Download - Session 9 Final MB
-
7/25/2019 Session 9 Final MB
1/67
Managing for Value CreationSession 9
Measuring (Financial) Value
Using Research & Market Indicators
-
7/25/2019 Session 9 Final MB
2/67
Lecture Schedule
2
-
7/25/2019 Session 9 Final MB
3/67
Measuring financial value
The strategic aim of a business is to earn a return
on capital, and if in any particular case the return in
the long run is not satisfactory, then the deficiency
should be corrected or the activity abandoned for a
more favorable one.
Alfred P. Sloan
My Years with General Motors
-
7/25/2019 Session 9 Final MB
4/67
Topics for today
Economic value added The balanced scorecard
Marketing metrics
Measuring returns on marketing
Customer lifetime value
Return on marketing investments
Issues with performance measurement
-
7/25/2019 Session 9 Final MB
5/67
EVA: an introduction
-
7/25/2019 Session 9 Final MB
6/67
What is Economic Value Added?
Specific measure developed by Stern Stewart andCompany in late 1980s.
Is a way of measuring that firms are earning returns on
capital exceedingtheir cost of capital.
EVA = economic profit
Not the same as accountingprofit:
in EVA, costs include expenses andcost of capital.
represents a minimum acceptable return
Economic Value Added =
after-tax operating income - investment charge
-
7/25/2019 Session 9 Final MB
7/67
What is Economic Value Added?
EVA = NOPAT (Cost of Capital x CapitalEmployed)
Since a cost is charged for equity capital, a positive
EVA generally indicates shareholder value is beingcreated.
Based on Economic NOT Accounting Profit.
NOPAT net operating profit after tax is a companys
potential after-tax profit if it was all-equity-financed (orunlevered)
-
7/25/2019 Session 9 Final MB
8/67
Components of EVA
NOPAT
Net operating profit after tax
Cost of capital
Weighted average cost of capital %
Capital employed
Net operating working capital, goodwill, other operating assets
NOPBT*)
Capital cost
before tax*)
EVA
time
Yr 1 Yr 2 Yr 3
-
7/25/2019 Session 9 Final MB
9/67
What is NOPAT?
Net sales (+) 150,000Cost of sales (-) 135,000
Depreciation (-) 2,000
Selling, General & Admin Expenses (-) 7,000
Net Operating profit (result from above) 6,000Taxes @ 40% 2,400
NOPAT 3,600
-
7/25/2019 Session 9 Final MB
10/67
What is Operating Capital?
Capital = Net operatingassets
Net operating assets: Cash, receivables, inventory, prepayments
Trade payable, accruals (adjustments to bemade), deferred tax assets
Net property, plant, and equipment
Exclude non-operating assets:
Marketable securities, investments,...
-
7/25/2019 Session 9 Final MB
11/67
What is the Capital Charge?
Represents a rental charge for the use of the operating
capital
Minimum rate of return operating capital should earn
Calculated as the:
firms weighted average cost of capital (%)
multiplied by invested capital.
typical WACC figures are 8-12%
Note: capital charges differ between projects and countries
-
7/25/2019 Session 9 Final MB
12/67
Drivers of Long-term EVA
Sales growth without incremental investment costs
(usually new channels OR new markets, not both)
Higher prices (develop strong brands, identify pricesensitivity by segment, effectively communicate
customer value, create exit barriers, innovation,pricing strategy matched to cost structure)
Cost decreases (more effective use of marketing
resources, balance between fixed and variable costs,scale and learning effects)
a more detailed view.........
