Thought Leaders

International Conference in
Brand Management
Emeritus Professor Malcolm McDonald
Cranfield University and Chairman Brand Finance
plc
Lugano, 11-12 March 2011

The role of powerful brands in

creating shareholder value

Agenda
The role of powerful brands in creating shareholder value
1. Introductory comments
2. A brief history of marketing
3. The difference between brands and powerful brands
4. Their role in creating shareholder value ( SVA )
5. How to measure SVA
Thank you

Contents Contents

The Impact of Price and Profit

Start Point
Volume
1000
Fixed Costs
400
Variable Costs 500
Profit
100
Turnover
1000

Profit Increase
Increase 0.0%
Profit
0%

Vol + 1%
1010
400
505
105
1010

Costs - 1%
1000
396
495
109
1000

Price + 1%
1000
400
500
110
1010

0.5%
5%

0.9%
9%

10.0%
10%

The Price-Value Cycle

Model 1
Higher volume
At lower
Margins

Cut
prices

Vicious Circle

Lose sales

Reduce
Specifications
& promotion
to maintain R.O.I

Model 2
Higher customer
Acceptance &
volume

Raise
price

Benign Circle
Improve
Product &
promotion

Lower volume, but

Higher revenue from
Better margins

A brief history of marketing

3 principal communities:

Practitioners

Academics

Consultants
6

Practitioners

Technology

Production

Sales

Accountancy

Fads

Marketing

Example 1 of major companies performance up to 1990

Year

Company1

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

MFI
Lasmo
Bejam
Racal
Polly Peck
Atlantic Computers
BSR
Jaguar
Amstrad
Body Shop
Blue Arrow

Market Value
(m)

ROI2

Subsequent
performance3

57
134
79
940
128
151
197
819
987
225
653

50
97
34
36
79
36
32
60
89
89
135

Collapsed
Still profitable
Acquired
Still profitable
Collapsed
Collapsed
Still profitable
Acquired
Still profitable
Still profitable
Collapsed

1. Where a company has been top for more than 1 year, the next best company has been
chosen in the subsequent year e.g.. Poly Peck was related top 1983, 84 and 85
2. Pre-tax profit as a percent of investment capital
From Professor Peter Doyle, Warwick University
9

Example 2 of major companies performance up to 2000

1.
2.
3.

Year

Company1

Market Value ROI3

%
(bn)2

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Maxwell Communications Plc

1.0
Imperial Chemical Industries Plc
8.6
Wellcome Plc
8.3
ASDA Group
1.6
TSB Group Plc
3.7
British Telecommunications Plc 22.2
British Steel Plc
3.3
British Airways Plc
6.1
National Westminster Bank Plc
19.6
Marconi Plc
29.8
Marks & Spencer Plc
5.3

5
13
40
7
20
17
19
7
14
22
7

Subsequent
performance
Collapsed
Collapsed
Acquired
Acquired
Acquired
Not Profitable
Collapsed
Not Profitable
Acquired
Acquired
Not Profitable

Each company was a FTSE100 when selected

Market Values as of 31 December of each year
Pre-tax profit as a percent of Equity & Long Term Debt

From Professor Malcolm McDonald

10

Measurement of segment profitability

Total Segment Segment Segment Segment Segment Segment

Market
1
2
3
4
5
6

Percentage of market
represented by segment

100.0

14.8

9.5

27.1

18.8

18.8

11.0

Percentage of all profits in

total market produced by
segment

100.0

7.1

4.9

14.7

21.8

28.5

23.0

Ratio of profit produced by

segment to weight of
segment in total population

1.00

0.48

0.52

0.54

1.16

1.52

2.09

Defection rate

23%

20%

17%

15%

28%

30%

35%

11

We measure customer retention by market segment

Not at all
49%
12%

10%

9%

7%

6%

3%

3%

Totally
1%

12

We know the financial impact of all the elements of our

marketing strategy and we measure and report them to
the board

Not at all
31%
25%

18%

6%

7%

1%

9%

1%

Totally
1%
13

The historic rift between marketers and the finance

department, caused by marketings reluctance to be
accountable for what they do, is as marked as ever.

Tense relations between CFOs

and Marketers are dividing
boardrooms over the value of
marketing.
One in three CFOs said they did
not believe marketing to be crucial
in determining strategy.

Marketers have constantly

hidden behind a fog of measures
that are based purely on tactical
marketing activity, rather than
solid financial metrics that are
relevant to the City.

