Marketing Finance This Page Intentionally Left Blank Marketing Finance Turning marketing strategies into shareholder value Keith Ward AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO Elsevier Butterworth-Heinemann Linacre House, Jordan Hill, Oxford OX2 8DP 200 Wheeler Road, Burlington MA 01803 First published 2004 Copyright © 2004, Keith Ward All rights reserved The right of Keith Ward to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publisher Permissions may be sought directly from Elsevier’s Science and Technology Rights Department in Oxford, UK: Phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333: e-mail: permissions@elsevier.co.uk You may also complete your request on-line via the Elsevier homepage (http://www.elsevier.com), by selecting ‘Customer Support’ and then ‘Obtaining Permissions’ British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data A catalogue record for this book is available from the Library of Congress ISBN 7506 5770 For information on all Elsevier Butterworth-Heinemann publications visit our website at www.bh.com Typeset by Integra Software Services Pvt Ltd, Pondicherry, India www.integra-india.com Printed and bound in Great Britain Contents Preface xi Part One: Overview 1 Creating Real Shareholder Value Overview Introduction A focus on shareholder value Risk and return Making a profit is not good enough Creating marketing assets Defining shareholder value Creating sustainable and real shareholder value Considering both business and financial risk Note 3 11 17 22 25 26 29 The Virtuous Circle of Analysis, Planning and Control Overview Introduction A strategic marketing finance approach The financial planning and control process Brand-led strategies Customer-led strategies Product-based strategies Case study – Rudolph and the Elves Discussion of problem 30 30 32 33 39 47 48 50 52 53 Part Two: Analysis and Design 59 The Strategic Management Process: Setting Goals and Objectives Overview Introduction 61 61 62 vi Contents Mission, goals and objectives Multilayered strategic management process Corporate centres Case study – the rise, fall and rise of IBM The rise of IBM The fall stage The second rising Strategic analysis Vertical integration Multinationals and risk-taking appetites Case study – multinational strategies Overseas investments Cross-border sourcing decisions Strategic opportunity Future Competitive Environment Review – Competitor Analysis Overview Introduction Defining the competition Competitor analysis as a decision-making aid Competitor analysis as a two-stage process A game theory view of the industry value chain Detailed but tailored analysis Sources of competitor information Case study – Marlboro Friday Market background Understanding Philip Morris The price reaction Competitor reactions The resulting impact Existing Position Appraisal Overview Introduction SWOT analysis Case study – example of a SWOT analysis Other techniques Case study – petrol retailing – is it part of the retailing or oil industries? Background Strategic analysis Product life cycles 65 69 74 77 77 78 79 81 84 87 88 88 90 94 97 97 98 100 103 104 110 115 117 118 119 121 122 124 125 128 128 129 130 132 135 137 137 139 142 Contents Case study – Ebenezer Scrooge meets Miser Shylock Case analysis vii 145 146 Part Three: Planning 151 The Planning Process Overview Introduction Corporate values Gap analysis and contingency planning An integrated process Strategic planning levels Top-down versus bottom-up More than a budget Case study – Knight Foods Background Canned meat products The sustainable competitive advantage Post-launch development 153 153 154 157 161 165 167 170 172 174 174 174 175 176 Strategic Investment Evaluation and Control Overview Introduction Payback period Discounted payback Discounted cash flows Accounting return on investment A personal approach to strategic investment evaluation Practical implementation issues Probability estimates Real options Real option example Case study – Peter Piper is puzzled Project A Project A analysis Project B Project B analysis Project C Project C analysis 179 179 180 182 184 185 189 190 191 194 199 203 207 207 208 209 210 211 213 Brand-Based Strategies Overview Introduction 215 215 216 viii Contents Brands as intangible assets Realising the asset value Brand development Development versus maintenance expenditures Brand attributes Brand evaluation process An overall perspective Case study – Philip Morris versus BAT plc Customer-Led Strategies Overview Introduction Marketing segmentation Customer account profitability analysis Relationship marketing Customer value Customer life cycle profitability analyses Case study – D & M Confectionery Ltd Background – The original business The new business opportunity 219 220 222 227 230 236 239 239 241 241 242 243 247 250 253 254 259 259 259 10 Product-Based Strategies Overview Introduction Direct product profitability Product attributes Product life cycle profitability analysis Penetration versus skimming pricing strategies Cross subsidisation Reinvesting to replace an existing competitive advantage Strategic use of standard costing Case study – Sub-assemblers Inc Transfer pricing Case study – Tissues Unlimited 262 262 263 265 268 270 275 276 277 279 282 285 285 Part Four: Control 291 11 Exercising Control over the Future Overview Introduction Integrating control into the planning process Impact of organisational structure Critical success factors of a marketing finance process 293 293 294 300 303 304 Contents A rapidly changing competitive environment Case study – McDonald’s Background Strategic analysis ix 308 316 316 317 12 Establishing Performance Measures Overview Introduction New performance measures Accountability and controllability Key performance