(FORTUNE Magazine) – If creating wealth for shareholders is the best measure of a businessman's success, Thomas J. Watson Jr. is the greatest capitalist who ever lived. When Watson, now 73, retired as IBM's chief executive in 1971, the company's stock was worth $36 billion more than when he got the job from his father 15 years before. Watson's father, one of the most successful industrialists of the 1920s and 1930s, was a selling genius. He gave the world the much-admired, sometimes parodied motto THINK. Under him IBM built and dominated the market for punch card accounting equipment. But it was the younger Watson who pushed the company into computers and led it through the longest and most spectacular burst of growth in modern business history. During Watson's tenure, IBM elbowed its way among the giants at the top of the FORTUNE 500, clobbering computer rivals like Remington Rand, RCA, General Electric, and Honeywell. By the time he stepped down after a heart attack, the company was undisputed ruler of the mainframe computer industry, and well on its way to becoming the most profitable business on earth. Watson was an intuitive leader, driven by the urgency of keeping pace with the computer revolution. When IBM needed it, he had a flair for the dramatic. In 1961, speaking before an industry conference, he admitted that a new IBM processor did not live up to expectations -- and declared that since the computer was only 70% as powerful as promised, IBM would lop more than 30% off its price. A tough boss, Watson helped set the high-stress tone of executive life at IBM in the 1950s and 1960s. Though he was paternal with ordinary employees, he often treated his lieutenants roughly. He trained executives by reshuffling them and pushing them into jobs that were over their heads. For those who erred he devised the so-called ''penalty box'' -- a temporary but humbling transfer off the company's fast track. Despite his success, Watson was a reluctant businessman who nearly pursued a career as an airline pilot after World War II. But a general whom he served as an aide persuaded him that he had talent and could go far -- especially at IBM. Unlike his father, who worked until the week of his death, young Watson never surrendered his life entirely to his IBM career. He has mixed public service with a life of adventure that would tax a man half his age. A lifelong Democrat, he was President Carter's ambassador to Moscow from 1979 to 1981, and has been an outspoken advocate of the mutually verifiable reduction of nuclear arms. For recreation he sails and pilots jets, helicopters, and a stunt biplane. In July he became the first American aviator to retrace the trans-Siberian air route that he and other Army Air Corps pilots used during World War II to ferry warplanes from the U.S. to Russia. None of Watson's six children work for IBM; his dozen grandchildren are too young to apply. Watson is now working on a memoir. At FORTUNE's invitation, he agreed to tell -- in his own words -- the story of the controlled explosion that was IBM under his leadership.

Around 1955 ''computer'' became a magic word as popular as vitamins. Top executives rightly believed that the companies of the future were going to be computer-run. Board chairmen would say, ''We've got to get a computer!'' Everybody wanted one. Some thought computers could improve balance sheets or cause fantastic recoveries of failing businesses, taking them automatically from the red to the black. Calculating power was the reason for this craze. The rudimentary computers of the day were a thousand times faster than conventional business equipment, a fantastic increase. Even though precisely how to use the machines was still a mystery, it became the consensus that management ran a bigger risk by waiting to computerize than by taking the plunge. This was a great boon to IBM. By the time of my father's death in 1956 it was obvious that we were in the midst of an explosion. Shortly afterward I sat down with Al Williams, who would later be named IBM's president, to decide how to meet the opportunity of fast growth that was being thrust upon us. Williams was my best friend. In the early 1950s we had gradually assumed the responsibility for running IBM. We made a good combination. He was totally policed as a man, orderly, and a little cautious; I was perhaps innovative, certainly highly motivated, and not cautious at all. His father had been a section boss in a coal mine who got fired and blackballed during the Depression for siding with the miners. At the same time my father became famous as the highest-paid executive in America, the thousand-dollar-a-day man. Al, who was in accounting school, saw that in the newspapers and said, boy, they pay good money in that company; that's where I want to work. Without him my success would certainly not have been possible and without me he, too, would perhaps not have had as much success as he did. IBM had expanded very quickly after World War II, helped by pent-up demand for punch card accounting equipment. The average annual growth rate between 1946 and 1955 was an extraordinary 22%. We were already past the $500-million- a-year mark ((more than $2 billion in today's dollars)), a size at which it might be prudent to slow to a more sedate rate of growth that Al and I were sure we could finance and manage. The problem was that this failed to take the computer into account. We thought that if we didn't grab the business, someone else would, and that we would never have this kind of opportunity again. We always thought of an order lost as a disaster. So we decided to push the company as rapidly as the market would permit. As a result, we kept IBM growing at more than 16% annually for the next 15 years. By 1970 annual revenues were $7.5 billion. The key to this growth was marketing. We successfully introduced computers into a market IBM had carefully pioneered using mechanical and electrical punch card devices. If you really look at the history of IBM, technological innovation wasn't always the thing that made us successful. Unhappily there were times when we came in second. But in the game I knew, that was less important than sales and distribution methods. We consistently outsold people because we knew how to put the story before the customer, how to install the machines successfully, and how to hang on to customers once we had them. The secret of my father's sales approach was what we called systems knowledge. Very few of our competitors ever had it; those that did never emphasized it enough. Consistently people would enter our field with hardware that was equal to or better than ours, and fall by the wayside because of an inability to install and service those systems properly. What IBM offered its customers was not just machines, but services : business equipment plus the continuing assistance of IBM's staff. Most of what we called sales in IBM were really rentals. This rental system, which later had to be abandoned for legal and competitive reasons, was one of IBM's greatest strengths. It required a big field force and large amounts of cash, but it made the business stable and essentially depression-proof. If you didn't sell a single machine in a year but worked hard at keeping customers who had installations happy, you would have the same income as the year before.

