The only sustainable future for marketing                              - professionalism and accountability     by Profess...
Agenda• What goes wrong without excellent marketing• The uselessness of Profit and Loss Accounts  and Balance Sheets• In o...
Inter Tech’s 5 year performancePerformance (£million)      Base Year      1      2       3      4      5Sales Revenue     ...
Why Market Growth Rates Are                 Important        InterTech’s 5 Year Market-Based PerformancePerformance (£mill...
Measurement of segment profitability                                Total Segment Segment Segment Segment Segment Segment ...
Balance sheet   Assets           Liabilities - Land             - Shares - Buildings        - Loans - Plant            - O...
Balance sheet    Assets              Liabilities- Land              - Shares- Buildings         - Loans- Plant            ...
Balance sheet    Assets              Liabilities- Land              - Shares- Buildings         - Loans- Plant            ...
Intangibles    P and G have paid £31 billion for Gillette, but have bought only £4 billion of tangible assets-   Gillette ...
Brands Increasingly Drive Business ResultsBrands affect business value by influencing the behaviour of a wide range of She...
Asset Breakdown for the top 10 countries byEnterprise Value (US$ millions, 2011)                                          ...
The historic rift between marketers and the finance         department, caused by marketing’s reluctance to be          ac...
The Cultural Web (What senior non marketers believe about                                               marketers)        ...
The purpose of strategic marketingThe overall purpose of strategic marketing,and its principal focus is the identification...
Definition of marketingMarketing is a process for:• defining markets• quantifying the needs of the customer groups (segmen...
Map of the marketing domain          Define markets           & understand               value             Asset         D...
In capital markets, success is measured in termsof shareholder value added, having taken account  of the risks associated ...
Financial Risk and Return             High                  1Return            2                  3             Low       ...
The route to Sustainable Competitive Advantage (SCA)Differentiation        High                       Price               ...
Map of the marketing domain                   Define markets       Strategic zone                    & understand         ...
What is Marketing Due Diligence?                 Marketing Due                    Diligence                Risk Assessment...
Sensitivity to business risk                                                                                              ...
Market Risk Profile• Product Category Existence   The marketing strategy has a higher                               probab...
Ansoff matrix                           PRODUCTS                        increasing technological                  Present ...
Gap analysis summary                                              Profit improvement      Productivity improvement        ...
Market Share Risk Profile•   Target Market Definition        The marketing strategy has a higher probability of success   ...
Listen to how customers talk about category needCustomer View                   Supplier ViewAdvice• cutting costs        ...
Understand the different category buyers                               Business                     Business              ...
This is a friend I know…                   … she is a busy young lady                   … she looks after her health and l...
STRENGTHS    WEAKNESSESOPPORTUNITIES   THREATS                             Page 30
Strategic marketing planning exercise – SWOT analysis                1. SEGMENT DESCRIPTION            2. CRITICAL SUCCESS...
Market map – office equipment                                     Direct                                 47%     24%      ...
Shareholder Value Risk Profile•   Profit Pool                  The marketing strategy has a higher                        ...
Setting expectations of performance         P                                        P  high              Supplier busines...
Market attractiveness evaluation                Factor                         Scoring Criteria                           ...
Profit Risk•   Profit Risk     – The probability that your marketing strategy will create       the anticipated value even...
Profit Risk                                 Internal      OtherProfit    Profit   Competitor                              ...
The components of Profit Risk• Profit pool risk   – The marketing strategy has a higher probability of     achieving its a...
The components of Profit Risk• Sources of profit growth risk   – Marketing strategies have a higher probability of achievi...
The components of Profit Risk• Competitor impact risk   – The marketing strategy has a higher probability of     success i...
The components of Profit Risk• Internal gross margin assumptions risk    – Probabilities of success are increased if gross...
The components of Profit Risk• Other cost assumptions risk    – Probabilities of success are increased if other cost      ...
What do most marketing strategies look like in this                                       area?1. They do not quantify the...
Market segment objectives:                Directional Policy Matrix                                                       ...
Map of the marketing domain                   Define markets       Strategic zone                    & understand         ...
