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(or Bridging the Gap Between Marketing and Finance)
CFO Alliance Phoenix, Arizona February 3, 2011
Professor Richard Ettenson
Copyright 2011 Richard Ettenson
Quick thought starter – If asked to tick the box, how would you describe your working relationship with the marketing department/function in your organization?
Excellent/highly effective working relationship
Somewhat effective -- needs improvement
Very ineffective -- needs major improvement
Executives with a strategic marketing mindset and strong brand focus can play a key leadership role in value creation at the world’s best companies
But there is a disconnect…
” Professor Peter Doyle University of Warwick Preface to “Value Based Marketing” . every chief executive and mission statement puts marketing at the very top of the agenda… At the same time.“Many senior managers have noticed a paradox in how firms perceive marketing. On the one hand. marketing professionals. marketing departments and marketing education are not highly regarded… …The paradox will never be resolved until marketing professionals learn to justify marketing strategies in relevant financial terms.
The disconnect cuts both ways There is often a fractious relationship (tension) between marketing and finance professionals .
What Marketing Thinks of Finance What Finance Thinks of Marketing .
In my view. marketing professionals are the ones who must step up and demonstrate they create business value All too often. we have not helped our own cause .
“Actually. I preferred „Heaven‟ too.” . but then the marketing guys got hold of it and changed everything around.
The *Magic* of Marketing/Brand Strategy The Magic Formula for Brand Strategy .
I remain a firm believer that executives with a strategic marketing mindset and strong brand focus can play a key leadership role in value creation at the world’s best companies In doing so. they must demonstrate the “business impact” strategic marketing and branding can deliver to the organization .
Good news – There is evidence (on multiple levels) that marketing and branding add to business value .
Marketing and innovation produce results.marketing and innovation. all the rest are costs” Peter Drucker 1954 What Are Some “Results” That Marketing and Innovation Might Produce in Today’s HyperCompetitive Global Business Environment? .Let’s Go Back to a Classic Business Quote “Business has two basic functions -.
NYU . in what economists call the production function of companies – the major assets that create value and growth. Accounting and Finance Professor. a transformation. Intangibles are fast becoming substitutes for physical assets” Baruch Lev.Another More Recent Quote Provides Further Insight “In the past few decades there has been a dramatic shift.
The business impact of marketing and branding Multiple levels of evidence – aggregate market data industry sector data company performance .
0 4.0 2. 0.Here Are Some of the “Results” Drucker Might Have Been Referring To S&P 500 – Market to Book Ratio (12/82 to 06/09) 8.0 1.0 3.6 -.0 Market/Book Ratio of 4.0 Source: J.the tangible assets on the balance sheets of the companies comprising the S&P 500 account for only 22% of their overall market value. Knowles. Type 2 Consulting .0 6.0 7.0 5.
This is a global phenomena (2010 data of 12. Knowles.000+ companies with market cap of $100M+) Source: J. Type 2 Consulting .
The business impact of marketing and branding Multiple levels of evidence – industry sectors .
Knowles.Source: J. Type 2 Consulting .
URLs Customer lists. trade secrets Exploitation rights. market research Copyright . trade dress. software.Think of Your Own organizations – Where Does the Intangible Value Lie? IASB ASSET CLASSES Technology-based Contract-based Marketing-related Customer-related Artistic UNDERLYING INTELLECTUAL PROPERTY Patents. servicing contracts Trademarks. order backlogs.
The business impact of marketing and branding Multiple levels of evidence – company performance .
Type 2 Consulting . Knowles.or below-median performance on profitability and brand strength Brand Strength 1.0 Low 1.9 High Low Profitability (EVA) Demonstrates that brand strength is a magnifier of underlying business performance Source: J.9 1.The Business Impact of Strong Brands Research on business pact of brands – based on integrating Stern Stewart's database on corporate performance with Young & Rubicam’s brand equity database High Analysis of the relative valuation of 140 companies over a 10 year period Companies allocated to quadrants based on whether they had above.2 2.
