Strategic Marketing: Balancing Customer Value with Shareholder Value

John Zinkin1, Nottingham University Business School

Whether shareholders are more important than customers is an old debate. By law, Boards are accountable to shareholders not to customers or other stakeholders. This is a view supported by Milton Friedman who argued that the purpose of companies is to maximise shareholder returns (Friedman 1970). Peter Drucker on the other hand has argued that the purpose of the firm is to create and maintain satisfied customers (Drucker 1955) and the late Sumantra Ghoshal has recently argued strongly that shareholders do not have priority over other stakeholders (Ghoshal 2005). Traditional Marketing has attempted to reconcile this apparent dilemma by being profit responsible. However, reported profits are not always the best measure of shareholder value because they depend on a range of accounting assumptions and are arbitrarily recorded based on a calendar year end. Moreover the underlying accounting assumptions reflect the needs of lenders more accurately than those of the shareholder. To cope with this Economic Value Added (EVA) has been developed as a better measure of shareholder value because it reflects shareholder needs rather than those of lenders (Stewart 2003b). Yet the main drivers of EVA are directly affected by Marketing rather than by finance and accounting decisions. This paper argues it is the role of Strategic Marketing to reconcile the two sides of the argument by balancing customer value with shareholder value for without customer value there can be no long-term shareholder value; and if the provision of value to customers is not disciplined by the constraints imposed by shareholder value, just as Marketing can destroy shareholder value by focusing too much on customer value, Finance can destroy customer value by focusing too much on short-term horizons most particularly the financial year end. Strategic Marketing also needs to reconcile efficiency with effectiveness. This paper attempts to provide a broader definition to the concept of Strategic Marketing by integrating finance, marketing theory and practice, as well as brand building and advertising practice to provide academics and practitioners with a holistic approach to reconciling the demands of shareholder and customer value. In so doing the paper reinforces the idea that it makes no difference in principle whether we are concerned with the marketing of goods and services or operating in a B2B or B2C context, by recognising that although the contexts may vary and therefore execution will reflect these variances, the principles remain the same. Keywords: Balanced Scorecard, BrandAsset Valuator, Branding, Customer Value, Economic Value Added, Marketing, Profits, Shareholder Value

Correspondence: John Zinkin, Nottingham University Business School, Malaysia Campus, 17 Lorong Taman Pantai 2, Taman Bukit Pantai, 59100 Kuala Lumpur, Malaysia, Fax : 00 603 2282 0122, Email : zinkin@streamyx.com

The Marketing Review, 2006, 6, 163-181 ISSN1472-1384 Westburn Publishers Ltd.

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Introduction This paper builds upon the important work of the late Peter Doyle (Doyle 2000b) who was among the first to recognise that the reason for the decline of the status of Marketing was that it was no longer seen to be a strategic participant in boardroom discussions, but had rather become distracted by too great an emphasis on tactics and on market share and brand awareness rather than shareholder value. If Marketing was to regain its rightful place as a key player in strategy discussions, practitioners needed to understand and speak the language of shareholder value and recognise that good corporate governance requires boards to put their shareholders first. This paper combines Doyles thinking with an integrative framework to reconcile the different perspectives of shareholder and customer value. Strategic Marketing, as defined in this paper, reconciles these two imperatives by creating competitive advantage through the customer value provided by relationships with valued customers to maximise shareholder value. It achieves this by recognising that although the principles of Marketing are constant, the different contexts in which Marketing activities are undertaken (goods versus services and B2B versus B2C) differ and implementation must reflect this appropriately. Strategic Marketing does this by identifying customer needs, both in the present and in the future to deliver shareholder value over time by ensuring that current products and services are protected, while developing a future business base as well. Recognising the importance of shareholder value ensures that segmentation and customer selection do not destroy value through being carried too far in the case of the former and being done cost-effectively in the case of the latter. Branding is essential to creating differential advantage, thereby increasing both customer and shareholder value. In discussing the branding process, this paper uses the BrandAsset Valuator approach developed by Young and Rubicam, focusing on the need to invest in Differentiation and Relevance through continuous product innovation and communication to customers, reinforcing the argument that investment in brand assets should not be placed at the mercy of short-term cost cutting. For Marketing to be truly strategic it must be instrumental in creating organisational alignment to deliver the appropriate experience and customer value through the customer exposure to the critical Moments of Truth and as a result is intimately involved with nearly all aspects of both the Income Statement and Balance Sheet a perspective not always recognised by practitioners who tend to focus on the tactical elements of the Marketing Mix nor by other departments in the organisation. Finally, it is the role of Strategic Marketing to keep the organisation externally focused and forward looking ensuring that in addition to the reconciliation of customer and shareholder value there is also reconciliation of efficiency and effectiveness. The ensuing discussion is developed beginning with the potentially conflicting perspectives of Milton Friedman with his focus on the primacy of the shareholder and Peter Drucker with his on the primacy of the customer.