-
7/25/2019 Session 9 Final MB
13/67
Improving EVA
Manufacturing EVA Drivers
Reduce inventory
Reduce cycle time
Improve yieldsReduce scrap/waste
Maximize labor efficiencies
Improve vendor efficiencies
Process improvements
Staff EVA Drivers
Work group/process simplification
Consistency monitors audit
Centralizing resources/synergies
Best practices benchmarking
Insourcing/outsourcing decisions
Simplify EVA measurements/reporting
Ensure compliance with legislation
Research & Development EVA Drivers
Improve to-marketprocess
Reduce R&D expenses as % of new product salesStrategic partners for R&D
Stronger links to product marketing
New products via:
!Research
!Formulation!Development
!Acquisition
Marketing EVA Drivers
Increase market share / revenue
New markets
More focused channel programs
Voice of customer / consumer
Leverage advertising / promotionBuild brand awareness
Customer Satisfaction New Products
Volume Marketing
Product Pricing Growth
Sales
Overhead Compensation
Account Management Training & Development
Manufacturing Costs
Operating Expenses
Acquisitions & Divestitures Working Capital Management
Alliances Accounts Receivable
R&D Decisions Inventory Management
Capital Charge
Improvement in EVA
-
7/25/2019 Session 9 Final MB
14/67
The balanced scorecard: an introduction
-
7/25/2019 Session 9 Final MB
15/67
Firms need to carefully make choices
Copyright ! 1998 by Houghton Mifflin Company. All rights reserved.
2-20
Tradeoff Between ProfitabilityTradeoff Between Profitabilityand Growth Rateand Growth Rate
G0
P1
P2
PMAX
G1 G2Growth Rate
Profitability
-
7/25/2019 Session 9 Final MB
16/67
The balanced scorecard
Firms need to tradeoff choices and activities:
Long-term versus short-term goals
Financial versus non-financial measures
Tangible versus intangible assets
Internal versus external perspective
Performance drivers versus outcomes
-
7/25/2019 Session 9 Final MB
17/67
The balanced scorecard
-
7/25/2019 Session 9 Final MB
18/67
The balanced scorecard
Vision andStrategy
Objectives Measures Targets Initiatives
FINANCIALTo succeedfinancially,
how shouldwe appear to
our
shareholders?
Objectives Measures Targets InitiativesLEARNING AND GROWTHTo achieveour vision,
how will wesustain our
ability to
change andimprove?
Objectives Measures Targets Initiatives
CUSTOMERTo achieveour vision,
how shouldwe appear to
our
customers?
Objectives Measures Targets Initiatives
INTERNAL BUSINESS PROCESSTo satisfy ourshareholders
andcustomers,
what business
processesmust we excel
at?
-
7/25/2019 Session 9 Final MB
19/67
Financial Perspective
How do we look to shareholders?
Sample Measures:
Sales revenue growth
Gross margin growth
Return on investment
-
7/25/2019 Session 9 Final MB
20/67
Customer Perspective
How do customers see us?
Top priority for long-term success
Customer satisfaction critical to achieving the companys
financial goals
Sample Measures:
Market share
Increasing number of customers
Customer satisfaction
Repeat customers / retention rates
Rate of on-time deliveries
-
7/25/2019 Session 9 Final MB
21/67
Internal Business Perspective
What business processes must we excel in to satisfycustomer and financial objectives?
Sample Measures:
The number of new products developed or
new-product development time (time-to-market)
The number of units produced per hour and defect rate
The number of warranty claims received, average repair
time, and average wait time
-
7/25/2019 Session 9 Final MB
22/67
Learning and Growth Perspective
How can we continue to improve and create value?
Sample Measures:
Hours of employee training
Employee engagement levels
Employee retention / turnover rates
Employee input / suggestions implemented.
Percentage of employees with access to customer data and
percentage of processes with real-time feedback.
-
7/25/2019 Session 9 Final MB
23/67
The balanced scorecard
Traditional financial reports look backward and do notmeasure value creation moving forward.
The Balanced Scorecard sets objectives, measures,targets and initiatives that create long-term value.
-
7/25/2019 Session 9 Final MB
24/67
Marketing metrics
-
7/25/2019 Session 9 Final MB
25/67
The need for marketing metrics
For years, corporate marketers have walked intobudget meetings like neighbourhood junkies.
