mcdonald imp

Thought Leaders International Conference in

Brand Management

Emeritus Professor Malcolm McDonald Cranfield University and Chairman Brand Finance

plc

Lugano, 11-12 March 2011

2

The role of powerful brands in creating shareholder value

3

1. Introductory comments

2. A brief history of marketing

3. The difference between brands and powerful brands

4. Their role in creating shareholder value ( SVA )

5. How to measure SVA

Thank you

Agenda The role of powerful brands in creating shareholder value

Contents Contents

4

Start Point Vol + 1% Costs - 1% Price + 1%Volume 1000 1010 1000 1000Fixed Costs 400 400 396 400Variable Costs 500 505 495 500Profit 100 105 109 110Turnover 1000 1010 1000 1010

Profit Increase 0.0% 0.5% 0.9% 10.0%0% 5% 9% 10% Profit Increase

The Impact of Price and Profit

5

Higher volume At lower Margins

Lose sales

Cut prices

Reduce Specifications & promotion

to maintain R.O.I

Raise price

Improve Product & promotion

Higher customer Acceptance &

volume

Lower volume, but Higher revenue from

Better margins

Vicious Circle

Benign Circle

Model 1

Model 2

The Price-Value Cycle

6

Practitioners

A brief history of marketing

3 principal communities:

Consultants

Academics

7

Practitioners

8

  Technology

  Production

  Sales

  Accountancy

  Fads

  Marketing

8

9

1. Where a company has been top for more than 1 year, the next best company has been chosen in the subsequent year e.g.. Poly Peck was related top 1983, ‘84 and ‘85

2. Pre-tax profit as a percent of investment capital

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Year

MFI Lasmo Bejam Racal Polly Peck Atlantic Computers BSR Jaguar Amstrad Body Shop Blue Arrow

Company1

57 134 79

940 128 151 197 819 987 225 653

Market Value (£m)

50 97 34 36 79 36 32 60 89 89

135

ROI2

Collapsed Still profitable Acquired Still profitable Collapsed Collapsed Still profitable Acquired Still profitable Still profitable Collapsed

Subsequent performance3

From Professor Peter Doyle, Warwick University

Example 1 of major companies’ performance up to 1990

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1.  Each company was a FTSE100 when selected 2.  Market Values as of 31 December of each year 3.  Pre-tax profit as a percent of Equity & Long Term Debt

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Maxwell Communications Plc Imperial Chemical Industries Plc Wellcome Plc ASDA Group TSB Group Plc British Telecommunications Plc British Steel Plc British Airways Plc National Westminster Bank Plc Marconi Plc Marks & Spencer Plc

Company1

1.0 8.6 8.3 1.6 3.7

22.2 3.3 6.1

19.6 29.8 5.3

Market Value (£bn)2

5 13 40

7 20 17 19

7 14 22

7

ROI3

Collapsed Collapsed Acquired Acquired Acquired Not Profitable Collapsed Not Profitable Acquired Acquired Not Profitable

Subsequent performance

From Professor Malcolm McDonald

%

Example 2 of major companies’ performance up to 2000

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Percentage of market represented by segment Percentage of all profits in total market produced by segment Ratio of profit produced by segment to weight of segment in total population Defection rate

Total Market

Segment 1

Segment 2

Segment 3

Segment 4

Segment 5

Segment 6

27.1

14.7

0.54

15%

18.8

21.8

1.16

28%

18.8

28.5

1.52

30%

11.0

23.0

2.09

35%

9.5

4.9

0.52

17%

14.8

7.1

0.48

20%

100.0

100.0

1.00

23%

Measurement of segment profitability

12

Not at all Totally 49% 12% 10% 9% 7% 6% 3% 3% 1%

We measure customer retention by market segment

13

Not at all Totally 31% 25% 18% 6% 7% 1% 9% 1% 1%

We know the financial impact of all the elements of our marketing strategy and we measure and report them to the board

14

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.

“Marketing in 3D” Deloitte

“Tense relations between CFOs and Marketers are dividing

boardrooms over the value of marketing.

One in three CFOs said they did not believe marketing to be crucial

in determining strategy”.

“Marketers have constantly hidden behind a fog of measures that are based purely on tactical

marketing activity, rather than solid financial metrics that are

relevant to the City”.

15

Finance Director: “Why is EBITDA down on forecast?”

