Finance theory tells us that a dollar tomorrow is less valuable than a dollar today.  I had always assumed that the argument rested primarily on the issue of opportunity cost – what could I have invested that dollar in today, and how much would it have been worth tomorrow?

But with interest rates as low as they are right now and markets as volatile as they are right now, the issue becomes less about opportunity cost and more about certainty. The reason why a dollar tomorrow is not worth as much as a dollar today is because it is less certain, rather than because I could have used the dollar to earn a higher return over the next 24 hours.

When you add into the occasion the observation that humans weight losses approximately three times as heavily as gains, you understand why certainty commands such a high premium.  Or, put another way, you understand why the long term is at a steep discount.

This is a big problem for marketers.  A significant proportion of marketing activity is aimed at short term returns but a large proportion is focused on laying the foundation for success in the future.  If the certainty of future returns are in doubt, then the value of marketing is decreased.

Unless, of course, we can show that brand-related profits are more certain than others forms of profit.  The argument for brands then becomes as much one of risk mitigation as it is of demand generation.

Some interesting research is already underway in academia about the impact of brands on firm-specific risk.  It sounds esoteric – but it is certainly relevant to the value we place on the long term.

of uncertainty, this a dollar tomorrow is

{ 0 comments }

I participated in a client workshop on “brand voice” today.  Despite being in the marketing business, I must admit to being something of a skeptic when it comes to the topic of voice.

After today’s session, I realize that my skepticism is a direct reflection of the rather superficial way in which I have treated the topic – namely that it consists of no more than defining a list of the attributes that should characterize the tone of a company’s communications.  For some reason, whatever the brand, the lists I generated always included “optimistic” and “human”…

As a result of today’s workshop, I have a new appreciation for the science (and art) of defining the “how we communicate” in such a way that it magnifies the “what we communicate.”  It seems to me that there is enormous potential to create a self-reinforcing dynamic between the content, tonality and visual style of a brand.

Alexander Pope famously captured this idea in his phrase “what oft was said, but ne’er so well expressed.”  What I take this to mean is that because of the incredible sensitivity of the human ear, eye, and brain’s to subtle variations in tone, shade and message, differentiation may be achieved as much by how something is said as by what is said.

This is a profoundly exciting thought.  B2B marketers exist in a universe where most competitors can – and do – say pretty much the same thing.  This suggests that the secret to differentiation may lie as much in the creation of a distinctive voice and visual style as it does in a distinctive message.

{ 0 comments }

As part of the preparation for the recent UNC conference on “Brands and branding in law, accounting and marketing” I merged two sets of data that I have historically conducted separately – data on the level of intangible value in the global economy; and data on the valuation of individual brands.

The data on intangible value shows that, for the 13,000+ companies globally with a market cap of $100mn or more, tangible assets only represented 47% of their aggregate enterprise value.  This number fell to 43% for the largest 500 companies in the world – and to 39% for US companies.

The lower number in the US reflects the relative skew in the US economy towards knowledge-based industries and away from industries such as materials, energy and utilities (in which tangible assets represent around 70% of enterprise value).

For the consumer staples and consumer discretionary industries globally, tangible assets represent only 35% of enterprise value.

So how much of this intangible value is represented by brands?  To answer this, I took the 121 publicly-traded companies in 2011 whose brands appeared on the Interbrand, Miilward Brown, Brand Finance or European Brand Institute lists of the top 100 global brands.

The intangible value analysis for these 121 companies revealed that tangible assets represented 41% of their enterprise value.  Brand value (I used the average of the valuations appearing on the four brand lists) represented 19%.

I then looked at the 64 B2C companies within these 121 companies, tangible assets represented only 26% of enterprise value – and brand value a further 24%.

For the 57 B2B companies, this implies a tangible asset ratio of 54% – and brand value of 14%.

These are useful rules of thumb for marketers to be able to share with the Finance colleagues when discussing the nature of the true asset base of their companies.

{ 0 comments }

For months, I have been looking forward to the conference on “brands and branding in law, accounting and marketing” that Natalie Mizik of the Kenan-Flagler Business School at UNC put together, and which was held over the past day and a half.  It was every bit as good as I had hoped it would be.

We were treated to a multi-disciplinary approach to branding that I think clarified the existence of three primary definitions of brands:

1. An intellectual property-centric view (favored by the lawyers and accountants)
2. A cash generating view (favored by Finance)
3. A customer-centric view (favored by marketers)

Each definition is valid for specific purposes – and the conference was a great opportunity to explore what these views have in common, rather than fixate on the differences.  The big challenge remains, however, that the marketing definition is externally-oriented and does not lend itself to easy mapping against the internal resources of the company that are responsible for making this “brand promise” possible.

As I expected, the event was something of a “reality check” for marketers to be confronted with how their discipline is viewed from outside.  Most of the speakers who were from other faculties admitted that this was the first time in their lives that they were at a marketing conference, having never perceived the relevance of marketing to their field.

I was happy that the panel on brand valuation was on the second day, which the majority of non-marketing participants did not attend.  It was rather unseemly “bun fight” where each speaker did their best to assert the superiority of their approach over the others.  One claimed superior rigor, another superior accuracy, another superior practicality, another superior insight for strategic decision making.  Each speaker was probably right – but in emphasizing their differences, it was left to the audience to derive their commonalities.

As always, I found there to be three enormous benefits to attending an academic conference:

1. It is an environment that provokes me to “think big thoughts”
2. I always find a couple of the new pieces of research to be directly relevant to my client work
3. It is great to reconnect with the cadre of academics that share my passion for understanding the business impact of marketing

{ 0 comments }

Many B2B companies struggle with developing compelling answers to the questions “what is unique about us?” and “what can ONLY we say?”

It reveals a pre-occupation with differentiation from competitors – an important question, but not the topic that is critical to their business success.  The question that is central to B2B business success is “for what types of clients are we able to deliver unique value?”

B2B success is primarily driven by the concept of “different for” as opposed to “different from” – in other words, the secret is to focus first on the clients you want to serve, and only then on the competitors you want to distinguish yourself from.

Another way of expressing this mindset shift is in terms of “relevant to” rather than “relative to” – B2B companies should focus on the clients they want to be relevant to, and only then about the competitors relative to whom they want to be differentiated.

The reason why this distinction is important is that the client’s question “what makes your company different?” is not an invitation to talk about your company in the abstract.  The intent behind the client’s question is “why is your company able to deliver differentiated value to me as a client?” – it should receive an answer about why the company is better for them, and not an answer about why the company is better than its competitors (however true that might be).

{ 0 comments }

In my view, there are two inter-related contributions that marketers can make to the success of the businesses they work for:

1. Identifying the target audiences
2. Definition a compelling value proposition to each

Simple, right?  Yet I am constantly surprised by how poorly either discipline is practised by business.  The imperative for growth tends to result in a reluctance to narrow the range of target audiences; the lack of definition of customer need tends to result in communications that are more about what the product or service does, as opposed to what it does for you in particular.

It is a critical moment in a company’s evolution when it accepts the need to move from being creator of products, to being a provider of solutions.  This evolution requires having a clear sense of three things:

1. Who the target customer is
2. What specific needs they are looking to have met
3. Why the customer should prefer to do business with you in particular

It is literally transformative for companies when they achieve clarity on these three issues.

{ 0 comments }

Yesterday I blogged about the superiority of the goal of being regarded as a “strategic resource” rather than a “strategic partner” because a resource implies a source of value.

All providers should aspire to being viewed as “value relevant” – meaning that the nature of their services is so important that it has a material impact on the performance and valuation of their client.

Value relevance requires demonstrating that what you do has a direct, measurable impact on one of the three drivers of corporate value – profit, growth or risk. Influence any one of these for the better (higher profit or growth, or lower risk), and you have the attention of the client’s finance and management team.

Ironically, this is where the issue of measurement becomes somewhat perverse.  It is far easier to demonstrate tactical, short term results than long term, strategic ones.  So, in their enthusiasm to demonstrate the materiality of their services and lay claim to the title of “strategic resource/partner”, providers often focus on the tactical impact of what they do.

We need to remember that the financial statements of a company consist of more than an income statement and a cash flow.  The reason why they include a balance sheet is precisely because of the importance of the asset base of a company.  Assets are defined as the resources controlled by the company from which future economic benefits are expected to be realized.  The most compelling demonstration of value relevance is the creation of an economic asset – because this is something that will generate returns over multiple time periods.

{ 0 comments }

It makes me nervous when companies claim to be “strategic partners” to their clients.  It is something we should all aspire to, but we should never forget that it is the client’s choice – not the provider’s – whether the relationship is viewed as one of partnership.

The goal of being viewed as a “strategic resource” is what most companies should be aiming for.  Our primary goal should be to be useful to our clients, and let the consumer of our services decide whether our level of usefulness merits the sobriquet of “strategic partner” or not.  Stable business relationships are built on the principle of value exchange.  It is only when relationships becomes asymmetric (either because there is a mismatch between the benefits received and the price paid, or because one party feels they are taken for granted and/or held captive) that the profits made by one party are regarded as unfair.  They are regarded as the product of exploitation, not partnership.

So let’s worry less about the social dimension of partnership (“do you respect me?”) and let’s focus on the functional dimension of partnership (“am I useful to you?”).  This will make it apparent why being viewed as a “strategic resource” is the  basis for an stable, mutually beneficial relationship, whether that relationship is called a “partnership” or not.

{ 0 comments }

A surprising number of marketers are unable to articulate the difference between a positioning statement and a value proposition.  This is worrying, since the core of marketing is the understanding of customer value.

A positioning statement is what it says – a statement that positions the company.  A value proposition is the articulation of a specific promise of value to a specific audience.  If you do not have a clear sense of who you are trying to communicate with, then the chances are that you have written a positioning statement, not a value proposition.

The distinction is important because customers are not interested in companies per se – they are interested in what companies can do for them.   Unless customers get a clear sense of “what’s in it for me?” they tune out the messaging.

It is hard for companies to be disciplined about creating value propositions rather than positioning statements.  First, because there is a natural tendency to focus on what the company wants to communicate rather than what the customer wants to hear.  Second, because it is hard to make the mental effort to look at things from the customer’s point of view.  Third, because a value proposition forces you to confront that the world is not your target market – there are different segments that you need to focus on, and develop specific messaging for.

At the heart of marketing are two disciplines:

1. Segmentation – identifying those segments of the market for whom the company can deliver a distinctive level of value
2. Value proposition – defining a compelling statement of “what’s in it for you” for each of those segments

{ 0 comments }

Marketers in B2B companies are often criticized for not understanding enough about the technical aspects of their businesses.  The implicit assumption is that, absent a deep technical understanding of how the business does what it does, marketing will be unable to help the business.

My goal is to help marketers expose this assumption as a fallacy.  My experience is that most B2B companies are full of people with deep technical understanding, and woefully short of people who can talk about the business in terms of the benefits that clients will receive.

This is the core mission of marketing – to understand the basis for, and to articulate, a compelling value proposition to clients.  The mission of marketing is NOT to become the technical writing department of the company, finding eloquent ways to talk about the company’s technology or services.

To do this, marketers obviously need to understand a lot about the technical side of how the company does what it does.  But marketers must never lose sight of the fact that their role is not “how to explain the company to the world” but rather “how to explain what kinds of customer needs are best resolved by our products/services/technology.”

What I am advocating is a more muscular stance by marketers.  They need to articulate where their value added lies, and be politely firm in resisting the suggestion that they need to become technical subject matter experts.  The true benefit to the company is not in swelling the ranks of the employees who can describe their technology but rather in creating a cadre of people who can articulate the benefits delivered by the technology.

{ 0 comments }

The business press has been full of commentary over the demise of Kodak.  Probably the most trenchant observation was the one voiced by The Economist (January 18 edition - economist.com/node/21542796) about the fallacy of “competing through one’s marketing rather than taking the harder route of developing new products and businesses.”

The moral for marketing is that a brand can only be as strong as the underlying business that it supports.  The mandate for marketing is therefore to be responsible for ensuring that the offerings and service of the company are focused on the hard task of ensuring the delivery of differentiated levels of customer value, not just differentiated communications.

That is why it is so depressing to hear Jeff Hayzlett, the CMO of Kodak until last year, describe himself as “a global business celebrity” and ” a leading business expert” – if he really was such, then the company of which he was until recently a member of the executive would not be in Chapter 11.

I have no problem with marketers like Hayzlett claiming to be communications experts.  What I have a problem with is them claiming to be “business experts” when their contribution is limited to communications.  It is this fallacy that “marketing communications alone are enough to drive business success” that lies behind the folly of brand as a separate asset on the balance sheet – the misguided notion that the brand exists in isolation from the capabilities, culture and products/services that gives the brand meaning to customers.

A true business CMO like Beth Comstock at GE recognizes that the CMO’s role encompasses ALL of the dimensions of the business that impact the customer experience.  She demonstrates as keen an interest in the innovation and service delivery of GE as she does in its communications.  She recognizes that the GE brand is better thought of as multiplier on the performance of the business.

The sooner that marketers accept that their (thankless) role is to champion all aspects of customer value, not just communications, the better chance we will have of avoiding the depressing spectacle of once-great companies declining into customer obsolescence.

{ 2 comments }

Brand valuation was one of the “chapters” in my presentation to the Thunderbird MBA students yesterday so I took the opportunity to revisit the analysis of the 2011 brand value league tables from Brand Finance, Interbrand and Millward Brown, plus the new kid on the block – the European Brand Institute.

The picture is not a pretty one if you are hoping for convergence in the estimates of the value of brand value between these four providers.  First of all, only 9 brands are common between the four top 30 lists.  And only 28 brands make it onto all four top 100 lists.  The aggregate value of those 28 common brands ranges from a low of $595 billion (Brand Finance) to a high of $1,040 billion (Millward Brown) – a difference of 75%.

At the individual brand level, the differences in the valuations are even more pronounced – the minimum and maximum values differ by a factor of more than 5 for Apple; more than 4 for Shell; more than 3 McDonald’s and Nissan; and more than 2 for Google, IBM, Coca-Cola, Intel, Amazon, UPS, HSBC, Cisco, Nokia and Citibank.

This is a depressing result given that each of the agencies enjoys high standing in the market, and uses a reputable methodology for arriving at their estimates of brand value.  It is important to realize that the divergences in their estimate of brand value are not due to technical factors – they reflect differences in their assumptions about the relative importance of brands in generating future cash flow.  In other words, the differences illustrate how highly subjective the practice of brand valuation is currently.

This means that using brand valuation for the purposes of demonstrating marketing accountability is a fool’s errand.

It is ill-conceived for two reasons:

• First, it produces a number that no-one can justify
• Second, it leads to a dysfunctional situation in which marketers try to lay exclusive claim to a certain proportion of the value of the business.  This flies in the face of the reality that marketing is about leveraging the other assets of the business to present a compelling offer in the market place

A much more productive approach to demonstrating the economic significance of brands is to show how they accelerate and magnify the cash flows that the business would otherwise generate.  In other words, the focus should be on overall business valuation, not just brand valuation.

{ 0 comments }

My final post of 2011.

Why is that we humans place such significance on the change of a date from 12/31/2011 to 1/1/2012?  A Vulcan would observe that it is just another day – in Excel, the difference between 40,908 and 40,909.

As humans, we are social animals and adore moments of collective celebration.  So whether it is the winter solstice, Christmas or the New Year that provides the pretext, we enjoy the opportunity for a collective experience.

{ 0 comments }

I used to believe that Marketing, Finance and Accounting inhabited different universes and spoke incompatible languages. But the topic of Brand Equity has convinced me that these worlds are actually aligned.

Each discipline recognizes that the goodwill that a company/product enjoys with customers is a form of economic asset.  In Accounting, the focus is on the reporting of that asset; in Finance, the focus is on exploiting the value of that asset; and in Marketing, the focus is on the creation of the asset.

It is therefore appropriate that the each discipline has its own definition of Brand Equity that reflects its particular interest. This definition broadens from the trademark (recognized by accounting), to brand-induced customer behavior (recognized by Finance), to the potential for value due to brand preference (recognized by Marketing).

