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.