Strategic Marketing 165 The Dichotomy: Milton Friedman Versus Peter Drucker Codes of corporate governance and company law assert that Boards are answerable to shareholders and it is the duty of the Board to maximise shareholder returns over time2. Milton Friedman in his 1970 article The social responsibility of business is to increase its profits - argued Boards should focus on maximising profits for shareholders and that managers were ill-equipped to do anything else, as they had neither the mandate nor the skills nor the resources to decide the correct trade offs between stakeholders. However, he did recognise that there were constraints on how profits were to be maximised: the company must serve an economic purpose by providing its customers with goods and services they wanted at fair prices; this should be done by staying within the Rules of the Game: without breaking the law and without offending existing social values. In his view, these constraints were adequate to ensure that companies would satisfy shareholders by serving a socially and legally acceptable economic purpose and that therefore there was no conflict between the rights of capital and the rights of society. However, the essence of competition is that it creates winners and losers through innovation - Schumpeters Creative Destruction - and so companies are faced with the relentless need to innovate or become irrelevant as customers needs and desires change. As a result, Friedmans Rules of the Game are not static, as implied in his article, but change over time. It is to this dynamic that Peter Drucker was referring when he wrote: Markets are not created by God, nature or economic forces, but by business men. Drucker P, The Practice of Management, p35 Drucker goes further, arguing for the primacy of the customer rather than the employees or the shareholders when he says: It is the customer who determines what a business is. For it is the customer, and he alone, who through being willing to pay for a good or a service, converts economic resources into wealth, things into goods. What the business thinks it produces is not of the first importance especially not to the future of the business and to its success. What the customer thinks he is buying, what he considers value is decisive it determines what a business is, what it produces and whether it will prosper. The customer is the foundation of a business and keeps it in existence. He alone gives employment. And it is to supply the consumer that society entrusts wealth-producing resources to the business enterprise. Drucker P, The Practice of Management, p35

Principle 1 of the International Corporate Governance Networks Working Kit published in Frankfurt on July 9th 1999

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Building on this idea, Drucker argues that: Actually Marketing is so basic that it is not just enough to have a strong sales department and entrust Marketing to it. Marketing is not only much broader than selling; it is not a specialized activity at all. It encompasses the entire business. It is the whole business seen from the view of its final result, that is, from the customers point of view. [Italics mine]. Concern and responsibility for Marketing must therefore permeate all areas of the enterprise. Drucker P, The Practice of Management, p36 What Drucker is saying is that Strategic Marketing is about ensuring the company will flourish by providing customers with goods or services they require over time, in the face of competition and relentless innovation. In return customers are willing to pay enough so the firm earns an adequate return on its capital employed. To do this, Strategic Marketing affects the entire Value Chain, and most elements of both the Income Statement and the Balance Sheet (as will be shown later). As a result, the decisions required to be an effective Strategic Marketer, are taken at the highest levels of the organisation. Yet Marketing Directors rarely sit on Boards and only 12 percent make it to CEO (Doyle 2000b). So what went wrong? The Wrong Focus: Earnings Doyle makes the case that the marginalization of Marketing is the result of Marketing Directors thinking too much in terms of customer value at the expense of shareholder value on the one hand and of CEOs justifying performance in terms of returns on the other. The problem with using returns or profit is that the impact of marketing investments takes time, whereas profits need to be reported annually or worse still, every 90 days. In these circumstances, a focus on earnings will put Marketing Directors at a disadvantage in discussion with CFOs, as the case can always be made that in the short term the business will be better off if marketing expenditures are reduced (Doyle 2000c). Countervailing arguments have been developed that recognise the lifetime value of customers and the consequent continuous need to invest in preventing them switching (Reichheld 1996; Slywotzky and Morrison 1997; Rust et al 2004). Even so, the relentless focus on short-term earnings of the Anglo-Saxon capital markets and the idea that the purpose of business is to maximise returns to shareholders has taken the place of Druckers view reinforced by financial theorists (Black et al 1998 and Brealey and Myers 1999), the focus of company law and the arguments of Milton Friedman to the detriment of customers. However, the limitations of the earnings approach have become glaringly obvious as a result of the failures of governance in the US, where companies desperate to protect their reported earnings distorted their capital structures, reported non-existent earnings and created scandalous failure (Enron, Qwest, WorldCom, Tyco, Adelphia to name but a few) as a result of an exaggerated focus on short-term shareholder value (Ghoshal 2005). Even had these companies not failed, the view was gaining ground that earnings and returns were not the right way to protect shareholder

Strategic Marketing 167 value but that Economic Value Added (EVA) was a better way (Stewart 2003). The advantages of EVA over traditional GAAP accounting based earnings reporting are that it looks at Net Operating Profit after Taxes (NOPAT) and deducts the weighted average cost of debt and equity capital thus measuring how efficiently the capital is being used. It also recognizes that some expenditures have long-term earnings implications and so EVA does not expense investments in the year of their being undertaken unlike traditional accounting. R&D, brand building, and advertising expenditures affect earnings in years following the investments and present GAAP accounting treatments do not recognize this, writing them off in the year in which they occurred. Moreover, EVA looks at the value of intangibles, puts them on the balance sheet and then measures whether they have been used effectively to create shareholder value, in the same way as traditional accounting looks at investments in tangible assets and the returns earned by them (Stewart 2003). How Does Strategic Marketing Create Value? In discussing this, I define Strategic Marketing as follows, attempting to reconcile the perspectives of Drucker, Doyle and Friedman: Strategic Marketing creates competitive advantage through the customer value provided by relationships with valued customers to maximise shareholder value. Drucker makes it quite clear that without creating satisfied customers there can be no long-term business, whilst Doyle defined Marketing as being the management process that seeks to maximise returns to shareholders by developing relationships with valued customers and creating a competitive advantage (Doyle 2003c). Figure 1 below develops Doyles idea and shows that there are four steps involved in balancing customer and shareholder value: 1) Identify customer needs (the foundation of customer value); 2) Determine whether the resulting market opportunity is worthwhile; 3) Create sustainable differential advantage through superior customer value; 4) Align the entire organisation to deliver appropriate relationships with valued customers (Figure 1). Yet we need to recognise that there are significant differences in practice between the marketing of goods and services (Figure 2) and that therefore effective Strategic Marketing recognizes and deals with these differences (Figure 3). There are also important differences between the B2B and B2C environments (Figure 4) and these too must be recognised, if marketing is to be effective (Figure 5). Once this has been done, Strategic Marketing must reconcile efficiency with effectiveness if it is to achieve balance between shareholder and customer value.

