Marketing Performance Measures and Impact of Marketing Actions

IBS MM-II
Sessions 9-10
Harish Keswani

Interface of Marketing with Finance

Marketing Performance Measures
(Ref: Principles of Marketing – Appendix 2)
• P&L Statement (Income statement, operating
statement)
• Difference between Balance Sheet and P&L ?

• P&L -Statement of Financial Performance (eg. for a product or
division)
• Balance Sheet – Statement of Financial ‘Position’
Fixed costs &
Overheads

• Break Even Sales
– Break Even Sales = Fixed Costs / Contribution Margin of Fixed costs
– To compute Total Cost = Fixed costs + Variable Cost
• Market Share = Company sales / Market Sales
• Gross Margin % = Gross Margin / Net Sales
• Net Profit % = Net Profit / Net Sales
• Operating Expenses % = Total Expenses / Net Sales
• Inventory Turnover Rate =
Cost of Goods sold/ Average Inventory at cost
(Higher the better, indicates better efficiency and profitability)
• ROI (Return on Investment)=
Net profit before tax/ Investment

• Net Marketing Contribution
= Net Sales – cost of goods sold – marketing expenses
(Higher the better)
• Marketing Return on Sales and investment
– Marketing ROS = Net marketing contribution/ Net Sales
(Higher the better)
– Marketing ROI = Net marketing contribution/ Marketing expenses
(Higher the better)
• COSTS :
– FIXED COSTS : Costs which remain constant irrespective of production
quantity (eg. Rentals, salaries of core permanent people, marketing
expenses etc)
– VARIABLE COSTS : Costs which are directly propotional and dependent on
quantity producted (eg. Cost of goods, ie raw material, packaging, etc)

Impact of Marketing Strategies & Action
Plans

Marketing Actions The Firm
Tactical Actions Strategies
Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm

Tactical Actions
Strategies
Promotion strategy,
Product strategy
Channel strategy, etc.
Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm

Strategies
Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm
Tactical Actions
Advertising
Service Improvements
Branding, Loyalty

Customer Impact
Impact on satisfaction,
Impact on attitudes, loyalty
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm

Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Brand Equity
Customer Equity
Market Position
Financial Position
Value of the Firm

Customer Impact
Market Impact
Market share impact
Sales impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm

Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Market share,
Sales, etc.
Financial Position
Value of the Firm

Customer Impact
Market Impact
Financial Impact
ROI, IRR, NPV, EVA
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm

Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Profits
Cash flow
Other measures
Value of the Firm

Customer Impact
Market Impact
Financial Impact
Impact on Firm Value
Forward thinking
Hinges on growth prospects
Marketing Assets
Market Position
Financial Position
Value of the Firm

Customer Impact
Market Impact
Financial Impact
Impact on Firm
Value
Marketing Assets
Market Position
Financial Position
Value of the Firm
Market capitalization
Total shareholder return

Financial Analysis of Marketing Tactics
To boost business -
• Option 1 : Increase advertising expenditure
Increase in Sales =
Increase in Cost / Contribution Margin of that cost head
(Similar to break even computation which is = total cost/contribution
margin)
• Factor to consider with increased sales targets
– Increase sales means increase in market share (if market size is stable)

To boost business -
• Option 2 : Increase Distribution coverage by hiring more sales
people
• One possible tool : Workflow method to determine increase
in sales team size
No. of Sales People =
No. of customers * Frequency of calls * Length of calls
_____________________________________________
Time avg sales person has for sales activities per year
• Now if this adds to cost by X
Then Additional sales required = X / Contribution margin

To boost business -
• Option 3 : Decrease Price (or give discounts)
• How do we compute how much increase in sales is required
to compensate for the discount to maintain break even
• Assume for a product Z
– Total Sales = Rs. 1 billion
– Current Unit Price = Rs. 17,000
– Unit Variable Cost % =76% = Rs. 12,920
– Unit Contribution = Rs. 4,080 (24%)