During World War II, Tom Jr. served as aide and pilot to the Air Corps inspector general, flying in war zones throughout Asia, Africa, and the Pacific. Though his safety often depended on electronic navigational equipment, Watson insists he had no appreciation for such technology until after the war. When he visited an IBM laboratory in 1946 with his father, an electronic tabulating device caught Tom's fancy. He proposed that IBM commercialize it for use with punch card systems. Later that year the company marketed it successfully as the first electronic multiplier.

Father had carefully built up a group of a few hundred salesmen and systems service specialists by the time World War II began. He treated the salesmen especially well, paying above-average commissions, offering advances, and guaranteeing each man his own territory. During the war, partly out of patriotism and partly out of shrewdness, he paid everyone a portion of their usual pay while they served in the armed forces. Each Christmas he'd send a box of food and gifts, and every once in a while you'd get a sweater or a pair of gloves. The result was that most of these skilled employees came back to IBM when the war ended. During my years with the company right after the war I devoted much of my time to technology. At my urging we incorporated electronic circuits in our punch card machines. But it took years for us to see the computer's commercial potential. In 1946 I went to the University of Pennsylvania for a look at the first ENIAC. It consisted of vacuum tubes that filled a large room, and was engaged in computing trajectories for artillery shells. It was hard to envision this complex, costly, unreliable device as a piece of business equipment. Nevertheless I was impressed by the speed of electronic circuits and became concerned that we didn't have the skills in our laboratories to advance very far into that field. Most of our product designers, who were used to working with electromechanical relays, saw the electronic tube as a very ethereal item. So I began to press our laboratory managers to recruit more electronics specialists. In 1950 I asked one of our few MIT graduates to move down to New York City from Endicott, our upstate factory town, and hire engineers in quantity. He asked if I meant a few dozen. I said, ''No, I mean at least a few hundred and perhaps a few thousand.'' A little later Al Williams discovered we were spending only 3% of our revenues on research and development, and we doubled that figure very rapidly. Not everyone in IBM management shared my enthusiasm, however. My father appreciated electronics and had nothing against computers. But they didn't fire his imagination, either. They were enormously expensive to build and IBM already was running at a breakneck pace in the postwar boom. What's more, Father had spent his whole life with punch cards, which would eventually be made obsolete by magnetic tape inputs. Most of our sales executives and planners were just as wedded to the punch card as Father. I worried that we were missing the boat. I was constantly pushed and prodded by Jim Birkenstock, a talented executive who was convinced that the future lay with electronics and that IBM would be doomed if we didn't convert. Furthermore, evidence began to accumulate that punch cards were on their way out. Our largest customers, like Metropolitan Life Insurance, were complaining about the space required to store the cards and beginning to look into the possibility of shifting to computers and magnetic tape. We finally overcame our inertia at the outbreak of the Korean war. Father was in Europe at the time and cabled President Truman, putting the resources of the company at his disposal. Birkenstock, with the aid of our top electronic engineer, Ralph Palmer, and his staff, quickly came up with a plan for a large computer that we could justify to everyone in the company because it helped the war effort. The Defense Calculator, as it was called, was the first computer IBM delivered commercially. A lot had to be done before we could go into electronics in a big way. We did not know how to mass-manufacture circuit boards, for example. We learned by landing a contract to build huge computers for the first North American early-warning system against bomber attacks, known as SAGE. The entire field of computer science was as new to us as it was to everyone else. To help overcome this, I went down to the Institute for Advanced Study in Princeton and arranged for John von Neumann, the eminent mathematician and computer theorist, to come to IBM and give seminars to our engineers and scientists. When we started delivering our first commercial machines, our customers often found that the most difficult thing about having a computer was finding somebody who could run it. We couldn't produce all those technicians ourselves. Yet there was not a single university with a computer curriculum. So I went up to MIT in the mid-1950s and urged them to start training computer scientists. We made a gift of a large computer and the money to run it. From then on we played a large role in funding efforts all over the country to create new professions such as programming and systems engineering. IBM was still a small company before the war when my father began cultivating universities; I put that near the top of the list of IBM's key moves. Within five years of the MIT connection, the people trained in those programs made it possible for the market to boom.