They couldnt always justify how well they spent past
handouts or what difference it all made.
They just wanted more money for flashy TV ads, for
bigticket events, for, you know, getting out the
message and building up the brand.
But those heady days of blind budget increases are fastbeing replaced with a new mantra:
measurement and accountability.
Diane Brady, with David Kiley & Bureau Reports
Business Week, 13 December 2004
-
7/25/2019 Session 9 Final MB
26/67
Marketing Metrics - Examples
Financial value is largely the result of creating customervalue. How can we measure customer value?
Assessing marketings impact on the bottom linemeasures may include:
Customer Lifetime Value (CLV)
Return on Marketing Investment (ROMI)
Retail metrics
Media metrics
-
7/25/2019 Session 9 Final MB
27/67
Sequence of activities
Market results
Marketing
Investments Purchase behavior
!Market share
!Unit sales
!Price premium
!Penetration of key
segments
!Etc.
Relationshipmarketing
Advertising
Promotions
Etc.!which in turn
affects!
$ Spend
affects!
SOM
Consideration
Brand and ProductAwareness
Intent
Purchase
Loyal--ty
!Allocation of funds across marketing activities
!Optimization of spending within each lever
Financial
results
!ROI
!Shareholder value
!EVA
!Etc.
!which in turn
affects!
$ Profit
SOM
-
7/25/2019 Session 9 Final MB
28/67
Consumer Purchase Funnel
!Internet / mass media
!Word-of-mouth (WOM)
!Referrals
Marketing Tools
Marketing Tool Mix and Purpose
Retention
!Search tools (Google / mobile++)
!Outdoor advertising
!Promotions
!Sampling
!Pricing offers
!Promotions
!
Pricing!Loyalty programs
!Increasing share of wallet /
upselling
Awareness
Consideration
Trial
Occasional
BuyerRegularBuyer
Pene-tration
-
7/25/2019 Session 9 Final MB
29/67
Measuring returns on marketing
-
7/25/2019 Session 9 Final MB
30/67
Financial and marketing metrics
Consider some of the previously discussedmeasures: EVA, Balanced Scorecard
Marketing-type measures can add to this as they are
distinctly different:
(Seggie et al, 2007)
M t i f C t C t i it
-
7/25/2019 Session 9 Final MB
31/67
Metrics of Customer-Centricity
(Source: Rust et al. 2010)
lifetime discounted value ofcurrent / future customers
-
7/25/2019 Session 9 Final MB
32/67
Customer lifetime value
-
7/25/2019 Session 9 Final MB
33/67
Customer Lifetime Value (CLV)
CLV considers the value of an individual customer.
The present value of the future cash flows attributed to thecustomer during his/her entire relationship with the company
Considers the cost of:
acquiring customers: money needed to advertise and
promote for future customers
discount rate: time value of money, typically 8-12%
retention rate: the % of customers that buy from one
purchase to the next purchase
the cash flows generated by customers,
CLV =(margin)(retention) t
1+discount%( )t
t=1
T
!
-
7/25/2019 Session 9 Final MB
34/67
CLV scenarios
Assume iPhone 600AUD, 1 purchase/year, 10AUD direct marketing
costs, 40% gross margin, 85% retention rate, 10% discount rate
-
7/25/2019 Session 9 Final MB
35/67
CLV scenario 1: increasing the price only
Assume iPhone 900AUD, 1 purchase/year, 10AUD direct marketingcosts, 40%gross margin, 85% retention rate, 10% discount rate
CLV scenario 2: increasing marketing spend
-
7/25/2019 Session 9 Final MB
36/67
CLV scenario 2: increasing marketing spendwithout benefits
Assume iPhone 600AUD, 1 purchase/year, 15AUD directmarketing costs, 40%gross margin, 85% retention rate, 10%
discount rate
CLV scenario 3: increasing marketing spend
-
7/25/2019 Session 9 Final MB
37/67
CLV scenario 3: increasing marketing spendwith benefits (retention rate)
Assume iPhone 600AUD, 1 purchase/year, 15AUD directmarketing costs, 40%gross margin, 95% retention rate, 10%
discount rate
-
7/25/2019 Session 9 Final MB
38/67
Making CLV scenarios
Consider the costs of acquiring and retaining customers (marketing
costs).
