Competing for Customers and Capital

by Chris Kenton on October 23, 2006

Today is the launch of an extended book discussion on Victor J. Cook, Jr.’s new book Competing for Customers and Capital. If you have any interest in marketing beyond managing campaigns, this is the book that puts marketing on the map of boardroom business strategy, detailing a framework that demonstrates the connection between marketing processes and shareholder value.

Mr. Cook is joining us for this online discussion, and is even making supplementary materials available that he uses for his graduate courses in marketing at Tulane, including narrated powerpoints to elaborate important ideas. If you’d like to join the discussion, there’s no fee or registration. Just click over the Book Discussion page where you’ll find some background on the book and a permanent index to all the discussion topics that emerge over the next few weeks.

This week we’ll be discussing only the first chapter of Competing for Customers and Capital, which lays the foundation for Cook’s framework and introduces some new high-level concepts in marketing performance measurement. This chapter covers three broad concepts:

  1. The role and importance of Intangible Value in creating shareholder value.
  2. The need for a common framework that marketing and finance managers can use to measure the cost of enterprise marketing and its impact on shareholder value.
  3. An introduction of that common framework, with a brief discussion of various comparative measures that use financial data to link the enterprise marketing processes of competitors with relative market share.

If you haven’t yet picked up a copy of the book, you can gain some understanding of the material by clicking over the Book Discussion page and reviewing the supplemental material linked under Chapter 1.

Today, it seems the most logical place to start the discussion is a focus on the role of Intangible Value. For those new to this discussion, a business creates value by using its tangible assets (e.g.: printers, machinery, factories) and intangible assets (e.g. patents, relationships, intellectual property, brand loyalty). The tangible value of a company can be fairly easily measured by adding up the current value of tangible assets. But intangible value is much harder to measure. How do you measure the current value of a set of relationships, or the good will of a loyal customer base that will always buy your product?

Since the true value of a company is a combination of both tangible and intangible value, it’s important to have meaningful ways to determine and measure all the intangibles. The reason becomes clear when you look at the sometimes dramatic difference between the tangible value of a company and its value on the stock market. If you look at, let’s say, a paper mill, the difference between the sum total of the company’s tangible assets (it’s mills and machinery) and the company’s value on the stock market may not be so great. But if you look at Amazon.com, the stock value soars with seeming "irrational exuberance" over the relative value of Amazon’s tangible assets (it’s offices, computers and warehouses). The obvious implication is that Amazon has phenomenal ability to create shareholder value with intangible assets–those things that are really hard to measure.

For some reason–and this will be my question to Victor today–the importance of intangible assets has grown tremendously in importance over the past decade or two. Back in, let’s say, the fifties, an overwhelming proportion of a company’s value was defined by its tangible assets. Today, the tide has turned dramatically, and for companies in many industries, more market value is determined by intangible than tangible value. Can you talk a little bit about this shift and what it means for businesses and shareholders? How dramatic is the change, and where does it appear to be heading? And how are businesses, investors, and of course marketers, responding to the changing determination of value?

{ 4 comments… read them below or add one }

Victor Cook, Jr., New Orleans, Louisiana October 24, 2006 at 8:36 am

Chris,

These are powerful questions that require thoughtful answers. In Chapter 1 I said that “Total shareholder value in this sample of 479 companies in 2003 was $4.412 trillion. The total value of intangibles was $2.950 trillion, or 67% (page 6).” This result is consistent with many other estimates of the importance of intangibles in determining shareholder value. See for example Jonathon Knowles report on “Brand Equity and Shareholder Value” in Marketing Performance Metrics Forum, published by the CMO Council in 2005. My results differ from his only because the sample percentage reported in my book was based on all the companies in the COMPUSTAT database screened for those that reported “Intangibles” on their balance sheet.

Your questions prompted me to recognize that my results have a built in (and subtle) selection bias. Companies that report “intangibles” in their balance sheet very different from those that don’t. The 479 companies were selected out of nearly 6,000 companies in the data base in 2003. How much does this selection bias affect the results?