Overall Marketing Metrics Model                                         Lead indicators            Lag indicators         ...
Marketing Metrics Model  Business  element Corporate      Market              Impact           Marketing &       Budgetper...
Map of the marketing domain                   Define markets       Strategic zone                    & understand         ...
Expenditures to develop marketing assets makesense if the sum of the discounted cash flows they               generate is ...
Projected cash              DCF and NPV                                  flows from                  methods              ...
Over 40 years of research into the link between long run financial success and              excellent marketing strategies...
Key Elements of World Class Marketing1.    A deep understanding of the market place2.    Correct needs-based segmentation ...
APPENDIX 1             Page 53
Valuing Key Market SegmentsBackground/Facts Risk and return are positively correlated, ie. as risk increases, investors re...
Suggested Approach Identify your key market segments. It is helpful if they can be classified on a vertical axis (a kind o...
Portfolio analysis - directional policy matrix (DPM)                       Relative company competitiveness               ...
APPENDIX 2             Page 57
The Contents of a Strategic Marketing Plan (<20 pages)• Mission or Purpose Statement                                      ...
Key (revenue and profit growth)• from productivity     • by product for market for existing products from existing markets...
SWOT Analyses on Key Segments  • include pictorial representations of the SWOTs, such as bar charts  • highlight major con...
APPENDIX 3             Page 61
Are you getting these essential deliverables from your              strategic marketing plan?Score out of 10Market structu...
Score out of 10Scope· Are all the segments classified according to their relative potential for growth  in profits over th...
Marketing Plans 7e                     Page 64
Take marketing into the boardroom,                                 and connect marketing strategy to                      ...
Page 66
m.mcdonald@cranfield.ac.uk           www.malcolm-mcdonald.comProf. Malcolm McDonald free videos and downloads             ...
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  1. 1. The only sustainable future for marketing - professionalism and accountability by Professor Malcolm McDonald Plekhanov University of Economics 29th January 2013This presentation is the copyright of Professor Malcolm McDonald
  2. 2. Agenda• What goes wrong without excellent marketing• The uselessness of Profit and Loss Accounts and Balance Sheets• In order to become the drivers of corporate strategy, marketers must become more professional and more accountable financially Page 2
  3. 3. Inter Tech’s 5 year performancePerformance (£million) Base Year 1 2 3 4 5Sales Revenue £254 £293 £318 £387 £431 £454- Cost of goods sold 135 152 167 201 224 236Gross Contribution £119 £141 £151 £186 £207 £218- Manufacturing overhead 48 58 63 82 90 95- Marketing & Sales 18 23 24 26 27 28- Research & Development 22 23 23 25 24 24Net Profit £16 £22 £26 £37 £50 £55Return on Sales (%) 6.3% 7.5% 8.2% 9.6% 11.6% 12.1%Assets £141 £162 £167 £194 £205 £206Assets (% of sales) 56% 55% 53% 50% 48% 45%Return on Assets (%) 11.3% 13.5% 15.6% 19.1% 24.4% 26.7% Page 3
  4. 4. Why Market Growth Rates Are Important InterTech’s 5 Year Market-Based PerformancePerformance (£million) Base Year 1 2 3 4 5Market Growth 18.3% 23.4% 17.6% 34.4% 24.0% 17.9%InterTech Sales Growth (%) 12.8% 17.4% 11.2% 27.1% 16.5% 10.9%Market Share(%) 20.3% 19.1% 18.4% 17.1% 16.3% 14.9%Customer Retention (%) 88.2% 87.1% 85.0% 82.2% 80.9% 80.0%New Customers (%) 11.7% 12.9% 14.9% 24.1% 22.5% 29.2%% Dissatisfied Customers 13.6% 14.3% 16.1% 17.3% 18.9% 19.6%Relative Product Quality +10% +8% +5% +3% +1% 0%Relative Service Quality +0% +0% -20% -3% -5% -8%Relative New Product Sales +8% +8% +7% +5% +1% -4% Page 4
  5. 5. Measurement of segment profitability Total Segment Segment Segment Segment Segment Segment Market 1 2 3 4 5 6Percentage of market 100.0 14.8 9.5 27.1 18.8 18.8 11.0represented by segmentPercentage of all profits in 100.0 7.1 4.9 14.7 21.8 28.5 23.0total market produced bysegmentRatio of profit produced by 1.00 0.48 0.52 0.54 1.16 1.52 2.09segment to weight ofsegment in total populationDefection rate 23% 20% 17% 15% 28% 30% 35% Page 5
  6. 6. Balance sheet Assets Liabilities - Land - Shares - Buildings - Loans - Plant - Overdrafts - Vehicles etc. etc.£100 million £100 million Page 6
