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Transcript of Malcolm mc donald. eng
Marketing in the Boardroom
Ten crucial questions Directors are asking their marketing
colleagues--- and the answers they should be receiving.
by Professor Malcolm McDonald
Russia 1st March 2012
This presentation is the copyright of Professor Malcolm McDonald
Objective
• To spell out how marketers can become more accountable to the Board for marketing strategy and for marketing expenditure
Page 2
AGENDA
* profit and loss Accounts and marketing * the impact of price on profits * challenges and how excellent companies respond * some basic concepts * ten questions directors are asking their CMOs
Page 3
Page 4
Inter Tech’s 5 year performance
Performance (£million) Base Year 1 2 3 4 5
Sales Revenue- Cost of goods sold
£254135
£293152
£318167
£387201
£431224
£454236
Gross Contribution- Manufacturing overhead- Marketing & Sales- Research & Development
£119481822
£141582323
£151632423
£186822625
£207902724
£218952824
Net Profit £16 £22 £26 £37 £50 £55
Return on Sales (%) 6.3% 7.5% 8.2% 9.6% 11.6% 12.1%
AssetsAssets (% of sales)
£14156%
£16255%
£16753%
£19450%
£20548%
£20645%
Return on Assets (%) 11.3% 13.5% 15.6% 19.1% 24.4% 26.7%
Page 5
Performance (£million) Base Year 1 2 3 4 5
Market Growth 18.3% 23.4% 17.6% 34.4% 24.0% 17.9%
InterTech’s 5 Year Market-Based Performance
Customer Retention (%)New Customers (%)% Dissatisfied Customers
88.2%11.7%13.6%
87.1%12.9%14.3%
85.0%14.9%16.1%
82.2%24.1%17.3%
80.9%22.5%18.9%
80.0%29.2%19.6%
InterTech Sales Growth (%)Market Share(%)
12.8%20.3%
17.4%19.1%
11.2%18.4%
27.1%17.1%
16.5%16.3%
10.9%14.9%
Relative Product QualityRelative Service QualityRelative New Product Sales
+10%+0%+8%
+8%+0%+8%
+5%-20%+7%
+3%-3%+5%
+1%-5%+1%
0%-8%-4%
Why Market Growth Rates Are Important
Page 6
%Sales RevenueCost of Goods SoldProfit MarginAdvertisingR&DCapital Investment
Operating ExpensesOperating Profit
Investment Ratio
Key Trends
Virtuous plc (%)10043571157
2014
23
• Past 5 year revenue growth 10% pa• Heavy advertising investment in new/
improved products• Premium priced products, new plant, so
low cost of goods sold
Dissembler plc (%)100
6139
3-2
2014
5
• Flat revenue, declining volume• No recent product innovation, little
advertising• Discounted pricing, so high cost of
goods sold
3Note: This table is similar to a P&L with one important exception - depreciation, a standard item in any P&L has been replaced by capital expenditure, which does not appear in P&Ls. In the long-term, Capex levels determine depreciation costs. Capex as a percentage of sales in an investment ratio often ignored by marketers, and it has been included in this table to emphasize its importance.
The make-up of 14% Operating ProfitsFactorProfit on existing products over3 years oldLosses on products recentlylaunched or in developmentTotal operating profits
Virtuous plc (%)21
(7)
14
Dissembler plc (%)15
(1)
14
From Hugh Davidson’s “Even More Offensive Marketing”
Quality of profits
Page 7
Financial data is of limited value
“The information appearing in the majority of boardrooms remains predominantly financial in nature. Without (additional) information on value-creating activities management are typically flying blind – when financials tell them there is a problem management have already missed the optimal point for taking appropriate corrective action”.
PricewaterhouseCoopers – ValueReporting™ Review 2003,Transparency in Corporate Reporting, p.25
Page 8
Short-term decisions
Improvements in a short-term financial measure such as economic profit can be achieved through postponing capital investments, reducing marketing and training expenditures, or by divesting assets, each of which may have a positive effect on near-term performance but could adversely affect long-term value creation performance. Nevertheless, when incentivised with bonuses to ‘manage for the measure’ this is exactly what many managers will do irrespective of the consequences on shareholder value.
‘Why Value-Based Management Goes Wrong’, Simon Court, Market Leader, 2002
Page 9
Page 10
The marketing investment time lag
Measuring marketing performance isn’t like measuring factory output – a fact that many non-marketing executives don’t fully gasp.
But the output of marketing can be measured only long after it has left the ‘plant’.
HBR, November 2004, McGovern, G., Court, D., Quelch, A. and Crawford, B.
