#87 Thomas Watson IBM

Summary Notes


In the episode featuring the book "The Maverick and His Machine: Thomas Watson Sr. and the Making of IBM" by Kevin Maney, the host delves into the life and career of IBM's iconic leader, Thomas Watson Sr. Watson's early struggles in Dayton, Ohio, set the stage for his eventual success and the creation of a business empire. Drawing inspiration from Mark Andreessen and other historical entrepreneurs, the host underscores the value of learning from past innovators and the importance of perseverance. Watson's harsh, cult-like leadership style and his aggressive business strategies, including forming monopolies and prioritizing research and development, are highlighted as key factors in IBM's rise to dominance. Despite personal flaws, Watson's ability to inspire loyalty and make critical decisions during tough times, like the Great Depression, played a vital role in building IBM's legacy. The host also offers insights into the podcast's value proposition and teases the next episode on Warren Buffett's shareholder letters, with a note on possible delays due to an impending hurricane.

Summary Notes

Thomas Watson's Turning Point at Age 40

  • Thomas Watson's life drastically changed after his experiences in Dayton, Ohio.
  • His time in Dayton involved significant success, but also near destruction.
  • These experiences were pivotal for the future of IBM and Watson's role as a major business figure.

"Thomas Watson began his life at age 40 after Dayton, Ohio nearly ruined him. In Dayton, Watson experienced fantastic success and near destruction. All of it had to happen for IBM to exist at all and for Watson to take his place among history's great business figures."

The quote explains that Watson's life had a significant turning point at the age of 40, which was crucial for his success and the establishment of IBM.

The Influence of Past Entrepreneurs

  • Entrepreneurs of the past were extreme characters, with Thomas Watson Sr. being a prime example.
  • Mark Andreessen emphasizes learning from the past to understand the efforts and experiments of previous entrepreneurs.
  • Historical knowledge is considered valuable for creating new businesses and managing them effectively.

"The entrepreneurs of the past were extreme characters. I'm thinking of Thomas Watson senior. If you want to know what it is like to work for someone who is harsh, read a book on Thomas Watson senior."

This quote by Mark Andreessen highlights the intense nature of past entrepreneurs like Thomas Watson Sr. and suggests that understanding their management styles can be insightful for modern entrepreneurs.

Value Proposition of Founders Podcast

  • The podcast aims to provide value by sharing the accumulated experiences of past business figures.
  • Listeners can gain knowledge from historical business figures through the podcast's content.
  • The podcast offers free episodes and a paid "misfit feed" for additional content.

"For very little money and a few hours of time, you can learn from someone's accumulated experience."

Mark Andreessen's quote is used to illustrate the value of the podcast, which provides access to the wisdom of historical entrepreneurs for a small fee and time investment.

National Cash Registers (NCR) and Thomas Watson

  • Watson worked for NCR, which held a monopoly on cash registers in the early 1900s.
  • He was promoted to run his own subsidiary, which was a significant step up from his previous role as a sales manager.
  • Watson's father advised him to focus on what makes him unique, especially in the information age.

"He told his father that he had have a budget of a million dollars, an amount that was unfathomable to both father and son."

This quote reflects the significant responsibility and opportunity Watson faced as he was entrusted with a large budget to run a subsidiary of NCR.

NCR's Monopoly Tactics and Watson's Role

  • NCR aimed to maintain its monopoly by creating a fake company, which Watson was asked to run.
  • The fake company, Watson Secondhand Cash Register Company, was intended to undermine the used cash register market.
  • Despite being a ruse, the company became unexpectedly profitable under Watson's management.

"Watson's rather a highly skilled operator, though. So this fake company actually grew into a successful profit generating company, and it was all a ruse."

This quote underscores Watson's capability as a business operator, as he managed to turn a fake company into a profitable venture, despite its initial purpose being to disrupt competition.

Patterson's Influence on Watson

  • Patterson, the head of NCR, had a cult-like leadership style that Watson emulated.
  • Watson viewed Patterson as a mentor and adopted both his positive and negative management practices.
  • The culture Watson created at IBM had similarities to the cult-like atmosphere at NCR under Patterson.

"Patterson created a cult. Watson did too early IBM, the only way, I think the only accurate way, based on the information and the reporting in this book."

This quote indicates that both Patterson and Watson created cult-like environments in their respective companies, which had a significant impact on their management styles and company cultures.