Rather than being incompatible, these definitions represent different points on a single spectrum – seeing things from this perspective provides a firm basis for the effective collaboration between the three disciplines.

It is inevitable that Marketing’s definition ill be broader because it focuses on the potential for value – whereas Finance and Accounting both require the realization of cash flow.

{ 0 comments }

Successful business are always managing two core tensions:

• Between value creation for clients and value appropriation for the company (the outside/inside tension)
• Between short-term profitability and long-term profitability (the now/later tension)

The concept of brand equity is important to the effective management of both tensions.  Brand equity serves to remind managers that the extent of value that a company can appropriate is entirely determined by the amount of value it creates for customers (a fancy way of saying that “customers have the money. companies have no other source of income than the money that they persuade customers to part with”).  Absent a reminder that brand equity is a wasting asset, companies will tend to focus too heavily on cost reduction and efficiency, and insufficiently on innovation (the principal way to increase the level of brand equity).

The concept of brand equity is also vital to the trade off between profits today and profits tomorrow.  The true measure of performance is the sum of current profitability plus/minus changes in brand equity (the NPV of future profits that the brand is expected to earn).  Absent a good measure of brand equity, companies will always be tempted to “borrow from the future” to boost short-term profits (otherwise known as “milking the brand”).

The current financial accounting system biases companies in favour of short-term profits and cost reduction.  We need a robust concept of brand equity to ensure that sufficient attention is paid to nurturing the customer franchise that is the underlying source of the company’s value.

{ 0 comments }

I was at a cinema yesterday with my daughter and one of the pre-movie ads was for Coca-Cola.  It was a beautifully filmed piece about the threat to the Arctic habitat of the polar bear.  It explained how concerned Coca-Cola was about this issue – and how it was turning its can white for the holiday season, and donating $2mn over 5 years…

Huh?  $2mn over 5 years?  A measly $400k a year from a company that earned $46 billion in revenue and $13 billion in net income for the 12 months to end September?  You have made an entire ad to explain how you are donating the equivalent of 0.00003% of your annual profits??  By my calculation, the donation equates to the profit that Coke earns every 16 minutes.

Coke will have spent more on the making of this ad and on the buying of the ad time that the value of the donation it is making.

Do you really think that showing me a cute picture of a polar bear will cause me to totally suspend my powers of judgment?  This type of cynical, manipulative advertising is what gets marketing a bad name.

It puts Coke in the same dubious cohort as Philip Morris and Home Depot – companies that have spent more money on campaigns to advertise their good works than on the good works themselves.

{ 0 comments }

Natalie Mizik of the Kenan-Flagler Business School at UNC is putting together a conference next April that takes a multi-disciplinary approach to branding.  Hallelujah!  This is exactly the kind of broad thinking that marketing needs.

Her conference will include academics and practitioners that deal with brands from the accounting, business, legal, marketing and business perspectives.  I am very optimistic about the prospects for some innovative thinking coming out of an event that brings together so many different viewpoints on branding.  I expect that the event will be something of a “reality check” for marketers to understand how their discipline is viewed from outside – and will encourage them to develop more effective ways to communicate the strategic contribution of brands.  The current obsession with ROI and brand valuation does not seem to be addressing the root cause of the problem – namely the lack of comprehension about the business benefits that marketing delivers.

I am particularly interested in learning about the accounting profession’s latest thinking about brands and intangible assets more broadly.  On the one hand, there is an acceptance that the current approach to “transaction based” balance sheet accounting is not providing the desired insight into the true resource base of a company; but on the other hand, the ongoing financial crisis is not an environment in which anyone is minded to make bold moves.  The whole “mark to market” idea was so good in theory, but proved a bust in practice because it permitted such a high level of subjectivity in valuation.

{ 0 comments }

There is a constant tension in business between the desire to maximize profits in the short run, and the knowledge that creating sustainable relationships with customers and suppliers requires that some money be left on the table so there is an incentive to do business together again.

The observation that the winning long term strategy is about ensuring value exchange over time has been proven by numerous game theory contests.  To the surprise of most, the winning strategies were not the ones that were based on trying to establish the optimal moment to “defect” – they were the ones (most famously, “tit for tat”) that created the basis for stable, predictable relationships.  The generalizable lesson appears to be “better to be a player in multiple low scoring games, than the person who scoops the pot once and then cannot find anyone to play with.”

So why do we find it so hard to carry over this principle into business?  My guess is that the reason is a mixture of testosterone, risk aversion and financial accounting.  Most business people choose to err on the side of excessive value extraction because we like to exert power when we have it; we are uncertain about the future and therefore would rather go for the “bird in the hand”; and the financial accounting system reinforces this bias towards realized profits over potential future profits.

No wonder our performance measurement systems tend to reward behaviour that we know to be unsustainable.  The importance of the concept of brand equity is that it enables businesses to determine whether today’s profits are true profits – or have been achieved by borrowing from the future (by extracting value now because we can, even though it reduces that customer’s willingness to do business with us in the future).

One of the reasons I love to work with privately-held and family-run businesses is that they have the opportunity to strike a more sustainable balance between short-term and long-term profit maximization.

{ 0 comments }

I am in the process of adding a personal note to everyone to whom I am mailing out the latest T2 newsletter.  It is an agonizingly slow process but it has an enormously valuable by-product:  it allows me to reflect on the way that each individual has contributed to my understanding of the field of marketing finance.  I truly hope that I have been able to enrich their lives as much as they have enriched mine.

The newsletter itself is also somewhat reflective.  Rather than focus on the last 12 months, I have taken the occasion of T2′s fifth anniversary to review the journey travelled so far.  It is an encouraging picture.  We began with hypothesis that the importance of the human dimension of business was systematically overlooked, particularly by companies with strong finance, science and engineering culture.  Our hypothesis was that these companies were “leaving money on the table” by failing to appeal to full range of dimensions on which they were able to deliver value to customers.  They over-emphasized the functional basis for the transaction, and under-emphasized the basis for a lasting relationship.

The newsletter includes a summary of our recent research on three topics that indicate the business value that these companies can unlock by replacing the assumption of “rational economic maximization” by the assumption that customers have a broader utility function that includes considerations such as convenience, security, status, belonging, and purpose.

Please let me know if you would like me to send you a copy of the newsletter.

{ 0 comments }

We have been receiving a lot of positive feedback on yesterday’s presentation at the B2B Social Media Summit.  It is exciting to be part of a group of progressive thinkers who are energized around a common agenda.

Two ideas appear to have resonated particularly strongly:

• The ability to talk to the CEO about social media’s ability to impact the longer term cash flows of the business, not just short-term revenue generation
• The concept of the social Copernican revolution and the dislodging of companies from the center of their customers’ universes

Both talk to the strategic role of marketing and the importance of a deep appreciation of what represents value for the customer.  I look forward to continuing the dialogue!

{ 0 comments }

I was privileged to be asked by a client to participate in their agency evaluation process recently –  5 presentations all in one day!

It was a fascinating opportunity to observe how 5 different agencies all responded to the same material.  I had not expected that the day would provoke such a broad spectrum of emotion.  At the one extreme, there was the elation of seeing an agency take a raw, rational concept and transform it into an inspirational idea; or take an activity as mundane as a media plan and craft an integrated campaign that shows real insight into the reinforcing effect that simultaneous use of different media can deliver.  At the other extreme was the deflation of having our collective time wasted by agency people more interested in talking about themselves than about the client.

Each agency showed flashes of brilliance in different ways – for some it was a creative concept; others revealed elegant design; others showed real grasp of the business strategy; others demonstrated an impressive grasp of technology; others were impressive for the cohesiveness of their team.  However, as a general critique, all of the agencies presumed far too great an interest in themselves, and devoted too much of their presentations to themselves.

It saddens me.  As marketers, we pride ourselves on being the people who really understand customers and can help companies craft the value propositions, positioning statements and communications that make those customers feel understood, respected and valued.  So why was this skill not on better display during these presentations?

Part of the reason is that creative agencies have a belief in the power of a single idea to solve business challenges.  Their pitch is therefore all about the “big idea” and their credentials for being the partner most likely to deliver it.

But the client’s needs are more complex than that.  Yes, the client longs for a single galvanizing theme that can unite the company and provide the psychological coherence to all its activities.  But the client also longs for the reassurance that comes from seeing that the agency has really worked hard on understanding the complexities of the client’s business, and has recognized all the other “stuff” that needs to get done.

It is a hard balance to strike.  Err too far on the side of reassurance, and you risk being seen as dull and uncreative.  Err too far on the side of unbridled creativity, and you risk being seen as lacking an understanding of the client’s business.  But balancing a customer’s simultaneous need for reassurance and inspiration is what marketers are meant to do best.  My regret is that this skill was not well represented during the presentations.

{ 0 comments }

One of the concepts that Chris Kenton and I discussed during our presentation at today’s B2B Social Media conference was the tendency to over-estimate the short-term impact of a new technology, and to under-estimate its long-term impact (a phenomenon formally known as “macro myopia”).

The hypothesis that we put forward was that the capacity for peer-to-peer communication had dislodged companies from the center of their customers’ universes.  Now that web 2.0 has enabled the creation of communities centered on common interests, companies have been relegated to the status of planets revolving around the true center of the customer’s universe – their specific topic of interest.
Our argument was that the strategic significance of social media lay in its ability to inform companies’ understanding of this new universe.  Just as companies were slow to understand the longer term implications of TQM (“what do you do when everyone’s products are of high quality?”), so we believe that companies may be slow to understand the implications of social media (“what do you do when customers no longer think of you as being the best source of information about your own products and services?”).

{ 0 comments }

According to my web analytics provider, this blog is now attracting over 5,500 unique visitors a month.  My question to you is “are you getting the value you want from this blog?”

The remit for this Marketing Finance blog is deliberately broad – anything to do with the business impact of marketing.  Because of my background in strategy and finance, my personal bias is to focus on the question “does marketing contribute to the creation of a business asset?” as this allows me to explore the topics of brand equity, customer value, brand valuation, and intangible value more broadly.

As regular readers of this blog will know, I do not spend that much time on Marketing ROI as it is traditionally defined (in terms of return on individual – or even integrated - marketing programs).  There are many other bloggers who provide more detailed insight on this topic.

I define my target audience in two ways:

1. Those who are interested in making the strategic case for marketing
2. Those who are not interested in marketing per se, but who are fascinated by how customers perceive value

My goal is to be a source of insight to you on a number of topics that are core to your interests.  Currently, my mental list comprises the following topics:

• Brand equity
• Brand valuation
• Corporate reputation
• Customer value
• Intangible value
• Marketing accountability
• Merger branding

Are certain of these more interesting to you than others?  Are there additional topics you want me to cover?  Send me an email at j.knowles@type2consulting.com to let me know..

{ 0 comments }

Type 2 Consulting has just updated our analysis of intangible value in the global economy, based on the 13,000+ public companies with a total enterprise value of $100mn or more at the end of June 2011.

The decline in the value of global equity markets this year shows up clearly in the analysis – the aggregate value of the equity value of these 13,000+ companies is $32 trillion (versus $37 trillion for the 12,700+ companies in our December 2010 analysis).  The level of corporate debt remained broadly constant at just over $9 trillion, so aggregate enterprise value was $41 trillion at end June.

The tangible asset base of these 13,000+ companies was essentially unchanged at $19 trillion, implying a reduction in the level of intangible value (the difference between total enterprise value and net tangible asset value) from just under 60% of the global economy as at end December to 53% at the end of June this year.

Despite this decline, my key observation remains the following: the tangible assets of the 13,000+ most valuable companies in the world only represent 47% of their aggregate market value (equity plus debt).  The big challenge for business remains to identify the nature of the intangible assets that account for more than half of their market value in order to better manage them.

{ 1 comment }

Just because we desperately wish for something to be true does not make it so.  This applies to the tooth fairy (sorry kids) and it applies to brand valuation.

Many people believe that opportunity to list brand value on the balance sheet is the panacea that will usher in a new era of respect for the business contribution of marketing.

This is wishful thinking that betrays a fundamental ignorance about the function of the balance sheet and a rosy optimism about the credibility of brand valuation.  Oh, and did I mention that nothing is stopping companies from reporting on the financial value of their brands in the notes to their financial accounts – yet only a tiny fraction choose to do so?

The function of a balance sheet is NOT to be an exhaustive inventory of the assets of a company (I wish it was – and accounting reform is aimed at moving in this direction).  For now, the balance sheet serves as the record of the cumulative total of all the transactions that the company has undertaken.  No transaction, no right to be on the balance sheet.  That is why brands that were acquired can appear on the balance sheet, but not those that are home grown.

For those who have a rosy optimism regarding the credibility of brand valuation as a business discipline, I would simply encourage you to review how the financial value attributed to some of the world’s leading brands differs wildly across surveys.  Despite each using legitimate valuation approaches, the numbers produced by Interbrand, Millward Brown and Brand Finance often vary by a factor of 2 or more.  This does not generate confidence with CFOs and anyone else who is legally required to vouch for the accuracy of the financial accounts.

The crusade to have brands recognized on the balance sheet is at best a distraction, and at worst an impediment to the greater appreciation of the business value of marketing.   I bitterly regret that a lot of effort is being wasted on this fool’s errand that could have been spent on more productive ends.

Analysts and investors have consistently said that they want better disclosure about the level and nature of marketing spending – they have no appetite for a brand valuation number, the credibility of which it will be impossible for them to verify.  Any marketer who is serious about improving the understanding of the financial impact of marketing should devote their efforts to achieving harmonization in the definition of marketing activities and common standards for their reporting, rather than to brand valuation.

As regular readers of this blog will know, I am a passionate believer in the strategic importance of marketing, and of fostering greater collaboration between marketing and finance.  In my career, I have valued literally hundreds of brands for a variety of technical and management purposes.

I know that putting brands on the balance sheet appears like a seductive alternative to daily grind of demonstrating marketing accountability but then wishing on a star seems like a more attractive route than the daily discipline of trying to realize your dream.

{ 0 comments }

Utility is a word that has become disappointingly narrow in its meaning.  Most people immediately think about gas or electricity supply, and associate the term with a generic benefit.

This is a shame because the word has a rich history in economics as the concept for the total satisfaction derived from the consumption of a good/service.

The notion of total satisfaction is important because there are multiple dimensions that are relevant to the aggregate quantum of satisfaction that a person experiences.  We tend to think of things as having a single, unchanging, functional value.  But the value of that function depends greatly on context (a glass of water on a hot day; or an umbrella on a rainy day).  Equally, the value may be greatly enhanced by the symbolic meaning of the object (a pair of jeans or a sports car).

The primary responsibility of marketers is customer value – or, more precisely, customer utility.  The strategic contribution of marketing is to understand what the “utility function” of the company’s customers looks like, so that the company can develop the most compelling value proposition to them.

I have been working with a large engineering and construction firm for the past 4 years.  You would have though that their customers would be interested only in the functional and technical benefits that my client could deliver.  Research revealed that, actually, customers found it hard to distinguish between the major players on purely functional and technical grounds.  They regarded a number of the leading companies as each being supremely competent.  If so, then presumably price was the only reason to prefer one over the other?

Far from it!  Our work revealed that customers took into account the process (“what will it be like to work with them?”) and the purpose (“what makes them tick?”) in judging the total utility of partnering with one provider versus another.

Only when a company recognizes the different dimensions of the benefit that it can deliver to customers is it in a position to craft a compelling value proposition.

{ 0 comments }

One question that comes up regularly during merger discussions is “which brand should we pick?”

There is no simple answer because, depending on the circumstances, the right answer may be either, both or neither. The only hard and fast rule is that the post merger branding should be whatever enables the company to maximize its delivery of customer value. When one of the merging brands is clearly weaker, this may mean migrating to the stronger brand (irrespective of whether it was the smaller or larger one prior to the merger) because this will be perceived as an “upgrade” for the customers of the weaker brand.  Many people believe that AT&T Wireless should have adopted the Cingular brand for this very reason.

