Monthly Archives: November 2006

Analyzing and Forecasting Enterprise Marketing Performance

We’ve arrived at the final chapter of Competing for Customers and Capital. If you’ve made it this far, you’ll see in this chapter how all the tools we’ve been discussing in Victor Cook’s marketing finance framework come together to provide a powerful tool for competitive valuation of the businesses in a strategic group, measuring the ROI for shareholders by analyzing the appreciation or depreciation of a company’s stock price over time.

If you haven’t followed the discussion this far—and to be fair, Cook’s framework is both technical and innovative—I’ll summarize some of the key building blocks that will help you understand this chapter.

1)      Using financial accounting data, it is possible to analyze a strategic group of businesses and draw a direct relationship between one company’s share of group revenues and its share of market value. This relationship is called the Value-Sales Differential, and it demonstrates a company’s competitive performance in generating a share of market value relative to its share of revenue—or bang for the buck.

2)      While it’s valuable to look at this data as a single snapshot in time, it’s even more valuable to look at a broader window of time to track the volatility in a company’s Value-Sales Differential. This is a Risk Adjusted Differential, and Cook’s model relies on 10 periods of data, either yearly or quarterly.

3)      By analyzing a company’s Value-Sales Differential in relation to its enterprise marketing expenses, you can measure the efficiency with which a company generates revenue and market share from its marketing resources, or its Enterprise Marketing Efficiency.

4)      By looking at the Risk Adjusted Differentials for a competitive group of companies, it’s possible to identify a point of Maximum Earnings for each company, an optimal point at which enterprise marketing expenditures generate the greatest possible earnings and market value. Below this sweet spot, the company is leaving revenue on the table, beyond it, the company is pouring marketing dollars down the drain.

5)      By comparing the maximum potential earnings of a company to its actual earnings, you can derive the company’s Relative Earnings Productivity, or its ability to optimize enterprise marketing expenditures in generating revenue.

Where we take all this information in Chapter 9, is using this data to analyze a company’s overall performance compared to its competitors, and to project trends into the future to forecast the company’s stock price. This includes the development of worst-case, best-case and expected scenarios for generating future earnings and share of market value. Which in turn leads to a forecast of low, high, and expected stock prices ten periods into the future.

This level of tracking market performance may seem more relevant to investor relations than determining the levels of budget allocation for enterprise marketing. But here’s the critical link: Cook demonstrates how a CMO can work with the CFO to orchestrate future spending on enterprise marketing resources that leads to a target stock price and return to shareholders. Along the way some surprising implications appear. You can see patterns that relate a company’s productivity in optimizing earnings to its efficiency in generating market value—patterns that may point to the impact of marketing and public relations events, in ways that internal Marketing ROI metrics could never hope to uncover.

Check out the narrated powerpoint for Chapter 9 for yourself, and see what we’re talking about. It’s only 14 minutes, and though it may take a few reviews and referrals back to the basic concepts, it’s worth it. If you find it hard to follow, skip forward to the charts in the final 3rd of the presentation to see how Cook uses 2003 financial data to analyze and forecast target spending, share of market value and stock prices for Novartis in 2007.

In Search of Maximum Earnings

Time for another chapter in our Book Discussion on Competing for Customers and Capital. We’re on to Chapter 7 now, and Victor Cook has posted a new narrated PowerPoint as a supplement. I have to say that the case studies in this chapter broaden the implications for his framework of marketing finance tremendously, and are easy to understand even if you only grasp the basic concept of his theory.

By way of short review:

  • We’ve learned so far about the power of using financial accounting data to analyze how a company spends on enterprise marketing.
  • We’ve learned the value of comparing a company’s relative earnings and expenditures on marketing to a strategic group of competing companies.
  • We’ve learned that with this information in hand, it’s possible to identify a clear relationship between a company’s value to shareholders and the revenue it generates, as well as a relationship between revenue and expenditures on enterprise marketing.
  • Finally, we’ve learned that it is possible to identify a theoretical point of Maximum Earnings, after which the expenses on Enterprise Marketing required to gain market share and revenues have diminishing returns, and before which the expenses on Enterprise Marketing are insufficient to take full advantage of potential earnings. IE: You’re either pouring money down the drain, or leaving revenue on the table.