There’s a fascinating clue in Chapter 4 on “Enterprise Marketing Expenses (page 94, Table 4-6). These results are based on a sample of 5,359 companies that reported these data in their 2002 annual reports. Obviously, most of these companies didn’t report intangibles (annual data item 33 in COMPUSTAT).

There is a surprising number in this table I haven’t paid much attention to till you asked these questions. Here’s that number: the ratio of the combined market value of all these companies ($10.281 trillion USD) to their combined revenues ($8.7 trillion USD) was 1.18. Or, in this much larger sample (drawn just a year earlier) total revenue and total value were nearly equal!

Today I’m running some new numbers from COMPUSTAT. I have two objectives in mind. First, over the long run how does this value/revenue ratio behave? Second, is there some way to out the effects of selection bias in how markets historically have evaluated tangible and intangible value over the long haul?

I began working on these questions at dawn (after your questions gave me a restless night). I hope to have some results to report by the end of the day. In the meantime, I’d sure like to hear what others have to say in answer to your questions.

jens October 25, 2006 at 5:49 am

in my definition the value of a company lies in its potential. potential to create future revenue … by selling their products and services, their machines or their real estate for example.

the shift towards intangible assets clearly indicates a shift in the perception of where to locate this potential within a corporation. is it in the production units, in the brand, in the ability to reinvent, entertain and innovate? … hard to say, even harder to nail down with numeric tools i guess.

to my opinion this change of perspective is a fact. and i am really curious to see which parts of the contemporary corporation metrics are able to illuminate and which not.

Victor Cook, Jr., New Orleans, Louisiana October 25, 2006 at 8:35 am

OIL v. IMAGES

When I put together the narrated power point presentation for Chapter 1, I went looking for high resolution images to dramatize the concept of the cobbler’s children. I couldn’t find any good ones in the usual places. By accident I found Getty Images (http://creative.gettyimages.com/source/home/home.aspx
). Two things were immediately clear to me. First, this site wasn’t designed for someone accustomed to paying ten bucks for stock images on the Internet. Prices stared at $55 and went up quickly from there. Second, the selection and quality of images, both still and moving, was extraordinary. I ended up buying four of the $55 images for that presentation.

Then, while running the numbers on the value/revenue ratio and the importance of intangible value I noticed that Getty Oil was an outlier in the early 1950s with a value/revenue (v/r) ratio of 17.2 in 1956. That was more than twelve standard deviation away from the average. The 782 companies reported in Standard & Poor’s COMPUSTAT files in 1956 had a combined market value of $207 million and combined revenues of $206 million, putting the v/r ratio at 0.99.

So I ran the numbers on Getty oil. In every year between 1950 and 1983 the company reported the value of intangibles (item 33 in the annual COMPUSTAT data) was $0.00. In all but six of those thirty-four years, the depreciated value of its tangible assets was greater than its market value. This I thought was a company ripe for takeover. Sure enough the following story appeared in the New York Times on January 8, 1984.

“Texaco Inc. and the Getty Oil Company are tentatively prepared to close the largest merger in American history, but a judge is delaying the estimated $10 billion agreement so that heirs of the oilman J. Paul Getty can study it.”

Then I wondered, is there any connection between Getty Oil (ticker symbol GET.1) and Getty Images? So I went to Yahoo Finance and looked up the company (ticker symbol GYI). Sure enough Getty Images was founded in 1993 by Getty’s grandson Mark. It went public in 1995 and complete financial data became available in 1996.

At the close of business on December 31, 2005 Getty Images had a market value of $5,558 million. The intangible market value of the company was $4,750 million, or 85% of total value. Its value/revenue ratio was 7.6. Or the company created $7.60 in shareholder value for every $1.00 in sales.

To me the comparison of an oil company with an image company in the same family captures beautifully the choices managers and investors must make in placing a value on tangible vs. intangible assets … oil vs. images. This in turn goes to the heart of the reasons I think drives these choices.

Now, I’m going to speculate about these reasons. I think they boil down to three forces: brands, technology, and services. Clearly design plays an important role in all three of these areas.