When both brands enjoy high levels of customer affection and loyalty, it may mean keeping both brands as product brands (even if a single brand is selected at the corporate level) so as to maintain the customer equity.  When the oil and gas majors merge (think Exxon Mobil or Chevron Texaco or Conoco Phillips), then maintain both brands at the retail level.

When the message is “the best of both worlds”, it is appropriate to merge the two brands (as United and Continental are doing) to support the perception that the merger is delivering increased value to customers.

When the story is “complete transformation of the customer experience” then it is appropriate to consider a new brand entirely.  Think Verizon.

The important point to note is that some of these strategies involve higher cost – and that is OK so long as the higher cost is justified by the increased/maintained levels of customer equity. This is the point that the finance types tend to miss – they are obsessed with reducing costs, and may forget that there is such a thing as “good costs” (those that support an increased level of revenue and profit).

The unique mission of marketing/branding is to generate upside potential for the business by creating the brand portfolio that will enable the merged company to maximize its share of the economic value pool of the industry.  Sometimes this will result in deliberately selecting a strategy of higher costs (such as maintaining two brands) because that is the only way to enable higher revenues and profits to be earned.

The reason why most mergers destroy value is not because they did not achieve their cost savings – it is because they failed to maintain their revenue growth (i.e. they lost customers).  Marketing should demand a seat at the merger table in order to ensure that this perspective of customer equity is appropriately represented.

{ 0 comments }

One of the big areas of debate in finance is the degree to which the stock market is efficient.  There are a number of different points of view – the “strong form efficiency” theorists maintain that the market discounts ALL information, even non public information, whereas the proponents of “weak form market efficiency” argue that the market only discounts public information.  There is even a “semi strong” point of view that maintains that the market is efficient at instantly discounting new public information.

The fact that the stock market is extremely volatile does not appear to undermine the credibility of the arguments about its efficiency.

Maybe marketers should take a leaf out of the finance book and put together a set of arguments around whether human behavior manifests “strong form rationality” or “semi strong form rationality” or “weak form rationality”?

It is not an idle suggestion.  One of the hurdles that marketers struggle with is the perception that human choice behavior – especially that of consumers – is highly irrational and subject to manipulation.  Exactly the same charge that is made of the stock market!

The key to this debate is the definition of rationality.  Most business people implicitly define rationality to mean “functionally logical” – and claim that any behavior that is not consistent with the maximization of functional benefit must be irrational.  But the true definition of rational behavior is behavior that is “congruent with your goals.”  Since human beings have goals that go beyond functional maximization, this sets the stage for frequent charges of irrationality, many of which are unjustified.  If you allow for the fact that humans are balancing a number of objectives – some functional, some psychological, some short term, some longer term – then the number of cases of irrational behavior is substantially reduced.

I would happily collaborate with any reader of this blog who wants to work with me on what the definitions are for “strong form rationality” vs. “semi strong form rationality” vs. “weak form rationality.”  Let me know if you are interested!

{ 6 comments }

{ 0 comments }

I am in the midst of a major program of customer interviews focused on uncovering the full spectrum of areas in which my client (a significant provider of B2B services) delivers value to its customers.
We are supplementing the formal interview process with some social media mining so as to get a more complete portrait of what customers care about – as evidenced by the range of issues around which substantial online communities have formed.
I alternate between finding social media completely exasperating (due to the huge volume of utterly inconsequential information that is exchanged) and completely exhilarating (due to the occasional nugget of profound insight that is buried deep in some discussion thread).
It is certainly true of social media that “you have to kiss a lot of frogs before you meet your prince” but the task is greatly simplified by the very powerful analytical tools that allow you to sift through inconceivably large volumes of data in order to identify the signal in the noise. Our recent two-year assignment to “map the social media landscape” as it relates to the topic of marketing finance was a great learning exercise on how to use social media – and what kinds of filtering and clustering techniques you need to have in place – to understand a multi-faceted topic.
Social media analysis is still in its infancy but I am convinced that it is as significant to B2B businesses as the internet itself. The real story of social media is not really about the B2C “social CRM” stories that are capturing the headlines at the moment – it is about the ability of businesses to understand the market and social context in which they exist, and to act as valued members in the communities whose needs they serve. Just as all the talk about the internet in the late 1990s focused on the consumer applications of the web while the real action was taking place in the electronic interchange of B2B data, so now the press is focusing on the B2C stories while the more fundamental and durable change is occurring in the B2B arena.

{ 0 comments }

I have been trying to synthesize the findings of the interview program that I have recently conducted for a major B2B client.

There is a paradox about the type of relationships that this company has with its clients – on the one hand, they are highly transactional (in fact, there may be literally millions of client transactions in a given day); but on the other, the average relationship may last for upwards of a decade or more.

I sensed a basic tension that arises – every day is a new day in the sense that millions of new transactions need to be processed and the relationship will only be as healthy as the success rate in processing these transactions accurately.  Yet, in a very real sense, every new day is the continuation of a relationship that has been in place for several years.

What is the most appropriate way to manage these relationships?  I would suggest that you need to show that you want to “earn success every day” by focusing on faultless execution of the transactional mandate, while simultaneously demonstrating that you regard the relationship as a partnership in which you are invested in each other’s long term success.  This means observing the small niceties to which we as humans are so well attuned – it means showing initiative and thoughtfulness, sharing information, making plans for future collaboration.  It involves explicit effort to signal that although the relationship consists of a vast series of daily transactions, it is not defined by them.

{ 0 comments }

I was fortunate to be invited to present today to the Strategists’ Summit of MarketShare Partners on the topic of measuring and valuing brand equity.

It would be hard to imagine a more perfect group with which to have a detailed discussion about the business impact of branding.  These folk live and breathe marketing mix modeling, channel optimization and other forms of modeling designed to enhance the effectiveness and efficiency of marketing spend.  They are therefore well versed in the challenges of constructing the business case for marketing investment in ways that are both rigorous and intuitively appealing.  We observed that the majority of the money being spent currently is relatively short-term in its focus (designed to answer questions such as “how do I optimize my spending across channels?”) because there was such opportunity for revenue acceleration and/or enhancement of the efficiency of spend.  But a straw poll of the group revealed that they were universally enthusiastic about the opportunity to apply the same rigor to the measurement of marketing asset creation.

My only regret was that the hour passed so fast.  Given half a day with these folk, I believe we could have pushed the peanut forwards in a material way.

For now, I think that there are two areas in which we can make progress independently:

1. The creation of the high-level “air cover” for the economic significance of marketing (the work I have done on intangible value measurement, and the characterization of brands as economic assets fall into this category)
2. The gradual expansion of the elements that go into a marketing mix model that would enable the model to be more insightful about the factors that are driving changes in baseline sales

{ 0 comments }

Over the past two years, Type 2 has had webcrawlers scanning the social web for conversations realting to the business impact of marketing.

Our database now exceeds 21,000 records so it is a robust data set on which to do some statistical clustering of the topics to better understand the focus of the conversations taking place online.

Three agencies were given the task of analyzing the data set using advanced text filtering and statistical clustering techniques to identify the key topics areas within the overall topic of marketing finance.

Drum roll, please – the most thorough of the three methodologies used identified 49 topic clusters within the data, of which 8 were absolutely core to the topic of marketing finance.

These eight topics can be labelled as:

1. Advertising – campaign creation
2. Advertising – media usage
3. Brand Equity
4. Customer Loyalty
5.  Intangible Assets
6. Mergers and Acquisitions
7. Performance Measurement Metrics
8. Statistical Analysis

It is fascinating to me to finally understand the topics that are of greatest interest to the marketing finance community.

{ 1 comment }

I had a fabulous meeting today with a medical client, with whom I have worked for the last year on a particularly thorny set of issues relating to their corporate, channel and product brand strategy.

Today was one of those moments of clarifying simplicity when we finally “cracked the code” of how to define their businesses in a way that enabled all of the issues to be put in perspective.  Suddenly we could see exactly what what needed to be done.

It reminded me of that great line from T S Eliot:

“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time”

{ 0 comments }

I spoke this evening as a guest lecturer on an MBA marketing elective at NYU’s Stern School of Business.  The course title (also the title of this post) gives you a good sense of the subject material that the students were interested in discussing.  And, my, were they interested in discussing it!  Rarely have I been in front of a more engaged audience.  I think it took me over 10 minutes to get past the title slide of my presentation…

I left the class feeling really optimistic about the future of marketing, and the ability of marketing to contribute to business performance, and to create economic surplus more broadly.  This was an audience that obviously embraced measurement (or they would not have chosen this elective!) but they were hungry for the story behind the numbers, not the numbers per se.  They clearly had a view of marketing as the growth engine of business and recognized the need for appropriate methodologies to measure how marketing was adding to customer value.  The quality of the questions was exceptional and ranged from questioning the validity of comparing market value to book value, to the relative importance of brand across different industries, to the impact of network effects on brand strength…

I stayed for their class presentations about the prevalence of marketing metrics in the 10Ks of five major companies.  There was some excellent analysis of the Google, Microsoft, Disney, McDonalds and Coca-Cola financial statements – all of which highlighted the relative paucity of the marketing data included in the financial reports.  This provoked a great discusion around the notion of “if marketing is so important, why is there so little data on marketing in the financial reports?”  I will return to this topic in a future post.

For now, NYU Stern partipants in tonight’s marketing elective (and Profesor Dawn Lesh – whose guest I was), thank you for a fabulous evening!

{ 2 comments }

Financial services is a tough environment for marketers.   Not so much because the products/services are intangible and largely devoid of emotion (credit cards being the exception to the rule) but more because financial services is such a brutal environment for creative people who do not believe that financial value is the only measure of worth.

I have just spent the day with the marketing team of a client in institutional financial services.  They are struggling to achieve recognition for the business contribution that marketing can make, and how it can serve as an effective vehicle for business strategy.  In another industry it would be acknowledged that the strength of the company’s brand and reputation were significant factors in their success in the marketplace.  In a financial services environment, the myth of pure rationality still reigns supreme.  Market success is deemed to be purely a function of the quality of the product/service offer.  End of story.

We intend to prove that an effective value proposition consists of more than a simple explanation of superior product functionality (as Scott Bedbury put it “where you see performance, others will see parity”).  It encompasses a broader spectrum of value sources.  Once we demonstrate that such a value proposition produces a marked improvement in the effectiveness of their sales effort, maybe we will be some begrudging acknowledgement that marketing is about more than sales collateral?  Watch this space.

{ 0 comments }

I spoke this morning at an MBA elective at Columbia’s Graduate School of Business entitled “marketing metrics and strategic decisions.”  My particular topic was brand equity measurement and valuation.

I always enjoy speaking with MBA audiences because they are intellectually curious and motivated to understand what makes businesses successful.  This group did not disappoint.  They asked lots of good questions, all essentially focused on the topic of “how important is branding to the performance and valuation of businesses?”

As their class assignments, they had been tasked to go through the annual reports of a number of companies and identify which marketing metrics were being reported.  The result was a veritable mishmash of metrics, running the gamut from the highly quantitative to the very subjective, and from marketing inputs to market outputs.  It was a great exercise to illustrate the complexity of demonstrating the causal relationship between marketing investment and corporate performance.

Fortunately Dawn Lesh, the course instructor, had encouraged the students to think in terms of where these metrics plotted on the “value chain” of marketing.  They were using the latest framework that Don Lehmann has developed in conjunction with Mike Hanssens of UCLA that allows you to classify metrics according to the stage in the process from marketing capabilities to corporate valuation to which they related.  Don was kind enough to participate in on the session to provide some live commentary on how his framework could be used most effectively.

All in all, a great way to spend a morning!

{ 0 comments }

The term “value proposition” is almost as widely used as “brand equity” and has almost as many meanings.  This is a shame because a well-articulated value proposition is a vitally important component of a company’s go-to-market strategy.

I define a value proposition as “the promise of the delivery of a specific benefit to a specific audience” – as such, it is NOT a loose catch-all term for “brand attributes” but rather the articulation of the unique value that the company is able to deliver to its target customers.

There are three main reasons why creating a compelling value proposition is hard:

• First, it requires you to focus on customer benefits, not on corporate attributes
• Second, it involves understanding what really creates value for customers and how to demonstrate that your offer can deliver on this better than the competition
• Third, it involves saying less rather than more

It is particularly hard for people involved in branding to generate good value propositions.  That is because branding is – appropriately – a relatively introspective discipline that is focused on defining the essence of what makes a company, service or product unique.

Value propositions are, by contrast, externally-facing.  The question is not “what makes us unique?” but “what is the unique value that we are able to deliver to customers?”

Done right, a value proposition creates a powerful bridge between a company’s sales efforts and its enterprise marketing.  If the uniqueness of the company (its brand) can be linked to a unique value to the customer (its value proposition), then the company is providing the compelling basis for both the immediate transaction and an ongoing relationship.  It does not get better than that in my world!

{ 0 comments }

Being involved with marketing is a roller coaster ride.  There are days when I feel on a high because I see the real human value that marketing is able to generate.  And on other days I hit a low point because I see how manipulative and deceitful many marketing practices are.

Today is a low day.  As some of you may know, Type 2 Consulting’s sister business is called Structured Intuition and is based in Canada.  One of the major telcos in Canada is Rogers.  And Rogers is one of the companies that, in my opinion, frequently errs on the side of deceitfulness in its marketing.

Let’s take today’s mailing as an example.  In big bold letters Rogers claims “3 GREAT NEW PLANS TO CHOOSE FROM” and then lists its options for phone plans.  In even larger type is the monthly price of these plans – $16.91, $26.91 and $31.91.  Pretty attractive, huh?  Or should I say “eh”?

Except that the tiny print informs you that you are required to take out a two year contract and the advertised price only applies to the first 3 months (or 6 months for the more expensive plans).  So your $16.91 plan will actually cost you $26.91 from month 4 onwards.  For an average cost of $25.66 over the term of the contract.

That’s what I mean by deceit.

I am an optimist.  I believe that you can fool the customer for a certain amount of the time but eventually customers get to realize which companies are truly trying to create a win/win and which companies are simply focused on extracting the maximum value from you.

{ 0 comments }

Marketing and Finance have traditionally existed in splendid isolation from one another.  Two forces have pushed them closer together over the past 20 years.  The first is the ascendancy of shareholder value as the language of the boardroom.  The second is the increasing measurability of marketing.

Together these two forces have led to the inevitable conclusion that the impact of marketing on business value must – and now can – be measured.

As a result, the field of Marketing Finance is beginning to gain traction in academia and, to a lesser extent, among practitioners.  I will be attending the second “Marketing Meets Wall Street” academic conference in Boston in May (the first was held two years ago at Emory) and am looking forward to hearing about the latest research being done to quantify the impact of different aspects of marketing on business performance and valuation.  Our paper on “Value Implications of Corporate Branding in Mergers” is on the agenda.

The relatively novelty of Marketing Finance as a field of study makes it inevitable that its exact definition remains somewhat cloudy.  I fully expect that a certain number of the papers at the conference will make me scratch my head in terms of the practical applications of the research.

As readers of this blog will realize, I use the term “marketing finance” in a broad sense to encompass all aspects of how marketing contributes to the enhancement of business value.  I am consciously trying to keep the focus broader than Marketing Performance Measurement in order to avoid the measurability trap (an undue focus on the short term, because that is where the data is most abundant).

This involves maintaining a focus on both transactions and relationships, on both the income statement and the balance sheet, on both the short term and the long term.  It means maintaining a focus on how value is created for customers, not simply extracted from them.

{ 0 comments }

Clients often ask me to contrast “marketing” and “branding” because they are confused about whether they are different, or whether one is part of the other, or whether both are part of something bigger – and whether either of them really matter.

When the client is in corporate marketing, “reputation” also gets thrown into the mix as another term that is increasingly widely used as the umbrella term for whatever combination of externally-facing activities the company is engaged in.