Marketing in 3D
Deloitte
14

Finance Director:
Why is EBITDA down on forecast?

Marketing Director:
The EBITDA news is a bit of a pisser, but wait til you see
my mood board!!

(Rory Sutherland, President IPA Brand Finance Forum, London 26th October 2010)
15

The Cultural Web:

(What senior non marketers believe about marketers)
Symbols

Stories
and Myths

Mud doesnt stick

Golden child
Quick promotion
No loyalty
Churn
Costs
Experience

Rituals

Paradigm

Planning
Delegating
Deadlines
Off site
meetings

Source: Defining a Marketing Paradigm (Baker, S. 2000)

Cars
Offices
Terminology
Statistics
Lunch

Unaccountable
Untouchable
Expensive
Slippery

Control
Systems

Power
Structures
Research withheld
Take credit for
others work
Jargon

Organisational
Structures
Lack of structure
Internal focus
Always in
meetings

10.00-16.00 hrs
Lunch
Travel
Soft measurement
For self
16

Consultants

17

FADS (300)

In Search of Excellence
Marketing Warfare
One Minute Manager
MBWA
Skunk Works
7 Ss
Etc.

18

Academics

19

Academics

Much research is directed at technical refinement, which produces

low risk, quick win publications that are largely irrelevant or
incomprehensible to practitioners. The voice of academics is
becoming weaker (Hugh Wilmott of MBS)
Robin Wensley said that marketing academics have had little
impact.
A much wider understanding of the nature of the competitive
market place is required, given that it is such a central
phenomenon
Of ten issues, (confirmed by 3- academic papers and the MSI), only
4% were addressed in the top, 5 star rated academic journals.

Malcolm McDonald - AM Debate 2000

20

 There are many excellent scientific journals devoted to

neurosurgery. Month by month, they publish learned papers, each
having been subjected to rigorous peer review, that chronicle the
latest discoveries, hypotheses, case-studies and innovations in the
neurosurgery world.
And the shocking thing is this: they are never read by
neurosurgeons.
Patients are put at risk because of the apparent disdain that the
practitioners have for academic theory and the accumulated
wisdom of others.
Youll have read the above with growing incredulity. That cant be
true of neurosurgery, you think. And youre right, thank God. It
isnt true. But in another trade, much closer to home, it very nearly
is.
Jeremy Bullmore, Bridging the Great Divide, Market Leader, Spring, 2006, page. 14
21

Marketing: existential malpractice

and an etherised discipline;
a sotereological comment
By:
Professor Malcolm McDonald
JMM Vol 20. 3-4. April 2004 ( pp 387-408 )

22

In undertaking an in-depth perusal of the evolutionary interaction of this acronymic

organisational communication, the dual orientation for the analysis paradoxically
required an unashamed repositioning of the eclectic conceptual framework amongst the
multi-disciplinary body of illuminative speculation in predominantly scholarly
bureaucratisation.
Yet, coincidentally, its empirical complexity had to remain relevant to the esoteric
realities of postmodern professorial integrative antecedent development trends at
appropriately conceptualised and operationally-implemented meta levels.
Consequently, it was necessary to review the independently formulated psychometric
traditions and to employ confidently the articulatedly-present phenomenological
methodologies currently available for polysyllabic paradigm exploration. Unfortunately,
the ensuing generalised multifaceted model for evaluation (in its specific systems
dimension, naturally) had unexpectedly and unexplainably exploded though not
exhaustively. The major administrative atomistic components, suitably enumerated, are
now, unfortunately, somewhat hindering the Assessors understanding process.
However, tabulation analysis of the topography implicitly indicates that comprehensive
evaluation of the interdenominational micro data has finally exhausted the course
Assessor and any further critical, unbiased, postmodernistical review, will just have to
wait until he has had a few strong gin and tonics!
I suspect you may not know what this means, but I dont really care, even if it takes you
half an hour to decode it!
I call this style anorexia doctoratitis an excessive desire to be more and more
impressive verbally, leading to mental emaciation and, eventually, death.
23

Socrates was a famous teacher who

went around giving advice
they killed him
(History howlers from University exam papers)

24

Definition of marketing
Marketing is a process for:
defining markets
quantifying the needs of the customer groups (segments) within
these markets
putting together the value propositions to meet these needs,
communicating these value propositions to all those people in the
organisation responsible for delivering them and getting their buyin to their role
playing an appropriate part in delivering these value propositions
(usually only communications)
monitoring the value actually delivered.
For this process to be effective, organisations need to be
consumer/customer-driven

25

25

Map of the marketing domain

Define markets
& understand
value

Monitor
value

Asset
Base

Determine
value
Proposition

Deliver
value
26

The value chain

Provider

Customer

Consumer

27

Differentiation is at the heart of successful marketing

For marketers, differentiation today is more

challenging than at any time in history
yet it remains at the heart of successful
marketing. More importantly, it remains the
key to a companys survival.