• Option 3 : Decrease Price (or give discounts)….cont
• Assume we want to decrease price by 10% for Product Z
– New Price = Rs.15,300
– Unit Variable cost = Rs.12,920 (This will not change just because
we want to reduce the price)
– Unit Contribution = Rs. 2,380 (15.56%)
• In order to maintain total contribution we can say
– New contribution margin X New Sales Level = Original Contribution
– So New Sales Level = Original Contribution/ New contribution margin
– Rs. 240 million / 0.1556 = Rs. 1.543 Billion
– Thus Sales must increase by 543 million in order to break even on a 105 price
reduction
– This again will point towards increasing market share proportionately

• Option 4 : Extend Product line with a lower priced product
• Sometimes adding new products in same category
‘Cannibalize’ existing products ,i.e eat into sales of existing
product.
• In order for this strategy to work, the total contribution
margin to fixed costs has to be maintained or increased.
• Eg. explained

Interface of Marketing with Operations
Toyota – Case Study

Toyota Motor Company: Losing its Quality Edge?
• On January 21, 2010, Toyota Motor Corporation (Toyota) recalled 2.3
million select Toyota Division vehicles in the US.
• The recall was done to fix sticking accelerator pedals which caused
unintended acceleration, leading to accidents. Earlier in November 2009
too, the company had recalled 4.2 million cars in the US to rectify
accelerator pedals which were getting lodged under the floor mats of the
vehicles.
• Subsequently on February 1, 2010, Toyota suspended the sales of eight of
its popular car models involved in the recall and discontinued production
at six of its North American car-assembly plants in response to growing
customer concerns.
• The eight car models represented 57% of Toyota’ s sales in the US in 2009
• The scale of the recalls was huge. The situation was serious. It points to
the possible dangers a global economy can bring to large corporations.

• Automotive operations accounted for 89% of
Toyota’ s total revenues in 2008.
• The company manufactured vehicles at 53
production sites in 27 countries around the globe.
• In the fiscal year 2008, Toyota sold approximately
8.91 million vehicles in 170 countries and regions
under the Toyota, Lexus, Daihatsu, and Hino
brands. North America was its biggest market
followed by Japan, Europe, and Asia.

General Perception about Toyota before recalls –
• Toyota recognized quality as one of the most important factors
affecting customer satisfaction and strove to achieve excellence in
manufacturing quality products at competitive prices.
• Toyota inplemented Qulaity frameworks like Kaizen (continuous
improvement), PDCA (plan, do, check, action), Pokayoke (mistake-
proofing), and Just-in-Time (JIT) to achieve excellence in production.
• To ensure zero defects in the finished product, Toyota set up quality
assurance systems across various divisions, including development,
purchasing, and production.
• Because of its competent quality process system, the Toyota brand
had become synonymous with quality, reliability, and durability,
experts said.

TMHE Improves Efficiency & Quality - The Toyota Production System (TPS)
http://www.youtube.com/watch?v=Tc9IQLJl4AU

A U-turn in perception of Toyota after recalls
• Some analysts felt that the Japanese company had
succumbed to the pressures of rapid globalization and
sacrificed its legendary quality to reach the goal of
becoming the number one auto maker in the world.
According to them, a series of recalls in the US, China,
and Europe had tainted the automaker’ s image of
manufacturing reliable cars and trucks
• “Toyota’ s “reputation for long-term quality is finished.
People aren’ t going to buy Toyotas, period. It doesn’ t
matter which model. What’ s happened is sufficient to
keep people out of the stores”

Some analysts remained loyal and confident
• Some analysts were positive that Toyota would
not lose its quality edge. According to them, the
fact that the car maker had discontinued sales of
the affected models until the recall issues were
resolved was proof of its commitment to quality
• They need to do something warmer, something
that demonstrates caring. I think they can
recover, but that window is closing. They will
have to do something big and fast