I have found that a productive way at getting to the underlying issue behind the question is to focus on the three big questions that a company needs to ask:

1. Who is my target customer?
2. What is my value proposition?
3. Why should he/she prefer to do business with us?

If you have good answers to all three of these questions, and a strategy for executing against them then, trust me, your marketing/branding/reputation is fine.

{ 0 comments }

One of the major challenges for a marketing services provider is to prove to a financial audience that they can have a material impact on the performance and valuation of a business.  Or, as academics and finance folk like to say, that it is “value relevant.”

Value relevance requires demonstrating that whatever you do has a material impact on one of the three drivers of corporate value – profit, growth or risk.  Influence any one of these for the better (higher profit or growth, or lower risk), and you have the attention of the finance folk and the whole management team.

This is easy to say, and remarkably hard to do.  There are two principal challenges.  The first is conceptual – the finance/business folk typically believe that customer purchase behavior is highly rational and so the impact of marketing is marginal and tactical.  The second concerns measurement – it is challenging to isolate the exact degree to which the customer decision was influenced by a wider set of human considerations rather than a narrowly functional view (what T2 calls the “Vulcan” versus “Earthling” perspective).

Much of the energy in marketing analytics is focused on measuring transactional efficiency – not because that is necessarily where the greatest value is being created, but because that is where it is easiest to demonstrate that some degree of incremental value is being contributed by marketing.

The tragic irony of this is that it is reinforcing the finance/business belief that marketing is a short term, tactical discipline whose full impact is captured in a simple ROI formula that considers investment and return in the current period.

The bigger contribution of marketing – the development and management of profitable customer relationships – is ignored.  It may be harder to measure, but this represents the larger component of the “value relevance” of marketing and branding.

{ 0 comments }

I had a fascinating breakfast this morning with an anesthesiologist turned serial healthcare entrepreneur.  He has two major scores already on the board (one company in medical reimbursement for physicians, another in pharmacy benefit management) and now on his third new venture – a new model for healthcare management.

What was so unique was his ability to switch effortlessly between perspectives – from that of a specialist within the existing healthcare system; to that of a business person looking to improve the effectiveness of an existing business; to that of a consumer advocate envisioning how the healthcare system could be changed to better serve the needs of patients, practitioners and payers alike.

In doing so, he was able to understand why the current system is the way it is, and the financial incentives that support the status quo.  What I admired was that, rather than creating a business to exploit the inefficiency of the current system (a.k.a value capture), he was devoting his talents to creating a different model that would deliver a fundamentally higher level of value to patients, practitioners and payers.  Now that is marketing with a big M.

{ 0 comments }

I am delighted that marketing analytics has become a hot topic outside of its traditional strongholds in the transaction-heavy banking, telecom and internet retail industries.  It is truly exciting that the availability and affordability of data now means that it is technically and financially possible to work out what motivates customers, and which marketing activities are resonating with them.

In the euphoria of this new environment, it is easy to forget that a good hypothesis is even rarer than good data.  Business remains a discipline of informed risk taking.  Clarifying the nature of the opportunities and risks that a company faces, and putting some quantifiable measures around them, is still the most valuable contribution of marketing to business success.

It is hard to remain focused on defining the decisions that you want analytics to help inform when there are vast reams of available data just waiting to be crunched.  For those of us who grew up on a starvation diet of data, this abundance is almost irresistible.  But it is important to recognize that there is now far more that is measurable than is worth measuring.

{ 0 comments }

I have been pleasantly surprised by the number of times our paper “The Value Implications of Corporate Branding in Mergers” has already been downloaded from the MSI and SSRN sites.  And, as best I can tell, the interest in the paper comes from both marketing and finance professionals.

The paper does seem to suggest that there is merit in the belief that human factors play a significant role in the post merger performance of companies.  Put that bluntly, it sounds intuitively obvious – but this hypothesis about the importance of the human dimension of business has been very hard to substantiate in a scientifically convincing way.

Our research falls short of proving the impact of corporate brand strategy on business performance or even identifying the mechanism of impact.  All we have done is to document that certain forms of brand strategy (the ones that preserve elements of the two merging brands) are associated with better investor response both at the time of the merger, and in the three years post merger.  We are not able to say whether this reflects a direct impact of the brand strategy on the strength of the company’s franchise with customers and employees (we did not measure this directly), or an indirect impact (that is, the branding choice is important only as a signal of management strategy).

My sincere belief is that the paper will encourage other researchers to adopt an external resource perspective on mergers – that is, to regard mergers less as an exercise in how to buy market share while eliminating costs, and more as an exercise in extending and deepening the merging companies’ equity with their customers and employees.

{ 0 comments }

Over the past 18 months, I have periodically reported on progress on some fascinating research that I have been conducting with Natalie Mizik and Isaac Dinner of the Graduate School of Business at Columbia into the value impact of branding on post-merger financial performance.

I am delighted to report that the results have now been published as Marketing Science Institute Working Paper 10-119 and the full paper can be accessed at:

http://www.msi.org/publications/publication.cfm?pub=1815

Our results are exciting because they suggest that corporate brand strategy may be a material factor in determining the post-merger financial performance of companies.  If this is true, then companies should regard the choice of corporate branding as a critical element of their strategy for maintaining the strength of their franchise with customers and employees, instead of treating it as a matter of corporate ego or horse trading.

Our starting observation was that one of the perennial conundrums of business strategy is the continuing popularity of mergers and acquisitions as tools of business growth despite the well documented evidence that, on average, mergers destroy value.  Researchers have failed to isolate the factors that explain why certain mergers succeed where others fail – in reviewing the various theories and empirical evidence, King, Dalton, Daily and Colvin concluded that “despite decades of research, what impacts the financial performance of firms engaging in M&A remains largely unexplained” and that “researchers simply may not be looking at the ‘right’ set of variables as predictors of post-acquisition performance” (see pages 197/198 of their 2004 paper “Meta-Analyses of Post-Acquisition Performance: Indications of Unidentified Moderators” in the Strategic Management Journal).

Our hypothesis was that corporate brand strategy was a variable that had hitherto been overlooked.  If the reason why most mergers fail to create value is not the failure to trim costs sufficiently but rather the shortfall in revenue growth (as reported in the May 2008 edition of HBR based on an analysis of 270 mergers by Rothenbuecher and Schrottke), then a critical factor in post-merger success was the maintenance of the health of the customer and employee franchise of the merger company.

Could it be that certain forms of corporate brand strategy were more effective in maintaining the strength of the external and internal franchise than others?  It seemed intuitive reasonable that a strategy of “pure acquisition” (under which one of the two merging brands simply disappears) was likely to result in greater attrition of customers and employees.  On the other hand, the additional costs of maintaining multiple brands might overwhelm the positive impact that this strategy had on customer and employee attrition.

It would be fascinating to see whether the data indicated that there was evidence of the consistent superiority of one approach over the others….

Here’s how the abstract of the published MSI paper summarizes the results:

“Most academic research on mergers has focused on the role and impact of the internal resources of the merging organizations on post-merger financial performance. In this report, Natalie Mizik, Jonathan Knowles, and Isaac Dinner take an external resource perspective and explore the value relevance of corporate branding’s role in communicating context- appropriate positioning and messaging to customers, employees, and investors. They investigate whether branding-related information is priced into merger valuations, both at announcement and over time.

Using a sample of 216 large mergers undertaken during 1997—2006, they classify merger transactions into three groupings according to the post-merger corporate branding: acquisition (the identity of one of the merging companies is discarded and it is rebranded with the other firm’s name and symbol), business-as-usual (both firms continue to operate under their own corporate names and symbols), and fusion (elements of both corporate brands are maintained in the new brand). They undertake event study and time-varying calendar-time portfolio analyses to assess potential differences in the value implications of corporate branding in mergers.

They find significant differences in the immediate market reaction to the merger announcements and significant differences in the post-merger performance across the three corporate branding types.

Firms using the more expedient and cheaper acquisition and business-as- usual branding strategies underperform firms that choose the more sophisticated and expensive fusion branding. Surprisingly, the market is better able to recognize the negative consequences of acquisition- branded mergers early on: the valuation of these firms is adjusted immediately at the time of the merger announcement, and there are no significant future-term adjustments following the merger completion. Only the business-as-usual branding mergers experience a significant post-merger negative adjustment in valuation: for them, the initial negative reaction to the merger announcement is compounded by further negative adjustment over the ensuing three years. Fusion-branded mergers do not experience negative market reaction at the time of the merger announcement, and the researchers find no systematic negative future-term adjustment in the valuation of these firms.”

Pretty cool finding, no?

{ 3 comments }

I attended the Canadian Marketing Association’s Marketing Analytics conference today.  As is usually the case with such conferences, a minority of the speakers deliver “blow your socks off” brilliant presentations, while the majority of speakers provide limited insight but a collection of helpful anecdotes, and then there is always one speaker who abuses his/her position at the podium to do an overt sales pitch for their product or services.

Those in the “blow your socks off” category included Gareth Herschel from Gartner who delivered a fabulous “state of the union” overview of the customer analytics industry, and Paul Tyndall from Royal Bank of Canada who gave a highly informative overview of the uses of text analytics.

A consistent theme of the day was how the true power of analytics lay in testing hypotheses about the optimal strategy for a company to pursue, rather than simply being used as a set of tools for optimizing whatever activities the company was already doing.  However, most of the presentations featured analytical approaches that fell into the latter category.  I came away impressed by the inventive use of technology to optimize existing media spend and to streamline the sales transaction process.  The remarks by Matt Ariker of Rogers Communications provided an eloquent explanation of why I always feel like my dealings with Rogers end up with them extracting the maximum value from me as a customer in exchange for them delivering the bare minimum value to me.

I came away from the conference admiring how analytics was being used to achieve much greater efficiency in marketing communications spending and sales funnel management.  But, at the same time, I was depressed by how marketing was being defined as “transactionalism” – the promotion of an efficient process for maximizing the transactions that could be stimulated from a particular customer set.  The focus is entirely on value extraction from customers, not value creation for customers.

{ 0 comments }

I attended two of the presentations at the Thunderbird Winterim today – a presentation by Mike Lawton, the CFO of Domino’s, and one by Chris Kenton, the CEO of SocialRep.  Both illustrated the need (and value) for marketers to be comfortable with quantitative measurement – whether in the form of financial numbers (Mike Lawton) or in terms of data on customer attitudes and behavior (Chris Kenton).

The presentations were perfect illustrations of some of the themes that I had raised the previous day so I was not surprised to hear from Rich Ettenson, the professor who organizes the Winterim, that the particpants were jazzed by how well he had constructed the sequence of the program!   The truth is that order of the presentations was fortuitous - but I am delighted that the participants have been presented with such a consonant view of the strategic role of marketing. 

Two points that I particularly appreciated:  the bluntness of Mike Lawton’s observation that marketers needed to be perceived as business people before their skill as marketers would be appreciated;  and the historical perspective that Chris Kenton provided on the history of mass marketing and the mistake of viewing social media as “just another channel through which companies can push their sales promotion message.”

{ 0 comments }

My best wishes for 2011 to all readers.  Thank you for your continued interest in the topic of marketing finance.  It is great to be part of a community that is dedicated to articulating, demonstrating and quantifying the business impact of marketing.  May 2011 be a productive year for us all!

My 2011 gets off to a strong start.   On Tuesday, I am the opening speaker at the Thunderbird Winterim – a two week marketing elective held in New York for close to 50 Thunderbird MBAs.  They are always a bright, curious and global group of students (this is the 6th year that I will be speaking at the event) who ask great questions – so I am looking forward to having any holiday cobwebs blown away!

For the past few years I have been the closing speaker for the event.  It was a great chance to help the participants draw together the key points from an intense two weeks of presentations.  This year I am experimenting with trying the opening slot.  It is a wonderful opportunity to help the participants develop a shared vision for the role of marketing and identify the key skills that they need to acquire.  I am also looking forward to helping them formulate a set of challenging questions for the speakers that follow me.  As always, Rich Ettenson (who runs the Winterim) has put together an A-list set of speakers from companies such as GE, Google, J&J, L’Oreal, Microsoft, Motorola and the NFL – so I have no qualms about helping the participants to ask probing questions!

{ 0 comments }

I was privileged to present tonight to the Masters in Branding class at the School of Visual Arts.  This is the first year that the program has run, and SVA seems to have attracted a really high quality contingent.

My topic was “The Business Case for Branding” – and my intention was to introduce the group to some of the concepts and frameworks that would enable them to engage in the discussion about the business impact of branding and marketing.  I made no apology that my topic was “spinach” – something they might not like, but which was good for them!

In the event, they were much more receptive to the material than I had expected (no-one does a Masters in Branding because they love numbers).  But just like most finance people will say “I do not have a creative bone in my body” so there was a tendency for this group to lament that “numbers are not my thing.”

As regular readers of this blog will know, I do not believe that anyone is wholly uncreative or innumerate. Sure, we are each left- or right-brain dominant, but we each are able to engage both forms of mental processing.

I am hoping that the image of the scales will stick in the minds of tonight’s class as a reminder of the fact that sustainable business success requires the balancing of customer value and shareholder value – and for that, you need to engage both your creative and your financial skills.

{ 2 comments }

I have been thinking further about the appropriate measures of intangible value and wanted to share my conclusions.  It seems to me that two approaches make sense:

• A “top down” approach that compares the book equity of a company (its total assets minus its total liabilities) to the market value of that equity (its market capitalization)
• A “bottom up” approach that compares the tangible assets of a company (the sum of its net property, plant and equipment, plus its net working capital) to its total value (its market capitalization plus long term debt)

The first approach reveals the excess of the market value of a company’s equity over its book value and is easy to calculate (which is why this metric is often published).   But it suffers from the weakness that book equity is a “plug” whose value is defined by “whatever number is required to make the balance sheet balance.”  It is therefore not immediately obvious what book equity represents other than the excess of the reported assets of a company over its liabilities.

If your interest is in how much of the total value of a company is represented by the tangible assets on its balance sheet (physical and financial), then the “bottom up” approach is the way to go.  The premise is simple – you can observe what value the market is putting on the total assets of a business (financial, physical, intellectual and human) - the question is “what proportion of that value is represented by ‘hard’ assets and how much is due to the ‘soft’ assets that do not appear on the balance sheet?” 

As regular readers of this blog will know, our interest is in the second approach because we believe this provides greater insight into the true asset base of a company – that is, the full range of resources that are responsible for generating the future cash flow of a business (and therefore its value).

{ 0 comments }

The October 2010 McKinsey Quarterly contains an interesting update on the research that McKinsey has been doing into the nature of what they call “centered leadership.”

What was originally scoped as research into the characteristics of successful female CEOs has now been extended to cover male CEOs.  Apparently the findings are robust across both genders – namely, that there are 5 qualities that are strongly predictive of a CEO’s level of professional and personal satisfaction.

The five qualities are:

1. meaning – putting your strengths to work in the service of a purpose that inspires you
2. positive framing – having an optimistic view of challenges
3. connecting – building strong communities
4. engaging – pursuing opportunities, despite the risks
5. energizing – finding ways to maintain your energy

Meaning has the strongest individual correlation with satisfaction (in fact, it is five times more influential than either the #2 or #3 dimensions, energizing and engaging); but the overall level of satisfaction is most strongly influenced by the extent to which the individual has mastered multiple qualities.

My take on this is that branding is a strong tool for CEOs.  It offers the vehicle for communicating meaning, creating community, and engaging the organization to act.

Tagged as: Business Strategy

{ 0 comments }

“Dunbar’s number” represents the maximum number of people with whom any individual can have a personal relationship.  It is based on the theory that that the size of an animal’s neocortex determines the natural size of the group (herd, pack, flock, school, pod) to which that animal belongs.  The number is derived from observations about other mammals, and empirical data about the natural group size observed for humans (such as the size of villages or fighting units).

There is heated debate about what the number is for human beings (and even whether the number is relevant given our ability to use social media to maintain many more “friendships” than might historically have been possible).  But the number is generally agreed to lie between 100 and 250.