High-growth companies dominated by entrepreneurial leaders inevitably face the difficult transition to professional management. For IBM, already a $600- million-a-year giant when Watson Sr. stepped aside, this maturing process was long overdue. It was up to Watson Jr. to develop a cadre of capable executives while fighting to maintain a breakneck rate of growth.

We tackled the question of organization in 1956. Until the mid-1950s the company was run essentially by one man, my father. If IBM had had an organization chart at that time, there would have been a fascinating number of lines -- perhaps 30 -- running into his office. As a consequence, people were constantly waiting outside his door, sometimes for as long as a week or two, before they could see him. He saw the important ones, of course, but when I complained about people wasting time in his anteroom, he said, ''Oh Tom, let them wait. They're well paid.'' This chaotic style had worked exceedingly well since 1914, but it couldn't support the scale of operations many of us anticipated. After several months of study in 1956, we called the top 100 people or so to a three-day meeting in Williamsburg, Virginia, where we distributed responsibility for running the company. We installed a check-and-balance arrangement that later became famous as the IBM system of contention management, in which staff officials would challenge the views of operating men. No decision was final without a staff man's concurrence -- and if he signed, his job was just as much at stake as the executive's who made the decision. When an executive and a staff man couldn't agree, the problem got kicked upstairs to senior management, which didn't suffer indecisiveness gladly. I never varied from the managerial rule that the worst possible thing we could do would be to lie dead in the water with any problem. Solve it, solve it quickly, solve it right or wrong. If you solved it wrong, it would come back and slap you in the face and then you could solve it right. Lying dead in the water and doing nothing is a comfortable alternative because it is without immediate risk, but it is an absolutely fatal way to manage a business. My way of doing business was never entirely scientific, but I think the emotional, dramatic kind of manager can hold his own with a scientific manager. I never hesitated to intervene if I saw the company getting bogged down. For instance, we were having a dreadful time in the late 1950s moving the development people into transistors. The Japanese were already making cheap transistor radios by the millions, and we were putting our computers together with acres and acres of vacuum tubes. The transistor was obviously the wave of the future: It was faster than the tube, generated less heat, and had great potential for miniaturization. But our people had labored to master the tube. This new invention shocked them and they resisted it. Williams and I finally wrote a memo that said, after June 1, 1958, we will design no more machines for electronic tubes. Signed, Tom Watson, Jr. The development people were awfully mad. But I kept giving them transistor radios. I ordered 100 of them, and whenever an engineer told me transistors were undependable, I would pull a radio out of my bag and challenge him to wear it out. I managed with a council of eight to ten executives, and I had a good deal more respect for the opinions of several of these people than for my own conclusions. I would dissolve this committee whenever it reached a point where I thought some people couldn't keep up as IBM grew. Then I would establish a new committee with a different name and most, but not all, the same people. By changing those committees I was able to keep them staffed with the hottest boys in town. My most important contribution to IBM was my ability to pick strong and intelligent men and then hold the team together by persuasion, by apologies, by financial incentives, by speeches, by chatting with their wives, by thoughtfulness when they were sick or involved in accidents, and by using every tool at my command to make that team think that I was a decent guy. I knew I couldn't match all of them intellectually, but I thought that if I used fully every capability that I had, I could stay even with them. My younger brother, Dick, was the leader who made the company live up to the ''international'' part of the name our father gave it in 1924. Father organized the IBM World Trade Corp. as a wholly owned subsidiary in 1950, and Dick soon became chief executive. He spoke fluent French, learned Spanish and Italian, and traveled the world to develop businesses in 80 countries. By 1970, World Trade's net earnings matched those of the domestic company, at about $500 million each. In IBM's domestic business I depended most heavily on Williams and Red LaMotte, to whom I turned on delicate issues of personnel. The most able operating man in IBM was Vin