Watson's Early Life and Career Struggles

  • Watson was born into a poor family and lacked any apparent outstanding talents.
  • He left school early and worked in various jobs, including as a bookkeeper and a salesman.
  • Watson faced many failures, including being fired from a sales job after his merchandise was stolen.

"Watson didn't seem to have any outstanding talents. He found little value at school."

This quote highlights the humble beginnings and lack of early success in Watson's life, which contrasts with his later achievements as a business leader.

Watson's Discovery of the Hollerith Machine

  • Watson learned about the Hollerith machine, which tabulated information using punched cards, from a friend at Eastman Kodak.
  • This discovery would later influence the direction of IBM and its dominance in the tabulating machine market.

"This just opened my eyes, Watson said."

Watson's realization about the Hollerith machine's potential signifies a pivotal moment in his career and the future of IBM.

Summary of Watson's Attributes and Impact

  • Watson was a complex figure with both positive and negative traits.
  • The author of Watson's biography, Kevin Maney, presents a balanced view, acknowledging Watson's successes as well as his flaws, such as narcissism and manipulation.
  • Watson's life story is a testament to the idea that success can come at any age and that one's past does not determine their future.

"Unfortunately, the traits that can make us extremely successful when applied in the wrong way or in an improper domain can also lead to your downfall."

This quote encapsulates the duality of Watson's characteristics and suggests that the same traits that contribute to success can also be detrimental if misapplied.

Early Ambition and Perseverance

  • Many young people are ambitious and on point, which is inspiring and provides them with an advantage.
  • Thomas Watson exemplifies the value of perseverance, as he continuously faced failures but did not give up.
  • Watson's determination and motivation stemmed from his lack of success and desire for a better life.
  • Watson's perseverance led him to success at NCR, where he moved up the ranks and turned around a struggling office at a young age.

"Watson was an example of that. So it says, Watson trugged to the local NCR office to transfer the installment payments on the store's cash register to the butcher shop's buyer. This is how he gets a job at the NCR office. He talked. This is another important event in his life at the NCR office, he talked with salesman John range. Watson asked range for a job and continued calling on range until range said yes."

The quote describes how Watson's persistence and continuous effort to seek employment at the NCR office eventually led to him being hired, demonstrating the importance of perseverance in achieving success.

  • Watson's indictment in 1912 was a turning point in his life, profoundly affecting his personal and professional identity.
  • The trial and subsequent guilty verdict had a significant impact on Watson, leading him to prioritize a clean image and reputation in business.
  • Watson's refusal to admit wrongdoing despite being guilty showed his extreme commitment to maintaining his integrity, which played a role in his leadership style.
  • The legal troubles and eventual firing from NCR forced Watson to start anew, which led to the foundation of IBM.

"IBM would not have existed, at least not the incarnation it was when Watson ran it without this. And I think it's extremely important to understanding that there was, like a fuel to him."

This quote emphasizes the significance of Watson's legal troubles and their role as a catalyst for the eventual creation of IBM, highlighting the impact of adversity on Watson's drive and determination.

Charles Flint and the Founding of IBM

  • Charles Flint's life story is remarkable and played a crucial role in the founding of IBM.
  • Flint's diverse experiences, including creating trusts and international trading, provided the groundwork for the formation of CTR, which would become IBM.
  • Watson's partnership with Flint was strategic, as Flint needed someone to save his failing trust experiment, CTR.
  • Watson's deal with Flint for a percentage of CTR's profits was a smart move that eventually led to his financial success.

"Watson had an appointment with Charles Flint, who would change Watson's life with a job offer."

This quote highlights the pivotal moment when Watson met Flint, leading to a job offer that would significantly impact Watson's career and the future of IBM.

Watson's Leadership and Vision for CTR (IBM)

  • Watson took over CTR without a specific vision for tabulating machines but communicated a broader vision of greatness for the company.
  • His optimistic leadership style was initially met with skepticism from employees who had witnessed the company's decline.
  • Watson's patience and savvy were evident in his leadership approach, and his charismatic personality eventually convinced employees of CTR's potential.
  • Watson's need to prove his moral integrity and business acumen drove him to transform CTR into a respected company, which later became IBM.

"Watson finally broke free of the worst episode of his life. But the desire to bury his past now consumed him."

This quote captures Watson's determination to overcome his past legal troubles and the motivation behind his efforts to build CTR into a great and admired company, which would ultimately become IBM.