In this latest Chapter, Victor offers up a number of case studies that show other insights that can be gained from an understanding of Enterprise Marketing. He demonstrates with case studies that include Amazon, Ebay, WalMart, AT&T, Gannett, and Merck, how publicly available financial accounting data can present a clear picture of whether companies are growing wisely, and whether market shaping events, like mergers, acquisitions and IPOs are likely to pay off or not. All of this insight comes from being able to analyze the relative gaps between actual and maximum earnings and market share, and actual and maximum Enterprise Marketing expenditures.

Victor also introduces a new derivitive metric, companion to the Risk-Adjusted Differential discussed earlier in the book, called Relative Earnings Productivity. The Risk Adjusted Differential is simply a view of the difference between a company’s stock market value and its revenue (the Value Sales Differential) over 10 quarters, which reveals both an average and a trend for that differential, thus reducing the risk of depending on a single quarter’s number. The Relative Earnings Productivity tracks the difference between a companies Actual earnings, and Maximum potential earnings, thus revealing how much revenue the company is leaving on the table, or much they are pouring down the drain by investing in market share they can’t sustain.

If this sounds too wonkish, just listen to the chapter summary and soak in the concept of being able to look at a company’s earnings and expenditures, and have a framework for understanding whether or not that company is leveraging its Enterprise Marketing resources wisely. Should the company be spending more? Spending less? Merging with a competitor? Lopping off a division? Imagine as a marketer being able to make the case for one of those courses of action, framed from the standpoint of marketing, but in language the CEO, CFO and investors understand.

This is big iron for marketers. 

Enterprise Marketing: The battle for Your Desktop

I’m running a little behind this week as I catch up on business demands, but we’re getting into the home stretch on this Book Discussion about Victor Cook’s Competing for Customers and Capital. Best of all, we’re reaching the point in the book where there’s a significant payoff for the hard work of wrapping your brain around new concepts that involve numbers.

I’m going to launch a discussion now of Chapter 6 (you can find a supplemental narrated PowerPoint here), which is a fantastic case study for applying the Rule of Maximum Earnings to an analysis of one of the world’s most infamous corporate corrections–IBM’s dramatic loss of market share during the 90s, and the rise of Dell. There are many ways to retrospectively read that market’s evolution and IBM’s fall, but in the context of a theoretical Maximum Earnings threshold that IBM substantially overreached, it has substantial value in highlighting the strategic importance of Enterprise Marketing. It’s interesting to me that at the time, Gerstner and his financial team figured out that they were dramatically overpaying for market share and a made many controversial moves to correct it, but the conventional wisdom still suggests that the real problem was manifest during the fall from the pinnacle of market share, rather than any problem, like over-investment, during the climb to the top.

One thing that seems to be a challenge in the application of the Enterprise Marketing framework relates back to chapter 3, and the definition of a strategic competitive group. IBM’s competitive group changed substantially during the 1990s, from a significant focus on systems and components to a focus on software and professional services. Microsoft and HP are two other 800-pound gorillas with such a diversified portfolio of products, it’s hard to shoe-horn them into any single competitive group, where the Enterprise Marketing expenses can be assumed to be evenly distributed over their various product categories.

Given the value of the Enterprise Marketing framework, I wonder if there are any potential strategies to unwind some of the financial data in ways that could shed more light on the various Enterprise Marketing expenses within a single companies product portfolios? I know it’s not a perfect solution by any means, but could enterprise-wide SG&A expenditures be allocated proportionately to various product groups based on group revenues, so that some comparison to other pure-play businesses in the strategic group could be made? I know each product group would probably have different levels of product marketing efficiency, but how different would you expect the corporate marketing efficiency to be across product groups? 

The Rule of Maximum Earnings

I’ve just spent a couple of days struggling through Chapter 5 of Competing for Customers and Capital. I suspect we’re going to lose a lot of marketers at this point, because the concepts are not familiar, and it takes some time to rearrange your synapses and understand them. But I’ll state once again for the record that these are concepts fundamental to the future of marketing. If you want to someday have a seat in the boardroom, do whatever it takes to get your mind around these concepts.

I’m going to start this thread by cutting right to the core concept that drives this chapter. There are a lot of steps to getting to main idea, but if you understand the main idea, it may make the steps more clear.

First of all, remember that the fundamental frame of reference is a strategic group of competing companies. You’re not looking at your company in a vacuum, and just calculating your cost of acquisition, for example. You’re looking at a competitive set of companies, and looking at what it costs for you to generate value as a share of the total value created by your strategic group.

