking to be included. Our own view of Cary’s management skills, cobbled together from random sources outside IBM, was aligned with the doubters. But all of us were wrong. Frank Cary was the first professional manager to head a traditionally entrepreneurial company that had outgrown its traces. His style may have been more modest than his predecessors, but, as Watson himself later acknowledged, "Trying to make himself famous was what any Watson would have done. But it wasn’t Frank Cary's style, and the fact was that for eight years he ran the company as well as it had ever been run."

Relocating Leasing Company Inventories

The earliest competitive threat encountered by the new Learson/ Cary team was likely the leasing companies, whose resale of secondhand gear at depreciated prices depressed the prices IBM could charge for new mainframes. The extent of this drag on product introductions was aptly described in the Watson days by a note (another Telex memo) from Bob Evans evaluating a new high-end mainframe against its predecessor. “The machine failed in the marketplace because it was considerably overpriced,” Evans said.