  7. 7. Balance sheet Assets Liabilities- Land - Shares- Buildings - Loans- Plant - Overdrafts- Vehicles etc.etc.£100 million £900 million Page 7
  8. 8. Balance sheet Assets Liabilities- Land - Shares- Buildings - Loans- Plant - Overdrafts- Vehicles etc.Goodwill £800m £900 million £900 million Page 8
  9. 9. Intangibles P and G have paid £31 billion for Gillette, but have bought only £4 billion of tangible assets- Gillette brand £ 4.0 billion- Duracell brand £ 2.5 billion- Oral B £ 2.0 billion- Braun £ 1.5 billion- Retail and supplier network £10.0 billion- Gillette innovative capability £ 7.0 billion TOTAL £27.0 billion(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005) Page 9
  10. 10. Brands Increasingly Drive Business ResultsBrands affect business value by influencing the behaviour of a wide range of Shell’sstakeholders, some of which directly impact Shell’s P&L (and hence value) STAKEHOLDER STAKEHOLDER FINANCIAL SHAREHOLDER PERCEPTION BEHAVIOUR IMPACT VALUE • Pay price premium Customers Revenues - individuals, • Buy more businesses Suppliers / • Lower prices Partners • Better terms Costs Brand - businesses, • Willingness to partner RevenuesTrademarks energy asset owners •(more opportunities) Employees • Better retention - current and potential Costs • Lower salary expectations Reputation Shareholders / Productivity • Better qualified candidates Bankers - individual and institutional • Higher PE ratio Indirect Other • Lower volatility Costs influence Stakeholders Influences on value • Lower borrowing costs Risk business and - government, media, opinion formers, • Better repayment conditions brand value academics, public, environmentalists Page 10
  11. 11. Asset Breakdown for the top 10 countries byEnterprise Value (US$ millions, 2011) Page 11
  12. 12. The historic rift between marketers and the finance department, caused by marketing’s reluctance to be accountable for what they do, is as marked as everTense relations betweenCFOs and Marketers are “Marketers have constantly hiddendividing boardrooms over behind a fog of measures that are the value of marketing. based purely on tactical marketing One in three CFOs said activity, rather than solid financial they did not believe metrics that are relevant to the City”. marketing to be crucial in determining strategy. “Marketing in 3D” Deloitte Page 12
  13. 13. The Cultural Web (What senior non marketers believe about marketers) Symbols • Cars • Offices Stories • Terminology Power and Myths • Statistics Structures • Mud doesn‟t stick • Lunch • Golden child • Research withheld • Quick promotion • Take credit for • No loyalty others work • Churn Paradigm • Jargon • Costs • Experience • Unaccountable • Untouchable Rituals • Expensive • Slippery Organisational • Planning Structures • Delegating • Lack of structure • Deadlines • Internal focus Control • Off site • Always in Systems meetings meetings • 10.00-16.00 hrs • Lunch • Travel • Soft measurement • For selfSource: „Defining a Marketing Paradigm‟ (Baker, S. 2000) Page 13
  14. 14. The purpose of strategic marketingThe overall purpose of strategic marketing,and its principal focus is the identification andcreation of sustainable competitiveadvantage. Page 14
  15. 15. Definition of marketingMarketing is a process for:• defining markets• quantifying the needs of the customer groups (segments) within these markets• putting together the value propositions to meet these needs, communicating these value propositions to all those people in the organisation responsible for delivering them and getting their buy-in to their role• playing an appropriate part in delivering these value propositions (usually only communications)• monitoring the value actually delivered.For this process to be effective, organisations need to be consumer/customer-driven Page 15
  16. 16. Map of the marketing domain Define markets & understand value Asset DetermineMonitor Base value value Proposition Deliver value Page 16
  17. 17. In capital markets, success is measured in termsof shareholder value added, having taken account of the risks associated with future strategies, the time value of money and the cost of capital. 17
  18. 18. Financial Risk and Return High 1Return 2 3 Low Low High RiskAdapted from Professor Keith Ward, Cranfield School of Management Page 18
  19. 19. The route to Sustainable Competitive Advantage (SCA)Differentiation High Price Sales Revenue High Volume Economies Low Business Lower of Scale Risk PositiveOperations SCA Costs Learning Low Financial NPV Curve Risk Gearing Interest Cover High CashFinancial Working Capital Ratio Flows Operational Leverage Page 19