28

Branding as Customer Service

Great brands do not differentiate just for the sake of differentiation

They innovate around core category benefits

They make the brand famous and distinctive (easy to recognise)
They make it easy to buy ( distribution and penetration )
In other words, they get the basics right

( Professor Malcolm McDonald, January 2011 )

29

The role of powerful brands in

creating shareholder value

30

The overall purpose of marketing is the identification and

creation of sustainable competitive advantage

31

In capital markets, success is measured in terms of

shareholder value added, having taken account of
the risks associated with future strategies, the time
value of money and the cost of capital.

32

Financial
Risk

High

High

Low

Business
Risk
Low

33

The route to Sustainable Competitive Advantage (SCA)

Differentiation

High
Price

Sales Revenue

High
Volume
Economies
of Scale
Learning
Curve

Operations

Lower
Costs

Financial

Gearing
Interest Cover
Working Capital Ratio
Operational Leverage

Low Business
Risk
Low Financial
Risk

High Cash
Flows

Positive
NPV

SCA

Financial Risk and Return

High
1

Return

Low
Low

Risk

High

35

Risk and Return

Required
returns
Perceived risk
Therefore
Expected volatility
in future returns

36

Shareholder value-adding strategies

37

Justifying investment in marketing assets

Whilst accountants do not measure intangible assets, the

discrepancy between market and book values shows that
investors do. Expenditures to develop marketing assets
make sense if the sum of the discounted cash flow they
generate is positive.

38

Balance sheet

Assets

Liabilities

- Land
- Buildings
- Plant
- Vehicles
etc.

- Shares
- Loans
- Overdrafts
etc.

100 million

100 million
39

Balance sheet

Assets
- Land
- Buildings
- Plant
- Vehicles
etc.

100 million

Liabilities
- Shares
- Loans
- Overdrafts
etc.

900 million
40

Balance sheet

Assets
- Land
- Buildings
- Plant
- Vehicles

Liabilities
- Shares
- Loans
- Overdrafts
etc.

Goodwill 800m
900 million

900 million
41

42

Asset Breakdown for the top 6 countries by Enterprise

Value (US$ millions, 2004)

43

Asset Breakdown for the top 10 countries by Enterprise Value

(US$ millions, 2010)

44

Intangibles

P&G have paid 31 billion for Gillette, but have bought

only 4 billion of tangible assets

Gillette brand
Duracell brand
Oral B
Braun
Retail and supplier network
Gillette innovative capability
TOTAL

4.0 billion
2.5 billion
2.0 billion
1.5 billion
10.0 billion
7.0 billion
27.0 billion

(David Haigh, CEO, Brand Finance, Marketing Magazine, 1st April 2005)
45

Brands as Assets

Kraft
Phillip Morris bought Kraft and its portfolio of food brands for $12.9billion four
times the value of Krafts tangible assets

Grand Met
Bought Pillsbury for $5.5billion a 50% premium on Pillsburys pre-bid value
and several times the value of its tangible assets

Nestle
Paid $4.5billion, more than five times Rowntrees book value

46

Comparison of some Global Brands by the Worlds Top Three

Brand Valuation Companies

(USD)

Brand Finance (2010)

Interbrand (2010)

Millward Brown (2010)

Coca Cola

34.8bn

70.4bn

67.9bn

Walmart

41.6bn

IBM

33.7bn

64.7bn

86.3bn

Microsoft

33.6bn

60.8bn

76.3bn

GE

31.9bn

42.8bn

45bn

Google

36.1bn

43.5bn

114.2bn

McDonalds

20.1bn

33.5bn

66bn

47

Brands are key intangibles in most businesses

Brands are estimated to represent at least 20% of the intangible value of
businesses on the major world stock markets. Brands combine with other
tangible and intangible assets to create value
Developed Markets
Brand

