ITL #51 Marketing’s self-destructive focus: time to recognise marketers’ real contribution to the creation of shareholder value
10 years, 11 months ago
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If Marketing is to demonstrate its true value to an organisation, Finance Directors should be able to put 10 key questions to their CMOs – and expect to get the right answers. By Malcolm McDonald.
There is one major problem with the Marketing community which I will briefly spell out.
Notwithstanding the contempt in which we are clearly held by, in particular the Finance community (the 2007 Deloitte report Marketing in 3D set out what CEOs and CFOs think about us), we ourselves seem to have been hell-bent on a path of self-destruction over the past twenty years. For a start, we have failed to attack the ridiculous, backward-looking behaviour of Accountants in the board room, with their depressing round of exotic debt instruments, excessive leverage, cost cutting and focus on cash.
These people have dominated boardrooms and it is depressing that today in the UK there are twelve times more Accountants per capita than Germany. These strategies however, cannot be relied on to bring about sustainable growth.
Secondly, there is Marketing’s self-destructive focus on the measurement of tactical promotional expenditure in an attempt to prove that marketers are not wasteful, self-indulgent and innumerate.
Yet our research shows that successful marketers make a major contribution to corporate wealth by understanding markets, doing proper needs-based segmentation, developing quantified value propositions, competitive analysis, portfolio analysis and managing market-place risk.
The real contribution
The time has come to recognise and measure the real contribution that world class marketers make to the creation of shareholder value. This will not come from econometric models – although these are important – nor from simple measures of marketing effectiveness. Top executives still don´t know how to convert, for example, brand equity to "real" equity, whilst single numbers such as the net promoter score just do not convince anyone. Hence the show-us-the -money school at the top in companies.
So, a totally new approach is necessary.
The most common financial objective of modern commercial corporations is the sustainable creation of shareholder value. This can be achieved only by providing shareholders with a total return, from capital growth and dividend yield, that exceeds their risk-adjusted required rate of return for this particular investment.
In today’s highly competitive environment, the major sources of shareholder value creation are the intangible marketing assets of the business, such as brands, customer relationships and channels of distribution, the 80 per cent of the company’s value that does not appear on the traditional balance sheet. Consequently, the critical future marketing strategies of a company, which indicate how these assets are to be developed, maintained and exploited, should be subjected to a rigorous review process.
Lack of rigour
Unfortunately, not only is such focused forward-looking information still normally absent from the externally available data produced by companies, but also, even more worryingly, there is often not even a rigorous internal evaluation of the shareholder value impact of such proposed marketing strategies.
Whilst most companies would undoubtedly have formally constituted, board-level audit committees that are responsible for reviewing all the major business risks that they face, conducting comprehensive financial due diligence processes on any major acquisitions or strategic investments, most have nothing for evaluating the risks associated with the use of their intangible assets to establish whether their marketing strategies create or destroy shareholder value.
Joint research at Cranfield between the Finance and Marketing Faculty tackled this problem head on and the result is a book, Marketing and Finance: creating shareholder value (Wiley 2013), sponsored by the Chartered Institute of Management Accountants and the Chartered Institute of Marketing.
This book sets out in detail a quantitative process for subjecting strategies to a rigorous risk assessment, then establishing whether the resulting risk-adjusted cash flows create or destroy shareholder value. To do this, it takes account of the time value of money and the cost of capital.
Books on 1001 metrics will not change the underlying problem of accountability nor help us to "talk the language of the board".
Fabulous work is being carried out in our community, not just by the Amblers, Rusts, Srinivansans, Raos et al, but we need to spend more of our research energy on proving the real value that professional marketing contributes to corporate wealth.
The wrong metrics
I am now a 76-year-old retired Professor – you write like one, I hear you say! – but I still work mainly at board level and a day with me usually convinces them that they have been looking for the wrong metrics from their senior marketing colleagues, even though those metrics are still necessary at an operational level.
When giving talks to Finance Directors, I always leave them with the following ten questions to ask their CMOs and the correct answers they should receive:
Question 1.
Do we know and understand our key markets?
Answer:
- We define our markets in terms of needs satisfied, not the services we sell. Remember IBM ("we are in the mainframe market")? and Gestetner ( "we’re in the duplicator market")?
- We map our markets, showing product/service flows, volumes/values in total, our shares and draw critical conclusions for our company.
- We know what the key decision points are. In particular, we understand the 20/80 rule, as this is where segmentation is done.
Question 2.
Do we address real segments in our markets?
Answer:
- We do proper needs based segmentation, not that a priori nonsense such as socioeconomics (not all A’s behave the same), demographics (not all 18-24 year old women behave the same, geodemographics (not everyone in the same street behaves the same) etc.
- We also understand the needs of members of each segment
Question 3.
Do we know what our sources of differentiation are in each of the principal market segments in our key target markets?
