value based marketing project

A HOLISTIC APPROACH TO VALUE BASED MARKETING


Table of Contents

1. Introdution - Value Based Marketing ………………………….3 2. The Marketing Pentadigm in the context of Cadbury India…………..4

2.1. Discover & Commitment to Customer Value Drivers………...42.2. Customer Value System Model by IBM ………............................5 2.3. Customer Value Engineering Model by Oliver Wyman-NY……..6 2.4. Lessons in CVE through competitors failures & success…………72.5. Create Customer Value………………………………………………82.6. Porter’s Value Chain…………………………………………………82.7. Benchmark Practices of Competitors…………………………...82.8. Customer feedback & improvement of value proposition………8

3. VBM at the Marketing- Finance Interface…………………………..........93.1. Market based Intagible Assets…………………………………..93.2. How Market Based Assets create Shareholder Value……………….93.3. Linking Marketing Activities to Shareholder Value………………103.4. Marketing Performance & Dupont Analysis………………………11

4. Conclusion………………………………………………………..115. List of Reference……………………………………………………..126. Annexture-I……………………………………………………137. Annexture-II…………………………………………………..14

Word Count: 1642 words ( Excluding- list of references, table of content, cover page, referencing of sources, schematics diagrams, and Annextures)

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Value Based Marketing is a marketing Lexicon, used to conceptualise the process of value creation, in the firm, for the customers , without loosing focus on profitability and thus increasing shareholder value.

De Bonis, Balinski & Allen approach to value based marketing is, essentially focusing on customer value, through the concept of - Marketing Pentadigm.

Marketing metrics used for evaluating marketing performance, such Brand Equity, CLV, repeat purchase rate etc, generally fall shy of management needs - due to lack of conformity with dominant accounting-finance language of the firm, making it difficult to compare with alternative expenditures undertaken in the firm, humorously reflected in:

“ I know I am wasting half of my advertisement budget, but I just don’t know which half”

Hence the the concept of VBM has evolved further. Peter Doyle conceptualises it as the Marketing-Finance Interface and attempts to link marketing activities to financial consiquences and creation of intangible assets.

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Kolter defines,

Customer Value = Perceived Customer Benefits (product, services, quality and personal or image benefits) – Customer Cost


The Marketing Pentadigm in the context of Cadbury India:

(I).Discover market segment, based on customers having similar value ratios, Assess competitive position and only serve customers with high Customer Lifetime Value.

(II).Commitment to find the critical cutomer value factors & quantify them, develop customer value commitment superior to competitors, then align orgnisational capability - sales, service, supply chain, to deliver value, so to make economic profit (EVA).

In (Fig 1) we discuss a model to identify and maximise a set of hypothetical customer value drivers in the context of Cadbury India. In practice customer value drivers are identified by co-joint analysis. Customer value drivers & their relative importance – would depends on the type of industry/product and also on market factors like demographics, culture, income levels etc.

The customer value commitments must be communicated by means of both marketing communications, and internal communications processes. Repurchase behaivior in customers is caused by the diffrential between promised and perceived value.

Customer value drivers are important to formulate Marketing Strategy. Since marking is the art of attracting and retaining profitable customers- the company should ideally target the market segment in which it’s value proposition has competative advantage. It has to communicate effectively the value proposition of a particular product category and brand, which in turn would help enhance the total customer perceived values/benefits.

Define key performance indicators like - Brand awareness and position, customer acquisition & retention figures, proportion of total sales/profit from new customers/products. Some external indicators are customer satisfaction ratings, status in the industry as a value creator, customer referrals etc.

Oliver Wyman’s Customer Value Engineering (TM) –model, allows companies to identify and quantify the true emerging drivers of customer value––those things that customers are actually willing to pay for in a competitive environment ––and evaluate the profitability of alternative strategies. In (Fig 2) we try to adapt this model to FMCG Products in the context of Cadbury.

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CUSTOMER VALUE =

PRICE : Price of Cadbury Chocolates/Bournvita wrt to Nestle. margins given to vendors compared to nestle for pushing products.

QUALITY: Customer perceived taste compared Nestle products.

PRODUCT BENEFIT: It’s health benefits- nutrients, sugar content, differentiation- Ex: Fruit & Nuts variants, choco shakes/ice-creams.

CONVENIENCE: Easy availibility- emphasise on channels Ex: vending machines, packeging & size, Easy: Nescafe (3 in 1), Maggi Insta-Noddles.

SERVICE: taking care of vendor interest- flexibility in supply, buy back of defects, credit/financing of stocks, ease of payments.

