Plehanov university prof mc_donald

Page 1

Professor Malcolm McDonald

Plekhanov Russian University of Economics29th March 2012

The Future of Marketing

Page 2

Agenda

• A very brief history of marketing• What marketers must do to be respected by the

board

Page 3

A VERY BRIEF HISTORY OF MARKETING

Page 4

3 Principal Communities in Marketing

• Practitioners

• Consultants

• Academics

Page 5

Practitioners

Page 6

• Technology

• Production

• Sales

• Accountancy

• Fads

• Marketing

Page 7

CAN YOU SAY WHAT YOUR STRATEGY IS?

“Any strategy statement that cannot explain why customers should buy your product or service is

doomed to failure”

(Collis D, Rukstad M. “Can you say what your strategy is?” HBR April 2008 pp 82-91)

Page 8

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%

InterTech’s 5 Year Profit Performance

Page 9

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%

Page 10

Page 11

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 measurers that

are based purely on tactical marketing

activity, rather than solid financial metrics that are

relevant to the City”

Page 12

Storiesand Myths

Symbols

Paradigm

ControlSystems

OrganisationalStructures

PowerStructures

Rituals

• Cars• Offices• Terminology• Statistics• Lunch

• Research withheld• Take credit for

others work• Jargon

• Lack of structure

• Internal focus• Always in

meetings

• Unaccountable• Untouchable• Expensive• Slippery

• Planning• Delegating• Deadlines• Off site

meetings• 10.00-16.00 hrs• Lunch• Travel• Soft measurement• For self

• Mud doesn’t stick• Golden child• Quick promotion• No loyalty• Churn• Costs• Experience

The Cultural Web (What senior non marketers believe about marketers)

Source: ‘Defining a Marketing Paradigm’ (Baker, S. 2000)

Page 13

Consultants

Page 14

FADS (300)

• In Search of Excellence• Marketing Warfare• One Minute Manager• MBWA• Skunk Works• 7 Ss• Etc.

Page 15

Academics

Page 16

There are many excellent scientific journals devoted toneurosurgery. Month by month, they publish learnedpapers, each having been subjected to rigorous peerreview, that chronicle the latest discoveries, hypotheses,case-studies and innovations in the neurosurgery world.And the shocking thing is this: they are never read byneurosurgeons.Patients are put at risk because of the apparent disdainthat the practitioners have for academic theory and theaccumulated wisdom of others.You’ll have read the above with growing incredulity. Thatcan’t be true of neurosurgery, you think. And you’re right, thank God. It isn’t true. But in another trade, muchcloser to home, it very nearly is.

Jeremy Bullmore, ‘Bridging the Great Divide,Market Leader, Spring, 2006, page. 14

Page 17

The purpose of strategic marketing

The overall purpose of strategic

marketing and its principal focus is

the identification and creation of

sustainable competitive advantage

© Professor Malcolm McDonald, Cranfield School of Management

Page 18

AssetBase

Define markets& understand

value

Determine valueproposition

Delivervalue

Monitorvalue

Map of the marketing domain

Page 19

Die(quickly)

EffectiveIneffective

Strategy

Tactics

Thrive

Die(slowly)

SurviveInefficient

Efficient

Page 20

Financial Risk and Return

High

Low

Return

HighLow

1

2

3

RiskAdapted from Sri Srikanthan, Cranfield School of Management

Page 21

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 planning processes6. Long-term integrated marketing strategies7. A deep understanding of the needs of major customers8. Market/customer-driven organisation structures9. Professionally-qualified marketing people10. Institutionalised creativity and innovation

Page 22

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 23

Differentiation is at the heart of successful marketing

“For marketers, differentiation today is more challenging than at any time in history – yet it remains at the heart of successful marketing. More importantly, it remains the key to a company’s survival.”

Page 24

Justifying investment in marketing assets

Whilst accountants do not measure intangible assets, the discrepancy between market and book values shows that investors do.

Page 25

Intangibles

P and G paid £31 billion for Gillette, but 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)

Page 26

Balance sheet

Assets Liabilities

- Land- Buildings- Plant- Vehiclesetc.

- Shares- Loans- Overdraftsetc.

£100 million £100 million


Page 27

Balance sheet

Assets Liabilities



- Land- Buildings- Plant- Vehiclesetc.


Page 28

Balance sheet

Assets Liabilities


Goodwill £800m


- Land- Buildings- Plant- Vehicles


Page 29

Page 30

Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions, 2011)

Page 31

Brands are key intangibles in most businesses

Brand

20%

OtherIntangible Assets

55%

TangibleAssets25%

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

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

Tra

dem

ark

sBrands Increasingly Drive Business Results

Page 33

AssetBase

Define markets& understandvalue

DeterminevalueProposition

Delivervalue

Monitorvalue


Measurement zone where metrics are applied (Levels 2 & 3)

Strategic zone where metrics are defined (Level 1)

Page 34

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 35

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 36

Ansoff matrix

MarketPenetration

ProductDevelopment

MarketExtension

Diversification

Present Newincreasing technological newness

increasing market newness

Present

New

PRODUCTS

MARKETS


Page 37

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 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 38

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 39

Page 40

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 41

AssetBase



Delivervalue

Monitorvalue




Page 42

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

Page 43

AssetBase



Delivervalue

Monitorvalue




Page 44

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 45

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 46© Professor Malcolm McDonald

APPENDIX

Page 47

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

Page 48

Suggested ApproachIdentify 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 49

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