So I was amused to read about a piece of research published today by Russell Investments about the optimal number of clients for a financial adviser to have.   Too few and the adviser cannot make a living;  too many and the adviser cannot provide personal service.  The Russell research found that the advisers who were happiest with the size of their client roster had between 210 and 240 clients…

{ 0 comments }

All human transactions can be seen in terms of exchanges of value.  What is fascinating to me is the variety of currencies in which value is denominated and exchanged.  Value can be functional, financial, emotional, psychological, social and situational – to name just a few of its myriad forms.

We are most familiar with commercial exchanges of value in which a product (a source of functional value) is sold for money (a store of financial value).  I am happy to pay you $5 for an umbrella.

Note that the functional value may increase depending on the situation – I am happy to pay you $10 for the same umbrella when you are selling it on a rainy day right at the exit of the subway stop.  The functional benefit of the item may be the same, but the value of that function and its immediate availability are greater.

The value of the same umbrella may also be enhanced by the addition of a [put your favorite sports team here] logo.  The product quality is unchanged but the function of the product has been expanded – it is no longer just a product for shielding me from the rain, it is now a way of expressing my identity.

Branding is a way of adding emotional and psychological value to an underlying product – thereby transforming it from “this product could do the job” to “that’s the one I want!”  Typically, brands add value in one of three ways:

1. Authority – they provide reassurance that this is a purchase that you will not regret (as in “nobody got fired for buying IBM”)
2. Belonging – they allow you to express which “tribes” you choose to belong to (as in wearing something emblazoned with the logo of [put your favorite sports team here])
3. Status – they allow you to express your superior taste, knowledge or wealth (as in driving/wearing something made by [put your favorite luxury brand here])

This dynamic is well understood in a commercial context – the price someone will pay is a reflection of the quantum of value that a product represents to them.  The price may be in dollars – but the benefit is measured in utils (or whatever the currency is in which human utility is measured).  The benefit will be a complex mix of functional, emotional, situational and psychological factors.

But my fascination with this topic goes beyond the purely commercial.  I believe that most human relationships can be understood in terms of exchanges of value.  As social relationships, money plays no part in the exchange.  But that does not mean that value is not being exchanged. 

Sometimes the exchange of value is immediate – we exchange information with another customer in Best Buy about which router to buy.  Sometimes the value exchange is ongoing and mutual - agreeing to “friend” someone on Facebook is a decision that presumably yields equivalent value to both parties (the functional convenience of being able to see one another’s updates).  Sometimes the value exchange is asynchronous – as in when I do you a favor now (such as introducing you to a new client) against some ill-defined, but clear expectation that you will return an equivalent favor at some point in the future. 

Even marriage can be understood as an exchange of value – I am always intrigued when people say “you complete me” in their marriage vows as I think it provides an indicator of the likely durability of the marriage.  So long as each partner continues to meet the needs of the other, then the union will be strong because ongoing value is being exchanged.

As a “reformed” finance person, I still see the world in terms of value.  But I am endlessly intrigued by the new ways in which our actions can bring value to others (in both the social and commercial realms) and the opportunity this represents for a genuine increase in human progress and happiness.

Tagged as: Customer Value

{ 0 comments }

Tony Hayward is another worthy recipient of the “Vulcan” award for demonstrating behavior that is justifiable on a narrowly functional basis, but utterly unjustifiable on a human basis.

Previous recipients include Rick Wagoner (of “Why don’t I take a private plane to Washington to ask for a Government bail-out?” fame) and Bob Nardelli (of “Why don’t we replace those skilled people in the Home Depot aisles by cheaper people with no discernable DIY experience?” fame).  Both demonstrated a stunning inability to see their actions through a human lens.  Saving time and money was all that mattered to them.

Tony Hayward showed the same inability to appreciate the human significance of his behavior.  As CEO of BP, he served as the focal point for everyone’s attention and expectations that BP would fix the problems that it had caused in the Gulf of Mexico.  Until such time as they did so, Tony Hayward was the symbol of BP and Tony Hayward the man did not matter.

People had zero interest in hearing him whine about how “he wants his life back” and were outraged by his decision to attend the “Round the Island” yacht race in the UK while oil was still flowing freely into the Gulf of Mexico.  It was not that people were unsympathetic to the needs of Tony Hayward the man – it was just that, until the well was plugged, Tony Hayward was the embodiment of BP.

Vulcans are blind to the human significance of their actions.  Earthlings understand that CEOs are always seen as more than just men (or women) – they are viewed as the embodiment of their organizations.  Tony Hayward’s failure to appreciate this, and readiness to favor the needs of Tony Hayward the man over the obligations for Tony Hayward the symbol of BP, earns him a “Vulcan” award.

{ 0 comments }

This post, jointly authored by Jonathan and Rich, was published on the HBR blog under the title “The Hazard of Having an Accidental Brand” on July 19:

For every Intel that intentionally crafts its trajectory as a brand rather than as a mere product, there are dozens of brands such as LYCRA, KONI, and Dell that have developed a deep resonance with customers more by accident than strategic intent. To judge by their websites and communications, the owners of these brands are well aware of what their products do for customers, but unaware of what they mean to customers.

These brands typically belong to engineering- and technology-based companies that have relentlessly pursued a strategy of delivering high quality, reliable, science-rich products. The companies are proud of their technological heritage and proudly assert their preference for substance over style. When we’ve asked executives at these firms what makes the company and its products special, they invariably list the ways in which their offerings are functionally superior to their competitors’. For them, brand strength begins and ends with better science or engineering, and they are inevitably offended when we suggest that they have a great product but an accidental brand—one whose emotional appeal to customers is clear to everyone except the executives themselves.

The core of the problem is the widespread belief in these companies that emotion is the enemy of reason. The assumption often is that an emotional bond with customers can only come at the expense of functional excellence, rather than as the result of it. It’s often news to these executives that a strong brand needs to be 100% rational and 100% emotional in its appeal, and that there needn’t be a trade-off between the two. And it’s often a surprise to them that performance is less of a differentiator than they imagine: Even in sophisticated B2B contexts, customers are too starved for time, uninformed, or uninterested to make an accurate judgment about which in a group of competing brands delivers superior functionality. TQM and Six Sigma have so narrowed the performance differential between leading suppliers of most products and services that the effort of uncovering the true functional differences between them outweighs the benefit.

Our advice to companies with accidental brands is to shift their emphasis from describing what the product does to communicating to customers what the product does for them. Microsoft and Hyundai have both recently embarked on such a transition.

Microsoft’s Window’s Division, long criticized for developing hard-to-use, over-engineered offerings (think Vista), is currently undergoing a radical and highly successful reboot of their brand. The “I’m a PC and Windows 7 was my idea” campaign showcases the company’s new-found commitment to building meaningful relationships with customers. And it appears to be delivering results. As of June 2010 Microsoft had sold 100 million licenses for Windows 7, and the company reports that 12% of all PCs worldwide are running the software, making it the fastest-selling operating system in history.

For Hyundai, the game-changing decision came in early 2009 when the company dramatically shifted its brand focus from the car to the customer. The now well-known Hyundai Assurance campaign resonated with customers worried about job loss and economic security. The central message was not that the company makes great cars (although Hyundai models continue to climb near the top of the quality rankings) but rather that Hyundai cared about its customers’ well-being in the economic recession, offering to let them walk away from their loan or lease and return the car if they became unemployed or suffered other “life-altering events.” In 2009, the company’s sales increased 8% while the industry declined 21%, and its share price tripled. Thus far, the Korean-automaker’s 2010 sales are up nearly 30% from the same period last year.

The toughest stretch goal for management of engineering- and technology-based companies is to understand the human and emotional aspects of their brands. Company leaders should ask the question “Do our executives truly understand—and can each of them articulate—the nature of the customer experience on which the growth and profitability of the business depends?” The response to this question provides insight into another key question: do you have an accidental brand?

Tagged as: Business Strategy, Creating Value, Customer Value

{ 0 comments }

Value is a devalued word.  The word is over-used because it can serve as a more attractive way of saying “low price” (as in “value meal” or “value plan”) or as a synonym for benefit (as in “value proposition”).

This is a tragedy – because value is such an important concept.  Value is a ratio. It expresses the relationship between a benefit and a cost. “Good value” means that the ratio between the benefit offered and the price charged is attractive.  The price may be high or low.  So long as the benefit is commensurate with the price charged, then the product remains good value.

In financial circles, value is sometimes defined as a ratio (as in the ratio between your return and your investment – a.k.a ROI) and sometimes as a residual (as in the net of your income after all ecomonic costs a.k.a economic profit).

The key point is that value always implies an explicit trade off between what you give and what you get. This applies both at the level of the individual and at a level of a corporation.  So long as the person or entity making the decision understands the expected benefits and recognizes the price to be paid, then a rational decision can be made.

However, if the decision maker does not understand the benefits of a product/service or have accurate information about its costs, then dysfunctional results are inevitable.  That is why purchases of idiosyncratic products (like consulting services) are generally not well suited to being led by the procurement department (since, through no fault of their own, they may lack a clear understanding of the nature of the benefits to be delivered and so conclude that the most rational decision is to award the contract to the lowest cost bidder).  That is also why expense account meals are always high ticket (because the person receiving the benefit is not the one paying the bill).

Business success is about optimizing the ratio between the customer benefit that you deliver and the economic costs incurred in doing so.  So long as marketing and finance exist in silos, your chances of achieving that optimal ratio are reduced.  It is only when you get collaboration between the people who understand about customer value (what benefits a customer expects at a given level of price) and the people who understand about the cost base of the business and how much it will will cost/save to increase/decrease the benefits delivered, that your odds of creating both customer value and shareholder value are maximized.

Tagged as: Creating Value, Customer Value, Marketing Finance

{ 0 comments }

I am just looking at the results of some market research that we have just fielded for a client to understand the strength of association of specific attributes with specific competitors. 

This data lends itself perfectly to being displayed as a perceptual map.  Attributes on which every competitor scores more or less the same (well or badly) have scores with low standard deviation and plot at the center of the map.  Attributes on which there is a greater variation in the individual scores plot more towards the periphery of the map.  Their position on the map is determined by how similar or dissimilar their tick pattern relative to other attributes (technically, their covariance).

Typically the top 5 or more highest scoring attributes in any category are all associated with every one of the main competitors and therefore cluster at the center of the map.  It is therefore almost impossible to establish a differentiated position based on them.  Counter-intuitive though it may appear at first, your best bet is to look at some of the less highly ranked attributes (because they are unevenly scored across competitors) and consider how they might be used as the basis for differentiation.

It is not that you do not need to “own” the top 5 attributes as well – it is just that you also need to add a difference that makes a difference.

The point is that percpetual maps are a powerful way of showing how respondents “view the world” (or at least that part of their world in which your company competes).  The map shows clearly which attributes are deemed to be “table stakes” – ones that everyone has to the same degree.  For technology companies this might mean “innovative” and for healthcare companies this might mean “caring” – the point is that they are attributes of the entire category and not the exclusive characteristic of any one company.

The key question is “what makes you special?” – the answer to that might be something relatively minor (like the 10th attribute on the list) but it may be the difference that has the potential to make a difference.

Tagged as: Brand Equity, Business Strategy, Customer Value

{ 0 comments }

The goal of any business is to achieve a monopoly – to become the uncontested supplier of products/services to its chosen audience.  Monopolies are very profitable.

What is often overlooked is that there are “good” monopolies and “bad” monopolies.  “Good” monopolies exist where there is actually an open and competitive market for a given product or service, but a single company has developed such a compelling value proposition that it enjoys an effective monopoly.  Think Google in search, or Apple in MP3 players.  Both have plenty of competitors but each has so delighted their customers that it is almost as if they have a monopoly.

“Good” monopolies generally come about through superior technology or a superior service (think Zappos).  They are not monopolies in the legal sense of the word (the absence of competition) as customers have the choice of buying a competitive product or service – but choose not to.  The “monopoly” is the product of a domination of customers’ preferences. 

“Bad” monopolies are when the customer has no choice (think NYC apartment building with a single cable provider or airline on an uncontested route).  The problem with “bad” monopolies is that the company can ignore the preferences of its customers because it knows that they are captive (think cell phone service contracts).  Even if the company does not actively abuse this monopoly, customers will resent the asymmetry in their relationship with the company and the fact that they have no choice.

That is why it is really hard for a company with a “bad” monopoly to enjoy a high level of brand equity.  Brand equity is about customer preference – and it is hard to have preference where there is no choice. 

But the simple truth for most businesses is that it is cheaper to develop ways to make customers captive than it is to find ways to continuously delight them (and so maintain a monopoly on their preference).  This is a significant source of tension between marketing and finance.  Marketing wishes to achieve a “good” monopoly (by making sure that customers do not want to leave) but finance knows that, certainly in the short run, it is much more profitable to focus on creating a “bad” monopoly (by making sure that customers cannot leave).

Tagged as: Business Strategy, Business Value, Customer Value

{ 3 comments }

I have just completed an extensive piece of online research to see what has been written on the topic of brand and reputation to see what additional insights were available to supplement the ideas in Rich and my 2008 Sloan Management piece (which I summarized in my earlier “brand vs. reputation” post).

The short answer is a fair amount has been written – but very little of it is worth reading.  I was shocked to see what a big business “reputation management” has become, with a host of web 2.0 social media scanning companies vying for attention against a phalanx of PR companies.  Most of these companies use “brand” and “reputation” as if they were synonyms – which, because they are approaching the topic from an entirely defensive stance, is probably OK.

By contrast, I found there was a lot of wisdom to be gained from reviewing the most famous quotations about reputation.  These illustrated a number of important points:

• “The purest treasure mortal times afford is spotless reputation” (Shakespeare)
• Reputation is built on action not intention
• Reputation takes a long time to acquire but can be lost in an instant
• It is worse to lose a good reputation than never to have had one
• Reputation often rests not on your ability to do what you say, but rather on the ability to do what people expect
• Repuation is what people think of us, character is who we are

To the last point, my favorite advice came from Socrates 2,500 years ago who said “The way to gain a good reputation is to endeavor to be what you desire to appear.”

Tagged as: Brand Equity, Business Value, Creating Value

{ 0 comments }

The practice of marketing is undergoing a radical transformation as a result of web 2.0 technologies.  Peer-to-peer connectivity (a.k.a. social networking) is rendering obsolete the long-standing metaphor for marketing as military strategy with its bellicose language of “campaigns,” “targets” and “captive” audiences.  In its place is emerging a new metaphor for marketing as participation in a series of customer communities, with new metrics such as “engagement” and “advocacy.”

Note that I do not believe that this changes the purpose of marketing – it is still about creating, communicating and delivering customer value – but it certainly changes the practice of marketing.

In a world of highly controlled broadcast media and largely passive consumers, Sun Tzu’s “Art of War” was rightly viewed as a source of valuable insight into how marketing strategies could be planned and executed.  In a web 2.0 world of fragmented media and peer-to-peer communication, marketing is less like a battlefield and more like a cocktail party – the people you are interested in speaking with are clustered in self-selected groups and are already communicating with one another.  Your effectiveness in this new environment depends on how well you contribute to the conversation, not by your attempts to control or dominate the discussion.

Engaging with a more fragmented, more informed, more interconnected set of audiences requires a new mindset and a strategy of “markicipation” (a strategic blend of marketing and relevant participation).  It involves recognizing that, for the majority of companies, the focus of the community is the customer’s need, not your brand.  While a few high engagement brands are able to form communities for which they serve as the central point, I believe these are the exception.  For most brands, the wiser strategy is to define the customer need to which their brand is a potential solution and focus on making a meaningful contribution to the vibrancy of those communities.

Tagged as: Business Strategy, Customer Value

{ 3 comments }

Interesting blog post on the HBR site on Friday (“Why Betterness is Good Business”) that summarizes the evidence for the correlation between corporate social responsibility (CSR) and financial performance:

http://blogs.hbr.org/haque/2010/05/why_betterness_is_good_busines.html

As the comments on the post make clear, none of the studies cited proves the causality in the relationship.  The post acknowledges a study that suggests that the financial outperformance by social funds disappears once their results are benchmarked against their specific universe of investment opportunities (i.e. excluding the “sin” industries) rather than the overall market.

