Recall from Chapter 4 on Enterprise Marketing (SG&A) Expenses that the three published components are HR, R&D, and A&P. This is a critical take on what generates intangible market value.

First, you carve out the three parts of a revenue dollar: COGS+SG&A+EBITDA equal revenues. Then you unwind SG&A into human resources, research and development, and earnings. These simple takes on your income statement give you a new perspective on the relative cost of the inputs that create intangible value. At this point you can ask: what should we be spending on each component to maximize earnings?

ALLOCATING SG&A EXPENSES

Yes, since SG&A expenses are so highly correlated with revenues, they can be allocated to groups so that comparisons with pure-play businesses can be made. This is a good idea.

MARKETING EFFICIENCY ACROSS GROUPS

In the seventy or so strategic groups I’ve analyzed, marketing efficiency ranges from very efficient (around 0.20) to very inefficient (1.9). Remember, an efficiency ratio of 0.20 means the company pays only $0.20 for resources that cost the average competitor $1.00, while the inefficient company paid $1.90 for those resources.

And there are significant changes over time. For example, look at the trends for Dell and IBM in the presentation on “The Battle for Your Desktop.” Dell’s enterprise marketing efficiency decreased from 0.39 in 1993 to 1.00 in 1991. While IBM’s ratio improved from 1.61 in 1996 to 1.37 in 2000. These are huge changes that have an enormous impact on earnings.