Marketing Director: “The EBITDA news is a bit of a pisser, but wait ‘til you see

my mood board!!” (Rory Sutherland, President IPA – Brand Finance Forum, London 26th October 2010)

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Stories and Myths

Symbols

Paradigm

Control Systems

Organisational Structures

Power Structures

Rituals

•  Cars •  Offices •  Terminology •  Statistics •  Lunch

•  Research withheld •  Take credit for

others work •  Jargon

•  Lack of structure •  Internal focus •  Always in

meetings

•  Unaccountable •  Untouchable •  Expensive •  Slippery

•  Planning •  Delegating •  Deadlines •  Off site

meetings

•  10.00-16.00 hrs •  Lunch •  Travel •  Soft measurement •  For self

•  Mud doesn’t stick •  Golden child •  Quick promotion •  No loyalty •  Churn •  Costs •  Experience

Source: ‘Defining a Marketing Paradigm’ (Baker, S. 2000)

The Cultural Web: (What senior non marketers believe about marketers)

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Consultants

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•  In Search of Excellence •  Marketing Warfare •  One Minute Manager •  MBWA •  Skunk Works •  7 Ss •  Etc.

FADS (300)

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Academics

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•  “Much research is directed at technical refinement, which produces low risk, quick win publications that are largely irrelevant or incomprehensible to practitioners. The voice of academics is becoming weaker” (Hugh Wilmott of MBS)

•  Robin Wensley said that marketing academics have had little impact.

•  “A much wider understanding of the nature of the competitive market place is required, given that it is such a central phenomenon”

•  Of ten issues, (confirmed by 3- academic papers and the MSI), only 4% were addressed in the top, 5 star rated academic journals.

Academics

Malcolm McDonald - AM Debate 2000

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•  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

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Marketing: existential malpractice and an etherised discipline; a sotereological comment

By: Professor Malcolm McDonald JMM Vol 20. 3-4. April 2004 ( pp 387-408 )

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In undertaking an in-depth perusal of the evolutionary interaction of this acronymic organisational communication, the dual orientation for the analysis paradoxically required an unashamed repositioning of the eclectic conceptual framework amongst the multi-disciplinary body of illuminative speculation in predominantly scholarly bureaucratisation. Yet, coincidentally, its empirical complexity had to remain relevant to the esoteric realities of postmodern professorial integrative antecedent development trends at appropriately conceptualised and operationally-implemented meta levels. Consequently, it was necessary to review the independently formulated psychometric traditions and to employ confidently the articulatedly-present phenomenological methodologies currently available for polysyllabic paradigm exploration. Unfortunately, the ensuing generalised multifaceted model for evaluation (in its specific systems dimension, naturally) had unexpectedly and unexplainably exploded – though not exhaustively. The major administrative atomistic components, suitably enumerated, are now, unfortunately, somewhat hindering the Assessor’s understanding process. However, tabulation analysis of the topography implicitly indicates that comprehensive evaluation of the interdenominational micro data has finally exhausted the course Assessor and any further critical, unbiased, postmodernistical review, will just have to wait until he has had a few strong gin and tonics! I suspect you may not know what this means, but I don’t really care, even if it takes you half an hour to decode it! I call this style ‘anorexia doctoratitis’ – an excessive desire to be more and more impressive verbally, leading to mental emaciation and, eventually, death.

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“Socrates was a famous teacher who went around giving advice –

they killed him”

(History howlers from University exam papers)

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•  defining markets •  quantifying the needs of the customer groups (segments) within

these markets •  putting together the value propositions to meet these needs,

communicating these value propositions to all those people in the organisation responsible for delivering them and getting their buy-in to their role

•  playing an appropriate part in delivering these value propositions (usually only communications)

•  monitoring the value actually delivered. •  For this process to be effective, organisations need to be

consumer/customer-driven

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Definition of marketing Marketing is a process for:

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Asset Base

Define markets & understand

value

Determine value

Proposition

Deliver value

Monitor value

Map of the marketing domain

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Provider Customer Consumer

The value chain

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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.

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They innovate around core category benefits They make the brand famous and distinctive (easy to recognise) They make it easy to buy ( distribution and penetration ) In other words, they get the basics right

Branding as Customer Service Great brands do not differentiate just for the sake of differentiation

( Professor Malcolm McDonald, January 2011 )

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The role of powerful brands in creating shareholder value

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The overall purpose of marketing is the identification and creation of sustainable competitive advantage

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In capital markets, success is measured in terms of

shareholder value added, having taken account of

the risks associated with future strategies, the time

value of money and the cost of capital.