But I still believe that there is an interesting hypothesis here – namely that companies that are better at anticipating future expectations of business are likely to perform better.

What makes this topic quite complex is that motives matter less than actions – companies may be engaging in CSR out of deep ethical conviction (such as Patagonia) or simply because they think it is a wise economic decision (I think that this is what truly motivates GE).  The important thing is that CSR is a core part of their operating philosophy.

For a few companies (such as Seventh Generation), CSR may be the very basis of their brand. But for most companies, CSR is better thought of as a core component of reputation.

For this reason I think it will be hard ever to prove a linkage between CSR (“doing good”) and financial outperformance (“doing well”).  Reputation is about meeting the market expectations of what is means to be a responsible business.  In efficient capital markets, there is no “alpha” in meeting market expectations but there is a big downside to failing to do so.  “Doing well” (i.e. generating excess value) will always be a function of delivering on customer expectations of superior value – and for most companies, CSR will only be part of that.

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

There is significant confusion among the business executives about whether “brand” and “reputation” are the same thing and, if they are not, what is the difference is between brand management and reputation management (that heavily promoted new offering from the PR community).
The confusion arises because the term “brand” is used very loosely and so has come to encompass everything from visual identity, to advertising, to culture and, yes, reputation.
But the true nature of a brand is as a customer-centric concept that focuses on what value the product (or service or company) promises to deliver to the customer. Brands are therefore about relevance, difference and added value to the customer.
By contrast, reputation is a company-centric concept that focuses on the credibility and respect that an organization enjoys among a broad set of constituencies. Reputation is therefore about legitimacy and the perception of the company as a responsible employer and valued member of the community.
While it is true that consumer activism and social media are causing the distinction between the two concepts to become increasingly blurry (Nike found out that consumers’ love of their brand did not mean that they were indifferent to the behavior of the company behind the brand), it is a mistake to assume that brand and reputation are the same thing.
A strong reputation gets you into the consideration set but does not provide a compelling reason to select you over a competitor with an equally laudable reputation. To be preferred by customers, you need to remember that the final decision is about them, not about you. Their purchase decision is based on what they perceive you can do for them specifically, not whether you are a wonderfully ethical employer who recycles their rainwater. It is brand, not reputation, that communicates why you are uniquely positioned to deliver on the customer’s need.

Tagged as: Business Strategy, Customer Value

{ 5 comments }

As regular readers of this blog will be aware, I have frequently noted that the key to sustainable business success is the maintenance of an attractive balance between customer value and economic cost. This is the only way simultaneously to have happy customers and happy shareholders.
This observation is the reason for my commitment to improving the relationship between Marketing and Finance. Only when the customer and cost perspectives of a strategy are considered together – as sides of the same coin – is there a likelihood that a sustainably positive outcome will occur.
“Value engineering” is an apt descriptor for this process. It connotes the idea of a well-designed system for balancing value creation for customers with value extraction for shareholders. It creates the vision of an efficient market that supports multiple product offerings, each representing a discrete space on some form of efficient frontier (the line created by the points representing the optimal price/benefit ratio for any given price or benefit). Each firm uses value engineering to identify what point on this line its particular combination of competences and costs allow it to occupy.
Sadly, in practice, value engineering seems to focus exclusively on the issue of how a given benefit can be delivered for lower cost.
It was not always this way. Value engineering has its origins in GE in the 1940s when shortages during the Second World War regularly forced companies to consider radical new ways of meeting a particular need. This created a fertile mindset that always assumed that there were multiple ways of delivering a given benefit. It meant a simultaneous focus on the benefit as well as the cost of that benefit – and often resulted in the identification of ways of delivering a whole new level of benefit at a lower cost.
It is sad that this breadth of perspective has largely been lost in our increasingly specialized world. The twin solitudes of Marketing and Finance are a case in point. When these two disciplines operate in isolation from one another, it is much less likely that the company will get to the efficient frontier of an optimal ratio between the benefits it can deliver to customers and the costs involved in their delivery.

Tagged as: Business Strategy, Customer Value, Marketing Finance

{ 0 comments }

My last few posts have all been about the benefits of integrating the marketing and financial perspectives on business.

The latest McKinsey Quarterly (Number 35, Spring 2010) contains a great piece about the fundamental rules of value (as seen from a finance perspective):

• The first rule is that value is only created when companies earn a return on capital that exceeds the cost of that capital
• The second is that value is magnified through growth (so long as – see rule 1 – the company is earning more than the cost of capital)
• The third is that anything that does not increase cash flow does not create value (unless it reduces the risk profile of the business)

The article is about how economic crises are the inevitable consequence of companies, governments and individuals forgetting these fundamental rules of value.  But what I found more interesting is that each of these rules relates to a company’s position in the market. 

For me, the article was a powerful reminder that Finance is not about “financial engineering” – it is about how to ensure that a company is effective at drawing resources from its environment (whether in the form of capital, raw material or labor) and transforming these inputs into products and services that are more valuable than the sum of their costs. Finance is about how a company delivers value to customers because value creation is only possible via the company’s transactions with customers (the source of its cash flow). 

Marketers often focus on the customer but forget about the need to generate cash flow.  Finance people often focus on measuring, leveraging, securitizing and valuing that cash flow but forget about what is actually generating that cash flow.

Tagged as: Business Value, Creating Value, Marketing Finance, Measure Value

{ 0 comments }

The reason why I am convinced about the importance of bringing the marketing and finance perspectives together is that it is often the key to discovering new sources of value. Whenever there is a misalignment between the economic cost of providing a service and the value that it generates for customers, there is an opportunity to increase shareholder value.
Let me give you a trivial example that will be familiar only to those of you who have cold winters and hot summers. This is the time of year when the semi-annual tire change occurs. Off go the winter tires, on come the summer tires. And accompanying this ritual is the usual huffing and puffing as the tires are carried to and from their storage space, wreaking their habitual damage on back and arm muscles.
Not for me. Two seasons ago the car dealership offered to store my tires (initially for free, now for $25 per season) and I have been singing their praises ever since.
Their tire storage service is an inspired move on multiple levels:

• It provides a service of significant value (not just in financial terms, but also in terms of physical effort, hassle and time) to customers living in condos or anywhere with limited storage
• It aggregates a set of costs currently borne by individuals into a service with significant economies of scale
• Most importantly, it ensures that I bring my car to the dealer every six month – so they get the service revenue

The world abounds with these opportunities – but you can only spot them if you are able to see through the twin lens of what might create value for customers, and what the economic cost of providing that value is likely to be.

Tagged as: Business Strategy, Business Value, Creating Value, Customer Value, Marketing Finance

{ 0 comments }

Why are school teachers paid less than bankers?  Is it that their work is less valuable?  Is it that their skills are less unique?  Or is it that it is harder to prove the connection between their work and the value that is generated?

Why are designers paid less then management consultants?  Is it that identity is less valuable than strategy?  Is it that design skills are less unique than consulting skills?  Or is it that it is harder to prove the connection between identity and business value than between consulting advice and business value?

Being a reformed finance person, I like to think about these issues in terms of the drivers of financial value – profit, growth, risk and time frame.   The market likes profits – and it likes them to be growing; and it likes them to be certain; and it likes them to be generated sooner rather than later.

This casts some light on why, in my schoolteacher/designer vs. banker/management consultant analogy, the problem might not actually be with an insufficient value is placed on what school teachers and designers deliver.   The problem may be that the outcome of their work is too variable, occurs too far into the future, and is too difficult to link specifically to their work.  Any one of these factors causes the discount rate on your work to rise, and therefore its market value to fall.  The fact that all three problems affect the work of school teachers and designers is a good explanation for why the salaries they command are relatively low.

Turning to the title of this post, the issue with valuing identity is that the judgement of its effectiveness is currently rather subjective; the impact of changes in identity may take a while to show up; and it may be hard to demonstrate the causal relationship in a definitive way.  

So the likely scenario is that the market will place a low value on identity.  Currently the design community focuses on arguing about the scale of the value they deliver (profit).  Maybe they should focus more on shortening the time frame and reducing the perceived riskiness of the impact of their work?  That would increase its market value.

Tagged as: Business Value, Creating Value, Measure Value

{ 0 comments }

Some weeks ago, I wrote about how sustainable business success is founded on achieving a balance between customer value and shareholder value.  I noted that this simple maxim is actually very hard to achieve on a consistent basis.  Companies are constantly veering too far in the direction of customer value by delighting their customers with high quality products and services but failing to earn enough to cover their economic costs; or in the direction of shareholder value by delighting their investors but leaving customers feeling fleeced – even endangered.

I believe that Toyota is going to be used for years to come as the textbook case of a company that strayed too far in the direction of shareholder value.  The current edition of BusinessWeek contains a fascinating account about how the “suits” took over at Toyota and obsessively pursued the goal of cost reduction, blind the fact that some of the costs were “good costs” (they were directly related to customer benefits) rather than inefficiency. 

Jim Press, Toyota’s senior US executive, put it very bluntly “the root cause of the problem is that the company was hijacked by… financially oriented pirates.”

As Toyota’s experience shows, it can take years for the imbalance in a business strategy to become evident in the marketplace (especially if, like Toyota, you are good at fending off investigations by the NHTSA).  But eventually the fact that you have debased your customer value offer becomes impossible to ignore.

Tagged as: Business Strategy, Creating Value, Customer Value, Marketing Finance

{ 0 comments }

I am reading the 1938 book “Milestones of Marketing” by George Hotchkiss.  It contains some fascinating insight into the origins of different forms of intellectual property.

Factoid #1 is that trade marks were originally considered to be liabilities for their owners.  Trade marks originated as “maker’s marks” and were required as a means of tracing adulterated, short-weight or otherwise defective products back to their source.  It was only later – when purchasers began to recognize that certain maker’s marks were associated with goods of high quality – that the trade mark became an asset to its owner.

Factoid #2 is that the observation that a patent – the right to enjoy a period of exclusive rights to exploitation of a discovery – has its antecedent in the 16^th century.  Apparently it was a generally accepted principle that, in recognition of the cost and danger of undertaking a voyage of discovery, the pioneer should enjoy a period of exclusive trade with any new market that they discovered.

There truly is nothing new under the sun…

Tagged as: Creating Value, Intangible Value, Intellectual Property

{ 0 comments }

I define Marketing Finance to refer to any effort to quantify the contribution of marketing to increased business value.

This is because I am interested in marketing in its broadest and most strategic sense, namely as the “creation, communication and delivery of customer value.”  The focus of Marketing Finance is therefore the quantitative measurement of any action designed to increase customer value.

I am aware that this is a broader definition than others use where the term refers to the economic and financial modeling of marketing actions.  The problem with this narrow focus is that it restricts the field of study to those marketing activities that can be explicitly modeled in terms of a supply and demand curve or directly linked to specific transactions.  It excludes activities that are indirect in their impact (for example, investments in customer service) and/or take time to have an impact (for example, a change of corporate identity).

Much of the focus of marketing performance measurement is on the near term.  This is not because that is where the impact of marketing is greatest – but simply because this is the time frame over which our measurement approaches are most developed.   In that sense, I think of marketers’ fascination with ROI in much the same way as drunkards who have lost their keys think of lampposts.

I see a clear business need for the articulation of the contribution of marketing to business value over the longer term, and via a coherent set of activities rather than just a single activity in isolation.  In other words, the quantification of the contribution of marketing strategy to business value.  From a Finance perspective, anything that causes a change in the profit, risk or growth profile of a business necessarily has an impact on business value.

The focus of this blog is on the linkage between customer value and business value.  That’s what I mean by Marketing Finance.

Tagged as: Marketing Finance

{ 1 comment }

Marketers face two big challenges:

• The first is external: how to develop ways of increasing the perceived and actual value that the company delivers to its customer
• The second is internal: how to demonstrate its value to a skeptical business audience

Few marketers do both tasks well.  The goal of this blog is to help them do so.

As of today, I have introduced some changes to the structure of this blog to make it easy to identify the posts that focus on the external challenge of creating, communicating and delivering customer value; and those posts that focus on how marketing performance should be measured.

Unifying these two core strands is the overall theme of “marketing finance” – how to create marketing strategy that delivers the numbers.

My conviction is that business is a balancing act between customer value and shareholder value. Favoring one too strongly over the other is a recipe for business underperformance as it will either lead to insufficient levels of profitability (the consequence of delivering customer value at excessive economic cost), or stalled growth and a weakened customer franchise (the consequence of focusing on profits and ignoring the customers whose satisfaction is the source of those profits).

Tagged as: Creating Value, Marketing Finance, Measure Value

{ 0 comments }

The statement that “our brand is our most valuable asset” appears almost as frequently as the statement “our people are our most valuable asset.”  But they cannot both be right, surely?

Many people dismiss both statements as pure pablum – soothing words uttered by senior management without meaningful content.  In some ways I am tempted to agree.  If the statements could be re-phrased as “people would not buy our products/do business with us if they thought we were untrustworthy” and “this company would fail if our employees did not show up for work,” then their utter banality would be revealed.

However, the popularity of the statements makes me believe that, at least some of the time, something more profound is being said.  In an environment in which the majority of business value is represented by intangible assets (that is, things other than bricks and mortar, inventory and cash), understanding the nature of those assets is a critically important business issue.

“People are our most valuable asset” is self-evidently true for companies that are talent-driven (professional services firms, research-based companies, sports teams, media properties).  It is the ingenuity of a small group of people that truly drives the value of the business (think Steve Jobs or Larry Fink) .

So, in what sense – and in which industries – might it be true that “brands are our most valuable assets” ?

The sense in which the phrase is insightful is when “brand” is used to mean “our perceived uniqueness in the minds of our customers” and not simply “reputation.”   This was the meaning that John Stuart, chairman of Quaker, had in mind when he made his famous remark that “if this company was split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.”

The industries in which “perceived uniqueness in the minds of customers” is truly the most important asset of the business are consumer industries (alcohol, cars, electronics, entertainment, fashion, retail) in which brands are a form of self expression for consumers; or “distress purchase” industries (insurance, financial services, medical products, certain technology products) in which consumer preference is driven by loss aversion. 

It is hard to think of a B2B industry in which it is true that “brand is our most important asset.”  Possibly certain types of professional services?  Suggestions welcome.

Tagged as: Business Strategy, Causal Model, Intangible Value, Intellectual Property

{ 0 comments }

I am a strong believer in the strategic importance of marketing – so it may seen a little odd that I am conflicted about the importance of companies having a Chief Marketing Officer.

Let me explain my thinking – the ideal scenario is that marketing (defined as a focus on the creation of customer value, and the definition of a powerful go-to-market strategy) is so embedded in the thinking of the executive leadership team that there is no need for someone to be designated as “chief marketing officer.”   All major decisions are already debated using the twin lenses of customer value and shareholder value. 

From this perspective, the creation of an executive-level CMO position is an explicit recognition that a company does not naturally see things through the lens of customer value, and needs to delegate a specific individual to play that (remedial) role.  No wonder that the average tenure of a CMO is so short!

Tagged as: Business Strategy, Creating Value, Marketing Finance, Marketing Performance

{ 0 comments }

Yesterday’s post highlighted the distinction between the proportion of marketers that needed to have a basic fluency in finance (in our view, 100%) and the proportion that is actively seeking to integrate finance into how they think about marketing (in our view, a significantly smaller number).

We know that people do not go into marketing because their first love is numbers.  People go into marketing because they love creativity – specifically, the type of creativity that creates a human connection.

Part of the T2 mission is to publish ideas and material that helps marketers craft productive responses to questions like “how do we know our marketing is working?” and “what’s the ROI on that?” and “how is marketing contributing to our business strategy?”

