The Rule of Maximum Earnings

by Chris Kenton on November 9, 2006

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.

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Victor Cook, Jr., New Orleans, Louisiana November 10, 2006 at 7:54 pm

Yes, it is like riding a bike. It isn’t easy at first, but you’ll never forget how to do it once you know. Your comment just happens to be the subject of a capstone piece in the current issue of Fortune magazine on Excellence in management:

Vhttp://money.cnn.com/magazines/fortune/fortune_archive/2006/10/30/8391727/index.htm

Thank you for placing this in perspective.

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