Brand

20%

Patents

Marketing intangible
Technology intangibles

Software

Intangible assets

Other
Intangible
Assets

Customer intangible

Distribution rights
Assembled workforce

55%
Tangible
Assets
25%

Customer relationships

Contract intangibles

Business Goodwill

Tangible assets

Illustrative

Source: Brand Finance

48

Brands Increasingly Drive Business Results

Brands affect business value by influencing the behaviour of a wide range of Shells
stakeholders, some of which directly impact Shells P&L (and hence value)

STAKEHOLDER
PERCEPTION

Customers

Trademarks

- individuals, businesses

Brand

Suppliers /
Partners
- businesses, energy
asset owners

Employees
- current and potential

Reputation Shareholders /

Bankers

- individual and institutional

Indirect
influence
on value

Other
Stakeholders
- government, media,
opinion formers,
academics, public,
environmentalists

STAKEHOLDER
BEHAVIOUR
Pay price premium

FINANCIAL
IMPACT

Buy more

Revenues

Lower prices
Better terms
Willingness to partner

Costs
Revenues

(more opportunities)

Better retention
Lower salary expectations
Better qualified candidates

Costs
Productivity

Higher PE ratio
Lower volatility
Lower borrowing costs
Better repayment conditions

Costs
Risk

SHAREHOLDER
VALUE

Influences
business and
brand value
49

Brands achieve this increased value by positively affecting different

stakeholders

Government

More invitations to tender

Greater propensity to award
Higher share of fields awarded

Partners

Greater willingness to partner

Partnership on better terms

Employees

Lower recruitment costs

Lower retention costs

Suppliers

Lower prices and better terms

Bankers

Lower borrowing costs

Better repayment conditions

Investors

Higher price earnings ratio

Lower volatility
50

Identification & Recognition Criteria of Intangible Assets

separable
Control

Future economic benefit

Identifiability

Flow of future economic benefit to

entity probable

contractual-legal

An intangible asset shall be

recognized as an asset apart from
goodwill if it arises from
contractual or other legal rights or
if it is capable of being separated
from the acquired entity and sold,
transferred, licensed, rented, or
exchanged. (SFAS 141, par. 39)

Cost reliably measurable

51

Intangibles

market equity (Coca Cola)

value chain equity (Walmart)
attitudinal equity (INTEL)

52

The Rational Consumer

20th century economics were based on the lunatic

assumption that humans are rational i.e. they
calculate their maximum utility, using perfect
information to reach perfect decisions, i.e. A precise
point on a precise graph.

53

 Charles Reichs The Greening of America

Theodore Roszaks The Making of a Counter
Culture
Alvin Tofflers Future Shock
The defenceless consumer
McDonald 2010

54

IPA Effectiveness Awards 2010

To inform (Doves beauty oriented deodorant)

Benefits (The trainline.com)
Society (Tobacco Control. Stroke Awareness Campaign.
Legacy giving)
Strategy (Waitrose Essentials)
Effectiveness all rigorously measured using econometric
models

55

Everything an organisation does converges on the

business value proposition that is projected to the
customer and is represented by the brand name.
The good thing about not having a powerful brand
name is that failure comes as a complete surprise
and is not preceded by a long period of worry and
depression.
(Professor Malcolm McDonald )

56

 A brand is a name or a symbol on a product, service, person or place

A successful brand creates super profits
A successful global brand presents the same or similar message all over
the world e.g McDonalds, Mercedes, Coca Cola, IBM
The brand is about the total experience, not the logo. Successful brands
offer consistently superior value that is delivered by fair processes.

57

The Brand Iceberg

Symbol
Brand Name
ion
t
a
t
n
e
Pres
Price
Product

What you
can see

Efficient
Production

Key Assets and

Competences
nt
e
l
l
e
c
Ex
ase
Datab

People

What you
cant see

Low Cost Operations

High
Service Levels
Strong Supply
Chain Management
Effective
Selling
Brands Are Business Systems, Not Just Labels and Names
From Even More Offensive Marketing by Hugh Davidson
58

INTANGIBLES
Quality
Perceptions
During
Sales
Service

Value
Perceptions

Before
Sales
Service

After
Sales
Service

Function

SERVICES
Packaging

Guarantees
Organisation

Design

Delivery
Other
User
Recommendation

PRODUCT
Price

Features

Warrantees

Availability

Efficacy
Brand
Name

Add-ons

Advice
Finance

Corporate
Image

MARKETING IS NOT
Selling
Advertising
Product Development
Customer Service

Reputation

MARKETING IS
A dialogue over time
with specific groups
of customers, whose
needs you understand
in depth and for whom
you develop an offer
with a differential
advantage over the
offer of competitors
59

