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Plehanov university prof mc_donald


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Plehanov university prof mc_donald

  1. 1. The Future of Marketing Professor Malcolm McDonaldPlekhanov Russian University of Economics 29th March 2012 Page 1
  2. 2. Agenda• A very brief history of marketing• What marketers must do to be respected by the board Page 2
  4. 4. 3 Principal Communities in Marketing • Practitioners • Consultants • Academics Page 4
  5. 5. Practitioners Page 5
  6. 6. • Technology• Production• Sales• Accountancy• Fads• Marketing Page 6
  7. 7. CAN YOU SAY WHAT YOUR STRATEGY IS? “Any strategy statement that cannot explain why customers should buy your product or service is doomed to failure”(Collis D, Rukstad M. “Can you say what your strategy is?” HBR April 2008 pp 82-91) Page 7
  8. 8. InterTech’s 5 Year Profit 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 8
  9. 9. 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 9
  10. 10. Page 10
  11. 11. The historic rift between marketers and the finance department, caused by marketing’s reluctance to be accountable for what they do, is as marked as ever. Tense relations “Marketers have between CFOs and constantly hidden behindMarketers are dividing a fog of measurers that boardrooms over the are based purely on value of marketing. tactical marketingOne in three CFOs said activity, rather than solid they did not believe financial metrics that are marketing to be relevant to the City”crucial in determining strategy. “Marketing in 3D” Deloitte Page 11
  12. 12. 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 • Deadlines structure • Off site Control Systems • Internal focus meetings • Always in • 10.00-16.00 hrs meetings • Lunch • Travel • Soft measurement • For selfSource: ‘Defining a Marketing Paradigm’ (Baker, S. Page 12
  13. 13. Consultants Page 13
  14. 14. FADS (300) • In Search of Excellence • Marketing Warfare • One Minute Manager • MBWA • Skunk Works • 7 Ss • Etc. Page 14
  15. 15. Academics Page 15
  16. 16. There are many excellent scientific journals devoted toneurosurgery. Month by month, they publish learnedpapers, each having been subjected to rigorous peerreview, that chronicle the latest discoveries, hypotheses,case-studies and innovations in the neurosurgery world.And the shocking thing is this: they are never read byneurosurgeons.Patients are put at risk because of the apparent disdainthat the practitioners have for academic theory and theaccumulated wisdom of others.You’ll have read the above with growing incredulity. Thatcan’t be true of neurosurgery, you think. And you’re right, thankGod. It isn’t true. But in another trade, muchcloser to home, it very nearly is. Jeremy Bullmore, ‘Bridging the Great Divide, Market Leader, Spring, 2006, page. 14 Page 16
  17. 17. The purpose of strategic marketing The overall purpose of strategic marketing and its principal focus is the identification and creation of sustainable competitive advantage© Professor Malcolm McDonald, Cranfield School of Management Page 17
  18. 18. Map of the marketing domain Define markets & understand value Monitor Asset Determine value value Base proposition Deliver value Page 18
  19. 19. Strategy Ineffective Effective Die Efficient Thrive (quickly)Tactics Die Inefficient Survive (slowly) Page 19
  20. 20. Financial Risk and Return High 1 2 Return 3 Low Low High Risk Adapted from Sri Srikanthan, Cranfield School of Management Page 20
  21. 21. 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 21
  22. 22. Excellent Strategies Weak Strategies• Target needs based • Target product categories segments • Make similar offers to all• Make a specific offer to each segments segment • Have little understanding of• Leverage their strengths their strengths and and minimise their weaknesses weaknesses • Plan using historical data• Anticipate the future Page 22
  23. 23. Differentiation is at the heart of successfulmarketing “For marketers, differentiation today is more challenging than at any time in history – yet it remains at the heart of successful marketing. More importantly, it remains the key to a company’s survival.” Page 23
  24. 24. Justifying investment in marketing assets Whilst accountants do not measure intangible assets, the discrepancy between market and book values shows that investors do. Page 24
  25. 25. Intangibles P and G paid £31 billion for Gillette, but bought only £4 billion of tangible assets- Gillette brand £ 4.0 billion- Duracell brand £ 2.5 billion- Oral B £ 2.0 billion- Braun £ 1.5 billion- Retail and supplier network £10.0 billion- Gillette innovative capability £ 7.0 billion TOTAL £27.0 billion(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005) Page 25