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r

Low High

Financial Risk

ü

ü r Low

High

Business Risk

The route to Sustainable Competitive Advantage (SCA)

Differentiation High Price

High Volume

Sales Revenue

Low Business Risk

Low Financial Risk

Positive NPV SCA

Economies of Scale Learning

Curve

High Cash Flows

Gearing Interest Cover Working Capital Ratio Operational Leverage

Financial

Operations Lower Costs

35

Financial Risk and Return

High

Low

Return

High Low

1

2

3

Risk

36

Required returns

Therefore Expected volatility in future returns

Perceived risk

Risk and Return

37

Shareholder value-adding strategies

38

Justifying investment in marketing assets

Whilst accountants do not measure intangible assets, the discrepancy between market and book values shows that investors do. Expenditures to develop marketing assets make sense if the sum of the discounted cash flow they

generate is positive.

39

Balance sheet

Assets Liabilities

- Land - Buildings - Plant - Vehicles etc.

- Shares - Loans - Overdrafts etc.

£100 million £100 million

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Balance sheet

Assets Liabilities


- Land - Buildings - Plant - Vehicles etc.


41

Balance sheet

Assets Liabilities


Goodwill £800m

- Land - Buildings - Plant - Vehicles


43

Asset Breakdown for the top 6 countries by Enterprise Value (US$ millions, 2004)

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Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions, 2010)

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Intangibles

P&G have paid £31 billion for Gillette, but have 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, CEO, Brand Finance, Marketing Magazine, 1st April 2005)

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Brands as Assets

•  Kraft Phillip Morris bought Kraft and its portfolio of food brands for $12.9billion – four times the value of Kraft’s tangible assets

•  Grand Met Bought Pillsbury for $5.5billion – a 50% premium on Pillsbury’s pre-bid value and several times the value of its tangible assets

•  Nestle Paid $4.5billion, more than five times Rowntree’s book value

47

Comparison of some Global Brands by the World’s Top Three Brand Valuation Companies

(USD) Brand Finance (2010) Interbrand (2010) Millward Brown (2010)

Coca Cola 34.8bn 70.4bn 67.9bn

Walmart 41.6bn - -

IBM 33.7bn 64.7bn 86.3bn

Microsoft 33.6bn 60.8bn 76.3bn

GE 31.9bn 42.8bn 45bn

Google 36.1bn 43.5bn 114.2bn

McDonald’s 20.1bn 33.5bn 66bn

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Brands are key intangibles in most businesses

Brand 20% Other Intangible Assets

55% Tangible Assets 25%

Developed Markets

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

Intangible assets

Brand

Software Patents

Distribution rights Assembled workforce Business Goodwill

Marketing intangible

Technology intangibles

Customer intangible

Contract intangibles

Illustrative

Source: Brand Finance

Customer relationships

Tangible assets

49

Brand

Reputation

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 PERCEPTION

STAKEHOLDER BEHAVIOUR

FINANCIAL IMPACT

SHAREHOLDER VALUE

Customers - individuals, businesses

Suppliers / Partners

- businesses, energy asset owners

Employees - current and potential

Shareholders / Bankers

- individual and institutional

Other Stakeholders - government, media,

opinion formers, academics, public, environmentalists

•  Pay price premium •  Buy more •  Lower prices •  Better terms •  Willingness to partner • (more opportunities) •  Better retention •  Lower salary expectations •  Better qualified candidates

Revenues

Costs Revenues

Costs Productivity

Costs Risk

•  Higher PE ratio •  Lower volatility •  Lower borrowing costs •  Better repayment conditions

Influences business and brand value

Indirect influence on value

Trad

emar

ks

Brands Increasingly Drive Business Results

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Government

Brands achieve this increased value by positively affecting different stakeholders

Partners

Employees

Suppliers

Bankers

Investors

•  Lower borrowing costs •  Better repayment conditions

•  Lower prices and better terms

•  Lower recruitment costs •  Lower retention costs

•  Greater willingness to partner •  Partnership on better terms

•  Higher price earnings ratio •  Lower volatility

•  More invitations to tender •  Greater propensity to award •  Higher share of fields awarded