  20. 20. Map of the marketing domain Define markets Strategic zone & understand where metrics are defined value (Level 1) Asset Determine Monitor Base value value PropositionMeasurement zonewhere metricsare applied Deliver(Levels 2 & 3) value Page Page 20 20
  21. 21. What is Marketing Due Diligence? Marketing Due Diligence Risk AssessmentMarket Risk: Strategy risk: Implementation risk:Is the market Will we get our Will we get our there? planned share? planned profit? Page 21
  22. 22. Sensitivity to business risk Marketing Due Diligence Risk Assessment Low market share High market share Low competitive intensity High competitive intensity High margins Low marginsLow growth intent High growth intent Low growth intent High growth intent Low growth intent High growth intent market risk MarketHighly sensitive Moderately sensitive to Risk: to market risk Share risk: share risk to Moderately sensitive to share risk Highly sensitive Profit risk: Moderately sensitive to Highly sensitive to profit risk profit risk Is the market Will we get our Will we get our there? planned share? planned profit? Low sensitivity to Moderately sensitive to Low sensitivity to Moderately sensitive to market risk market risk Low sensitivity to Moderately sensitive to share risk share risk profit risk profit risk Sensitivity to each source of risk is dependent on the source of growth, current share and planned margins Page 22
  23. 23. Market Risk Profile• Product Category Existence The marketing strategy has a higher probability of success if the product category is well established• Segment Existence If the target segment is well established If the sales volumes are well supported by• Sales Volumes evidence If the forecast growth is in line with• Forecast Growth historical trends If the pricing levels are conservative relative• Pricing Assumptions to current pricing levels Page 23
  24. 24. Ansoff matrix PRODUCTS increasing technological Present newness New Present Market Product Penetration DevelopmentMARKETSincreasing market newness Market New Diversification Extension Page 24
  25. 25. Gap analysis summary Profit improvement Productivity improvement Sales growth Existing assets Change Market Market Product asset base penetration development development Improve Cost Improve Asset Increasereduction Product/ Take New Convert Existing New Utilisation Increase Price/ competitors’ segments Non-users markets markets Customer usage (eg more/ Reduce mix customers better discounts sales calls) Cash and margin focus Growth focus Investment Divestment •Acquisition Redevelopment •Joint ventures of capital resources •etc Capital Utilisation focus Page 25
  26. 26. Market Share Risk Profile• Target Market Definition The marketing strategy has a higher probability of success if the target is defined in terms of homogeneous segments and is characterised by utilisable data If the proposition delivered to each segment is different• Proposition Specification from that delivered to other segments and addresses the needs which characterised the target segment If the strengths and weaknesses of the organisation are• SWOT Alignment independently assessed and the choice of target and proposition leverages strengths and minimises weaknesses If choice of target and proposition is different from that• Strategy Uniqueness of major competitors• Anticipation of market change If changes in the external microenvironment and macroenvironment are identified and their implications allowed for Page 26
  27. 27. Listen to how customers talk about category needCustomer View Supplier ViewAdvice• cutting costs • fast PAD family• future technology direction • multimedia FRADsHelp • PIX firewall• design & configuration• process engineering • Solutions• electron commerce • Gigabit EthernetRun • solutions• international network• disaster recovery • high performance • LAN support Page 27
  28. 28. Understand the different category buyers Business Business perfectionist Save my budget Radical thinkers Business Profit engineer general “Reward” “Relief” Radical Save my architect career Technical Conservative idealist technocrat Technical Page 28
  29. 29. This is a friend I know… … she is a busy young lady … she looks after her health and loves fresh produce … she drives to the supermarket on a Saturday morning … she reads Hello Magazine … she has a cat … she doesn‟t pay attention to the price of products … she does look out for promotionsI know 12m people in the UK as well as I knowMiss Jones Page 29
