Post of the Day
May 1, 1998

From our AOL
Gorilla Game Board


Subject: Tee Bee's Assertion
Author: BH Apollo

Tee Bee,

I suppose that your reference to us watching a little too much "King Kong" and not enough "Twister" is largely a comment upon the discussions revolving around Sun and SAP. I won't comment on Sun (although I believe that it also illustrates my point) but I am going to discuss SAP here for a moment as a lesson that reflects upon emerging technologies in general. If people are getting sick of SAP, I apologize and I welcome you to skip all of my future posts on the company if you will at least hear me out this last time since this post relates to technology investing as a whole...

Our case study: ERP. To date, the software for Enterprise Resource Planning has been predominantly two seperate categories: back office and front office. The front office is the newer of the areas, while the back office is several years older and a bit more established. Only one portion of this entire sector, however, has evolved into the middle (or mainstreet) portion of its lifespan. That part of the market is the backbone for large
  What I do want you to understand is that what we're calling a "King Kong" today, ten years from could be the company that we're comparing to a certain unseen character in the "Ten Commandments" that parts seas and appears as a burning bush.
corporations, it is a ten billion dollar market growing 25-30% a year with the positions of its players largely set in with SAP at a 33% market share and the Gang of Three (Oracle, Baan, & PeopleSoft) in at a combined total of 21% of the market. The rest of the ERP arena is still in the bowling alley or in a tornado. There is a three to five billion dollar market for the ERP backbone in small and midsize corporations (a market growing 50% a year), one to two billion dollar market for supply chain management that is doubling annually, a whole host of international markets that are untapped, the front office software arena, purchasing software, business to business commerce software, and a bunch of other areas that are probably being thought up in the garages and dorms of twenty year olds across the nation. Although the entire ERP market is enormous with an expected total of $20 billion in revenue this year, it is estimated to grow at 35-40% annually over the next several years. In 2000, ERP should be a market grossing in excess of $40 billion and still have a great deal of room to grow. We have been frequently discussing SAP in depth over the past two weeks because although it is the gorilla of a ten billion dollar segment, it has the potential to be the gorilla of the entire field. Call it monopolistic, call it the rich getting richer and the poor getting poorer, or even call it the law of increasing returns if you like -- a gorilla in the right place at the right time has the possibility for phenomenal growth.

As I have already said, this post, however, is not intended to show you how wonderful or exciting the ERP market is -- I honestly don't care if you're interested. What I do want you to understand is that what we're calling a "King Kong" today, ten years from could be the company that we're comparing to a certain unseen character in the "Ten Commandments" that parts seas and appears as a burning bush. The Justice Department at that point will probably be comparing such a company more to the overzealous plant named Audrey in "Little Shop of Horrors" but that's the way things go.

If there is anything in The Gorilla Game that I believe deserves further emphasis than the authors give it, it is that it takes a discontinuous innovation to spawn new gorillas. That little statement, the summary of the dynamics of the technology sector, is why I invest in already established gorillas. It is extremely difficult to develop an entirely new market and then spark its growth. Despite the beliefs of many company founders who were
It is extremely difficult to develop an entirely new market and then spark its growth.  
certain of the superiority, discontinuity, and nimbleness of their company in comparison to the established gorillas, there are very few companies that actually become gorillas and even fewer that become anything but a very short lived gorilla. To become an old gorilla you have to be in a completely distinct market from anything that's currently out there -- only one company out of the hundreds of contenders pulls that off. Just take a look at networking for a host of fizzles and failures with only a single enormous success: Cisco leveraged its dominance of the router market into an established leadership of the entire data networking sector. And as most of us are aware, Cisco is hardly alone in history. In CPUs, Intel created a controlled series of tornados to continue growth of its semiconductor business while leaving competitors and innovators dead or wounded. In operating systems, Microsoft has leveraged its dominance into an applications monopoly and encroached upon other adjacent operating system markets.

When we do look for future gorillas, let us not lack sufficient paranoia. Our analyses of potential investments in companies we've come across from "looking into the future" should rely heavily upon examining the ability of the emerging market to be markedly discontinous. Forgetting about the power of gorillas and the importance of discontinuity has led people to invest in companies like Netscape, Novell, Corel, and a whole host of forgottens. Of course, in the process, we don't want to end up throwing the gorilla out with the bath water either.

-Brent-


Go To Gorilla Game Board

The Post of the Day may be edited for readability or length, but never for content. The opinions expressed in the Posts are those of their authors, and not necessarily The Motley Fool. We make no claim or warranty as to the veracity or accuracy of any post, and present this feature only as an example of what may be found on our message boards. Don't take the Post of the Day, or anything else here, as gospel and, as our seventh grade English teacher, Mrs. Peacock, used to say, do your own homework, and avoid run-on sentences.