In 1987, IBM was the most valuable company in the world, worth an estimated $105.8 billion. By the end of 1992, IBM had an estimated value of $28.8 billion. This decline in value can be traced to a strategic error made by IBM in the early 1980s. Prior to 1981, IBM was the major player in the computer market and was the primary provider of computers for government, universities, and businesses. At this time, believe it or not, virtually no computers were available at an affordable price for individuals.
Then, in 1981, IBM introduced its personal computer (IBM PC), and it quickly established the standard by which other PCs would be measured. However, IBM elected to leave the software development for PCs to other companies. Instead of developing its own disk operating system (DOS), IBM elected to use a DOS developed by a small company located in Seattle MICROSOFT.1
Microsoft was founded in 1975 by Bill Gates and Paul Allen.2 When they founded Microsoft, Gates and Allen envisioned that computers would eventually find their way into everyday life (contrary to IBM s prediction in the 1950s when one IBM executive forecast the total worldwide demand for computers to be about five). While IBM s performance floundered in the midand late-1980s, Microsoft demonstrated an amazing ability to become a major player in practically every aspect of the computer software market from operating systems to the Internet to networks to spreadsheets and word processors.
With Microsoft s many accomplishments comes the question: Just how successful is the company? The answer to that question depends on how you define success. Measured in terms of number of employees, Microsoft has grown from just 32 employees in 1981 when IBM elected to use Microsoft s DOS to 31,575 as of the June 30, 1999, fiscal year. In terms of social impact, Microsoft and its employees donate millions of dollars each year to such charitable causes as Special Olympics, Boys and Girls Clubs, and the United Negro College Fund. Microsoft also supports elementary and high schools throughout the country in their efforts to incorporate technology into the curriculum, and the company has established scholarship programs to encourage minorities and women to pursue careers in computer science and related technical fields. In addition, Bill Gates and his wife Melinda have started a foundation dedicated primarily to health and education. Thus far they have contributed several billion dollars to their foundation.
In terms of stock price, Microsoft s per share stock price (adjusted for stock splits) has gone from $0.17 in 1986 to over $70 in April of 2000 (see Exhibit 1-1). On virtually every dimension you can think of, Microsoft has succeeded. But most of these dimensions are a by-product of Microsoft s ability to produce products that are valued by the market. If Microsoft were unable to produce and sell quality products, the company would not be in a position to employ so many people, to give so much money to charities, to dominate (some would say monopolize) its markets, or to experience such an incredible increase in stock price. And this is where accounting enters the picture.