Learson, who eventually succeeded me as chief executive. Learson was an imposing figure, 6 feet 6 inches tall, and his mere presence in a room was enough to get people's attention. He came from a Boston Irish family and put himself through Harvard. For 20 years I gave him IBM's toughest assignments, such as selling off our time-clock company and rescuing a new line of mainframes that had gotten bogged down, and he did each task successfully. I never hesitated to promote someone I didn't like. The comfortable assistant -- the nice guy you like to go on fishing trips with -- is a great pitfall. Instead I looked for those sharp, scratchy, harsh, almost unpleasant guys who see and tell you about things as they really are. If you can get enough of them around you, and have patience enough to hear them out, there is no limit to where you can go. With so much contention built in, why did IBM's management work? For one thing, with rare exceptions we promoted from within. Virtually every IBM executive started as a salesman. Because we were growing so fast, promotions came quickly. All of our senior executives, including me, knew what it felt like to be thrown into deep water not knowing if you could swim. When the Williamsburg reorganization created dozens of slots for staff specialists in such areas as manufacturing, personnel, finance, and marketing, we ''made'' the expert simply by naming the man to the job. This method worked in the main because, as young and inexperienced as these executives might be, they had come up from the bottom. They knew what IBM stood for as well as they knew their own names. IBM employees all had job security, dating back to the days when my father refused to fire people during the Depression. Instead, he kept the factories running and made parts for the bins, which stood us in good stead when the Social Security Act passed and we landed the contract to supply the accounting equipment the government needed. If you proved ineffectual at a job, you were not put out on the street; you were reassigned to a level where you were known to perform well. In doing this we would sometimes strip a man of a fair amount of dignity, but we would then make a great effort to rebuild his self-respect. Money was another reason the system of contention worked. On one occasion I was ranting in an executive committee meeting about something, I hope something worthwhile, and this rather unusual, sarcastic, and outspoken fellow from my office named Tom Buckley leaned over to Spike Beitzel, later a senior vice president, and asked, ''Do you know why they all take this bunk from him?'' Beitzel, who was anxious not to attract my attention just then, shrugged. Buckley said, ''Because they're all getting filthy rich!'' In 1955 I persuaded my father to give stock options for the first time. He was conservative about anything having to do with the company's stock. Although he never actually owned more than 5%, he always operated the company / very much as though it were his. The very mention of selling more stock would sometimes send him into a rage. Dad never had options and didn't believe in them. Instead he paid high salaries and urged his employees -- and everyone else he met -- to buy IBM stock. Some of the people who made sandwiches behind the counter at Halper's drugstore underneath IBM's old headquarters in Manhattan, where Dad occasionally had coffee, ended up with fortunes. Despite the dim view he took of options, my father stopped objecting as soon as I told him they had become accepted practice and that we couldn't hang on to the best people without them. The options we gave were liberal, about seven times the employee's salary. People making $50,000 got $350,000 in options that were probably worth $10 million eventually. In the first two rounds about 40 people got them, and each one ended up a wealthy man.

Because of the family business, Watson Sr. and Jr. were involved more intensively with each other than most fathers and sons. Watson Jr. was born in 1914, the year his father landed a job managing the little three-year-old holding company that would become IBM. Its subsidiaries sold time clocks, industrial scales, and primitive accounting machines. Young Watson accompanied his father on business trips all over the world, attending his first sales convention at age 5. A slow starter as a youth, Watson barely graduated from Brown University. Yet when he returned to IBM after World War II, he rose rapidly, becoming a vice president in 1946, executive vice president in 1949, and president in 1952. In 1956, six weeks before he died, the older Watson handed over the chief executive spot.

My father was 72 at the time I arrived at IBM out of the Air Corps, and he died at 82. Those were ten turbulent years. Age was forcing him to spend less and less time with the business. Yet it was his whole life outside of his family, and he was reluctant to let go.

