Luck: The Elusive Link Between Risk and Reward The Greatest Business Risk of the Twentieth Century

August 14, 2017 / NO RISK NO REWARD

Luck: The Elusive Link Between Risk and Reward The Greatest Business Risk of the Twentieth Century

August 14, 2017

Peter Greulich Author

Peter E. Greulich is an author, publisher and public speaker. His forthcoming book due in September 2017, THINK Again: IBM Can Maximize Shareholder Value, studies how a corporation can truly maximize shareholder value. IBM’s history reflects an almost non-intuitive truth: that a corporation maximizes shareholder value by maximizing stakeholder value. Its greatest Chief Executive Officers distributed profits equitably within their stakeholder community depending on the current social, economic or political conditions of the day. In doing so, they maximized shareholder value. The foreword is available here: Think Again: IBM CAN Maximize Shareholder Value.

To deliver the mainframe in the ’60s, IBM invested two and one-half times what the U.S. government spent to build the atomic bomb. FORTUNE called Watson Jr.’s investment “IBM’s $5,000,000,000 Gamble.” For IBM to make an equivalent investment today, it would have to spend $137,000,000,000 on a single product, so revolutionary that it would obsolete not only its entire install base of mainframes but the intellectual capital of every single one of its major competitors: the likes of Intel, Hewlett Packard and Accenture. It was a risk of outsized proportions unmatched by any corporation–even to this day.

Two chief executives require two different scales to measure rewards 

Kevin Maney in The Maverick and his Machine writes about the luck of Watson Sr., the traditional founder of IBM. There is a chapter entitled “Daring and Luck.” One of Watson Sr.’s favorite dogs was named Lucky. Maney writes that “Watson had luck by the boatload.” In 1956, at the end of Watson Sr.’s forty-two years with IBM, corporate employment stood at 56,000, revenue at $700 million, and net income at $73 million. Yet, the individual who manufactured even more luck than Watson Sr. was Watson Jr. He delivered results on a scale that even his father would have considered unimaginable.

Instead of taking four decades, Watson Jr. added on average 56,000 employees every four years, $700 million in revenue almost every year and a half, and $73 million in net income almost every year. In a decade and a half, revenue per employee grew by 150%, net income per employee by more than 200%, and the number of stockholders by more than 2,000%. In 1974, while reminiscing in an interview with THINK Magazine about the success of the mainframe effort, IBM’s former Chief Executive Officer, Watson Jr., commented, “Of course, we had some luck.”

Watson Sr. sometimes used the word luck too, but neither he nor his son would have attributed their corporate successes to chance. They were always pushing their corporation to be prepared for its next opportunity. For Watson Jr., his opportunity was computers.

Although he called it luck, it wasn’t by chance

Watson Jr., as soon as he took over as chief executive, called what he meant to be a “constitutional convention” of his top leadership. He decentralized decision making; he replaced his father’s autocracy with autonomy and used his corporation’s greatest asset—its belief system—to avoid anarchy. He simplified the belief system to three memoriable words: respect for the individual; service to the customer; and the pursuit of excellence. Through this belief system, Watson Jr. enforced his authority without being autocratic, as he too was subject to its judgements. In 1962, he elaborated on the benefits of this belief system, it brought out the great energies and talents of IBM’s people, helped them find common cause, and kept them pointed in the right direction.

Watson Jr. then invested $5,000,000,000 to make people more productive, processes more effective and products more valuable. He challenged every individual to be a wild duck—a man or woman who wouldn’t be tamed or shamed into being a “company man”. He told his management team that all of this autonomy would make them feel uncomfortable, but that encouraging individual thought and empowering individual action was the only way to achieve the growth they wanted to achieve. One of the individuals who heard the call was William W. Simmons.

Instead of accepting the forecast that revenue growth would slow he took independent action to ensure his corporation was prepared to meet its new opportunity in computers.

When employees manufacture personal luck, it makes for an extremely lucky corporation

Simmons, an employee and author of Inside IBM: The Watson Years, conducted a pilot program and discovered that within 90 days after a sales representative received an industry-specific education there was a 20% rise in revenue. So, his sales organization realigned its entire sales force within fifteen industries and sent them to industry-specific education. In the insurance industry, for example, the sales reps received two to four weeks of Rutgers University training. By the end of 1963—just in time for the announcement of the mainframe—two out of every three sales representatives were trained and selling into their industry specialty. IBM gained market share in all industries. Its share of the insurance industry market grew to an incredible 88.5%.

Although Bill Simmons was exceptional, he was one of thousands who were similarly motivated by a leader who encouraged, emboldened and rewarded individual action.

For maximum success, a chief executive should encourage employees to float their own boats

I feel that I am the luckiest man in the business world. … because every member … has always given to this business the best that he has had to give. It is that cooperation and coordination of effort on the part of the people in every department … that has built IBM. —Watson Sr., IBM Homestead, 1947

The Watsons were lucky, but they weren’t gamblers, they were businessmen. They practiced the business definition of luck: the point at which preparation intersects with opportunity. Watson Jr.’s type of luck left little to chance, because he found a way to exponentially magnify his father’s boatload of luck. Watson Jr. created a work environment that encouraged all employees to float their own boats–loaded up with luck.

If you are trying to outgrow your entrepreneurial limitations, does your work environment encourage employees to form vast armadas that constantly scan the horizon for your corporation’s next opportunity? Are you bringing out the great energies and talents of your people? 

Peter Greulich Author

Peter E. Greulich is an author, publisher and public speaker. His forthcoming book due in September 2017, THINK Again: IBM Can Maximize Shareholder Value, studies how a corporation can truly maximize shareholder value. IBM’s history reflects an almost non-intuitive truth: that a corporation maximizes shareholder value by maximizing stakeholder value. Its greatest Chief Executive Officers distributed profits equitably within their stakeholder community depending on the current social, economic or political conditions of the day. In doing so, they maximized shareholder value. The foreword is available here: Think Again: IBM CAN Maximize Shareholder Value.

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