  30. 30. STRENGTHS WEAKNESSESOPPORTUNITIES THREATS Page 30
  31. 31. Strategic marketing planning exercise – SWOT analysis 1. SEGMENT DESCRIPTION 2. CRITICAL SUCCESS 3. WEIGHTING 4. STRENGTHS / WEAKNESSES It should be a specific part of FACTORS (How important ANALYSIS the business and should be In other words, how do is each of these How would your customers score you and very important to the customers choose? CSFs? Score each of your main competitors out of 10 on organisation out of 100) each of the CSFs? Multiply the score by the weight. 1 You Comp A Comp B Comp C Comp D 2 1 3 2 4 3 5 4 5. OPPORTUNITIES / THREATS Total 100 5 What are the few things outside your direct control that have had, and will have, an impact on this part of your business? THREATSOPPORTUNITIES 1 2 3 4 5 6. KEY ISSUES THAT NEED TO BE ADDRESSED What are the really key issues from the SWOT that need to be addressed? Page 31
  32. 32. Market map – office equipment Direct 47% 24% Type A 5% 3% Field Sales Dealer Chain Type A 7% 3% Independent Type B 0% 1% Dealer Chain Type B 1% 8% Independent Type C 15% 9% Dealer Chain Manufacturers Final Users Type C 7% 18% Independent 5% 4% VARs Buying 7% 10% Final Users Route to Market Consortia 4% 10% Retail Company’s Route to Market Direct 0% 4% Extracted from the complete map Response 0% 6% Other Page 32
  33. 33. Shareholder Value Risk Profile• Profit Pool The marketing strategy has a higher probability of success if the targeted profit pool is high and growing If the source of new business is growth in• Profit Sources the existing profit pool• Competitor Impact If the profit impact on competitors is small and distributed• Internal Gross Margin If the internal gross margin assumptions are conservative relative to current Assumptions products• Assumptions of Other Costs If assumptions regarding other costs, including marketing support, are higher than existing costs Page 33
  34. 34. Setting expectations of performance P P high Supplier business high/ medium strength with High customer Low C G C G High Strategic Star Strategic SelectiveMkt/Segment investment investmentattractiveness Status Streamline P Pmedium Pro-active Manage for low - maintenance cash Low C G C G Page 34
  35. 35. Market attractiveness evaluation Factor Scoring Criteria 10-7 6-4 3-0 Score Weighting Ranking 1. Market Size (£ millions) > €250 €51-250 < €50 5 15 0.75 2. Volume Growth (Units) > 10% 5-9% < 5% 10 40 4.0 3. Industry Profitability > 15% 10-15% < 10% 8 35 2.8 4. Competitive Intensity Low Medium High 6 10 0.6 Total 8.15This form illustrates a quantitative approach to evaluating market attractiveness. Each factor is scored, then multiplied by thepercentage weighting and totalled for the overall score. In this example, an overall score of 8.5 out of 10 places this market in thehighly attractive category. Page 35
  36. 36. Profit Risk• Profit Risk – The probability that your marketing strategy will create the anticipated value even if you win the anticipated market share from the predicted market size• Begins by explaining the sources of the growth in value generation• There are five Profit Risk factors – Taken from many years of research and incorporating the ideas of game theory based strategy development – 5 characteristics that differentiate low risk strategies from high risk ones Page 36
  37. 37. Profit Risk Internal OtherProfit Profit Competitor gross costpool sources impact margin assumptions risk risk risk risk risk Page 37
  38. 38. The components of Profit Risk• Profit pool risk – The marketing strategy has a higher probability of achieving its aims if the targeted profit pool is large and growing and the marketing strategy’s objectives only require a small share of this pool. – In such cases, these objectives will not have dramatically negative impacts on existing or potential competitors. Hence the probability of aggressive competitor reaction is much lower. Page 38
  39. 39. The components of Profit Risk• Sources of profit growth risk – Marketing strategies have a higher probability of achieving their aims if the source of profit growth is primarily from growth in the total profit pool. – Where profit growth comes totally from such overall growth in the profit pool, this means that no competitor actually loses existing profits as a direct result of this marketing strategy. Once again therefore the probability of competitor reaction is reduced. Page 39