• Though the company was hit by a series of quality issues in 2006, it
continued with its global expansion spree. In 2007, Toyota added an
average of two new factories a year to its global network.
• By 2007, about two-third of Toyota's workforce was located outside Japan
and the company could no longer rely on word of mouth to convey its
managerial and manufacturing methods to workers at its overseas plants.
• As a result, quality suffered. There were complaints from customers that
oil-sludge buildup had destroyed their vehicles’ engines. Between 2004
and 2007, Toyota recalled 9.3 million vehicles, a number exceeding its
total annual output.
• In the 2007 J.D. Power survey, the Toyota brand scored below that of
Hyundai
• Despite the recalls, in 2008, Toyota realized its goal and surpassed GM as
the world’ s largest car maker in terms of sales volume

• Critics alleged that Toyota had had to
compromise on quality to achieve the number
one spot in the auto industry. The ranking
came at the expense of the company’ s
engineering and quality control prowess, they
said.
• As the intensity of the recalls increased,
experts began to question Toyota’ s reputation
as a quality automaker. Toyota’ s position
began to slip in consumer satisfaction surveys
too

Discussion, reasons :
• Rapid expansion overseas, increased demands on
production
• Most of the production outside Japan may have taken
time to adapt the Quality Systems setup in Japan.
• Outsourcing of certain components’ design
• Chasing Sales volume and Market share put pressure
on manufacturing to ramp up faster
• Cost cutting measures may have impacted quality
How does this impact ‘ Brand Image’
• “It takes a very long time to establish a reputation for
safety and reliability. It doesn’ t take very long to lose
it”

Solutions:
• Experts felt that in order to prevent its image from slipping
further, Toyota had to focus on its quality aspect. The
company needed to closely monitor quality and overhaul
its design, engineering, and manufacturing operations.
• According to industry analysts, Toyota, known for its
reputation for quality, had to effectively communicate its
strategy to customers to retain its position as one of the
biggest auto makers in the world.
• Toyota should contact owners individually in order to get
them into dealerships for repairs, and then compensate
them by offering a rebate or another free service. Toyota
must avoid creating more bad feelings among consumers,
they said.

Solutions:
• On January 31, 2010, in order to rebuild its
decades-long reputation for quality and to
promote the reliability and safety of its
vehicles, Toyota launched a major public
relations campaign. The company ran a full-
page print ad in major newspapers explaining
its decision to halt production of the defective
cars.
• A top executive from the company was likely to
appear on television to discuss the recalls.
• Toyota planned to set up a global quality
special task force that would conduct regional
quality improvement activities around the
world. The committee headed by the president
was to inspect every process —quality in
design, quality in production, quality in sales,
and quality in service and provide customers
with satisfying products in each and every
region

Solutions:
• To develop quality-management professionals, Toyota would start an
“Automotive Center of Quality Excellence” in key regions.
• Based on the improvements, Akio planned to seek evaluation from
outside experts regarding its newly improved quality-control
management and listen to each and every customer and improve
quality.
• Talking about his initiatives, Akio said, “Under the banner, “Let’ s build
better cars”, we will go back to the basics of “customer first” and
“genchi genbutsu”, and once more, deeply consider what “customer
first” really means.
• All our employees around the world, all of our dealers, and all of our
suppliers will unify in their utmost efforts to regain the trust of our
customers as soon as possible.
• Discuss : Role of marketing !

While solutions were being worked out :
• In the fiscal year through March 2010, Toyota expected a
net loss of 200 billion yen despite efforts to cut costs by
440 billion yen during the year.
• It was reported that global recalls of about 8 million
vehicles would reduce the demand by 100,000 vehicles
and cost the company 100 billion yen.
• In the three months ending March 31, 2010, sales of
503,000 vehicles were predicted in North America.
• However, analysts felt that the company would not able to
achieve the sales target as customers were reluctant to
buy Toyota vehicles due to quality problems.

Next Session Topics :
Interface of Marketing with HRM
Coaching a Sales Team

Marketing Performance Measures and Impact of Marketing Actions

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