  26. 26. Balance sheet Assets Liabilities - Land - Shares - Buildings - Loans - Plant - Overdrafts - Vehicles etc. etc. £100 million £100 million © Professor Malcolm McDonald, Cranfield School of Management Page 26
  27. 27. Balance sheet Assets Liabilities - Land - Shares - Buildings - Loans - Plant - Overdrafts - Vehicles etc. etc. £100 million £900 million © Professor Malcolm McDonald, Cranfield School of Management Page 27
  28. 28. Balance sheet Assets Liabilities - Land - Shares - Buildings - Loans - Plant - Overdrafts - Vehicles etc. Goodwill £800m £900 million £900 million © Professor Malcolm McDonald, Cranfield School of Management Page 28
  29. 29. Page 29
  30. 30. Asset Breakdown for the top 10 countries byEnterprise Value (US$ millions, 2011) Page 30
  31. 31. Brands are key intangibles in most businessesBrands are estimated to represent at least 20% of the intangible value ofbusinesses on the major world stock markets. Brands combine with other tangibleand intangible assets to create value Developed Markets Brand Brand Marketing intangible 20% Patents Technology intangibles Software Intangible assets Customer relationships Customer intangible Other Intangible Distribution rights Assets Contract intangibles Assembled workforce 55% Business Goodwill Tangible Tangible assets Assets Illustrative 25% Source: Brand Finance Page 31
  32. 32. Brands Increasingly Drive Business Results Brands affect business value by influencing the behaviour of a wide range of Shell’s stakeholders, some of which directly impact Shell’s P&L (and hence value) STAKEHOLDER 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 Revenues energy assetTrademarks owners •(more opportunities) Employees • Better retention - current and potential Costs • Lower salary expectations Reputatio Shareholders / • Better qualified candidates Productivity n Bankers - individual and institutional • Higher PE ratio Indirect influence Other • Lower volatility Costs Influences Stakeholders Lower borrowing costs on value • Risk business and - government, media, opinion formers, • Better repayment conditions brand value academics, public, environmentalists
  33. 33. Map of the marketing domain Define markets Strategic zone & understand where metrics are defined value (Level 1) Asset Determine Monitor value value Base Proposition Measurement zone where metrics are applied Deliver (Levels 2 & 3) value Page 33
  34. 34. What is Marketing Due Diligence? Marketing Due Diligence Risk Assessment Market Risk: Strategy risk: Implementation risk: Is the market Will we get our Will we get our there? planned share? planned profit? Page 34
  35. 35. Market Risk Profile The marketing strategy has a higher• Product Category Existence probability of success if the product category is well established If the target segment is well• Segment Existence established If the sales volumes are well• Sales Volumes supported by evidence If the forecast growth is in line with• Forecast Growth historical trends If the pricing levels are conservative• Pricing Assumptions relative to current pricing levels Page 35
  36. 36. Ansoff matrix PRODUCTS increasing technological newness Present New Present Market Product Penetration DevelopmentMARKETSincreasingmarketnewness Market New Diversification Extension © Professor Malcolm McDonald, Cranfield School of Management Page 36
  37. 37. Market Share Risk Profile 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 • Target Market Definition If the proposition delivered to each segment is different from that delivered to other segments and addresses the needs which characterised the target segment • Proposition Specification If the strengths and weaknesses of the organisation are independently assessed and the choice of target and proposition leverages strengths and minimises weaknesses • SWOT Alignment If choice of target and proposition is different from that of major competitors • Strategy Uniqueness If changes in the external microenvironment and macroenvironment are identified and • Anticipation of market change their implications allowed for Page 37
  38. 38. Listen to how customers talk about categoryneedCustomer 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 38 Page 38
  39. 39. 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 39 Page 39
  40. 40. Shareholder Value Risk Profile • Profit Pool The marketing strategy has a higher probability of success if the targeted profit pool is high and growing • Profit Sources If the source of new business is growth in the existing profit pool • Competitor Impact If the profit impact on competitors is small and distributed If the internal gross margin • Internal Gross Margin assumptions are conservative Assumptions relative to current products • Assumptions of Other If assumptions regarding other Costs costs, including marketing support, are higher than existing costs Page 40