Page 11
Marks & Spencer’s Trends
Base: M&S Customers
5
15
25
35
45
55
65
75
85
95
Service Positive Value for Money Share Price (Indexed)
Nov 95 Sept 99Mar 98
Page 12
Marks & Spencer’s Market Cap (from Bloomberg)
In 2004, M&S was in the throes of an attempted takeover by Arcadia Group & BHS boss, Philip Green. On 12 July a recovery plan was announced which would involve selling off the financial services business to HSBC Bank plc. Philip Green withdrew his takeover bid after failing to get sufficient backing from shareholders
Under the stewardship of Stewart Rose value in the business recovered up until the 2008 crisis
Page 13
The devastating impact of price discounts
- 5% Discount -10% Discount
Price £10 9.50 9.00Profit £2 1.50 1.00Sell 100 133.3 200
Page 14
The Impact of Price on Profit
Start Point Vol + 1% Costs - 1% Price + 1%Volume 1000 1010 1000 1010Fixed Costs 400 400 396 400Variable Costs 500 505 495 500Profit 100 105 109 110Turnover 1000 1010 1000 1010
Profit Increase 0.0% 0.5% 0.9% 10.0%0% 5% 9% 10%Profit Increase
Page 15
The impact of price on profit
Start point Volume = +1% Costs = 1% Price = +1%
Volume 1,000 1,010 1,010 1,010
Fixed costs 400 400 396 396
Variable costs
570 575.7 570 570
Profit (3%) 30 34.3 44 54 (+80%)
Price 1 1 1 1.01
Turnover 1,000 1,010 1,010 1,020
Page 16
Higher volumeAt lowerMargins
Lose sales
Cutprices
ReduceSpecifications& promotion
to maintain R.O.I
The Price-Value Cycle
Raiseprice
ImproveProduct &promotion
Higher customerAcceptance &
volume
Lower volume, butHigher revenue from
Better margins
Vicious Circle
Benign Circle
Model 1
Model 2
Page 17
Challenges
• Market Maturity
• Globalisation
• Customer power
Page 18
Market Maturity
Page 19
• Technology
• Production
• Sales
• Accountancy
• Fads
• Marketing
Page 20
Globalisation
Page 21
Embrionic markets Growing markets
Guerrillas
2nd tier
Leaders
Mature markets
New guerrillas
?
New global leaders
Page 22
Customer Power
Page 23
In search of excellence (Peters)
43 “excellent” companies
14 “excellent” companies 5 years later
6 “excellent” companies 8 years later
(Richard Tanner Pascale “Managing on the Edge:
how successful companiesuse conflict to stay ahead”
1990, Viking, London)
Page 24
Page 25
How excellent companies are responding
Page 26©
How excellent companies are responding
Product/Service
Customers
Processes
ProfessionalMarketing People
(UnderstandingMarket Needs)
(Creativity)
(Core Value) (Efficiency)
Page 27
Quality and share both drive profitability
3827
20
25 2013
2114
7
High 60% 25% LowLow
High
40%
-1%
Relative Market Share
Relative ProductQuality
ROI (%)
Source: PIMS
Page 28
Page 29
Over 40 years of research into the link between long run financial success and excellent marketing strategies reveal the following:
Excellent Strategies• Target needs based
segments• Make a specific offer to each
segment• Leverage their strengths
and minimise their weaknesses
• Anticipate the future
Weak Strategies• Target product categories• Make similar offers to all
segments• Have little understanding of
their strengths and weaknesses
• Plan using historical data
Page 30
Key Elements of World Class Marketing
1. A deep understanding of the market place2. Correct needs-based segmentation and prioritisation3. Segment-specific propositions4. Powerful differentiation, positioning and branding5. Effective strategic marketing processes
The purpose of strategic marketing planning
The overall purpose of strategic marketing, and its principal focus is the identification and creation of sustainable competitive advantage.
© Professor Malcolm McDonald
Page 31
AssetBase
Define markets& understand
value
Determinevalue
Proposition
Delivervalue
Monitorvalue
Map of the marketing domain
Page 32
Page 33
Financial Risk and Return
High
Low
Return
HighLow
1
2
3
Risk
Adapted from Professor Keith Ward, Cranfield School of Management
Question 1
• Do we know and understand our key target markets?
Page 34
Market mapping
N NationalBuilders
N LocalBuilders
N PrivateCompanies
N LocalGovernmentUsers
N DomesticUsers
N Contractors
N LocalDistributors
N RegionalDistributors
N NationalDistributors
N Other Retailers
N Spcist. Retailers
N Detp. Retailers
N Sheds
UK Sales
vol/val %
vol/val %
vol/val %
vol/val %
vol/val %
vol/val %
vol/val %
vol/val %
vol/val % vol/val %
vol/val %
vol/val %
vol/val %
vol/val % vol/
val %
vol/ val %
vol/val %
vol/val %
vol/val %
N = Number
% = Your Share
…including the number of each customer type
NB. Sketch out complex junctions separately. Alternatively, build an outline map, applying details at the junctions to be segmented.
Page 35
Manufacturers
Type BDealer Chain
Type BIndependent
Type CDealer Chain
Type CIndependent
VARs
BuyingConsortia
Retail
DirectResponse
Other
Type AIndependent
Type ADealer Chain
Final Users
Direct Field Sales 5%
47%
7%
0%
1%
15%
7%
5%
7%
4%
0%
0%
Company’s Route to Market
Final Users Route to Market
3%24%
3%
1%
8%
9%
18%
4%
10%
10%
4%
6%
Market map – office equipment
Extracted from the complete map
Page 36
Question 2
• Do we address real segments in our key target markets?
