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?