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Marketing is the management process that seeks to maximise returns to Shareholders by developing relationships with valued customers and creating a competitive advantage. Doyle P., Value-Based Marketing p29 The process by which Marketing creates Shareholder Value is the same for both Goods and Services in B2B and B2C environments

Identify actual and potential customers wants and needs

Determine the size of the opportunity

Define target market New product development process Idea generation and screening Concept development Brand development Test market Commercialize Segmentation Demographics Psychographics Usage Needs/Preferences Price Define value to be created ENPV Size of NPV Selecting customers Strategic importance Customer significance Customer profitability Loyalty effect

Create Differential Advantage

Marketing Knowledge Actual and potential customer wants/needs Customer behavior Matches program to production Analyses competitors Strong brands Attribute Experience Aspirational Brand building Product Basic brand Augmented brand Potential brand Line extension Inner core Outer core Latent potential No-go zone Strategic relationships Customer loyalty

Align organisation to marketing program

Define moments of Truth Align Value Chain to deliver Organisational USP the Right Side Up Define source of marketing advantage Customer benefit Unique Profitable Sustainable Branding Attribute Experience Aspirational Support Product/Service USP Develop positioning Which market? Communicable? What needs? What usage? How unique?

Invention v. Innovation Benefit Unique Timely Sustainable Marketable Market Research Consumer behavior Place in PLC Todays business Tomorrows business Options for growth

John Zinkin 2004

Figure 1. Five Steps to Effective Marketing Implementation: Step One

However, there are significant differences in the way goods and services provide customer value

Services characteristics

Goods characteristics

Activity Intangible No transfer of ownership Consumption at time/place of production Perishable cannot be inventoried Heterogeneous experience Search qualities low Experience qualities high Credence qualities high Quality dimensions Reliability (32%) Responsiveness (22%) Assurance (19%) Empathy (16%) Tangibles (11%)

Object Tangible Transfer of ownership Consumption separate from production and location Can be inventoried Homogeneous experience Search qualities high Experience qualities medium Credence qualities low Quality dimensions Performance Consistency Reliability Serviceability

Based on Kotler and Doyle John Zinkin 2004

Figure 2. Five Steps to Effective Marketing Implementation: Step Two

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Therefore, effective Marketing recognizes the differences between goods and services in creating offers to satisfy consumers

By varying execution of the Marketing Mix

By creating a continuum of goods and services

Pure goods Four Ps Product Price Promotion Place Sales Channels 5th P - Policy Transactional approach CRM of limited use

Pure services Nine Ps Product* Price* Promotion* Place* Sales Channels Point of consumption Physical evidence People* Processes* Productivity Procedures* 10th P - Policy Relational approach CRM

Enhancing goods through Addition of service Organisational USP Loyalty programs Owners clubs CRM Internet interactivity Multilevel marketing

Reducing service dependency on people and processes Self-service Internet self-selection

Shifting from selling products to selling solutions

* Seven Ps of Booms and Bittner

John Zinkin 2004

Figure 3. Five Steps to Effective Marketing Implementation: Step Three

There are also significant differences in the way B2B and B2C provide customer value

B2B characteristics
Product or service usually transformed or resold Product or service offered developed in partnership No retail intermediation, though intermediaries may still exist no dominant intermediaries to erode margins Often All or nothing sale makes the results very lumpy and difficult to forecast Limited customer universe, segmented by Trade class Size of business Budget Decision-making structure Centralized v decentralized Buyer only v buyer in committee Promotion tends to be narrowcast Specialist/vertical media Role of face-to-face selling critical Mainly below the line activity Sponsorship Trade Fairs PR B2B exchanges Offer negotiable, value variable (discounts, bundling) Tendering Relationships critical Organizational USP critical to buyer organization

B2C characteristics
Product or service consumed Product or service offered already fixed Retail intermediation, unless direct selling model or multi-level marketing used margin erosion Share of shelf space allowing for incremental budgeting importance of listing fees Unlimited customer universe, segmented by Demographics Psychographics Wealth and disposable income Product/service bought for own use or gift Promotion tends to be broadcast Broadcast/horizontal media Supplemented by specialist/vertical media Face-to-face selling only applies in direct and multi-level marketing models Mainly above the line activity, supported by Sponsorship Trade Fairs (when public can attend) PR Internet portals and pop-up ads Offer non-negotiable, value fixed No tenders Relationships secondary Organizational USP not relevant to consumer, but to intermediary instead

John Zinkin 2004

Figure 4. Five Steps to Effective Marketing Implementation: Step Four

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Therefore, effective Marketing recognizes the differences between B2B and B2C in creating offers to satisfy consumers