The main concept in this chapter is the notion that there is a sweet spot where a company achieves the greatest marketing efficiency, and the greatest share of market value relative to its earnings. Why is that important? Because most companies approach growth like a cancer cell–Grow. Grow. Grow.–without any critical analysis of diminishing returns on the investment in growth, much less an application of this knowledge to marketing operations. It turns out that there is an identifiable curve, defined by the dynamics of your competitive strategic group, that demonstrates the optimal point at which earnings and market value are maximized.

Imagine if you had this knowledge, and could work backwards to calculate a marketing budget based on a clear understanding of how your market growth would impact market value relative to a group of competitors. Well, you can, and it isn’t that difficult, once you get your arms around the concept. It’s like riding a bike. It isn’t easy at first, but you’ll never forget how to do it once you know.

Victor has put together another narrated powerpoint summarizing the major concepts in Chapter 5. Jump into it and ask questions. Victor is following the thread and will respond to any discussion about the concepts.

The Mysteries of Enterprise Marketing

We’re moving this week into the heart of our book discussion on Competing for Customers and Capital, and we’re also making some adjustments as we go. After looking at the data showing how readers were going through the narrated powerpoint slides, and noticing a significant early drop-off, Victor has been editing down his supplementary presentations to make them more streamlined. I started a "cheat-sheet", putting in lay terms the Enterprise Marketing concepts that form the core of Victor’s framework, which I’ll post as soon as possible.

Today we’re going to move on to Chapter Four, and start getting into a practical discussion of Enterprise Marketing expenses–or, what counts as marketing? One of the significant challenges to marketing’s ascension into the board room is the lack of clarity in defining exactly what consititutes a marketing expense. You may be surprised at the wide gap between what marketers typically consider a marketing expense, and what investors consider a marketing expense under Sales, General & Accounting numbers–not to mention the variations across industries and companies.

In this chapter, Victor discusses the definition of Enterprise Marketing expenses, and lays out specific categories or domains of enterprise expense that relate to the intangible value that makes up such a significant portion of a company’s market value. One interesting observation on this chapter: in the case studies that highlight businesses that have returned the greates value to shareholders over the past 30 years, it is the companies that have succeeded in effective Enterprise Marketing that are on top–not those that have pursued the kind of corporate strategy that minimizes marketing to a managerial function.

To pick up the conversation where we left off, visit Victor’s narrated powerpoint on Chapter 4. If you’re joining this book discussion for the first time, you can get caught up by visiting the book discussion index.

Penetrating the Mist of Marketing Financials

We’re getting into some of the critical nitty-gritty details in this book discussion of Victor Cook’s Competing for Customers and Capital. We’ve been talking this week about how companies generate value, and getting into numbers, ratios and differentials. This is where it becomes an uphill struggle for a large number of marketers who haven’t studied finance or statistics. It may feel to a lot of readers like groping in the mist, but it’s critically important to push ahead and absorb whatever you can. If marketing as a profession is unable to climb this hill, we’re in trouble. Trying to drive marketing strategy without understand the underpinnings of how value is created would be like popping the hood of a broken-down car to try and get it running, with no understanding of how an engine works.

I can’t state this any more clearly: for any marketer that hopes to one day sit in the boardroom, this is a step you can’t skirt–and it’s one that’s been made a whole lot easier by this book. You don’t need to become a CPA. Just push through and absorb what you can. The view is a lot brighter up ahead.

Okay. So maybe over the next two days, we can drill down for a little more clarity on the most important concepts that run through this book before we go on.

The first critical concept is the Value-Sales Differential, since I think most of the analysis derives from this metric. The idea behind the Value-Sales Differential is that you take a group of competing companies and add up all the revenue they generate in a given period. Then add up the entire market value of those companies (they must be publicly traded for you to get that data, but the data is free). What the Value-Sales Differential does is look at the difference between one company’s share of the total revenue generated in its competitive group, and compare it to the same company’s share of market value within that group. When you do this for all the companies in the competitive group, the picture can be astounding.

In the case of Southwest, which we’ve been discussing this week, compared to its competitors, like United Airlines or American, Southwest doesn’t have the largest share of revenue, but it has an overwhelming share of market value. That means that Southwest is able to generate shareholder value with vastly fewer resources than its competitors. Given that capability, it’s worthwhile to ask how that extra value is being created. And guess what? A lot of that capability is directly within the domain of marketing. That’s why this is so critical–for the first time, we have a doorway into a financial system of measurements that allows us to start demonstrating the value-creating capability of marketing in terms that any CEO or CFO could appreciate.

Vic: what’s the next critical path concept behind Value-Sales Differential that a marketer would need to understand before we move on to some of the analysis and implications in the next chapters?