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

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In 1924, a collection of business machine companies adopted the name International Business Machines Corporation, or IBM. IBM became the largest office machine producer in the United States with sales of over $180 million in 1949. Meanwhile, a new type of device had appeared in the computing machine market, the electronic computer. Now, early electronic computers were used by the British and the Americans during World War II to decipher codes and to compute missile trajectories. Programming these early electronic computers involved flipping switches and plugging cables into different holes in big circuit boards. Now, on a personal note, this is exactly what our dad did when he started as a computer programmer for the U.S. Department of Defense, programming computers by switching wires around on circuit boards. Now back to IBM. In 1950, resistance to the idea of electronic computers was high inside IBM. IBM's engineers 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 electronic computers. IBM executive forecast that the size of the total worldwide market for computers was no more than five. Five. Think about that for a moment. Five computers for the entire world. Now look around where you're 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. Well, following significant internal debate, and in spite of this pessimistic sales forecast of five computers, years, IBM pressed forward with the production of its first electronic computer, the 701. Through the 1960s and 70s, with its aggressive leasing program, emphasis on sales and service, and continued investment in research and development, IBM established a dominant, some claimed monopolistic, position in the mainframe 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 its personal computer back in 1981, IBM decided to use microprocessors made by Intel. Now, IBM could have designed and produced its own microprocessors. The company had historically made all of its computer components in-house. But for speed of development of the IBM PC, IBM went with existing Intel microprocessors. Now as of August 2025, Intel is worth $111 billion. 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. And as of August 2025, Microsoft is worth $3.8 trillion. Okay, well, so you keep telling what everybody's worth. What's IBM worth? Well, as of August 2025, IBM is worth $224 billion. In retrospect, it makes you wonder where IBM would be today if the company had made its own microprocessors and its 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 five computers worldwide. If IBM had relied completely on that sales forecast, the company would have never entered the computer market at all. And most of us would have probably never heard the letters IBM. The starting point, and in many ways the most important point of any financial modeling in exercise is the sales forecast.

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