indicators Tailored financial control measures Case study – Coca-Cola Inc Background Strategic analysis 320 320 321 322 325 330 334 340 340 342 Index 344 336 Marketing Finance Growth Launch Business risk high Business risk v high Maturity Decline Business risk medium Business risk low Direction of life cycle Figure 12.4 Business risk – as it will change over the life cycle Growth Launch Business risk high Business risk v high CSF: Growth in market share and development of total market Maturity CSF: Development and launch of new product Decline Business risk medium Business risk low CSF: Maintenance of market share at minimum cost CSF: Cost minimisation and/or asset realisations Figure 12.5 Changing critical success factors over the life cycle using up the limited competitive advantage period during which super profits can be generated Once the product is launched this risk is removed and the business passes into the growth phase; as previously discussed the key objective is to grow market share to its optimum level during this rapid growth period, as competitive responses to share gains are likely to be less aggressive Establishing Performance Measures 337 However if the company was first to launch the product it should start out as market leader and its strategy will normally be to maintain this market leadership during the growth stage As previously discussed, it is the responsibility of the market leaders to ensure that the total market fulfils its full potential, and this gives two critical success factors for this phase: growth in market share and development of the total market Once the product matures, the focus of the strategy should change as aggressive market share growth can result in value destroying responses from competitors (i.e the start of price wars resulting in a lose–lose game for the industry) The critical success factor for the market leader is to maintain its market share at the minimum cost possible, without opening up opportunities for competitors to steal significant share; Chapter showed that it was during this maturity phase that the benefit of sharing cost savings with customers was particularly valuable Of course, smaller competitors may be less worried about entering into value destroying competition, as they have a smaller share of the existing industry value chain, but it is still in the interests of the market leader to manage the profitability of the total industry Eventually the product will move into its decline stage where sales volumes reduce, albeit slowly, and it is important that the business does not try to avoid this by over-investing in marketing activities The focus should be on downsizing the business to match the new levels of demand, so that asset realisations and cost reduction activities become more important It is quite common that, by this stage, the basis of competition has become selling price, so that the relative cost levels will be of increasing importance These critical success factors can themselves be translated directly into tailored leading indicator performance measures with a particularly valuable measure being a leading indicator of when the product is moving into the next phase However these non-financial measures also help to highlight what type of financial control measures should be applied to each stage of development It is only during the maturity phase, as shown in Figure 12.6, that the very common accounting-based ROI is at all valid Even here, I much prefer the residual income measure discussed earlier in the book although, as shown in Figure 12.7, the best financial performance measure for mature products is sustainable operating cash flows as it avoid the potential confusion that can be caused by ‘Mickey Mouse’ accounting presentations The reason that ROI is acceptable for mature businesses is that the business is focused on producing good profits now while maintaining the asset base for the future, and ROI gives a reasonable view as to whether that is being achieved Unfortunately it is still a lagging indicator for the current year but this year’s profits can be used as a reasonable leading indicator for future sustainable profit levels None of the other stages is either steady state or stable and therefore using ROI will either overstate or understate the future potential of the business During the launch phase there is almost no meaningful financial control measure due to the very high business risk and associated very high level of volatility 338 Marketing Finance Growth Launch FCM: DCF evaluation of investments in growth in market and market share FCM: R&D milestones, decision focused reviews, probability assessments Maturity Decline FCM: accounting return on investment or residual income FCM: free cash flow from operations Figure 12.6 Tailored financial control measures over the life cycle The financial evaluation that should have been done prior to committing the funds to develop, and launch the product would have been based on the expected future cash flows but, as discussed in Chapter 7, these ‘expected’ cash flows will probably have a very wide range of possible outcomes Typically Launch Growth CSF: market dominance CSF: Focus: marketing Focus: R&D / market research FCM: DCF of marketing investments FCM: Maturity time to market R&D milestones decision-focused reviews risk management Decline CSF: maintenance of position CSF: controlled exit Focus: supply chain Focus: asset management & cost control FCM: sustainable operating cash flows / ROI / RI FCM: total free cash flow including asset realisations Figure 12.7 Illustration of matching financial control measures to strategic thrusts over time Establishing Performance Measures 339 this would include some chance of complete failure