To this day, I do not know for certain if he was keeping a position open for me during the war. If you had gone up to IBM in 1945 to look it over, you'd have decided that the prospective competition for the top jobs wasn't great. Some of the more capable people retired, and as they dropped by the wayside, my father perhaps didn't replace them as rapidly as he might have. I looked at the senior executives and how they appeared to the public. I used to go to a lot of meetings and dinners in New York, to try to establish myself in the business community and also see how these IBMers were performing. Of course my father outperformed them all. He'd get up, start working the room, hit every doggone table where he knew anybody, shake every hand, and particularly, even if he was on the dais, go down to the IBM table and meet everybody and their wives. I was unconsciously picking up how you build morale, because these people were always very appreciative that the old man came down from the upper tiers to greet them. Only someone of his own blood would have been tolerated as a potential successor by T. J. Watson Sr. at that time. There was friction and competitiveness and the feeling of the young taking over from the old woven into this relationship. Most of the time he would just leave operating decisions to me. But we were fighting an antitrust suit in the punch card business that was finally settled in 1956, and I had the damndest time getting him convinced that it was better to sign a consent decree than to take the thing to court. My father was never comfortable with the huge numbers we were beginning to deal with. I'd often spend the night at his New York townhouse, and late in the evening T. J. would come in with some kind of project. ''You fellows are really mismanaging the sales operation,'' he would say. I'd ask, ''What do you mean?'' and he would say, for instance, that the only way to manage is for branch managers to read the sales call reports. He used to read all of them in his early days in Buffalo, New York, with the National Cash Register Co. I tried to tell him that the salesmen were making four calls a day, and in a bigger office we had 40 salesmen, meaning 160 reports per day, and it just wasn't possible. He detested ''no'' as an answer. My mother would then hear us argue long into the night, which was agonizing for us both. The biggest disagreements we had were over financing. IBM was building factories and coughing out rental machines that paid us back over six years, so the company required an awful lot of cash. When I'd ask Father for more money, I'd get a terrible argument back that ''you and Al Williams are spending money in a very careless way.'' He liked the idea of growth, but hated debt. Having lived through several depressions, he felt you should always have enough liquid assets to pay any debt that was called. I'd say, ''All right, Dad, we don't have to borrow. But we'll have to cut back on the sales force, because we've got all the orders we can fill right now.'' That just killed him, because he had been a salesman. He'd say, ''Gentlemen, let me see those numbers for a moment.'' Then he'd order his secretary to make an appointment for us to go see the Prudential and borrow more. When Father died, I took my boy to Alaska after the funeral to recover. But before I left I faced one of the toughest decisions I've ever had to make. One of our directors, a man of influence and head of our compensation committee, came to see me and said, ''What do you want to be paid?'' It hadn't occurred to me that we would have such a discussion. I expected to be paid what my old man was paid. I said, ''Well, equal pay for equal work. I want precisely what my father got, with the same profit sharing.'' He said, ''Your father started this business from nothing! He had to go out and call on banks! He had to really do things!'' This made me furious. I said, ''Dad has been less active in recent years and we are sustaining growth here of 16%. I take it that's what you directors want to have continue?'' He said he would have to go back to the committee. It was a very tough position to be put in with Dad just dead. But I thought that to start in by being a patsy would put me in a position where I really couldn't manage the board from then on. All the way up to Alaska I kept calling Al Williams. But the board made no decision until after I came back two weeks later. Then they agreed to pay what I asked. Soon afterward, the director came to me and said, ''I suppose you are going to want my resignation.'' I told him that was nonsense, and he remained a valued member of the board for many years.

The corporate culture that Watson Sr. had created would seem Japanese today. Employees gathered for inspirational lectures, sang company songs, and obeyed strict rules governing dress and personal conduct. The elder Watson would tell employees never to dress like ''just salesmen'': that to sell to businessmen, they had to look like businessmen. A self-made man, he exerted a powerful appeal on the sons of Depression-era working-class families, who saw in IBM a steady job and the chance to attain prosperity. Like his father, the younger Watson was a perfectionist who continued to conduct meticulous inspections of remote sales offices even as IBM grew huge. But he also modified the corporate culture, phasing out the company songs and substituting button-down collars for the starched detachable ones Watson Sr. had insisted employees wear with their mandatory white shirts. To cope with growth, he codified the company values and vastly expanded the education system to train tens of thousands of new employees each year.