By varying execution of the Marketing Mix

By blurring boundaries of B2B and B2C

B2B
Nine Ps to achieve Org USP Product negotiable Price negotiable Promotion narrowcast Place Face to Face selling (SPIN), Partnership selling Physical evidence not so important People key Processes key Productivity matters Procedures matter th P - Policy 10 Relational approach CRM important

B2C
Nine Ps Product fixed* Price fixed* Promotion broadcast and narrowcast* Place* Sales Channels Point of consumption Physical evidence matters People secondary* Processes hidden* Productivity Procedures hidden* 10th P - Policy Relational approach CRM

B2C

B2B

Enhancing B2C through Using ideas from B2C in B2B Addition of service Segmenting by Loyalty programs Psychographics Owners clubs Buyer behavior CRM Advertising corporate Internet interactivity brand in broadcast media Multilevel marketing Internet chat rooms Reducing B2C vulnerability retailer pressure by above Shifting from selling product to solutions Increasing relational dependency on people and processes Affinity clubs Internet chat rooms

* Seven Ps of Booms and Bittner

John Zinkin 2004

Figure 5. Five Steps to Effective Marketing Implementation: Step Five Step 1: Identify Customer Needs One of the key ways in which Strategic Marketing is able to create both customer and shareholder value is to ensure that new ideas are in fact innovations rather than inventions. As Doyle (2000c) put it, the difference between an invention and an innovation is that an invention remains a good idea that does not tap into real customer needs and fails as a result, whereas an innovation satisfies latent customer needs and changes the way people behave. For this to be so, it must provide unique benefits that are timely, sustainable and above all marketable. This process has cash flow implications and it is only by determining whether the expected NPV is greater than zero, given the companys risk-adjusted cost of capital that we can assess whether the process of creating customer value has also created shareholder value (Figure 1 above). This must be done with due regard for the different characteristics of goods and services (Figure 2 above) by varying the execution of the marketing mix and creating a continuum between goods and services marketing approaches (Figure 3 above). Once this has been recognised, we can see that the approach remains fundamentally the same for both goods and services. Equally the same applies if the context is B2B or B2C (Figure 4 above) and effective Strategic Marketing is able to reconcile these differences by once again varying the execution of the marketing mix and blurring the boundaries between B2b and B2C (Figure 5 above) again allowing us to see that despite all the differences that exist, the underlying principles do not change.

Strategic Marketing 171 Moreover, Strategic Marketing must concern itself with the companys ability to protect the businesses of today, build the businesses of tomorrow and identify options for the future. This is a reflection over time of the need to manage cash flows along the lines envisaged by BCG in their portfolio matrix and keep the business growing (see Figure 6). On this basis, shareholder value can be defined as: The static net present value of todays company plus the value of future growth options the company is planning to undertake through its investments and new ideas Zinkin J, What CEOs Must Do To Succeed, p324 This approach highlights three of the key drivers of shareholder value: the way the company allocates capital between present and future earnings streams and existing projects on its books; the companys record of innovation and its track record in creating future income streams, which in turn depends on the companys ability to turn great ideas into profits (Zinkin 2003) i.e. its R&D and Marketing ability to create innovations rather inventions and its ability to generate options for the future by remaining flexible (Copeland and Keenan 1998). Step 2: Determine Whether the Opportunity is Worthwhile Once the potential balance of the portfolio between the present and likely future shape of the business is understood, it becomes the job of Strategic Marketing to assess whether the projects within the portfolio are

Net Cash Flows

Future Options = Mix of Question Marks

Future Portfolio = Mix of Question Marks, Stars and Dogs

Present Portfolio = Mix of Cash Cows, Question Marks, Stars and Dogs

Time

Figure 6. Sources of Potential Cash Flows

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worth the time and effort needed to realize them. This is done by a combination of segmentation and selection of strategic customers. Customer Segmentation Segmentation can be done in a variety of complementary ways: demographics, psychographics, usage, needs and preferences and buyer behavior. A good way of deciding whether a segment is worth the time and effort needed to develop it is to adopt a needs-based approach to segmentation where prospects are grouped into segments based on similar needs and benefits in solving a particular consumption problem (Rozin et al 2003). Segmentation is justified on the grounds that it provides focus and, by so doing, allows marketers to deploy their resources more precisely in terms of developing targeted products and services and communicating more effectively to relevant target audiences. A good example of this is the Dow Corning Criticality Grid which segments customers into those who are interested in minimum effort and where the supplier is one of many with a traditional buyer-seller interface offering standard mature products; those who seek to minimize cost only, where the supplier would use webbased interfaces with minimum personal support; those who seek competitive advantage where high tech collaborative alliances are the way to sell; and finally those who want to minimize risk, where a single source collaboration is the most appropriate approach (Rozin et al 2003). Knowing which segment the customers belong in determines what the company does to satisfy them and at what cost so segmentation is essential to understand what the customers will value and what are the most suitable ways of serving them, thus creating customer and shareholder value at the same time. However, segmentation incurs costs: the costs of determining the nature of the segments in question, as well as the extra costs of developing more products and variants more SKUs incur inventory management costs, data preparation costs, logistics costs and manufacturing costs. It also may mean foregoing the Marketing economies of scale that can be achieved by a one size fits all approach to advertising, selling, distribution and listing in retail outlets. There is an added reason why segmentation hits diminishing returns and that is the way retailers treat small brands. For brands to be successful in the US for example, they must reach a threshold of US$ 100 million per year (Ball et al. 2004). The other problem with successful segmentation is that even if it passes the tests of customer value and retailer willingness to list, profitability may not last long. For example, Pfizer created a new category in packaged products with its Listerine PocketPak mouthwash strips which hit sales of US$ 175 million in the first year. It is now challenged by products from Novartis and Momentus Solutions and Wm Wrigley is closing the plant that served this market because of insufficient demand as a result of 128 strip products being launched in the first nine months of 2004. Sales of C2, Coca-Colas reduced-calorie and reduced- carbohydrate cola the biggest new introduction since Diet Coke are in decline just months after its being launched (Ball et al. 2004). Innovation is thus essential to keep ahead of the competition. This is where the discipline of shareholder value proves helpful to marketers, lest they incur unnecessary research costs or costs of