with no resulting cash inflows and some chance of very high cash inflows if the product ultimately proves to be very successful Thus, while the ‘expected’ cash flows can and indeed must be used for evaluating the investment, they cannot be used as a meaningful ‘control’ measure during the development and launch stage Control should instead focus on managing the very high-risk profile of the project and this includes using milestones for the research and development activities and marketing research, carrying out decision-focused reviews before committing the next phase of expenditure and, as discussed in depth in Chapter 7, trying to increase the probability of success of later stages before committing significant amounts of money to the project Once the growth phase has been reached, much more information on the market and the relative strength of the company’s product will have been obtained Thus the total range of the expected outturns should have reduced significantly so that the discounted cash flow evaluations can now also be used as a meaningful financial control measure It is vital that such a long-term control measure is used if the product is to achieve its full potential, as much of the marketing expenditure during this growth stage will be development spend which has a long-term return During the decline stage, the business is looking to reduce its investment in the product by recovering some working capital as volumes drop, and by not reinvesting all the accounting depreciation expense in new plant and machinery This means that the cash generation from the product should be higher than its accounting profit level and this makes free cash flow from operations a good performance measure The drawback is that actual cash flow is once again a lagging measure, but targets can be set both for releasing working capital and for the reinvestment rate in fixed assets, and this can produce a more leading indicator of the actual cash generation This process can therefore be developed to produce a balance of financial and non-financial measures that link together the critical success factors of the strategic thrust at each stage with the focus of the marketing finance system and the appropriate type of performance measure, as shown in Figure 12.7 Another way of developing a set of tailored performance measures for different types of organisation has already been discussed in Chapter 6, where the Rainbow Model showed that the specific role of the corporate centre in large groups can have a significant impact on the performance measures that should be used across such a group If all the relevant various factors are combined for any particular business, it should become clear that a unique set of tailored performance measures can be developed for each business depending on its specific needs Thus, as discussed in the Rudolph and the Elves case study at the end of Part One, these tailored performance measures may well have more in common with a business applying a similar strategic thrust in a completely different industry 340 Marketing Finance than with a business in the same industry that is employing a very different strategy Case study – Coca-Cola Inc It was very tempting to try to write a final case study that covered all the issues addressed in the book, but I soon gave this up as too ambitious However I decided to finish by discussing a company that consistently delivered very high levels of shareholder value over quite a long period from a clear marketing focus; in other words it achieved the sub-title of the book by ‘turning marketing strategies into shareholder value’ Its challenge is to continue to this in the future Background Coca-Cola Inc was able to grow, initially in the USA, very rapidly by focusing on the manufacture of its syrup concentrate and the brand advertising for its soft drink product The actual production of the finished consumer product was outsourced to bottlers spread across the USA These bottlers were set up with territorial exclusivity (by 1920s there were 1200 franchised Coke bottlers), perpetual contracts and a fixed syrup price The bottlers did very well as the market grew rapidly but, as the USA market matured in the 1970s with volume growth rates of only per cent, they looked on Coke bottling and distribution as a good profit generator but no longer a high potential business Also Coke’s bottlers were, by definition, locally based and therefore were not structured to regional and national deals with the rapidly expanding retail chains Pepsi–Cola could this as it owned many of its larger bottlers; by 1977 Pepsi had an equal share to Coke in the USA supermarkets In the early 1980s Pepsi moved into snack foods and restaurants, acquiring Pizza Hut, Taco Bell and KFC; all of these chains, not surprisingly, switched to selling Pepsi Coca-Cola already had McDonalds but then won Burger King and Wendy’s as well The restaurant sector and vending machines are highly profitable channels of distribution for soft drinks companies; pricing is high and so are consumption levels, thus exclusive distribution can be a major advantage Unusually, grocery distribution in this industry is more a method of brand building rather than a source of super profits; it is in the grocery channel that both Coke and Pepsi have faced their most severe competitive pressure from retailer brands and generic competition Coca-Cola wanted to restructure its bottlers but the perpetual contracts and fixed price syrup made this potentially very expensive The new CEO, Robert Establishing Performance Measures 341 Goizueta, used a product development to achieve this in 1981 The company had developed a high fructose corn syrup as an alternative to sugar in the syrup which reduced