1. The Future of Marketing
Professor Malcolm McDonald
Plekhanov Russian University of Economics
29th March 2012
Page 1

2. Agenda
• A very brief history of marketing
• What marketers must do to be respected by the
board
Page 2

3. A VERY BRIEF HISTORY
OF MARKETING
Page 3

4. 3 Principal Communities in Marketing
• Practitioners
• Consultants
• Academics
Page 4

5. Practitioners
Page 5

6. • Technology
• Production
• Sales
• Accountancy
• Fads
• Marketing
Page 6

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. InterTech’s 5 Year Profit Performance
Performance (£million) Base Year 1 2 3 4 5
Sales Revenue £254 £293 £318 £387 £431 £454
- Cost of goods sold 135 152 167 201 224 236
Gross 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 24
Net Profit £16 £22 £26 £37 £50 £55
Return on Sales (%) 6.3% 7.5% 8.2% 9.6% 11.6% 12.1%
Assets £141 £162 £167 £194 £205 £206
Assets (% 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. InterTech’s 5 Year Market-Based Performance
Performance (£million) Base Year 1 2 3 4 5
Market 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. Page 10

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 behind
Marketers are dividing a fog of measurers that
boardrooms over the are based purely on
value of marketing. tactical marketing
One 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. 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 self
Source: ‘Defining a Marketing Paradigm’ (Baker, S. Page 12

13. Consultants
Page 13

14. FADS (300)
• In Search of Excellence
• Marketing Warfare
• One Minute Manager
• MBWA
• Skunk Works
• 7 Ss
• Etc.
Page 14

15. Academics
Page 15

16. There are many excellent scientific journals devoted to
neurosurgery. Month by month, they publish learned
papers, each having been subjected to rigorous peer
review, that chronicle the latest discoveries, hypotheses,
case-studies and innovations in the neurosurgery world.
And the shocking thing is this: they are never read by
neurosurgeons.
Patients are put at risk because of the apparent disdain
that the practitioners have for academic theory and the
accumulated wisdom of others.
You’ll have read the above with growing incredulity. That
can’t be true of neurosurgery, you think. And you’re right, thank
God. It isn’t true. But in another trade, much
closer to home, it very nearly is.
Jeremy Bullmore, ‘Bridging the Great Divide,
Market Leader, Spring, 2006, page. 14
Page 16

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. Map of the marketing domain
Define markets
& understand
value
Monitor Asset Determine value
value Base proposition
Deliver
value
Page 18

19. Strategy
Ineffective Effective
Die
Efficient Thrive
(quickly)
Tactics
Die
Inefficient Survive
(slowly)
Page 19

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. Key Elements of World Class Marketing
1. A deep understanding of the market place
2. Correct needs-based segmentation and prioritisation
3. Segment-specific propositions
4. Powerful differentiation, positioning and branding
5. Effective strategic marketing planning processes
6. Long-term integrated marketing strategies
7. A deep understanding of the needs of major customers
8. Market/customer-driven organisation structures
9. Professionally-qualified marketing people
10. Institutionalised creativity and innovation
Page 21

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. Differentiation is at the heart of successful
marketing
“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. 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. 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. 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. 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. 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. Page 29

30. Asset Breakdown for the top 10 countries by
Enterprise Value (US$ millions, 2011)
Page 30

31. Brands are key intangibles in most businesses
Brands are estimated to represent at least 20% of the intangible value of
businesses on the major world stock markets. Brands combine with other tangible
and 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. 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 asset
Trademarks
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. 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. 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. 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. Ansoff matrix
PRODUCTS
increasing technological newness
Present New
Present Market Product
Penetration Development
MARKETS
increasing
market
newness
Market
New Diversification
Extension
© Professor Malcolm McDonald, Cranfield School of
Management
Page 36

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. Listen to how customers talk about category
need
Customer View Supplier View
Advice
• cutting costs • fast PAD family
• future technology direction • multimedia FRADs
Help • PIX firewall
• design & configuration
• process engineering • Solutions
• electron commerce • Gigabit Ethernet
Run • solutions
• international network
• disaster recovery • high performance
• LAN support
Page 38
Page 38

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. 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. 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. Overall Marketing Metrics Model
Lead indicators Lag indicators
Resource
Intention/ Plan/ Strategy/ Objectives/ Forecast/
allocation/
actuality action achievement results profit
spend
PFs
budget actions, esp. product corporate
Business funds & performance
marketing market
element time segment
HFs
£ what who
£ what who ms% corporate
budget £ sales£ rev£
what who CSFs
£ profit£ profit£
what who
Measure- application costs, metrics on performance turnover,
ment of activity achievement by product profit &
spend milestones of factor to market shareholder
& outputs required level segment value
Positioning
of issues in
the 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. 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. 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. Conditions determining a strong marketing
strategy
• 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. APPENDIX
© Professor Malcolm Page 46
McDonald

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 Malcolm
McDonald
Page 47

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. 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