To survive and succeed in a hot market, a company must be willing to change everything about itself except its basic beliefs. IBM operated for decades on a simple set of principles: Give the individual full consideration, spend a lot of time making customers happy, go the last mile to do a thing right. Everyone shared these values, but we never got around to codifying them until the early 1960s. You would be surprised how primitive our training methods were up until the late 1950s. We looked up to General Electric, which had an excellent school. We had our sales school and machine school, but nothing to teach a man how to be someone's boss. A branch manager would call a salesman in and say, ''You're promoted to assistant manager. Be careful with people, don't swear, and wear a white shirt.'' Not until 1966 did we pass a rule that people could never manage unless they had been to management school. When we started the program, we used cases straight from the Harvard Business School. I took the head of the program aside one day and said, in my usual undiplomatic way, that if we were really going to do something unique, we had to teach something unique. He said, ''Don't you want them educated to be good managers?'' ''You don't understand,'' I said. ''We are going to educate them in IBM management: communications, supreme sales and service efforts, frequent meetings, going to a guy's house if his wife is ill and seeing if you can help out, making post-death calls.'' You don't read that in anybody else's manual. Those were things we'd built up over the years, and new IBM managers have to know them in addition to technology. For disgruntled workers we had the Open Door Policy, a practice tracing back to the early 1920s. Employees had to first take up their gripes with their managers. If they got no satisfaction, they could come to my office. I spent about one-fifth of my time on Open Door complaints or walking through plants, talking to salesmen, and chatting with customers. I asked what was right and, more important, what was wrong. You don't hear things that are bad about your company unless you ask. It is easy to hear good tidings, but you have to scratch to get the bad news. My father strove to blur the distinction between white-collar and blue- collar workers. Not only did he pay well, but he eliminated piecework in the factories. For many years IBM's retirement package was identical for all employees, with pensions based solely on length of service, not salary or position. This philosophy stood my father in good stead during the period where there was a lot of labor unrest in America. Organizers were hitting pretty hard at the lush retirement plans some companies offered their executives. I don't think we were primarily driving to stay unorganized, but it had that effect. In 1958 Jack Bricker, our manager of personnel, suggested that we shift all of our employees to salaries, eliminating the last difference between factory and office work. Although this move came off well, it was thought at first to be very risky. The joke went around that on the first day of hunting season no one would show up for work at our Rochester, Minnesota, plant. I considered taking even more radical steps to increase our employees' commitment to IBM. When I talked to my wife at night, I would speak of various ways of sharing our success more broadly. Those at the top were doing fantastically well on stock options. This despite the fact that Williams and I stopped taking options in 1958, after Williams said, ''We don't want to look like pigs.'' While IBM's workers were making high salaries, they weren't making the kind of capital gains that employees with options were. I even asked myself whether our present system of corporate ownership is the system that will support the free American way long term. Though I never found a practical way to achieve it on a meaningful scale, I looked for ways to increase employee ownership of the business. Historically even the employee stock purchase plan has done little to encourage long-term investment by employees, because people sell when the stock rises. And the plan can create bad morale problems whenever the stock value is declining. We decided we could do the best for our employees by developing benefits such as major medical coverage and matching grants for charities and schools. Those we worked very hard on. I disliked applying a double standard to managers and employees. A business is a sort of dictatorship. You have the antitrust laws that tell you what you can do, and you know you shouldn't be a thief. But the top man has wide discretion. He can give unfair bonuses, he can suggest policies that are not right, he can run airplanes to golf resorts. I never criticized my contemporaries publicly, but there are a lot of things that IBM did differently from other businesses during my watch. Maybe they didn't have my philosophies -- or my markups, either. I thought that the head of a business has responsibilities almost like the head of a country -- without a supreme court and without the checks and balances, except for the checks and balances that the marketplace and the annual report impose on his operation. For that reason you cannot treat management differently from the employees. If a manager does something unethical, he should be fired just as surely as a factory worker. It took me a number of years to realize that a CEO has to spot-check decisions made by his subordinates. Early in my career some managers in one of our plants started a chain letter. The idea was that one manager would write to five other managers, and each of those would write to five more, who would each send some money back to the first guy and write to five more, and so on. Pretty soon they ran out of managers and got down into employees. It ended up that the employees felt pressure to join the chain letter and pay off the managers. I got a letter of complaint about this and brought it to the attention of the boss of the division. I expected him to say, at a minimum, ''We've got to fire a couple of guys. I'll handle it.'' Instead he simply said, ''Well, it was a mistake.'' I couldn't persuade him to fire anybody. Now you could admire him for defending his team, but I think there is a time when integrity should take the rudder from team loyalty. He was in many ways a capable manager, but from then on I thought he had a blind spot, and it retarded his career. If it had happened a few years later, I would have fired the managers involved myself. I did this in perhaps a dozen cases when managers broke rules of integrity. Each time I overruled a lot of people who argued that we should merely demote the man, or that the operation would fall apart without him. The company was invariably better off for the decision and the example, but the decisions were lonely.