Management of ongoing customer relationships becomescritical, not the individual sale
Focus moves away from acquiring customers regardless (think
of supermarket discounting) to reducing churn.
Helps optimize allocation of marketing resources in order to
achieve a better returns
Problems: the retention rates are not similar and vary for customer
segments
Use http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.htmlas a
calculator for the CLV and for making alternative marketing scenarios.
-
7/25/2019 Session 9 Final MB
39/67
Assessing Investments vs Returns: CLV
How can CLV help? How can CLV help make decisionson what compensation to offer?
- What measures should we use?
(Source: Rust et al. 2004)
-
7/25/2019 Session 9 Final MB
40/67
Return on Marketing Investment (ROMI)
-
7/25/2019 Session 9 Final MB
41/67
The idea behind CLV
Rust, Lemon, Zeithaml. JOM 2004
R M k i I (ROMI)
-
7/25/2019 Session 9 Final MB
42/67
Return on Marketing Investment (ROMI)
How can we measure the returns on these marketinginvestments?"ROMI!
ROMI=
An important consideration in calculating ROMI is the
estimation of short- and long-run effects
(Incremental revenue due to marketing
spending*contribution margin) - marketing spending
marketing spending
(R t t l 2004)
-
7/25/2019 Session 9 Final MB
43/67
ROMI: model (Rust et al. 2004)
Improve valueequity drivers
Improveswitching matrix
Improverelationship equity
Improve brandequity drivers
Improve relationequity drivers
Improve brandequity
Improve valueequity
Improvecustomer
lifetime value
Improvecustomer equity
Firm value
I l it
-
7/25/2019 Session 9 Final MB
44/67
Improve value equity
Value Equity:
the customers objective assessment of the utility of a brand, basedon perceptions of what is given up for what is received
Quality, price, convenience
I b d it
-
7/25/2019 Session 9 Final MB
45/67
Improve brand equity
Brand Equity:
the customers subjective and intangible assessment of the brand,above and beyond its objectively perceived value
brand awareness, attitude toward the brand, perceptions of
ethics/corporate citizenship
I l ti it
-
7/25/2019 Session 9 Final MB
46/67
Improve relation equity
Relation equity:
the incremental tendency of the customer to stick with the brand,above and beyond the customers objective and subjective
assessment of the brand, arising from relationship management
Loyalty programs, special recognition and treatment, affinity,
community building, knowledge building
-
7/25/2019 Session 9 Final MB
47/67
www.interbrand.com
Brand Value 2015 Interbrand Valuations
-
7/25/2019 Session 9 Final MB
48/67
Brand Value 2015 Interbrand Valuations
Sept 2015 trust in VW andimpact on brand value
Source: www.interbrand.com
Practical use of Valuing a Brand
-
7/25/2019 Session 9 Final MB
49/67
Practical use of Valuing a Brand
Source: Interbrand, Feb 2016
-
7/25/2019 Session 9 Final MB
50/67
Assessing Marketings impact on the bottom line
Marketing metrics
-
7/25/2019 Session 9 Final MB
51/67
Marketing metrics
Marketing metrics are useful if
they impact financial measures.