But the core of our mission (and the part for which we get paid) is to support marketers in companies with science-, engineering- or finance-dominant cultures.  These are environments that are often deeply brand-skeptical because they assume that “emotion” is “illogical” (a classic Vulcan trait).  Our role is to show that brands are about creating “emotional logic” – and that this is an essential enhancement to their existing “functional logic” if their goal is to have customers who want to have a relationship with their company, not just buy their products.

For these marketers, integrating marketing and finance is a need, not a want.

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

Type 2 Consulting was created to serve an evident need for more business-literate marketers.  Our explicit ambition was – and remains – to support the emergence of a “next generation” of marketers who are able to integrate marketing and finance.  We consider this combination of skills to be essential for the creation of strategies that balance the needs of customer value and shareholder value. 

Marketing and finance is only one dimension of the integrated thinking that we believe is necessary for this “next generation” of marketers to demonstrate.  We believe that business-literate marketing involves having a working understanding of strategy, technology and (in a services company) HR as well.  But the integration of marketing and finance is our primary focus.

We were aware that only some marketers would be interested in our services, although we believe passionately that all marketers should consider that basic fluency in finance to be essential.   But it took a remark by one of the other speakers at the Thunderbird Winterim two weeks ago to crystallize my thinking about the segmentation of Type 2′s audience.  Perceptively, he remarked “The participants wanted to hear about my topic – but they needed to hear about yours.”

I am totally OK with the fact that most marketers do not like finance.  But we all like respect.  If the answer to the title of this blog post is “the respect of my business colleagues”, then I see basic financial literacy as something that all marketers should want, not just need.

Tagged as: Business Strategy, Creating Value, Marketing Finance, Marketing Performance

{ 0 comments }

My previous post on the topic of “transactionships” has clearly struck a chord based on the number of calls and emails that I have received.  The feedback has revealed a fundamental schism in attitudes:

• Some argue that businesses are purely commercial enterprises with which it is impossible to have a true “relationship” – the best you can hope for is to be efficiently targeted and processed
• Some believe that businesses exist in the context of communities and, in order to retain their legitimacy, must develop the capacity for relationships rather than just transactionships

These points echo my earlier post about the “balancing act” of business – that you need to find a sustainable balance between creating customer value (a.k.a “being a valued contributor to the community”) and shareholder value (a.k.a “capturing enough of the customer value to keep your investors happy”).   A cynic might argue that, for a business, a “relationship” is the way in which to maximize the value of a transactionship over time.  He/she would say that businesses need to demonstrate just enough concern about diversity, the environment, and the other components of corporate social responsibility in order to keep customers transacting with them.

The proof of this particular pudding is beautifully illustrated by the current practice of ”green washing”.  Businesses with even the most dubious track record of environmental performance are falling over themselves to stress their “green” credentials.  Their motive is transparent – while a few may have genuinely had a “Damascus road” epiphany about the virtues of sustainability, the majority are just motivated by the desire to keep their customers transacting with them.

So – is it realistic to expect businesses to have real “relationships” ?  And why would they want to do so?

I have some thoughts to share – but I would welcome your input before doing so.  Keep comments coming to me at j.knowles@type2consulting.com

Tagged as: Business Strategy, Creating Value, Customer Value, Marketing Finance

{ 1 comment }

I have been having a fascinating dialogue over the past few months with Chris Kenton, the founder of SocialRep and former BusinessWeek journalist, about the strategic significance of social media.

One issue we have debated at length is the relationship of social media to CRM (customer relationship management), especially as a number of companies (including Oracle) are now actively describing their social media technologies as “Social CRM.”

I observed to Chris that CRM is a misnomer.  Only a Vulcan would refer to a system that only captures information on the commercial interactions between two parties as a “relationship” management system.  It should be called CTM (customer transaction management) because what the technology enables is a “transactionship.”   A relationship requires understanding who a person is, not just what a person does.

This struck a chord with Chris – he shared the results of some research he led while at the CMO Council that suggested that marketers believed that CRM has contributed to a decline in their “customer intimacy”.  They were spending more time analyzing customer behavior than actually speaking with them!

Both Chris and I are huge fans of CRM.  We believe that CRM technology has enabled companies’ ability to serve their customers better (through improved information) and more efficiently (through reduced cost).  Personally, I thank the CRM Gods every time that a company “recognizes” me when I call their call center or access their website because I know that I will not have to waste my time reminding them of my preferences and recent purchases.

We also value the impact that CRM has had on marketing – Chris is eloquent on the subject of how CRM has enabled “scientific marketing” to replace the “just go with your gut” approach so celebrated in “Mad Men.”

But, as a customer and an Earthling, I want to deal with companies that offer a relationship, not just a transactionship.

Tagged as: Business Strategy, Creating Value, Customer Value, Marketing Finance

{ 2 comments }

The core theme of my presentation to the Thunderbird MBA Winterim in New York yesterday was that business success is a balancing act.

Specifically, sustainable business success is founded on achieving a balance between customer value and shareholder value.  Until you create customer value, there is no opportunity to create shareholder value (except where you have monopoly or the ability to extract revenue through force).  The goal of business is therefore to create strategies that allow you to deliver products and services for which customers are prepared to pay a price that exceeds your economic costs.

That simple maxim is actually very hard to achieve on a consistent basis.  Companies are constantly veering too far in the direction of customer value or shareholder value.  They are either continuing to delight their customers with high quality products and services but failing to earn enough to cover their economic costs (which include a charge for the capital they employ); or they are delighting their investors but leaving customers feeling fleeced.

The best advice I could give the participants in the Winterim (and clients for whom I work) is to develop the discipline of explicitly reviewing things from a marketing and a finance perspective.  That is the best way that I know to ensure that businesses can maintain their franchise with their customers while simultaneously ensuring that they remain in business.

Tagged as: Business Strategy, Creating Value, Customer Value, Marketing Finance

{ 0 comments }

I had the privilege of giving the 3 hour concluding presentation to the Thunderbird MBA Winterim in New York today.  My theme was “Does Marketing Matter?” – a deliberate provocation to a group just about to start their job search for careers in marketing.

My point was a serious one:  they face a brutal recruitment environment and will need to distinguish themselves as potential recruits.  I suggested that they can do so by demonstrating their ability for integrative thinking – specifically by their ability to integrate the marketing and finance perspectives on business.

One aspect of our discussion was how to think about the resources that generate economic value for the business.  I urged them to think about this issue from both a marketing perspective (which focuses on the company’s understanding of its markets, and the quality of its franchise with customers) AND a financial perspective (which focuses on the efficiency of its business model, and the quality of the tangible and intangible resources it controls).

A particularly insightful part of the discussion centred on the divergence between the book value and the market value of companies, and whether the currently recognized forms of tangible and intangible asset (see my previous post) represented a comprehensive list of assets.  The concept of “human capital” was the focus of the debate.

To a marketer, it is patently obvious that one of the key assets of a business is the ingenuity of a company’s employees.  This is the source of their ability to craft new and valued sources of customer value. 

To an accountant, this is problematic since an “asset” needs to be legally owned and controlled by the company.  Now that slavery has been abolished, companies do not own their employees (even though employees may still feel that way at times!).   Legal ownership is limited to the output generated by employees, whether in terms of physical product or intellectual property.

This highlights one reason why, even when we include the five categories of intangible assets sanctioned by the International Accounting Standards Board, the gap between book value and market value of companies will not be completely closed.

Tagged as: Business Value, Creating Value, Marketing Finance

{ 0 comments }

The issue of what constitutues an asset is an important one if, like me, you like to be able to understand the relationship between a company’s reported assets and the valuation it enjoys in the market place.

As my previous post noted, any discrepancy between the two must reflect EITHER that the company is reporting its assets at less than market value OR that there are certain resources that are generating value (a.k.a “assets”) but that are not eligible for inclusion in the officially sanctioned list of assets. 

For the longest time, this was a debate of minimal economic significance.  Until the early 1980s, the difference between market value and book value was rarely more than 20%.  But the discrepancy was still deemed to be sufficiently troubling for the economist, James Tobin, to win the Nobel Prize for Economics for revealing its cause.  He showed that the discrepancy could be eliminated through “marking to market” (restating assets from their book value to their market/replacement value). 

This seemed to solve the problem – at least, until the merger boom of the 1980s and 1990s when the purchase price of companies regularly represented 4x book value or more.  It was clear that the purchasers were paying for more than just the tangible assets of the businesses they acquired.  This heralded the recognition of a new set of assets – intangible assets.

The UK led the charge with Finanical Reporting Standard 10 (“Goodwill and Intangible Assets” – issued in December 1997) which was mirrored and expanded by US Financial Accounting Standard 141 (“Business Combinations” – issued June 2001).  A multi-national standard, International Financial Reporting Standard 3, came into effect in April 2004.

The aim of each of these was to achieve greater transparency about the scale and nature of the intangible assets that acquiring companies believed they were acquiring in the merger.  IFRS 3 went the furthest in suggesting 5 classes of intangible asset that companies should use for reporting the “goodwill” component of the purchase price (the amount by which the purchase price exceded the net assets of the acquired company).

These five categories are:

1. Tecnology-based asssets (such as patents)
2. Contract-based assets (such as exploration rights)
3. Artisitic assets (things covered by copyright)
4. Customer-related assets (such as customer lists and market research)
5. Marketing-related assets (such as trademarks)

Because each of these categories of intangible asset was based on a form of intellectual property, they met the reporting requirement for an asset, namely “a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

Problem solved?  So we now have an exhaustive list of corporate assets (both tangible and intangible) and can reconcile book value with market value?

Just as the initial euphoria about Tobin’s Q “solving” the market to book problem through the revaluation of tangible assets proved misplaced, so I believe the current confidence in the exhaustive nature of the current list of corporate assets will prove unfounded.

I will explain why in my next post.

Tagged as: Business Value, Creating Value, Marketing Finance

{ 0 comments }

The last time I did a detailed calculation of the level of intangible value in the S&P 500 was in the dark days of March 2009.  I did not realize it at the time, but my analysis was done the bottom of the market (8 March 2009 was the low point).  So it is high time I looked at the composition of market value again.

Here is the latest data (figures as at January 8 2010):

• Aggregate market capitalization of the S&P 500:  $10.7 trillion
• Aggregate book value of the S&P 500:  $4.8 trillion
• Aggregate tangible book value of the S&P 500:  $2.1 trillion

A couple of points are worth noting:

• Tangible book value represents only 20% of market value (2.1/10.7)
• Declared intangible assets now represent a larger proportion of book value than tangible assets ($2.7 trillion vs $2.1 trillion)
• The aggregate value of balance sheet assets (both tangible and intangbile) accounts for less than 45% of market value (4.8/10.7)

So the big question is “what explains the other 55% of market value?”

There are two ways to close the gap between the balance sheet and market value:

• Restate balance sheet assets to show their market value rather than their book value (currently assets are shown at the lower of historic cost or net realizable value) – otherwise known as “marking to market”
• Include resources that are clearly responsible for generating value for companies but that do not meet the accounting definition of an asset (“a resource controlled by the enterprise”) and so are not eligible to appear on the balance sheet

The answer to the 55% question is a mix of the two.  I will develop this argument further in subsequent blog posts.

Tagged as: Intangible Value, Marketing Finance, Measure Value

{ 0 comments }

I am nearing the end of a series of client workshops that will have taken me to 13 locations around the world over the past month.

The thing that has most struck me about the experience is that a corporate culture can be every bit as strong as a national culture, even for a firm that focuses on hiring locally in each market and that has made a number of significant acquisitions.  I have been amazed by the way in which all of the operations that I have visited are united by a set of shared values and culture.

That is not to say that there is not something distinctively French about their French operations, and something distinctively Japanese about their Japanese operations.  These operations clearly manifest their local cultures and customs – but the dominant impression that you take away from meeting them is the similarity of their aspirations and values.

The usual explanation for this phenomenon is that the national operations have become “Americanized” (my client is headquartered in the US).  I believe this is wrong.  I have worked with many American companies that are way more formal and hierarchical than the stereotypical German or Japanese company.  I believe that the truth is that the company has recognized the importance of creating a corporate culture that transcends national culture.

By articulating a way of doing business and demonstrating a set of behaviors that embodies a consistent set of values, the company has created a corporate culture that is the same across the globe, and that is enriched – not threatened – by national “interpretations” of these underlying values.

It is a remarkable thing to behold.

It is also a powerful source of competitive advantage – this commonality of beliefs was a major factor in allowing the company to respond swiftly and effectively to the market meltdown last year, and in facilitating its ability to integrate a number of recent acquisitions.

Tagged as: Business Strategy, Creating Value, Customer Value, Marketing Finance

{ 0 comments }

One of the struggles in working with senior management groups on complex topics is the danger that the discussion begins to focus narrowly on one specific aspect of the topic on which a number of those present have deep expertise or strong opinions (or both).  It is totally natural that people want to find a way to simplify the complexity of the topic but the risk is that, all of a sudden, a decision about the whole strategy looks like it will be made on the basis of one relatively minor dimension.

I have found that a useful technique for preventing this is to attach an explicit financial value to the individual items on the agenda.  The number represents the additional financial value that could be generated by an insightful group discussion of that topic.  So item 1 “Minutes of the last meeting” will have a modest notional value attached to it but item 3 “Sources of incremental growth” might have a $500 million notional value.

I have found that this approach has two benefits:

• It ensures that the allocation of time in the meeting is in closer proportion to the financial importance of the topic than might otherwise be the case (participants will often cut short an unproductive discussions with the remark ”why are we wasting our time on a topic that has little financial value when there are other, more valuable items yet to discuss?”)
• It ensures that the discussion of a truly important topic is not allowed to hinge on a single, relatively minor aspect – even if there is strong debate about that aspect (participants will make a remark like “we are not going to let a $500mn decision hinge on the choice of stationery supplier”)

I encourage marketers to adopt this technique when presenting to senior leadership teams.  Begin your presentation as follows ”Our first topic – strategic positioning – is potentially a $50mn topic, so we would welcome a detailed discussion.  Our third topic – social media strategy for our holiday sales promotion – has a more modest upside value of $5mn but we would still welcome your input.” I guarantee that jaws will drop and your career prospects will rise…

Tagged as: Business Strategy, Business Value, Creating Value, Marketing Finance

{ 0 comments }

What began with a whimper seems to be ending with a bang.  One month to go, and 2009 is looking like it will turn out to be an average year. 

Of course, it is average only in the sense that a statistician would use when saying “on average, the temperature is fine” while standing with his feet on a block of ice and his head under a blow torch.  In similar vein, I guess the combination of a train wreck in the first half of the year and partying like its 1999 all over again in the second half could be said to produce an average result in aggregate.

As they say about soccer – “it’s a game of two halves…”

Tagged as: Creating Value, Marketing Finance

{ 0 comments }

The ANA has just released its 2009 State of Marketing report, subtitled “The Shift” in deference to Prophet’s sponsorship of the survey and the release of their senior partner’s book “The Shift: The Transformation of Today’s Marketers into Tomorrow’s Growth Leaders.”

The survey report serves as the basis for reiterating the key points from Scott Davis’s book, specifically the  five dimensions of the transformation that marketers need to make in order to make the move from “being merely a sales enabler to being a value driver across the enterprise”  – or, as the book terms it, to becoming a Visionary marketer. 

The language may be a bit self aggrandizing but the ideas are good, specifically the core idea about how the influence of marketers is in direct proportion to their contribution to driving the growth agenda of the business.  In finance theory, the value of a business is driven by three things – profit, growth and risk.  Scott Davis is right to get marketers to up their game from just a focus on marketing efficiency (that primarily sees marketing’s contribution in terms of margins and therefore profit) to one that focuses on growth.

This change of mindset is probably the single biggest thing that marketers can do to elevate their impact from the tactical to the strategic.

One critical component for doing so is for marketers to gain a deeper understanding for how the business actually works - my favorite data from the survey was the contrast of the level of cross-functional collaboration by “visionary marketers” vs. their visually-challenged peers.  60% of the visionaries claimed to collaborate closely with finance and 39% with operations vs. figures of 26% and 9% for their myopic peers.