Watson's Personal Flaws and Impact on IBM

  • Watson's focus on success in business led to a blurring of lines between his personal life and IBM, with negative consequences in his family life.
  • His need for adulation and tendency to promote those who flattered him created a problematic work environment.
  • Despite these flaws, Watson's strategic moves, such as creating a market monopoly, contributed to IBM's success during his tenure.
  • Watson's leadership strategy included promoting from within and training his own people, which contributed to the cult-like culture he fostered at IBM.

"I have a hard time respecting anybody. I don't care if you make a billion dollars, if you're a crappy dad, you fail to life, it doesn't matter."

The quote reflects the speaker's personal values, emphasizing that success in business does not compensate for failing in personal responsibilities, particularly as a parent, and offers a critique of Watson's personal life.

Development of Internal Talent

  • Thomas Watson believed in developing talent from within the organization rather than hiring outside experts.
  • Watson emphasized the importance of understanding the business deeply and continuously learning.
  • He criticized his team for not knowing their own numbers, highlighting the importance of being well-informed and detail-oriented in business.

"I like to develop men from the ranks and promote them."

This quote demonstrates Watson's policy of nurturing internal talent and promoting from within, as opposed to bringing in external hires for key positions.

Leadership and Management Style

  • Watson's leadership style involved direct criticism and high expectations.
  • He believed in thorough analysis and understanding of business reports.
  • His approach has been criticized for being harsh, as he would scold his executives for mistakes, even when the criticism was based on his own incorrect information.

"I've preached and preached and preached to study the business, study the business, study the business."

This quote encapsulates Watson's philosophy that in-depth knowledge of one's business is crucial for success, and that dedication to learning about one's field is essential.

Corporate Culture and Innovation

  • Watson aimed to create a positive, optimistic corporate culture at CTR (later IBM).
  • He introduced various cultural elements from his previous company, NCR, such as clubs for successful salesmen, annual conventions, and a company newspaper.
  • Watson focused on innovation as a key strategy, especially when facing the expiration of patents.

"Watson was building a religion. Watson was building a cult."

This statement suggests that Watson's methods of instilling company culture and values were intense and all-encompassing, to the point of being compared to a cult-like following.

Strategic Focus on Data Processing

  • Watson recognized the potential of tabulating machines (early data processing technology) and shifted the company's focus towards them.
  • He understood that tabulating machines, which automated mental work, had a unique appeal and vast potential.
  • Watson's vision was that data processing had unlimited opportunities and was the future of the company.

"The biggest oak starts from an acorn. You've got to be willing to let that acorn grow into a sapling and then into a small tree, and then maybe one day it'll be a big business on its own."

This quote, attributed to Jeff Bezos, reflects the idea that success often requires patience and gradual growth, a principle that Watson also embraced in his strategic focus on the burgeoning field of data processing.

Learning from Peers and Competitors

  • Watson valued the insights and strategies of other successful business figures, such as Charles Kettering and George F. Johnson.
  • He learned from Johnson's community-oriented management style, which included profit sharing and employee welfare programs, although Watson's own management style differed.
  • Watson's approach to business was influenced by observing and learning from the successes and practices of his contemporaries.

"Johnson proved to be a manager like no other of the era."

This quote describes George F. Johnson's progressive and community-focused management style, which stood in contrast to the more authoritative and efficiency-driven approach of Watson.

Patent Strategy and Market Domination

  • Watson leveraged patents strategically to maintain a competitive edge and drive sales.
  • IBM's focus on acquiring and developing patents in data processing aimed to ensure market leadership and create barriers for competitors.
  • The company's aggressive patent strategy eventually led to an antitrust suit due to its monopolistic position in the market.

"Watson acquired more patents by buying upstart competitors."

This quote explains part of IBM's strategy under Watson's leadership to dominate the data processing market by acquiring patents, both through invention and acquisition of other companies.

The Significance of Persistence and Incremental Progress

  • Watson's success was attributed to persistence, incremental progress, and making well-considered decisions over time.
  • Rather than relying on epiphanies or predictions, Watson's approach was methodical and based on continuous observation and adaptation.
  • The development of IBM into a leader in data processing was a result of Watson's long-term vision and unwavering determination.

"He didn't have a grand vision for turning IBM into a punch card company. He got there little by little, one observation after another over a period of ten to twelve years."