ENTERTAINMENT : Create a product association with fun, family, festivity. Ex: Cadbury Celebrations gift packs as substitute to sweets.

ETHICS & SUCURITY: Parents favour Cadbury for their children as we are safe, healthy. Ex: Audit Storage Fecility of Distributors/Channels


(Figure : 1) CUSTOMER VALUE SYSTEM:

PRODUCT /NEED CATAGORYOCCATIONS

(Source: Adapted & Applied in the context of Cadbury from IBM Institute for Business Value analysis; partially adapted from Retail Forward and “Retailing”, Dale M. Lewison)

Figure 2: Customer Value Engineering

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SELF ACTUALIZATION: Not applicable

ESTEEM: Childrens height increases with Bournvita Drinks, he’s able to do better in academics. Chocolates appeal to women , Sextuality.

SOCIAL : Chocolates mostly satisfies this need.

SURVIVAL: Ex: Bournvita- Drinks complements diets, bridges gap in intake of vital nutrients.

CONVENIANCE: related to distribution/channels

DISCOVERY: N.A

REPLENISHMENT: Notion of quick & easy food value. Ex: Nestle Kit Kat, Cadbury Perk

SELF EXPRESSION: Moments of happyness rewarded with chocolates, Ex: Adv showing fans having chocolates after winning a cricket match. Students having chocolates after passing an exam

SOLUTIONS: Ex: Soln to nutrients deficiency,child


100 New Features Finacing/ BRANDS External Quality of Ease of

Price

Ex: Fruit & Nuts

Sugar Free Endorsements Trials

Consumption:

Innovation: cold coffes in can,smaller affordable packs for rural consumers

PremiumBournvita +Vitamin-C

credit sales, margins

Ex: By Celebrity. Customer

Amitav Bacchan doing for Cadbury

Surveys: Listen to your customers Delivery Time Support to

Vendors

80 Core Features Price User Competance Product Advertisement/

Choco Endorsements of Sales Team Availibility Promotions

Caramel/

Wafers ( the word of

mouth is very Awareness

60 Performance: important for Campaigns

TASTE relative to competing food products) Discounts

products

30 Safety

Both in

Production & Storage

in Channels

Product Price Brand Influencer Sales Process Time to Ongoing

Specification Value Support

15 40 60 70 75 80 100

ACTUAL & EMERGING VALUE DRIVERS

(Source : Adapted and Applied in the context of Cadbury India from Oliver Wyman Client Example – of CVE in technology products company)

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The values given here are notional based on judjement, however actual weightages of value drivers and their component is dependent on –market surveys and data analytics. It’s important to note that from Cadbury’s point of veiw both the end consumers and distribution channels- like stockist, retailers are customers, so some of the value drivers are not pertaining to end consumers.

Lessons in CVE through competitor’s failures & success:

Branding: Nestle can be credited for revolutionizing the snack market in India - both Maggi and Nescafe, has attained generic brand status. However Milo has failed in India, despite being the No.1 malted drink brand globally. The reason I believe is that – Milo is also a sorghum grain used as horse fodder, 50% of Milo production is still eaten by the world’s poorest, and during the great famine Indians had to eat Milo imported from USA, as we didn’t have dollars to import wheat.

Ethics: Nestle has helped farmers of Moga district in India, to developing good dairy practices in this area with concepts like high-yield cows, quality fodder and balanced cattle feed. Kraft Foods- became the first to stop advertising junk food to children, CEO-Roger Deromedi said, “Our relationship with consumers is about trust. If you don’t align with society and you get out of step with that, then you’re going to destroy shareholder value.”

Product Innovation by Listening to Customers: Food habits are influenced by local tastes and flavors – Nestle India has customised its products to satisfy customer needs. This has allowed them to command higher price premium.

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( III).Create customer value commitment culture- as an expected, normative behavior throughout the organization. (Refer to Fig:3) Invest in appropriate resources & infrastructure to deliver value cost-effectively and efficiently, since a customer may not choose to buy even if, the perceived customer benefits are higher than the competitors, due to higher price proposition.

Value = Desired Benefits /Relative Costs.The components of Relative Costs are, Acquisition costs, Possession costs like, inventory mangement cost and Usage costs like, product shelf life, replacement costs, etc. The less value you deliver, the more price is commoditized.

Fig-3: Value Chain Within an Orgainsation by M.E Porter.

