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March 13, 2007

Comments

Doc

You're exactly right, John. In 1991 IBM was paying an extraordinarily large premium to sustain its 76.6% share of the $84.6 billion in revenues generated by the strategic group in that year. And your second comment cuts right to the quick ... IBM already was experiencing diminishing returns to its SG&A expenses.

Here's a surprising fact. In 1991 just 1/100th of IBM's next market share point had an incremental cost of $15.6 million. The earnings from that market share basis point after SG&A expenses were $4.9 million. In other words, acquiring just 1/100th of next revenue share point theoretically would have cost IBM $10.7 million in lost earnings after SG&A expenses. In 1991 the company actually spent $28.0 billion on SG&A. If the company had maximized earnings in that year it would have spent $21.6 billion to sustain a revenue share of 58.2%.

Chapter 6 "The Battle for Your Desktop" is dedicated to how Gerstner turned the ship around over the seven years of his tenure. In 200 he actually achieved maximum earnings market share of 42.9%.

The conventional wisdom is to trash Gerstner for destroying a great company. The truth is he saved the mother ship by trading market share for earnings. In 1991 IBM had a market cap of $50.8 billion. By the close of business in 2000 its market cap had increased almost three fold to $148.1 billion. And while IBM's market share fell dramatically, revenues increased to $88.4 billion by 2000.

If you're interested in how the desktop drama involving IBM, Compaq, Dell and Hewlett-Packard unfolded from 1991 through 2000 take a look at my 17 minute narrated Breeze presentation on Chapter 6 http://breeze.tulane.edu/cookchaptersix/

Thanks for you insightful comments!

John Dawson

Interesting point but surely there is another point-of-view on this - namely that IBM were paying a premium in order to sustain a higher share.

I'd also assume that like most things, SG&A will at some stage enter diminishing returns - the $7bn is a great figure and highlights a big potential issue. However to then turn round and say let's wipe $7bn from SG&A doesn't necessarily follow. Would that £7bn have protected IBM and helped them maintain dominance? Unlikely because the operating model they had wasn't quite what consumers were after. However whether any reduction in SG&A would have left enough resource to turn the ship around more quickly is a different question to which i don't know the answer.

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