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Identification & Recognition Criteria of Intangible Assets

separable

contractual-legal Control

Future economic benefit

Identifiability

Flow of future economic benefit to entity probable

Cost reliably measurable

An intangible asset shall be recognized as an asset apart from

goodwill if it arises from contractual or other legal rights or if it is capable of being separated from the acquired entity and sold, transferred, licensed, rented, or exchanged. (SFAS 141, par. 39)

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•  market equity (Coca Cola) •  value chain equity (Walmart) •  attitudinal equity (INTEL)

Intangibles

53

The Rational Consumer

20th century economics were based on the lunatic

assumption that humans are ‘rational’ i.e. they

calculate their maximum ‘utility’, using perfect

information to reach perfect decisions, i.e. A precise

point on a precise graph.

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•  Charles Reich’s “The Greening of America” •  Theodore Roszak’s “The Making of a Counter

Culture” •  Alvin Toffler’s “Future Shock” •  “The defenceless consumer” •  McDonald 2010

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IPA Effectiveness Awards 2010

•  To inform (Dove’s beauty oriented deodorant) •  Benefits (The trainline.com) •  Society (Tobacco Control. Stroke Awareness Campaign.

Legacy giving) •  Strategy (Waitrose Essentials) •  Effectiveness all rigorously measured using econometric

models

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Everything an organisation does converges on the

business value proposition that is projected to the customer and is represented by the brand name.

The good thing about not having a powerful brand name is that failure comes as a complete surprise and is not preceded by a long period of worry and depression.

(Professor Malcolm McDonald )

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•  A brand is a name or a symbol on a product, service, person or place

•  A successful brand creates super profits

•  A successful global brand presents the same or similar message all over the world e.g McDonald’s, Mercedes, Coca Cola, IBM

•  The brand is about the total experience, not the logo. Successful brands offer consistently superior value that is delivered by fair processes.

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The Brand Iceberg

What you can’t see

What you can see

Key Assets and Competences

Symbol Brand Name

Presentation

Price

Efficient Production

Low Cost Operations Excellent

Database

High Service Levels

Strong Supply Chain Management Effective

Selling

Product

People

Brands Are Business Systems, Not Just Labels and Names From “Even More Offensive Marketing” by Hugh Davidson

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PRODUCT

Function

Packaging Design

Price Features

Efficacy

Finance

Before Sales Service

During Sales Service

After Sales Service

Warrantees

Guarantees

Add-ons Advice

Availability

Delivery

Quality Perceptions

Value Perceptions

Corporate Image

Brand Name Reputation

Organisa- tion

Other User Recom- mendation

INTANGIBLES

SERVICES

MARKETING IS NOT   Selling   Advertising   Product Development   Customer Service

MARKETING IS   A dialogue over time with specific groups of customers, whose needs you understand in depth and for whom you develop an offer with a differential advantage over the offer of competitors

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Customer Experience

Customer experience is defined by every touch point between a company and its customers, across all channels. Customer expectation can be damaged

during a single transaction if it is let down by even one channel (from Web site to email and then call centre). And the proliferation of channels means it is cheaper

and easier to find a better experience.

20:20 Customer Experience IBM Business Consulting Services, 2005

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Successful brands

•  Have a clear customer benefit •  Make a promise and keep it •  Have simplicity, clarity and honesty •  Have distinctive logos and design •  Are widely available •  Build trust •  Have a price/quality trade off – win/win •  Help consumers make good decisions •  Offer consistently superior value •  Are about the total experience •  Result ? Higher margins, higher volumes, innovation,

better quality

61

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•  In most cases brand choice is merely a mild feeling of preference, because we simply don’t care that much. Brands that elicit indifference

from consumers should be of most concern.

63

Tough times make people think more. Those companies who have confused customer habit with customer loyalty quickly discover that they are not the same. Unless underpinned by intrinsic quality, “added value” begins to seem little more than fancy packaging. Jeremy Bullmore, Market Leader, Quarter 3 2009 (pp. 15-16)

63

64

Confusion Marketing (1)

•  “Advertising must be legal, decent, honest and truthful” ( ASA )

•  * P and G’s Sunny Delight ( positioned as a fruit drink ) •  * SKB’s Ribena Toothkind (British Dental Association -

censored) •  Nestle’s Shredded Wheat (British Heart Foundation -

Nestle fined £750k) •  ‘Copycat’ Branding (e.g. Coke, versus Sainsbury’s)

65

•  “Even when your product is not that different, better or special, it’s the job of the marketer to make people think it’s different, better or special” (Sergio Zyman - former chief marketing officer, Coca Cola)

•  What he really means is:

•  “when you genuinely can’t add value for your customer (compared with what your competitors are offering), pull the wool over their eyes instead!”

