From the course: Financial Modeling and Forecasting Financial Statements

IBM and the famously bad sales forecast

From the course: Financial Modeling and Forecasting Financial Statements

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IBM and the famously bad sales forecast

- [Man In Red Shirt] In 1950, resistance to the idea of electronic computers was high inside IBM. - [Man In Pink Shirt] IBM's engineries were specialists in electromechanical devices and were uncomfortable working with vacuum tubes, diodes, and magnetic recording tapes. - In addition there were many questions about the customer demand for electronics computers - In fact, one IBM executive forecast that the size of the world-wide market for computers was no more than five. - Now think about that for a moment. Five computers for the entire world. Look around where you are sitting right now, with your phone, your computer, and various other personal devices. There may be five electronic computers in the room with you, right now. - While following significant internal debate and in spite of this pessimistic sales forecast of five computers. IBM pressed forward with the production of it's first electronic computer, the Model 701. - [Man In Red Shirt] Programming these early early electronic computers involved flipping switches and plugging cables into different holes in big circuit boards. [Pink Shirt] Now, on a personal note this is exactly what our dad did when he started as a computer programmer for the US Department of Defense. He was programing computers by switching wires around on circuit boards. - Through the 1960's and 70's with it's aggressive leasing program emphasis on sales and service and continued investment in research and development IBM established a dominate. Now, some claimed a monopolistic position in the main frame computer market. - Since then IBM has made a couple of strategic decisions that, in retrospect created a lot of money for other companies. First, when creating it's personal computer back in 1981 IBM decided to use microprocessors made by Intel. - IBM could have designed and produced it's own microprocessors. The company had historically made all of it's computer components in house. But, for speed of development of the IBM PC, IBM went with the existing Intel microprocessors. - [Man In Pink Shirt] And, it's interesting to note as of May 2019, Intel is worth about $230 billion dollars. - Additionally, when the IBM PC was released in 1981, IBM chose not to develop the operating system for its first PC. Instead, electing to use a system called DOS, licensed from a small 32 person company named, Microsoft. - [Man In Pink Shirt] And, as of May 2019, Microsoft is worth about $1 trillion. - [Man In Red Shirt] Now you keep saying what everybody's worth. What's IBM worth? - [Man In Pink shirt] Well, as of May 2019, IBM is worth about $ 125 billion. In retrospect it makes you wonder where IBM would be today if the company had made it's own microprocessors and it's own PC operating system. - It's also interesting to go all the way back to that original sales forecast in 1950. Only a market for 5 computers, world-wide. If IBM had relied completely on that sales forecast the company would have never entered the computer market at all. - Most of us would probably have never heard the letters IBM. - The starting point, and in many ways the most important point of any financial model exercise is the sales forecast.

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