This quote highlights the gradual and deliberate nature of Watson's strategic decision-making process, leading to IBM's eventual focus on data processing technology.

Competition and Labor Market

  • Thomas Watson needed to compete with Johnson in a labor market where the best workers had clear preferences.
  • Watson considered following Johnson's lead due to market pressures.
  • The decision to change the company's environment is a common dilemma for founders.

"to change some of the stuff because he has to compete with Johnson." "For Johnson, the residents weren't so sure about IBM."

These quotes highlight the competitive nature of the labor market and the necessity for Watson to adapt his business strategies to attract and retain talent.

Leadership and Management Style

  • Watson's leadership style involved unleashing tirades at managers, which was rationalized by executives as a sign of being valued.
  • Watson's approach created a cult-like dedication among IBM employees who saw the company as their life and ambition.
  • Despite the harsh management style, Watson rewarded loyalty with bonuses, promotions, and compassion during personal crises.

"Watson felt he could unleash tirades at his managers with impunity." "Executives rationalized his behavior by telling each other, if you weren't worth putting together, he didn't bother to tear you apart."

These quotes reflect Watson's authoritarian management style and the internal justification by executives for enduring such behavior, indicating a culture of fear and respect within IBM.

Innovation and Risk During the Great Depression

  • Watson maintained an optimistic outlook during the Great Depression, contrary to the general business sentiment.
  • He made risky decisions to keep factories running and to increase R&D spending despite the economic downturn.
  • These decisions almost bankrupted IBM but ultimately positioned the company as a leader when the economy recovered.

"He made two dangerous decisions. One, he would keep factories running and lay off no one. And two, he would increase spending on research and development even as companies around the world slashed their R&D budgets."

This quote captures the bold and risky strategy Watson employed during the Great Depression, which ultimately paid off for IBM in the long run.

The Social Security Act and IBM's Growth

  • The Social Security Act of 1935 created an unprecedented demand for data processing, which IBM was uniquely positioned to fulfill.
  • IBM's previous investments in production and R&D allowed it to meet the new demand, leading to significant revenue growth.
  • This period marked the beginning of IBM's dominance in the data processing industry for the next several decades.

"And overnight, the demand for accounting and data processing machines exploded because every single business now had to do data processing and accounting on a scale never before had seen in the United States."

The quote explains the serendipitous impact of the Social Security Act on IBM's business, showcasing how external factors combined with strategic readiness can lead to corporate success.

Watson's Personal Traits and Business Philosophy

  • Watson's complex personality included both admirable and difficult traits.
  • He believed in the importance of R&D and was willing to invest heavily in it, even during tough economic times.
  • Watson's morning routine included dedicated thinking time, which he also encouraged among his employees.

"To me, he's such a bizarre. He's got really good ideas like that and then cringy personality traits."

This quote reflects the speaker's view of Watson as a multifaceted individual with both positive and negative attributes, emphasizing that perfection is not a prerequisite for business success.

Legacy and Company Culture

  • Watson inspired loyalty and was known for his generosity and recognition of employees' contributions.
  • His actions during crises and personal tragedies built a strong company culture.
  • The company's success was attributed to a cycle of attracting and retaining talented individuals who were loyal to Watson and IBM.

"Thomas Watson was volatile and self-aggrandizing. He could be domineering, unbending, demanding, and a maddening micromanager."

The quote summarizes Watson's character flaws, yet acknowledges his ability to build a successful and respected company, reinforcing the idea that success can coexist with imperfection.

Supporting the Podcast and Personal Endeavors

  • The speaker encourages listeners to support the podcast by subscribing to the Misfit feed.
  • The speaker prepares extensively for the podcast by reading and highlighting key ideas from books.
  • Upcoming episodes include a deep dive into Warren Buffett's shareholder letters.

"I don't think anybody else prepares more than I do."

This quote emphasizes the speaker's dedication to providing well-researched and valuable content for the podcast listeners, highlighting the effort behind the production.

Addressing Uncertainties and Future Plans

  • The speaker may face disruptions due to Hurricane Dorian and provides a contingency plan for podcast release.
  • Listeners are invited to recommend books for future podcast episodes.
  • The speaker expresses gratitude for support and encourages sharing the podcast with others.

"There's a good chance I might have fleet. I've been through enough of these things. I can't stay for a storm like that."

The quote discusses the potential impact of a natural disaster on the speaker's ability to produce the podcast, showing a commitment to the audience despite external challenges.

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