Page 37
Personalising segments
Page 38
Listen to how customers talk about category need
Customer ViewAdvice• cutting costs• future technology directionHelp• design & configuration• process engineering• electron commerceRun• international network• disaster recovery
Supplier View
• fast PAD family• multimedia FRADs• PIX firewall
• Solutions• Gigabit Ethernet• solutions
• high performance• LAN support
Page 39
Understand the different category buyers
Businessperfectionist
Radical thinkers
Profit engineer
Save mybudget
Businessgeneral
Save mycareer
Conservativetechnocrat
Technicalidealist
Radicalarchitect
“Reward” “Relief”
Technical
Business
Page 40
Page 41
This is a friend I know…
I know 12m people in the UK as well as I know Miss Jones
… she is a busy young lady… she looks after her health and loves fresh produce… she drives to the supermarket on a Saturday morning… she reads Hello Magazine… she has a cat … she doesn’t pay attention to the price of products… she does look out for promotions
Question 3
• Do we know for sure what our sources of differential advantage are in each of the principal segments in our key target markets?
Page 42
SWOT analysis
• By segment, what value is required by the customer?
• What value are you offering to entice the customer to buy from you
• Avoid SWAGs
© Professor Malcolm McDonald
Page 43
STRENGTHS WEAKNESSES
OPPORTUNITIES THREATS
WRONG
Page 44
Strengths• It can create value for the
organisation and customers• It is unique• It is inimitable• It is lastingOpportunities• It is large• It is accessible• It is lasting
Weaknesses• It is meaningful to the
customer• It is unique• It is difficult to fix
Threats• It is significant• It is lasting
Page 45
Page 46
Independent Schools--- 5 key buying factors
• Academic• Convenience• School and family relationships• Enhancement• Costs
Academic Factors
• Personality and vision of Head• Exam results• Class size• League table position (compared to regional competitors)• Student academic successes (Oxbridge, major universities, competitions)• Academic planning: A level, IB, pre-U; IGCSE? New subjects?• Flexibility of subject choice• Academic history (results over a number of years)• Quality/knowledge/experience of staff• Facilities for teaching and learning• Learning opportunities outside mainstream subjects (could be vocational skills)• Reporting procedures• Innovations in teaching and learning
Page 47
Strategic marketing planning exercise – SWOT analysis
1
2
3
4
5
You Comp A Comp B Comp C Comp D
Total 100
1
2
3
4
5
1. SEGMENT DESCRIPTIONIt should be a specific part of the business and should be very important to the organisation
2. CRITICAL SUCCESS FACTORSIn other words, how do customers choose?
3. WEIGHTING(How importantis each of theseCSFs? Scoreout of 100)
1
2
3
4
5
THREATS
5. OPPORTUNITIES / THREATSWhat are the few things outside your direct control that have had, and will have, an impact on this part of your business?
6. KEY ISSUES THAT NEED TO BE ADDRESSEDWhat are the really key issues from the SWOT that need to be addressed?
OP
PO
RT
UN
ITIE
S
4. STRENGTHS / WEAKNESSES ANALYSISHow would your customers score you and each of your main competitors out of 10 on each of the CSFs?Multiply the score by the weight.
Page 48
Question 4
• Do we all agree on the prioritisation of our markets and the segments within each market?
Page 49
Question 5
• Are the objectives for revenue growth and market share realistic?
Page 50
Setting expectations of performance
P
GC
P
GC
P
GC
P
GCHigh Low
High
Low
Mkt/Segmentattractiveness
Supplier business strength with
customer
high high/medium
medium low
Streamline
Manage for cash
Streamline
Manage for cash
Strategic
Strategic investment
Strategic
Strategic investment
Status
Pro-active maintenance
Status
Pro-active maintenance
Star
Selective investment
Star
Selective investment
-
Page 51
Page 52
Market attractiveness evaluation
This form illustrates a quantitative approach to evaluating market attractiveness. Each factor is scored, then multiplied by the percentage weighting and totalled for the overall score. In this example, an overall score of 8.5 out of 10 places this market in the highly attractive category.
1.
2.
3.
4.
Market Size (£ millions) >
Volume Growth (Units) >
Industry Profitability >
Competitive Intensity
10-7
€250
10%
15%
Low
6-4
€51-250
5-9%
10-15%
Medium
3-0
< €50
< 5%
< 10%
High
Factor Scoring Criteria
Score
5
10
8
6
Weighting
15
40
35
10
Total
Ranking
0.75
4.0
2.8
0.6
8.15
Question 6
• Are the strategies (including products, services and solutions) consistent with the objectives?
