Goliath and the Three Davids

In his comment on Microsoft's $8 billion problem Jonathan Knowles suggested that I run the enterprise marketing efficiency (EME) numbers on all public companies. I've been working with Gerstner's "Cost per Dollar Sales" for years and it never occurred to me to do a large sample study of this metric. It's so easy to lose sight of the forest for the trees!

In the meantime I went back to my analysis of The Battle for Your Desktop and pulled up a table on the EME ratios for IBM and three of its troublesome little competitors beginning in 1991.

GOLIATH AND THE THREE DAVIDS
In 1991, a couple of years before Lou Gerstner took the helm, IBM's sales were $64.8 billion and its enterprise marketing (SG&A) expenses were $28.0 billion. It cost the company 43¢ to generate a dollar of sales. Hummm, somehow IBM's enterprise marketing efficiency (the first red column in this table) is troublingly close to Microsoft's cost of 45.5¢ per dollar sales in 2006 (see my last post Stuck in a Rut). Here's the data for IBM and the three Davids over the decade:

 

Gerstner and his team were able to drive IBM's enterprise marketing (in)efficiency down to 24¢ by 2000. Which in its own right was extraordinary. Even so IBM never could catch up with Compaq (CPQ), Hewlett-Packard (HPQ) and Dell (DELL). These three Davids didn't amount to much in 1991 with sales of just over $18 billion. But their enterprise marketing expense per dollar sales (the second red column in this table) was only 35¢ in that year and fell to 17¢ by 2000!

ENTERPRISE MARKET SHARES
You can easily calculate from the sales data in this table what happened to IBM's enterprise market share over the last decade of the 20th century. It fell from 78% in 1991 to 43% in 2000. And we know what happened to the market caps of the three Davids during the decade.

In 2006 Microsoft's sales were $44.3 billion. Google and Yahoo! together generated sales of $17.0 billion. Microsoft's market sahre was 72%. Is it destined to become the IBM of the 21st century? I guess that depends on whether or not Microsoft can fix it's $8 billion dollar problem. Before it gets to be an even bigger one.

~V

Comments

[Jonathan Knowles]

Wow! Thank you, Vic, for such a quick response to my comment.
IBM's situation in 1991 seems an amazingly close parallel to Microsoft's current predicament, right down to their respective EME ratios (around 45%) and share of sales (over 70%).
Your analysis shows that IBM went from an apparently unassailable market position in 1991 of sales 3.5x the combined total of its three rivals to a position 7 years later where its rivals' combined sales surpassed IBM's.
It is a neat coincidence that Microsoft's 2005 revenues were $41 bn - 3.4x Google and Yahoo's combined revenues of $12 bn.
As you note, whether Microsoft mirrors IBM's subsequent fate depends largely on fixing its $8 bn problem.