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.

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Too frequently, marketers take this question at face value.  In my experience there are actually at least four questions for which the ROI question serves as a cipher:

1. “Is marketing on the same page as the rest of the business in terms of how it defines your objectives?”
2. “Can you explain why marketing matters to the business – after all, don’t good products sell themselves?”
3. “Is marketing willing to be subject to similar performance measurement standards as the other areas of the business?”
4. And, finally, “What actually is the ROI on our marketing?”

In other words, the ROI question is frequently not actually about ROI.  As illustrated above, the person asking the question is often not looking for a mathematical calculation – he/she is looking for evidence of the following things:

• ALIGNMENT: Evidence that marketing defines its mandate in terms of increasing the overall value of the business, rather than increasing brand value or customer preference
• CAUSALITY:  Explanation of how marketing adds to the value of the business
• MEASUREMENT:  Identification of the business metrics on which marketing has the greatest impact

Of course, there are times when the question “what’s the ROI on our marketing?” means exactly that.  If so, marketers need to be aware that ROI is a short term performance metric that only applies to impact (return) generated in the current time period.  So all that the ROI calculation will prove is that the specific investment being evaluated is going to generate more profit than it costs to fund – not that the entirety of marketing is value positive.

There is a clear business need for a demonstration of the contribution of marketing to business value over the longer term, and via a coherent set of activities rather than just the ROI on a single activity in isolation.  In other words, the quantification of the contribution of marketing to overall business value.

In my opinion, a good rule for marketers to follow is to assume that the ROI question is really about the business impact of marketing and to respond with evidence of alignment, causality, and the impact on key business metrics before you consider an actual ROI calculation.

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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.

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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.

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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.

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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.

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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.

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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.

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What is marketing?

It is a simple question – but one to which I very rarely hear a satisfactory answer, even from marketing professionals.  Generally, the answer involves a description of the activities of marketing (typically, the 4Ps) or an inventory of the media or channels used by marketing.  All of these are valid descriptions of what marketing does, but not of what marketing is.

Sometimes, I get a more philosophical answers along the lines of “marketing is creativity” or “marketing is inspiration.”  Again, these may tell me how marketing operates, but not what it is.

If marketing wants to be taken seriously as a business discipline, it needs to accept that its role – in common with every other discipline in the company – is to create business value.  It is to figure out how its contribution to how the company can create an economic surplus.

The best definition of marketing is therefore “the creation, communication and delivery of customer value” because it explains the unique contribution of marketing to the success of the business.  It articulates how marketing informs how the resources of the company can be used to create customer value at an economic cost that leaves the business with an attractive economic return.

The core of marketing is therefore not creativity, nor the 4 Ps, nor communications – it is the discipline of understanding what customers value, and using this knowledge to define how the company can develop the most compelling value proposition to them.

This is not well understood by marketers, so it is hardly surprising that it is not understood by the other business disciplines.  Until we directly challenge the myth of “rational economic maximization” as the basis for customer value, we will never be able to make a strategic case for marketing.  If customers are assumed to be rational, then the role of marketing is to get customers to behave irrationally.

That is why marketing’s current obsession with ROI is well-intentioned, but misguided.  The challenge is not whether we can demonstrate that marketing campaigns are generating an adequate short term financial return (this is what ROI measures) – the challenge is to demonstrate the contribution of marketing to business strategy.

This means focusing on value proposition, and not on marketing tactics.  It means demonstrating that customer value is a complex concept that includes multiple forms of benefit (not just narrowly, functionality and price) and identifying the ways in which the company can create sustainable competitive advantage by developing a value proposition that is uniquely well aligned to the requirements of a core set of customers.

For me, the essence of marketing is therefore three things:

1. Understanding customer value
2. Developing a unique value proposition and the core segments to be targeted
3. Creating the go to market strategy

As marketers, we are to blame for the low esteem for marketing in the boardroom.  We have spent far too much time focused on the mechanics of marketing – and far too little time on the hard work of marketing strategy.

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