Page 53
Page 54
Invest for Growth
Maintain Manage for Cash
OpportunisticDevelopment
Market ShareMaintain or Increase Dominance
Maintain or slightlymilk for earnings
Forego share for profit
Invest selectively in share
DistributionBroadendistribution
Hold wide distribution pattern
Gradually withdraw distribution
Limited coverage
PromotionAggressive marketing
Limit Minimize Aggressive marketing
PriceLead - aggressive pricing for share
Hold prices or raise if possible
Raise Aggressive - price for share
ProductsDifferentiation Aggressively prune Differentiation
line expansion
Prune less successfuldifferentiate for keysegments
Activities by medium
Personal contact
Direct mail
Telephone
Advertising
Electronic
Recognise potential
Initiate dialogue
Exchange information
Negotiate / tailor
Commit
Med
ium
Activity
Page 55
Page 56
InternetMobile
telephoneiTV Broadcast
TV
• Recognise
Negotiate/tailor
Commit
• Exchange value
Traditional channels
Exchange potential
• Initiate dialogue• Exchange information
• Monitor
The Sunworshippers
Page 57
InternetMobile
telephoneiTV Broadcast
TV
• Recognise
Negotiate/tailor
Commit.
• Exchange value
Traditional channels
Exchange potential
• Initiate dialogue• Exchange information
• Monitor
John and Mary Lively
Relevant?
The Times 19th Jan 2005
Page 58
Question 7
• Have we assessed dispassionately the risks associated with our strategic marketing plan?
Page 59
Justifying investment in marketing assets
Whilst accountants do not measure intangible assets, the discrepancy between market and book values shows that investors do.
Page 60
Balance sheet
Assets Liabilities
- Land- Buildings- Plant- Vehiclesetc.
- Shares- Loans- Overdraftsetc.
£100 million £100 million
© Professor Malcolm McDonald, Cranfield School of Management
Page 61
Balance sheet
Assets Liabilities
£100 million £900 million
© Professor Malcolm McDonald, Cranfield School of Management
- Land- Buildings- Plant- Vehiclesetc.
- Shares- Loans- Overdraftsetc.
Page 62
Balance sheet
Assets Liabilities
£900 million £900 million
Goodwill £800m
© Professor Malcolm McDonald, Cranfield School of Management
- Land- Buildings- Plant- Vehicles
- Shares- Loans- Overdraftsetc.
Page 63
Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions, 2011)
Page 64
Page 65
Intangibles
P and G have paid £31 billion for Gillette, but have bought only £4 billion of tangible assets
- Gillette brand £ 4.0 billion- Duracell brand £ 2.5 billion- Oral B £ 2.0 billion- Braun £ 1.5 billion- Retail and supplier network £10.0 billion- Gillette innovative capability £ 7.0 billion
TOTAL £27.0 billion
(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005)
Brands are key intangibles in most businesses
Brand
20%
OtherIntangible
Assets
55%
TangibleAssets
25%
Developed Markets
Brands are estimated to represent at least 20% of the intangible value of businesses on the major world stock markets. Brands combine with other tangible and intangible assets to create value
Intangible assets
Brand
Software
Patents
Distribution rights
Tangible assets
Assembled workforce
Business Goodwill
Marketing intangible
Technology intangibles
Customer intangible
Contract intangibles
Illustrative
Source: Brand Finance
Customer relationships
Page 66
Page 67
Everything an organisation does converges on the business value proposition that is projected to the customer and is represented by the brand name.
(Professor Malcolm McDonald )
Page 68
Brand
Reputation
Brands affect business value by influencing the behaviour of a wide range of Shell’s stakeholders, some of which directly impact Shell’s P&L (and hence value)
STAKEHOLDER PERCEPTION
STAKEHOLDER BEHAVIOUR
FINANCIALIMPACT
SHAREHOLDER VALUE
Customers- individuals, businesses
Suppliers /
Partners- businesses, energy asset
ownersEmployees- current and
potential
Shareholders / Bankers
- individual and institutional
Other Stakeholder
s- government, media,
opinion formers, academics, public, environmentalists
• Pay price premium• Buy more
• Lower prices• Better terms• Willingness to partner• (more opportunities)
• Better retention• Lower salary expectations• Better qualified candidates
Revenues
CostsRevenues
CostsProductivity
CostsRisk
• Higher PE ratio• Lower volatility• Lower borrowing costs• Better repayment conditions
Influences business and brand value
Indirect influence on value
Tradem
ark
s
Brands Increasingly Drive Business Results
Page 69
• A brand is a name or a symbol on a product, service, person or place
• A successful brand creates super profits
• A successful global brand presents the same or similar message all over the world e.g McDonald’s, Mercedes, Coca Cola, IBM
• The brand is about the total experience, not the logo. Successful brands offer consistently superior value that is delivered by fair processes.