Strategic Marketing 173 fragmentation of the franchise in their desire to increase share, especially since 25 percent of new product variants launched in the US do not increase sales (Ball et al. 2004). As long as the expected discounted net present value of the incremental revenue streams is positive, then segmentation will create both shareholder value and increased customer value through better designed products or services that meet the specific needs of customers, with lower costs of search as well, resulting from better targeted communications of how these products and services satisfy the specific requirements of prospective customers. Customer Selection Customer selection is a much neglected area with many companies losing a great deal of money as a result of inadequate understanding of activity based costs incurred by serving the majority of customers. In fact according to Professors Cooper and Kaplan of the Harvard Business School 20 percent of customers account for 225 percent of the profits and 80 percent lose 125 percent of the profits (Doyle 2000c). Again the discipline of requiring the creation of shareholder value acts as a good regulator on the sales perspective that seeks to capture as many customers as possible, regardless of their effect on profits and, more important, cash flows. The need to consider shareholder value forces marketers to think carefully why they wish to have the customer portfolio they aspire to, just as it forces them to reconsider the extent to which they will go in segmenting the market into its constituent elements and how many variants and SKUs they need to produce to serve those segments. More important still, the discipline of shareholder value and the associated thought process of looking at the stream of cash flows derived from customers going past the accountants arbitrary annual reporting timeframe has led companies to understand the value of the lifetime relationship with customers that creates so-called profit zones (Slywotzky et al 1997) and the importance of the loyalty effect (Reichheld 1996) in increasing both customer value and shareholder value. What both of these approaches have in common is that they turn their back on the idea that going for market share delivers profits and shareholder value. It is perhaps worth spending a moment on the redefined concept of customer-centredness that Slywotzky refers to. Instead of looking at past data, mountains of market research and customer satisfaction surveys, he argues that marketers must spend time with their customers in order to understand how their business and priorities are changing over time. For only in this way will marketers be able understand directly where they can make profits from serving their customers as they and their problems evolve over time and so deliver appropriate customer value. The end result of this change in approach is that instead of starting with the companys assets and competences and using them to convert raw materials and inputs into products and services that need to be distributed through channels to reach the customer, the company starts with the priorities of the customer, decides on the channels needed to reach the customer, designs the appropriate offer, using whatever inputs are required, which in turn reflect the companys assets and core competences (Slywotzky et al 1997). Such an approach makes sense if it is disciplined by the need to deliver

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shareholder value, and indeed the concept of looking for the profit zone implicitly recognizes that greater shareholder value will result from adopting such an approach rather than the traditional market share driven view. There is, however, more to ensuring that targeted marketing investments deliver shareholder value than just understanding the profit zones and the importance of loyalty, because too many marketers still overemphasize short-term cost over long-term gain, favouring the pursuit of customers who are cheap to acquire and cheap to retain without necessarily being very profitable... Maximizing customer acquisition and customer retention separately does not maximize profits. As with any supply chain, companies can get more out of direct marketing if they see it as a single system for generating profits than if they try to maximize performance measures at each stage of the process (Thomas, Reinartz & Kumar 2004). If they are to create shareholder value, marketers must ensure that they have not taken the company beyond the point of diminishing returns with respect to the value of acquiring and retaining customers and have got the mix right between the types of customers they have. Customers divide into four groups: 1) those easy to acquire and retain 32% of the sample but only 20% of the profit; 2) those who are expensive to acquire but easy to maintain 15% of the sample, but 40% of the profits; 3) those who are difficult to acquire and retain 28% of the sample, but only 25% of the profits; 4) those who are easy to acquire but difficult to maintain 25% of the sample, but only 15% of the profits. If retention efforts simply focus on keeping the most customers, companies will not only waste money trying to retain the loyal unprofitable group but will also vainly throw money after the profitable transient group. What's worse, those funds won't be spent on attracting potentially highly profitable customers who are hard to acquire (Thomas, Reinartz & Kumar 2004). Step 3: Create Differential Advantage The process of Creative Destruction means that customers have choice, change their ideas of what they want and are free to change suppliers when they are no longer satisfied with what they are receiving. Strategic Marketing must therefore find ways to make it as difficult as possible for customers to switch between products - achieved through branding and long-term customer relationships. A case in point of branding a commodity was the spectacular growth of Domestos in the late 1960s and early 1970s after Lever Brothers acquired the Domestos Company in the UK. They took a commodity sodium hypochlorite or bleach branded it, added value to it by thickening it and perfuming it as they were able to command a price premium and continued investing in it. By the early 1970s Domestos represented more than 60% of the market volume at prices that were more than twice those charged by the competition because of successful brand differentiation. This reinforces the basic purpose of effective Strategic Marketing, which is to move a product or a service as far away as possible from the world of commodities. Effective branding increases customer value by making the right emotional and functional connections with the buyers of the brand. They can trust the brand, which reduces their costs of search