SUPPORT ACTIVITIES

PRIMARY ACTIVITIES

Benchmark practices of Competitors:

Procurement : Nestle faces stiff competition from Amul Dairy, which can operate on very thin margins owing to it’s co-operative structure. Milk, constitutes 47% of Nestle's total raw material costs. The company has replicated Amul’s procurement system - in Moga district, it sources 1.1 m lts of milk per day from 980,000 farmers through 2,250 collection centers.

Technology : Nestle India has access to global technology, brands and product development skills of the parent, Nestle SA, which spends more than US$1.5b on R&D every year. Nestle India now uses its own ERP- Application Software for supply chain management.

(Source Of Data : Motilal Oswal Securities, India –Oct 2007 Investment Report, Nestle Annual Report )

(IV &V). Asses customer feedbacks & Improve customer value ratio:As customer value needs and expectations are dynamic, so anticipate change and redefine customer value commitments through innovation.

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PROCUREMENTTECHNOLOGYHRFIRM INFRASTRUCTURE

INBOUND LOGISTICS

OPERATIONSOUTBOUND LOGISTICS

MARKETING & SALES

SERVICES


Conceptual Framework: VBM as the Marketing – Finance Interface

(Individual Marketing Activities: Advertisement, Customer Satisfaction, Customer Value,

Branding, Promotions, Product Innovation)

Marketing is viewed as an investment that produces an improvement in the drivers of customer equity.This leads to improved customer perceptions which result in increased customer attraction and retention, Better attraction and retention lead to increased CLV and customer equity.

(Source : Rust, Roland, Lemon,Zeithaml, Valarie)

(Source: Adapted from, Linking Market-Based Assets to Shareholder Value (Srivastava, Shervani and Fahey 1998)

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Market /Shareholder Value

Intangible-Market Driven Assets

Brand Equity

Customer

Equity

Channel Relationship

Intellectual

Property

Tangible Assets

Plant,Cash,& Inventory,

MARKET BASED ASSETSCUSTOMER RELATIONS: BRANDS PARTNER RELATIONS: CHANNELS, CO-BRANDING, NETWORKS

MARKET PERFORMANCE

FASTER MARKET PENETRATION, MARKET SHARE, PRICE PREMIUM, CUSTOMER LOYALTY/RETENTION, SALES/SERVICE COST

SHAREHOLDER VALUEACCELARATED CASH FLOW, ENHANCED CF REDUCED VOLATILITY & VUNERABILITY OF CASH FLOW, ENHANCED RESIDUAL VALUE OF CF.


(Source:Rust et. al. The Chain of Marketing Productivity, Rust, et. Al, 2004),

Performance Analysis of Cadbury vs Nestle in India, Using Dupont Model:

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Analysis ( Refer to Annexture I &II for workings) :

Marketing ROS of Nestle is about 15 % higher over the last 5 years as compared to Cadbury, suggesting Nestle has been more effective in it’s marketing activities & commnicating it’s value proposition.

Being leaders in the category – like chocolates & beverages, Cadbury didn’t invest Selling & Marketing for 3 years. But Nestle has been consistanly doing so, and now Kit-Kat is the market leader in choco-wafers. Strong marketing investments and performance will result in higher margins as well as turnover as expressed in revenue premium and measure of brand equity. Brand equity helps protect margins, turnovers, and results in even cash flows.

By managing operating margin & net margins (margins/sales) and asset turnover (sales/assets), companies can “engineer” return on assets (ROA). Operating margins of Nestle has been (5-9)% higher than Cadbury in the past 5 years.

Cumulative value creating for shareholders (EVA) generated by Cadbury in 5 years is about Rs 3030 mn, 5x less than Nestle at Rs 15610 million, although difference in Sales in about 3x.

Interbrand Survey- values Nestle Brand at $5.6 b (excluding Nescafe), while Cadbury is yet to feature in the ranking.

Conclution: VBM tools enables managers to integrate data on customer benefits and costs in a systematic manner, analyse relative importance of attributes & anticipate market value of their products to multiple targets groups. It’s also a management system for marketing to grow it’s fianacial contribution.

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LIST OF REFERENCES:

Value-Based Marketing for Bottom-Line Success by De Bonis, Balinski, and Allen

Linking Marketing Metrics to Financial Performance- by Rajendra Srivastava, David J. Reibstein and Yogesh V. Joshi. A Technical Report , Zymen Institute of Brand Science –Emory Goizueta Business School.

