Marketing and FinanceCreating Shareholder Value
Written for marketing and finance directors, CEOs, and strategists, as well as MBA students, this practical book explains the principles and practice behind rigorous due diligence in marketing. It connects marketing plans and investment to the valuation of the firm and how it can contribute to increasing stakeholder value. Completely revised and updated throughout, the Second Edition features new case examples as well as a completely new first chapter containing the results of new research into risk and marketing strategies amongst Finance Directors and Chief Marketing Officers.
Foreword by Anne Godfrey, Chief Executive, CIM xi Foreword by Charles Tilley, Chief Executive, CIMA xiii Foreword from the First Edition by Sir Michael Perry, GBE xv A note for busy people: How to get the best out of this book xix List of figures xxi List of tables xxv Part 1 What is Marketing Due Diligence? 1 Chapter 1 The lessons of experience 3 Fast track 3 Introduction 3 Success stories 5 Starbucks: A holistic offer based on insight and culture 5 The Economist: Side stepping in time to the future 6 Yamazaki Mazak: Matching itself to the market 7 Essilor: Growing the pie 8 Failure stories 9 Blockbuster: Left behind 9 Gateway: Playing a zero-sum game 10 Microsoft’s Zune: So what’s better? 11 Nortel: Playing the wrong game 12 Woolworth’s: Failure to focus 13 Seeing a pattern 14 Financial smoke and mirrors 14 Share and share alike 16 Marketing accountability 16 A new approach 18 Chapter 2 A process of Marketing Due Diligence 21 Fast track 21 What is marketing? 22 What is the connection between marketing and shareholder value? 23 What is the Marketing Due Diligence diagnostic process? 25 Explicating the strategy 27 Assessing the risks 29 Assessing shareholder value creation 34 What is the Marketing Due Diligence therapeutic process? 39 Implications of the Marketing Due Diligence process 41 Chapter 3 The implications of implementing Marketing Due Diligence 43 Fast track 43 The linkage to shareholder value 44 The risk and return relationship 45 A focus on absolute returns rather than risk 48 Using probability estimates to adjust for risk 51 Alignment with capital markets 56 Turning Marketing Due Diligence into a financial value 57 Adjusting marketing planning outcomes 57 Placing the adjusted fi nancial return into context 58 Allowing for ‘capital at risk’ 60 Highlighting deficiencies and key risks 62 Implications for users 63 Part 2 The Marketing Due Diligence Diagnostic Process 65 Chapter 4 Assessing market risk 67 Fast track 67 Some important background to what constitutes ‘success’ 68 Short-term success 68 Strategy and tactics 70 The strategic marketing plan 71 Market risk 71 The meaning of ‘product’ and ‘market’ 72 Combining product and market 77 Product/market growth or decline 78 Product and market combined 82 Market risk assessment 86 Conclusion 93 Chapter 5 Assessing share risk 97 Fast track 97 What do we mean by share risk? 98 How do we assess share risk? 100 Assessing target market risk 101 Assessing proposition risk 103 Assessing SWOT risk 106 Assessing uniqueness risk 108 Assessing future risk 110 Assessing other sources of share risk 113 Aggregating and applying share risk 116 Step 1: Explicate the marketing strategy 117 Step 2: Assess the explicated strategy against the sub-components of share risk 117 Step 3: Aggregate the sub-components into an overall assessment of share risk 119 Step 4: Identify the growth component of the strategy 120 Step 5: Moderate the growth component of the strategy to allow for risk 121 Step 6: Allow for complex strategies 122 The outcomes of share risk assessment 122 Chapter 6 Assessing profit risk 125 Fast track 125 Introduction 126 Profit pool risk 129 Profit sources risk 135 Competitor impact risk 138 Internal gross margin risk 142 Other costs risks 144 Summary 148 What do weak marketing strategies look like? 148 Part 3 The Marketing Due Diligence Therapeutic Process 151 Chapter 7 The key role of market defi nition and segmentation 153 Fast track 153 Introduction 154 Correct market definition 155 A crucial business discipline, not just a philosophical argument 155 Market mapping 158 Leverage points 162 Market segmentation 165 How customers vary: Needs-based segmentation 170 Some final thoughts 178 Chapter 8 Creating strategies that create shareholder value 181 Fast track 181 Starting from where we are 181 Understanding and managing market risk 183 Understanding and managing product category and market existence risk 183 Understanding and managing sales volume, forecast and pricing risks 189 Understanding and managing share risk 191 Reducing target market risk 192 Reducing proposition risk 192 Reducing SWOT alignment risk 196 Reducing uniqueness risk 198 Reducing future risk 199 Other components of share risk 200 Understanding and managing profit risk 203 Reducing profit pool risk 203 Reducing profit source risk 205 Reducing competitor impact risk 206 Reducing internal gross margin risk 207 Reducing other costs risk 209 Summary and conclusions 210 Chapter 9 Managing high-risk marketing strategies 211 Fast track 211 Allowing for risk 212 Risk equals volatility 213 Controllable versus uncontrollable volatility 214 Using real option analysis 219 Real option example 223 Summary 228 Chapter 10 Fast track: A summary and reminder of the marketing and finance interface 229 The lessons of experience 229 A process of Marketing Due Diligence 229 The implications of implementing Marketing Due Diligence 231 Assessing market risk 232 Assessing share risk 233 Assessing profit risk 234 The key role of market definition and segmentation 236 Creating strategies that create shareholder value 237 Managing high-risk marketing strategies 238 Afterword: What to do now 241 References and further reading 243 Index 245