Customer Experience

Customer experience is defined by every touch point

between a company and its customers, across all
channels. Customer expectation can be damaged
during a single transaction if it is let down by even one
channel (from Web site to email and then call centre).
And the proliferation of channels means it is cheaper
and easier to find a better experience.
20:20 Customer Experience
IBM Business Consulting Services, 2005

60

Successful brands

Have a clear customer benefit

Make a promise and keep it
Have simplicity, clarity and honesty
Have distinctive logos and design
Are widely available
Build trust
Have a price/quality trade off win/win
Help consumers make good decisions
Offer consistently superior value
Are about the total experience
Result ? Higher margins, higher volumes, innovation,
better quality

61
61

 In most cases brand choice is merely a mild

feeling of preference, because we simply dont
care that much. Brands that elicit indifference
from consumers should be of most concern.

62

Tough times make people think more. Those companies

who have confused customer habit with customer loyalty
quickly discover that they are not the same. Unless
underpinned by intrinsic quality, added value begins
to seem little more than fancy packaging.

Jeremy Bullmore, Market Leader, Quarter 3 2009 (pp. 15-16)

63
63

Confusion Marketing (1)

Advertising must be legal, decent, honest and

truthful ( ASA )
* P and Gs Sunny Delight ( positioned as a fruit drink )
* SKBs Ribena Toothkind (British Dental Association censored)
Nestles Shredded Wheat (British Heart Foundation Nestle fined 750k)
Copycat Branding (e.g. Coke, versus Sainsburys)

64

Confusion Marketing (1)

Even when your product is not that different, better

or special, its the job of the marketer to make people
think its different, better or special (Sergio Zyman former chief marketing officer, Coca Cola)
What he really means is:
when you genuinely cant add value for your
customer (compared with what your competitors are
offering), pull the wool over their eyes instead!

(Alan Mitchell, Marketing Business, May, 2001)

65

There are many products that pretend to be brands,

but are not the genuine article. As the Director of
Marketing at TESCO said, Pseudo brands are not
brands. They are manufacturers labels. They are
me-toos and have poor positioning, poor quality and
poor support. Such manufacturers no longer
understand the consumer and see retailers solely as
a channel for distribution
Marketing Globe Vol 2, No. 10. 1992.

66

What went wrong with many brands?

Success led to smugness

Superior margins became the primary purpose
Cutting corners/reducing costs
Economical with the truth (eg. low fat, but no mention of high
sugar content)
Add some gold to the packaging (illusion of quality)
Made decision-making harder
Became the new commodities

67

67

68

High

Branded
markets

Price
differentiation
Commodity
markets

Low
High

Production/image
Low
differentiation
Time

The Commodity slide

Source: M. McDonald, Marketing Plans, Butterworth Hienemann, 1999

69

Marks & Spencers Trends

Service Positive

Value for Money

Share Price (Indexed)

95
85
75
65
55
45
35
25
15
5

Nov 95

Mar 98

Sept 99

Base: M&S Customers

70

Marks & Spencers Market Cap (from Bloomberg)

Under the stewardship of Stewart Rose value in the business
recovered up until the 2008 crisis
In 2004, M&S was in the throes of an attempted takeover
by Arcadia Group & BHS boss, Philip Green. On 12 July a
recovery plan was announced which would involve selling off
the financial services business to HSBC Bank plc. Philip
Green withdrew his takeover bid after failing to get sufficient
backing from shareholders

71

The danger of market research

Examples of hugely successful brands that originated their category

but which failed disastrously in market research include:
Sony Walkman; Baileys Irish Cream; Post-it; Red Bull; Cashpoint
machines; Perrier ( in the UK )
The consumer doesn't know what they want.
Kieron J Market Leader September 2010 " The death of Innovation "

72

Excellent Marketing
Customer insights that lead
to the development of
genuinely new products.
Clear positioning and
branding.
Clear, honest marketing
communications that make
for easy access and
availability.

VS

Confusion Marketing
New, improved products
that pretend to be different.
Confusing, emotional
communications to justify
price premiums for parity
products.
Pricing strategies designed
to make comparisons
impossible.
Distribution strategies that
out obstacles in the way of
choice.

