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We're in the Hardware Business

IBM management did not understand the first principle of software management: they were in the software business. The consequences were severe. For many years, IBM thought of itself as a hardware company. It had started manufacturing and selling punched-card machines. It wasn't until the 1960s that IBM got into the computer business in a big way. Even then, IBM's senior management had grown up in the punched-card era and could not see the potential of software. They viewed software as an expense and thought they could make money only with hardware.

In 1976, the IBM CEO recognized that the personal computer (PC) business was important. He also found that engineering had no PC products under development or even planned. He pushed the development divisions for several years but finally lost his patience. Then he set up a special PC project that reported directly to him. He told this group to get a product on the market within a year.

The PC engineering group was formed quickly, and the product manager was told to break any IBM traditions that got in the way. IBM had recently disbanded its centralized programming group, and each hardware product team had software people of its own. Since the PC group was newly formed, it had no software resources and there was no centralized programming department from which to obtain help. The PC product manager had to get his programming support from a young entrepreneur named Bill Gates, who was just starting a company called Microsoft.

IBM announced the PC about a year later, and it was an enormous success. The company expanded production and extended marketing throughout the world. As PC demand grew, they added new models and enhanced performance and capacity. At the same time, Microsoft was enhancing the PC software.

When the PC was introduced, IBM was the third most profitable company in the world, and Microsoft was not even ranked among the top industrial organizations. Within ten years, IBM had the largest operating loss in history. Over the same period, Microsoft had grown spectacularly and had a market valuation more than twice that of IBM. It took another ten years, a complete change of management, and a downsizing of 200,000 employees for IBM to address the new software-intensive marketplace.

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