  (Alan Mitchell, Marketing Business, May, 2001)

Confusion Marketing (1)

66

There are many products that pretend to be brands, but are not the genuine article. As the Director of Marketing at TESCO said, “Pseudo brands are not brands. They are manufacturers’ labels. They are “me-toos” and have poor positioning, poor quality and poor support. Such manufacturers no longer understand the consumer and see retailers solely as a channel for distribution”

Marketing Globe Vol 2, No. 10. 1992.

67

What went wrong with many brands?

•  Success led to smugness •  Superior margins became the primary purpose •  Cutting corners/reducing costs •  Economical with the truth (eg. ‘low fat’, but no mention of high

sugar content) •  Add some gold to the packaging (illusion of quality) •  Made decision-making harder •  Became the new commodities

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69

Branded markets

Price differentiation

The Commodity slide

Source: M. McDonald, Marketing Plans, Butterworth Hienemann, 1999

High Production/image Low

differentiation

High

Low

Time

Commodity markets

70

Marks & Spencer’s Trends

Base: M&S Customers

5

15

25

35

45

55

65

75

85

95

Service Positive Value for Money Share Price (Indexed)

Nov 95 Sept 99 Mar 98

71

Marks & Spencer’s Market Cap (from Bloomberg)

In 2004, M&S was in the throes of an attempted takeover by Arcadia Group & BHS boss, Philip Green. On 12 July a recovery plan was announced which would involve selling off the financial services business to HSBC Bank plc. Philip Green withdrew his takeover bid after failing to get sufficient backing from shareholders

Under the stewardship of Stewart Rose value in the business recovered up until the 2008 crisis

72

The danger of market research

Examples of hugely successful brands that originated their category but which failed disastrously in market research include: Sony Walkman; Baileys Irish Cream; Post-it; Red Bull; Cashpoint

machines; Perrier ( in the UK )

The consumer doesn't know what they want.

Kieron J Market Leader September 2010 " The death of Innovation "

73

Excellent Marketing •  Customer insights that lead

to the development of genuinely new products.

•  Clear positioning and branding.

•  Clear, honest marketing communications that make for easy access and availability.

Confusion Marketing •  ‘New, improved’ products

that pretend to be different. •  Confusing, emotional

communications to justify price premiums for parity products.

•  Pricing strategies designed to make comparisons impossible.

•  Distribution strategies that out obstacles in the way of choice.

VS

74

Brand valuation uses

•  Balance sheet reporting •  M & A planning •  Investor relations •  Internal communications •  Licensing and franchising •  JV negotiations

•  Securitised borrowing •  Litigation support •  Tax planning •  Market budget allocation •  NPD planning •  Agency performance

75

Asset Base

Define markets & understand value

Determine value Proposition

Deliver value

Monitor value


75

Measurement zone where metrics are applied (Levels 2 & 3)

Strategic zone where metrics are defined (Level 1)

76

Inter Tech’s 5 year performance

Performance (£million) Base Year 1 2 3 4 5 Sales Revenue - Cost of goods sold

£254 135

£293 152

£318 167

£387 201

£431 224

£454 236

Gross Contribution - Manufacturing overhead - Marketing & Sales - Research & Development

£119 48 18 22

£141 58 23 23

£151 63 24 23

£186 82 26 25

£207 90 27 24

£218 95 28 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 Assets (% of sales)

£141 56%

£162 55%

£167 53%

£194 50%

£205 48%

£206 45%

Return on Assets (%) 11.3% 13.5% 15.6% 19.1% 24.4% 26.7%

From The Marketing Process Company 76

77

Performance (£million) Base Year 1 2 3 4 5

Market Growth 18.3% 23.4% 17.6% 34.4% 24.0% 17.9%

InterTech’s 5 Year Market-Based Performance

Customer Retention (%) New Customers (%) % Dissatisfied Customers

88.2% 11.7% 13.6%

87.1% 12.9% 14.3%

85.0% 14.9% 16.1%

82.2% 24.1% 17.3%

80.9% 22.5% 18.9%

80.0% 29.2% 19.6%

InterTech Sales Growth (%) Market Share(%)

