The GM Challenge

In 1979, GM was the largest corporation in the world in terms of sales.

GM Buildings in Downtown Detroit Photo courtesy: downtowndetroit.org

(CALGARY, Alberta) - Now that the American public is the major shareholder of GM, a concern raised by many is that government, being inherently incapable of running or overseeing any kind of business, is going to mismanage the whole operation.

This assumes that big business is better than big government. In my previous article "Capitalism cannot work" [see: Capitalism Doesn’t Work. Period - Political Perspective by Daniel Johnson Salem-News.com]

I drew the obvious conclusion that for the last fifty years, the management of GM, Ford and Chrysler have driven the industry into the ground. So, Big Business itself has obviously failed.

In 1979, GM was the largest corporation in the world (by sales) at $54 billion and IBM was tenth at $18 billion. IBM nearly lost it, as well.

1979 was at approximately the beginning of the PC (personal computer) revolution. Why, the astute reader will wonder, isn’t there an IBM computer on virtually every office desk using an IBM operating system? The short answer is that IBM inadvertently created Microsoft. IBM, as a giant bureaucracy was unable to manage innovation. Some at IBM saw the potential in the PC, but its development was not possible within the IBM bureaucratic culture.

This prompted me to dig up a book I’d read about a decade ago. Paul Carroll, as a Wall Street Journal reporter, covered IBM for seven years through the 1980s and wrote a book, Big Blues, which is a real eye opener about how really big businesses work (or don’t work) behind the scenes.

This is a point I’ve been making for decades. When a government screws up—wastes money, operates inefficiently—it’s front page news. It’s my money the irate taxpayer rails. But what they don’t see is that the media that reports this is privately owned and have a vested interest in making the public sector look bad. When business screws up—wastes money, operates inefficiently—no one cares. But it’s still the taxpayers money! All the operating costs of a business, wasteful or not, are built into the prices of products that the taxpayer, as consumer, buys.

But, as philosopher Joseph Heath writes in his book The Efficient Society: “The world is full of fast-food restaurants precisely because we often want our food to be prepared fast. In the same way, the world is full of bureaucracies precisely because we demand organizational results that only bureaucracies can deliver.”

Buying IBM stock

Chairman John Akers stepped up a program in the late 1980s to buy back IBM stock, arguing that the stock had become undervalued. Over the years, he wound up spending about $6 billion buying back IBM stock at prices averaging $119 a share. That was nearly two and a half times the price of IBM’s stock in mid-1993 when it was in the high forties, so, at least on paper, IBM lost $3.5 billion buying its own stock.

The Golden screwdriver

There was the “golden screwdriver”. If a customer ordered a mainframe that was the smallest machine that IBM offered, the company might actually ship the customer a machine that was twice as powerful and contained twice as much memory. IBM would simply include a couple of lines of software on the machine, which kept the processor from using the extra memory and made it run at half its true speed. Assuming the customer did eventually decide he wanted a faster machine with more memory, IBM received a windfall. It simply sent out a technician, who shooed everyone out of the room lest someone figure out exactly what he was doing with his “golden screwdriver”. The technician merely erased the couple of lines of software that were slowing things down, then left the customer a bill for a few million dollars. By the late 1980s, IBM had so much extra capacity already installed at customer sites just waiting to be activated, that the company appeared to be capable of coasting for a long time even if growth in demand slowed.

The Change team

This is my favorite IBM story.

There were two young programmers in Chicago who were so good at fixing bugs that they were nicknamed, the “Change Team”. O. M. Scott, a senior executive from headquarters, visited Chicago in the late 1960s and decided to meet with all the major teams in the area. He’d heard someone mention the Change Team and, not realizing it was just a nickname for two people, had his secretary schedule a lunch with them.

Jim Cannavino’s colleague was off sick that day, so the lunch was just Scott and Cannavino. It took the two a while to figure out what was going on. Cannavino had just been told to have lunch with Scott, not why. He kept waiting for Scott to get to the point. Scott kept wondering who this Cannavino was and when Cannavino was going to take him to the meeting of the full Change Team.

That would make a perfect “government” story.

Writing computer code

At the beginning of the partnership between IBM and Microsoft, Bill Gates was focused on developing a program called Windows while IBM focused on an operating system called 0S/2. The partnership couldn’t work because the two companies had different programming styles.

The IBM system mainly measured how many lines of code someone wrote, which actually encouraged programmers to write inefficient software. Big pieces of software run slowly because they overtax the PC’s processor. Large amounts of software also require computers with lots of memory for storing all the code—which turned out to be a crucial problem in the case of OS/2, because memory chips were very expensive in the mid- to late 1980s when OS/2 was struggling to catch on.

One of the biggest fights the IBM and Microsoft developers had, came when a Microsoft developer took a piece of IBM code that required 33,000 characters of space and rewrote it in 200 characters. IBM programmers were offended. Other Microsoft developers then rewrote other parts of IBM’s code to make it faster and smaller. This was even more offensive. IBM managers then began complaining that, according to their measurement system, Microsoft hadn’t been pulling its weight. Measured in lines of code, they said, Microsoft was actually doing negative work.

