Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

International Business Machines Corp. (IBM): Three Secrets to Success for the World’s Oldest Tech Company

Watson might have been many things — a good manager, an innovative thinker, a controversial amateur diplomat — but first and foremost, Thomas J. Watson was a great salesman. Before arriving at IBM in 1914, Watson built his reputation by brutally outmuscling competitors at the head of National Cash Register‘s Rochester, N.Y., sales office. A great salesman has to know his audience, and Watson understood that the best customers of IBM’s best product would be larger data-driven businesses, at least to the extent that businesses could be data-driven in those days. Thus he instilled from day one the corporate culture that prized customer relationships as much as technology.

That’s not to say that Watson was anything near a Luddite. He understood that a technology company is only as good as the minds it contains, and when he arrived from NCR, he also brought along a personal mantra: “THINK.”

Legend has it that Watson coined the mantra in a sales meeting, interrupting something tedious to point out: “[T]he trouble with every one of us is that we don’t think enough. We don’t get paid for working with our feet — we get paid for working with our heads.” Watson emphasized this by writing the word THINK on the meeting room blackboard.

“We get paid for working with our heads.”

Keep in mind that this was around the same time that Henry Ford (NYSE:F) was becoming the world’s most revered industrialist by turning men into little more than cogs in a living machine on the assembly line. Although celebrated for instituting a companywide eight-hour, $5 workday the same year that Watson joined IBM, Ford Motor Company (NYSE:F)‘s high wages were meant to be means of workplace control rather than a reward for the highly skilled. Ford Motor Company (NYSE:F) employees on the factory floor got paid for working with their feet and hands, not their heads.

Watson needed his employees to use their heads, and they did — the company’s revenues doubled in the first four years of his leadership. In the 1920s, IBM expanded again into time recording products and continued to advance the technology behind its punched-card tabulators, which would set standards for the format that remained in place until digital computation swept punched cards into history’s dustbin decades later. During this time, IBM firmly established itself as a technology powerhouse, and the company opened its first modern research lab in Endicott, N.Y., in 1932.

Watson’s commitment to producing cutting-edge technology for deep-pocketed enterprises was soundly validated when the company won a contract (all but unopposed) to supply tabulating equipment for the newly instituted Social Security Administration in 1935. Called “the largest accounting operation of all time,” the timely contract ensured that IBM would be a major U.S. government supplier for many years and gave the company a financial foundation from which to grow.

Out with the old
By the end of the second World War, real computers — bulky, clunky, hard-wired, and very limited, but still computers — began to appear. Although IBM was essentially a “tech” company, the pre-transistor era experienced far slower rates of progress than the period following the transistor’s invention in 1947. The company had relied on punched-card technology for so long that it was hard to imagine moving on to something newer and unproven. Watson didn’t see the company through the dawn of the computer era, but his legacy lived on in his son, Thomas J. Watson Jr., who assumed leadership after his father’s death in 1956.

In many ways, the son would surpass the father. He oversaw the development and sale of the 701, IBM’s first commercial scientific computer, four years before assuming company leadership. On his ascent to the corner office, Junior restructured the company with a greater focus on research and development and reaffirmed IBM’s commitment to large business and government clients at a time when the market for computing products was starting to expand dramatically.

A year after becoming CEO, Watson Jr. made innovation a mandate by barring further development on vacuum-tube machines in favor of solid-state circuitry. The 701 used vacuum tubes. Within Watson Jr.’s first two years at the helm, IBM saw the end of antitrust actions against its dominant data-processing machines, designed the first example of artificial intel (NASDAQ:INTC)ligence, created the first high-level programming language, and built the world’s first hard disk drive, shown below:

Source: Wikimedia Commons .

Watson Jr. took over a company with nearly $1 billion in annual sales and, just as his father before him, doubled IBM’s revenue in his first four years at the helm. By the end of those first four years, almost no trace remained of the company’s tabulating-machine origins. Despite this dramatic change, IBM held true to its roots while embracing Watson Jr.’s intensified push for innovation. IBM under Watson Jr. freely made its old products obsolete, notably in the 1960s with the launch of the System/360 mainframe line and in a 1969 decision to split hardware and software sales. Watson Jr. retired in 1971 after a heart attack, leaving behind a company more than nine times larger (and 12 times as profitable) as the one he’d inherited in 1956. He also left a research-driven culture that has now produced five Nobel Prize winners, all awarded in the years after Watson Jr.’s retirement.

A near-fatal detour
IBM’s lowest ebb as a public company must have come in early 1993, when it was fresh off a $5 billion annual loss (the worst in history at that time) and facing the near-certainty of another terrible year. IBM had created the PC standard and had then gifted the richest slices of that standard to Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC), which made the two most essential elements of what quickly became reverse-engineered commodity hardware. IBM was making boxes. Anyone could have made those boxes, and many competitors did so at a lower cost.

Source: Wikimedia Commons.

IBM had rushed to market with off-the-shelf parts, and the companies making those parts got rich. The company had strayed from its mission of building technological solutions for businesses and came as close as it ever has to eliminating its dividend. Despite cutting the payout by 80% in 1993, IBM held on — thanks to the timely hiring of Louis V. Gerstner as its new chief executive.

Gerstner is best-known for shifting IBM away from unprofitable consumer electronics and back into high-margin business technology services, returning the company to a business model frequently used in the Watson Jr. era. Gerstner also renewed the company’s focus on cutting-edge research, which has given the world a succession of increasingly impressive forms of artificial intelligence — first Deep Blue, and later Watson, the Jeopardy!-playing supercomputer named for IBM’s first great executive.

The market was always businesses and the focus was always on innovation, but IBM almost failed by straying from those core principles during the PC era. Its renewed success today is perhaps luck as much as anything. Would the company be where if it hadn’t hired Gerstner in 1993? Still, luck can only take you so far. Today, IBM is best known as a software and services company. What will it become in the future? Shareholders can rest easy knowing that the company should be consistently strong, as long as it remembers its core principles.

The article 3 Secrets to Success for the World’s Oldest Tech Company originally appeared on

Fool contributor Alex Planes owns shares of Intel. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology.The Motley Fool recommends Ford and Intel and owns shares of Ford, Intel, IBM, and Microsoft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.