the cost by 20 per cent; Goizueta made the lower cost product available to bottlers on a condition of amending the original contracts During the early 1980s Coke then acquired many of its bottling franchisees and focused on developing the areas of other good bottlers Unfortunately this significantly increased its asset base and made its return on equity look much lower, even though these bottlers were themselves highly profitable In 1986, Coca-Cola Enterprises was set up as a holding company for these owned bottlers and a majority stake (51 per cent) was floated onto the USA stock market This achieved two things; one, Coke no longer had to consolidate its remaining 49 per cent minority stake; so its return on equity rose back to its old levels and, two, it generated over $1 billion in cash that could be spent on acquiring more bottlers This model was replicated as Coca-Cola grew rapidly internationally during the 1980s and 1990s with its large anchor bottlers that effectively controlled a region or large country being partially owned by Coca-Cola Enterprises (CCE) By the mid-1990s Coca-Cola had a dominant share in the international (i.e to them, non-USA sales) soft drinks market and 80 per cent of its $4 billion operating profit was made outside the USA The growth rate outside the USA was still significantly greater than the now very mature USA market Coke’s market capitalisation had grown astronomically from under $5 billion in 1981 to around $150 billion in 1996 Coca-Cola had thus generated significant shareholder value over a 15-year period by being a focused branded beverage producer linked to a network of bottlers that are its key direct customers Pepsi–Cola, on the other hand, had moved into other product areas including snack foods (e.g Frito Lay) and fast food restaurants (now sold off) but 90 per cent of its profits came from the USA; not least because it had less than half Coke’s market share outside the USA (45 per cent versus 21 per cent) Pepsi has also now spun off its bottling operations In the second half of the 1990s Pepsi mounted an aggressive marketing campaign in the USA; it doubled its annual marketing spend, based on blind taste tests that indicated consumers actually preferred Pepsi to Coke This closed the market share gap to its smallest level since 1980 and resulted in the launch of New Coke, which was supposed to taste better than either Old Coke or Pepsi This well-documented disaster was rapidly replaced by Classic Coke (i.e Old Coke again) but Coca Cola also faced other problems, not helped by the economic slowdown and its own quality issues: growth of competitor brands (e.g Dr Pepper, now owned by Cadbury Schweppes), continuing growth of retailer brands and a growing range of alternative ‘healthier’ drinks Another new CEO, Douglas Ivester, tried to change the corporate culture and refocus the company on creating shareholder value He introduced economic 342 Marketing Finance value as the group’s main financial performance measure and radically overhauled the company’s planning and control process This tried to bring about more creativity from lower level employees through a greater level of delegated authority so as to reduce the perceived arrogance and bureaucracy that had built up within the company Unfortunately the stock market lowered its future growth expectations for the shares as the company showed that it could not sustain its previous sales growth rates Its dominant market share meant that it could still achieve profit growth by not spending on its brand marketing (there were no high-profile marketing campaigns during this period), but this was also seen as a longer-term threat by stock market analysts Ivester left in 1999 and was replaced by Douglas Daft; as stated earlier, he has recently curtailed Coke’s short-term profit estimates in an attempt to ensure that the focus is on the long-term strategy Strategic analysis Coca-Cola made a very early key strategic decision that was to try to gain a dominant market share while its market was in its infancy; hence, the use of exclusive franchised bottlers that gave it national coverage very quickly It focused on controlling the brand imagery and the product quality (the syrup concentrate and the product’s packaging, including its unique bottle shape) This enabled it to develop an incredibly strong consumer franchise despite having at least two intermediaries between it and the consumer (the bottler and the retail channel of distribution) The strategy also minimised its required investment in both capital and people, so that the rate of potential super profits was very high once strong market share was achieved However it also restricted its strategic flexibility if its bottlers were not as committed to the brand and the consumer as Coca-Cola was It needed more negotiating power once the channels of distribution became more concentrated and its consumer branding potentially became less powerful Exclusive distribution in restaurants, bars, clubs, etc is a potentially double-edged marketing sword; it is a source of brand trial as many consumers will not leave just because the restaurant serves Pepsi rather than their normal Coke or vice versa; hence they get to try the competitive product and may get to like it However a request for one brand which gets automatically replaced by the No.1 rival brand may damage the perceived brand differentiation; ‘its all really the same stuff, but we happen to sell only Pepsi’ Coca-Cola has proved several times, by launching other products, that it is virtually impossible to replicate the strength of a brand like Coke, which makes it a victim of its own success The potential market for Coca-Cola may be very large but it is definitely finite and