Page 70
The Brand Iceberg
What youcan’t see
What youcan’t see
What youcan see
What youcan see
Key Assets andCompetences
SymbolBrand Name
AdvertisingPresentation
Price
HighQuality
EfficientProduction
Low Cost OperationsExcellent
Database Strong R&DHighService Levels
Strong SupplyChain Management Effective
Selling
Product
People
Brands Are Business Systems, Not Just Labels and NamesFrom “Even More Offensive Marketing” by Hugh Davidson
Page 71
SUCCESSFUL BRANDS• Build trust• Have a price/quality trade off – win/win• Offer consistently superior value
• Result ? Super profits through higher volume/margins
UNSUCCESSFUL BRANDS• Cut corners/ reduce costs• Tell lies• Add some “gold “ to the packaging
• Result ? Eventually become commodities and trade on price
Page 72
Unsuccessful Brands There are many products that pretend to be brands, but are not
the genuine article. As the Director of Marketing at TESCO said, “Pseudo brands are not brands. They are manufacturers’ labels. They are “me-toos” and have poor positioning, poor quality and poor support. Such manufacturers no longer understand the consumer and see retailers solely as a channel for distribution”
Marketing Globe Vol 2, No. 10. 1992.
Page 73
AssetBase
Define markets& understand
value
Determinevalue
Proposition
Delivervalue
Monitorvalue
Map of the marketing domain
Measurement zone where metrics are applied (Levels 2 & 3)
Strategic zone where metrics are defined (Level 1)
Page 74
Page 75
The historic rift between marketers and the finance department, caused by marketing’s reluctance to be accountable for what they do, is as marked as ever.
“Marketing in 3D”Deloitte
Tense relations between CFOs and Marketers are dividing boardrooms over the value of
marketing.One in three CFOs said they did not believe marketing to be crucial
in determining strategy.
“Marketers have constantly hidden behind a fog of measures that are based purely on tactical marketing activity, rather than solid financial
metrics that are relevant to the City”.
Three questions need to be answered
• How does the company plan to generate its predicted future sales and profits?
• Will the marketing strategy on which these plans are based work?
• Will this strategy create shareholder value, given its inherent level of risk?
Page 76
What is Marketing Due Diligence?
Marketing DueDiligence
Risk Assessment
Market Risk:Is the market
there?
Strategy risk:Will we get ourplanned share?
Implementation risk:Will we get ourplanned profit?
Page 77
Market Risk Profile
• Product Category Existence
• Segment Existence
• Sales Volumes
• Forecast Growth
• Pricing Assumptions
The marketing strategy has a higher probability of success if the product category is well established
If the target segment is well established
If the sales volumes are well supported by evidence
If the forecast growth is in line with historical trends
If the pricing levels are conservative relative to current pricing levels
Page 78
Ansoff matrix
MarketPenetration
ProductDevelopment
MarketExtension
Diversification
Present Newincreasing technological
newness
increasing market
newness
Present
New
PRODUCTS
MARKETS
© Professor Malcolm McDonald, Cranfield School of Management
Page 79
Market Share Risk Profile
• Target Market Definition
• Proposition Specification
• SWOT Alignment
• Strategy Uniqueness
• Anticipation of market change
The marketing strategy has a higher probability of success if the target is defined in terms of homogeneous segments and is characterised by utilisable data
If the proposition delivered to each segment is different from that delivered to other segments and addresses the needs which characterised the target segment
If the strengths and weaknesses of the organisation are independently assessed and the choice of target and proposition leverages strengths and minimises weaknesses
If choice of target and proposition is different from that of major competitors
If changes in the external microenvironment and macroenvironment are identified and their implications allowed for
Page 80
Shareholder Value Risk Profile
• Profit Pool
• Profit Sources
• Competitor Impact
• Internal Gross Margin Assumptions
• Assumptions of Other Costs
The marketing strategy has a higher probability of success if the targeted profit pool is high and growing
If the source of new business is growth in the existing profit pool
If the profit impact on competitors is small and distributed
If the internal gross margin assumptions are conservative relative to current products
If assumptions regarding other costs, including marketing support, are higher than existing costs
Page 81
Question 8
• Having taken account of the risks referred to above and having adjusted the forecast net free cash flows for each major product for market for each year, have we calculated whether the strategic marketing plan creates or destroys shareholder value?
Page 82
Question 9
• Have we agreed the measurement of effectiveness metrics we want reported to us and their frequency?
Page 83
AssetBase
Define markets& understand
value
Determinevalue
Proposition
Delivervalue
Monitorvalue
Map of the marketing domain
Measurement zone where metrics are applied (Levels 2 & 3)
Strategic zone where metrics are defined (Level 1)
Page 84
Overall Marketing Metrics Model
product market segment
ms%sales£profit£
corporate rev£
profit£
actions, esp. marketing
metrics on achievement of factor to required level
costs, activity milestones & outputs
Strategy/ achievement
Objectives/results
Plan/action
performanceby product market segment
application of spend
budget funds & time
Resource allocation/ spend
Forecast/profit
corporate performance
turnover, profit & shareholder value
budget
££££
Intention/actuality
Business element
Measure-ment
Lead indicators Lag indicators
Required by customers.Relative to competitors
Market growthCustomer acquisition/ retention/
uptrading/ X-selling/ regainedProduct/customer mixChannel performance
Cost to achieveResponsibilities
who
who
who
who
what
what
what
what
Positioning of issues in the model
PFs
HFs
CSFs
AssetBase
Define markets& understand
value
Determinevalue
Proposition
Delivervalue
Monitorvalue
Map of the marketing domain
Measurement zone where metrics are applied (Levels 2 & 3)
Strategic zone where metrics are defined (Level 1)
Page 86
Page 87
Expenditures to develop marketing assets make sense if the sum of the discounted cash flows they generate is positive.