Microsoft programmers complained to Gates and Balmer through the mid-1980s that IBM was too stupid to do business with. Gates and Balmer held to their prime directive, that they had to keep IBM’s business at any cost. So programmers coined the term bogu, which they would call out to Gates and Balmer anytime they were preparing for a meeting with IBM. The word bogu stood for “bend over and grease up”. When directed primarily at Balmer, it became Bogus, for “bend over and grease up, Steve”.

IBM didn’t get a reasonably usable version of OS/2 out until spring 1992—nine years after the work began. It was slow, and an important part of the graphics software had to be redone. But when a group of mainframe programmers found out that Brian Proffit had redone the software on his own, they asserted that they, in IBM’s terms, had “ownership” of that sort of graphics. The mainframe group insisted that it should do the software. Both sides “escalated” the dispute, which eventually went all the way up to the Management Committee. Weeks later word came back down that Proffit had lost. The mainframe group assigned the project a low priority, though, and never finished it. Proffit’s already-completed work sat on the shelf for three years while people continued to criticize OS/2 for being slow.

As a former programmer myself, I know it’s not a 9-5 kind of job. One of the managers, Lee Reiswig, tried to increase productivity by making fifty-hour weeks mandatory. Some of the programmers, who had already been working eighty- to ninety-hour weeks were insulted. They said that if IBM wanted to play those sorts of penny-ante games, then they’d work exactly fifty hours a week. Progress on OS/2 actually slowed after extra hours became required.

Around the same time, Microsoft was still small enough that most people knew each other. One programmer was leaving the building just as Gates was coming in. The programmer reported to Bill that he had just put in 12 hours on some project. Gates responded with: “Working half days, huh.”

Management

At the top of the IBM bureaucracy were the older executives who ran the company but did not really understand or concern themselves with technology and what it could do. As Carroll observed: “IBM had become like a music-publishing company run by deaf people.” The company had developed the attitude that meeting the needs of the bureaucracy are more important than meeting the needs of individuals outside the bureaucracy.

For example, IBM missed many multi-billion dollar opportunities in the growing PC market. Customers in the mid-1980s became interested in upgrading their PCs with more memory, disk drives, and so forth that multi-billion-dollar markets developed, but IBM missed them. Culturally, IBM saw itself as a seller of systems, not as a mere supplier of parts. So, although IBM invented the technology for both floppy disks and hard-disk drives, it was the Seagates and Conners of the world that made fortunes by selling disk drives to intrepid individual users and to clone makers.

After the Change Team, this is my favorite

Jerry Kaplan learned that he shouldn’t send anything to IBM in writing. He would invariably get calls from six people at IBM saying they owned part of whatever topic he was writing about and castigating him for writing to whomever he had chosen. Kaplan also found that any letter he sent was copied and sent around to at least fifteen people, all of whom would then have to be drawn into any future discussions on the subject. Sending a letter was the quickest way of turning a one-on-one conversation into a series of meetings.

Conclusion

Paul Carroll concluded (this was in 1993)

“The unmaking of IBM has probably hurt more people than the problems at any company in history. The human toll starts with the 140,000 IBMers whose jobs have disappeared over the last seven years. That’s equivalent to eleven Microsofts and is more employees than all except the very largest companies in the world have in their total work forces. But that 140,000 number is just the start. Including spouses and children who were affected, those job losses disrupted the lives of perhaps 400,000 people—about the population of Pittsburgh. Whole towns lost their livelihoods, especially in the Hudson Valley. IBM was easily the biggest employer in that area, with ten times as many jobs in some counties as the next-largest employer.”

The effects ripple through the entire local and extended economies. Unemployment rises, housing prices are affected, real estate companies struggle and fail, small businesses fail, school boards hurt because of reduced tax income, charitable donations shrink. IBM reduced its dividends, affecting the lives of hundreds of thousands more who depended on IBM dividends for part or much of their retirement.”

And government had nothing to do with it.

GM and the rest of the auto industry has already gone part way down this road. If it can do a u-turn remains to be seen.

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Daniel Johnson was born near the midpoint of the twentieth century in Calgary, Alberta. In his teens he knew he was going to be a writer, which is why he was one of only a handful of boys in his high school typing class—a skill he knew was going to be necessary. He defines himself as a social reformer, not a left winger, the latter being an ideological label which, he says, is why he is not an ideologue. From 1975 to 1981 he was reporter, photographer, then editor of the weekly Airdrie Echo. For more than ten years after that he worked with Peter C. Newman, Canada’s top business writer (notably a series of books, The Canadian Establishment). Through this period Daniel also did some national radio and TV broadcasting. He gave up journalism in the early 1980s because he had no interest in being a hack writer for the mainstream media and became a software developer and programmer. He retired from computers last year and is now back to doing what he loves—writing and trying to make the world a better place