  40. 40. The components of Profit Risk• Competitor impact risk – The marketing strategy has a higher probability of success if any adverse profit impact on competitors is small and evenly distributed. – The worst case is where the potential impact of the marketing strategy actually threatens the continued existence of a specific competitor. This competitor may well cease to behave in an economically rational way as it fights for survival. This can seriously damage the total profit pool of the market segment or complete industry. Page 40
  41. 41. The components of Profit Risk• Internal gross margin assumptions risk – Probabilities of success are increased if gross margin assumptions in the marketing strategy are conservatively based on existing, or otherwise provable, levels. – This risk tends to be critical when the marketing strategy is based on either ‘new’ products or on selling existing products into a new market segment where pricing and comparative cost information is not readily available. Page 41
  42. 42. The components of Profit Risk• Other cost assumptions risk – Probabilities of success are increased if other cost assumptions are conservatively based on existing levels. – The most common source of error in this area is the assessment of ongoing marketing support that will be needed to maintain the sales revenues that are predicted in the marketing strategy. Often high levels of launch marketing are included but these decline rapidly even where high levels of competitor response should be expected. Page 42
  43. 43. What do most marketing strategies look like in this area?1. They do not quantify the total profit pool2. They do not specifically identify sources of profit growth3. They do not quantify the impact on key competitors4. They often assume higher levels of gross margin in the future5. They frequently include significant improvements in other cost levels, even though the plans may require new product developments and launches Page 43
  44. 44. Market segment objectives: Directional Policy Matrix Analysis process Relative company competitiveness •Attractiveness of each segment (ranked) High Low •Projected net free cash flow (3/5yrs) - for each segment High Strategic •Key risk factors influencing cash flows Selectively invest/ invest •Risk assessment for each segment build Segmentattractiveness •Risk adjusted future cash flows per Pro-actively segment maintain Manage for cash •Deduct risk-adjusted cash flows from No the capital x cost of capital change for each segment Low •Aggregated positive net present value Present position Forecast position in 3 yrs Strategies to Critical success factors increase present value •Increase future cash flows •Cash flow happens earlier •Reducing the risk in the cash flows Page 44
  45. 45. Map of the marketing domain Define markets Strategic zone & understand where metrics are defined value (Level 1) Asset Determine Monitor Base value value PropositionMeasurement zonewhere metricsare applied Deliver(Levels 2 & 3) value Page 45
  46. 46. Overall Marketing Metrics Model Lead indicators Lag indicators Resource Forecast/Intention/ Plan/ Strategy/ Objectives/ allocation/ profitactuality action achievement results spend PFs budget actions, esp. product corporateBusiness funds & performance marketing marketelement time segment HFs £ what who £ what who ms% corporate budget sales£ rev£ £ what who CSFs profit£ profit£ £ what whoMeasure- application costs, metrics on performance turnover,ment of spend activity achievement by product profit & milestones of factor to market shareholder & outputs required level segment valuePositioningof issues inthe model Cost to achieve Required by Market growth Responsibilities customers. Customer acquisition/ retention/ Relative to uptrading/ X-selling/ regained competitors Product/customer mix Channel performance
  47. 47. Marketing Metrics Model Business element Corporate Market Impact Marketing & Budgetperformance segments factors other actions resource Segment needs Segment attributes Productivi Other ty factors actions Qualifyin Marketing g factors actionsCorporate Competitive Budget advantage Revenue factors Profit Segment Funds outcomes: Time sales, GM, MSForecast/ Objectives/ Strategy/ Plan/ Resourceresults outcomes response action allocation/ spend Future/ actuality Page 47
  48. 48. Map of the marketing domain Define markets Strategic zone & understand where metrics are defined value (Level 1) Asset Determine Monitor Base value value PropositionMeasurement zonewhere metricsare applied Deliver(Levels 2 & 3) value Page 48
  49. 49. Expenditures to develop marketing assets makesense if the sum of the discounted cash flows they generate is positive. Page 49
