Suppose you’re the CMO of a public company and took my recommendation to get a user ID and password to one of its financial databases. Now that you have access, what do you want to know?
HOW TO MAKE AN ELEPHANT DANCE
In his book “Who Says Elephants Can’t Dance” Lou Gerstner reported that his CFO Jerry York found their competitors were spending just 31 cents while IBM was spending 42 cents to produce $1 of revenue. He concluded that when they multiplied that eleven cents (inefficiency) times total revenue of the company they had a $7 billion dollar problem.
ENTERPRISE MARKETING EFFICIENCY
The math is simple. IBM’s sales in 1992 were $64.523 billion. When you multiply $0.11 time these revenues you get $7.1 billion. That was IBM’s “$7 billion dollar problem.” How did Jerry York come up with those eleven cents? I don’t know for sure, but it just happens if you take the company’s selling, general and administrative (SG&A) expenses in 1992 ($23.048 billion) and divide them into sales revenues in that year you get $0.40. If you do the same thing in the same year for the sum of Hewlett-Packard, Dell and Compaq you get $0.29. The difference between IBM’s and these competitors’ cost per dollar of sales just happens to be eleven cents! That was IBM’s enterprise marketing (in)efficiency in 1992. For a review of these expenses see my 12 minute audio slide show Enterprise Marketing Expenses.
SIMPLE BUT POWERFUL
SG&A expense per dollar sales is simple to calculate. But it has powerful implications, since it is a direct measure of a company's enterprise marketing efficiency [EME]. For IBM in 1993 the implication was that Gerstner had to cut $7 billion dollars out of SG&A expenses. These expenses had been built up over the years to a level that IBM no longer could sustain in the face of explosive competition from old enemies and new kids on the block. As a result, IBM shed 35.7 market share points over the next seven years.
WHAT’S YOUR EME RATIO?
What are your company’s (and its top competitors’) enterprise marketing efficiency ratios? Don’t you think you should know the answer to this question? Well, you can find out the same way IBM did. Just pull those revenue and SG&A numbers up on your screen and do the math. How do you compare with the competition? You can bet your CFO will be interested in the answer to this question.