Strategic Marketing 175 and they can relate to it. This is achieved by focusing on Differentiation, Relevance, Esteem and Knowledge3. The way brands are built is shown in Figure 7. Differentiation is the foundation upon which brands are built: it is the brands ability to be distinctive and unique and it allows the brand to endure and survive in changing markets, provided companies continue to invest in R&D and communication to reinforce the brands points of difference. Relevance is about making sure that the brand has people who are interested in buying it. Brands that are both differentiated and relevant tend to be market leaders, whereas ones that are high on Differentiation alone tend to be niche brands. Differentiation and Relevance move the brand up the vertical axis representing the brands strength and potential. Esteem and Knowledge move it along the horizontal axis, representing brand stature. Esteem measures the extent to which target customers feel good about the brand and this is a function of quality and popularity. Knowledge represents all the things the market knows about the brand what it stands for, its positioning and what it does. Awareness is a subset of Knowledge (Rozin et al 2003). When a brand is new, it does not score well on Differentiation (D), Relevance (R), Esteem (E) or Knowledge (K). It is therefore the job of marketers through appropriate communications strategies to raise the awareness of the ways in which the brand is distinct and relevant so that it can grow. As we can see from Figure 7, when brands enter the Growth quadrant, they tend to be rated highly on Differentiation, score well on Relevance, but do less well on Esteem as they are not yet well established in

GROWTH

LEADERSHIP

NEW

DECLINE

Source: Young & Rubicam - BrandAssetValuator

Figure 7. How Brands Grow and Decline

3

Differentiation, Relevance, Esteem and Knowledge are the Four Brand Pillars of Young & Rubicams BrandAsset Valuator

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the marketplace, and rate very low on Knowledge. Leadership brands like Coca-Cola, Sony, or Mickey Mouse score well on all four counts indeed it is this ability to be well rated on all four counts that determines whether a brand is assessed as a leader or not by the BrandAsset Valuator methodology. However, high scores deliver customer value in different ways: Differentiation and Relevance by meeting customer needs in a distinctive and superior way that makes a difference, whereas Esteem and Knowledge deliver against the dimension of trust and reduced costs of search. In a very real sense the Differentiation and Relevance criteria are the lead indicators of brand strength and Esteem and Knowledge are lagging indicators. So it is perhaps not surprising that often when a brand reaches the Leadership quadrant, the pressures from the finance function to begin realizing Marketing economies of scale by cutting investment in innovation and communication often become irresistible, with the result that the brand begins to decline. And the problem is that traditional measures used to test for brand strength such as image and awareness levels stay high, while the brand drivers of Differentiation (functional and real as well psychological and perceived) and Relevance erode as a result of the failure to continue investing in them through innovation and communication as is shown in the Decline quadrant. At the same time owners of brand portfolios may find themselves looking to rationalize them as part of a short-term attempt to increase shareholder value at the expense of customer value. A notable case in point has been Unilevers declared policy of rationalizing 1,600 brands down to 400 power brands. The underlying idea was to increase shareholder value by reducing the Marketing diseconomies of scale caused by brand proliferation. This policy, introduced by Unilevers last Chairman, Niall Fitzgerald, was successful in improving Unilevers margins, but at the cost of stalled growth perhaps the result of reduced customer value as brands were rationalized. The recognition of the difficulties Unilever now faces sent the share price down by 5.7% to 459.5 pence, down 21% on the February 2004 high of 582.5 pence the drop in shareholder value reflecting the drop in future customer value caused by the rationalization and the reduction in communication spending needed to reinforce Differentiation and Relevance (Ball 2004). Step 4: Align the Organisation One of the most effective ways of sustaining Differentiation is to align the entire Value Chain to deliver the brand promise. Doing this properly can prove to be a core competence as organisational alignment is difficult to replicate because so much of alignment depends on processes, procedures and policies that must be embedded in the organisation. Moreover, delivering the brand experience requires employees who understand what the brand stands for and are able to live the brand thereby creating functional and psychological customer value by recognizing what the brands Moments of Truth are and so making sure that the customer touch points deliver what customers expect from every point in the Value Chain (Zinkin 2003). The fact that Strategic Marketing decisions affect almost all of the organisation is shown by nearly all the elements of the Income Statement