"Measuring Marketing Productivity: Current Knowledge and Future Directions" October 2004, Journal of Marketing article by Roland T. Rust, Tim Ambler, Kumar, and Rajendra K.Srivastava

Roland T. Rust, Katherine N. Lemon, & Valarie A. Zeithaml, : Return on Marketing: Using Customer Equity to Focus Marketing Strategy, Journal of Marketing 68(1), 2004, 109-127)

Value Based Marketing by Peter Doyle

Marketing Essentials by Philip Kotler

NESTLE Report: Return of Golden Era – by Motilal Oswal Securities, Bombay 9th October 2007

IBM Institute for Business Value quick read, undated by Steve Ballou, Julian Chu, Gina Paglucia Morrison.

Oliver Wyman New York, Customer Value Engineering

http://www.oliverwyman.com/ow/pdf_files/Uncover_Drivers_Cust_Demand.pdf

From Customer Lifetime Value to Shareholder Value: Theory, Empirical Evidence.Paul D Berger; Naras Eechambadi; Morris George; Donald R Lehmann; et alJournal of Service Research : JSR; Nov 2006; 9, 2; ABI/INFORM Global.

High Performance Marketing , by Naras Eechambadi, Chapter 4, THE MEASURE OF MARKETING.

Calculating EVA,Principles of Corporate Finace by Brealey & Myers.

JOURNAL OF MANAGERIAL ISSUES Vot. X\7I 2005: 11-25 Customer Lifetime Value, Customer Profitability, andthe Treatment of Acquisition Spending Phillip K. Pleifer.

Bombay Stock Exchange www.bse.com

National Stock Exchange www.nse-india.com

www.investopedia.com

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http://www.investopedia.com/

http://www.nse-india.com/

http://www.bse.com/

http://www.oliverwyman.com/ow/pdf_files/Uncover_Drivers_Cust_Demand.pdf


ANNEXTURE – I ( Income Statement & Calculations)

Industry : Food Processing CADBURY India

NESTLE India

Dec '03

Dec '04 Dec '05 Dec '06 Dec '07 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07

Profit & Loss ( Rs crores)12 mths

12 mths 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Income

Net Sales729.8

1 764.05 879.781,058.2

41,293.4

72,160.2

12,229.4

2 2,475.092,819.1

63,500.9

6

Other Income 18.98 13.44 17.87 8.71 7.68 15.87 8.21 23.67 15.33 21.24

Stock Adjustments 5 13.48 10.44 -2.54 17.29 -7.88 6.55 16.73 13.42 71.01

Total Income753.7

9 790.97 908.091,064.4

11,318.4

42,168.2

02,244.1

8 2,515.492,847.9

13,593.2

1

Expenditure

Cost of Goods Sold402.2

7 439.67 499.07 613.92 772.33 1244.72 1338.39 1472.06 1732.58 2219.06

Gross Margin % 55.12 57.54 56.73 58.01 59.71 57.62 60.03 59.48 61.46 63.38

Selling and Admin Expenses 0 0 0 266.54 323.54 417.12 423.06 460.53 480.14 496.22

Sales & Mkt % 0.00 0.00 0.00 25.19 25.01 19.31 18.98 18.61 17.03 14.17

Marketing ROS 55.12 57.54 31.54 33.00 40.40 38.64 41.43 42.44 47.28 63.38

Miscellaneous Expenses246.6

9 256.33 292.11 35.88 43.13 54.96 42.76 56.78 87.55 172.54

Total Expenses648.9

6 696 791.18 916.341,139.0

01,716.8

01,804.2

1 1,989.372,300.2

72,887.8

2

Operating Profit 85.85 81.53 99.04 139.36 171.76 435.53 431.76 502.45 532.31 684.15

Operating Margin % 11.76 10.67 11.26 13.17 13.28 20.16 19.37 20.30 18.88 19.54

PBDIT104.8

3 94.97 116.91 148.07 179.44 451.4 439.97 526.12 547.64 705.39

Interest 1.85 2.41 1.7 2.22 2.03 1.92 0.78 0.21 0.44 0.85

PBDT102.9

8 92.56 115.21 145.85 177.41 449.48 439.19 525.91 547.2 704.54

Depreciation 30.89 33.95 34.07 33.41 34.32 46.27 49.14 56.84 66.28 74.74

OPBIT 87.7 83.94 100.74 141.58 173.79 437.45 432.54 502.66 532.75 685

Profit Before Tax 72.09 58.61 81.14 112.44 143.09 403.21 390.05 469.07 480.92 629.8