A
B
C
Projected cash flows from investing in a promotion
DCF and NPV methods implicitly make this comparison
Assumed cash flow resulting from doing nothing
Companies should be making this comparison
More likely cash flow resulting from doing nothing
Note: Most executives compare the cash flow from promotion against the default scenario of doing nothing assuming, incorrectly, that the present health of the company will persist indefinitely if the investment is not made. For a better assessment of the promotion’s value, the comparison should be between the projected discounted cash flow and the more likely scenario of a decline in performance in the absence of promotional investment.
Figure 10
Adapted from Christensen CM et al, ( 2008 )
£ - 7 million + 2 + 2 + 2 + 2 = £-0.6 million(1+r) (1+r)² (1+r)³ (1+r)4
£ - 1 million + 2 + 2 + 2 + 2 = £5.4 million(1+r) (1+r)² (1+r)³ (1+r)4
Page 88
Question 10
• Overall, are we happy that the time, effort and expense involved in developing marketing strategies are really worth it?
Page 89
Conditions determining a strong marketing strategy
• That the marketing strategy defines real target segments.
• That the marketing strategy defines segment-specific value propositions
• That the marketing strategy allocates resources differentially by segment or market
• That the marketing strategy aligns to the market via SWOT
Page 90
Page 91
“Great stars shine brightest when the sky is darkest. In austere times, great brands bestow pleasure, maintain their premium and take a long view”
Mark Ritson, Marketing Magazine3rd December 2008 (p.20)
Page 92
Page 93
APPENDIX 1
Market mapping
Showing the number of each customer type, volumes and share
Sketch out complex junctions separately. Alternatively, build an outline map, applying details at the junctions to be segmented.
Suppliers Distributors Retailers Contractors Final usersSuppliers Distributors Retailers Contractors Final users
Segment 1[2500]
Segment 3[3000]
Segment 4[5500]
Others[12 500]
Contractors[90]
Specialists[110]
Sheds [4]
Regional[18]
National [3]
Local [45]
Suppliers[9]
140k 15% (21k)
60k 40% (24k)
45k 42% (19k)
55k 36% (20k)
75k 40% (30k)
20k 50% (10k)
60k 42% (25k)
15k 33% (5k)
65k 38% (25k)
80k 19% (15k)
35k 51% (18k)
45k 22% (10k)
25k 28% (7k)
90k 22% (20k)
45k 9% (4k)
300k 28% (84k)
General[320]
35k 29% (10k)
Segment 1[2500]
Segment 3[3000]
Segment 4[5500]
Others[12 500]
Contractors[90]
Specialists[110]
Sheds [4]
Regional[18]
National [3]
Local [45]
Suppliers[9]
140k 15% (21k)
60k 40% (24k)
45k 42% (19k)
55k 36% (20k)
75k 40% (30k)
20k 50% (10k)
60k 42% (25k)
15k 33% (5k)
65k 38% (25k)
80k 19% (15k)
35k 51% (18k)
45k 22% (10k)
25k 28% (7k)
90k 22% (20k)
45k 9% (4k)
300k 28% (84k)
General[320]
35k 29% (10k)
Suppliers Distributors Retailers Contractors Final usersSuppliers Distributors Retailers Contractors Final users
Segment 1[2500]
Segment 3[3000]
Segment 4[5500]
Others[12 500]
Contractors[90]
Specialists[110]
Sheds [4]
Regional[18]
National [3]
Local [45]
Suppliers[9]
140k 15% (21k)
60k 40% (24k)
45k 42% (19k)
55k 36% (20k)
75k 40% (30k)
20k 50% (10k)
60k 42% (25k)
15k 33% (5k)
65k 38% (25k)
80k 19% (15k)
35k 51% (18k)
45k 22% (10k)
25k 28% (7k)
90k 22% (20k)
45k 9% (4k)
300k 28% (84k)
General[320]
35k 29% (10k)
Segment 1[2500]
Segment 3[3000]
Segment 4[5500]
Others[12 500]
Contractors[90]
Specialists[110]
Sheds [4]
Regional[18]
National [3]
Local [45]
Suppliers[9]
140k 15% (21k)
60k 40% (24k)
45k 42% (19k)
55k 36% (20k)
75k 40% (30k)
20k 50% (10k)
60k 42% (25k)
15k 33% (5k)
65k 38% (25k)
80k 19% (15k)
35k 51% (18k)
45k 22% (10k)
25k 28% (7k)
90k 22% (20k)
45k 9% (4k)
300k 28% (84k)
General[320]
35k 29% (10k)
Key: Using ‘Segment 3’ as an example (one of three target segments); the total number of customers found here is [3000] and the total quantity of units they buy is 45k of which your company’s share is 42% which equates to (19k) units.