Strategic Marketing 177 having marketing content. Thus revenues are the direct result of marketing activities for it is Marketing that determines the unit volumes and the unit prices achieved that yield net sales revenue. Equally there is a major Marketing input into the cost of goods sold since it is the role of Marketing to decide what the company can afford to provide in the creation and delivery of the product or service being offered to customers. None of this is new. What is perhaps less obvious is that Strategic Marketing also affects many of the overheads that are subtracted from Gross Margin. Marketing has a direct influence on fixed advertising and promotional budgets. It can also have a say in the rents and rates and in the utilities bill a company has to pay, particularly if it is a service organisation, where it is important to tangibilize the brand. Financial institutions, for example, spend money on locating their branches in the right place and in making them look impressive and trustworthy a Marketing decision. The same can be said for fixed transportation costs (freight, distribution and storage) as these will be directly affected by decisions taken on the logistics service standards the company chooses to offer its customers again a Marketing decision. Even salaries have an indirect Marketing element in them, for they determine whether the organisation is perceived to be an employer of choice or not, and satisfied employees are the best ambassadors of the brand. Only depreciation has no Marketing element in it. The prevalence of Strategic Marketing can be seen in the Balance Sheet as well, when we look at the assets needed to run the business: working capital and fixed assets. Working capital is directly affected by Marketing decisions: the level of debtors and the credit terms offered are a trade-off between the desire to make it easy for customers to buy and the costs of finance; the amount of inventory held is a trade-off between minimizing stock-holding costs and ensuring that customers do not go out of stock; the level of creditors is a trade-off between maximizing the time taken to pay and the need to ensure continuity of supply. Even the decision whether to own manufacturing plants and where to locate them can have serious Marketing implications through the impact such decisions can have on the reputation of the company. Reconciling Efficiency and Effectiveness Underlying the preceding discussion is the need to reconcile efficiency and effectiveness. This too is an old debate and has been explored at great length in the development of the Balanced Scorecard (Kaplan and Norton 1996). It is self-evident that if a company loses its ability to be efficient, it will destroy shareholder value as it gets undercut by nimbler, leaner rivals who will destroy its profitability in the short-term. It may still be able to provide customer value in the medium-term at the expense of profits, though in the long-term it will lose its ability to do even that as it becomes incapable of investing in maintaining the Differentiation that is crucial to customer value. On the other hand, a company that focuses only on efficiency at the expense of effectiveness may be able to improve its profitability in the shortterm, and so increase shareholder value without any apparent reduction in customer value. Yet, because focusing on efficiency is to look inwards at

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productivity and processes, perhaps at the expense of the customer, management may take their eye off what is happening externally in terms of changing environments and changing customer needs. This may lead to a loss of effectiveness as a result of reduced customer value either through cutbacks in the R&D and communication budgets needed to refresh the brands, or through the rationalisation of brand portfolios, as may have occurred in the case of Unilever. Sometimes companies look to enhance shareholder value by adding products to their portfolios in the mistaken belief that they are able to negotiate better as a result with the Wal-Marts and Tescos whose buying power squeezes their margins. Over the past four or so years, many of the FMCG companies have acquired brand portfolios so that by bulking up their portfolios they become more powerful when negotiating with the giant retailers (Ellison 2004). In fact the reverse has proved to be the case, because they have lost focus on why the brands they have acquired offer customer value. Kraft Foods is selling off Altoids and Life Savers, brands they bought a few years ago. Nestle has sold off 30 small businesses in 2004 and is looking to simplify its portfolio. The problem with the round of diversification in 2000 is that it took manufacturers out of their areas of expertise widening portfolios led to increased complexity and missed the importance of holding onto and developing category leaders. The recognition that what matters now in negotiations with the giant retailers is being the category leader created category managers who advise retailers on what to stock and why, as a result of their superior ability to reconnect with the creation and provision of customer value. Even Kraft, the USs biggest food company cant always throw its weight around. What really matters is how big you are in a particular category, and being a star in one aisle doesnt guarantee respect in another. Compared with companies like Wrigley, Mars and Hershey, Kraft is tiny when it comes to selling candy, gum and mints in the convenience store Ellison, S., Food Firms Lose Appetite after Bingeing on Brands, Asian Wall Street Journal, October 29th-31st 2004, p A7 Perhaps if the major FMCG companies had concentrated more on remaining connected to the drivers of customer value instead of trying to build shareholder value through acquisition and had spent the money they used bulking up their portfolios to create and communicate better customer value they would not be looking to sell off brands for which they almost certainly overpaid, destroying shareholder value in the process. Conclusion Companies need to reconcile the apparently conflicting priorities of shareholder value and customer value. Often the discussion is a dialogue of the deaf, with the CEO and the Board focusing on shareholder value, without attempting to link it to customer value. Equally, often Marketing Directors have been guilty of focusing on delivering customer value without paying enough attention to delivering shareholder value and their attempts

Strategic Marketing 179 to reconcile the two sides of the argument have failed when they have focused on earnings instead of shareholder value, because earnings are an inappropriate measure of shareholder value. Strategic Marketing is able to reconcile these two imperatives by creating competitive advantage through the customer value provided by relationships with valued customers to maximise shareholder value. The way in which this is achieved is in principle the same regardless of whether the offer is a good or a service and whether it is sold in a B2B or B2C environment. It does this by identifying customer needs, both in the present and in the future so that the firms portfolio of businesses and brands is able to deliver shareholder value over time by ensuring that current products and services are protected and at the same time that the company develops a future business base as well. In so doing, recognising the importance of shareholder value ensures that the critical processes of segmentation and customer selection do not destroy value by being carried too far in the case of the former and being done properly in the case of the latter this enables the company to determine whether the opportunity is in fact worth investing in. Strategic Marketing goes on to create differential advantage through the process of branding - designed to increase both customer and shareholder value when compared with selling commodities. In order to protect and build the product portfolio, it recognizes the need to invest in Differentiation and Relevance through continuous product innovation and communication to customers. In addition, Strategic Marketing recognizes the importance of achieving organisational alignment to deliver the appropriate experience and customer value through the customer exposure to the critical Moments of Truth and as a result is intimately involved with nearly all aspects of both the Income Statement and Balance Sheet. Finally, it is the role of Strategic Marketing to keep the organisation externally focused and forward looking ensuring that in addition to the reconciliation of customer and shareholder value there is also reconciliation of efficiency and effectiveness. Adopting this approach from a pedagogical perspective has the merits of simplicity, clarity and parsimony, which is why it is proposed in this paper. References Aaker, D.A. (1999) Managing Brand Equity. (New York: Free Press). Anderson, J.C. and Narus, J.A. (1996) Rethinking distribution: adaptive channels. Harvard Business Review 74, pp112-122. Anthony, R.N. and Pearlman, L.K. (1999) Essentials of Accounting. (Englewood Cliffs,NJ: Prentice-Hall). Ball, D, Unilever Slashes Earnings Outlook Asian Wall Street Journal, September 21st 2004, pA4. Ball, D, Ellison, E and Adamy, J, Probing the Psyche of Shoppers, Asian Wall Street Journal, October 29th-31st 2004, ppA6-7.