Answer:
- We regularly check on the buying motives of segments and compare how well our company performs compared with main competitors
- We act on the resulting strengths and weaknesses. We check that our strengths create value for us and the customer and that they are difficult to copy. We work hard at tackling our weaknesses that are meaningful to the customer
- We regularly monitor the opportunities and threats by segment and work hard to take advantage of the opportunities and to ameliorate the threats.
Question 4.
Do we all agree where we should target our limited resources?
Answer:
- We prioritise the segments in each market, having classified them all according to relative potential for growth in our profits in each over the next three years and according to our company’s relative competitive position in each.
Question 5.
Are our objectives for revenue growth and market share realistic?
Answer:
- For attractive markets (attractive means there is potential growth in sales and profits in the next three years), our objectives are to improve Net Present Value (NPV), whilst investing in growing/retaining our competitive position
- For attractive markets in which we have few strengths, having chosen the better ones, our objectives are to improve our competitive position by investing in them . For those markets not selected for investment, our objectives are to maximise net free cash flows
- For unattractive markets in which we have few strengths, our objectives are to maximise net free cash flows
- For unattractive markets where we have strengths, our objectives are to minimise costs consistent with retaining our competitive position and to maximise net free cash flows
Question 6.
Are our strategies for product development, pricing, customer service, channel management and promotion consistent with our objectives?
Answer:
- Our strategies match the objectives referred to above. For example, the majority of the available budget goes into attractive markets where we have strengths followed by unattractive markets where we have strengths, followed by attractive markets where we have few strengths – in that order
Question 7.
Have we dispassionately assessed the risks associated with our strategic marketing plan?
Answer:
- We assess the risks associated with our MARKET forecasts by using the long established tools of marketing, such as product life cycle analysis. We assess the risks associated with our plans for new products and markets by using tools such as the Ansoff matrix
- We assess the risks associated with our declared STRATEGIES by testing whether we are addressing proper needs-based segments with specific offers and whether we are leveraging our strengths, minimising our weaknesses, taking advantage of opportunities and ameliorating threats.
- We assess the risks associated with our declared BUDGETS by checking our forecast margins against historical margins and by checking that we are not setting unrealistic objectives such as rapid growth in static or declining markets.
Question 8.
Have we calculated whether our strategic marketing plan creates or destroys shareholder value?
Answer:
- We work with our senior accountants having taken account of the risk adjusted net free cash flows from all of products for markets. We then calculate whether these cash flows are greater than the cost of capital. If they are, we are creating shareholder value and can quantify this.
Question 9.
Have we agreed the metrics for measuring market effectiveness?
Answer:
- We know the levels of promotional expenditure necessary to maintain our current level of sales (maintenance)
- We subject any promotional expenditure over and above maintenance expenditure (investment/growth expenditure) to net present value calculations).
- We know the difference between lead indicators (actions that cause sales etc.) and lag indicators (outputs, such as sales growth)
- s a result of this, we know what needs reporting, why, when, how often and to whom it should be reported.
Question 10.
Are we happy with our marketing planning processes?
Answer:
Our plans demonstrate:
- A deep understanding of our markets
- A clear understanding of needs based segments
- A clear prioritisation of our objectives and strategies
- Quantified proof that they create shareholder value
- They are clear, creative and interesting
- They enable us to allocate our scarce resources differentially
In conclusion, let me say that, whilst all these questions are not relevant to all markets, unless marketers can answer the relevant ones, they should either get their marketing education up to par, or question whether they are in the right job.
Thought Leader Profile
Professor Malcolm McDonald MA(Oxon) MSc PhD DLitt DSc, Emeritus Professor, Cranfield University School of Management. Until 2003, Malcolm was Professor of Marketing and Deputy Director of Cranfield University School of Management, with special responsibility for E-Business. He is a graduate in English Language and Literature from Oxford University, in Business Studies from Bradford University Management Centre, and has a PhD from Cranfield University. He also has a Doctorate from Bradford University and from the Plekhanov University of Economics in Moscow. He has extensive industrial experience, including a number of years as Marketing and Sales Director of Canada Dry. Until the end of 2012, he spent seven years as Chairman of Brand Finance plc.
He spends much of his time working with the operating boards of the world’s biggest multinational companies, such as IBM, Xerox, BP and the like, in most countries in the world, including Japan, USA, Europe, South America, ASEAN and Australasia.
He has written 40 four books, including the best seller Marketing Plans; how to prepare them; how to use them, which has sold over half a million copies worldwide. Hundreds of his papers have been published.
Apart from market segmentation, his current interests centre on the measurement of the financial impact of marketing expenditure and global best practice key account management. He is an Emeritus Professor at Cranfield and a Visiting Professor at Henley, Warwick, Aston and Bradford Business Schools.
In 2006 he was listed in the UK’s Top Ten Business Consultants by the Times.
The Author
Malcolm McDonald
Professor Malcolm McDonald spends much of his time working with the operating boards of the world’s biggest multinational companies, such as IBM, Xerox, BP and the like, in most countries in the world, including Japan, USA, Europe, South America, ASEAN and Australasia.
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