sustaining high growth when you have a dominant share of a maturing market becomes more and more difficult The risk is that the brand strength and the pressure for profits lead to Establishing Performance Measures 343 a strategy of trying to keep increasing profit margins; not surprisingly there are many similarities between the Coca-Cola story and Marlboro cigarettes These increasing profit margins make it easier for competitors to offer better value for money products and still make a more than acceptable return This is particularly true when the total size of the market makes it possible to be financially viable with only a very small market share The consequence is that it is vital that the company can continually refresh its brand imagery, but this becomes increasingly difficult as the brand gets older, with the result that the age profile of Coca-Cola drinkers gets much broader Also as the market share of the grocery channel increases, the visibility of the leading brand’s price premium becomes greater and there is the significant additional risk that the economic buyer (the supermarket shopper) is not the actual end consumer, and he/she may decide to buy the much cheaper alternative cola brand ‘because its all really the same stuff’ and ‘its probably made by the same people anyway’ Another problem for the market leader in a maturing market is that it has the major role in defending and developing the total value of the market, while the small competitors can simply look to gain market share even at the risk of damaging the total return for the existing leaders For several years Coca-Cola offset its maturing USA market by growing internationally, eventually taking an even greater share of the world market outside the USA than it has inside the USA While this overall market and Coke’s share of it was growing rapidly, the overall group’s profit could sustain a strong rate of growth As this market slows, the future rate of growth becomes much more questionable and inevitably this would lead to a re-rating of the growth expectation that is incorporated into the share price Shareholders tend to extrapolate existing growth rates into the future (sometimes seemingly to infinity) and accordingly bid up the share price They then require that the company achieves these growth expectations that they have by now already paid for; if the company fails, the resulting fall in the share price can be both very rapid and very large It is therefore important that the company manages the expectations of the stock market, so that its share price does not rise too far; i.e well beyond what can actually be sustainably delivered by the company’s long-term strategy Coca-Cola undoubtedly turned its fantastically successful original brandbased marketing strategy into a massive amount of shareholder value; the challenge is now to sustain and build on this in a much more mature market with a more sophisticated set of competitors, more aggressive other stakeholders, and potentially less loyal consumers If it is to this, it will need a very tailored set of marketing finance generated performance measures, but they will not be the same ones that served it so well in the past Index Accountability/controllability, cost apportionment/recharging systems, 327–8 economic performance measures, 325–6 FCMG, 330 gaps, 327–8 necessity of, 325 sales performance, 328–30 shareholder value, 326–7 stock options, 326 Aircraft industry, 274–5 Ansoff matrix, 44–6, 161, 163 Assets, 17–19 management, 250 research, investment, maintenance expenditure, 250 Bain & Co., 251 BAT (British American Tobacco), 109, 122, 124, 134–5, 239–40 Boston Matrix, 129, 143–4 BP (British Petroleum), 139 Brand attributes, 21, 47 commitment/involvement, 234–5 concept, 230–1 customer loyalty, 232–6 functional/representational, 231, 232 importance of, 232 linked branding, 232–3 Brand-based strategies, case study, 239–40 creating awareness, 223–4 customer-based, 217–18, 222 evaluation process, 47–8, 236–9 financial control/evaluation, 219, 221–2, 225–6 marketing budgets, 228–30 new user trials, 224–5 product-based, 216 rate of regular usage, 226 re-purchase phase, 226 risk assessment, 226–7 SOV/SOM ratio, 230 super profits, 48, 215, 219, 220–2 target setting/planning, 225 use of discounted cash flow, 47–8 value-weighted level of distribution, 223–4 Brands, concept, 215 as intangible assets, 219–20 customer loyalty, 217–19, 222, 233–6 definition, 221 development of, 215–16, 222–7 dominant, 37–8 evaluation, 216, 297 life cycle, 217–18 loyalty, 216 positioning of, 216 realising asset value, 220–2 strength of, 221 umbrella branding, 232–4 value for money, 221 Budgeting, 172–4, 238–9 Capital Asset Pricing Model (CAPM), 11 Car industry, 88–96, 100–1, 232, 244, 303 Case studies, biscuit manufacturer, 132–4 competitor analysis, 118–27 customer-based, 259–61 financial control, 316–19 five forces model, 135–42 Knight Foods, 174–6, 249, 265, 268 marketing finance, 52–8 multinationals, 87–96 performance measures, 342–3 Peter Piper, 207–14 planning, 174–8 product-based, 282–9 product life cycle, 142–9 Rudolph/Elves, 52–8 Scrooge/Shylock, 145–9 strategic investment, 207–14 strategic management, 77–80 sub-assemblers, 282–5 Tissues Unlimited, 285–9, 323 transfer pricing, 285–9 variance analysis, 282–5 Cash flow forecasts, 22–3 Cigarette industry, 18 Co-opetition, 114 Coca-Cola Inc., 21, 22 background, 340–2 strategic analysis, 342–3 Commodity suppliers, 37–8 Competitive advantage, and competitor comparisons, 99–100 distribution channels, 258 in growth phase, 111 investment, 277–9 new sources of, 102 product-based strategies, 263 reinvestment to replace existing, 277–9 sustainable, 13–14, 16, 17–18, 20, 37, 175–6, 302–3 Index Competitive strategy, 68, 334–5 