73

Brand valuation uses

Balance sheet reporting

M & A planning
Investor relations
Internal communications
Licensing and franchising
JV negotiations

Securitised borrowing
Litigation support
Tax planning
Market budget allocation
NPD planning
Agency performance

74

Map of the marketing domain

Define markets
& understand
value

Monitor
value

Measurement zone
where metrics
are applied
(Levels 2 & 3)

Asset
Base

Strategic zone
where metrics
are defined
(Level 1)

Determine
value
Proposition

Deliver
value
75

75

Inter Techs 5 year performance

Performance (million)

Base Year

Sales Revenue
- Cost of goods sold

254
135

293
152

318
167

387
201

431
224

454
236

Gross Contribution
- Manufacturing overhead
- Marketing & Sales
- Research & Development

119
48
18
22

141
58
23
23

151
63
24
23

186
82
26
25

207
90
27
24

218
95
28
24

Net Profit

16

22

26

37

50

55

Return on Sales (%)

6.3%

7.5%

8.2%

9.6%

11.6% 12.1%

Assets
Assets (% of sales)

141
56%

162
55%

167
53%

194
50%

205
48%

Return on Assets (%)

11.3%

206
45%

13.5% 15.6% 19.1% 24.4% 26.7%

From The Marketing Process Company

76
76

Why Market Growth Rates Are Important

InterTechs 5 Year Market-Based Performance
Performance (million)

Base Year

Market Growth

18.3%

23.4% 17.6% 34.4% 24.0% 17.9%

InterTech Sales Growth (%)

Market Share(%)

12.8%
20.3%

17.4% 11.2% 27.1% 16.5% 10.9%

19.1% 18.4% 17.1% 16.3% 14.9%

Customer Retention (%)

New Customers (%)
% Dissatisfied Customers

88.2%
11.7%
13.6%

87.1% 85.0% 82.2% 80.9% 80.0%

12.9% 14.9% 24.1% 22.5% 29.2%
14.3% 16.1% 17.3% 18.9% 19.6%

Relative Product Quality

Relative Service Quality
Relative New Product Sales

+10%
+0%
+8%

+8%
+0%
+8%

+5%
-20%
+7%

+3%
-3%
+5%

+1%
-5%
+1%

0%
-8%
-4%

From The Marketing Process Company

77
77

Quality of profits
%
Sales Revenue
Cost of Goods Sold
Prot Margin
Adver8sing
R&D
Capital Investment
Investment Ra8o
Opera8ng Expenses
Opera8ng Prot
Key Trends

Virtuous plc (%)

100
43
57
11
5
7
23
20
14

Dissembler plc (%)

100
61
39
3
-
2
5
20
14

Past 5 year revenue growth 10% pa

Heavy adver8sing investment in new/
improved products
Premium priced products, new plant, so
low cost of goods sold

Flat revenue, declining volume

No recent product innova8on, liXle
adver8sing
Discounted pricing, so high cost of
goods sold

3Note: This table is similar to a P&L with one important excep8on - deprecia8on, a standard item in any P&L has been replaced by capital

expenditure, which does not appear in P&Ls. In the long-term, Capex levels determine deprecia8on costs. Capex as a percentage of sales in
an investment ra8o o\en ignored by marketers, and it has been included in this table to emphasize its importance.

The make-up of 14% Opera8ng Prots

Factor
Virtuous plc (%)
Prot on exis8ng products over
21
3 years old

Losses on products recently
(7)
launched or in development

Total opera8ng prots
14
From Hugh Davidsons Even More Oensive Marke8ng 1998

Dissembler plc (%)

15

(1)

14
78

Overall Marketing Metrics Model

Intention/
actuality

Business
element

Lead indicators

Resource
allocation/
spend
budget
funds &
time

Plan/
action

Lag indicators

Strategy/
achievement

Objectives/
results

Forecast/
profit

product
market
segment

corporate
performance

PFs
actions, esp.
marketing
HFs

budget

Measure-ment application
of spend

Positioning of
issues in the
model

what

who

what

who

what

who

what

who

costs, activity
milestones &
outputs

Cost to achieve
Responsibilities

CSFs

metrics on
achievement of
factor to
required level

Required by
customers.
Relative to
competitors

ms%
sales
profit

corporate
rev
profit

performance
by product
market
segment

turnover,
profit &
shareholder
value

Market growth
Customer acquisition/ retention/
uptrading/ X-selling/ regained
79
Product/customer mix
Channel performance

79

Projected cash
flows from
investing in a
promotion

DCF and NPV

methods
implicitly make
this comparison

B
C
More likely
cash flow
resulting from
doing nothing

Companies
should be
making this
comparison

Assumed cash
flow resulting
from doing
nothing

Note: Most executives compare the cash flow from

promotion against the default scenario of doing nothing
assuming, incorrectly, that the present health of the
company will persist indefinitely if the investment is not
made. For a better assessment of the promotions value,
the comparison should be between the projected
discounted cash flow and the more likely scenario of a
decline in performance in the absence of promotional
investment.

