tectionism did not help in the Great
Depression and it won’t help today.
ibm and nCr
The cases of IBM and NCR make interesting contrasts in weathering the
economic storm.a NCR fared badly—it
didn’t go out of business, but it was not
until World War II that it fully recovered. In 1928, the year before the crash,
NCR was ranked the world’s second
largest office machine firm (after Remington Rand) with annual sales of $49
million; IBM was ranked the fourth
largest with sales of less than $20 million. A decade later, and well into the
recovery, NCR sales were only $37 million, whereas IBM had sales approaching $40 million and it was the largest
office machine supplier in the world.
The depression years 1929–1932
were a desperate time for NCR. Before
the crash it had been a wonderful firm
to work for. Headquartered in Dayton,
Ohio, it had built a “daylight factory”
set in urban parkland in the 1890s and
it had pioneered in employee welfare,
with all kinds of health, recreational,
and cultural benefits. During the depression years NCR’s sales fell catastrophically. Overseas sales, which had
formerly amounted to 45% of total
sales, were badly affected by protectionism. According to the then-CEO
Edward Deeds “commercial treaties,
tariff barriers, trades restrictions, and
money complications” took “
productivity from the Dayton factory.” It had to
cut its work force by more than half in
order to survive—from 8,600 down to
3,500 workers. At the worst of times, all
that could be done was to sponsor a relief kitchen, run by the NCR Women’s
Club, to feed the unemployed and their
families. Mirroring the fall in business,
NCR’s shares fell from a peak of $165
in 1928 to $6.79 in 1932. Recovery was
very slow, and was only fully achieved
with the coming of World War II when
NCR was put to work making armaments, analog computer bombsights,
and code-breaking machinery.
The story of IBM in the Great Depression could hardly be more differ-
a An excellent economic and business history
of these firms is: James W. Cortada, Before the
Computer: IBM, NCR, Burroughs, and Remington
Rand and the Industry They Created 1865–1965,
Princeton University Press, 1993.
ent than NCR’s. IBM’s main product
line between the wars was punched
card accounting equipment, which was
the most “high-tech” office machinery.
There were machines for punching
and verifying cards, others for sorting
and rearranging them, and the most
complex machine—the tabulator—
could perform sophisticated accounting procedures and report generation.
Although orders for new machines fell
drastically, IBM’s president Thomas
J. Watson, Sr. decided to maintain the
manufacturing operation. Watson reasoned that rather than disband IBM’s
skilled design and manufacturing work
force it would be more economical, as
well as socially desirable, to stockpile
machines for when the upturn came.
For IBM, the upturn came in 1935
when President Franklin D. Roosevelt
launched the New Deal and the Social
Security Administration. The new administration was hailed as the “world’s
biggest bookkeeping operation.” IBM
turned out to be the only office machine firm left that had an adequate
inventory of machines to service the
operation and it supplied 400 accounting machines to the government. It was
a turning point for IBM and its profits
soared for the remainder of the 1930s.
Watson was justly celebrated for his
faith in the future. He became a confidant of Roosevelt and chairman of the
International Chamber of Commerce.
Heroic as Watson’s strategy was, it
would not have been possible for NCR,
Remington Rand, or Burroughs to do
the same. IBM had an income that was
practically recession-proof. First, IBM’s
machines were not sold but leased.
The manufacturing cost of an accounting machine was recovered in the first
one or two year’s rental, and after that,
apart from the cost of maintenance,
the machine revenue was pure profit.
The accounting machines had an average life of at least 10 years, so it was an
extremely profitable business. During
the depression, although new orders
stalled, very few firms gave up their
accounting machines—not only were
they dependent on the equipment,
but they needed them more than ever
to improve efficiency. During the depression years, while IBM did not lease
many new machines, it was kept afloat
by the revenues from those already in
IBM’s second big revenue source
was the sale of punched cards. IBM enforced a rule—and got away with it until
an antitrust suit in 1936—that only IBM
cards could be used on IBM machines.
Cards were sold for $1.40 a thousand,
far more than they cost to produce. Card
revenues accounted for an astounding
30% of IBM’s total revenues and an even
higher percentage of its profits. Because
cards were a consumable, firms had to
continually purchase them so long as
they were still in business.
The key difference between NCR
and IBM was that NCR made almost
all its money from the sale of new machines, whereas IBM made its money
from two sources: leasing and the sale
of punched card consumables. Looking back at the NCR and IBM experiences with the benefit of hindsight, we
can see it was an early incarnation of
the product-versus-services business
models. When they start out, product
firms have the advantage that they get
a very rapid return on investment. In
a single sale, the firm gets all the returns it will ever get from a customer.
This helps a firm to grow organically
in its early years. In contrast, when a
services firm takes a new order it gets a
modest annual income extending over
many years. This slower rate of return
makes it difficult for a firm to retain
profits to achieve organic growth and
it may need access to capital until it
starts to generate a positive income.
But the slower growth and steady income makes for much less volatility.
As Communications columnist Michael
Cusumano noted in 2003—writing in
the aftermath of the dot-com bust—
the trick for survival of all firms is
getting the right mix of products and
services.b Products generate a rapid
return on investment, but services provide a steady income that gives some
immunity against recessions. It’s not
easy to get the balance right, but IBM
did it in the 1930s.
b Michael A. Cusumano, “Finding Your Balance
in the Products and Services Debate,”
Commun. ACM 46, 3 (Mar. 2003), 15–17.
Martin Campbell-Kelly ( M.campbell-Kelly@warwick.
ac.uk) is a professor in the Department of computer
science at the university of Warwick, where he specializes
in the history of computing.
copyright held by author.