brand-based, 215 co-operative, 45 long-term, 111 Competitor analysis, 302 and value creation, 114 as decision-making aid, 103–4 as forward looking, 97 as two-stage process, 104–10 business in context, 104–5 case study, 118–27 classification in non-mutually exclusive categories, 105–10 company/competitors comparison, 98 competitor/competitor comparison, 99–100 core/peripheral business, 108–9 cost benchmark, 116–17 customer-led definitions, 101 destructive/constructive competition, 114 detailed but tailored, 115–17 entry/exit barriers, 105–8 existing competitors, 101–2 focused/defined, 115 future focus, 104 game theory, 98, 110–15 identification of competitors, 97, 100–3, 105 internal perspective, 100 life-cycle analysis, 107 performance measures, 109–10 prediction of strategic initiatives, 97 principal decision-maker, 110 risk-taking, 110 sources of information, 98, 117–18 strategic position, 105 timing, 115 usable information, 115 value-in-use, 115–16 vertical integration, 109 Consumer associations, Contingency planning, 35–6, 38, 153, 164, 173 Corporate centres, 62, 158, 168 benefits, 72 controls configuration, 74–5 corporate configuration, 74, 76 direct/indirect involvement, 74, 75 scale/scope configuration, 76 under attack, 74 value creation, 74, 75, 76, 77 Corporate values, 157–8 and corporate culture, 158 and corporate style, 158, 159 communication of, 158 definition, 157–8 derived from/consistent with vision statement, 158 Critical success factors, control in advance of financial commitment, 306–7 develop overall investment planning/control process, 308 financial/non-financial performance measures, 307–8 focus on/measure intangible marketing assets, 306 management discretion, 307 marketing objectives/engineered relationships, 307 marketing/finance communication gap, 305 345 objectives, strategies, marketing finance systems, 304 relevant information, 306 strategic marketing decisions, 305–6 Customer account profitability (CAP) analysis, 48–9, 243, 247–53, 266 design of, 247 example, 248 importance of, 246 level of attributable cost, 249–50 life cycle, 254–9 objectives, 247 product-costing system, 248–9 real cost drivers, 247–8 Customer-led strategies, assessment of customer value, 48–50 built around existing customers, 48 CAP analysis, 48–9, 242–3, 247–50 case study, 259–61 concept, 241 direct attributable costing, 49 financial analysis, 241 future growth, 48 life cycle profitability analyses, 254–9 long-term relationships, 241–2, 250–3 marketing segmentation, 243–7 relationship marketing, 49 retention/development, 49 super profits, 48 Customer life cycle profitability analyses, 254 company strengths, 254 competitor risk, 257 concept, 254 customer compatibility, 255–6 DCF evaluation, 256 directional policy matrix, 254–5 distribution channels, 258 lifetime economic value, 258 marketing finance measures, 255, 256 share of customer business, 256–7 strategic thrust, 255–6 structure of, 254 TPM/FEC techniques, 256 use of data warehouses/data mining techniques, 257–8 Customer value, 49–50, 243, 253, 266 Customers, brand loyalty, 19, 217–19, 222, 233–6 habituals, 236 lost, 251 retaining/developing, 251 switchers, 234–5 variety seekers, 235 D & M Confectionery Ltd case study, background, 259 new business opportunity, 259–61 Dell Computers, 245 Direct product profitability (DPP), 50–1, 262 based on existing products, 264–6 costings, 264, 268 decision relevant costs, 267–8 development of, 266 example of, 266–7 346 Index Direct product profitability (DPP) – continued grouping products, 268 loss-making products, 267 objective, 264–5 product definition, 264–5 rate of sale, 266 relationship marketing/customer value, 266 under recovery/over recovery, 264 value-added component, 270 Discounted cash flow (DCF), 326–7 and shareholder rate of return, 185–6, 192 arguments against using, 186 brand evaluation, 237–8 CAP analysis, 258 concept, 185 criterion rate of, 185–6 implementation of, 186 IRR method, 186–9 Economic profit (residual income), 23–4 Economist Intelligence Unit (EIU) Report, 34–5 Enron, 26 Entry/exit barriers, 16, 105–8 against competitors, 251 as key assets, 18 finite economic life, 17–18 Esso, 139 Existing position appraisal, 63, 99, 128 forces model, 128, 135–42 external environment, 129–30 internal position, 130 product life cycle, 129, 142–9 review current position, 129 SWOT analysis, 128, 130–5 techniques, 128–9 Experience curve, 51, 262, 270–5 External factors, 35, 36, 38, 68, 98–9, 129–30, 131–2, 322 Fast moving consumer goods (FCMG), 122, 126, 224, 226, 296–7, 298, 330 Feedback loops, 40, 41, 156, 162–3, 176, 294, 300 Finance/accounting, actual/planned performance comparison, 99 efficiency/effectiveness measures, evaluation, 6–7, 19, 338 forecast outcome benefits, 99 involvement with marketing, 5–8 role of, traditional system, 98–9 Financial control, brand-based strategies, 294–7 case study, 316–19 changes to, 40 changing competitive environment example, 308–16 commitment process, 293–4 competitive strategy, 334–5 concept, 33 constraining, 321 cost increases, 321–2 differential advantage, 302–3 enabling, 322 evaluation, 294 exports/imports, 298 feedback loops, 40, 41, 294, 300 focus on decision-making, 293 historical analysis, 293 impact of organisation structure, 303–4 internal/external environment, 34, 36, 38 key learnings about future, 300–1 link with planning, 39–46, 153, 159–60, 293, 294, 300–3 objectives, 39–40 performance measures, 40–4, 297 pricing, 295 promotions, 298–300 prudent view, 295 retailer response, 295–7 risks, 294 ROI ratio, 295 SLAs, 293 strategic, 294, 321–2 success factors, 293, 304–8 sustainability of present situation, 302 tailored, 334–40 two-stage process, 294 uninvolved/uncommitted, 321 Financial services, 102, 218 product