This series started by noting that IBM recently celebrated its 100th year of incorporation. It's had its ups and downs, but it's been hugely profitable for nearly every year of its century.
Contrary to popular belief, IBM isn't really a technology company. Although IBM will make and sell anything that will yield a profit, it's core purpose isn't to make money by selling technology. Its core purpose is to work with customers to identify technical problems which IBM can solve for them.
If the solution uses hardware or software which IBM happens to sell, well and good. If the solution requires some other vendor's offerings, that's OK too. If IBM ends up selling too much of another vendor's products, they'll likely buy the vendor as they bought Lotus, but that's not a core part of their strategy.
To name but one example, IBM has slowly invested around $14 billion to support their "Smarter Cities" initiative. The goal is to help crowded, polluted cities reduce crime and help traffic flow better using software which backs up sensors scattered all over the city. Improving traffic flow by managing traffic lights better is far cheaper than building new highways, particularly in cities. Reducing pollution by reducing time lost in traffic is a huge win for everyone and doesn't require passing laws forcing people to do something they'd rather not do, like riding bicycles to work.
The earlier articles in this series discussed important business tactics which helped IBM achieve a profitable first century. This article discusses some higher-level strategies which IBM follows.
Being focused on customer needs is business 1.01, 02, and 03. This is a tactic, in that employees need to be reminded every day that customers drive cash flow and that products are intimately related to payroll. Customer focus is also a strategy in that management has to create policies and procedures so that it's hard for employees to lose customer focus.
Any business that loses customer focus goes out of business unless the taxpayers can be persuaded to cover its costs. This is so well known that every business in the world speaks of being "customer centered," but few businesses actually persuade their employees to think in terms of who the customers really are and what they really need.
Telling stories is one of the best ways to teach employees proper behavior. Most big companies have in-house newsletters why try to do that.
In the early mainframe days, IBM's field servants were given authority to commandeer any corporate asset to keep a customer's computer working. One customer's site was damaged by a flood. Their IBM rep got on the phone and replacement components started flowing in.
The last component was a refrigerator-sized disk drive. One was available in an IBM office, the corporate jet happened to be nearby, and it was about to ferry Thomas J. Watson himself to an important meeting.
Without hesitation, the shipping people loaded the disk aboard and Mr. Watson flew commercial.
The story of rebuilding the data center overnight made the employee newsletter, but not page one because stellar field service was the norm. The fact that this story is remembered nearly 50 years later is a tribute to the power of story telling to teach proper behavior, but the boss had to go along. What would the message have been if Mr. Watson had kept the corporate jet? The entire message about "over the top" customer support would have been dismissed as hypocrisy.
It's really important to know who the customers are. Back when it was about to go under, IBM saved itself by realizing that big businesses had to use many different technologies. Few businesses knew how to manage every technical wrinkle they needed, so IBM offered to help. IBM is a big business that sells mostly to big businesses. Consequently, buying from IBM needs human help. It's extremely difficult for a small business to penetrate their web site and figure out what to buy.
That's OK because IBM has set up a number of value-added resellers who're big enough to navigate the IBM product line and small enough to sell to smaller firms.
Google is utterly different. Although Google has people who talk to large customers, most of their customers never interact with Google's people. A small business can sign up to buy or sell adds without any human help at all. The Google software places the ads and collects fees via the customer's credit card with no human contact.
Dell is stuck in the middle. Their web site is really awful. Even when you can choose a Dell product without human help, you'll need human intervention if you have to change to a different shipping address, for example. This adds to costs. Amazon has figured out how to sell tens of thousands of products with essentially no human interaction while gaining a reputation for good customer service but few companies are able to use the Internet that effectively.
Once a business has a clear focus on its customers, the mission statement becomes a single sentence. Unless most if not all employees can state the business focus, the business loses focus over time. If, like Dell or Microsoft, the business becomes too focused on a technology, they'll lose over time as the technology changes out from under.
Everything the business wants to do requires money. Companies that intend to survive for along time take a conservative attitude towards debt. The American tax system encourages businesses to go into debt. Interest on debt is tax-deductible. Dividends, on the other hand, are not deductible. What's worse, dividends are taxed twice. The company pays taxes on its profits, they pays some of the profits as dividends. The people who receive the dividends have to pay taxes on them.
The favorable treatment of interest on debt is a really strong temptation for businesses to borrow rather than sell stock. As we've explained, borrowing money lets you leverage your assets. This is wonderful when things go well, but kills you in bad times because you have to meet your lenders' demands for interest payments no matter what.
