The Worst Decision IBM Ever Made


The next attempt had to be with IBM ”a company Penney was reluctant to call because, as Batten put it, "They were then a highprice, high-cost operation. Their prices usually were not too competitive. We wondered if they could sell the equipment at the kind of price we'd be willing to pay. Assuming they would be interested.

"But we were running out of candidates. So we got in touch and, surprisingly, IBM was interested, even after my repeated concerns about price. We formed a joint venture almost exactly like the one with NCR." And then Batten received an unexpected phone call.

"Of all people, Bob Oelman was on the line. He wanted back in." Batten explained about IBM, saying that IBM would have to agree to NCR rejoining the project. If that happened , he said, then they would have to establish two separate task forces going in different directions, IBM and NCR, with a Chinese Wall between them so no proprietary information could be exchanged. "And that's what was done," Batten recalled. "But after initial work had begun, Oelman called again and said they'd soured on the project. They were out for the second time."

Penney proceeded with IBM, and a prototype was developed. The venture rented and secured a warehouse where a mock store floor was built. In secrecy , the IBM and Penney people performed simulations of transactions and collected data. Basically, the device worked ”although, not surprisingly, extensive refinements were called for. Everyone at the testing and technical levels wanted to go ahead.

In Manhattan, however, Batten received a call from an IBM officer. [2] They agreed to meet the next day at J. C. Penney. After the project was reviewed, the officer said, "Mil, we had a policy committee meeting yesterday and we've decided to drop the project."

"Really? I'm surprised. Would you mind telling me why?"

"Three reasons. We've already spent about $20 million in research, development, and machine tooling. It's an expensive project, Mil."

"Yes. Which we both knew going in."

"And if that was the only thing, we're still in it."

"So your second reason?"

"Market research. We cannot find anyone else out there who is even slightly interested in this. And as much as we like the Penney Company, we can't afford to make this equipment just for you at the price you're willing to pay."

"And the third?" wondered Batten. He was stumped. He had anticipated the first two objections (he had seen figures), but a third problem eluded him.

"It's the biggie," said the IBM officer. "What you're doing, really, is asking us to develop a small computer. These specifications are really a small computer."

"We understand that."

"But you're not in the computer business. We are." IBM practically owned the mainframe business, and mainframes were the computer business at the time. "So we would naturally look to spin off some of the development costs elsewhere if possible ” look for other markets for a small computer."

"Of course."

"But, Mil, we've drawn a total blank."

"There's no other market out there?"

"One. Small businesses. The problem is that almost nobody there could afford it. Bottom line? There will never be a small computer."

" All right," said Batten. "We have to accept your decision, but I'm not going to do it gracefully." But he was smiling and his voice was pleasant, putting the officer at ease.

"Okay."

"So I have to say that I think your committee made the wrong decision, one that someday you'll regret . In fact, I would suggest that you circle yesterday's date on your calendar and keep the calendar."

"Yesterday?"

"Your policy committee meeting." Batten was actually chuckling, as though what he said next was a joke for both of them to share. "Someday you're going to look at that date and remember the worst decision IBM ever made."

The officer chuckled himself, agreeably saying, "Okay."

Some time later Batten called Fred Borch, chairman of General Electric, checking out a small news item. He had read that Federated Department Stores and General Electric had worked together on a proprietary project that had been dropped. No further details. Borch explained that Ralph Lazarus, Federated's chairman and a GE board member, had approached GE to help develop a successor to the cash register. GE went ahead. "But they ran into too many problems," Batten remembered . "Everybody became exasperated and both sides agreed to erase the partnership. Hearing that, I told Fred that we had the same interest, but we had made some progress. Would GE possibly be interested in continuing with J. C. Penney? Almost immediately, he said yes."