specialist/account manager, 329–30 Five forces model, 128, 135–7 case study, 137–42 Ford Motor Company, 100–1, 244 cross-border sourcing decisions, 90–4 overseas investments, 88–90 strategic opportunity, 94–6 Game theory, 36, 45–6 application of, 112–14 value chain, 110–15 Gap Analysis, achievement of targets/objectives, 162 application of, 161–2 benefits of, 163–4 BHAG (big hairy audacious goals), 162 concept, 161 feedback loops/performance criteria, 162–3 General Electric Company (GEC), 28–9 Greenspan, A., 25 Growth strategy, 15, 46 and competitive advantage, 111 customer-led, 48 increase market share, 111 product-based, 143–4, 263, 337–8 IBM, 37–8, 142, 232 analysis of, 81–7 fall of, 78–9 rise of, 77–8 second rising, 79–80 vertical integration of, 84–7 Inflation, 191–2 Insurance, 15–16 Internal rate of return (IRR), 179, 309 application of, 186 flaws in, 187–8 popularity of, 186–7 profitability index, 188–9 Index Key performance indicators (KPI), 320–1 advertising awareness, 333–4 cascading pyramid, 331 concept, 331 creating focus, 331–2 leading/lagging, 332–4 linking levels, 332–3 repeat purchase, 332–3 Knight Foods case study, 249, 265, 268 background, 174 canned meat products, 174–5 post-launch development, 176–8 sustainable competitive advantage, 175–6 Levi’s, 218 Life Assurance, 334 McDonald’s, background, 316–17 strategic analysis, 317–19 Market segmentation, biographics, 246 degree of compatibility, 246 degree of loyalty, 246 delivery/distribution requirements, 246 differential advantages/positioning strategy, 244 geo-demographic analyses, 246 innovation/flexibility, 246 mass customization, 244–6 mass production, 244 objective/subjective, 246 product differentiation, 244 product importance, 246 psychographics, 246–7 situational context, 247 style of decision-makers, 246 systems compatibility, 246 trends in, 244 Marketing expenditure, above the line/below the line, 19–20 challenges to, 4–5 control, 294–5 decline, 20–1 extension of life of asset, 21 maintenance/development, 20, 21, 216, 227–30, 238–9 planning, 22 proportion of total expenditure, 21 Marketing finance, 5–8, 19 analysis, 34–5 budget, actual, variance syndrome, 33–4, 321 case study, 52–3 competitor analysis, 36–8 competitor risk, 257 control process, 36, 38–9, 250, 293–4 critical success factors, 304–8 customer value, 253 development, 20, 21 discussion of case study, 53–8 external environment, 34 game theory, 36, 45–6 internal/external costs, 98–9 participative, 322 perceived use values, 52 planning interface, 36–8, 156–7 347 role of, 301 shareholder value, 253 tailored, 44, 308–19 Marketing, and advertising, 7–8 brand awareness, 7–8 brand development, 222–7 creating assets, 17–22 customer discounts, 16 financial evaluation, 226–7 finding new customers, segments, markets, 46 reduction in risk perception, 16 strategy, 30–2, 46 success/failure, 227 See also brand-based strategies Marks & Spencer, 217, 218 Marlboro Friday, 118–27, 135, 142 Mars, 223 Milk market, 102 Mission statements, 61, 64, 66–7, 68, 69, 100 Model T Ford, 245 Multinationals, case study, 88–96 cross-border sourcing problems, 90–4 overseas investments, 88–90 risk-taking, 87–8 strategic opportunity, 94–6 Noorda, R., 114 Oil industry, 109 background, 137–9 strategic analysis, 139–42 supermarket competition, 138–9 Old Mutual assurance company, 166 Options, advantages of real option value drivers, 201–2 call, 199 concept, 199 life of, 200–1 models, 199 put, 199 real, 203–6, 258 use of real options, 202 value drivers, 199–202 volatility of investment returns, 201 Organisational structures, combination of, 159 control process, 303–4 corporate centres, 74–7, 168 corporate configuration model, 76, 159 divisional, 70–2, 168 functional, 70 geographic/strategic move, 158–9 matrix type, 73 mixed, 72–3 Rainbow diagram, 159, 160, 339 separate internal service centres, 169–70 vertical integration, 109 Pareto 80:20 rule, 300 Payback method, advantages, 182 concept, 182 discounted, 184–5 in practice, 182–7 problems with, 183–4 relevance of, 183 348 Index Perfect competition, 13, 105 Performance measures, 294 accountability/controllability, 325–30 achieving, 43 actual/planned comparison, 99 altering, 323 as leading indicators, 322 case study, 340–3 committed/discretionary expenditure, 307 competitor analysis, 109–10 concept, 320 customer needs, 252 decision-oriented, 322 developing appropriate, 41 economic, 41–3, 320, 325–6 efficient/effective, 320 financial/non-financial, 322, 339 goal congruence, 43, 324 hierarchy of, 320 identify appropriate financial, 307–8 internal/external, 42, 44, 322 key indicators, 30–4, 320–1 machine utilisation, 297 managerial, 42–3, 320, 333 new, 322–4 relative competitive performance, 42, 43 sales force, 328–30 shareholder value, 326–7 short-term/long-term balance, 40–1, 323 tailored, 297, 321, 322, 334–40 transfer pricing, 323, 324 Philip Morris, 109, 135, 239–40 competitor reactions, 124–5 market background, 119–21 price reaction, 122–4 resulting impact, 125–7 understanding business of, 121–2 Planning, and assessment of risk, 154–5 and choosing courses of action, 154 budget objectives, 172–4 bureaucratic approach, 156 case study, 174–8 competitive strategy, 153, 167–8 complexity of, 155–6 conservative/extreme, 153 contingency, 153 corporate, 158–9, 167 creative, 160–1 direct involvement, 161 financial, 32–3, 39–46 gap analysis, 153, 161–4 group activities, 168–9 in context, 155 integrated process, 165–6 link with control process, 39–46, 153, 159–60, 293, 300–3 marketing finance interface, 36–8, 156–7 performance measurement systems, 153 portfolio of businesses, 153 preparation, 39 Rainbow diagram, 159–61 strategic levels, 167–70 top-down/bottom-up, 153–4, 170–2 unexpected/unplanned, 165 Porter, M., 128, 135–7 Pricing