In order to control for shifting market forces, I ran the numbers on the fifty companies with the highest intangible value in 1966 and 2003. Twelve of these reported the data in both years. And all of them had an intangible market value greater than 50%.

The intangible market value of five companies appears to me to be brand driven: Coca-Cola (1966 v2 = 76%; 2003 v2 = 81%); Gillette (80%, 77%); Procter & Gamble (57%, 77%*); Johnson & Johnson (68%, 76%); PepsiCo (52%, 75%*). The intangible value of seven companies appears to me to be technology driven: Pfizer (59%, 78%*); 3M (77%, 78%); Eli Lilly (77%; 73%); Texas Instruments (65%, 71%); Merck (85%, 62%*); Bristol-Meyers Squibb (85%, 62%*); IBM (77%, 38%*). The standard deviation in this small sample was 11%, so changes in the percent of intangible value are significant at a two sigma level for those companies marked with an asterisk. Please review the methods I used to calculate intangible market value (v2) on pages 2 and 3 of my book.

Fifteen companies of the top fifty companies weren’t even on the radar screen in 1966. These companies were (along with an estimate of their 2003 intangible market value): eBay (91%); Amazon (90%); Genentech (86%); Yahoo (86%); SAP (86%); Amgen (85%); Cisco Systems (81%); Qualcomm (80%); Sysco Corp (76%); Microsoft (74%); Clear Channel Communications (72%); Nokia (63%); Wal-Mart (58%); Home Depot (58%); and Nextel Communications (57%). I’ll leave it to you to decide whether the intangible market value of these companies is driven by brands, technology, or service … or some combination of all three.

Meanwhile, what do these results mean to managers and investors? In my view the market value of leading companies across a broad spectrum of industries is driven by the intangible forces of brands, technology, and services. Just as clouds in the sky drive the weather. And accountants can’t agree on how to (or even if) these can be reported in the balance sheet. So, we’ve got to figure out what inputs drive intangible value and how they affect total market value. I hope my book will provide you with some useful clues by pointing to enterprise marketing (a.k.a. selling, general and administrative) expenses as a critical measure of the inputs that drive intangible market value.

p.s. I’m still working on the trends from 1950 through 2005. More about my findings later.

Jonathan Knowles October 25, 2006 at 7:11 pm

I am delighted to learn that Vic’s analysis and mine are broadly consistent about the proportion of aggregate company value that is represented by intangibles.

My analysis was based on the S&P 500 and found that, if financial services companies are excluded (due to the very different natures of their balance sheets), then the proportion of market value accounted for by tangible assets was only 26%. Note that this number is an average of all industries – the individual industry numbers varied between 60% for utilities and close to 10% for technology companies.

As recently as 1982 (this is as far back as I have taken my analysis), the proportion of market value that was accounted for by tangible assets was 80%.

It is clear that something dramatic has happened in terms of the drivers of business success, and that intangibles have become the dominant source of value creation (by the way, this phenomenon is a global one).

One challenge is that there has been no common classification of intangibles – at least until recently. Surprisingly it is the accountants that have been the most clear minded on the topic. They think of intangibles purely in terms of forms of intellectual property that can be proven to legally belong to the company and which, if the company so chose, could be sold or licensed outside the company. The guidance notes to the new International Accounting Standards for dealing with goodwill arising from acquisitions (i.e. how to explain the price premium paid over the value of the tangible assets) suggest five classes of intangible asset:
- technology-related
- contracts
- artistic content
- customer knowledge
- marketing-related

Brand (or, more precisely, trademarks, trade dress and associated goodwill) fall into the category of marketing-related intangible assets. In aggregate, my analysis suggests that this class of intangibles represents 14% of the value of the S&P 500 (ranging form essentially 0% in basic materials to around 30% in consumer goods) – or a cool $1.5 trillion in market value.

So while it is only true to say that “brand is a company’s most valuable asset” for a minority of companies (there are only 7 companies in Interbrand’s most recent list of global brands for whom brand value was more than 50% of market value), it is clear that – for the majority of companies – brand represents a serious asset.