When IBM delivered its first computer in 1953, it found the machine being referred to as ''IBM's Univac.'' Remington Rand, the maker of Univac, was also IBM's sole competitor in punch card machines, and seemed a formidable threat. Instead it became the first of a parade of larger competitors that IBM overwhelmed during Watson's tenure. The most fearsome rivals were RCA and General Electric, Goliaths that set out to claim big chunks of the computer industry. A combination of their own missteps and IBM aggressiveness did them in. The final blow was IBM's vaunted System 360, introduced in 1964. It prompted most major customers to adopt IBM products as a standard. No sooner had IBM established a hammerlock on the market than it faced a new set of competitors grabbing for limited but lucrative segments of the company's franchise. In the late 1960s leasing companies bought IBM computers and rented them out at cut rates. Start-up manufacturers sold computer memories, disk drives, and, ultimately, processors that were compatible with IBM products. IBM's struggle with makers of compatible equipment continues to this day.

I went home terrified one day in the early 1950s after stopping in Washington. The manager met me at the airport and described how Univac had installed computers at the Census Bureau, and how our equipment was shoved off to the side to make room. I thought, my God, here we are trying to learn electronics manufacturing by building defense calculators, while Univac is smart enough to start taking all the commercial business away. I could see my great future and IBM's going out the window. I came back to New York in the late afternoon and called a meeting that stretched long into the night. We decided that we must make a major effort to build a commercial version of our machine. In the months following we worked like the dickens and did it. Remington Rand had what amounted to a four-year jump on us. If they had really put their money and their heart and mind behind it, and come into our shop and hired a half dozen strategic people, we'd have been in dire trouble. But no one at the top there had my father's vision. Jim Rand was more of a conglomerateur. He refused to use his punch card salesmen to sell Univac machines. If Univac's tiny sales force made a sale that displaced Remington Rand punch card equipment, the punch card salesman lost commissions. T. J. Watson, on the other hand, believed that ever more modern business machines were the world's answer to accounting. When we announced the commercial version of our computer, he put the entire sales force behind it. Salesmen in those days knew almost nothing about computers, so we made sure that senior executives and the engineers who did know were available to help them sell. Thirty months after IBM's first commercial computer was delivered in 1953, we had 32 machines installed and 164 on order, compared with Univac's 33 and 24. When you have a small company, a lot of fear, and great opportunity, you can do amazing things. In two short decades the potential of IBM, which was good but not breathtaking when World War II began, became limitless. Optimists could see $10 billion, $20 billion, $40 billion in annual sales -- a figure IBM reached in 1983. The forward thinkers, of which I was not one, could see the computer industry as the largest industry in the world by the end of the century. I now believe it will be. Although we were having success after success, the future looked bleak and I ran very scared. When RCA came into the industry, I thought they would be terribly tough. Al Williams always believed the most serious competition would come from General Electric, which entered the business shortly after we did. They are a smart company, well organized, and when they take hold of something like jet engines or even dishwashers, they really do it thoroughly. In the mid-1950s RCA was twice as big as we were and GE was six times our size. If either company had had sense enough to hire away some of our best people and commit their financial resources fully to this thing, they would have wiped us off the map. Shortly after Dad died in 1956, I was haled over to General David Sarnoff's office at RCA. RCA had been experimenting with computers since the 1940s and had actually delivered a half dozen machines, called BIZMACs, to commercial customers, including the Bank of America. Some RCA executives believed computers would be as important to the company's future as color televisions. The General was a short man, but he sat on either a high chair or a modest platform. In any case, he looked towering to young Tom Watson Jr. He had a long cigar that he pulled at spasmodically, and while I knew him socially, this was a different General Sarnoff. He said he wanted licenses under our computer patents and he thought we were reluctant to make them readily accessible, even though we were required to do so under the consent decree we had recently signed. He told me that the expertise that produced RCA's TV sets could also be used for computers and that he intended to capitalize on that. He awed me, but not so much that I was unable to tell him that I thought computers were a highly specialized market, more dependent on sales and systems expertise than hardware, and that while we would gladly license him any patents he wanted, I thought he would have a difficult time in the computer business. That was the last we heard of the General and RCA for a time. Meanwhile, we were at work getting IBM's