  41. 41. Map of the marketing domain Define markets Strategic zone & understand where metrics are defined value (Level 1) Asset Determine Monitor value value Base Proposition Measurement zone where metrics are applied Deliver (Levels 2 & 3) value Page 41
  42. 42. Overall Marketing Metrics Model Lead indicators Lag indicators ResourceIntention/ Plan/ Strategy/ Objectives/ Forecast/ allocation/actuality action achievement results profit 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 activity achievement by product profit & spend 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/ Relative to retention/ uptrading/ X-selling/ competitors regained Page 42 Product/customer mix
  43. 43. Map of the marketing domain Define markets Strategic zone & understand where metrics are defined value (Level 1) Asset Determine Monitor value value Base Proposition Measurement zone where metrics are applied Deliver (Levels 2 & 3) value Page 43
  44. 44. 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 nothing Note: Most executives compare the cash flow from promotion against the default scenario of doing nothing assuming, incorrectly, that the present health of the company will persist indefinitely if the investment is not made. For a better assessment of the promotion’s value, the comparison should be between the projected discounted cash flow and the more likely scenario of a decline in performance in the absence of promotional Figure 10 investment.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 44
  45. 45. Conditions determining a strong marketingstrategy• That the marketing strategy defines real target segments.• That the marketing strategy defines segment-specific value propositions• That the marketing strategy allocates resources differentially by segment or market• That the marketing strategy aligns to the market via SWOT Page 45
  46. 46. APPENDIX© Professor Malcolm Page 46McDonald
  47. 47. Valuing Key Market Segments Background/Facts •Risk and return are positively correlated, ie. as risk increases, investors require a higher return. •Risk is measured by the volatility in returns, ie. high risk is the likelihood of either making a very good return or losing all your money. This can be described as the quality of returns. •All assets are defined as having future value to the organisation. Hence assets to be valued include not only tangible assets like plant and machinery, but intangible assets, such as Key Market Segments. •The present value of future cash flows is the most acceptable method to value assets including key market segments. •The present value is increased by: - increasing the future cash flows - making the future cash flows ‘happen’ earlier - reducing the risk in these cash flows, ie. improving the certainty of these cash flows, and, hence, reducing the required rate of return.© Professor MalcolmMcDonald Page 47
  48. 48. Suggested Approach•Identify your key market segments. It is helpful if they can be classified on a vertical axis (a kind of thermometer) according to their attractiveness to your company. ‘Attractiveness’ usually means the potential of each for growth in your profits over a period of between 3 and 5 years. (See the attached matrix)•Based on your current experience and planning horizon that you are confident with, make a projection of future net free cash in-flows from your segments. It is normal to select a period such as 3 or 5 years.• These calculations will consist of three parts: • revenue forecasts for each year; • cost forecasts for each year; • net free cash flow for each segment for each year.•Identify the key factors that are likely to either increase or decrease these future cash flows.•These factors are likely to be assessed according to the following factors: • the riskiness of the product/market segment relative to its position on the ANSOFF matrix; • the riskiness of the marketing strategies to achieve the revenue and market share; • the riskiness of the forecast profitability (e.g. the cost forecast accuracy ).• Now recalculate the revenues, costs and net free cash flows for each year, having adjusted the figures using the risks (probabilities) from the above.•Ask your accountant to provide you with the overall SBU cost of capital and capital used in the SBU. This will not consist only of tangible assets. Thus, £1,000,000 capital at a required shareholder rate of retur 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 48
  49. 49. 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 49© Professor Malcolm McDonald