Of course, it is one thing to measure the value of an asset but quite another to understand what causes that value to go up or down. That is why I am looking forward to Vic’s insights into what drives increases or decreases in intangible value

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Competing for Customers and Capital

by Chris Kenton on October 16, 2006

Today I’m kicking off Marketonomy’s first Book Discussion, featuring Victor Cook’s Competing for Customers and Capital. This week we’ll be talking with Victor about the general concepts behind the book, before diving into the book material next week. If you want background on this book, or how the book discussion works, click through to the Book Discussion page.

I want to kick off today by saying why I chose Competing for Customers and Capital as the first book to dialog on Marketonomy. Victor Cook has been a top marketing scholar for more than 40 years, and has written some of the most influential works on marketing strategy and finance. True, he hasn’t written the kind of Snappy and Sappy marketing books that might have made him a pop guru. Instead, he has consistently developed incisive theories that challenge the status quo. 

His latest book cuts right to the heart of today’s marketing dilemma: demonstrating the bottom-line value that marketing delivers to successful businesses—and he does it in an unexpected and ground shaking way. This is not another book about Marketing ROI, or dashboards, scorecards and campaign metrics. This is a book directed straight at the boardroom, demonstrating through financial accounting data how business and stock performance can be critically and effectively measured in light of enterprise marketing processes. In other words, measuring a company’s revenue and market value is important, but you can learn much more by comparing how efficiently and effectively companies use their resources to generate that revenue and market value.   

I’m starting with this book because today marketing’s biggest dilemma is not about performance metrics or customer intimacy or new communications technology, even though these are all mission critical challenges. Marketing’s biggest dilemma is the lack of a guiding principle that defines a clear and consistent strategic role in the corporation. So many marketers dream of gaining a respected seat in the boardroom, and yet most can’t articulate the business strategies that drive boardroom decisions, much less stand up and argue effectively for the value of marketing processes in informing those decisions. Now is the time, and the opportunity, to turn the tide.

Victor Cook’s new book bridges the gap from marketing to boardroom strategy by clearly establishing the relevance of marketing processes to the creation of shareholder value. This is an important opportunity for marketers to gain a better understanding of how marketing fits into the strategic business landscape. And in the light of that understanding, the cyclical trends that continually redefine marketing—from branding to customer intimacy, from lead generation to marketing ROI—will make far greater sense in the larger scheme of improving the practice of the marketing profession.

So Victor: as a lead in to this in-depth discussion, maybe you can tell us where this book originates in your work over so many years.

{ 13 comments… read them below or add one }

Victor Cook October 16, 2006 at 7:48 am

Chris,

It’s a long story, with a number of chapters. I’m not sure your readers will be interested in the details, so I’ll begin with the bookends.

The tipping point was on July 3, 2003 when I just started writing the book for no apparent reason other than my fingers wanted to. Less than two months later on August 24 the first draft was written. Full disclosure: I had worked on the raw material for twenty years. And, several people had suggested I write a book. The first draft was incomplete, riddled with errors, and barely good enough to use in my first class. But there it was.

The genesis was in the fall of 1960 when, fresh out of my fine arts undergrad program and one case course in marketing, I began a master of science degree at LSU. The first course I took was microeconomic theory. The Professor’s name was Bernie Sliger. I was mesmerized by his 2D chalk board drawings of marginal cost and revenue schedules. I took notes as if his lectures were the most extraordinary learning experiences in my life.

It turns out they were. Professor Sliger was so taken buy my written examinations that he recommended me for a full scholarship in the Ph.D. program at the University of Michigan. I took that scholarship and flew to Ann Arbor with my wife and baby boy. There in the fall of 1962 I began another series of memorable class room experiences.
These included work with Ken Boulding (Microeconomics), Paul McCracken (Macroeconomics), Maynard Phelps (Marketing Thought), and Allen Spivey (Statistics).

Between these bookends are forty-four years of management practice and academic study of marketing strategy that finally motivated to those compulsive fingers! You can find a short summary of the academic story in a Listmania (The 14 Building Blocks) I posted on Amazon.

