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? 

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.

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.

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?      

Last week we talked a lot about how the value of a company is measured, and ended up with an incredibly incisive discussion about how marketers contribute to that value. This week, we’re going to look at Southwest Airlines, and some new ways to understand how marketing has helped them consistently beat the competition. If you’re just joining the discussion, you can get up to speed by visiting the index to this Book Discussion on Victor Cook’s Competing for Customers and Capital. If you missed the last thread, I highly recommend reading Vic’s comments on how marketers can demonstrate the contribution of value to the bottom line in a way that’s relevant in the boardroom.

Once again, Vic has put together a narrated PowerPoint to discuss the important concepts in his analysis of Southwest Airlines. This section looks at Southwest the same way a savvy investor would. But instead of looking at typical ways to measure stock performance like, say, a price/earnings ratio, Vic introduces a number of measures that look at a company’s performance within a competitive group, and at how marketing impacts performance.

One example is the Value/Sales differential, which clearly differentiates the winners and losers of a competitive group according to their ability to generate shareholder value, relative to their share of revenue. Southwest consistently soars above the competition in its ability to generate a higher premium for its stock among investors, compared to its share of revenue among competitors. There are a number of marketing factors to consider in explaining the relative market value of a company among its competitors, which Victor will help elucidate this week.

As a lead in to this week’s discussion, I’d like to ask Victor to discuss what has been missing from the investor’s tool kit in measuring the value of a company on the stock market, and how that relates to marketing.

If you’re just joining us, we’re having a fascinating discussion about the future of marketing in light of significant changes in the business environment. We’re discussing Victor Cook’s new book, Competing for Customers and Capital. If you want to get up to speed, hop over to the Book Discussion page to get started.

Okay, let’s move on to the second bullet point in this discussion.  I’d like to propose some questions for Vic (and Jonathan, I hope you don’t mind being brought in on this one).

First, I think some of those who have read your posts and reviewed Vic’s narrated power point are a little bewildered. On the one hand Vic says in the power point presentation that intangibles are like "clouds in the sky," which makes them difficult to measure, at best. On the other hand you both reported in your last posts the percentage of market value accounted for by intangibles. How did you move from the clouds in the sky to percent of intangible value? Can anyone apply your methods? Please give us some examples of where you got the data and how you used it to come up with these results.

Second, you both provide a list of the types of intangible value. Vic, on page 16 of your book you say intangibles are created from the following list of "assets," and point out they don’t actually appear on the company balance sheet:

technology-based
customer-based
market-based
talent-based organizational related
contract/statutory based

In his post yesterday Jonathan said they are:

technology-related
contracts
artistic content
customer knowledge
marketing-related

Looks to me like you guys agree on the framework to describe these "assets." This is a good start.  Now, can you give us some idea how to measure the costs of those "assets"? And maybe say something about why they don’t show up on the balance sheet?

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?

If the traffic and discussion from this week are any indication, we should get some good steam with the dialog about marketing finance that will kick off here next week with an extended discussion of Victor Cook’s Competing for Customers and Capital. (Background on the book and discussion.)

As the dialog in the comments over the last two posts shows, this dialog moves very quickly toward a discussion about the future of marketing, which is exactly why I chose this book. Marketing is in the midst of a dramatic sea change, and is currently bobbing around in the shifting tide like a boat without a rudder. Marketers are buffetted with new theories and best-selling fads at every turn–It’s About the Customer, No It’s About Metrics, No It’s About Leads, No It’s About Brand. Meanwhile, the CEOs are saying, look, tell me exactly what it is you actually do that delivers revenue. Well, that would be a nice CEO. Most are really saying, hey, just go report to the sales department.

Competing for Customers and Capital is a watershed book that lays the foundation for defining marketing’s relevance to business strategy. We’re not talking about campaign metrics or brand measurement. We’re talking about how marketing processes increase revenue and shareholder value. This is a story any marketer must understand if they have any aspirations toward a seat in the boardroom.

Please join us next week to kick off the book discussion, and invite a friend.

I’ve been talking this week with Victor Cook as a prologue to next week’s launch of a book discussion on Competing for Customers and Capital, which you can learn about here.

In order to get the discussion rolling, I’d like to post some questions for readers to answer in the comments section. This dialog can’t happen without you, so if you want to see useful content, please jump in and help get us spark it.

Over the past few years, the defining challenge for marketers has been proving performance. It shows up in the buzzwords about ROI, the popularity of dashboards, and the day-to-day demand for accountability. Marketing’s dilemma is that so much of what we do is intangible, and the path to the bottom line is anything but clear. So what I’d like to ask of readers on this thread is to respond to one of the following questions, or both:

1. What programs, activities or events do you believe influence the intangible value–or the perceived value–of your company to investors. This applies whether you’re publicly traded or not.

2. How can you trace the cost or expense associated with those programs, activities or events back into your company’s financials? And do you currently do so?   

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.