Marketing and Finance Creating Shareholder Value

Professor Malcolm McDonald was recently cited as one of the top marketing gurus in the world, along with Philip Kotler and Michael Porter and, in a 2006 Times HE piece, he was named as one of the top ten consultants in the UK. He is now Emeritus Professor at Cranfield University School of Management where, until recently, he was Professor of Marketing and Deputy Director. Formerly Marketing Director of Canada Dry, he is Chairman of six companies and works with many of the operating boards of the world’s biggest multinationals on every continent. He is the author of over 40 books, many of which have been translated into several foreign languages and has published hundreds of articles and papers. Malcolm continues to research and teach at Cranfield and other universities around the world, in addition to speaking engagements, visiting lectures, and consultancy work.

Professor Brian D. Smith is a world-recognised expert on competitive strategy in pharmaceutical and medical markets. He is Adjunct Professor at Bocconi SDA and Visiting Research Fellow at the Open University Business School, where his research interests include strategy making and implementation in medical markets. He is the editor of the Journal of Medical Marketing and the author of over 200 books, papers and articles in the field of marketing and competitive strategy. He also runs Pragmedic, a specialist strategy consultancy and works with many of the world’s leading pharma and medtech companies. Brian has over 30 years experience in medical technology and pharmaceutical markets in both R&D and commercial roles. He has been a member of the Chartered Institute of Marketing for over 20 years and is a former International Vice Chair of the Board of Trustees. He currently serves on the committees of two CIM groups, The Levitt Group and the Medical Marketing Group.

Keith Ward studied economics at Cambridge and then qualified as both a chartered accountant and a chartered management accountant. He worked both in the City and abroad as a consultant and held senior management positions in manufacturing and trading companies (the last being as group financial director of Sterling International). In 1981 Keith joined Cranfield School of Management, where he progressed to become Professor of Financial Strategy, as well as being Head of the Finance and Accounting Group and Director of the Research Centre in Competitive Performance. In addition to his academic work, he developed his own international consultancy practice. He then moved to a Visiting Professorial role at the School, while continuing with his research and consultancy interests, until retiring at the end of 2009. He is the author of a number of books including Marketing Finance. He has also published numerous papers and articles, and contributed to several other books, including as editor.

Foreword by Anne Godfrey, Chief Executive, CIM xi

Foreword by Charles Tilley, Chief Executive, CIMA xiii

Foreword from the First Edition by Sir Michael Perry, GBE xv

A note for busy people: How to get the best out of this book xix

List of figures xxi

List of tables xxv

Part 1 What is Marketing Due Diligence? 1

Chapter 1 The lessons of experience 3

Fast track 3

Introduction 3

Success stories 5

Starbucks: A holistic offer based on insight and culture 5

The Economist: Side stepping in time to the future 6

Yamazaki Mazak: Matching itself to the market 7

Essilor: Growing the pie 8

Failure stories 9

Blockbuster: Left behind 9

Gateway: Playing a zero-sum game 10

Microsoft’s Zune: So what’s better? 11

Nortel: Playing the wrong game 12

Woolworth’s: Failure to focus 13

Seeing a pattern 14

Financial smoke and mirrors 14

Share and share alike 16

Marketing accountability 16

A new approach 18

Chapter 2 A process of Marketing Due Diligence 21

Fast track 21

What is marketing? 22

What is the connection between marketing and shareholder value? 23

What is the Marketing Due Diligence diagnostic process? 25

Explicating the strategy 27

Assessing the risks 29

Assessing shareholder value creation 34

What is the Marketing Due Diligence therapeutic process? 39

Implications of the Marketing Due Diligence process 41

Chapter 3 The implications of implementing Marketing Due Diligence 43

Fast track 43

The linkage to shareholder value 44

The risk and return relationship 45

A focus on absolute returns rather than risk 48

Using probability estimates to adjust for risk 51

Alignment with capital markets 56

Turning Marketing Due Diligence into a fi nancial value 57

Adjusting marketing planning outcomes 57

Placing the adjusted fi nancial return into context 58

Allowing for ‘capital at risk’ 60

Highlighting defi ciencies and key risks 62

Implications for users 63

Part 2 The Marketing Due Diligence Diagnostic Process 65

Chapter 4 Assessing market risk 67

Fast track 67

Some important background to what constitutes ‘success’ 68

Short-term success 68

Strategy and tactics 70

The strategic marketing plan 71

Market risk 71

The meaning of ‘product’ and ‘market’ 72

Combining product and market 77

Product/market growth or decline 78

Product and market combined 82

Market risk assessment 86

Conclusion 93

Chapter 5 Assessing share risk 97

Fast track 97

What do we mean by share risk? 98

How do we assess share risk? 100

Assessing target market risk 101

Assessing proposition risk 103

Assessing SWOT risk 106

Assessing uniqueness risk 108

Assessing future risk 110

Assessing other sources of share risk 113

Aggregating and applying share risk 116

Step 1: Explicate the marketing strategy 117

Step 2: Assess the explicated strategy against the sub-components of share risk 117

Step 3: Aggregate the sub-components into an overall assessment of share risk 119

Step 4: Identify the growth component of the strategy 120

Step 5: Moderate the growth component of the strategy to allow for risk 121

Step 6: Allow for complex strategies 122

The outcomes of share risk assessment 122

Chapter 6 Assessing profit risk 125

Fast track 125

Introduction 126

Profit pool risk 129

Profit sources risk 135

Competitor impact risk 138

Internal gross margin risk 142

Other costs risks 144

Summary 148

What do weak marketing strategies look like? 148

Part 3 The Marketing Due Diligence

Therapeutic Process 151

Chapter 7 The key role of market defi nition and segmentation 153

Fast track 153

Introduction 154

Correct market defi nition 155

A crucial business discipline, not just a philosophical argument 155

Market mapping 158

Leverage points 162

Market segmentation 165

How customers vary: Needs-based segmentation 170

Some final thoughts 178

Chapter 8 Creating strategies that create shareholder value 181

Fast track 181

Starting from where we are 181

Understanding and managing market risk 183

Understanding and managing product category and market existence risk 183

Understanding and managing sales volume, forecast and pricing risks 189

Understanding and managing share risk 191

Reducing target market risk 192

Reducing proposition risk 192

Reducing SWOT alignment risk 196

Reducing uniqueness risk 198

Reducing future risk 199

Other components of share risk 200

Understanding and managing profi t risk 203

Reducing profit pool risk 203

Reducing profit source risk 205

Reducing competitor impact risk 206

Reducing internal gross margin risk 207

Reducing other costs risk 209

Summary and conclusions 210

Chapter 9 Managing high-risk marketing strategies 211

Fast track 211

Allowing for risk 212

Risk equals volatility 213

Controllable versus uncontrollable volatility 214

Using real option analysis 219

Real option example 223

Summary 228

Chapter 10 Fast track: A summary and reminder of the marketing and finance interface 229

The lessons of experience 229

A process of Marketing Due Diligence 229

The implications of implementing Marketing Due Diligence 231

Assessing market risk 232

Assessing share risk 233

Assessing profi t risk 234

The key role of market definition and segmentation 236

Creating strategies that create shareholder value 237

Managing high-risk marketing strategies 238

Afterword: What to do now 241

References and further reading 243

Index 245

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