~Vic

Chris October 16, 2006 at 10:58 am

Can you discuss the genesis of how you began to tie marketing and finance together 40 years ago? Why is it that what seems like such an obvious area of study has been so neglected in business until now? How is that in 2006, the concepts you introduce in your book are so alien to most business strategists?

Victor Cook October 17, 2006 at 6:05 am

CAN YOU DISCUSS THE GENESIS OF HOW YOU BEGAN TO TIE MARKETING AND FINANCE TOGETHER 40 YEARS AGO?

In my mind it all began with Dorfman and Steiner’s paper on Optimal Advertising and Optimal Quality in a doctoral seminar at the Michigan Business School in the fall 1963. At the time I thought their paper carved out the foundation for the marginal analysis of market share and profits. It did.

See Dorfman, R.T. and P. O. Steiner. 1954. “Optimal Advertising and Optimal Quality.” American Economic Review 44 (December): 826-836.

WHY IS IT THAT WHAT SEEMS LIKE SUCH AN OBVIOUS AREA OF STUDY HAS BEEN SO NEGLECTED IN BUSINESS UNTIL NOW?

There are two reasons. Generally, the guardians of functional specialties in management education have built silos around them to protect their operational integrity. To make matters worse, the marketing and finance disciplines speak different languages, rely on different theories, and use different data to such a degree that there is virtually no communication between them. Consider the following results on citation counts in the three years 1995-1997:

Total times the top five marketing journals cited articles published in marketing journals 5,278. These authors cited finance journals only 31 times. Marketing to Finance Cite Ratio: 170 to 1.

In the same period, authors of papers published in the top five finance journals cited articles published in finance journals 7,399 times. These authors cited marketing journals only 13 times. Finance to Marketing Cite Ratio: 569 to 1.

The CMOs in Fortune 500 companies were taught from marketing literature that made reference to the finance literature only once in every 170 citations. And here’s the drop dead ratio: your CFO was taught from literature that made reference to marketing only once in every 569 citations!

HOW IS THAT IN 2006, THE CONCEPTS YOU INTRODUCE IN YOUR BOOK ARE SO ALIEN TO MOST BUSINESS STRATEGISTS?
My answer to your second question also applies here, but the imbalance is not nearly as great. If you substitute management for marketing the ratio is only 21 to 1. Other forces were work.

Over the last two decades the stature of marketing in the world of business strategists gradually diminished. Today marketing hardly appears on their radar screens — except as after-the-fact reports on gains/losses in customer satisfaction and market share.

Marketing’s fall from grace began when the PIMS studies and the BCG matrix were discredited by scholars, freshly armed with structural equation modeling and the computers to power them, who questioned the direction of causality in the market share/profit relationship. The decline was accelerated by the publication of Michael Porter’s five forces model and the rise of resource based management theory. At the time both of these developments were overlooked my many emerging marketing scholars because their theoretical paradigm had shifted from economic analysis of firm performance to psychological analysis of consumer behavior. And marketing scholars committed to economic analysis of firm performance carved out their own niche in marketing science. Their work was high in quality, but narrow in reach. It focused on micromarketing problems that were largely outside the domain of business strategists.

While it took about two decades for PIMS and BCG to reach a stage of disappointment, it took about one decade for the same to happen to brand equity. The turbo-charged recent history of marketing ROI seems to be reaching that point in about half a decade. Even marketing metrics guru Tim Ambler concluded that “ROI is not so much understood as waived about as a totem to ward off evil spirits, namely those trying to cut advertising expenditures.”

If you want more details on these developments I’ll send you a link to a paper that Bill Moult, Jim Spaeth and I presented at the INFORMS meeting in San Francisco in November 2005: “When Marketing Science Meets Corporate Finance.”

Chris Kenton October 17, 2006 at 6:32 am

“The CMOs in Fortune 500 companies were taught from marketing literature that made reference to the finance literature only once in every 170 citations. And here’s the drop dead ratio: your CFO was taught from literature that made reference to marketing only once in every 569 citations!”

Nice how that puts it all in perspective!