Adapted from Christensen CM et al, ( 2008 )

- 7 million +

- 1 million +

2 + 2
+ 2
+ 2
(1+r) (1+r)
(1+r) (1+r)4

= -0.6 million

2 + 2
+ 2
+ 2
(1+r) (1+r)
(1+r) (1+r)4

= 5.4 million

80
80

Map of the marketing domain

Define markets
& understand
value

Monitor
value

Measurement zone
where metrics
are applied
(Levels 2 & 3)

Asset
Base

Deliver
value

Strategic zone
where metrics
are defined
(Level 1)

Determine
value
Proposition

81
81

What is Marketing Due Diligence?

Marketing Due
Diligence
Risk Assessment

Market Risk:
Is the market
there?

Strategy risk:
Will we get our
planned share?

Implementation risk:
Will we get our
planned profit?

82

Market Risk Profile

Product Category Existence

Segment Existence
Sales Volumes
Forecast Growth
Pricing Assumptions

The marketing strategy has a higher

probability of success if the product
category is well established
If the target segment is well established
If the sales volumes are well
supported by evidence
If the forecast growth is in line with
historical trends
If the pricing levels are conservative
relative to current pricing levels

83

Ansoff matrix

PRODUCTS

increasing technological newness

Present
New

Present

MARKETS

increasing
market
newness
New

Market
Penetration

Product
Development

Market
Extension

Diversification

Professor Malcolm McDonald, Cranfield School of

Management

84

Market Share Risk Profile

Target Market Definition

Proposition Specification

SWOT Alignment

Strategy Uniqueness

Anticipation of market change

The marketing strategy has a higher

probability of success if the target is defined
in terms of homogeneous segments and is
characterised by utilisable data

If the proposition delivered to each segment

is different from that delivered to other
segments and addresses the needs which
characterised the target segment

If the strengths and weaknesses of the

organisation are independently assessed and
the choice of target and proposition leverages
strengths and minimises weaknesses

If choice of target and proposition is different

from that of major competitors

If changes in the external microenvironment

and macroenvironment are identified and
their implications allowed for
85

Shareholder Value Risk Profile

Profit Pool

The marketing strategy has a

higher probability of success if the
targeted profit pool is high and
growing

Profit Sources

If the source of new business is

growth in the existing profit pool

Competitor Impact

If the profit impact on competitors

is small and distributed

Internal Gross Margin

Assumptions

If the internal gross margin

assumptions are conservative
relative to current products

Assumptions of Other
Costs

If assumptions regarding other

costs, including marketing
support, are higher than existing
costs
86

Brand valuation uses

Balance sheet reporting

M & A planning
Investor relations
Internal communications
Licensing and franchising
JV negotiations

Securitised borrowing
Litigation support
Tax planning
Market budget allocation
NPD planning
Agency performance

87

Having taken account of the risks referred to above and

having adjusted the forecast net free cash flows for
each major product for market for each year, have we
calculated whether the strategic marketing plan
creates or destroys shareholder value?

88

Valuing Key Market Segments

Background/Facts
Risk and return are positively correlated, ie. as risk increases, investors require a
higher return.
Risk is measured by the volatility in returns, ie. high risk is the likelihood of either
making a very good return or losing all your money. This can be described as the
quality of returns.
All assets are defined as having future value to the organisation. Hence assets
to be valued include not only tangible assets like plant and machinery, but intangible
assets, such as Key Market Segments.
The present value of future cash flows is the most acceptable method to
value assets including key market segments.
The present value is increased by:
- increasing the future cash flows
- making the future cash flows happen earlier
- reducing the risk in these cash flows, ie. improving the certainty of these cash flows,
and, hence, reducing the required rate of return.
89