organizational structure straightened out. We turned for help to a management consultant I knew socially who worked for Booz Allen Hamilton. The man told me he was a top consultant to RCA and would have to get their permission. Then he accepted and worked quite intimately in our company for almost a year, and rendered a useful report. A few weeks later he telephoned and said that Sarnoff had offered to make him president of RCA. He asked if I had any objection. I said I most certainly did, because we had entrusted him with detailed knowledge of our methods and plans. Nevertheless he took the job. After that I was very sparing in my use of management consultants. The threat posed by the man from Booz Allen would have been much more grave had I not listened to Al Williams's advice. Al telephoned one day to tell me that Booz Allen's team was asking for an explanation of IBM's pricing practices. Sure, I said, it's like your doctor; you have to tell them everything. But Williams insisted it was unwise to give them the data. I was affronted because I thought highly of the consultant, but I always listened to Williams. So I said, all right, don't tell them. The pricing practices had been built up since the early days of the company. Behind the price of each rental product IBM had its own cost of marketing, cost of servicing, and rate of planned obsolescence -- all carefully kept secrets. In the consultant's hands this knowledge would have enabled RCA to aim where IBM's product line was weakest and avoid attacking where we were strong and could cut prices to fend off competitors. Any inroad made by a competitor like RCA was worrisome. In an industry exploding like ours, it was one of my unwavering convictions that gaining and holding market position was crucial. Any deviation from this goal in an attempt to maximize profit short term would, over the long term, reduce the total amount of our profit. By the same token, to try to pick and choose a limited number of areas to be strong in was a dangerous and frivolous course. In so doing we would make it easier for competitors and limit the scale of our business, reducing our ability to compete across the board. + This did not prevent the computer businesses of other companies from growing even more rapidly than we were, because the industry was growing. It was our job to make sure that for well-financed rivals like GE and RCA, the computer marketplace seemed too risky a bet. We did this by making ourselves tremendously sensitive to toeholds. The feeling among our sales force was that if a General Electric could get 5%, it could get 100%. A salesman who lost an account without having first alerted management that the account was in jeopardy was subject to discipline. IBM salesmen had two types of call reports to fill out. The first were routine. The second were called Special Account Reports, which came in two colors. Pink ones were for situations where IBM was bidding against someone else to win a new customer; yellow slips represented sick accounts, where a customer was dissatisfied. These reports were compiled and exhaustively analyzed -- geographically, by customer type, by product type. Coupled with other research and with public financial statements, the special account reports enabled us to assess accurately how the competition fared. One of the challenges senior management faced was not to exaggerate threats or overreact, particularly as we began to come up against smaller competitors. In 1961 I circulated a standard of ethics about what our people could do. ''In considering a particular action,'' I wrote, ''turn the situation around. Suppose that you were a competitor -- small, precariously financed, without a large support organization, and without a big reputation in the field -- but with a good product. How would you feel if the big IBM company took the action which you propose to take? Would you regard the IBM company as taking unfair advantage of you? Would you consider that the IBM company was using a sales tactic that IBM possessed solely because of its size and reputation, and which, therefore, was unavailable to you? . . . We simply cannot shoulder people around or give the appearance of doing so.'' I was desperate about this matter because we had a great business. We had no reason to monopolize, no reason to be predatory in our actions. It would have been stupid. On the last day of the Johnson Administration, the Justice Department sued us for trying to monopolize the computer business. The day before, I spent hours in Attorney General Ramsey Clark's office with our general counsel, trying to dissuade him from dropping this suit in the Nixon Administration's lap. Our main argument was that the competition in our business was strong and increasing, thanks to the expansion of the industry and the constant evolution of technology, which no one has a monopoly on. I had a heart attack in late 1970 and resigned before the trial got under way. But I think history showed our main argument to be right. After 13 years of litigation, the Justice Department withdrew its complaint. IBM is now a $50-billion-a-year business, seven times the size it was when I left, but the industry has grown to $350 billion. By concentrating on systems knowledge and serving the customer, IBM should keep growing at or above the industry rate. The managers under Chairman John Akers are as capable as the young people who worked with me. More important, I think they feel the same pride and fear that motivated us every day.