There are a lot of salient points in your response that we could dig into–the rise of corporate strategy over marketing is one that I’ve talked a lot about and would like to return to with you. But for the moment, what I think is most compelling is the sweeping historical view you have of marketing as a scholar who has tried to bridge the gap with finance. What have you seen in your career that explains what appears to be such a persistent lack of due diligence among marketers both in the business and academic worlds to understand business and financial fundamentals? How did we get to a point where marketing students can receive an advanced professional degree without taking classes in capital budgeting?

Victor Cook October 17, 2006 at 9:07 am

“UNSTRUNG”

An article by the same title in the October 2, 2006 issue of The New Yorker magazine reviews two exposes of what’s behind the mess the authors claim string theory got the study of physics into. “Physics, in their view, has been overtaken by a cutthroat culture that rewards technicians who work on officially sanctioned problems and discourages visionaries (page 86).” Replace the word “Physics” with “Marketing” and you have my personal answer to your first question. For a blow-by-blow account of how this culture operates in marketing just download and read my 1985 Journal of Marketing paper posted on this site: “Understanding Marketing Strategy and Differential Advantage.”

The answer to your second question is easier. Many marketing professors have absolutely no interest in accounting or finance. These are foreign languages that are difficult to learn. I’ve spent years mastering financial accounting data. The deeper you dig the more complex they become. And while these data are not “objective” reality, the financial statements of public companies are “audited” reality. Financial accounting data are unforgiving. Misplace a single line item and all your results are wrong. Worse, everyone will know because the audited data are in the public domain.

Finally, financial accounting data have nothing to say about how consumers behave. Combine this with the shift in the marketing paradigm from economic to psychological theory over the past two decades and you begin to understand why marketing students can receive an advanced professional degree without taking classes in capital budgeting … or advanced financial accounting.

Chris Kenton October 17, 2006 at 3:25 pm

“Combine this with the shift in the marketing paradigm from economic to psychological theory over the past two decades and you begin to understand why marketing students can receive an advanced professional degree without taking classes in capital budgeting … or advanced financial accounting.”

That’s a meme that deserves a lot of critical discussion in marketing circles–because it bears directly on the crisis marketing faces today as it tries to regain relevance and credibility in the boardroom.

To me, marketing went off the rails with the rise of mass markets after WWII. The various internal disciplines of marketing, from distribution to merchandising, became eclipsed by the glamour of advertising and the promise of engineered persuasion. For ages, marketing could get away without the accountability that has always dogged anyone in sales. Big creative budgets with soft measures of success. But now that technology is increasingly allowing tighter measurement of marketing impact, marketers know a lot about creative, but have very little idea of what actually drives customer relationships and commitment–much less revenue.

I guess the question now is how does marketing, as a profession, retrench and establish a solid foundation in fundamental business principals? To me, one big issue is the complete and utter lack of an understanding of marketing *history*. When I last checked, the latest really decent history of marketing was published in 1974, and is now out of print. Sure, you can find glowing accounts of marketing Celebrities and Golden Ages, but critical histories are lacking. That means an entire generation of marketers doesn’t really know where it came from. So how can it possibly know where it’s going?

But beyond history, an understanding of the forces that shape business strategy is critical. As you mentioned, corporate strategists now own the board room, and many assert that marketing is nothing more than a line function to be efficiently managed.

So in light of Competing for Customers and Capital, what do you think marketing can contribute to the boardroom discussion of business strategy?

Victor Cook October 17, 2006 at 6:16 pm
Chris Kenton October 17, 2006 at 7:41 pm

That adds a few bullet point details to my definition of what marketing can/should contribute to the business strategy discussion. In essence I think marketing’s guiding role is the identification of market opportunity, the measurement of its potential value and risk, and the organization of resources to profitably tap it.

And that, in a nutshell, is why I think your book is so important–it elevates the marketing discussion to the level of business strategy, and focuses on measuring how efficient and effective businesses are in using their tactical resources to leverage strategic market opportunities.

I’m going to leave the comments open on this thread so others can post questions. Tomorrow, we’ll move on to another thread.