PS The five dimensions on which marketers need to “shift” are:

• From creating marketing strategy to driving business impact
• From controlling your message to galvanizing your network
• From incremental improvements to pervasive innovation
• From managing marketing investments to inspiring marketing excellence
• From an operational focus to a relentless customer focus

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

I cannot decide whether I think that JC Larreche’s book “The Momentum Effect” is ground breaking – or banal.  Oddly, I feel the same way about Chan Kim and Renee Mauborgne’s “Blue Ocean Strategy.”  As an alumnus of INSEAD, I am proud to see the faculty achieve such recognition but I wish that I was convinced that their books represented a major breakthrough in business thinking. 

Both books have achieved an impressive degree of traction in the marketplace based on the same basic insight – namely, that business success is based on understanding the sources of customer value, and on crafting your product/service offering in a way that delivers unique value to customers.  I think Peter Drucker made this observation over 50 years ago.

Kim and Mauborgne phrase the opportunity in terms of “creating uncontested market space” while Larreche talks in terms of “shifting from compensating strategy to momentum strategy”.  I find Larreche’s take on the topic to be more appealing because it is explicit about what companies should stop doing (spending their time pushing products that do not offer compelling customer value) as well as what they should do more of (creating “power offers”).

Net net, I am delighted that the “marketing mindset” is once again being recognized as a powerful source of value creation for business.  To my mind, the fundamental challenge of business is how to create a business culture that places equal value on the insights that come from a “marketing mindset” with the operational efficiencies that comes from a “finance mindset”.

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

I came across an interesting post by BNET’s Steve Tobak called “Aspiring Managers: Learn to Act Like Adults” in which he lists the five skills at which managers have to become adept:

• Finance
• Selling
• Presenting
• Negotiating
• Communicating

His comment about Finance was spot on:  “I don’t care if you manage engineering, HR, IT, sales, whatever, you need to learn about finance. Why? Because that’s how companies are run and how business works. Period.”

Finance is the language in which business is “scored” so you need to be aware of how success is going to be measured.  This is especially true for marketers who often mistake their objectives of high awareness, strong brand equity, loyal customers as ends in themselves.  These objectives are important – but their importance comes from the fact that these are the things that ultimately produce strong and stable cash flow.

That is why it is so important to maintain a healthy dialogue between the Earthlings in the marketing department and the Vulcans in the finance department.  Without an understanding of what drives customer value, it is impossible for a company to deliver shareholder value on a sustainable basis.

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

I am just putting the finishing touches to the T2 Fall 2009 newsletter.

It has been a good opportunity to review the highlights of the past 12 months and, specifically, the progress made on advancing our research agenda.  Whatever else you can say about the GFC (global financial correction), it did at least provide an opportunity to push the peanut forwards on a number of projects that typically take second place to client work.

The newsletter reviews the key findings from our research in five main areas:

1. The scale of intangible value as a proportion of market value
2. The categorization and relative importance of intangible assets
3. Brand valuation
4. Brand strategy and post merger financial performance
5. Social media discussion of brand equity and marketing accountability

We certainly tried to follow Rahm Emanuel’s exhortation of “never let a crisis go to waste”…

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

This was the title of my presentation today at the town hall of a talented design and branding firm with which I have collaborated on a number of occasions.  Like so many others, they are grappling with the issue of how to respond productively to questions about ROI and the value of their work.

My mandate was simply to talk about the research and analysis I have been doing on a number of topics relevant to the business context and business impact of marketing.  I talked briefly about intangible value, brand valuation, the brand “bonus” and the relationship between brand strategy selection and post-merger financial performance (all topics on which I have shared topline results in this blog).

I hope I provided them with some interesting insights, and some confidence to engage in the discussion about the financial impact of marketing.  At the very least, I left them with a number of financial observations for use in their conversations with clients:

• Tangible book value represents only 21% of the value of US companies, and 33% of the value of Canadian companies
• Brand value represents an average of 15% of market value – but varies enormously by sector (ranging from less than 5% in energy and basic materials to over 40% in consumer goods)
• Strongly branded companies seemed to benefit from a cushion of 3 to 5% during the market meltdown of late 2008/early 2009
• In the two years following a merger, companies that used the more sophisticated forms of corporate brand outperformed those that used the two “expedient” forms of brand strategy by a margin of 5 to 10%

My parting advice to them was to use any request for ROI or brand value as an opportunity to engage in a discussion about the changes in customer and employee behavior that would result in signficant financial returns.  That would do two things:

• Convince the person asking the question that you are focused on improving the performance of the business
• Generate the working assumptions on which a credible model could be based

Tagged as: Business Strategy, Creating Value, Marketing Finance, Marketing Performance

{ 0 comments }

As readers of this blog will know, I have recently pulled the data on the value of publicly-traded companies with a market cap of over $1bn. 

Today I thought I would share some headline data on the ten year (1999 to 2008) average of tangible book value as a proportion of market value by geographical region:

• US and Canada  16%
• Europe  23%
• Middle East and Africa  32%
• Latin America  43%
• Asia  45%

In aggregate over the 10 year period, tangible assets accounted for only 24% of market value across all regions. 

As might be expected, data for June 2009 shows that all regions have seen a decline in the multiples at which their companies trade over tangible book value.  Across the board, the proportion of market value represented by tangible book value has risen significantly:

• US and Canada  21%
• Europe  30%
• Middle East and Africa  44%
• Latin America  44%
• Asia  51%

In aggregate, tangible book value now represents 33% of the $26 trillion in market value covered by my analysis.

Tagged as: Intangible Value, Marketing Finance, Measure Value

{ 2 comments }

I have pulled ten years of data on the value of publicly-traded companies with a market cap of over $1bn.  It has been a laborious process – but it is providing valuable insight into how the level of tangible assets/intangible value varies by industry.

I thought I would share some headline data on the ten year (1999 to 2008) average of tangible book value as a proportion of market value:

• Consumer Staples  8%
• Healthcare  10%
• Telecoms  10%
• Information Technology  19%
• Consumer Discretionary  21%
• Industrials  21%
• Financials  36%
• Energy  36%
• Basic Materials  37%
• Utilities  45%

In aggregate over the 10 year period, tangible assets accounted for only 24% of the market value.  This means that three quarters of the market value of the largest publicly-traded companies in the world was due to factors other than the tangible assets on their balance sheets.

Future posts will share some thoughts about what these intangible assets might be – and how their importance might differ by industry category.

Tagged as: Intangible Value, Marketing Finance, Measure Value

{ 0 comments }

I thought it would be interesting to dig a bit deeper into the extent of the increase in the proportion of aggregate market value attributable to tangible assets over the past 12 months.  In particular, I was intrigued to analyze the differing valuation dynamics for financial vs. non-financial firms.

The topline answer is, not surprisingly, that the valuation of financial services companies has seen the greatest change.  Two years ago, tangible book value represented 36% of the market value of financial companies.  In June last year, this number was 47%.  In June this year, it was 57%.

For non-financial firms, the increase in the proportion of market value represented by tangible assets was significant – but much less dramatic.  Tangible book value has risen from 19% of their market value in June 2007 to 22% last year, to 27% this year.

My point is that – whichever way you want to slice the data – intangible value represents the majority of market value in all but a few sectors.  The ambition of this blog (indeed, of Type 2 Consulting more generally) is to support companies as they seek to maximize the contribution of intangible assets to overall business performance.

Tagged as: Intangible Value, Marketing Finance, Measure Value

{ 0 comments }

I have just completed one of my periodic “deep dives” into the topic of intangible value.  As before (see the May 2009 archive for the previous postings), my initial objective is simply to document the extent of intangible value – how much of aggregate market value it represents, how this percentage varies by sector, and what has been the impact of the stock market decline on the proportion of intangible value.

This time, I decided to use as my data set all publicly-traded companies with a market cap of over $1bn as at the end of June for the past 10 years.  The yielded a data set of 1,488 companies in June 1999, rising steadily to a peak of 4,588 companies as at end June 2007, then declining precipitously to a total of 3,537 companies at end June this year.

The aggregate market value of these companies rose from $17 trillion in 1999 to a peak of $41 trillion in 2007, declining to $27 trillion in June of this year.

The proportion of market value represented by tangible book value (total assets minus total liabilties minus balance sheet intangibles) averaged 24% for the period June 1999 to June 2008.  In other words, only one quarter of the value of the world’s 3,500 largest publicly traded companies was explained by the tangible assets reported on their balance sheets.  In June 2009, that figure increased to 33% – but this still means that intangible assets account for two thirds of market value.

That observation bears repeating:  based on an analysis of the 3,500 largest publicly traded companies in the world as at end June 2009, INTANGIBLE VALUE REPRESENTS TWO THIRDS OF MARKET VALUE.  Based on my experience as a business consultant, I am convinced that insufficient attention is paid to intangible assets during the strategic planning process.

Tagged as: Intangible Value, Marketing Finance, Measure Value

{ 3 comments }

Today’s breakfast briefing hosted by the Council of Public Relations Firms on “Strategy, Leadership and Communications” went well.  Following a brief presentation of the research findings, we had a lively debate about the role of communications in strategy formation and execution. The research finding that generated the most discussion was that CEOs favor a more active role for communicators in the strategy formation process, but that communicators themselves hold a narrower view of their role, preferring to define it in terms of providing a “sounding board” rather than fully-fledged participation in strategy development.

It helped that the organizers had put together a diverse panel of communicators and strategists from different industries – Chris Atkins (Standard & Poor’s), Ray Jordan (Johnson & Johnson), Herb Muktarian (BAE Systems), Ana Maria Delgado (Organizacion Corona), Emily Yoo (Tokio Marine) and yours truly.  The diversity certainly led to a richness of perspective on the various issues.

I personally was heartened by the extremely articulate views that Herb and Chris expressed about the importance of communicators to define what specific skills/perspectives they were bringing to the top table, and the circumstances under which good communications were most valuable.  Their point was that it was a mistake to believe that the value of communications was intuitively obvious to senior management.

It was nice to hear the Vulcan/Earthling conundrum articulated by others!

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

This is the title of tomorrow’s breakfast session organized by Forbes at which I am a panelist.  The session presents the findings of research among the Forbes Advisory Panel about the role of communications in successful strategy development and execution.  Panel respondents were drawn from three groups – CEOs; senior strategists; and senior communications executives.  Not surprisingly, the importance of good communications was not contested by any of the three groups!

My planned contribution consists of three observations:

1. Since two thirds of the value of companies is represented by intangible value, and since that intangible value is the direct product of human ingenuity, then the business case for keeping those ingenious humans aligned and motivated via good communications is a no-brainer
2. The evidence from the market downturn is that companies with a strong brand/reputation (presumably the ones with the best communications) enjoyed a 4% “bonus” relative to their category peers
3. The evidence from the M&A market is that companies using the more nuanced forms of brand strategy (presumably the ones which put the greatest emphasis on good communications) outperform those using the more expedient forms of brand strategy by around 5% per year in the two years following the merger

Somehow, I also need to work in the observation that marketing is about more than communications.  I plan to remind the attendees that marketing’s mandate is about “conceiving, creating, communicating and delivering customer value” – not just the communications piece.  This final observation may be a little unwelcome since the event is sponsored by the Council of Public Relations Firms…

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

The question I posed in my last blog entry concerned the most appropriate way in which to measure the value of marketing.  To my mind, the best place to start is consider the entire “value added” of a business, then move on to consider what percentage of that value added can reasonably be ascribed to marketing.

Here are some key thoughts to bear in mind:

• All value added is the result of human ingenuity.  Tangible assets are inert – it is only the addition of human capital that makes a business more valuable than the sum of its tangible assets
• A company does not actually own its human capital (that is, the people themselves) but it does own the results of their work in the form of the unique business systems, new scientific discoveries, unique information and desirable brands that they generate
• Certain industries – basic materials and utilities, for example – rely heavily on physical assets, so the relative degree of value added of human capital will necessarily be lower than in industries – such as software - which employ very little by way of physical assets
• Just as the overall value added by human capital relative to tangible assets varies by industry, so does the relative importance of different forms of intangible value.  For example, scientific discovery is the dominant form of intangible value in the pharamceutical industry but, for consumer goods, it is effective brand management

My belief is that a convincing argument for the value of marketing needs to begin by documenting the importance of intangible value in each industry, and then advancing a compelling argument about the relative importance of marketing vs. other disciplines in creating that intangible value.

My next post will try to establish some rules of thumb.

Tagged as: Business Strategy, Creating Value, Marketing Finance, Marketing Performance

{ 0 comments }

By my calculation, I have sat through close to thirty presentations over the past two days at the Marketing Sciences INFORMS conference.  Each of the seven 1 1/2 hour sessions has comprised 4 or 5 individual presentations.  It is a bewildering amount of information to absorb – but the conference functions very effectively as a form of intellectual “speed dating,” allowing you to get a great overview of the body of research that is currently underway in any one of the 15 topic areas that the conference covers.

So, who did well in the dating stakes?  The best received presentations seemed to share the following characteristics:

• Outline an interesting hypothesis that seems intuitively reasonable
• Create an elegant, but robust, way of testing the hypothesis
• Draw clear implications for how the resulting information can be used

A common factor among the presentations that were less well received was, curiously, not the absence of the second and third elements.  It was the presumption that the importance of your topic was self-evident to your audience.

This reminded me of why the dialog between Marketing and Finance is often so difficult – it is because we make the mistake of assuming that the importance of marketing is self-evident.  We need to be more adept at articulating the basic hypothesis for how marketing adds value to the business.

Tagged as: Business Strategy, Creating Value, Marketing Finance

{ 0 comments }

Tomorrow I present the preliminary results of the research that I have been doing into whether there is evidence that certain types of corporate brand strategy are associated with abnormal post merger stock returns.  The hypothesis is that the more nuanced forms of brand strategy (that is, those that do not simply involve rebranding the target company with the acquirer’s brand, or maintaining the target company as a standalone subsidiary) result in greater engagement from employees, customers and investors – and that this facilitates a smoother post merger integration process.

The initial results are encouraging – analysis of 215 mergers using the Fama French 4 factors revealed an abnormal monthly stock return of 0.4% on a portfolio comprising companies using the “sophisticated” brand strategies versus a portfolio using the two “expedient” strategies mentioned above.  The number is not huge, but it is certainly enough to merit further investigation and an expansion of the data set.

We have now classified 350 mergers and the excess returns to the “sophisticated” strategies is still there.  I say “seems to be there” as I have just done a simple comparison of the dividend adjusted returns for each company deflated by the relevant sector index.  Based on a simple average of the results, it would appear that the average returns for companies using the “sophisticated” strategies exceeds the returns generated by companies using the “expedient” strategies by 5% over the two years following the completion of the merger.

I am looking forward to the session tomorrow and expect some great suggestions for how this analysis can be extended and enhanced.

Tagged as: Creating Value, M&A, Marketing Finance

{ 0 comments }

I have just completed a global analysis of the market value of publicly traded companies with a market cap of $500mn or more. The objective is to understand the types of asset that are driving business value across different industry sectors.  Is it the assets that appear on the balance sheet? Or is it the types of intangible asset (technology, art and relationships) that human beings are so good at creating but which do not generally appear on any balance sheet?

Yesterday I mentioned how the importance of tangible assets varied by industry. Today I want to share how it varies by country.

For the global economy as a whole, tangible book value accounts for around one third of market value.  However, tangible book value accounts for pretty much 100% of the value of publicly traded Russian companies (lots of mining, energy and heavy manufacturing there) and close to 90% of the value of Japanese companies.  At the other extreme, tangible book value accounts for only 15% of the value of US companies (reflecting the strength of the US in industries such as telecoms, infotech and healthcare).  Interestingly, the UK, France and have similar results to the US. The figure for Germany, Switzerland, India and China is around 30%.

My two next steps are:

• Generate a more granular understanding of which types of tangible asset predominate in each industry
• Identify the components of intangible value and how they vary in importance by industry

Tagged as: Intangible Value, Marketing Finance, Measure Value

{ 0 comments }