12.8% 20.3%

17.4% 19.1%

11.2% 18.4%

27.1% 17.1%

16.5% 16.3%

10.9% 14.9%

Relative Product Quality Relative Service Quality Relative New Product Sales

+10% +0% +8%

+8% +0% +8%

+5% -20% +7%

+3% -3% +5%

+1% -5% +1%

0% -8% -4%

Why Market Growth Rates Are Important

From The Marketing Process Company

77

78

% Sales Revenue Cost of Goods Sold Profit Margin Adver8sing R&D Capital Investment

Opera8ng Expenses Opera8ng Profit

Investment Ra8o

Key Trends

Virtuous plc (%) 100 43 57 11 5 7

20 14

23

•  Past 5 year revenue growth 10% pa •  Heavy adver8sing investment in new/ improved products •  Premium priced products, new plant, so low cost of goods sold

Dissembler plc (%) 100 61 39 3 -‐ 2

20 14

5

•  Flat revenue, declining volume •  No recent product innova8on, liXle adver8sing •  Discounted pricing, so high cost of goods sold

3Note: This table is similar to a P&L with one important excep8on -‐ deprecia8on, a standard item in any P&L has been replaced by capital expenditure, which does not appear in P&Ls. In the long-‐term, Capex levels determine deprecia8on costs. Capex as a percentage of sales in an investment ra8o o\en ignored by marketers, and it has been included in this table to emphasize its importance.

The make-‐up of 14% Opera8ng Profits Factor Profit on exis8ng products over 3 years old Losses on products recently launched or in development Total opera8ng profits

Virtuous plc (%) 21 (7) 14

Dissembler plc (%) 15

(1)

14

From Hugh Davidson’s “Even More Offensive Marke8ng” 1998

Quality of profits

79

Overall Marketing Metrics Model

79

product market segment

ms% sales£ profit£

corporate rev£ profit£

actions, esp. marketing

metrics on achievement of factor to required level

costs, activity milestones & outputs

Strategy/ achievement

Objectives/ results

Plan/ action

performance by product market segment

application of spend

budget funds & time

Resource allocation/ spend

Forecast/ profit

corporate performance

turnover, profit & shareholder value

budget

£ £ £ £

Intention/ actuality

Business element

Measure-ment

Lead indicators Lag indicators

Required by customers. Relative to competitors

Market growth Customer acquisition/ retention/ uptrading/ X-selling/ regained Product/customer mix Channel performance

Cost to achieve Responsibilities

who

who

who

who

what

what

what

what

Positioning of issues in the model

PFs

HFs

CSFs

80

A

B

C

Projected cash flows from investing in a promotion

DCF and NPV methods implicitly make this comparison

Assumed cash flow resulting from doing nothing

Companies should be making this comparison

More likely 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 investment.

Adapted from Christensen CM et al, ( 2008 ) £ - 7 million + 2 + 2 + 2 + 2 = £-0.6 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

80

81

Asset Base

Define markets & understand value

Determine value Proposition

Deliver value

Monitor value


Measurement zone where metrics are applied (Levels 2 & 3)

Strategic zone where metrics are defined (Level 1)

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82

What is Marketing Due Diligence?

Marketing DueDiligence

Risk Assessment

Market Risk:Is the market

there?

Strategy risk:Will we get ourplanned share?

Implementation risk:Will we get ourplanned profit?

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Market Risk Profile

•  Product Category Existence

•  Segment Existence

•  Sales Volumes

•  Forecast Growth

•  Pricing Assumptions

The marketing strategy has a higher probability of success if the product category is well established

If the target segment is well established If the sales volumes are well supported by evidence If the forecast growth is in line with historical trends

If the pricing levels are conservative relative to current pricing levels

84

Ansoff matrix

Market Penetration

Product Development

Market Extension Diversification

Present New increasing technological newness

increasing market

newness

Present

New

PRODUCTS

MARKETS

© Professor Malcolm McDonald, Cranfield School of Management

85

Market Share Risk Profile

•  Target Market Definition

•  Proposition Specification

•  SWOT Alignment

•  Strategy Uniqueness

•  Anticipation of market change

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

If the proposition delivered to each segment is different from that delivered to other segments and addresses the needs which characterised the target segment