John Girard October 18, 2006 at 2:40 pm

Fascinating discussion here.

I’m curious about this — since marketing has evolved (devolved?) into a fuzzy discipline, it has become a self-fulfilling prophecy that marketers are not ROI-oriented.

Given that, this is about more than just shifting the thinking of marketers, it is about shifting who marketers are.

I am amazed, for instance, at how often the “marketing” people I interview respond with horror when I ask them about financial metrics for success. “I am an intuitive marketer,” they crow proudly, “I don’t think in numbers.”

Given the deep entrenchment of the “pseudo-marketer” (harsh, yes, but all too often appropriate), why not scrap “marketing” as a discipline altogether and start over with something new?

For instance, “marketing” seems a less apt way to describe the study of markets than even a kitschy term like “marketology”.

In fact, to see just how broken “marketing” is as a term, search for “define: marketing” on google, and you get jaw-droppers like “the techniques used to attract and persuade consumers” and “The innovative synergism of all those activities within an organization to get the goods or services of that organization in the hands of the customers.”

I am not convinced that marketing as it currently stands can be rescued or reclaimed. So how about abandoning it and coming up with something new?

Vic Cook October 19, 2006 at 6:15 am

SCRAP MARKETING?

What’s the role of marketing in the evolution toward functional integration in your company? Chris laid the groundwork for an answer in the last of his series of three articles in Business Week Online — “When Sales Meets Marketing Part III” http://www.businessweek.com/smallbiz/content/mar2004/sb2004034_7619.htm?chan=search:

“I think the solution to sales-and-marketing integration can only come from marketing. And I think the reason the solution has not been forthcoming is that marketers have not accepted the challenge and taken the reins to effectively drive change. … Successful initiatives in sales-and-marketing integration are based in a strong relationship founded on collaboration and trust.”

Following this lead I believe the CMO is the only person in most organizations that can lead the way in finance-and-marketing integration. When CMOs complain that financial managers don’t understand marketing numbers, they’re right. What they forget is that financial managers see only two ways that the marketing numbers affect the bottom line: increase marketing expenses and profits fall; decrease them and profits rise. That’s how financial accounting works.

From the financial perspective marketing is an expense, not an “investment.” And you can’t close the GAAP (Generally Accepted Accounting Principles) by asking them to ignore this fact of financial life. Successful initiatives in finance-and-marketing integration must be founded on collaboration. Real collaboration is not achieved by inviting financial management to learn the marketing numbers. It’s more likely to work if marketing managers ask to learn the financial numbers in a strategic marketing context (e.g. Competing for Customers and Capital).

Imagine the surprise of a CEO if his/her CMO asked for a user ID and PW to access the companies COMPUSTAT data through its site license to Standard &Poor’s “Research Insight.” Why would they do this? It’s a first step in understanding the numbers that senior managers use to measure company performance. It would the equivalent of the surprise a Sales VP experiences when a CMO asks to be scheduled in a series of sales calls!

Chris October 19, 2006 at 9:45 am

I think John’s musings about the death of marketing are probably all too close to what many executives feel–and what many have actually acted on. I can’t tell you how many of my telecom clients in 2001 responded to the recession by firing their entire marketing teams to focus solely on sales. Marketing simply could not stand and deliver.

As a marketer myself, I am the first to stand up and flog marketers for letting the balance swing too heavily on the side of emotional campaign-oriented branding. Jonathan Knowles expressed the dilemma most succinctly when he described the gap between CMOs and CFOs as a problem over the definition of “value”. This generation of marketers has grown up defining value as what is delivered to the customer, while CFOs define value as what is delivered to the bottom line. There’s no balance, and when the survival of the company is on the line, the vast majority of today’s marketers simply haven’t been trained to understand and incorporate the CFO’s perspective. As a result, marketers see accountability measures as a wrong-headed restraint on what’s necessary to woo customers, and CFO’s see marketers as dangerously out of touch with fundamental business objectives.