89

Suggested Approach
Identify your key market segments. It is helpful if they can be classified on a vertical axis (a kind of
thermometer) according to their attractiveness to your company. Attractiveness usually means the potential of
each for growth in your profits over a period of between 3 and 5 years. (See the attached matrix)
Based on your current experience and planning horizon that you are confident with, make a projection of
future net free cash in-flows from your segments. It is normal to select a period such as 3 or 5 years.
These calculations will consist of three parts:
revenue forecasts for each year;
cost forecasts for each year;
net free cash flow for each segment for each year.
Identify the key factors that are likely to either increase or decrease these future
cash flows.
These factors are likely to be assessed according to the following factors:
the riskiness of the product/market segment relative to its position on the ANSOFF matrix;
the riskiness of the marketing strategies to achieve the revenue and market share;
the riskiness of the forecast profitability (e.g. the cost forecast accuracy ).
Now recalculate the revenues, costs and net free cash flows for each year, having
adjusted the figures using the risks (probabilities) from the above.
Ask your accountant to provide you with the overall SBU cost of capital and capital used in the SBU. This will
not consist only of tangible assets. Thus, 1,000,000 capital at a required shareholder rate of return of 10% would
give 100,000 as the minimum return necessary.
Deduct the proportional cost of capital from the free cash flow for each segment for each year.
An aggregate positive net present value indicates that you are creating shareholder value ie. achieving overall returns greater
90
90
than the weighted average cost of capital, having taken into account the risk associated with future cash flows.

Portfolio analysis - directional policy matrix (DPM)

Relative company competitiveness

High

High
Segment
attractiveness
Low

Invest/
build

Low

?
NB. Suggested
time period 3 years

Maintain
No
change

Present position

Manage for
cash

Forecast position in 3 years

91

91

A great brand is the Holy Grail, the distillation of years

of creativity, sweat, ambition and investment.
Not so much a logo, more a way of life, a way of being,
a way of doing business: a great brand conveys
everything that in your finest dreams you want your
customers to understand about your business and
product.

( Nick Peters. Brand Man. Business First. March 2010. page 19 )

92
92

Great stars shine brightest when the sky is darkest. In

austere times, great brands bestow pleasure, maintain
their premium and take a long view

Mark Ritson, Marketing Magazine, 3rd December 2008 (p.20)

93

Books:

Global recogni8on

94

94

www.malcolm-mcdonald.com
Take marketing into the boardroom,
and connect marketing strategy to
shareholder value
Available to order now from:
www.malcolm-mcdonald.com

95

Thank you

BRANDFINANCE is the worlds leading, independent brand valuation consultancy.

We advise strongly branded organisations, both large and small, on how to
maximise shareholder value through effective management of their intangible
assets.
Intangible assets, most notably brands, are vital strategic and financial assets which
marketers are increasingly being held accountable for managing and building. At the
same time, finance directors and smart investors want greater understanding and
disclosure of intangible asset values and marketing performance to improve their
investment decisions.
We help our clients to value, articulate and build their intangible asset base using
language and approaches understood by financial, marketing and investor
audiences.
96

Malcolm McDonald Chairman

Brand Finance plc
m.mcdonald@brandfinance.com
+ 44 (0)207 389 9400
3rd Floor, Finland House
56 Haymarket
London, SW1Y 4RN
United Kingdom

Brand Finance, the worlds leading independent brand valuation consultancy, has a
global footprint with 21 offices world wide. For more information please refer to our
website: www.brandfinance.com

97

Emeritus Professor

Malcolm McDonald
Chairman, Brand Finance

Malcolm, until recently,

Professor of Marketing and
Deputy Director Cranfield
School of Management with
special responsibility for EBusiness, is a graduate in
English Language and
Literature from Oxford
University, in Business Studies
from Bradford University
Management Centre, and has
a PhD from Cranfield
University. He also has an
honorary Doctorate from
Bradford University. He has
extensive industrial
experience, including a
number of years as Marketing
Director of Canada Dry.

Malcolm is Chairman of Brand

Finance plc and spends much
of his time working with the
operating boards of the worlds
biggest multinational
companies, such as IBM,
Xerox, BP and the like, in most
countries in the world,
including Japan, USA, Europe,
South America, ASEAN and
Australasia.

His current interests centre

around the measurement of
the financial impact of
marketing expenditure and
global best practice key
account management.
He is a Professor at Cranfield,
Henley, Warwick, Aston and
Bradford Business Schools

He has written forty three

books, including the best seller
"Marketing Plans; how to
prepare them; how to use
them" and many of his papers
have been published.

Team McDonald
About Prof. Our
Malcolm

98