The moment it looks like you're having trouble, your lenders pounce and can take you down.
Stockholders, in contrast, will understand if you stop paying dividends for a while. They'd rather interrupt dividend income than get wiped out.
IBM has always been very careful about debt. USA Today reports:
IBM carries about 95 cents of long-term debt for every $1 invested in the business by investors, says Thomson Reuters. That's well below the $138 in debt to every dollar of shareholder money invested in the average company in the S&P 500. [emphasis added]
Being financially conservative allows an older company to reward investors' patience and loyalty as it weathers the good times and bad. IBM's dividend payments to shareholders, for instance, have steadily increased over the past 100 years, despite a few large cuts in the 1990s, says Ken Winans, market historian and investment manager at Winans International.
IBM borrows less than 1% as much as other companies borrow. Their shareholders have benefited greatly.
As a nation is the sum total of its citizens, a business is the sum total of its employees. 2,500 years ago, Confucius pointed out that the government's main job was to look out for, take care of, and benefit its citizens. Napoleon, who was renowned as a leader, said:
We must serve the people worthily, and not occupy ourselves in trying to please them. The best way to gain their affections is to do them good.
Any company that wants to last for a long time had better do good to its employees. If they don't, the smart ones leave and the company is stuck with whomever can't find another job. How well will that work out over the long haul?
IBM consistently made their employees feel pride in working for IBM. They got high pay, country clubs, and generous retirement.
IBM nearly demanded that each employee buy stock in the company - how could they act like owners if they weren't owners?
When the stock price was high, IBM told them to rejoice, their nest egg was worth more. When the stock price was down, IBM told them to rejoice, they got more shares for each dollar of payroll deduction. Either way, IBM-ers were encouraged to think like owners and participants, not passive onlookers.
People appreciate being told the truth. Employees can tell when things are bad, and if management doesn't tell them what they know, they'll assume the worst. Just telling bad news isn't enough, however, management must also explain how the company is going to get out of the unfortunate situation. When IBM management told the employees they were going to switch to the consulting business and how they were going to get there, everyone believed. They worked hard, and fixed the problem.
The employees were willing to work hard enough to bring the firm through the crisis because they knew that IBM would resume taking care of them once they fixed the problem and because management had always told them the truth. When IBM announced the plan to return to profitability, it made sense, and the employees made it happen.
Trust-driven corporate resurrections of this sort are much more common in Asia. Even IBM has occasionally had no choice but to lay off thousands of employees; until recently Japanese companies would rather die than do layoffs. However, IBM has never claimed to offer lifetime employment even when it all but did; the great Japanese corporations did. IBM's truth-telling made managing the hard times slightly less hard than they otherwise would have been.
Big companies aren't known for being able to innovate, but IBM's history is full of technologies they've invented, exploited, and then abandoned when profit margins got too small. This requires that the company tolerate failure. If venture capitalists report that only 1 in 20 new ventures succeed, a big company has to be prepared to tolerate 19 failures out of 20 tries.
IBM had a habit of funding two development teams - one budgeted in the normal way and one given only 1/10 the budget of the main team. In order to succeed at all, the smaller team had to be very creative. When the smaller team succeeded, the results were genuinely impressive. Even when they didn't win the design competition, their ideas were generally worth incorporating in the main effort. USA Today reported IBM's view of innovation:
"Innovation is applied to business, technology and all manners of operation (at IBM)," says Bernie Meyerson, vice president of innovation at IBM. "We are here because we are innovators. We would not be here if not for it."
Letting people explore new ideas requires that they be given freedom to dabble. 3M lets employees spend up to 15% of their time looking at new ideas 15% on side projects, google allows 20%.
This requires long-term thinking - most innovations take 5 of 10 years to pay. If a company is overly focused on short-term profits, such long-term investments can't occur, and the company is doomed when the market shifts.
It's an interesting coincidence that IBM is celebrating a successful century just at the time that many Americans are wondering if their own country is going to make it another few decades without going bankrupt, much less another hundred years. Running a country is, of course, not the same thing as running a company, but there are similarities between a very large company and a nation-state. Companies die when they get too far out of touch with the realities of what their customers want.
We'll shortly be starting a new series exploring comparisons between the experiences of IBM and other large companies, the principles that drive them, and what we observe in the life-cycles of countries which rise, decline, and die when they get too far out of touch with reality.