Note: The number of units ‘consumed’ by the final users usually equates to the number of units entering the market (any surplus being ‘stock’) – 300k in this example. Please take some time to follow the routes through the map and you will observe that, like the work of an accountant, it all ‘balances’.
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APPENDIX 2
Quick Market Segmentation Solution
• Write down the main benefits sought by customers• Hygiene factors are benefits that any product or service must have to be
acceptable in the market. Try to ignore these.• Motivators are those benefits that contribute towards the customer’s
decision about which product to buy• Take the ‘motivators’ and choose the 2 main ones• Draw two straight horizontal lines and make an estimate of the
percentage of customers at each end. So, for example, if service level is a key motivator of what is bought, see below:
60%Low service High service
Likewise, if the breadth of the product range is a key motivator of what is bought, see below:
40%
60%high range
40% low range
• Take the left hand point of the first horizontal line and drag it over the second horizontal line to make cross as shown
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24 36
1624
40% 60%
Small productrange
Large productrange
60% highService
40% lowservice
Page 97
• Starting at the top, and moving in a clockwise direction, multiply 60% by 60% to give 36% (see 1st circle).
• Then multiply 60% by 40% to give 24% (see second circle)• Then multiply 40% (the bottom of the vertical axis) by 40% to
give 16% (see third circle).• Lastly, multiply 40% by 40% to give 16% (see fourth circle).• The circles represent segments in the market.
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• The 1st segment (36%), the biggest segment, requires both high service and a large product range.
• The second segment (24%) prefers a large product range and is less interested in service.
• The third segment (16%), doesn’t care much about either a large product range or service.
• The fourth segment (24%) prefers good service and is less interested in a large product range.
• Although not essential, you might consider giving each segment a name.Action• Ensure your ‘offer’, including the product, price, service and promotion
reflect the differing needs of each segment.Example• An example of segmentation of the A4 paper market follows. Please note
that if, as in the case of the A4 paper market, there is one very large segment (in this case 56%), the exercise ca be repeated for just this large segment, resulting in seven segments in total.
Interpretation
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APPENDIX 3
You
r C
ompa
ny’s
Per
form
ance
1 2 3 4 5Importance to Customer
ABCDEFG
5
4
3
2
1
SWOT Summary Matrix
Critical Success Factors (how customers choose)
Importance to customer (1 to 5)
Your company’s performance (1 to 5)
A
B
C
D
E
F
G
1 = relatively less important5 = very important
1 = poor performance
5 = excellent performance
Instructions1. List critical success factors – i.e. How customers choose in the first column.2. For each CSF score its relative importance to the customer (between 1 and 5)
NOTE: that a score of 1 or 2 doesn’t mean it is unimportant to customers – only that it is relatively less important than a CSF with a high score (the second column).
3. For each CSF, score your company’s actual or perceived performance (between 1 and 5) (the third column).
4. Transfer the joint scores for each CSF and performance to the matrix.5. Interpretation
• Scores in the bottom left of the matrix could indicate that you are over-performing
• Scores in the top right of the matrix could indicate that you are under-performing
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APPENDIX 4
Valuing Key Market Segments
Background/Facts
· Risk and return are positively correlated, ie. as risk increases, investors require a higher return.
· Risk is measured by the volatility in returns, ie. high risk is the likelihood of either making a very good return or losing all your money. This can be described as the quality of returns.
· All assets are defined as having future value to the organisation. Hence assets to be valued include not only tangible assets like plant and machinery, but intangible assets, such as Key Market Segments.· The present value of future cash flows is the most acceptable method to value assets including key market segments.· The present value is increased by:- increasing the future cash flows- making the future cash flows ‘happen’ earlier- reducing the risk in these cash flows, ie. improving the certainty of these cash
flows,
and, hence, reducing the required rate of return.© Professor Malcolm McDonald
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Suggested Approach· Identify your key market segments. It is helpful if they can be classified on a vertical axis (a kind of thermometer) according to their attractiveness to your company. ‘Attractiveness’ usually means the potential of each for growth in your profits over a period of between 3 and 5 years. (See the attached matrix)
· Based on your current experience and planning horizon that you are confident with, make a projection of
future net free cash in-flows from your segments. It is normal to select a period such as 3 or 5 years.
· These calculations will consist of three parts:· revenue forecasts for each year;· cost forecasts for each year;· net free cash flow for each segment for each year.
· Identify the key factors that are likely to either increase or decrease these future cash flows.
· These factors are likely to be assessed according to the following factors:· the riskiness of the product/market segment relative to its position on the ANSOFF matrix;· the riskiness of the marketing strategies to achieve the revenue and market share;· the riskiness of the forecast profitability (e.g. the cost forecast accuracy ).