It soon became clear to the Batten team, however, that GE's approach was problematic . At the time, GE was in the computer business with mainframes. They wanted to use one to cover a region, with transactions fed into the computer by telephone line and data fed back to the store. Penney argued against the approach, but GE was convinced that small in-store computers were not feasible . "So we went ahead with misgivings," said Batten. "We had no other place to go. And maybe we'd learn something. So GE set up a regional center in Phoenix with lines feeding in from 44 Penney stores in California and Arizona.

"But then there was a serendipitous occurrence that began to turn the tale."

NCR was having a board meeting in London during the week when GE and Penney finally announced their joint venture "to develop electronic equipment." It happened that the next week Citibank, on whose board Batten sat, had a board meeting in Gleneagle, Scotland. Mil Batten arrived at a Gleneagle hotel the afternoon before the meeting. Going down in the elevator that evening, who should get on but Bob Oelman, the NCR chairman, who was also a Citibank director. Oelman looked at Batten as though he had just lost his last friend.

"Of all people," smiled Batten.

"Mil," said Oelman gravely, "we read the article. What does this mean with you and GE?"

"What do you mean, Bob?"

"I mean as regards our long- term relationship with J. C. Penney? Mil, I have to tell you that the news virtually ruined our board meeting in London. We have to talk."

"Certainly," said Batten. He pleasantly added, "But don't forget, you were the ones who pulled out, Bob. Twice."

"But GE? NCR has no better customer than J. C. Penney, Mil."

Oelman became emotional, and when the elevator opened at the lobby his eyes were moist. "Bob, hold on," said Batten. "Let's go over and sit." He led Oelman to a secluded couch and then assured him that the news release meant nothing more than the fact of the joint venture. The Penney-NCR relationship had not dissolved. "But," he felt compelled to gently add, "we had to go with GE because there was no one left after NCR kept walking."

"We made a mistake."

"Yes, and you were our first choice. We thought we'd click together."

"Mil," said Oelman, his voice unsteady, "is it too late for us to try again?"

Batten hesitated, then delivered a reassuring smile and said, "We're not married to any particular company and we have no commitment unless something is developed."

"You'll let us back in?"

"If you're willing to work with us while we work with GE, fine, we can do the same thing that we did with IBM."

"Then let's do it. It's a deal?"

"Deal."

As it soon developed, the GE/Penney mainframe venture in Phoenix was dropped, the telephone linkage proving too unreliable. "All that work just confirmed our original thinking," Batten remembered. "The equipment had to be in the store."

Now NCR had a clear run at developing the transaction recorder. This time they came through. The NCR 280 was the world's first point-of-sale data-gathering device. "By 1968 we were finally ready," said Batten. "To introduce the equipment, it was installed in the new Parkersburg, West Virginia, store, the town where I began as a part-time and then full-time associate. Bob Oelman and I met there to celebrate. He was just as happy as I was."

Years later Batten was asked to assess the value of being so far ahead. "Not as much as you would think," he answered surprisingly. "These things can be duplicated and they don't remain proprietary for very long. And even though we had this big lead, we also had all the hassle and extra expense. So it evens out.

"One might ask, then, ˜Why bother to innovate? In my view, a business cannot afford to ever sit back. That can often hurt you more than plunging ahead, perhaps even be fatal. Examples come to mind. A majority of the dominant retail companies of 1940 have disappeared. They sat back and died. But at Penney, we always felt it was important to identify what we needed for the future and then go out and get it, regardless of what the others were or were not doing, and regardless of what Wall Street thought. It's a cultural decision, having to do with your values. Importantly, too, you establish a reputation for being innovative, for being a leader, and that does something for your people. They feel like they're part of a progressive organization on the cutting edge of things. Which is of no small value."

[2] Twenty years later Batten could not recall the man's name .




Celebration of Fools. An Inside Look at the Rise and Fall of JCPenney
Celebration of Fools: An Inside Look at the Rise and Fall of JCPenney
ISBN: 0814471595
EAN: 2147483647
Year: 2003
Pages: 177
Authors: Bill Hare

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