If they are early indicators
If they relate imperfectlytofinancial measures
If they are causally linked
If they are valid / can bemeasured reliably
Metrics and firm performance:
-
7/25/2019 Session 9 Final MB
52/67
Metrics and firm performance:
Value capture
Value creation
Source: Gupta & Zeithaml (2006), Kumar & Shah (2009)
-
7/25/2019 Session 9 Final MB
53/67
Example
Measure Customer satisfaction
Purpose Understand why customers are (dis)satisfied
Relates to Need to satisfy customers
Target 75%
Formula % customers rating high / very high (top 2 box
Source of data Customer surveys; issued consistently
Frequency Quarterly
Who measures? Marketing department
Who acts on the data? CEO, with marketing with salesWhat do they do? Analyze very low scores, find source of (dis)
satisfaction and influence these drivers to increase
results
Summary
-
7/25/2019 Session 9 Final MB
54/67
Summary
Ability to measure marketing performance has a significant
impact on firm performance, profitability, stock returns, andmarketings stature within the firm
Customer Lifetime Value (CLV) and Customer Equity (CE) arelong-term oriented metrics; measurement is often challenging.
Value, brand, and relationship equity are reflected in customer
equity
Customer Equity can be a proxy for firm value
-
7/25/2019 Session 9 Final MB
55/67
Issues with performance measurement
-
7/25/2019 Session 9 Final MB
56/67
Managers who complain about lack of motivation oftheir workers might do well to consider the possibility
that the reward systems they have installed, are paying
off for behavior other than what they are seeking
Steven Kerr
Academy of Management
Executive, 9(I), 1995
Issues with measurement
-
7/25/2019 Session 9 Final MB
57/67
Issues with measurement
On the folly of rewarding A, while hoping for B
What does the US military want:
to win
What does the average soldier want:
to survive / to go home Hoping to win, rewarding survival behavior
Result of the Vietnam war:
Seek and evade becomes military jargon
Many business examples
What is the issue?
-
7/25/2019 Session 9 Final MB
58/67
What is the issue?
Goal displacement:
Goal displacement results when the means become
ends-in-themselves that displace the original goals
Issues with measurement
-
7/25/2019 Session 9 Final MB
59/67
Issues with measurement
On the folly of rewarding A, while hoping for B.
Hoping for: While rewarding:
Team work and collaboration,(all-for-one spirit)
the best team members (advertisingendorsements)
Innovative thinking and risk taking Proven methods and not making
mistakesDevelopment of people skills Technical achievements and
accomplishments
Employee involvement andempowerment
Tight control over operations andresources
High achievement Another years effort
Long-term growth Short-term sales cycle targets
Causes
-
7/25/2019 Session 9 Final MB
60/67
Causes
Causes:
Fascination with an objective criterion
Overemphasis of visible behaviors
Emphasis on morality or equity rather than efficiency
Other problems with performancet
-
7/25/2019 Session 9 Final MB
61/67
management
Other problems with measurement systems
-
7/25/2019 Session 9 Final MB
62/67
Other problems with measurement systems
Amassing too much data (and not using it)
Focusing on the short-term only
Dumbing-down the data Establishing unrealistic and/or unreasonable
measures
Other problems with measurement systems
-
7/25/2019 Session 9 Final MB
63/67
Ot e p ob e s t easu e e t syste s
Driving the wrong performance
Encouraging competition and discouraging team work
Measuring progress too often or not often enough
Conclusion: Designing control systems
-
7/25/2019 Session 9 Final MB
64/67
g g y
Nature ofperformance
measure?
Subjective
Objective
Motivating only iftrust is high!
Is measurecomplete?
Can individualinfluencemeasure?
Can individualinfluencemeasure?
Complete
Incomplete
Yes
Yes
No
No
Ideal, but difficult to design
for non-routine work
Limited control (e.g. firmvalue, profit, EPS)
Dysfunctional behavior
Ignore
Characteristics ofdiagnostic control
systems measures
Source: R. Simons, 1995, Levers of Control, HBS
-
7/25/2019 Session 9 Final MB
65/67
Any remaining questions or issues?
Lecture Schedule
-
7/25/2019 Session 9 Final MB
66/67
66
-
7/25/2019 Session 9 Final MB
67/67