Management

Book Review: Father, Son, & Co., by Thomas Watson Jr and Peter Petre

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Buy the book: Father, Son & Co.

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When Tom Watson Jr was 10 years old, his father came home and proudly announced that he had changed the name of his company. The business that had been known as the Computing-Tabulating-Recording Company would now be known by the grand name International Business Machines.

“That little outfit?” thought young Tom to himself, picturing the company’s rather random-seeming collection of products, which included time clocks, coffee grinders, and scales, and the “cigar-chomping guys” who sold them. This was in 1924.

This is the best business autobiography I’ve read. It’s about Watson Jr, his difficult relationship with his father, the company they built, and the emergence of the computing industry. It is an emotional, reflective, and self-critical book, without the kind of “here’s how brilliant I was” tone that afflicts too many executive autobiographies. With today being IBM’s 100th anniversary (counting from the incorporation of CTR), I thought it would be a good time to finally get this review finished and posted.

Watson’s relationship with his father was never an easy one. From an early age, he sensed a parental expectation that he would follow his father into IBM, despite both his parents assuring him that this was not the case and he could do whatever he wanted. This feeling that his life course was defined in advance, combined with fear that he would never be able to measure up to his increasingly-famous father, was likely a factor in the episodes of severe depression which afflicted him from 13 to 19. In college Watson was an indifferent student and something of a playboy. His most significant accomplishment during this period was learning to fly airplanes—-“I’d finally discovered something I was good at”–a skill that would have great influence on his future. His first job at IBM, as a trainee salesman, did little to boost his self-confidence or his sense of independence: he was aware that local IBM managers were handing him easy accounts, wanting to ensure success for the chief executive’s son. It was only when Watson joined the Army Air Force during WWII–he flew B-24s and was based in Russia, assisting General Follett Bradley in the organization of supply shipments to the Soviet Union–that he proved to himself that he could succeed without special treatment. As the war wound down, he set his sights on becoming an airline pilot–General Bradley expressed surprise, saying “Really? I always thought you’d go back and run the IBM company.” This expression of confidence, from a man he greatly respected, helped influence Watson to give IBM another try.

The products that Watson had been selling, as a junior salesman, were punched card systems. Although these were not computers in the modern sense of the word, they could be used to implement some pretty comprehensive information systems. Punched card systems were an important enabler of the increasing dominance of larger organizations in both business and government: the Social Security Act of 1935 was hugely beneficial to IBM both because of the systems they sold to the government directly and those sold to businesses needing to keep up with the required record-keeping.

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A Manufacturing Renaissance?

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The value of the dollar (shown here measured against a basket of currencies) continues to fall–this of course makes imports more expensive to American consumers. There is inflation in China:

That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere. In some cases, retailers are bidding for goods at prices the exporters consider too low.

“I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers,” Mr. Tao said. “I’ve been covering the Chinese economy for a long time, and I’ve never heard that before.”

…which has the same effect of making U.S. manufacturing generally more competitive.

The natural effect of these phenomena is that manufacturing in the U.S., for export and for domestic consumption, becomes more competitive and hence factories operate at higher capacity, new ones are built, and employment increases along with economic growth. There are other factors that seem to point in this direction.

The greatly increased availability of U.S. natural gas, driven by new drilling technologies, offers potential advantages both to companies using gas as a feedstock and to those which are heavy energy consumers. Dow Chemical, for example, is increasing its production of ethane and of ethane’s downstream products: Dow’s plastics business has led earnings growth this year after lower natural-gas prices made U.S. production cheaper than oil-based resins made in Europe and Asia.

And in the broader manufacturing realm, quite a few companies are realizing that the “offshoring” boom was in some cases based on superficial analysis, ignoring the logistical realities of a 6000-mile-long supply chain and the consequent inventory, forecasting, and human communications problems. Our friends at Evolving Excellence cover this topic frequently. Note also that rising oil prices directly increase the costs of bunker fuel (for ships) and jet fuel (for planes) and hence have a significant negative effect on the economics of offshoring for many kinds of products.

So, can we expect a manufacturing renaissance in the U.S.? There are certainly indications of at least a temporary uptrend, and there are structural factors, as discussed above, which have the potential of creating growth over the long term.

I am afraid, though, that we are likely to snatch defeat from the jaws of victory. Multiple political and social factors will, unless they are reversed, make it difficult for U.S. manufacturing to live up to its full potential.

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Saturday Business Links and Commentary

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The Senate has passed a bill which would implement significant changes in the U.S. patent system. Bill Waddell has some serious concerns.

Also via Bill comes this interesting interview (video) with the head of GE’s Appliance business, which is significantly expanding its manufacturing operation in Louisville, KY. See also the discussion at Bill’s site.

WSJ reports that the SEC is considering relaxing the limit on the maximum number of shareholders in private companies, currently set at 499. According to another article in the same publication, the SEC is also considering a rather bizarre “crowdsourcing” approch under which companies would be able to sell investments in very small dollar amounts–$100 was mentioned–using social networking sites such as Facebook. (Another related WSJ piece here)

An alternative–perhaps complementary–approach is being proposed by David Weild, a former vice chairman of NASDAQ. Weild would like to see the creation of a new stock exchange, focused on raising capital for emerging companies and with a wider bid-ask spread to make dealing in such companies a more profitable activity for marketmakers.

A Business Insider article assesses recent organization changes at Google as a demotion for Marissa Mayer, based partly on the following reasoning:

Last year, Marissa Mayer was moved from being in charge of search to being in charge of local…Thing is, search is Google’s cash cow, and it’s probably the most important business in tech. So not running it anymore definitely makes her a less powerful executive.