Tax 26.44 22.24 35.19 43.62 44.67 136.06 134.58 159.49 165.43 214.8

Effective Tax Rate36.67

6 29.551 43.3695 38.8029 17.779 34.7536 35.4134 34.0035 34.4797 34.295

Assuned Constant Tax Rate 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%

Reported Net Profit 45.65 41.29 45.95 68.81 117.65 263.08 251.92 309.57 315.1 413.81

NOPAT=OPBIT*(1-tax) 57.01 54.56 65.48 92.03 112.96 284.34 281.15 326.73 346.29 445.25

(Source of Raw Data: www.moneycontrol.com)

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ANNEXTURE- (II) ( Balance Sheet & Calculations )

Industry : Food Processing

CADBURY India

NESTLE India

Dec '03 Dec '04Dec '05

Dec '06

Dec '07

Dec '03 Dec '04

Dec '05

Dec '06 Dec '07

Balance Sheet (Rs crore)12 mths 12 mths

12 mths

12 mths

12 mths

12 mths 12 mths

12 mths

12 mths 12 mths

Sources Of Funds

Total Equity 357.93 395.99433.8

1392.

1406.1

4 335 319.4354.

1 388.89 418.43

Total Debt 12.34 7.04 8.2210.0

1 8.76 5.1 7.91 14.3 16.27 2.87

Total Liabilities 370.27 403.03442.0

3402.

1 414.9340.

1 327.3368.

4 405.16 421.3

Application Of Funds

Net Block 153.73 145.93160.6

2165.

1245.5

9391.

4 397.2473.

8 541.79 601.81

Capital WIP 6.85 21.41 29.5582.1

8 25.5813.9

4 34.0922.8

3 38.24 73.7

Investments 127.34 232.3258.2

1253.

4298.4

973.6

4 154.9104.

4 77.77 94.4

Inventories 94.76 98.28102.3

3122.

1151.0

2219.

4 216.7253.

1 276.22 401.22

Sundry Debtors 24.13 24.59 10.6811.3

7 13.14 31.7 26.1730.5

2 55.76 53.49Total CA, Loans & Advances 217.59 176.04 184.8

189.5

246.02

412.4 421.2

514.6 583.45 678.7

Total CL & Provisions 135.24 172.65 218.5301.

8 400.8551.

2 680.1747.

2 836.11,027.3

0

Net Current Assets(WC) 82.35 3.39 -33.7 -112-

154.8 -139 -258.9 -233-

252.65 -348.6

Total Assets 370.27 403.03442.0

3402.

1414.8

8340.

1 327.3368.

4 405.15 421.31

Contingent Liabilities 57.33 58.83 66.5484.7

5106.1

2 4.87 10.3950.0

4 35.93 63.27Interest (From P&L A/C) 1.85 2.41 1.7 2.22 2.03 1.92 0.78 0.21 0.44 0.85

Cost of Debt % 14.99 34.23 20.6822.1

8 23.1737.6

5 9.86 1.47 2.70 29.62G Sec Coupon% (NSE) Rf 0.06 0.05 0.07 0.07 0.07 0.06 0.05 0.07 0.07 0.07Beta (ITC:0.64), (HUL:0.45) 0.64 0.64 0.64 0.64 0.64 0.45 0.45 0.45 0.45 0.45BSE SENSEX ( 5 yr CAGR) 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15

R = Rf + Beta( Rm-Rf) 11.76 11.40 12.2412.2

4 12.1210.0

5 9.5010.7

8 10.78 10.60

WACC 11.87 11.80 12.4012.4

9 12.3510.4

6 9.5110.4

2 10.46 10.73

Capital Employed 236.08 149.32126.9

252.8

2 90.81252.

5 138.4241.

2 289.14 253.21

WACC*Capital Emp28.017

3 17.61815.73

36.59

511.21

826.4

2 13.1625.1

330.235

827.168

3

NOPAT=OPIBT (1-tax) 57.01 54.56 65.4892.0

3112.9

6284.

3 281.4326.

7 346.29 445.25

EVA28.992

7 36.94249.74

785.4

3101.7

4257.

9 268.2301.

6316.05

4418.08

2

( Source of Raw Data from www.moneycontrol.com, www.nse-india.com, www.bse.com )

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http://www.nse-india.com/

http://www.moneycontrol.com/


Assumptions & Notes:

1. Published beta values of ITC & Hindustan Unilever taken as proxy to Cadbury and Nestle respectively.

2. EVA = Nopat – WACC *( capital employed not including investments)3. Net operating income after tax = (Operating Income exclusing other income)*(1-tax)4. Rm: market return assummed as BSE Sensex ( 5 years CAGR).

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value based marketing project

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