This is a problem that runs deep–and in fact, is entrenched in the training executives get in business schools. Take a look a marketing curriculum and you’ll find precious little depth in business fundamentals. Take a look at a management or financial curriculum, and you’ll find marketing reduced to a ridiculous caricature of the four Ps.

That said, there is a tremendously rich history in marketing discipline that goes back at least to the mid-1800s, and centuries further before it was separated out from general business discussions. The problem is we let marketing be totally recast in the Madison Avenue image of high-rolling creatives, and that became a feed-back loop for bringing up marketers trained primarily in creative campaigning. That side of marketing is crucial, and shouldn’t be crushed in the pursuit of accountability and discipline, but if it’s the only thing marketers know, it’s like being a gorgeous model with no brain.

So I don’t personally think that marketing should be killed–but I do think it needs, and is getting, a very solid kick in the ass. And I think the (r)evolution is already underway. One of the most sought after skills among marketers today is Analytics, and within a few years, if you’re a marketer and you can’t demonstrate a clear understanding of how to manage performance accountability, you won’t go further than being a campaign manager. But if we respond with too eager a flushing of creativity, we’ll simply find ourselves 20 years down the road in a mirror-image of the dilemma we have today–very effectively measured marketing programs with no soul and no connection with customer communities.

John Girard October 19, 2006 at 11:13 am

I hear what you both are saying, and certainly agree it would be a mistake to throw out the baby with the bathwater.

On the other hand, markering today looks to me like a classic evolutionary “local peaks” problem. It has probably “progressed” as high as it possibly can up the current mountain – the problem is just that its on the wrong mountain.

My suggestion is less about abandoning marketing per se, and more about abandoning the mountain (and all those who elect to continue to camp out on it). Why not gather up those of us who are dissatisfied and go find another peak to climb?

Bringing this back out of the world of metaphor for a moment, I think the tension between the cfo and the cmo may actually be a false one. I think that it is just terrified marketers who have constructed the vision of a soulless marketscape driven only by numbers – but that is exactly the group that is making it so hard to bridge the perceived gap between the demands of the boardroom and the demands of the market in the first place.

Let’s go find another mountain :)

Chris Kenton October 19, 2006 at 12:08 pm

Now you’re speaking my language! Let me first restate what I think the “wrong mountain” is, before stating what I think the “new mountain” is.

I think the wrong mountain is the mentality that “it’s all about the customer”. It’s all the rage (once again) to talk about customercentricity and all that–but the very paradigm sets up a dichotomy where it’s “us and them”. It leads too quickly down a path of mercenary tactics to win campaigns (an aggressive military term, by the way) rather than looking at the marketing function within the context of the business as a whole. The result: highly tactical campaigns that often lead customer-myopic companies astray from intelligent business strategies.

The right mountain, in my mind, is the mentality of community–that the business must not only identify a customer need they can fill profitably but, to sustain success, they need to play an active and responsible role as a *member* of the community of customers they serve. How is it that so many supposedly customercentric companies wind up at odds with their customers over product quality and service? Because they only value the customer when they’re trying to win them, and they don’t see themselves as a member of a community, and therefore not continually accountable after conversion. The most impressive marketing I’ve seen lately is the participation of businesses in active online communities, where they respond to the concerns and needs of their market in real time. It’s not a monolithic tactical campaign–which is what makes it so hard for marketers to understand–but an ongoing mentality of engagement and participation, punctuated by tactical programs that enjoin participation by the market.

From a tactical perspective, the wrong mountain is what I call marketing with a small “m”. It’s the view that marketing is only valuable as sales support. Marketing has a very important strategic role to play in the definition of business strategy–but has forgotten that role and its relevance. In my mind, marketing with a big “M” is all about Opportunity Value–about being able to identify market opportunities (which can only happen by active participation in the market served), measure the relative potential and risk, and organize resources to leverage the opportunities and minimize the risk in order to generate profit.

That is indeed a new mountain–one that requires marketing to be recast as a fundamental component of Business Strategy, and I believe Victor’s framework for measuring the financial value of marketing processes is an incredibly important cornerstone of that new mountain.

Whoever is willing to move in that direction, I’m working my butt off trying to build a bus.

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