If the strengths and weaknesses of the organisation are independently assessed and the choice of target and proposition leverages strengths and minimises weaknesses

If choice of target and proposition is different from that of major competitors

If changes in the external microenvironment and macroenvironment are identified and their implications allowed for

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Shareholder Value Risk Profile

•  Profit Pool

•  Profit Sources

•  Competitor Impact

•  Internal Gross Margin Assumptions

•  Assumptions of Other Costs

The marketing strategy has a higher probability of success if the targeted profit pool is high and growing

If the source of new business is growth in the existing profit pool

If the profit impact on competitors is small and distributed

If the internal gross margin assumptions are conservative relative to current products

If assumptions regarding other costs, including marketing support, are higher than existing costs

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Brand valuation uses

•  Balance sheet reporting •  M & A planning •  Investor relations •  Internal communications •  Licensing and franchising •  JV negotiations

•  Securitised borrowing •  Litigation support •  Tax planning •  Market budget allocation •  NPD planning •  Agency performance

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Having taken account of the risks referred to above and having adjusted the forecast net free cash flows for

each major product for market for each year, have we calculated whether the strategic marketing plan

creates or destroys shareholder value?

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Valuing Key Market Segments

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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.

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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 return of 10% 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.

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Invest/ build

?

Maintain Manage for cash

Relative company competitiveness

Portfolio analysis - directional policy matrix (DPM)

High

Low

High Low

Segment attractiveness

No change

Present position Forecast position in 3 years

NB. Suggested time period - 3 years

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A great brand is the Holy Grail, the distillation of years

of creativity, sweat, ambition and investment.

Not so much a logo, more a way of life, a way of being,

a way of doing business: a great brand conveys

everything that in your finest dreams you want your

customers to understand about your business and

product.

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( Nick Peters. Brand Man. Business First. March 2010. page 19 )

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“Great stars shine brightest when the sky is darkest. In

austere times, great brands bestow pleasure, maintain

their premium and take a long view”

Mark Ritson, Marketing Magazine, 3rd December 2008 (p.20)

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94 Global recogni8on Books:

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Available to order now from: www.malcolm-mcdonald.com

Take marketing into the boardroom,

and connect marketing strategy to

shareholder value

www.malcolm-mcdonald.com

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BRANDFINANCE is the world’s leading, independent brand valuation consultancy. We advise strongly branded organisations, both large and small, on how to maximise shareholder value through effective management of their intangible assets. Intangible assets, most notably brands, are vital strategic and financial assets which marketers are increasingly being held accountable for managing and building. At the same time, finance directors and smart investors want greater understanding and disclosure of intangible asset values and marketing performance to improve their investment decisions. We help our clients to value, articulate and build their intangible asset base using language and approaches understood by financial, marketing and investor audiences.

 Thank you

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3rd Floor, Finland House 56 Haymarket

London, SW1Y 4RN

United Kingdom

Malcolm McDonald Chairman Brand Finance plc

[email protected]

+ 44 (0)207 389 9400

Brand Finance, the world’s leading independent brand valuation consultancy, has a global footprint with 21 offices world wide. For more information please refer to our website: www.brandfinance.com

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Malcolm, until recently, Professor of Marketing and Deputy Director Cranfield School of Management with special responsibility for E-Business, is a graduate in English Language and Literature from Oxford University, in Business Studies from Bradford University Management Centre, and has a PhD from Cranfield University. He also has an honorary Doctorate from Bradford University. He has extensive industrial experience, including a number of years as Marketing Director of Canada Dry.

His current interests centre around the measurement of the financial impact of marketing expenditure and global best practice key account management.

He is a Professor at Cranfield, Henley, Warwick, Aston and Bradford Business Schools

Emeritus Professor

Malcolm McDonald Chairman, Brand Finance

Malcolm is Chairman of Brand Finance plc and spends much of his time working with the operating boards of the world’s biggest multinational companies, such as IBM, Xerox, BP and the like, in most countries in the world, including Japan, USA, Europe, South America, ASEAN and Australasia.

He has written forty three books, including the best seller "Marketing Plans; how to prepare them; how to use them" and many of his papers have been published.

Our Team About Prof. Malcolm McDonald

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