  50. 50. Projected cash DCF and NPV flows from methods investing in a implicitly make promotion A this comparison B Companies should be Assumed cash C making this flow resulting comparison from doing More likely nothing cash flow resulting from doing nothingNote: Most executives compare the cash flow frompromotion against the default scenario of doing nothingassuming, incorrectly, that the present health of thecompany will persist indefinitely if the investment is notmade. For a better assessment of the promotion’s value,the comparison should be between the projecteddiscounted cash flow and the more likely scenario of adecline in performance in the absence of promotional Figure 10investment. Adapted from Christensen CM et al, ( 2008 ) 2 + 2 + 2 + 2 = £-0.6 million £ - 7 million + (1+r) (1+r)² (1+r)³ (1+r)4 £ - 1 million + 2 + 2 + 2 + 2 = £5.4 million (1+r) (1+r)² (1+r)³ (1+r)4 Page 50
  51. 51. Over 40 years of research into the link between long run financial success and excellent marketing strategies reveal the following:Excellent Strategies Weak Strategies• Define markets in terms of needs • Define markets in terms of• Target needs based segments products• Make a specific offer to each • Target product categories segment • Make similar offers to all segments• Leverage their strengths and • Have little understanding of their minimise their weaknesses strengths and weaknesses• Anticipate the future • Plan using historical data• Spell out the financial effectiveness • Make unjustified forecasts of of marketing expenditure revenue and profits Page 51
  52. 52. Key Elements of World Class Marketing1. A deep understanding of the market place2. Correct needs-based segmentation and prioritisation3. Segment-specific propositions4. Powerful differentiation, positioning and branding5. Effective strategic marketing planning processes6. Long-term integrated marketing strategies7. A deep understanding of the needs of major customers8. Market/customer-driven organisation structures9. Professionally-qualified marketing people10. Institutionalised creativity and innovation Page 52
  53. 53. APPENDIX 1 Page 53
  54. 54. Valuing Key Market SegmentsBackground/Facts Risk and return are positively correlated, ie. as risk increases, investors require ahigher return. Risk is measured by the volatility in returns, ie. high risk is the likelihood of eithermaking a very good return or losing all your money. This can be described as thequality of returns. All assets are defined as having future value to the organisation. Hence assets to be valued include not only tangible assets like plant and machinery, but intangible assets, such as Key Market Segments. The present value of future cash flows is the most acceptable method to value assets including key market segments. The present value is increased by:- increasing the future cash flows- making the future cash flows „happen‟ earlier- reducing the risk in these cash flows, ie. improving the certainty of these cash flows,and, hence, reducing the required rate of return. Page 54
  55. 55. Suggested Approach Identify your key market segments. It is helpful if they can be classified on a vertical axis (a kind of thermometer) according to their attractiveness to your company. „Attractiveness‟ usually means the potential of each for growth in your profits over a period of between 3 and 5 years. (See the attached matrix) Based on your current experience and planning horizon that you are confident with, make a projection of future net free cash in-flows from your segments. It is normal to select a period such as 3 or 5 years. These calculations will consist of three parts: revenue forecasts for each year; cost forecasts for each year; net free cash flow for each segment for each year. Identify the key factors that are likely to either increase or decrease these future cash flows. These factors are likely to be assessed according to the following factors: the riskiness of the product/market segment relative to its position on the ANSOFF matrix; the riskiness of the marketing strategies to achieve the revenue and market share; the riskiness of the forecast profitability (e.g. the cost forecast accuracy ). Now recalculate the revenues, costs and net free cash flows for each year, having adjusted the figures using the risks (probabilities) from the above. Ask your accountant to provide you with the overall SBU cost of capital and capital used in the SBU. Thiswill not consist only of tangible assets. Thus, £1,000,000 capital at a required shareholder rate of return of10% would give £100,000 as the minimum return necessary. Deduct the proportional cost of capital from the free cash flow for each segment for each year. An aggregate positive net present value indicates that you are creating shareholder value – ie. achieving overall returns greater than the weighted average cost of capital, having taken into account the risk associated with future cash flows. Page 55