Professor Malcolm McDonald was recently cited as one of the top marketing gurus in the world, along with Philip Kotler and Michael Porter and, in a 2006 Times HE piece, he was named as one of the top ten consultants in the UK. He is now Emeritus Professor at Cranfield University School of Management where, until recently, he was Professor of Marketing and Deputy Director. Formerly Marketing Director of Canada Dry, he is Chairman of six companies and works with many of the operating boards of the world’s biggest multinationals on every continent. He is the author of over 40 books, many of which have been translated into several foreign languages and has published hundreds of articles and papers. Malcolm continues to research and teach at Cranfield and other universities around the world, in addition to speaking engagements, visiting lectures, and consultancy work. Professor Brian D. Smith is a world-recognised expert on competitive strategy in pharmaceutical and medical markets. He is Adjunct Professor at Bocconi SDA and Visiting Research Fellow at the Open University Business School, where his research interests include strategy making and implementation in medical markets. He is the editor of the Journal of Medical Marketing and the author of over 200 books, papers and articles in the field of marketing and competitive strategy. He also runs Pragmedic, a specialist strategy consultancy and works with many of the world’s leading pharma and medtech companies. Brian has over 30 years experience in medical technology and pharmaceutical markets in both R&D and commercial roles. He has been a member of the Chartered Institute of Marketing for over 20 years and is a former International Vice Chair of the Board of Trustees. He currently serves on the committees of two CIM groups, The Levitt Group and the Medical Marketing Group. Keith Ward studied economics at Cambridge and then qualified as both a chartered accountant and a chartered management accountant. He worked both in the City and abroad as a consultant and held senior management positions in manufacturing and trading companies (the last being as group financial director of Sterling International). In 1981 Keith joined Cranfield School of Management, where he progressed to become Professor of Financial Strategy, as well as being Head of the Finance and Accounting Group and Director of the Research Centre in Competitive Performance. In addition to his academic work, he developed his own international consultancy practice. He then moved to a Visiting Professorial role at the School, while continuing with his research and consultancy interests, until retiring at the end of 2009. He is the author of a number of books including Marketing Finance. He has also published numerous papers and articles, and contributed to several other books, including as editor.
The truest sign that an executive has reached, or is on a trajectory towards a senior position is when they start to look outside of their own functional silo and consider business issues that normally lie within the remit of other departments. Nowhere is this more true than at the marketing/finance interface. At this mission-critical boundary, senior marketers must understand the implications of their strategies not just for sales or profit, but on risk adjusted rate of return. Similarly, senior finance executive can no longer manage the numbers; they must make critical assessments of commercial goals and understand how alternative marketing strategies may create or destroy shareholder value. The Marketing and Finance Solution is the first book of its kind to address this interface, not from a marketing or finance angle, but from a combined perspective that incorporates leading knowledge in both disciplines. Written by three leading academics with decades of experience working across this functional boundary in major multinationals, The Marketing and Finance Solution is a unique and essential addition to the library of senior marketing and finance professionals. This updated, revised, 2nd edition of the critically acclaimed Marketing Due Diligence includes a re-written first chapter that compares effective and ineffective business plans to identify the fundamentals of commercially successful strategies. Filled with examples from both business-to-business as well as consumer markets from a wide range of sectors, this new edition includes a thorough update of those examples for the modern, post-financial crash world.