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3Note: This table is similar to a P&L with one important exception - depreciation, a standard item in any P&L has been replaced by capital expenditure, which does not appear in P&Ls.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


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



- Land- Buildings- Plant- Vehiclesetc.


Page 62

Balance sheet

Assets Liabilities


Goodwill £800m


- Land- Buildings- Plant- Vehicles


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


value

Determinevalue

Proposition

Delivervalue

Monitorvalue


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


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


value

Determinevalue

Proposition

Delivervalue

Monitorvalue




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


value

Determinevalue

Proposition

Delivervalue

Monitorvalue




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’.

Page 94

Page 95

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

Page 96

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.

Page 98

• 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

Page 99

Page 100

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

Page 102

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

Page 106

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


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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


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Page 109

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


Page 109

Page 110

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.

Page 112

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.

Page 114

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

Page 115

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.

Page 116

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.

Page 117

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?


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Page 121

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?


Page 121

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