Products versus Brands Further Company Specific Evidence – Two Illuminating Examples of the Impact of Strong “Brand Equity” Tea Toyotas & .
23/lb 19% .70/lb 81% 17% Price Premium 4+x share Minor (Store) Brands 2.AC NIELSEN: Analysis of Category Sales For Bagged (Non-Specialty) Tea National Brands Market Share 2.
417 230 CHEVROLET PRIZM 15. thousands of units 3.Separated At Birth: Twin Products Meet Separate Fates TOYOTA COROLLA 15.360 9.556 11.000 14.462 .973 Sales in 2000.315 4.223 250 14.955 52 MSRP Rebate Net Price 658 Difference per vehicle Depreciation Trade-in value 1.315 1.
What is the Real Asset? .Key business impact question re: brand equity: -.
a brand is merely a trademark. service. a brand is more than a trademark. Creating and increasing brand loyalty results in a corresponding increase in the value of the trustmark. or corporation. Brand loyalty is the asset. identifiable symbol with little value. distinctive promise.” Light and Morgan .Brand Equity – What is the Real Asset? “A brand is not an asset. A brand identifies a promise. an ownable. It is a trustmark of enormous value. relevant. A strong brand is a trustworthy. With the loyalty of its customers. It is more than a trademark. A trademark identifies a product. Without the loyalty of its customers.
What is the “Real” Asset? Another Way to Think About It: A strong brand(s) is your organization’s strategic bridge to future earnings .Brand Equity -.
to the income statement… Brand Equity . but not yet released.Brand Equity -.What is the “Real” Asset? Yet Another Way to Think About It: Brand equity is a reservoir of cash flow earned.
Marketing and finance – reconcilable differences? Need to find common ground .
We use the same terms to mean different things Marketing Perspective “Value” and “equity” are defined from the customer perspective Value is the ratio of perceived benefit to price Equity is defined in terms of satisfied customers Focus is on ways to enhance customer utility Finance Perspective “Value” and “equity” are defined from the shareholder perspective Value is revenue minus economic costs Equity is defined in terms of shareholder value Focus is on ways to enhance business efficiency Goal is to create preference Goal is to generate profit .
Effective business performance is based on the integration of the marketing/branding and financial perspectives on value and value creation And there is common ground .
Strong Brands Deliver Finance Equivalent Our company can command and sustain a price premium for its products (or choose to price at parity and enjoy higher growth) Profitability Preference Growth Extensions / Permission Our company can grow faster than the industry average because we have earned the trust of our customers Risk Loyalty Our company’s earnings will be more stable than the industry average because of lower “defection” .
Creating more effective dialogue .
The Marketing / Brand Value Chain (M/BVC) Marketing Activity Brand Image Brand Equity Customer Behavior Business Impact The marketing activities to promote your products and services What customers think of your brand relative to competitors The extent to which your brand image creates a preference for your brand The extent of the change in customer behavior due to this preference Incremental cash flow resulting from changes in customer behavior You Can Reach the Promised Land – It is a Journey .
Image. Equity. and Behavior Metrics BRAND IMAGE What customers think of your brand relative to its competitors • • • • • Image attributes Beliefs Feelings Associations Awareness BRAND EQUITY The extent to which your brand image creates a preference for your brand • Relevant differentiation • Willingness to recommend • Worth paying a premium for • Perceived quality • Performance/affinity indices CUSTOMER BEHAVIOR The extent to which your brand image creates a preference for your brand • • • • • Purchase frequency Price premium Reorder rate Share of wallet Cross-sell ratio .
Small group exercise – .
Think about your current working relationship with the marketing function: When you did work together effectively – what elements made it effective? Specific examples? When the relationship was less than effective – what areas caused tension and need improvement? Specific examples? What did you hear today that may help improve the dialogue and working effectiveness? Specific examples? How to improve? Next steps? .
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