  56. 56. Portfolio analysis - directional policy matrix (DPM) Relative company competitiveness High Low High ? Invest/ build Segment NB. Suggested time period -attractiveness 3 years Maintain Manage for Low No cash change Present position Forecast position in 3 years Page 56
  57. 57. APPENDIX 2 Page 57
  58. 58. The Contents of a Strategic Marketing Plan (<20 pages)• Mission or Purpose Statement Products• Financial Summary Existing New Existing 1 2 Markets Revenue New Profit 3 4 t.0 T+1 T+2 T+3 Page 58
  59. 59. Key (revenue and profit growth)• from productivity • by product for market for existing products from existing markets• from new products in existing markets• from existing products in new markets• from new products in new marketsPlus a few words of commentaryMarket Overview/Summary Market definition Market map showing vol/rev flows from supplier through to end user, with major decision points highlighted Where appropriate, provide a future market map Include commentary/conclusions/implications for the company At major decision points, include key segments Page 59
  60. 60. SWOT Analyses on Key Segments • include pictorial representations of the SWOTs, such as bar charts • highlight major conclusions/issues to be addressedPortfolio Summaries of the SWOTs • include Directional Policy Matrix (DPM) summaries of:- - the attractiveness of the segments over the next 3-5 years - the current relative competitive position of your company in each segment - the planned competitive position of each segment over the next 3-5 yearsMarketing Objectives and Strategies for the next 3-5 years • include objectives (volume, value, market share, profit, as appropriate) for the next 3-5 years for each segment as represented by the planned position of each circle on the DPM • include strategies (the 4XPs) with costs for each objectiveConsolidated Budget for the next 3-5 years • this will be a consolidation of all the revenues, costs and profits for the next 3-5 years and should accord with the financial summary provided earlier Page 60
  61. 61. APPENDIX 3 Page 61
  62. 62. Are you getting these essential deliverables from your strategic marketing plan?Score out of 10Market structure and segmentation• Is there a clear and unambiguous definition of the market we are interested in serving?• Is it clearly mapped, showing product/service flows, volumes/values in total, our shares and critical conclusions for our organisation?• Are the segments clearly described and quantified? These must be groups of customers with the same or similar needs, not sectors.• Are the real needs of these segments properly quantified with the relative importance of these needs clearly identified?Differentiation• Is there a clear and quantified analysis of how well our company satisfies these needs compared to competitors?• Are the opportunities and threats clearly identified by segment? Page 62
  63. 63. Score out of 10Scope· Are all the segments classified according to their relative potential for growth in profits over the next three years and according to our company’s relative competitive position in each?· Are the objectives consistent with their position in the portfolio? (volume, value, market share, profit)· Are the strategies (including products, services and solutions) consistent with the objectives?· Are the measurement metrics proposed relevant to the objectives and strategies?· Are the key issues for action for all departments clearly spelled out as key issues to be addressed?Value capture· Do the objectives and strategies add up to the profit goals required by our company?· Does the budget follow on logically and clearly from all the above, or is it merely an add on? Page 63
  64. 64. Marketing Plans 7e Page 64
  65. 65. Take marketing into the boardroom, and connect marketing strategy to shareholder value Available to order now from…www.malcolm-mcdonald.com – insert offer code ATZ6 into the basket and receive 10% off plus free post and packing! Page 65
  66. 66. Page 66
  67. 67. m.mcdonald@cranfield.ac.uk www.malcolm-mcdonald.comProf. Malcolm McDonald free videos and downloads @www.oxlearn.com
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