I’m not a Google shareholder and don’t really follow the internal gossip of the company all that closely, so I have no particular opinion on how good a job MM has or has not been doing, nor when I read the linked article did I have any real opinion on whether or not the changes represented a good or a bad thing for her. (Later information suggests probably the latter.) But the kind of thinking represented by the assertion that less revenue responsibility means a less important job can be very dangerous to a business. The bad thinking in this case being done by the author, not necessarily by Google…however, an earlier BI article also observes that core search and AdWords are still king. That’s where the money comes from today, and why the engineers in those groups are treated like kings.

The problem with this line of thinking is that today’s revenue-dominant product is not necessarily tomorrow’s revenue-dominant product, and to the extent that power, resources, and status flow excessively to the current revenue king, tomorrow’s revenue king may never have a chance to be born and to grow up. A recent issue of Fortune offered Microsoft as an example–in a very hard-hitting article, the author argued that the grossly excessive dominance of Windows, aided and abetted by Steve Ballmer at every turn, has strangled many promising initiatives in their cradles.

A very astute and successful CEO observed that “the secret of startups is that you can have very smart people working on very small things.” By “small,” he did not mean unimportant; he meant small in terms of existing revenue. It is possible, of course, for established companies to also put appropriate focus on new and promising initiatives, but this will not happen where the company culture overly associates “success” with “current revenue managed.”

Clayton Christensen & Michael Raynor extensively discussed the tension between new and existing businesses in companies in their excellent book The Innovator’s Solution, which I reviewed here.

Complex Management Structures Spell Doom

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Recently John Chambers, the CEO of CISCO, came out with a memo that discussed failings in the company. Over the last decade or so CISCO (CSCO) has lagged performance of its peers on NASDAQ and recently they haven’t participated much in the broad market rally (down 20% or so in the last 6 months while NASDAQ is up by 16%). I read how the memo was portrayed in the media, but then I found the actual memo here and cite it directly.

You’ve also made it very clear that we must make it simpler to do the work we love to do, and to accelerate the impact we know we are making for our customers… As I’ve said, our strategy is sound. It is aspects of our operational execution that are not. We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders. That is unacceptable. And it is exactly what we will attack.

What is interesting to me is that I was just sort of waiting for this to occur. Back in 2009 I read about CISCO’s new team based model here in this WSJ article titled “CISCO CEO John Chambers Big Management Experiment“. From the article:

Now executives work on committees—dubbed councils and boards in Cisco-ese—and the company makes 70% of its decisions collaboratively, up from 10% just two years ago.
 
The moves have been controversial at Cisco. About 20% of the company’s senior leaders have left since the shift began in 2007—a percentage organizational experts call unusually high. Chambers compares the executives who’ve departed to basketball stars who don’t fit into a team’s system and adds that Cisco is better off without them despite their talent. He says the old Cisco, which relied on a handful of people to oversee new efforts, would never have been able to pursue so many opportunities.
 
Critics of the new structure say that it adds bureaucracy and strips away accountability. Cisco has lost market share in key product categories recently, and some people who have worked under the new structure draw a line between these losses and the management-by-committee approach.

The core idea of the business enterprise and entrepreneur-ship is all about leadership, accountability and personal responsibility. Businesses aren’t non profit organizations, they aren’t schools, and they aren’t after-school specials. They are serious efforts, with salaries and families and cities on the line, and people need to be given roles and held to the results that they committed to. These aren’t concepts that can be maintained through revolving committees where no one is responsible. Trying isn’t good enough.

And another reason this is doomed…

Chambers says the idea for the new management structure came to him while participating in a collaboration exercise at the 2007 World Economic Forum in Davos, Switzerland. He was on a team with Arianna Huffington, among others, and the group was told to present a vision for life in 2015.

Awesome. Getting ideas for how to run a world-class company from dilettantes in Davos and a blogger, albeit one who was able to turn her re-posted “content” into actual cash through the dying AOL banner (don’t ever underestimate the power of cashing out at the right time).

It is odd that Chambers thought that he was big enough to stand the lifetime of experience on management on its head and go with this ludicrous team concept. Not team in EXECUTION, which is critical, but in RESPONSIBILITY, which is doom. Someone has to stand up and make decisions and take the heat or fall for bad decisions, and you can’t fire everyone in a committee.

This isn’t the first time Chambers has been blinded by faddish ideas. I was with a consulting firm that was a partner with CISCO in the first dot-com boom and at the time CISCO was touting their “fast close” and their ability to rapidly forecast sales and earnings. This occurred right before the markets crashed and they had to write off millions of dollars in unsold inventory, basically proving that their forecasts weren’t worth the paper they were printed on (or the internet space taken up explaining them, since this is now a virtual world).

Cross posted at LITGM

“Decision-Making in the Pressure Cooker: Lessons Learned from the Collapse of Lehman Brothers”

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Presented by the Lumen Christi Institute and the Catholic Lawyers Guild.

Thursday, March 3, 5:30 PM, Jenner & Block, 353 North Clark Street.

Info here.

Register here.

The speaker whom I am most interested in hearing is Luigi Zingales. I mentioned his essay Capitalism After the Crisis in this post. Zingales was one of the economists who urged Congress to hold hold hearings on the Paulson bailout plan, and as we know that did not happen. I just read his essay Learning to live with not-so-efficient markets, which I commend to your attention. A compendium of his recent writing, entitled “MY LOSING BATTLE AGAINST THE LEVIATHAN (Public interventions of a desperate free-market economist” can be found here.