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Black, A., Wright, P. and Bachman, J.E. (1998) In Search of Shareholder Value. (London: Pitman). Brealey, R.A. and Myers, S.C. (1999) Principles of Corporate Finance. (New York: McGraw-Hill). Broadbent, S. (1994) Diversity in categories, brands and strategies. Journal of Brand Management 2, pp9-18. Buffet, W. (1994) Letter to shareholdersIn Berkshire Hathaway Annual Report. Butterfield, L. (1999) Advertising and shareholder value. In L. Butterfield, Excellence in Advertising. (Oxford: Butterworth Heinemann), pp. 26596. Copeland, T. and Keenan, P.T. (1998) How much is flexibility worth? McKinsey Quarterly 2, pp38-49. Copeland, T., Koller, T. and Murrin, J. (1996) Valuation: Measuring and Managing the Value of Companies. (New York: Wiley). Doyle, P. (2000a), European Management Journal 18(3), pp233-245. Doyle, P (2000b), Value-based Marketing, Journal of Strategic Marketing 8, p299-311. Doyle, P (2000c), Value-based Marketing,(Chichester: John Wiley). Drucker, P (1955) The Practice of Management, (Oxford: Butterworth Heinemann), pp35-39. Ellison, S, Food Firms Lose Appetite After Bingeing on Brands, Asian Wall Street Journal, October 29th-31st 2004, p A7. Friedman, M (1970) The social responsibility of business is to increase its profits, New York Times Magazine, September 13. Ghoshal, S., (2005), "Bad Management Theories Are Destroying Good Management Practices", Academy of Management Learning and Education, 2005, Vol 4, No 1 pp75-91. Kaplan, R.S. and Norton, D.P (1996) Translating Strategy into Action The Balanced Scorecard, (Boston: Harvard Business School Press), p7 . Keller, K.L. (1993) Conceptualising, measuring and managing customerbased brand equity. Journal of Marketing 57, pp1-22. Kendall, N. (ed.) (1999) How advertising enhanced Orange plc shareholder value In Advertising Works 10: IPA Advertising Effectiveness Awards Cases. (London: NTC Publications.). Rappaport, A. (1998) Creating Shareholder Value. New York: Free Press. Reichheld, F. (1996) The Loyalty Effect: the Hidden Force Behind Growth, Profits and Lasting Value. (Boston: Harvard Business School.). Rozin, R and Magnusson, L, Processes and Methodologies for creating a global to business-to-business brand, Brand Management, Vol 10, No 3, February 2003 . Rust, R. T., Lemon, K., Zeithaml, V. A., (2004), Return on Marketing: Using Customer Equity to Focus Marketing Strategy, Journal of Marketing, Volume 68, pp109-127. Slywotzky, A. J. and Morrison, D (1997), The Profit Zone How Strategic Business Design Will Lead You To Tomorrows Profits, (New York: Times Business). Smith, D.C. and Park, C.W. (1992) The effects of brand extensions on market share and advertising efficiency. Journal of Marketing Research 29, pp296-313.

Strategic Marketing 181 Srivastava, R.K., Shervani, T.A. and Fahey, L. (1998) Market-based assets and shareholder value: a framework for analysis. Journal of Marketing 62, pp2-18. Stewart, B (a)Closing the Gap in GAAP: Fix Accounting by Reporting Economic Profit, Wall Street Journal, 2nd June 2003. Stewart, B (2003b) interviewed in Financial Executive, July/August 2003, Accountings Cure: Shifting Focus From Lenders to Shareholders, p17. Thomas, J, Reinartz, W, Kumar, V, Getting the Most Out of All Your Customers, Harvard Business Review, July/August 2004, Volume 82, Issue 7/8. Vakratsas, D. and Ambler, T. (1999) How advertising works: what do we really know? Journal of Marketing 63, pp26-43. Zinkin, J (2003), What CEOs Must Do To Succeed,( Prentice Hall, Malaysia). About the Author John Zinkin has over 34 years experience in business, of which 20 have been in Asia, holding senior line management and corporate strategy/business development positions in major multinational manufacturing, marketing and consulting companies. John has his own consulting firm specializing in brand positioning and change management. Clients include major multinationals and local companies. He runs accredited seminars on Corporate Social Responsibility, Corporate Governance and Branding for directors of Public Listed Companies as part of the Malaysian Stock Exchanges Directors Continuous Education Programme. His areas of research are corporate governance and corporate social responsibility in a multinational environment and their impact on branding. His publications include Corporate Governance (coauthored with Peter Wallace, 2005) and Strategic Management What CEOs Must Do To Succeed (2003).