· Now recalculate the revenues, costs and net free cash flows for each year, having adjusted the figures
using the risks (probabilities) from the above.
· Ask your accountant to provide you with the overall SBU cost of capital and capital used in the SBU. This will not consist only of tangible assets. Thus, £1,000,000 capital at a required shareholder rate of return of 10% would give £100,000 as the minimum return necessary.
· Deduct the proportional cost of capital from the free cash flow for each segment for each year.
· An aggregate positive net present value indicates that you are creating shareholder value – ie. achieving overall returns greater than the weighted average cost of capital, having taken into account the risk associated with future cash flows. Page 104
Invest/build
?
MaintainManage for
cash
Relative company competitiveness
Portfolio analysis - directional policy matrix (DPM)
High
Low
High Low
Segmentattractiveness
No change
Present position Forecast position in 3 years
NB. Suggested time period - 3 years
© Professor Malcolm McDonald Page 105
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APPENDIX 5
The Contents of a Strategic Marketing Plan (<20 pages)
• Mission or Purpose Statement• Financial Summary
Revenue
Profit
t.0 T+1 T+2 T+3
Products
Mar
kets
Existing New
Ne
wE
xist
ing
1 2
3 4
© Professor Malcolm McDonald
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Key (revenue and profit growth)
• from productivity• by product for market for existing products from existing markets
• from new products in existing markets• from existing products in new markets• from new products in new markets
Plus a few words of commentary
Market Overview/SummaryMarket definitionMarket map showing vol/rev flows from supplier through to
end user, with major decision points highlightedWhere appropriate, provide a future market mapInclude commentary/conclusions/implications for the companyAt major decision points, include key segments
© Professor Malcolm McDonald
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SWOT Analyses on Key Segments • include pictorial representations of the SWOTs, such as bar charts • highlight major conclusions/issues to be addressed
Portfolio Summaries of the SWOTs • include Directional Policy Matrix (DPM) summaries of:-
- the attractiveness of the segments over the next 3-5 years- the current relative competitive position of your company in
each segment- the planned competitive position of each segment over the
next 3-5 years
Marketing Objectives and Strategies for the next 3-5 years • include objectives (volume, value, market share, profit, as appropriate) for the next 3-5 years for each segment as represented by the planned position of each circle on the DPM • include strategies (the 4XPs) with costs for each objective
Consolidated Budget for the next 3-5 years • this will be a consolidation of all the revenues, costs and profits for the next 3-5 years and should accord with the financial summary provided earlier
© Professor Malcolm McDonald
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APPENDIX 6
Page 111
Ten Crucial questions Boards are asking their marketing colleagues and the answers they should be giving.
By Professor Malcolm McDonald
Introduction
As was made clear by the Deloitte report in 2007, Directors will no longer tolerate sloppy, unprofessional marketing departments who fail to justify the often substantial sums of money they spend. The following are ten crucial questions they are increasingly demanding answers to.
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Question 1.
Do we know and understand our key markets?
Answer:
We define our markets in terms of needs satisfied, not the products 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 As 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 .
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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.
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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
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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.
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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. I f 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)
As a result of this, we know what needs reporting, why, when, how often and to whom it should be reported.
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Question 10.
Are we happy with our marketing planning processes?
Answer:
Our plans demonstrate:
1 A deep understanding of our markets
2 A clear understanding of needs based segments
3 A clear prioritisation of our objectives and strategies
4 Quantified proof that they create shareholder value 5 They are clear, creative and interesting 6 They enable us to allocate our scarce resources differentially
Page 118
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.
Professor Malcolm McDonald
Page 119
APPENDIX 7
Page 120
Are you getting these essential deliverables from your strategic marketing plan?
Score out of 10Market structure and segmentation• Is there a clear and unambiguous definition of the market we
are interested in serving?• Is it clearly mapped, showing product/service flows,
volumes/values in total, our shares and critical conclusions for our organisation?
• Are the segments clearly described and quantified? These must be groups of customers with the same or similar needs, not sectors.
• Are the real needs of these segments properly quantified with the relative importance of these needs clearly identified?
Differentiation• Is there a clear and quantified analysis of how well our company
satisfies these needs compared to competitors?• Are the opportunities and threats clearly identified by segment?
© Professor Malcolm McDonald
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Detailed checklist of essential deliverablesfrom a strategic marketing plan
Score out of 10Scope· Are all the segments classified according to their relative potential for growth
in profits over the next three years and according to our company’s relative competitive position in each?
· Are the objectives consistent with their position in the portfolio? (volume, value, market share, profit)
· Are the strategies (including products, services and solutions) consistent with the objectives?
· Are the measurement metrics proposed relevant to the objectives and strategies?
· Are the key issues for action for all departments clearly spelled out as key issues to be addressed?
Value capture· Do the objectives and strategies add up to the profit goals required by our
company?· Does the budget follow on logically and clearly from all the above,
or is it merely an add on?
© Professor Malcolm McDonald
Page 121
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