strategies, 323 penetration vs skimming, 275–6 reduction, 271, 273–4 short-run decisions, 301–2 transfer, 285–9 value-in-use, 115–16 Probability estimates, 179–80 advantages of, 197–8 assessment of, 198–9 in high-risk strategic investment decisions, 196–8 revising initial, 195 use of, 194–9 Procter & Gamble (P&G), 233, 266 Product attributes, 262, 268–9 cost advantage, 269–70 differential advantage, 270 matrix, 269 Product-based strategies, 31–2 case studies, 282–9 competitive advantage, 263, 277–9 competitor analysis, 52 concept, 262 costing techniques, 263 cross subsidisation of products, 262–3, 276–7 DPP analysis, 50–1, 262, 264–8 experience curve, 51, 262, 270–1 focus on existing products, 263–4 growth objectives, 263 life cycle profitability analysis, 262, 270–5 market share, 44–5 penetration vs skimming pricing, 275–6 perceived use values, 52 product attributes, 262, 268–70 profit generation, 262 promotions, 298–300 reinvestment, 277–9 standard costing techniques, 279–82 super profits, 50, 263 sustainable cost advantage, 51–2 transfer pricing, 263 use of predictive knowledge, 51–2 variance analysis, 263 Product life cycle, 20, 129, 142–3 case study, 145–9 critical success factors, 335–7 decline phase, 338–9 development of, 143 growth phase, 143–4, 337–8 risk, 335–6 Product life cycle profitability analysis, 262 asymptotic exponential curve, 271–2 experience curve, 270–5 selling price, 271, 273–4 short term loss per unit, 273–4 Profitability index, 179, 188–9 Rappaport, A., 22 Rate of return (RoR), 19, 185–6, 192, 207, 212 Real options, See options Relationship marketing, 49, 241–2 administrative support, 251 conditional probability, 258 dealing with complaints, 252 DPP analysis, 266 entry barriers, 251 Index financial/control process, 250 indirect benefits, 258 internal costs, 251 key performance measures, 252 lifetime economic value, 258 lost customers, 251 product innovation, 258 recovery of costs, 251 referrals/referencability, 258 retaining/developing customers, 251 satisfying/anticipating customer expectations/requirements, 252 simulation/real options, 258 super profits, 253 Rentokil Initial plc, 68–9 Return on investment (ROI), 189–90, 295, 326–7, 337 Return on Total Assets (ROTA), 43 Risk, 110 assessment, 154–5 business/financial combination, 26–9 investment, 181, 185–6, 192–9 multinationals, 87–8 perception of, 16 probability of, 179–80, 194–9 shareholder value, 9–11, 14 timely decision support, 294 Scenario analysis, 164 Service level agreement (SLA), 87, 293 Share of voice/share of market (SOV/SOM), 229–30 Share prices, 25–6 Shareholder value, 297 analysis of, 23–5 and dominant market share, 111 and making a profit, 11–16 as aim of company, brands, 215 bubble effect, 26 calculation, 326–7 capturing, 46 creating, 3–4, 8–9, 12–13, 45, 46, 253, 321, 327 definition, 22–5 focus, 8–9, 16 risk/return relationship, 9–11, 14 sustainable/real, 4, 25–6 Shell, 139–41 Standard costing, development of, 279–80 engineering type relationships, 280 input/output relationship, 280 price per unit, 280 usage per unit, 280 variance analysis, 280–2 Strategic business units (SBUs), 71, 158 Strategic investment, accounting return on investment, 189–90 as one-off opportunities, 181 case study, 206–14 characteristics of, 181 concept, 179 definition, 180 discounted cash flow technique, 179, 185–9 discounted payback, 179, 184–5, 210 financial evaluation, 181 internal rate of return, 179 long-term aspects, 181 net present value method, 179 option valuation models, 180 payback method of evaluation, 179, 182–4 personal approach to evaluation, 190–1 practical implementation issues, 191–4 probability estimates, 179, 194–9 real options, 194–206 success-based cash flows, 180 Strategic management, 30–1 analysis of case study, 81–7 case study, 77–80 competitive strategies, 62–3 corporate centres, 62, 74–7 corporate strategy, 63 definition, 63 flexibility of, 74 focus on business processes, 62 goals/objectives, 61, 67–8, 69 influences on, 64 mission statement, 61, 64, 66–7, 68, 69 mixed structures, 61 move from public to private, 65 multilayered process, 69–73 multinationals/global businesses, 62 organisation structure, 70–3 stakeholder/shareholder conflict, 64 vertical integration, 62 vision statement, 61, 66, 67, 69 Super profits, 14, 16, 18 and relationship marketing, 253 brand-based, 47, 215, 219, 220–2 customer-based, 48 importance of, 22 maximisation of, 21 product-based, 50, 52, 263 sources of, 111 sustainable competitive advantage, 68 Supermarkets, 109 SWOT (strengths, weaknesses, opportunities, threats), 128, 130–1, 154 case study, 132–4 good news/bad news, 134–5 honest analysis, 131 Tangible assets, 18–19 Technology products, 273 Technology, media and telecoms (TMT), 25 Tesco, 140–1 Total shareholder return (TSR), 24–5 Transaction-led strategy, 250 Transfer pricing, 168, 285, 323, 324 case study, 285–9 implementation, 293 Value-added strategies, 14–16 Variance analysis, 280–2 case study, 282–5 Virgin group, 219 Vision statement, 61, 66, 67, 69 and corporate philosophy, 158, 159 Volkswagen (VW) Group, 101 Wal-Mart, 253 whisky, 231–2 WorldCom, 26 349 This Page Intentionally Left Blank ... marketing and finance In many businesses, the marketing and finance functions can often find themselves in apparent direct conflict, often due to a lack of the close working relationship which finance. .. strategy and finance The essential role for financial evaluation and control as part of the marketing planning process is now accepted by leading companies and, in some cases, the marketing finance. .. Hopefully the book will stimulate some new thinking by both marketing and finance practitioners about how marketing finance should be implemented My aim was neither to turn accountants into marketing